Chicago follies (XXXIII)

18 Dec, 2018 at 19:25 | Posted in Economics | 2 Comments

At the University of Chicago, where I went to graduate school, they sell a t-shirt that says “that’s all well and good in practice, but how does it work in theory?” That ode to nerdiness in the ivory tower captures the state of knowledge about rising wealth inequality, both its causes and its consequences. Economic models of the distribution of wealth tend to assume that it is “stationary.” In other words, some people become wealthier and others become poorer, but as a whole it stays pretty much the same. Yet both of those ideas are empirically wrong: Individual mobility within the wealth distribution is low, and the distribution has become much more unequal over the past several decades …

Economists typically highlight individual or inter-generational mobility within the wealth distribution as both a reason not to care that the distribution itself is unequal and as an argument that having wealthy parents (or not) doesn’t matter that much for children’s outcomes. 2011-10-26-dumb_and_dumber-533x299-2In fact, an influential model by the late Gary Becker and Nigel Tomes, both of the University of Chicago , predicts that accumulated wealth reduces income inequality because parents who love all their children equally allocate their bequests to compensate for their stupid children’s likely lower earnings potential in the labor market. According to those two authors, families redistribute from the smart to the dumb, and therefore, by implication, governments don’t have to redistribute from the rich to the poor.

But as Thomas Piketty and numerous other scholars point out, those reasons not to care about wealth inequality are not empirically valid. There’s scant evidence that parents leave larger inheritances to stupid children. Nor is there much evidence that native ability is the major determinant of earnings in the labor market or other life outcomes. The weakness of these explanations gets to a much larger question, one of the most important (and unanswered) ones in economics: Why are some people rich while others are poor? What economists are just finding out (while others have known for awhile now) is, essentially, “because their parents were.”

Marshall Steinbaum

2 Comments

  1. Why are some people rich while others are poor? What economists are just finding out (while others have known for awhile now) is, essentially, “because their parents were.”

    Also, some of their ancestors committed great crimes. Le secret des grandes fortunes sans cause apparente est un crime oublié, parce qu’il a été proprement fait.

  2. I too went to graduate school at University of Chicago!
    .
    “Why are some people rich while others are poor?”
    .
    I pondered this at U of C, where Hyde Park with its rich white professors and students sits next to a poor black neighborhood where I used to go with my friend Azell to buy weed. My answer: policy. If policy had made drugs legal, for example, a lot of poor blacks would have been merchants, probably. Today legal weed stores in this state seem to be making money even while being taxed at exorbitant, pigovian rates and selling product for below what street prices used to be …


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