It's Not Who You Know, It's Who You Are
By Bryan Caplan
Children resemble their parents. When the resemblance is physical, we usually think it’s funny or cute. But when the resemblance is financial, it’s an Issue. Non-economists debate the merits of the cynic’s maxim that, “It’s not what you know, it’s who you know.” Economists debate the magnitude of the intergenerational income correlation.
During the past two weeks, I’ve been reading all the articles I can find on this subject. Here’s my three stage summary:
Stage 1 (1970s-80s): The intergenerational income correlation is low, about .2. This shows that capitalism is pretty fair – while many people see a class society where rich people give their kids a massive edge in life, the reality is that people succeed largely on their merits.
Stage 2 (1980s-1990s): Previous researchers underestimated the intergenerational income correlation by failing to correct for year-to-year fluctuations. The true correlation is much higher, about .4, showing that we live in an unfair class society.
Stage 3: (late 1990s – today): The intergenerational income correlation is indeed quite high. But twin and adoption studies show that most or all of this correlation stems from heredity. The reason why kids from rich families do well isn’t that mom and dad buy their way through life. The reason, rather, is that rich families have genes that cause financial success, and pass these genes on to their kids. (Casual consumers of this literature often get confused by the fact that the effect of IQ is far too small to explain the intergenerational income correlation. The key thing to remember is that there is a lot more to genetics and success than IQ).
Notice: In Stage 1 and Stage 2 , the normative subtext was quite clear. Capitalism is pretty fair! No, it’s not! On my reading, though, most researchers have moved from Stage 2 to Stage 3 without noticing that their normative subtext is more pro-capitalist than Stage 1 even imagined.
Stage 1 was defensive: “Sure, life’s not fair. The children of the rich do better. But the unfairness is pretty small, and almost vanishes after two generations.” Stage 3, in contrast, is offensive: “Life is fair. The children of the rich do better because talent breeds talent, and under capitalism, the cream rises to the top.”
Rawlsians will naturally protest that “talent is just another kind of luck.” But doesn’t my smug Victorian take follow from the facts plus normal meritocratic moral intuitions?