COVER STORY • Digital Society — Issues & Challenges • 6

Digital Capitalism &Japan
Author Takeshi Mori

By Takeshi MoriA Sense of Greater Well-Being
The digitalization of daily life took off in 2014, when 4th-generation
smartphones began to be widely adopted. Data clearly show that thiscaused a significant change in the sense of well-being in the daily
lives of the Japanese people.
The “sense of one’s standard of living compared to the rest of theJapanese public” as given in the response to the “10,000-Responder
Survey on Life in Japan” conducted by the Nomura ResearchInstitute (NRI) every three years shows an increasingly large numberof participants giving their standard of living as “upper” or “upper
middle” since 2006 (Chart 1).
Why has the sense of well-being among the Japanese publicgrown during this period even as GDP and wage levels stalled, andincome disparity is said to have widened in Japan? What the people
who responded “upper” or “upper middle” have in common is thatthey responded that they had “become able to consume wisely bycollecting information on daily life and bargains through the Internet

and other means”. It can be observed quantitatively here that the useof information technology has risen dramatically with the result thatthe standard of living can be sustained on a higher level even as
income has remained stagnant.
GDP figures tell us that the Japanese economy is stalled. At thesame time, the people experience well-being in their daily lives. Dig
into this a little deeper and we realize that digitalization is providing
us with something that does not show up in GDP statistics.
What digitalization has offered is a decline in price levels that was
unthinkable before. Consumers can be thorough in comparing prices
on the Internet, which puts relentless downward pressure on retailprices even if production costs remain unchanged. Online vendors
can interact directly with consumers, eliminating the cut for the
middleman. A report published by the Bank of Japan (BOJ) estimatesthat Internet retail sales could account for a price reduction of
approximately 0.3% (“Impact of the Growth in Online Retail Sales”,
Bank of Japan Review, June 2018), but it is possible that pricedecline is even larger in certain areas. Music and other merchandise

CHART 1

Sense of one’s standard of living among the Japanese public
100%
90%

9.6

8.0

9.2

53.8

53.1

53.1

8.4

14.8

16.6

52.1

52.3

33.1

2009
(10,252)

Upper/
upper middle
18.8

20.0

80%
70%
60%

49.7

50%

Middle
53.7

54.6

31.0

27.5

25.3

2012
(8,821)

2015(8,718)2018(8,431) (Number of responses)

40%
30%
20%

36.6

38.9

37.7

41.8

10%
0%

1997
(10,052)

2000(10,021)2003(10,060)

2006(10,071)

Lower middle/
lower

Note: No responses excluded from aggregation

Source: “10,000-Responder Survey on Life in Japan” conducted by the Nomura Research Institute (NRI) (1997-2018)https://www.jef.or.jp/journal/

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that can be digitalized can be copied at negligible cost, reducing
overall production costs dramatically. Even when a product isfunctionally unchanged from its analogue days, its price and cost are
greatly reduced by digitalization.

Producer Surplus & Consumer Surplus
When someone purchases a merchandise or service, there is a
maximum amount that the person is willing to pay for that particular
content. This is the “willingness to pay (WTP)”. The difference
between the WTP and the actual price is the “consumer’s surplus”.
Think of the consumer’s surplus as the degree to which consumers
can feel that they have made a profit or secured a bargain.
On the other hand, the producer is actually producing its productat a lower cost than the price. It is gaining the difference between theprice and cost as the producer’s surplus. This is the profit of the
producer. Digitalization can influence WTP, price and the cost ofthings, but it seems price and cost have been lowered even though
the WTP has not changed much. This is causing the consumer’s
surplus to grow and the producer’s surplus to shrink.
To go back to the relationship between the impact of digitalization
and GDP statistics, the key point is that the producer’s surplus isquantified and reflected in GDP statistics but the consumer’s surplus,
given its subjective nature, is not measured and therefore goesunaccounted for. Thus, we look at GDP statistics without recognizing
the consumer’s surplus that digitalization has amplified and sensethat there is a gap between the economic trends and our impressions
from our daily lives.
The sum of the consumer’s surplus and producer’s surplus iscalled total surplus, or economic welfare. This overall surplus could
be viewed as the value-added in the true sense created by themerchandise or service. Overall surplus consists of the producer’s
surplus, which can be objectively measured, and the consumer’s
surplus, which can only be grasped subjectively. Overall surplus isdifficult to identify as data. However, subjective matters can bequantified, as the NRI confirmed in its questionnaire survey. In aworld where digitalization is progressing, it is becoming difficult tomeasure value with GDP as the sole indicator. The time is ripe for a
new benchmark.

