I received interesting responses to my opinion piece last week about the social function of fat cats. One of the responses, from a libertarian-leaning soul, disputed the idea that wealth comes from the workers rather than the administrators and investors, and besides: “Fortunes rarely persist down the generations.” This is a very common idea, one that is promoted, at every opportunity, in the press and the media in the U.S. But is it true?

Gregory Clark is an economist who I’d put on the rightwing part of the political scale. In his Farewell to Alms, he made a pseudo-Darwinian argument for the genetic superiority of the elite I suspect his real allegiance is to Pareto – whose famous 20-80 ratio is numerological catnip for the ideologues of hierarchy. These disqualifiers in place, his books, The Son Also Rises, does at least try to test the thesis that fortunes rarely persist by going back over a number of centuries, in a number of societies – Swedish, British, American, etc – and tracing fortune by way of family name.  Much depends on that marker, the family name. In an interview with Mother Jones, after the book came out, Clark gave a sort of elevator speech abridging his discoveries into sound bites:

The data suggest that more than half your overall lifetime status is predictable at the point you are conceived. And that number is just as big in Sweden, and just as big in medieval England. We have not in modern high-income, public-education, open-access societies actually managed to increase the rate of social mobility above what it was in preindustrial society.

This thesis goes against what both liberals and conservatives claim for the democratic revolutions of the 18th and 19th century. But it is consistent with a persistent theme among muckrakers. In particular, this is the theme hammered on by Ferdinand Lundberg, who published a book in 1939 entitled America’s 60 Families, and another in 1969 entitled The Rich and the Superrich, which contended that there is a plutocratic consort in the U.S. that has remained stable for almost a century, and that either controls much of the private national wealth or holds it outright.

Lundberg’s thesis is not that there has been no change in the composition of the upper 1 percent – but, rather, that the appearance of new families there is the result of old family wealth flowing into new channels. GM for instance might have made many a millionaire, but the core of the money that made GM came from Dupont. Or, to take a modern instance, if Kleiner Perkins hadn’t taken on Amazon as an IPO, and if the original Kleiner Perkins founders, who started the venture capital group in 1972, hadn’t had an influx of money from Kleiner, who made his fortune from Fairchild Semiconductor, which in turn was headed by Sherman Fairchild, whose own father, George Winthrop Fairchild, started IBM – Amazon would not be where it is today. The genealogy of our companies conceals the genealogy of our plutocratic dynasties – that is the most dramatic way of putting it. A more modest way of putting it is that the new fortunes of every generation depend in ways big and small on the old fortunes of previous generations – they don’t supplant them.    

In the journalistic world, the idea that old wealth, expanded and recycled, is behind new wealth is a non-starter. It goes against the prejudices of both the wealthy and the non-wealthy, at least as the latter aspire to riches. It is definitely a downer if your purpose is to defend capitalism and that sacred freedom of all to become … billionaires. It is like a Cinderella story gone wrong, in which the Prince, after all, goes through with the arranged marriage to some princess after having his way with Cinderella, and then generously hires her as a maid. And then her illegitimate child becomes a maid, and so on, as Hollywood happy endings give way to the feudal system.

So whenever some purported study of showing that fortunes don’t last down the generations is pumped through the system, the media jumps for it. For instance, this study: the American Enterprise Institute, that stalwart engine of plutocratic reflection, published the findings of two of its researchers, Kaplan and Rauh, in 2014, which purported to show that there was a vast socially mobilizing churn that we can see by looking at the Forbes 400.

Kaplan and Rauh have divided the individual who find places in the Forbes 400 from 1982 to 2012 into three categories: that that come from wealthy families, those that come from upper middle class families, and those that come from working or middle class families. The claim to discern a distinct change from 1982 to 2012 – the number of individuals coming from wealthy families declines, while those from upper class families increases. Thus, there is churn at the top, due to the meritocratic structure of American capitalism.

This study was approvingly cited by Larry Summers in a speech patting American capitalism on the back for its meritocratic form and substance. So: is it true?  

