An International Comparison of #Inherited #Wealth (#OldEurope vs the #USA)

Inherited Wealth over the Path of Development: Sweden, 1810–2010

by Henry Ohlsson (henry.ohlsson@riksbank.se), Jesper Roine (jesper.roine@hhs.se) and Daniel Waldenström (daniel.waldenstrom@nek.uu.se)

Abstract: Inherited wealth has attracted much attention recently, much due to the research by Thomas Piketty (Piketty, 2011; 2014). The discussion has mainly revolved around a long-run contrast between Europe and the U.S., even though data on explicit historical inheritance flows are only really available for France and to some extent for the U.K. We study the long-run evolution of inherited wealth in Sweden over the past two hundred years. The trends in Sweden are similar to those in France and the U.K: beginning at a high level in the nineteenth century, falling sharply in the interwar era and staying low thereafter, but tending to increase in recent years. The levels, however, differ greatly. The Swedish flows were only half of those in France and the U.K. before 1900 and also much lower after 1980. The main reason for the low levels in the nineteenth century is that the capital-income ratio is much lower than in “Old Europe”. In fact, the Swedish capital-income ratio was similar to that in the U.S., but the savings and growth rates were much lower in Sweden than in the U.S. Rapid income growth following industrialization and increasing savings rates were also important factors behind the development of the capital-income ratio and the inheritance flow during the twentieth century. The recent differences in inheritance flows have several potential explanations related to the Swedish welfare state and pension system. Sweden was “un-European” during the nineteenth century because the country was so poor, Sweden is “un-European” today because so much wealth formation has taken place within the welfare state and the occupational pension systems.

URL http://econpapers.repec.org/paper/hhsuulswp/2014_5f007.htm.

Review by Guido Alfani (Bocconi University, Milan)

Summary

The paper by Ohlsson, Roine and Waldenström was distributed by NEP-HIS on 2014-08-25. It provides annual estimates of inheritance flows and of the share of inherited wealth over total wealth for Sweden covering fully two centuries, from 1810 to 2010. In this period, Sweden changed deeply: originally a relatively poor and mostly agrarian country, by the 1970s it was one of the wealthiest areas of the world. It also became known for its particularly extensive welfare state.

Building upon earlier research conducted by Roine and Waldenström on wealth concentration and on the wealth-income ratio in Sweden, the paper points out a striking difference between such country and other European areas: while in nineteenth-century France and U.K. the wealth-income ratio was in the 600-700 percent range, in Sweden it stayed within the 300-500 percent range until the early twentieth century. These values are similar to those characterizing the U.S., and the authors argue that they go hand in hand with the limited importance of inheritance flows in nineteenth century Sweden and the U.S. compared to France and the U.K. In both Sweden and the U.S., limited historical accumulation of wealth explains initial low wealth-income ratios.

However, the similarities stop here as the authors describe the first as a poor country characterized by sustained out-migration, and the second as a “land of opportunity”. By 1950, in all the four countries wealth-income ratios had converged to low levels (generally speaking, in the 200-400 percent range, with Sweden even falling below 200 in the 1970s). In recent decades, all four countries experienced a tendency to the increase in the wealth-income ratio. In Sweden, however, the increase has been smaller and what is more, it has resulted into an only minimal increase in inheritance flows.

The core of the paper consists in an attempt to reconstruct the long-term evolution of inherited wealth (b), which is shown to have been around 11 percent of the national income throughout the nineteenth century (half the figure for France and the U.K.), later dropping to just 5 percent around 1970. Following Piketty’s approach, the authors decompose the inheritance flow into its determinants which comprise, apart from the wealth-income ratio (β), the ratio of the average wealth at death to the average wealth of the living (μ) and the mortality rate (m). This can be described with a simple formula:

b= β·μ·m

The reason why we are interested in the share of inherited wealth is that, according to what Piketty (2014) suggests, if the share of inherited wealth is too high then it may result incompatible with the principles of meritocracy and social justice which characterize modern democracies. The authors find that in Sweden, in the long run the wealth-income ratio was the main driver of changes in the share of inherited wealth (in its turn, the wealth-income ratio was influenced by changes in private savings and by fluctuations in the growth rate). However in recent decades, an increase in the wealth-income ratio has only partially translated into an increase in the share of inherited wealth, essentially due to a decline in the ratio of the average wealth at death to the average wealth of the living. The authors provide two possible explanations for this: the fact that new wealth was accumulated among the relatively young, or the retirement savings pattern which, in comparison to France and the U.K., would lead the Swedish to be keener on decumulating private wealth.

