Why Nobody Invests in Japan
Tokyo’s Failure to Welcome Foreign Capital Is Hobbling Its Economy
Economists from Adam Smith to Joseph Schumpeter have long defined capitalism by the existence of two classes: one that earns its income through labor and the other whose income derives from property. Some economic thinkers, notably Karl Marx, saw the relationship between these classes as necessarily antagonistic and leading to conflict. Others, such as Frédéric Bastiat in France and John Bates Clark in the United States, viewed the classes as collaborating toward the greatest possible output. But none doubted that these two large groups of people existed or that they differed from each other.
But the past 40 years have produced a profound change in that dichotomous picture. In the “new”—or, as I have called it in my book Capitalism, Alone, liberal—capitalism, and especially in the United States, an increasing percentage of people are rich in terms of both labor and capital incomes. I called this phenomenon “homoploutia,” a neologism created from the Greek words homo (the same) and ploutia (wealth), meaning that the same individuals or families are rich in both human and financial capital.
Such convergence very seldom—almost never—occurred in the past. The figure below illustrates its evolution in the United States between 1980 and 2017. It is obtained by taking all the people whose labor incomes place them in the top decile of wage earners and finding what percentage of them are also in the top decile of recipients of capital income. And it shows that the percentage of such earners rose from approximately 15 in the 1980s to almost 30 today.
The novelty in the new capitalism is that its top wealth holders . . . well, work. And many are paid very high wages, which suggests that they must be highly educated. From other sources, we also know that top wage earners work longer hours than the people around the middle of the wage distribution. In his book The Meritocracy Trap, the legal scholar Daniel Markovits has called such high earners “the Stakhanovites of today,” using the Soviet term for model workers who exceeded production expectations. Under classical capitalism, the top wealth holders were often derided for leading idle lives; today, on the contrary, a statistically significant number of them work long hours.
In a recent paper, the Italian economist Marco Ranaldi and I show that classical capitalism, with strict class divisions, is still common in India and Latin America. But the advanced economies—and not just the United States—increasingly display features of homoploutia. The mathematician Yonatan Berman and I then looked more carefully at the United States, going back to the 1950s and using three sources of data (household surveys, tax data, and wealth surveys) to show rising homoploutia starting in the mid-1980s.
Can the slide toward an aristocracy of labor, capital, and hard work be arrested?
Why, exactly, has homoploutia grown? One possibility is that top jobs became more lucrative as marginal tax rates were reduced, making them more appealing to the capital rich. Social norms in this class therefore changed, such that its members came to view university education less as a luxury acquisition and more as a means of securing good jobs. Another possibility, for which Berman and I found some suggestive evidence, is that rising wage inequality and, most notably, very high top wages, both of which became more common with 1980s-era tax cuts and then financial deregulation, enabled many highly paid managers and professionals to save significant portions of their incomes, invest, and become rich capitalists (while keeping their good jobs). Most likely, both mechanisms were at work.
Whichever way homoploutia occurred, it radically altered an essential feature of classical capitalism. Incomes from labor and property did not disappear—but these different income sources were no longer “embodied” in different people.
Homoploutia has coincided with another development: more frequent marriages than in the past between people sharing similar education and income levels. The changing status of women largely drives this phenomenon. Compared with the 1960s and 1970s, women now have much greater access to higher education and are likelier to postpone marriage, and both sexes are freer to select their partners.
According to a recent paper by CUNY Graduate Center economist Nishant Yonzan, in 1970, the top decile, by earnings, of American men between the ages of 25 and 35 were as likely to marry women from the bottom decile (of women’s earnings) as from the top. By 2017, however, the ratio was three to one in favor of marrying highly paid women. For women, the situation changed even more dramatically. While high-earning young women had about equal preference for high- and low-earning men in the 1970s, they prefer the former by the ratio of five to one today.
Homoploutia and assortative mating are both independently desirable developments. Homoploutia breaks down class divisions that have often destabilized capitalist societies. Marrying people like oneself enshrines gender equality and freedom of choice.
The very definition of an inheritable upper class means that social mobility is reduced.
The resulting rich couples, Markovits shows, spend more time with their children than middle- and lower-class parents and heavily invest in their children’s education. In doing so, they display the old-fashioned, rather traditional virtues of hard work and concern for one’s family. So what can possibly be wrong with this?
When equally skilled and rich people pair up—and when their wealth derives from both income and capital—their union contributes to rising inequality. And these couples are likely to remain on the top of the pyramid, regardless of external events. A person rich in both skills and capital is strongly diversified: even a catastrophic decline in the stock market will not wipe out all of such a person’s assets, as happened to many of the (merely) capital rich at the onset of the Great Depression. Similarly, those with enough capital wealth can weather an increase in unemployment (however unlikely for the highly skilled). The diversification extends from individuals to couples: if one skilled and rich partner loses a job, the other one will be there to contribute perhaps even more. Such couples are resilient to crisis.
The elite status of these couples has the potential to create a deeply entrenched new class structure. By working hard on transferring to their children skill and capital advantages (the former through expensive education), wealthy couples directly and, it would seem, successfully work toward the creation of a self-sustaining upper class. The very definition of an inheritable upper class means that social mobility is reduced. The child of middle-class or poor parents will not have the same opportunities as the child of two homoploutic high flyers. In fact, Bhashkar Mazumder, from the Federal Reserve Bank of Chicago, has published data confirming the decline of social mobility in the United States over the past 40 years, the exact period during which homoploutia rose.
Can the slide toward an aristocracy of labor, capital, and hard work be arrested? The “cure” is easy to define but hard to implement. It must consist of preventing the excessive transmission of financial power across generations and of opening access to the top educational echelons to people of all backgrounds. We thus arrive at the two central elements of the philosopher John Rawls’s “theory of justice”: strong taxation of inheritance and public education. But the latter would need to be superior in quality to private education. If the schools that lead to the best-paying jobs are public, the best-paying jobs will be open to everybody. That would check the ability of the “new aristocracy” to extend itself over several generations. And if, in addition, that class cannot transfer 100 percent of its acquired wealth, the generational playing field will be further leveled. To get there will require the most difficult task of all: emancipating politics from the grip of the rich.
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