Intellectual history

Hugh Dalton and the “Strange Neglect” of Inherited Wealth

By Thomas James Holland

By Thomas James Holland

Hugh Dalton is primarily remembered as an economist and Chancellor of the Exchequer in Clement Attlee’s post-war Labour government; but not as a historian. He built his intellectual legacy on a novel contribution to the measurement of income inequality and the pioneering study of inherited wealth in Some Aspects of the Inequality of Incomes in Modern Communities (1920). His exposition of the fundamental role of inheritance in driving wealth inequality influenced economists such as Josiah Wedgwood, James Meade, and Anthony Atkinson. R. H. Tawney praised the work as having “sailed into an almost uncharted sea” (Dalton, 108).

Yet the entirety of part two of Inequality of Incomes, comprising eight chapters, was dedicated exclusively to tracing a “History of the Development of the Theory of Distribution.” This was surprising, given the wider shift within British economics away from history and ideas of social evolution led by W. S. Jevons and A. C. Pigou. Moreover, Dalton prefaced part two by attacking “the so-called historical method” as a “very bad substitute for the analytical,” or rather, for being “no substitute at all” (Dalton, 34). What, then, was the purpose of his lengthy history of economic thought?

As Dalton reflected in his memoir, he intended to demonstrate that past economists had ignored “to an almost incredible degree, the importance of inherited wealth as a prime cause of the inequality of personal incomes.” It was partly to understand this “strange neglect of so obvious a phenomenon,” that he undertook a “chronological classification” of theories from Adam Smith to his own time (Dalton, 105). One of the most striking reasons he gave was that most economists had given “doubtful answers to the wrong questions,” thereby slowing the progress of “the theory of distribution” (Dalton, 84, 111).

The “first glimmerings” of the theory, Dalton argued, emerged in the works of Cantillon and the Physiocrats, but Smith “contented himself” with only a few comments on the “evil effects of primogeniture” (Ibid, 37, 43). McCulloch’s discussion of inherited wealth was “defective,” for he devoted “too little attention to its effects on distribution.” John Stuart Mill’s inheritance tax proposal in Principles of Political Economy (1848) could have inspired a great leap in the theory, but “no such development had begun in 1871, nor even . . . in 1918” (Ibid, 58, 84). Gustav Schmoller of the German historical school barely mentioned inherited wealth, and in France, Pierre Leroy-Beaulieu’s study of inequality proceeded “along wrong lines” (Ibid, 94). Henry Sidgwick critiqued Mill’s proposal, and Alfred Marshall’s Principles of Economics (1890) contained “only a passing reference” to inheritance. The theory of distribution then “ran into a rut.” Ultimately, it did not re-emerge until the early twentieth century, when Edwin Cannan in England, Richard T. Ely in America, and Eugenio Rignano in Italy grasped the “extreme importance of inherited wealth in relation to the distribution of income” (Ibid, 111, 123).

Viewing “the theory of distribution” transhistorically made it easy to condemn past thinkers for failing to live up to the standards of modern inquiry. Dalton imbibed this approach from his supervisor Cannan’s History of the Theories of Production and Distribution(1893). In that work, for example, Cannan dismissed early nineteenth-century ideas about capital as appearing “to the modern inquirer a most hopeless farrago of blunders” (Cannan, 300). This condescending method, of the kind which prompted the scorn of their contemporary R. G. Collingwood, exemplified what Quentin Skinner later termed the “mythology of doctrines.” That is, Dalton’s historical account fell into the absurdity of searching for a predetermined “unit idea,” in this case “the theory of distribution,” and then criticizing past thinkers for their incompetence in failing to discuss a related doctrine that he expected to find, but which they could not have anticipated (Skinner, 64-65).

Other reasons Dalton gave for the economists’ relative neglect of inherited wealth were more plausible. It is possible that Bentham and Ricardo’s “opposition to any great change in the existing law of property” exerted such a profound influence over their many disciples that “fruitful speculation” on the subject was inadvertently impeded. While Bentham’s fear of the French Revolution constrained his stance, the stockbroker Ricardo naturally took private property for granted (Dalton, 123). Earlier economists, Dalton suggested, were instead focused upon the “great industry” springing up in the North, “in the conduct of which inherited wealth played at first but a trifling part.” Although its significance grew within the resulting context of steadily rising prosperity, the main coordinates of economics had been predetermined at the beginning of the century. This “traditional theory” dealt predominantly with categories and rarely with persons, obscuring the economic consequences of inheritance (Ibid, 125).

