Capitalism hasn't made the world better for everyone

Editor's note: Wang Dan is the chief economist at Hang Seng Bank China. The article reflects the author's opinions and not necessarily the views of CGTN.

Free markets and free exchange are at the core of capitalism. In the last century, the broad consensus was that a free market system is the key to growth and poverty eradication. However, when the financial crisis in 2008 shook the global economy, the mood shifted quickly.

The recovery had been uneven; the rich seemed to have benefited from the crisis while the poor shouldered the costs. Ten years later, income inequality only grew wider, and the whole trend of machines replacing labor has left low-skilled workers facing the risk of losing their jobs.

Entering 2021, the backlash against capitalism has grown fiercer. Emmanuel Macron, the French President, said at the 2021 Davos conference that capitalism is no longer responding to those left behind due to the model itself. The GameStop saga this week has stirred up a global wave of anti-Wall Street sentiment.

Against the backdrop of difficult post-pandemic recoveries worldwide and divided politics at home for leading Western countries, 2021 could be the year we determine whether free markets are still the answer to our problems.

Capitalism is by nature more efficient and therefore has a high tolerance for inequality. In this system, people born with talents or high social status will likely earn much more wealth than others. Business elites, including those in finance and technology, tend to become the center of power, such was the case for former U.S. President Donald Trump. The policies they make will inevitably reinforce the leading edge of the rich.

In a capitalist society, money is almost the only measure of a person's worth. Pursuing self-interest is justified, as it brings the highest profits. This is behind the rise of technology giants and powerful Wall Street players. They tend to set up overseas entities to avoid taxes legally, but ordinary people do not have such options. The social cost of allowing self-interest to drive economic decisions become prohibitively high when governments accept the free flow of capital as an excuse for tax avoidance.

An unfortunate consequence of a free-market economy and liberal democracy is that there is little room for consensus. Poverty reduction or bridging the income gap has never been the center of policy debate. China has so far made the most significant progress in the global fight against poverty.

The country has achieved its goal of eliminating poverty, using measures such as heavy investment in infrastructure and direct cash transfer. China's poverty eradication program was not only introduced to address concerns over social stability, but the Chinese society also has a consensus on the importance of helping the poor.

We are likely to see Western governments step up their efforts to rein in the power of large corporations. Regulators will also tighten the leash for large hedge funds and other major financial players. To a certain extent, we will see a convergence in economic policies in China and the West. The U.S. and Europe have already openly discussed the use of industrial policies to protect low-income workers.

The Joe Biden administration has put climate change policies at the center of his country's economic recovery in the long term. The goal of emission reduction and industrial transition without jeopardizing jobs can only be achieved when the government is heavily involved. We have to understand that capitalism can cause market failures, and government intervention is needed, or even desirable, to bring down the negative externalities.

Capitalism can bring prosperity, but it doesn't promise a better world. Social values, such as integrity, social responsibility and fair treatment for all, still need to be embraced. Capitalism alone, without corrections from political and social forces, may unsurprisingly reach a dead end.