Free Digital Services in Japan
Internet usage is rising rapidly in Japan. According to a survey by
24 Japan SPOTLIGHT • November / December 2018

the Ministry of Internal Affairs and Communication (MIC), theaverage Japanese spent 86 minutes per weekend day on the Internet
on average in 2013. This figure rose to 120 minutes in 2016 (MIC,
Survey on Time Spent on Information Communication Media andInformation Activities 2017). The numbers vary greatly between age
groups. While the 10-19 and 20-29 age groups logged significant
time, at 225 and 216 minutes respectively, the 60-69 group onlyused it for 43 minutes. The information and digital services provided
over the Internet are making our daily lives so convenient, and muchof this is being provided free of charge.
Erik Brynjolfsson, professor at the MIT Sloan School ofManagement, and Joo Hee Oh, assistant professor at the Rotterdam
School of Management (RSM), Erasmus University, developed amodel to express the consumer surplus that these free digital
services produce in monetary terms and applied it to the UnitedStates (The Attention Economy: Measuring the Value of Free Goodson the Internet, 2012). According to this study, value equal to 2.3%
of GDP was being produced on average between 2002 and 2011. The
same model applied to Japan indicated that consumer surplus fromfree digital services could be worth up to 90 trillion yen per year, orthe equivalent of 17% of GDP between 2012 and 2016. Japan has
been gradually slipping from 20th among 63 countries in 2013 to27th in 2017 in the IMD World Digital Competitiveness Ranking
published by the International Institute for Management
Development. As the IMD report notes, it is true that Japan lacks
human resources in digital technology and Japanese businesses are
slow to adopt digital technology. However, as the 90 trillion-yen
consumer surplus shows, Japan is at the forefront in the acceptanceof digital technology in the daily lives of its people.
The consumer surplus being produced by digital technology
explains the paradox of the rising sense of well-being in the face of astalling GDP. Digital technology is generating a significant increase in
consumer surplus, i.e. the unmonetized value.

History of Capitalism
Digitalization is causing significant changes in the daily lives of theJapanese. It is also changing the economic system and capitalism
itself, as can be seen from the significant loss in the effectiveness of
traditional economic indicators (such as GDP). Let’s take a look at
the characteristics and history of capitalism.
In this essay, capitalism will be defined as a “system for pursing
the permanent accumulation of capital by obtaining profits throughCOVER STORY 6

discovering, utilizing, and creating differences”. Let’s call the firststage of capitalism “commercial capitalism”. This will be easy tounderstand if you imagine a merchant who engages in long-distance
trade. The merchant buys merchandise at a low price in one country
and sells it at a higher price in another. In other words, this is anactivity that finds existing differences in the price system and earns
profits from them.
The system following it, created through the 18th-century
Industrial Revolution in the United Kingdom, is called “industrial
capitalism”. The Enclosure Movement turned communally-owned
land into private property, chasing out the farmers there, who beganselling their labor as if it were merchandise. Capitalists amassedlabor, land, and other resources and achieved mass production
though massive investments and division of labor. Under industrial
capitalism, profits are accumulated by utilizing the difference
between labor productivity and wages and creating products that are
distinguished from those of competitors through innovation.
Actually, there is no consensus among experts over whether theongoing digital revolution is creating a new stage in capitalism. Thereis a wide range of opinions, as some say that capitalism is nearing
its end while others say that industrial capitalism is becoming evermore sophisticated. Still others say that a new type of capitalism,
one that we haven’t seen before, is emerging.
Klaus Schwab, the originator of the World Economic Forum, calls

