Intergenerational Wealth: the incredible 600-year-old story of Florence, Italy

There’s a certain kind of American man, middle-aged with maybe a little work done, that I seem to meet as a seat-neighbour on planes. On a flight from Sydney to Hobart, one sat beside me. I could tell he was American from his chirpy demeanour even before he spoke. I was editing a video in a cramped Qantas economy seat. He adjusted his baseball cap. “Oh”, he said. My head swivelled to take him in. Fit, mid-fifties, rises at 5am, takes endless work calls where he nods meaningfully. “Are you a YouTuber?”.

John, it turned out, was the kind of man many of my corporate ex-colleagues wanted to be. Confident, expecting an answer, a sensitive family patriarch. He’s the president of a successful company, with interests, side hustles and a sense he’d give generously to the arts fund. “I work for a wealth management firm”, he said, underplaying his ownership share. “We help rich people, America’s 1%, I guess, maintain their wealth and pass it on”.

Risky Business

I worked in a different branch of finance for 25 years: insurance. That’s based on the idea of risk. You might crash your car, get sick, die. Insurance aims to offset the risk of loss and protect your current position. Wealth management has some of the same protective goals, e.g., how it offsets a very specific intergenerational risk: the shirtsleeves curse.

Shirtsleeves to Shirtsleeves

The ‘shirtsleeves’ idea is that family wealth will decline across generations, meaning the original wealth creator (who started in shirtsleeves) becomes rich, the second generation squanders it and the third generation returns to shirtsleeves1. Wealth ebbs away like the decaying half-life of uranium, just faster. Some people call it the three generation curse. While most wealth managers are sick of the story2, it persists because a parable about avoiding inherited wealth mismanagement sells services.

The Irish Connection

I’ve come across very few Irish families with that kind of intergenerational money. They exist but not always in the Sunday paper. Meeting John on the plane made me think of a brush with serious family cash, albeit on the fringes. I met a “G4”, each generation was coded to indicate its distance from the originator of the family wealth. A G4 was the fourth generation. I didn’t see evidence of the shirtsleeves curse, but something different, which I’d call “generational share dilution”.

Premise: The split of shares from Company A diminishes with the growth of each generation

Bob, a G2, owns 20% of Company A and has 4 kids, they inherit 5% each.
Millicent, a G2, owns 20% of Company A and has 1 kid. They inherit 20%.
A G3 kid may be very differently off from another G3, all else being equal.

However, all else is not usually equal. Over history, family members might be disinherited for not meeting norms, daughters were married off and lost a portion, the idea of primo genitor rewards the accident of first born male with a bigger settlement. Bastards usually got nothing from the intergenerational pot of wealth.

We should also ask, what is the value of the thing being inherited? If it’s straight cash or cash arising from a pot of shares, that might dilute over generations. The dilution is only offset if the family works to grow the value of the pot. But what if the inherited value is something else, money as a key, signifying access to social advantages?

The Florentine Connection

When I read that the five richest families in Florence were STILL the richest, I had to ask how did these families maintain their advantage?

Barone & Mocetti3 wrote a paper comparing information about people in Florence in 1427 versus 2011. The research relies on the idea of ‘pseudo-descendants’, which connects wealthy 1427 ancestors to modern 2011 ‘descendants’ via patrilineal surnames rather than DNA. So if Famiglia A exists in 1427 and 2011, the researchers used their information for comparison. Using those data, the authors claim that persistent intergenerational wealth in Florence relied on two factors:

  1. Where an ancestor had an elite occupation like banker, lawyer or goldsmith (alongside access to privileged groups or clubs), their offspring were now in equivalent roles and have equivalent privileges. Medieval nepo babies.
  2. Historically, intergenerational mobility was low, meaning that any difference of socioeconomic status between two successive generations was fairly small.

I can’t help but think of Florentine families who haven’t made it into the Top 5 across 600 years. What was different for them? The authors recognise the ‘glass floor’, meaning no wealthy family member could be permitted to fall into poverty. Poorer families didn’t have those resources. Nor did they have access to elite groups, which helps wealth to ‘stick’. Wealthy individuals can monopolise opportunities, which is always at the expense of other groups, further embedding their privilege. The Florence study reveals that inequality is the key driver in intergenerational wealth.

Is bias always bias?

We might imagine that modern families are pretty different from the Florentine example. Children don’t necessarily enter the ‘family business’ any more and socioeconomic mobility can move up and down between successive generations. At work, equality and inclusion programmes try to combat bias and disadvantages, often not very successfully. However, the world (as constructed) is full of disparities, some ‘natural’, many not. In the context of family, the intentions of wealth managers like John seem honourable: to help parents minimise disparities for their children and generations they’ll never meet.

Conclusion

I wish I could respond to this fascinating study of wealth with an easy answer to “what can we do?”. At the extremes, you might see some inspiration or even reassurance in the Florentine example. Alternatively, would you scrap the capitalist system or ‘eat the rich’? Tax inheritance or interfamilial gifting to eradicate the advantage of ancestral wealth? I might be a fence-sitter by saying this: I don’t hero-worship the wealthy, or bow the knee to privileged royals, or wish I’d inherited millions. But at the same time, I support parents who want their child to have access to any learning opportunity or play or activity that supports that child’s growth towards happiness. I’d like to measure my legacy in the wealth of craic (Irish: a good time). But I’m not naive: I can see that access to education, play or activities is already unequal. And that wealth makes access to opportunities much easier. So all I can say is that my voting choices are better informed from taking the time to write this article and think about economic policy. Now that is quare stuff.

  • When you read this story, did you develop an opinion on intergenerational wealth? Please join the conversation and add your comment below.
Footnotes
  1. https://www.kansascity.com/news/local/community/johnson-county/article280478329.html ↩︎
  2. https://www.forbes.com/sites/dennisjaffe/2019/01/28/the-shirtsleeves-to-shirtsleeves-curse-how-family-wealth-can-survive-it/?sh=db361566c8d4 ↩︎
  3. https://academic.oup.com/restud/article-abstract/88/4/1863/5958123?redirectedFrom=fulltext&login=false ↩︎
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