I ran across a video clip the other day that showed the late economist Milton Friedman answering questions from the audience of an old episode of ‘Phil Donahue.’ In one of his comments, he mentioned the phrase ‘shirtsleeves to shirtsleeves in three generations.’ This is a phrase describing the mobility of incomes in America and is something the followers of the tax-the-rich idea should learn.
The concept of shirtsleeves-to-shirtsleeves describes a common occurrence among the newly-wealthy in the US. To understand how the process operates across generations, imagine a laborer—who wears shirtsleeves, rather than a suit—who invents a valuable labor-saving product. Let’s say he’s a plumber named Joe (not necessarily that Joe the Plumber, but he could be). Joe’s invention is a result of insights gained mastering his craft and allows him to quit his plumbing job so that he can focus on manufacturing and selling the new gizmo. Joe’s invention makes him rich.
Now imagine Joe’s son, Joe Jr. Joey was born into a working-class life and sees the rewards of hard work and ingenuity. Joey goes to college and earns an MBA in preparation for running his father’s successful enterprises. Joe and Joey work hard and the business thrives. They make millions and live the American dream.
Joey’s son, Joe III, is known as Trés. Trés was born into his father’s wealth. He’s a great soccer player and has never mowed a blade of grass. In college, Trés majored in fraternity and minored in anthropology until his grades forced him out of school. He then borrowed enough from his father to open a sports bar, but found it difficult to run the bar effectively from the golf course. Consequently, Trés was unprepared to run Joe’s business when Joey died of cancer at 60.
Trés’ extravagant lifestyle and lack of business skills allowed the competition to take most of the firm’s customers. Soon, the company closed its doors and laid off all of its workers. Trés now works as a bartender—once again, in shirtsleeves.
In short, this story tells how entrepreneurship builds fortunes; but, it also shows that if hard work and business acumen aren’t nurtured, the benefits of wealth can be fleeting. The people who are born into wealth lose it if they are unable to continue to create valuable goods for society. The Occupy Wall Street crowd seems to believe that inherited wealth should be punished because it promotes a sort of caste system where generation after generation of trust-fund kids are born into a pampered life they didn’t earn. The truth is, however, that as long as entrepreneurs have the opportunity to pursue their dreams, inherited wealth will be kept only by those who are able to continue to manage it in a way that produces goods and services that consumers want to buy.