The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface
• Note.
• Wealth
• Chapter I: The Subject-matter of Economics
• Chapter II: The Fundamental Conditions of Wealth For Isolated Man and For Society
• Chapter III: Co-operation, Or Combination and Division of Labour
• Chapter IV: Population
• Chapter V: The Social Order
• Chapter VI: The Controlling Power of Demand
• Chapter VII: The Control of Provision For the Future
• Chapter VIII: Continuous Power to Demand, Or Income
• Chapter IX: The Classification of Incomes
• Chapter X: The Division of Income Between Owners and Workers
• Chapter XI: Incomes From Ownership of Property
• Chapter XII: Incomes From Work
• Chapter XIII: The Relation Between Individual Income and Individual Wealth
• Chapter XIV: The Wealth of Nations

CHAPTER XI

incomes from ownership of property

Why do some people have property from which the owner can draw a large income without appreciable exertion on his own part, while other people have less such property, and many none at all ? Here the principal cause clearly is the fact that all persons do not receive equal amounts of property by way of inheritance and bequest. Some receive enormous amounts and others small amounts, while the great majority receive nothing at all. Thinking of particular individuals we regard this as a matter of luck. It has always been thought simply lucky to be “born with a silver spoon in your mouth.” The heir of a large property is “fortunate,” and sometimes his property is even called his “fortune.” But it IS not chance which causes greater inequality from this cause to prevail at one time or place than at another. One set of conditions will produce more inequality than another.

Where there is not much property, there cannot be much inequality of inheritance. Consequently, under primitive conditions the inequality from this cause is unimportant. Each generation then receives little from its predecessor, and the inequalities which arise from unequal inheritances are small compared with the inequalities which arise from the same cause when generation after generation has accumulated property in the shape of improved land, buildings, and instruments of all kinds. Hence, even in our own time we can see a difference between what we call the “old” and the “new” countries. The inequality which arises from unequal inheritance is much more marked in Europe than in North and South America or Australia. The American, H. R. Seager, said in 1904: “So long as a fair degree of equality of economic opportunity is preserved, the influences which make for the disintegration of large accumulations of wealth are likely to predominate, and the very rich men of each generation are likely to be those who have acquired the greater part of their fortunes during their own lifetimes. This has been the case in the United States up to the present time, and there is nothing in the practice of paying interest and rent for the use of property fairly acquired that threatens to make It less the case in the future. “But in his 1913 edition he decided to omit this passage. As the United States ceases to be a “new” country, more and more property will be inherited in proportion to that which is acquired in the lifetime of a generation, and there will consequently be more scope for inequality of inheritance. Already the Astor and the Vanderbilt families show that the process of assimilation of American to European conditions has made considerable progress. America may be free from inequalities arising from grants of land made by William the Conqueror, but it is just as easy to be the lucky inheritor of a farm which becomes part of the site of a great city there as in England. The Astor inheritance in America has the same source as the Grosvenor inheritance in England, and the Vanderbilt and Morgan millions are no more likely to “disintegrate” than those of the Rothschilds. We may take it that mere continuance of prosperity is likely to increase the inequality of incomes resulting from inequality of inheritance.

But variations of law and custom exercise an influence, and may exercise greater influence in the future. Primogeniture, strictly carried out, and applicable to the only important kind of property, no doubt kept the inequality greater than it would have been under a system of equal division between children. In our own time primogeniture plays but a small part: property as a whole is generally divided nearly equally between a man's children by his will, except when the eldest has a title, and, therefore, it is supposed, some state to support. The restrictions on freedom of disposition between the testator's children and others which prevail in many European countries probably exercise but little real influence, an merely compel what would almost always be done voluntarily. More important is the state of opinion about marriages between one class and another, which, in modern civilization, practically means between persons belonging to rich and persons belonging to poor families. If there is much intermarriage between the children of the rich and the children of the poor, there will clearly be a more equal distribution of inherited property than if the children of the rich marry none but their own class. Another most important factor is the relative number of surviving children among rich and poor, If every millionaire had twenty children, there would be much more “disintegration” of great fortunes than if he had only one or two. So far this subject has been very little discussed, and very little is known about it. J. S. Mill alone of the older writers thought it worthy of consideration, and not much has been added since his time.

Along with differences of income arising from unequal inheritances and bequests we must place differences arising from unequal gifts from the living to the living—gifts inter vivos as it is commonly expressed. Gifts are not, as we have seen, themselves regarded as income, but when property has once been handed over from one person to another, so that the giver has no longer any control over it, then the income which the property yields is of course income to the person who receives the gift. Such gifts of property are not made to any great extent. People who wish to give usually prefer to retain the ownership of the property and give away the income from time to time, so that they can if they please at any moment revise their donation. But transfers of the property are considerably encouraged by the heavy taxes levied on inheritances in recent times. They are made chiefly to persons who would have received the property by way of bequest or inheritance a little later, and are consequently subject to just the same influences as inheritances, and the reasons for their inequality are the same.

The second great cause of inequality of income from property is inequality of saving. Some save much, others save little, and others nothing at all. If those who had little property saved much, and those who had much saved nothing, or exercised negative saving by spending more than their incomes, inequality of saving would, of course, not be a cause of inequality, but rather a cause tending to greater equality. But as a matter of fact it is the rich who save most, both in absolute amount and in proportion to their incomes, so that saving does not mitigate inequality arising from other causes, but aggravates it. The amount of a man's savings depends upon his power and his will to save. His power depends upon the magnitude of his income less any claims on it which have to be met whether he likes it or not, and upon the length of the time during which he has commanded the income. We do not expect to find that a young person with a small income to start with has saved much, especially if his mother has made him contribute a good deal to the support of the family. We do expect a man who started with a good income a long time ago and who had no great claims upon him to have saved a great deal if we know that he desired to save. If inequality in the desire to save were arranged so that those who had the least power to save had the most desire to do so, this might, of course, counteract to an appreciable extent the results of unequal power to save. But there is no reason for supposing any such providential distribution of desire to save, and therefore on the whole we must regard saving as actually operating to increase rather than decrease inequality of incomes.

It must be remembered, too, that the education and training of children is a quasi-investment which competes with saving in the ordinary sense of the word. As here is no object in spending more than a particular limited amount in this direction, it follows that cost of training will absorb a larger proportion of potential savings in the case of parents with moderate means than in that of very wealthy parents, thus leaving a less proportion for savings in the ordinary sense.

The third great cause of inequality of income from property is the fact that the income derived from particular property is liable to change from all sorts of causes which are beyond human foresight. If all property came to its possessors by inheritance, It is not clear that this liability to unforeseen appreciation and depreciation would increase inequality: if a number of persons are given unequal amounts by chance, and then some other chance disturbs these amounts, there is no reason for supposing that the second distribution will be more unequal than the first. But as a large amount of property is obtained by savings from earnings, and earnings are not altogether a matter of chance, but are largely subject to certain obvious rules, it follows that chance changes in the income derived from particular property do aggravate inequality. Two men earn equal amounts because they are of about equal ability and industry and work at the same trade: they save equal amounts, and invest with what good authorities would consider equal judgment, but the investment of the one turns out fortunate and that of the other unfortunate. The one becomes rich and the other remains poor.