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Neo Capitalism

Capitalism's flaws spur soul-searching, from Bill Gates to AI

Hong Kong and US pay price as beacons of economic freedom dim

A protest in Hong Kong on Dec. 8: Fears of losing individual freedom have prompted many residents to consider leaving Asia's financial hub.   © Reuters

TOKYO -- As 2019 drew to a close, Microsoft co-founder and billionaire Bill Gates published a blog post that took many readers by surprise. "I think the rich should pay more than they currently do, and that includes Melinda and me," he wrote, referring to his wife.

Gates noted that the U.S. government depends "overwhelmingly" on taxing income from labor -- wages and salaries. Instead, he argued it should raise the capital gains tax to draw more revenue from stock investments and real estate. The system "isn't fair," he wrote. "I don't see any reason to favor wealth over work the way we do today."

Gates is not the only well-off American to warn of a crisis of capitalism. The growing concentration of wealth among a select few, some argue, is unsustainable. But what, exactly, are the roots of the problem? And what can be done?

Nikkei spent the past couple of months asking nearly 50 economists and corporate leaders for their thoughts.

"While the economy has become global, politics today are shifting toward anti-globalism," observed Yoshimitsu Kobayashi, chairman of Japan's largest chemical producer, Mitsubishi Chemical Holdings. Meanwhile, Arun Sundararajan, a professor at New York University's Stern School of Business, stressed, "The distribution of wealth is not refined in our digital era."

Their comments suggest the rise of populism around the globe and the accumulation of valuable information by a small group of tech companies are distorting democracy, politics and policymaking. The result may be a failure to adapt capitalism to the modern world.

"Democracy has been the basis of capitalism," said Tetsuji Okazaki, a professor at the University of Tokyo well-versed in economic history. Freedom and diversity -- two fundamental values of democracy -- allow for competition, creativity and innovation.

In Britain, the cradle of capitalism, the Bill of Rights was signed toward the end of the 17th century. This outline of individual freedoms helped pave the way for the Industrial Revolution.

That said, there has always been a degree of tension within capitalism and democracy. Extreme capitalism can lead to excessive inequality. Democracy is vulnerable to populist impulses, which can result in protectionism that chokes free markets.

The danger, now, seems to be that both capitalism and democracy are under strain at the same time. There are signs of this from the East to the West.

Seven months have passed since protests erupted in Hong Kong, triggered by a proposed bill that would have allowed extraditions to mainland China. The city has reaped the fruits of capitalism and, even in a tumultuous 2019, was likely the world's top destination for initial public offerings for the second straight year. But the fear of losing individual freedom under Beijing's tightening grip appears to be driving locals away from Asia's financial hub.

"You can choose to live in the terror of being prosecuted, or to make an effort to [choose] your own life," said Chris Cheung, a 27-year-old doctor in Hong Kong. Cheung has decided to move to either the U.K. or the U.S. this spring.

The Hong Kong police say applications for the Certificate of No Criminal Conviction -- a document required when applying for a foreign visa -- surged in the second half of last year. In November alone, 3,460 Hong Kong residents applied, up 88% from the same month a year earlier.

The Bauhinia Foundation Research Centre, a local think tank, published a survey last month showing that 52% of Hong Kongers who responded were dissatisfied with the city's rule of law, while only 12% were satisfied.

"Prevention of the abuse of power by the government" ranked second among respondents' priorities, after "judicial independence."

A country that has long been a beacon for people seeking greater freedom, however, is losing its magnetism for global talent.

U.S. President Donald Trump's administration has imposed more restrictive policies on H-1B visas, which allow American companies to hire foreign IT specialists and other highly skilled workers for positions they would otherwise have trouble filling. Trump's clampdown resulted in 24% of new applications being denied through the third quarter of fiscal 2019 -- up from just 6% in fiscal 2015 -- according to the think tank National Foundation for American Policy.

The NFAP warned in an October report that the "H-1B visa restrictions push jobs outside the United States and lead to less innovation in America."

Some skilled workers are diverting to Canada, where they find fewer barriers to immigration. Thor Kallestad, chief executive of Seattle-based mining data analysis company DataCloud, said the Canadian process is "much more predictable than in the U.S." The company opened a branch in Vancouver last May.

The fading appeal of Hong Kong and the U.S. illustrates how the erosion of freedom can undermine economic foundations.

It is true that other models besides free-market democracy have produced economic success.

There used to be a widely held belief that "individual freedom was necessary for economic growth, but mainland China demonstrates that it is not true," conceded Graham Allison, the founding dean of Harvard University's John F. Kennedy School of Government. "If a more directed system [like China's] can facilitate things happening, that would end up leading to a better [economic] performance" than even democratic countries like the U.S.

Nevertheless, NYU's Sundararajan is convinced that a well-functioning democracy still promises a better overall outcome for society.

"Capitalism needs a certain control mechanism," he said, "and the right kind of democracy will push the government toward the right kind of control." As democracies evolve, he added, they tend to go through phases of pushing for equality.

At the same time, British historian Niall Ferguson, a senior fellow at Stanford University's Hoover Institution, warns against a rush to abandon capitalism in pursuit of fairness. Throughout human history, he said, "nothing has done more to solve the problems of existence than capitalism."

Clues on what the world needs now might not even come from humans.

Japan's Hitachi and Kyoto University conducted a study using artificial intelligence to analyze 20,000 simulations of communities in the year 2050. The AI, one might say, made some of the economic and social incentives behind 18th-century economist Adam Smith's "invisible hand" visible.

Two requirements for sustainable communities stood out in the AI's analysis: "altruistic actions" and "morality." Capitalism and democracies, perhaps, could use bigger doses of both of them.

This is the second part in a special Nikkei series looking into the future of capitalism.

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