Comment

Ohlsson, Roine and Waldenström provide a novel perspective on an old story – how Sweden became an exceptionally “egalitarian” Western society – by making excellent use of the analytical tools produced by the recent wave of research on long-term changes in inequality. They provide many interesting and useful insights into two centuries of Swedish history, although sometimes more detail would be useful. For example the statement, that maybe the recent increases in the wealth-income ratio translated only partially into an increase in the share of inherited wealth because new wealth was accumulated mainly by the relatively young, would probably require more supporting evidence.

Particularly interesting is the analysis of the role played by the public in transferring wealth inter-generationally, by means of an exceptionally generous welfare state which basically replaces part of the private inheritance (and influences the pattern of private savings). Perhaps this aspect would have been worthy of further discussion, clarifying for the international reader how such welfare state system came into being, but also pointing out at possible cultural differences between the Swedish and others which might explain a preference for both a more developed welfare state, and lesser wealth (and income) inequality in general. Instead, Ohlsson and colleagues simply suggest that Sweden was «un-European» essentially because «old wealth was not as important in Sweden as it was in France and the U.K. in the 1800s», this in turn being due to the fact that «Swedes were so poor that they simply needed to eat almost all their income in the pre-1900 era» (pp. 21-22). But, looked at from the view point of continental Europe, Sweden has many other peculiarities which might be relevant in explaining the dynamics that the authors so convincingly reconstruct. This being said, the paper is clearly an important contribution to current debates on long-term changes in inheritance and inequality, pointing out many aspects which would well be worthy of more international research.

References and Suggested Further Reading

Alafani, G. (2014) “Economic Inequality in Northwestern Italy: A Long-Term View (Fourteenth to Eighteenth centuries)”, Dondena Working Paper, n. 61, March 2014.

Atkinson, A.B. (2012) “Wealth and Inheritance in Britain from 1896 to the Present”, Working Paper, Oxford University.

Lindert, P.H. (1991) “Toward a Comparative History of Income and Wealth Inequality”, in Y.S. Brenner, H. Kaelble, M. Thomas (eds.), Income Distribution in Historical Perspective (Cambridge: Cambridge University Press), pp. 212-231.

Piketty, T. (2014) Capital in the Twenty-First Century (Cambridge, MA: Harvard University Press).

Piketty, T., G. Postel-Vinay, and J-L Rosenthal (2006) “Wealth Concentration in a Developing Economy: Paris and France, 1807-1994”, American Economic Review, 96(1): 236-256.

Piketty, T. and Zucman, G. (forthcoming 2014), “Capital is Back: Wealth-Income Ratios in Rich Countries 1700-2010”, Quarterly Journal of Economics 129(3).

Roine, J. and D. Waldenström (2009), “Wealth Concentration over the Path of Development: Sweden, 1873-2006”, Scandinavian Journal of Economics , 111(1): 151-187.

Putting Round Pegs in Square Holes

Economía Neoinstitucional: Prueba Falsable a las Hipótesis de Douglass North en Colombia
(Neoinstitutional Economics: The Falsification of Douglas North Hypothesis in Colombia)

by Fernando Estrada (Universidad Externado de Colombia)

Abstract: This article aims to propose a reading of political (dis) order in Colombia, using as a theoretical source Douglass North’s reflections on the economic formation of political institutions. The contributions of this letter are very preliminary in nature and can better be understood taking into account two objectives of the research project: (1) explain why, in Colombia there are very limited conditions for coordinating collective action, (2) what direct and indirect effects has the armed conflict and civil war had on the political (dis) order.

URL: http://econpapers.repec.org/paper/pramprapa/58515.htm

Revised by Stefano Tijerina

This paper was distributed by NEP-HIS on 2014-11-17. In it Fernando Estrada argues that a historically weak state, the prolonged civil war, political corruption, institutional failure, the lack of political accountability, a culture of dishonesty, and the numerous armed conflicts currently succumbing Colombia have led to citizen’s loss of credibility on its institutions, thus today’s “political (dis) order.” He uses the case of Colombia to test the falsifiability of the theory on political order developed by Douglass North, William Summerhill, and Barry R. Weingast in Order, Disorder, and Economic Change, concluding that there is an urgent need for political and institutional structural change, accountability, and an effective and firm implementation of the rule of law, in order to achieve the political and economic stability necessary for the effective implementation of a market economy. If these positive initiatives are achieved, says Estrada, then it will be possible for Colombians to construct a long-term political order that will “foment credible commitments” between citizens and their political institutions.

