I agree this is a serious problem and I’ve thought some about it over many years. An additional problem I see is the interaction of wealth and politics. Like, if some heir gets a billion dollars, he’s likely to use some portion of it buying political favors to stop or at least slow down how quickly he’d otherwise lose the rest of it to his bad decisions in the market.
In one perspective this is mostly not a problem of capitalism but a problem of age-related disease and death that impacts capitalism. I think if great people didn’t usually die in less than 100 years, the transitions of their wealth could go a lot better. But for the time being aging disease and death is part of the context capitalism has to deal with.
I think unless wealth is already in stuff like cash, bank CDs, government bonds, or index funds, it is best to think of it as a kind of business even if it’s not expressly called a business or organized as a business entity. Many so-called “passive income” assets aren’t really passive in the long term sense because if you don’t make good buy/sell/hold decisions over time and update your knowledge your wealth and “passive income” will reliably disappear. Owning real estate is a business. Intellectual property rights are a business. A family farm is a business. Picking stocks or private placements or debt instruments etc. is a business. Inheriting that kind of stuff is inheriting a business, with many of the same kinda problems (though not necessarily as urgent) as inheriting a store or a bank or an oil company. So where I talk about businesses I’m thinking of it in the broad sense including most forms of wealth that people inherit other than cash or index funds.
Professional management, either directly or through a myriad of trust types is one common attempt to solve the problem of inheriting businesses that helps some but brings problems of its own. The main one I’ve noticed is that effectively running a business requires characteristics like honesty, creativity, and persistence. Those are quite hard to find, hire, and retain (or cultivate in oneself, for that matter). Finding, hiring, and retaining them or cultivating them in oneself is itself a kind of business for which heirs are often not suited. It’s a hard problem. One way people try to solve it is to have the great person hire great managers, and then let the great managers hire other great managers over time. I don’t think that works very well because most of the time the level of greatness diminishes with each handoff.
And I think some great people’s roles in some businesses are practically irreplaceable. As in, no other person alive is capable of doing the great person’s job as well as the great person did it.
And I think great people tend to want to build their own thing rather than step in and continue to run some other great person’s thing.
But I also think some cultural norms about passing on wealth make the situation worse than it has to be even in the context of politics, aging disease and death, problems of professional management, and the scarcity and preferences of great people. Sometimes these norms are reflected in or encouraged by the tax code and other laws.
Who: The primary norm is to pass wealth to one’s offspring, regardless of their merit or lack thereof. There are secondary norms especially if one lacks offspring: to pass wealth to people who were especially nice to you as a reward, or to the needy, or to fight whatever disease killed you or someone you loved. There’s also a norm that the government should get whatever society thinks the owner don’t deserve to decide who gets. There’s big fights over whether that’s 0% or 30% or 90% of a large estate, but the government is always the assumed recipient of whatever fraction it is, even though we know the government spends money less efficiently than lots of other economic actors. I don’t think any of those norms are capitalist. There is little or no cultural norm or legal support for finding and passing wealth ownership to people with the desire and objective merit to best use it productively.
When: The primary norm is to pass wealth and control at or near the death of whoever produced it. There is a secondary norm of passing relatively small amounts of wealth using the annual gift tax exclusion in the relatively few years preceding death. I don’t think either of those norms is capitalist. There is little norm beyond the charitable foundations of the extremely wealthy for passing wealth to people who can better decide how to use it on an ongoing basis while the wealth producer is alive, so the producer can see how it’s going, make adjustments, and there isn’t a ton to pass at death. I think it’d be better if there were cultural norms around how to pass money productively over a greater time span.
How: There is a cultural bias in favor of passing wealth in the form it was acquired or is currently held by its producer - very often businesses in the broad sense of the word. At some level I understand this since businesses sold at or near their owner’s death tend to fetch far below market prices simply because the only one involved on the sale side who really understood the market value of the asset(s) is now dead or incapacitated. But still, people think of selling off a family business at a large discount to an investor and distributing the diminished value to heirs as tragic in a way they don’t think of those same heirs trying to run the business for years but failing and running it into the ground (~zero value) over several years. I think that’s anti-capitalist and unreasonable.
I looked some into buying a business. One thing that stood out to me and the main reason why I decided not to do it is how easy and common it is for a business buyer to destroy large amounts of value in making the purchase and transitioning ownership. And that’s even with risk mitigating factors like:
- The buyer has carefully researched what kind of business to buy and has chosen the business as a match to their interests and capabilities
- The buyer has typically put up a bunch of their own money to buy the business so has some track record with acquiring wealth in the first place and a strong incentive not to fuck it up
- The buyer has often competed with other buyers, sometimes just on price but sometimes on other factors relating to their likelihood of success at the business
- Ideally, the seller of the business remains available in a consultative role and has a carry-back financial interest in the continued success of the business
Inheriting a business interferes with the above risk mitigations. And there’s often more than one inheritor, so they may have different goals & ideas, may fight for control etc. The only upside I see for success at inheriting vs. purchasing a business is that the heir may have been involved with the business for many years before inheriting it. If an heir(s) were true business partner(s), gradually took over running the business and the inheritance is for practical purposes just a financial interest buy-out at $0, then I think that could work out OK. I don’t know how often that happens though vs. the heir(s) being mostly uninvolved or involved more like an employee until the main owner dies.
Even though buying a business is risky, unless the inheritor(s) were already mostly/completely running the business I think it’s probably better to sell the business (or the business’s assets) to the best possible buyer(s) and pass on the money to heirs rather than the business itself.
Retirement: The cultural norms of retirement seem especially fucked up to me. On the one hand a very large portion of people have a major goal in life to get to a point where they do literally nothing more productive in their career field and, for many years or a few decades either just consume or work part-time low skilled jobs to make a bit of extra money and help pass the time. A much smaller (but still sizable) proportion reject the non-productivity retirement goal but then act as if they can&will keep doing exactly what they’ve been doing in their career forever. Eventually death or severe illness catches those people and their business affairs largely or entirely unprepared. I don’t think either of those norms is capitalist. In both cases the people who could best manage a successful transition of whatever businesses they built aren’t actively involved in doing that.
Steiger’s Law: Businesses that grow beyond just the owners and maybe a handful of employees almost always aspire to survive virtually everything, including their founders’ death, ~intact and unchanged. Because making that happen successfully is a hard problem, businesses and their owners spend a ton of resources on it both before and after the death(s). I’m not sure that’s a good idea. Even when it’s nominally successful it doesn’t mean the resources spent on it were necessarily the best way those resources could have been spent. I haven’t reached a conclusion. But perhaps we’re culturally too uncomfortable just winding things down, and would be better off not planning to keep some endeavors going after their founders are gone.
Like, maybe Jobs/Apple should’ve recognized years before Jobs’ death that Jobs was irreplaceable, and should have therefore made different plans than to attempt to continue Apple as if Jobs was replaced. FWIW I think continuing Apple as if Jobs was replaced has apparently worked out OK for Apple and its customers at least so far. Maybe that’s due to Apple accumulating a ton of excess resources under Jobs (not just money but intellectual capital, corporate culture, customer goodwill, etc.) that are now being gradually spent down maintaining the approximate appearance of continuity. Or not. I don’t know.
Similarly maybe it was a bad idea for Rand to try to set up an intellectual heir. Maybe she should have recognized herself as irreplacable, and that when she’s gone she’s just gone. Trying to designate some person or organization to carry on in her name after the fact has maybe done more harm than good.