On intergenerational mobility

Luke Johnson in the FT is scathing about the sons of rich men:

The children of self-made parents almost never possess the same level of ambition or capacity for enterprise. Consequently family fortunes tend to wither

They are, he says, "an unimpressive lot...spoilt and deficient in energy or experience of the real world."

This appeals to my prejudice. But it doesn't appeal to the tiny rational part of my brain. Sure, some heirs can screw themselves up. But many others don't. For example, the Koch brothers, Kerry Packer and Rupert Murdoch all inherited their businesses from their fathers and thrived. And very many of the most successful entrepreneurs came from pretty wealthy families: Bill Gates' dad was a successful lawyer and Larry Page, Eric Schmidt and Sergey Brin's fathers were all professors. James Dyson and Richard Branson's families were at least well-off enough to send their sons to private schools. I suspect Larry Ellison and Alan Sugar are atypical in succeeding from the wrong side of the tracks.

There are at least two reasons for this.

One is that entrepreneurship doesn't merely require a particular character. It also requires money. As Michal Kalecki wrote: "The most important prerequistite for becoming an entrepreneur is the ownership of capital." It's much easier for rich kids to get the first step in business than poor ones.

Secondly, in some cases, having rich parents can actually be a spur to get rich oneself. If you've been brought up in luxury, you'll come to expect a lavish lifestyle -  which needs funding. By contrast, many of us from poorer backgrounds have lower expectations; I lost all my ambition in my 30s when I realized I would never have to sleep under a bridge. And, of course, having a rich dad can make a son want to outdo him, or at least impress him; in contrast, the fact that I've not seen the inside of Gartree gives me one over my pater.

So much for hypothesizing. What of the facts? IFS economists have estimated (pdf) that the correlation between fathers' and sons' income in the UK is 0.4-0.6 - much the same as in the US (pdf). This is sufficiently below one to be consistent with Luke's claim that some sons of the rich are no-marks. But it's sufficiently far above zero to corroborate my view.

However, if we multiply these correlations, they fall markedly. They imply that the correlation between our income and our great-great-grandchildrens' is just 0.06 - as near as dammit zero. "Rags to rags in three generations" is an exaggeration, but it contains some truth, as Greg Clark has pointed out (pdf). Eventually, the waves wash everything away.