Granting, for the moment, that the categorization, although a bit fuzzy, does actually represent three different kinds of individuals, we have to trust Kaplan and Rauh on their judgments as to which class individuals fall. They don’t include the list of all individuals on the list – in Peter Bernstein’s book about the list, All the Money in the World, there were 1302 people on the list from 1982 to 2006, which makes it likely that there might have been fifty to one hundred more in the six years after 2006 – but instead give us representative names – which is how we know that they included Bill Gates in the upper middle class group, because his father was a well known lawyer. This tells us a lot about the laziness and bias of the authors. Even a cursory glance at the numerous profiles of Bill Gates over the years would tell you that he was endowed with a million dollar trust fund by his maternal grandfather, who owned a Seattle bank. A million dollars back in the sixties was a figure to reckon with. According to Google’s inflation calculator, that sum is worth 7million dollars today. If Kaplan and Rauh truly think 7 million dollars only puts you in the upper middle class, they need to get out more. And if one can’t trust the authors about Gates, one of the five names they mention, how are we to trust them about the rest?

Of course, family money is a tricky subject. Carl Icahn definitely came from a middle class family. On the other hand, when Icahn was 32 and wanted to buy a seat on the NYSE, it was certainly convenient that he had an uncle, Elliot Schnall, who was a Palm Beach millionaire and who could loan him the money without questions.

This leads us to a much larger criticism concerning how well the 400 represents dynastic wealth. In fact, the very framework seems to occlude it. In 1987, CBS news reported that, curiously, there was not a Dupont on the list, even though the Dupont family was worth an estimated 10 billion dollars. CBS resolved this enigma by pointing out that if each of the 1500 Dupont relatives got a share of that money it would come to 5 million apiece. However, this is a deeply misleading. The Dupont fortune operates as a unified entity through family trusts. As an entity, it is as unified as the ‘Gates’ entity. In a list of individuals going from 1982, sheer mortality and reproduction would naturally diminish the part of the inheritors, but this would not really give us an idea of how much money is under dynastic control. In Lundberg’s 60 families, for instance, there are names that seem foreign to us, who are used to reading about tech barons and hedgefunders. But because they have receded from the press spotlight doesn’t mean that they have “lost their fortunes”. This fact is easy to disguise, because few journalists or economists are going to really try to find where the money goes.  

Sometimes, the journalistic disinterest in where the money goes turns into outright journalistic malfeasance. For instance: in 2015 the Williams Group wealth consultancy put out a publicity release that stated that 70% of wealthy families lose their wealth by the second generation, and 90% by the third. This was regurgitated in the business press as a fact, rather than fact-checked. Then regurgitated again, as though it originated not in a company pushing its songbook but in some serious journalistic investigation. So, for instance, Atlantic Magazine’s Ester Bloom (September 2015) quoted this stat as originating from  Time Magazine, and went on to survey some of the gilded age families with a hasty dab of research. Nobody checks these stories. So to demonstrate the thesis, Bloom presses the Gould family, with a fortune derived from Jay Gould, the famous robber baron, into the confines of the Gone with the Ritz narrative.  I’m going to quote the entire passage because it is so egregiously sloppy, so incredibly refutable, that it would not pass by the merest 15 minutes worth of factchecking if it didn’t adhere to the contours of a well-beloved myth:

Jason “Jay” Gould, the original 19th-century robber baron, is one of the richest American citizens of all time and possibly one of the richest people, ever.* He made his money in railroads, by attempting to corner the stock market, and by being what CNBC has called one of the worst CEOs ever:

Gould sold out his associates, bribed legislators to get deals done, and even kidnapped a potential investor. He duped the U.S. Treasury, pushing up the price of gold and prompting a scare on Wall Street that depressed all stocks. After hiring strikebreakers during a railroad strike in 1886, he was reported to have said, “I can hire one half of the working class to kill the other half.”

Where did his billions go?

Jay had several children and, among them, they married a Tallyrand, a Baron Decies, and a Drexel. Jay’s oldest son, George, inherited the family fortune. George had seven legitimate and three illegitimate children, all of whom he recognized in his will. But more of George’s money went to creditors than to his offspring: He had $30,000,000 to bequeath when he died, according to his obituary in the Times, down from his father’s peak of $77,000,000 (not adjusted for inflation). Yet even that was later revised down by the Times to only half as much. After the creditors were paid off, George’s children were said to collectively receive a little over $5 million in 1933 dollars.

