Friday, February 10, 2012

Heirs Eat Oats and Does Eat Oats

Professor of Economics and Political Science & Gorter Family Professor of Islamic Studies at Duke University Timur Kuran is visiting GMU this week thanks to the generosity of the Mercatus Center. He's sharing a paper on the institutional underpinnings of wealth outcome differences between Indian Muslims and Hindus (gated version here, ungated here). I urge interested readers to take a look. At the risk of oversimplifying the thesis, Kuran and Singh’s claim is that Hindu customs of business formation and inheritance proved more adaptable than Muslim to technological and organizational innovations brought by British rule.

Inheritance law (and I use the term “law” here in the Boudreauvian, Hayekian sense) is an evocative topic. Introspection tells me that its consideration pits notions of individual desert against the notion of family as a durable organizational unit. Setting aside Sharia Law and Hindu tradition for the moment, I think about the sorts of arguments I’ve heard over the years concerning the justice of inheritance. Two arguments sort of stick out: one utilitarian, one based on merit. The utilitarian argument is similar to other arguments for redistribution. Poor people have higher marginal utility for cash than already-wealthy heirs and heiresses. Steven Landsburg busts this argument nicely here:

Really, Landsburg's argument is all you need to explain why confiscating heritable wealth is destructive. I would only add that the big effects are in all the foregone human capital. My point isn’t to pick bones with Landsburg of course, but to mention that careful, reasonable explanations like this don’t directly address the moral outrage some people have about insolent teenagers who never worked a day in their life only to inherit a huge pile of cash when other folks are out working their fingers to the bone, just barely scraping by with enough to feed their kids. I believe this is the sentiment that swims closest to the euvoluntary shoals and the one I’d like to try to address today.

The first question to ask is, “is inheritance exchange?” To an economist, the answer should be knee-jerkingly obvious: yes, of course it is. There is a clear exchange of value. The parent gives up current consumption in exchange for the satisfaction that the children will enjoy more material comfort. To the non-economist, I think this argument floats like Jimmy Page, Robert Plant, John Paul Jones and John Bonham. Regular folk would scoff (try it for yourself and see what you get). Conventional trade would mean that the child would have to work, to produce something of value to earn that boodle. So right off the bat, right with condition 2 of EE, we have our violation and our moral outrage, and the larger the inheritance, the larger the outrage. Lavish inheritances are not euvoluntary. In this instance I think the pedestrian understanding is gravely mistaken, but it is what it is, people. The median voter has never taken Intermediate Microeconomics.

But as Kuran and Landsburg note, the cure is far, far worse than the disease. Muslims end up falling behind Hindus and corporate fatcats buy more Gulfstreams and Azimuts. Furthermore, it is probably wise to remind our friends that there is no such thing as idle wealth. Savings are not stuffed under mattresses and there is no Scrooge McDuck swimming around in a pool of gold coins (not that taking specie out of circulation is a social bad, of course). Importantly, even bratty, bored trust-fund heirs with penthouse apartments in Manhattan have an incentive to maintain their stock of wealth. This necessarily implies active management, meaning that liquidity is available to new companies just starting up and so on and so forth. It might be that the visible part of the snotty rich kid is what we see on TV from time to time, but there also exist hard-working venture capitalists and loan officers behind that pile of underserved riches making sure that deserving entrepreneurs with good ideas have access to loanable funds so that they can perhaps set enough aside that their own kids don’t ever have to go hungry.

Or perhaps there’s something about venture capitalism that isn’t euvoluntary. Hm--eek. Looks like I’ve got some thinking to do.

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Do you have suggestions on where we could find more examples of this phenomenon?