And we're back talking about Balzac again (I really must read Pere Goriot sometime -- if anyone wants to recommend other Balzac in the comments, I'd like that). This whole chapter is largely an analysis of how the advice Vautrin gives to Rastignac, that you can't possibly earn enough money for a civilized life, so if you're not going to inherit a fortune you need to marry one, plays out in the economic conditions of various periods, and how it may play out in the future.

Thesis of the chapter: "Whenever the rate of return on capital is significantly and durably higher than the growth rate of the economy, it is all but inevitable that inheritance (of fortunes accumulated in the past) predominates over saving (wealth accumulated in the present)." P. concedes that this is not necessarily true, but believes that it is actually true. If the 21C is an era of low growth, inheritance will take on increased importance, although it may be structurally distinguishable from the role it played in the 19thC.

Fig. 11.1 shows inheritance (in which he includes gifts between individuals, and which he calculates by two methods, fiscal flow and economic flow, which turn out to be quite consistent with each other) as a fraction of national income from 1820-present (in France. It is later revealed that US data is worthless on this point): essentially, annual inheritance is stable-ish between 20% and 25% of national income through the 19C until WWI, at which point it drops like a rock to about 10%, and then keeps on drifting down to 5% in 1950, since which time it's drifted back up to 15%. (Piketty missed a trick by not citing to Lady Mary's fiance in Clouds of Witness, who lost his investments in the war and then killed himself when he could no longer afford diamond cats for his expensive mistress. Not that it would have added much to the chapter, but neither do the rest of the literary examples.) This collapse in the inheritance flow is much greater than the drop in the value of capital at the same time we saw in earlier chapters -- while capital shrank compared to income in the 20C, inheritance shrank to a much greater extent, and was almost unimportant in the period right after WWII.

P. sets up an accounting identity: if Β is the capital/income ratio, m is the mortality rate (percentage of the adult population that dies every year), μ is the ratio of decedent's wealth to average living person's wealth, and b_y is inheritance (+gifts) as a percentage of national income, then by definition b_y=μmΒ. The breakdown works as follows: where Β is high, there's more wealth to inherit; where m is high, deaths happen more frequently so there's more inheritance, and where μ is high, people die rich rather than outliving their wealth, so there's more inheritance.

Modigliani (not the painter) developed the 'life-cycle theory of wealth' in the 1950s, speculating that people accumulate wealth for retirement, and then spend themselves down to zero at death, making μ nearly zero -- P. will later in the chapter argue that this does not describe reality well. Mortality dropped due to the baby boom, when a large percentage of the population was young, but will go back up again when the boomers start croaking, and will go up even more in countries with low birthrates, making inheritance more important. Greater age at death means greater age at inheritance, but this has been compensated for by a rise in gifts, which are largely to children.

Rebutting the 'Modigliani triangle' -- which claims that poor young people save, become wealthy, retire, and finish consuming their wealth at death -- Fig. 11.5 shows that in France the dead have consistently been wealthier than the living, and if you add back in gifts (as money that the dead would have died with if they hadn't given it away), the dead are much wealthier than the living, rather than poorer as Modigliani would have predicted. (Buck, kibbitzing, queries whether paying for college counts as the sort of gift that's equivalent to an inheritance. Sounds plausible to me, and significant in what P. calls the 'patrimonial middle class', but P. doesn't raise it.)

P. now examines wealth as a function of age in various eras: 1820, 80 year olds were hardly wealthier than 50 year olds, by 1910, they were two and a half times wealthier (remembering that the majority of people had basically zero wealth at both times). This accumulation of wealth in the elderly (leading to high μ, in that we can regard the elderly as the immediately pre-mortem), P. attributes to saving of income from capital -- if your return is 5%, and you live off 2%, that gives you a 3% growth rate every year, and over the decades that accumulates. (NB: Even in 19thC France, there were some earned fortunes, but once those fortunes were earned, they behave like the inherited ones; growing through the accumulation of capital income, and providing inheritances to the next generation.)

Come the world wars, economic shocks meant that lots of rentiers lost everything. This was particularly hard on older people, who didn't have much time to recover when post-war good times returned. The 1950s were the period when Modigliani's triangle looked plausible; older people had been impoverished and weren't in a position to earn much, while younger adults had less accumulated wealth to lose and more earning capacity. Inheritance was temporarily unimportant -- that is, this age-cohort effect, where old people lost more wealth than young people, explains why the U-shaped curve for inheritance over the 20thC was deeper than the U-shaped curve for wealth, as we noted above. Now, however, things are returning to normal -- 80-year-olds were, in 2010, 30% wealthier than 50-year-olds, and if you add gifts back in they're twice as wealthy.