In other words, the fortune of the man who once helped collapse the stock market didn’t survive the 1929 collapse.

None of Jay’s various children or grandchildren seems to have done anything with the great financier’s remaining money except spend it on polotennis, and litigation.”

Now of course this is an ultra-screwy description of the Gould family fortune. Since one of his daughters married into one of the richest families in France, and their combined fortune is powering descendants to this day, I could go in that direction. The key role played by marriage, and by daughters, in the preservation and transmission of family fortunes, is overlooked by reporters because of: sheer sexism.

But instead, let’s look at the poor Goulds with their 5 million dollars in 1933 currency – which in today’s terms is 94 million dollars. This is why Ester Bloom did not calculate that money in today’s terms. But is it true that it was all spent on polo, tennis, and litigation?

Ask Kingdon Gould III. Ester Bloom should have. His father, who didn’t dissipate his money on polo but spent it on becoming a parking garage king, was an ambassador to the Netherlands, and made the list of 400 wealthiest Americans in 1986. Not bad for the second generation.  Did his children spend their money on polo, and are their grandkids living in trailer camps? No. Kingdon Gould III expanded on the real estate kingdom that his dad created and is often listed as one of the wealthiest denizens of D.C. His company is currently building Konterra, a three billion dollar mixed us center in Laurel, Maryland.

So: why did Ester Bloom look up the NYT archives to see how much Jay Gould left at his death, but ignored the easily available evidence of the continued wealth of family members, which is even now leaving a big mark in the D.C. and Maryland real estate space? I don’t think it is just that she is a bad journalist. This is the result of a story line that is as firmly in place as the one about how America only intervenes in the affairs of other nations to promote democracy. It is a guiding myth.

Luckily, it is a myth that is breaking up. Gregory Clark’s work, which is hamstrung by his peculiar view of genetic endowment, and his search for Paretian laws, is still useful. Recently, Fabian Pfeffer and Alexandra Killewand have been doing work on intergenerational transfers of wealth that capture the larger reality of such transfers. See their article, “Generations of Advantage. Multigenerational Correlations in Family Wealth” in Social Forces (June, 2018) for their tentative conclusions, and, as well, for the bibliography. Since wealth as opposed to income is hard to track in the United States, researchers have to make a lot of inferences. There are no hard and fast figures here. Anybody who seizes on the Forbes 400 list as a sociologically conclusive data point is not serious. Researchers have to take into account the multiple ways to disguise family wealth offered by the panoply of tax-dodging legal constructs: most popular are family investment trusts, which are pretty much black holes to the outside observer.

Luckily, it is a myth that is breaking up. Gregory Clark’s work, which is hamstrung by his peculiar view of genetic endowment, and his search for Paretian laws, is still useful. Recently, Fabian Pfeffer and Alexandra Killewand have been doing work on intergenerational transfers of wealth that capture the larger reality of such transfers. See their article, “Generations of Advantage. Multigenerational Correlations in Family Wealth” in Social Forces (June, 2018) for their tentative conclusions, and, as well, for the bibliography. Since wealth as opposed to income is hard to track in the United States, researchers have to make a lot of inferences. There are no hard and fast figures here. Anybody who seizes on the Forbes 400 list as a sociologically conclusive data point is not serious. Researchers have to take into account the multiple ways to disguise family wealth offered by the panoply of tax-dodging legal constructs: most popular are family investment trusts, which are pretty much black holes to the outside observer.

So the rough answer to the statement that “fortunes rarely persist down the generations” is that it is true, if at all, of the smallest fortunes, like grandmother’s wedding ring. The big Gilded Age fortunes did not disappear in the social mobility churn. They are still chugging along, in Palm Beach, Westport and Greenwich, and wherever a venture capital  fund manages an IPO of a hot start-up. There’s always room at the top – for people who are pretty near the top. Don’t worry about the great great great grandkids of the Social register of 1912 – chances are you work for them.

Roger Gathmann
Roger Gathmann

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