How do you become rich and successful? Through luck and chance, says sociologist Katja Rost. Or by inheriting, adds historian Simon Teuscher.
From rags to riches – it's the ultimate hackneyed cliché. But it also sums up an important article of faith for our meritocratic, middle-class society. Namely, that hard work and dedication will get you far. But while effort and diligence are certainly not detrimental to success, there are two other factors that are far more important. According to sociologist Katja Rost, it is luck and chance that are critical – an assertion that is backed up by research into what makes entrepreneurs successful. The conclusion? “Successful businesspeople had the right idea at the right place and the right time,” says Rost. To put it simply, they were lucky.
This doesn't just apply to the founders of new digital companies like Amazon, Google and Facebook. Rost names examples from history such as the Zurich-based printing house Orell Füssli, which is celebrating its 500th anniversary this year. The company was founded by Bavarian immigrant Christoph Froschauer, who came to Zurich in 1515 to work as a journeyman in the small workshop of Hans Rüegger. When Rüegger died, Froschauer married his widow – his first stroke of luck. Froschauer took over the printing house and became a citizen of the city of Zurich in 1519. This allowed him to take printing orders from the city.
The Bible as a bestseller
Like many other printers in German-speaking Europe, Froschauer got his big breakthrough thanks to the Protestant Reformation. He printed the works of Luther – and more importantly, those of Zwingli, including his German translation of the Bible. Zwingli’s writings were bestsellers and helped Froschauer build up a successful company – his second stroke of luck. At that time, the printing industry was still the young outgrowth of a new technology, much like today’s internet-based digital industry. Froschauer was a lucky businessman. One could draw parallels to the Silicon Valley boys of today: They too had the right idea at the right place and the right time.
As the case of Christoph Froschauer shows, one way of achieving success and wealth is thus through fortunate circumstances; but it is even easier to have the good fortune of being born into a rich family. Yet unlike luck in business, which can be fickle, being blessed with wealth by birth is a constant throughout history, says medieval historian Simon Teuscher. “Rich people are usually born rich,” he says. “There are different routes to wealth depending on place and time. What is astonishing, however, is the continuing importance of inheritance.” It was long assumed that the market economy would increase the importance of merit when it comes to getting rich. “On the contrary,” says Teuscher. “This assumption is now also being questioned by many economists.”
The sources of wealth have changed over the years. In the Early Middle Ages, the rich were primarily those who had laborers like slaves, serfs or bonded peasants. In the Late Middle Ages and early modern period, the rich were those who owned vast tracts of land. The Industrial Revolution made mobile capital – the kind that could be invested in machines and factories – the new basis of affluence.
As the sources of wealth changed, so did people’s ideas of it. Wealth and power were closely intertwined in the Middle Ages. Those who were rich – the king and the nobility – were also powerful. The reverse held true as well. “In Middle High German, ‘rich’ meant powerful and noble,” says Simon Teuscher. “The modern era brought about attempts to separate wealth from (political) power.” This was the great project of the American and French revolutions, both of which abolished the feudal system. They also severed the link between political and economic power. “At least superficially,” says Teuscher. “You could put it like this: Everyone is equal politically but not economically. Political inequality is bad, but economic inequality is acceptable.”
How have these revolutionary ideals developed since then? “Separating economic and political power is still an ideal that often remains unachieved,” says Teuscher. “Because those who have money can also influence the political process.” The mega-rich in the US are a prime example of this: Their election donations have enormous impact. The wealthy still have much better opportunities, and politics is no exception. The Blocher family in Switzerland is one example of a powerful plutocratic entity.
Good ideas in demand
For the past 200 years, wealth has expressed itself through the ownership of capital. But what about now? “Today the question is how much capital is still needed to invest in production and whether education and access to specific forms of knowledge might become the more decisive resources. But also here the family you are born into plays a big role,” says Teuscher. An example of key knowledge would be the ability to write the kinds of intelligent algorithms used by Google and Facebook. According to Teuscher, an interesting development of the digital age is that very lucrative industries often no longer require large amounts of capital. “It is primarily good ideas that are in demand,” he says. Like Facebook founder Mark Zuckerberg’s idea of connecting people digitally – who would have thought this could turn into a billion-dollar business?
