Capitalism, Retirement and Heirs

Pro-capitalist arguments say that, in an actual free market, money accumulates with those who do a good job and earn it.

Suppose that works out pretty well. What happens next?

After a while, those high-merit businessman retire or die.

It’s extremely hard to find good heirs/replacements, be they family members or a new CEO to replace you. Great people like Ayn Rand, Eli Goldratt and Steve Jobs failed at this.

There are older examples like the Rockefellers. I don’t know the exact timelines: without looking it up, I think things got bad one to three generations after John D Rockefeller, the original guy.

I think a lot of pro-capitalist argument glosses over this problem. It says that, if the heirs are not deserving, one of two things will happen.

  1. They could be non-opinionated investors/savers (e.g. buy index funds and bonds). This is basically harmless.
  2. They will squander the money, be a bad leader, make bad decisions, etc…

If they actually do anything bad (case 2), they’ll lose money. Their control over wealth will go down. Money will move on to whoever is good now. So the problem will sort itself out, right?

Yes, but, in can cause a lot of harm in the meantime. If some heir squanders a billion dollars, that has large negative effects in people’s lives. And the wealth doesn’t just get transferred to other people. A lot can be destroyed.

For example, let’s suppose that Tim Cook is an undeserving boss of Apple who is doing a bad job. If he runs Apple into the ground, eventually some new tech companies will replace Apple in the market. But that will take a long time. Customers will be faced with bad tech products for a few decades while they wait for new stuff to replace Apple’s products, and then they’ll also have to switch ecosystems (learn a new operating system, buy new apps on a new platform instead of continuing to use the apps they already bought, etc.). That’s really bad.

Sometimes new bosses change a company’s priorities but the company still does fine financially for a long time. They might even do fine in the long run – but screw over their previous customers (because they took over the market to serve those customers, then abandoned them). This can happen without any leader retiring or dying, but a leadership change is a common cause (so is a company being sold to a different company, which also causes a leadership change).

Spouses getting control over a ton of wealth that they didn’t create and don’t understand can also be bad in a similar way. It’s particularly a problem with divorces, since at that point the non-businessman spouse will no longer be listening to the leadership of the businessman.

There’s no easy solution – particularly with a mindset of free individuals acting independently, not central rulers controlling people’s lives – but I think the problem should be acknowledged as serious.

Sorting out undeserving heirs could take one to three generations and we could get new undeserving heirs on average every like 1.2 generations (in other words, the problem usually happens after just one generation, but sometimes an heir/replacement is good, which raises the average above 1).

If you mentally model things as every great businessman has bad heirs, and we get new great businessmen in each generation, and they manage to get a lot of wealth, and then they die and different people without much money are the next great businessmen, repeat, that actually causes a huge amount of chaos, disruption, lost wealth in transitions, etc.


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.


I agree. Also, the situation might be worse than you think.

At least in Australia (IDK about the US or UK/EU/etc.), I’ve been advised not to draft a will that names a non-family member as the major beneficiary, and not to name a non-family member as a beneficiary of a trust. These things aren’t impossible, but they’re much more difficult.

WRT wills, basically the next of kin can challenge a will for inheritance – and this often works, though not always. My impression is that, if you wanted your will to give ~90% of your assets to X person (not blood related), then you should proactively argue in your will why your next of kin don’t deserve it. Either that, or compromise and give ~67% to next of kin and 33% to someone else – that’s better than the court finding in your kins’ favor. IDK if that pans out with large estates, though. In any case, it’s hard to argue in court once you’re dead. So it’s probably wise to mention, in your will, an unlimited legal fund to defend challenges to the will including permission to use the estate as bank roll. That’s a pretty shit use of an estate, though.

WRT trusts, it mb is as simple as: it’s not much work to add family members, but it can be a major PITA to add other people. You can name e.g., “my immediate kin”, but naming an actual person is difficult. (The solution is to do some tax minimization later on and figure out something that works over a longer period.)

Either way, there’s substantial pressure from the legal system to positively bias family, and if you don’t (w/ willis) then things might turn out worse than if you compromised.

edit-extra wrt wills: I’ve also been advised not to try anything fancy, even if it’s simple. The idea I wanted was to name an executor and that executor had full control over the estate including disbursement. A major reason for that was to allow disbursement without excessive taxes via e.g., capital gains from liquidating assets (esp if a company or trust was involved). It’s something I’ll reconsider when I have enough assets to justify it, but it’s impractical to do it proactively.

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I’ve heard that in the US wills can be challenged on psychiatric grounds, particularly if you make major changes (like cutting out some relatives) when you’re old/near-death and possibly senile or possibly unduly influenced and controlled by someone (like your second wife). Szasz may have written something about this.

I’ve heard that in the US using a trust is better than using a will that has to go through probate court. You can also gift a lot of money before your death to help avoid challenges or probate court (I don’t think that offers guaranteed success though).

I also understand that you can assign beneficiaries in bank and investment accounts so that ownership can be transferred automatically on death without a will or probate court. I assume that too could be challenged in court.

I’ve heard that if you want to cut a relative out, you should leave them a token amount (small but not insulting, like $5,000 not $5 – more if you’re rich) so they are named in the will. It makes it look more intentional instead of like you forgot them.

I’ve never heard of having to give the majority to relatives or being unable to give a lot to other people. Certainly you can leave a bunch to charity. I guess leaving much money to something other than relatives or charities (e.g. to friends or coworkers) is rare so I haven’t heard much about it.