Throughout the paper Estrada focuses on current issues that illustrate why Colombia is suffering from a systemic political (dis) order. Through the use of commentaries from Colombian public and academic figures, he points out that private-public relations within the market system have failed due to political corruption and institutional failure, and that there is an urgent need for social, political, and institutional reform that sets the course for what North, Summerhill, and Weingast refer to as consensus based political order that provides the necessary conditions for the advancement of a market economy.

Fernando Estrada

Implicitly, Estrada reveals that the theory of political order withstood the falsifiability test since his conclusions on citizenship rights, the absence of economic, political and judicial guarantees, the predominance of political corruption and dishonesty, and the lack of “productive and entrepreneurial” incentives, have resulted in a complete loss of credibility on the political system. Colombia, according to the theory on political order, is not democratic or able to effectively function within a market economy, it is a country with an “authoritarian” political order where “political officials cannot sustain a set of universal rights, and instead abuse the rights of a major portion, if not all of the citizenry.”

Estrada however does not question the reasons why the nation’s economic, social, and political development has followed the “authoritarian” path for the construction of political order. His disregard for historical evidence impedes him from better understanding and explaining the realities of the development of Colombia’s political order. An analysis on Path Dependency would have allowed Estrada to center on the historic constrains imposed on the definition of citizenship, why economic, political and judicial status quo has prevailed over time, why political corruption and dishonesty has been perpetuated over time, and why economic and political regional elites have opposed the expansion of the market economy. The historical analysis would have provided a local explanation to a local reality and would have allowed Estrada to move away from the generalizations of imported models and theories that only partially explain the outer layers of the nation’s realities.

Douglass North

A historical analysis would have provided clarity that seems to be missing in Estrada’s argument. This would have provided empirical evidence that showed that Colombian citizens distrust their institutions because they were never part of the process of creating them in the first place. It was the case of democracy, policy, and the majority of the key institutions that have shaped the national distributive, financial, and security policies, including the Departamento Nacional de Planeación (DNP), Banco de la República, and the Departamento Administrativo de Seguridad (now known as Agencia Nacional de Inteligencia Colombiana – ANIC); all the result of foreign mandates to fit the needs of both domestic “power individuals” and the international system.

Walter Kemmerer and President Pedro Nel Ospina during the Kemmerer Mission 1923

It is important to look at theoretical models but it is more important to contextualize the theory and situate it within its local reality. There is a need to develop local theoretical models and explanations based on a self-evaluation of the nation’s particular historical trajectory and experiences. The solution lies in analyzing the uniqueness of Colombia’s institutional and programmatic development and the historical implementation of the idiosyncratic definition of democracy and capitalism.

Political (dis) order has been one of the pillars of nation building since independence. It has been the political and economic elite’s way of securing their own personal sources of livelihood, and it has been the formula used by foreign capitalist interests to secure resources and influence in Colombia. Their preservation over the control of the political order has relied on the state, its institutions, and policies that throughout the twentieth century achieved a high level of sophistication and arte now capable of disenfranchising sectors of society and limiting the rights of citizenship and personal security vis-à-vis one of the most progressive and pluralist constitutions in the international system.

Contrary to North, Summerhill, and Weingast fundamental requirements for the creation of political order within a market economy, Colombia’s historical trajectory shows that political order may also be achieved by constricting and limiting citizen’s access to institutions that guarantee their personal security, economic security, and that of their families, yet capable of guaranteeing institutional security to local elites and foreign interests. For example the land use policies of the 1920s that guaranteed access of the Colombian subsoil to Tropical Oil or the current mining policies and the supportive institutions and programs that provide access to foreign transnational corporations while at the same time limiting the rights of local artisan miners; past and present realities that allow the effective operation of the market system while at the same time limiting the actions of citizens within the political order.