Successful ideas are transformed into capital again, which is then bequeathed to future generations and used to send children to the right schools and buy entry into important social circles. It isn’t just money, stocks or real estate that gets handed down but also social capital, which is just as important as the real thing. The rags-to-riches stories of those who built business empires from nothing – like Christoph Froschauer, Jeff Bezos (Amazon), Mark Zuckerberg (Facebook), or Larry Page and Sergey Brin (Google) – are the exception to the rule, according to Katja Rost. “Around 80 percent of CEOs come from the upper class,” she says. They reach the top not only because of their education or talent, but primarily because they also have the right pedigree. “If you grow up in a rich family, you will know how to move in those circles,” explains Rost. This plays an important role during job interviews, where having socks that are long enough, wearing a matching pocket square, and having the right hobbies – golf, sailing, playing the violin – constitute an advantage.
People who are part of the same class know how to interpret these social codes. Here the “birds of a feather flock together” principle applies – not only to work but also to romance, where the rich and beautiful marry the rich and beautiful. “If you have money, you can buy your way into a good gene pool even if you yourself are not attractive,” says Rost, naming Donald Trump as an example. According to Rost, Trump has been able to marry very good-looking women and therefore have very good-looking children despite not being handsome himself. She says Trump is an example of the Matthew effect: “Whoever has will be given more.” The US president inherited his wealth, enabling him to increase his genetic capital by reproducing with beautiful women. A sure advantage for his offspring, as good-looking people are more successful, both in business and in their personal lives. In the business world, chance plays a bigger role than we think – not only for new companies but also for the success of established businesses and their managers. “Luck or fortunate circumstances explain a large part of the performance gap between companies and individuals,” emphasizes Rost. This is backed up by current management research, such as Rost's work with Chenwei Liu, professor at the University of Warwick.
However, neither managers nor those who select and hire them are aware of just how big of a factor chance is. This is why successful managers are held up as heroes and tend to overestimate themselves. The consequences can be fatal. Rost gives the example of (bad) investments and exaggerated salary demands that are justified with the exceptional qualities and successes of top managers. “If there was more awareness that a substantial part of success is down to external factors, namely luck and chance, it would no longer be possible to justify these exorbitant salaries,” she says. One possibility to keep the hubris of managers in check would be to introduce an element of randomness to the hiring process. Rost proposes using a partial lottery for staffing top positions (see the box for more information).
She believes that a bit more humility would benefit managers outside of work as well. Rost claims that her lottery proposal would also be a boon to companies and employees: They would have a chance at a fairer distribution of financial resources if the head honcho is bit less convinced that they are indispensable. Rost’s idea is well-intended. Perhaps a manager lottery for executive positions really would increase equal opportunity and dampen hubris among executives. However, the fundamental principle of becoming and staying rich would remain the same: “Whoever has will be given more.”
The Manager Lottery
Top positions in business and civil society should be assigned via a lottery, suggests sociologist Katja Rost.
The University of Basel, Switzerland’s oldest institution of higher education, found itself in a crisis in the 16th century. The number of students plummeted to half, and the teaching staff consisted almost entirely of local academic families who awarded each other professorships. The nepotism crisis was so deep that the solution was ultimately proposed by the academics themselves. The university’s clergy and professors brought a proposal to the parliament of the city of Basel in 1714 in which they suggested selecting new professors by lottery. They said that a lottery would not depend on a person’s reputation or connections and could not be influenced by flattery, promises or threats of violence.
The proposal was implemented, and for the 100 years between 1718 and 1818, professors at the University of Basel were selected by lottery. A multi-step process was put into place. First, applicants had to submit a written essay on their field of study and hold a public lecture. Whoever successfully overcame this hurdle was then entered into the candidate pool. If necessary, a short list of three candidates was made through a “sensible selection process” as a second step. The new professorship would then be randomly awarded to one of these three finalists.