Yet the last three reasons Dalton gave for the absence of earlier studies on inherited wealth remain compelling today. Firstly, could it be that inheritance was viewed by many as “a perfectly obvious process,” which needed “no discussion?” (Ibid, 124) To those without leisure to reflect upon such matters, the laws governing the inheritance of wealth might easily appear part of the “inevitable order of nature,” standing almost “on the same footing as the facts of life and death, or the change of the seasons.” Economists could not be forgiven for holding such opinions.  English property law might have been “the best that could be devised” – perhaps a mocking allusion to the conclusion reached by the Real Property Commissioners of 1828 that the law was “near to perfection. Dalton maintained that it was still the duty of economists to provide evidence for this claim and compare the law’s effects with those of other nations (Ibid).

Secondly, class prejudice stymied research into the economic thought about inheritance. Excepting Mill after 1848, it is hard to deny that the sympathies of most early nineteenth-century economists “were with the propertied, rather than with the working classes” (Ibid). Bentham and McCulloch did variously condemn the feudal inheritance laws of primogeniture and entail, but as members of an affluent intellectual aristocracy it was not in their interests to actively challenge the very foundations of property ownership. McCulloch, in fact, was an aristocrat by birth: he inherited a sizable castle and estate in Scotland. The latter half of that century saw the rise of what Dalton considered the “dumb” impartial professional: proto-technocrats attempting to provide economic doctrines “equally acceptable to all classes,” and subsequently avoiding such controversial subjects altogether. In the concurrent “unsophisticated” clash between “socialism and individualism,” the former failed to consider the value of inheritance reform since their eyes were “fixed upon larger reconstructions,” while the latter passed it over in silence, perhaps apprehending “a weak point in their system” (Ibid).

Thirdly, Dalton contended that the fundamental role played by inheritance in generating massive accumulations of wealth was concealed in the popular imagination by the ideal of the “self-made man, who owes nearly all his wealth to his luck, enterprise and saving.” This was the most familiar type of capitalist at the beginning of the nineteenth century, “and to some extent even today” (Ibid, 125). Once the vastly unequal opportunities shaped by inherited wealth were better comprehended, the ideal of the “self-made” capitalist began to appear as a convenient and simplistic ideological narrative (Mill, 225-6, Beckert, 13-4, 167, 177-9, 275). He did not develop this point further in the historical chapters, though it notably touched upon the idea of distinguishing between “earned” versus “unearned” forms of income that was the subject of intense debate during the interwar period and which partly motivated his inheritance reform suggestions that concluded Inequality of Incomes. Before revaluating Dalton’s intervention, it is necessary to briefly examine some contemporaneous ideas on this “differentiation” problem.

Although Dalton illuminated the relative absence of studies on inherited wealth within the history of economic thought, he began writing Inequality of Incomes at a time when the subject had become politically incendiary. Liberal MP William Harcourt’s controversial Budget of 1894 equalized death duties between real and personal property and applied the “democratic principle of graduation” to the size of the total estate for the first time (Collini, 117, Daunton, 242, Gardiner, 297). It was Lloyd George’s “People’s Budget” of 1909, however, that paved the way for future Liberal and Labour policy by explicitly harnessing taxation to wage war on poverty (Jackson, 80). A central pillar of the Budget was an unprecedented increase in death duties, to be organized around the morally charged principle of differentiation between “earned” and “unearned” income, proposed earlier by Asquith (Collini, 119, Gardiner, 255). By 1910, the country had been plunged into a constitutional crisis and two general elections, as the Liberals attempted to push the Budget through Parliament with limited success.

That year, Dalton attended lectures by Cannan and L. T. Hobhouse at the LSE; just as the latter worked on his influential Liberalism (1911). As his future colleague — Dalton began teaching at the LSE in 1919 —Hobhouse probably had an underacknowledged impact on Dalton’s thinking about inheritance. They shared the same milieu, interrogating similar issues with divergent intellectual approaches. Emboldened by the evolving political landscape, in Liberalism, Hobhouse outlined his “functionalist” vision of property, declaring that inherited wealth “is the main determining factor in the social and economic structure of our time” (Hobhouse, 95). As the prime example of “functionless” property, such wealth was particularly ripe for taxation. For Hobhouse, the real difference was between the “inherited and the acquired,” since income from capital might “represent the savings of the individual,” and not their inheritance (Ibid). Specifically targeting inheritances would likely avoid the danger of harming productivity (Ibid, 96).

Following the Great War and the Russian abolition of inheritance in 1918, the case for radical tax reform gained fresh impetus. Tawney’s Acquisitive Society (1921) which adapted Hobhouse’s functionalist critique of inherited wealth was published just a year after Dalton’s Inequality of Incomes. As a devoted follower of anti-historicist economist Arthur Pigou, Dalton’s scheme for inheritance reform in part four of Inequality of Incomes unusually drew from his historical research to intervene within the debate over differentiation. Introducing Rignano’s principles of taxation into England for perhaps the first time, he combined these with Mill’s earlier proposal (Tawney, 244).