What will happen in the future? Fig. 11.6 tells us that if r=3% and g=1.7%, inheritance will stabilize at about 16% of national income; for r=5% and g=1%, it keeps growing and hits about 23% in the 2060 -- the levels we saw at the beginning of the 20th century.

P. then turns to the fraction of capital that consists of inherited wealth. Before WWI, inherited wealth was 80-90% of all private wealth (still leaving a significant 10-20% role for earned capital). I'm a little confused here -- he must be counting capital accumulated from the income on inherited capital as itself being inherited capital? Otherwise, his numbers seem misleading. Fig. 11.7 gives us another U-shaped 20thC graph, this one bottoming out in the '70s when inherited wealth was less than 50% of all capital. But we're back up to almost 70% again now, heading probably for 80 or 90%.

Back to Rastignac's Dilemma

Get a job, or marry rich? To decide which makes sense, we're going to analyze inheritances and earned incomes as multiples of the lifetime earnings of a typical prole, defined as the average lifetime income of the bottom 50% of the income distribution. In the 19thC, a top-centile heir could expect a 20-30 prole-equivalent inheritance, while a top-centile earner only earned 10 prole-equivalents. Advantage, inheritance; you'd be a fool to work for a living. For someone born in 1910-1920, though, their inheritances were the ones that got lost in the wars: a top-centile heir only got 5 prole-equivalents, while a top-centile earner would still earn 10-12 prole-equivalents. Advantage, working-stiff. (More missed opportunities on the literary references: surely this explains all Wodehouse's useless young men between the wars raised to expect to be heirs, but scrambling because their inheritances aren't materializing). Starting for the generation born in 1930, though (this is all in Fig. 11.10) the value of inheritance in prole-equivalents began to rise again, hitting a crossover point for the generation born in 1970 (hey, this suddenly feels personal), when top-centile heirs and top-centile earners received the same value (now they tell me. I mean, you can't pick your parents, but I suppose I could have married rich. Eh, probably couldn't have.) Anyway, we had a couple of generations where wealthy people were predominantly earners rather than heirs, but that's coming to an end. Heir-dominant periods occur only when capital is highly concentrated.

Patrimonial Societies: Balzac and Austen

(Note: throughout this section I found it hard to tell when P. was referring to income and when to capital. I will be guessing as I summarize, but someone should speak sharply either to P. or to his translator.) In your classic B&A 19C novel about rich people, an adequate income was about 30 times the average income (also, P defined the prole-equivalent above (although the punchy name for it is mine) but seems to have stopped using it here although it would have been just as useful as the 'average income' benchmark he begins to use instead. Annoying.) As noted above, this was not an income that could be achieved through work. There were poorer rentiers -- Rastignac's family had an income of 6 times the average income, which was pathetic. Likewise, in Cesar Birroteau the 'audacious perfumer' (I haven't read it, so the nature of his audacity is a mystery) rejects settling for an income of 5-10 times the average, holding out for 20-30 times. Similar discussion of Sense and Sensibility -- poverty, for a family of gentlewomen, was an income of four times the national average. See also Washington Square, in which Catherine Sloper discovers that a dowry sufficient to produce 20 times the average income isn't enough if you're sufficiently unappealing. In the 19thC, life was pretty lousy if you weren't rich; food, clothing, travel were all laborious, expensive, and required servants.

Meritocrats defend large wage inequalities, sometimes on the grounds that prestigious wage earners, like important civil servants, should have an economic position comparable to the wealthy heirs they regulate/govern. (As a civil servant, I'm all for this idea.) Also, unless there are people who earn ridiculous salaries, all the rich people would be heirs, and that would be unjust. (P. says there are people who make this argument. I don't think I've ever actually seen it in the wild. Is it familiar to anyone else?) So the existence of high wealth/inheritance inequality is used to justify high wage inequality. (Again, maybe? I haven't seen that, I don't think.) And the upper middle class is self-righteous about how they deserve their money because of their work-ethic and general awesomeness. (This, I'm familiar with. Heck, I have to consciously talk myself out of thinking that way.)

Despite the increasing importance of inheritance again, it's still not close to Balzac/Austen levels of concentration. That 30 times average income cutoff would correspond to a capital holding of about 30 million € these days, and present-day novelists don't mostly write about people that rich because there aren't enough of them and it would seem absurd. Also, modern novels tend to hold heirs in contempt, and glorify wage-earners, rather than treating the ability to live off lots of unearned income as the basis for a civilized life. But this means that less-concentrated inheritance goes to more heirs. Fig. 11.11 shows the percentage of each cohort from 1790 on that inherits at least one prole-equivalent, and it's up to about 10% of the population and rising.

Is all this generalizable to the rest of the world, particularly the US? Can't tell because the US data is worthless. Damn you, generous estate-tax exemption!