Katja Rost researched this “Wahl zu Dreyen” (“Selection among the three”) in Basel and used it as the basis of a laboratory study (conducted together with sociologist Joël Berger and economist Margit Osterloh). The experiment placed students in the role of managers who had to decide how to distribute salary payments between themselves and other employees. Every student manager who came into their position via a conventional merit-based selection process decided to keep a considerably larger sum for themselves. The student managers who were selected by a partial lottery process distributed the sum more evenly, as they were aware that they were in their positions also due to chance and not merit alone – a realization that made them more humble.
Rost says that a partial lottery process has three advantages: It increases humility in those who are ultimately chosen, acts as a preventative measure against unfairness, and decreases the role of bias. The differences between applicants who are on a final short list are often only marginal, which can grant more importance to certain characteristics such as sex or age. Rost experienced this herself when applying for professorships. Several times she was among the top three candidates but was rejected in favor of someone who was usually older, more experienced and male. “With a lottery I would've landed a professorship earlier,” she says laughing. “But then again, I wouldn't be here now.”
Rost says it is important for the lottery to be conducted in a two-step process. First comes the selection of suitable candidates; then comes the lottery. This ensures that the position is given to a competent person. This lottery selection process could be used to award top positions in academia, business and politics.
“Unjust and old-fashioned”
Revenue from inheritance tax could be used to compensate people who perform unpaid care labor, says historian Simon Teuscher.
Handing down wealth is a constant throughout history, as Simon Teuscher has pointed out. It is often important to the wealthy to pass their assets down to the next generation. However, a look back at history shows that this is not always easy. Dividing up assets can be difficult depending on what is being bequeathed. Teuscher gives land and political offices as examples, which were two important foundations for wealth during the transition from the Middle Ages to the early modern period. “This resulted in the formation of rigid systems of inheritance,” he explained. “It often meant writing the daughters and sometimes also the younger sons out of the will, all the way up to primogeniture, which bequeathed practically all the assets to the eldest son.” If necessary, the eldest son was then obligated to provide certain types of support to his impoverished siblings. The idea behind the system was to preserve sources of wealth – tracts of land and political offices – without dividing them up too much. This was a problem faced by both princes and farmers, who feared having their land ownership split up.
The Industrial Revolution changed the foundation of wealth, with capital increasingly becoming the most important resource for creating and handing down prosperity. This kind of wealth can be easily distributed and also easily pooled together again. According to Teuscher, this led to the “enormous expansion of equal inheritance” but also triggered the spread of cousin marriage, which allowed for money to be distributed among children while still keeping it in the same pool.
Lopsided distribution of wealth
But what about today? At present, the state and its tax regime could be considered the biggest “threats” to passing on undiluted wealth. Since the 1980s, inheritance tax has been abolished or reduced significantly in many countries – a move inspired by the policies of Reagan in the US and Thatcher in the UK.
This has contributed to an increasing accumulation of wealth in the hands of ever fewer families. Today the wealthiest one percent of the global population owns 45 percent of the world’s assets. And this inequality is on the rise. In Capital in the 21st Century, renowned French economist Thomas Piketty describes how many Western societies became more equal from the post-Napolean era until 1945 and then more unequal again after 1975. The abolition of the inheritance tax has exacerbated this trend.
Simon Teuscher finds a lopsided distribution of wealth to be problematic. Here he is referring not just to the much-discussed gap between the richest and the poorest, but rather to wealth disparities within families. “The way in which we distribute our wealth needs to keep up with the times. That means that we should base wealth distribution on what we perceive as just,” he says, claiming that this is not the case today. He points to care work for children and older people, which is primarily carried out by women and usually uncompensated. “Their only social safety net often consists of a marriage to a breadwinner,” says Teuscher. “This is simply old-fashioned and cements inequality between the sexes, which almost no one finds just anymore.”
The return of inheritance tax
But if women are to be paid for care work, who will foot the bill? Teuscher thinks that a return to higher inheritance tax levels could be part of the solution. “In my view, this question has to be linked to questions of intergenerational justice and the accumulation of assets through inheritance, where huge sums are passed down from one generation to the next. Why couldn’t part of that be used to support people who are raising children, for example?”