Dalton proposed that upon the death of “any person owning more than a certain amount of property,” their estate ought to be taxed according to the “simplified Rignano principle” (Ibid, 340). This meant a progressively graduated tax according to the size of the estate, falling only upon the part already transmitted by inheritance or gift, leaving the individual’s savings either untouched or taxed at a significantly lower rate. Moreover, “the net estate remaining after the deduction of this tax” would be subject to further graduation, such that above a specified amount, one hundred per cent of the inheritance or gift ought to be deducted; thereby implementing Mill’s suggestion to set a “maximum individual inheritance” (Ibid). Below a minimum fixed value, “inherited property would not be taxable” (Ibid, 319). Crucially, the plan would ensure that the same portion of inherited wealth could not be transmitted beyond three generations.

The scheme tackled two major difficulties raised during earlier inheritance debates. Firstly, it provided “the only practicable method of nationalizing private capital, while at the same time stimulating, rather than discouraging, work and saving by private individuals” (Ibid, 318, 328). Dalton could therefore allay Hobhouse’s fears about negative effects on productivity and simultaneously refute Sidgwick’s critique in Elements of Politics(1891); that Mill’s inheritance tax proposal would be “dangerous to industry and saving” or “liable to evasion by gifts inter vivos” (Ibid, 103). Dalton replied that gifts could be treated as inheritance since acquiring property via gift was effectively the same process. The seriousness of the problem of evasion by gift was “less than might be imagined,” as considerable amounts would “generally be traceable, and consequently taxable.” Moreover, the Rignano principle was unlikely to induce individuals to evade tax in this way because “such gifts will tend to diminish that part of a person’s property, which at death will pay the lowest rate of tax;” that is, their hard-earned savings (Ibid, 325, 326).

Finally, Dalton’s proposal tackled “the chief practical problem” of differentiating between “earned” income; property gained through work and saving, and “unearned” income; that which is “due to the work and saving of various individuals” from whom they have inherited. Rather than adopting a functionalist standpoint, Dalton concurred with Rignano that this need only be a “quantitative and not a qualitative division.” Instead of distinguishing between “pieces of land” or “blocks of shares” as they are transmitted by inheritance, it would be enough to divide the property of the deceased into parts “according to their total value” (Ibid, 318). Its practical implementation was an essentially bureaucratic, technical question, involving “little more than a sufficiently elaborate system of book-keeping by Government tax-collectors.” By this method of regulation Hobhouse’s worry about distinguishing savings in the form of capital from that of inheritance could be dealt with. Dalton had no doubts about the modern state’s capacity to establish a system of receipts detailing the amount of each individual’s taxable property transmitted through inheritance and by gift, so long as the results justified “the cost and trouble involved.” The income from inheritance tax would ultimately be entrusted to Public Assets Commissioners to pay off the national debt and used for the “gradual reorganization of industry on a socialistic basis” (Ibid, 319).

Dalton belonged to that endangered species of politician who combined practical ability with a formidable command of political and economic theory. As a reluctant historian of economic thought who approvingly quoted F. W. Maitland: that “a history, however interesting, is not a reason,” he nevertheless plundered the past for relevant ideas (Ibid, 34). Reviewing Inequality of Incomes for the Economic Journal in 1921, economist F. Lavington went so far as to define the book “as a review of existing opinion and a convergence of this opinion on a subject not hitherto dealt with as a unity.” He questioned whether analyses of the causes of inequality had suffered the “strange neglect” Dalton had supposed. How else would Dalton have produced his “chronological classification” and enlightened synthesis of Mill and Rignano’s proposals? Yet, despite his dubious credentials as a historian, there is reason to suppose that Dalton has more claim to originality than previously thought. As he explained in his memoir, the main motivation for writing his “History of the Development of the Theory of Distribution” was to recover past studies of inherited wealth as a major driver of inequality. For this purpose, he could not rely upon Henry Maine or Maitland’s legal histories of inheritance as authorities. This was because Dalton had, almost unwittingly, produced the first English language history of economic thought on inherited wealth and its consequences.

Thomas James Holland is a PhD candidate in Political Thought and Intellectual History at King’s College, University of Cambridge. His thesis explores political theories of inherited wealth between the nineteenth and early twentieth centuries, from Alexis de Tocqueville to John Rawls, questioning how these can inform contemporary debates about distributive justice. He is also interested in wider theories of property, inequality, and democracy. He tweets as @Tom_J_Holland

Edited by Tingfeng Yan

Featured Image: Photograph of Hugh Dalton. Credit: LSE Library.

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