Colombia’s founding fathers, the leaders that carried the nation into modernity, and those of the present time have never had as their central objective the construction of an open society or political order based on consensus. Citizen’s credibility on the political system and its institutions never impeded economic and political elites from insisting on the implementation of their own and unique political order, even after the emergence of guerrilla movements in the 1950s, the escalating pressure of labor unions throughout the Cold War, the indigenous movements, the emergence of narcotics trafficking as a parallel economy, the emergence of highly sophisticated criminal organizations, and the current array of armed conflicts that are asphyxiating Colombia’s society. Surprisingly, what seems to have mounted pressure on Colombia’s elites to consider moving toward a political order based on consensus has been the international system and their demand for a change in the political order that will allow Colombia to effectively integrate itself into the market system.

Foreign investors, transnational corporations, global resource extraction companies, and the powers of the global market system require new nurturing grounds for the expansion of capitalism, narrowing in on nations such as Colombia. It is these forces that are pushing for changes in the structural nature of the nation’s political order. Aware or unaware, Estrada advocates for changes that could transform Colombia’s political and institutional system into North, Summerhill, and Weingast’s consensual based political order.

Following a neoliberal line of thought, Estrada concludes that Colombia needs to move toward the consensus model in order to effectively navigate the international system and fully immerse in the complexities of a market economy, and that it must bring to an end the civil war and the numerous other armed conflicts that impede the nation from moving forward. What is ultimately recommended is that Colombia finds its own unique ways of establishing and securing political order, even it if means constructing a reality that projects institutional and programmatic order, and that generates civil credibility under a system that favors the interests of the international system.

The problem of constructing realities that project institutional and programmatic order.

Estrada uses the falsifiability test on North, Summerhill, and Weingast’s theory on political order to justify the promotion of neoliberal institutional change in Colombia. He suggests changes that apply to the particular idiosyncrasies of Colombia, including greater accountability, eliminating clientelism from political relations, the establishment of a system that fosters political and economic competition, consensus among elite groups, society’s unquestionable trust on the consensus based political order, a decreasing role of the state in economic and social matters, cultural change toward a model of meritocracy and self-discipline, and judicial, programmatic, and institutional adjustments aimed at improving investor’s confidence. These changes however do not guarantee the “creation of credible commitments” that, according to North, Summerhill, and Weingast, are necessary for the transition from an authoritarian political order to a consensus based political order.

The theorists suggest that in order to achieve this transition, citizens’ own belief systems must “translate into the institutions that shape performance.” Legitimacy and credibility may only be achieved if constructed by the majority; in other words, if Colombian’s collectively decide to move forward with a market economy. However this is impossible to achieve under current distributive realities. Politicians, representatives, and the bureaucracy must “honor” the rights and norms that regulate the consensus based political order, leading to the “self-enforcement” of the model. This, in the Colombian context, is impossible based on current realities and it would require a revision of the status quo, something that has historically lead to armed conflict. According to the theory, credibility on political and economic policies and institutions may only be achieved if the system guarantees citizens the rights and freedoms to prosper economically; security of income and investment become the crucial drivers of national economic growth. This again would require political and economic elites to accept a change in the status quo as well as the international system’s acceptance of a non-commodity supply role for Colombia, changes that seem utopic at this time.

The implementation of consensus based political order in Colombia seems unrealistic today. The foreign model does not fit with the nation’s current reality. Estrada’s approach forces us to question how effective is the implementation of foreign models and theories to explain local phenomena, knowing well that theorists like North are developing ideas and solution to complex problems that depart from their own cultural and social biases? Why rely on foreign solutions and explanations to resolve and transform local realities when it is clear that they are not a perfect fit? As in the case of Colombian political institutions, the dependency on foreign models at the end result in a frustrating experience of “putting round pegs in square holes.” The falsifiability test fails when one does not compare apples with apples; when one tries to force external realities into local contexts. The consensus-based model of political order fits well with the realities of the United States but not in Colombia. This is a country in the early stages of nation building, in the one hand closing the long chapter of a civil war while on the other juggling the complex realities of the market system.

The impact of importing foreign models to solve local economic development problems.

Further Readings

North, Douglass C.; William Summerhill, and Barry R. Weingast. (2000) ‘Order, Disorder, and Economic Change: Latin America Versus North America’. In Bruce Bueno de Mesquita and Hilton L. Root (eds) Governing for Prosperity. New Haven: Yale University Press, pp. 17-59.

North, Douglass C.; John Joseph Wallis, and Barry R. Weingast. (2012) Violence and Social Order: A Conceptual Framework for Interpreting Recorded Human History. Cambridge: Cambridge University Press.

Page, Scott E. (2006) ‘Path Dependence’ Quarterly Journal of Political Science, 1: 87-115.