the ongoing digital revolution the Fourth Industrial Revolution, and
the German government is promoting what it calls Industry 4.0. As
the terms show, these people believe, or hope, that industrial
capitalism will be enhanced through progress in digitalization.
By contrast, as Peter Drucker stated, “That knowledge has become
the resource, rather than a resource is what makes our society ‘postcapitalist’.” Dr. Katsuhiko Iwai, emeritus professor of the Universityof Tokyo, states that the era of post-industrial capitalism has begun
and points out that the capitalism at the dawn of the Internet actually
has the characteristics of commercial capitalism, the primeval formof capitalism, in that it creates value from differences in information.

The Arrival of Digital Capitalism
This report agrees with Dr. Iwai that capitalism has
metamorphosed into a new form, which I will call “digital
capitalism”. There are several reasons for this. First, those who callthe ongoing digital revolution the Fourth Industrial Revolution andIndustry 4.0 are the main players of industrial capitalism. The morethey are invested in the existing capitalism, the more likely theirmindset is unconsciously biased and that they have a vested interestin denying that industrial capitalism is coming to an end.
Next, a comparison of the ongoing process with industrial
capitalism shows that value is coming to be created in a

CHART 2

Industrial capitalism & Digital capitalism<Industrial Revolution><Digital revolution>

Manufacturing and transportation revolution

Revolution in data collection and analysis

Industrial capitalism

Digital capitalism“Maximizing producer’s profit”“Maximizing user’s subjective utility”(18-20C)(21C-)

Player• Industrial capitalist• Platform provider

Venue for value creation• Factory/market• Digital platform

Value pursued• Maximizing production and profit• Optimal use/maximizing utility

Source of value• Labor• Activity information

Source: NRI

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COVER STORY 6

fundamentally different manner. The Industrial Revolution, in short,
was a revolution in production and transportation. There, theindustrialist was the value creator, and physical factories were theplaces where the value was created. The value being pursued wasquantitative expansion; growth through mass production andconsumption was the aim. And labor was an important source of thisvalue.
By contrast, the digital revolution is a revolution in the capacity fordata collection and analysis. Here, digital platforms become thevenue for value creation. The core value is no longer mass
production and consumption, but optimal utilization by or
maximizing utility for the user. The sharing economy is theframework that embodies this value and is difficult to conceive under
the industrial capitalism framework. The development of car-sharing
services increases options for the user, enhancing convenience, but
it is likely to reduce the number of cars sold as its share grows. As aresult, while the frequency of travel and the market for car-sharing
grows, production in the automobile manufacturing sector declines,
with a possible negative net impact on GDP. This is the paradox that
may arise when GDP, a benchmark of industrial capitalism, is used.

The digital revolution is also creating new sources of value: theinformation activities that we humans as well as machines are
generating. Just as human labor was separated and turned intomerchandise in the Industrial Revolution, all information activities byhumans and machines are currently being separated from theirsources and sucked into platforms to be conglomerated as Big Data,
from which value is extracted through analysis (Chart 2).

Flipping the Perspective on Industry“Mobility as a service”, or MaaS, has emerged as a concept intransportation. This describes service as a business that provides the
optimum means of travel from the user’s perspective, a concept thattranscends existing industrial categories such as automobile
manufacturing and transport. There, whether or not you possess avehicle is irrelevant. The choice between a taxi, ride-sharing like
Uber, or renting a car P2P depends totally on the level ofconvenience for the user.
Under industrial capitalism, business traced the supply chain inwhich the producer is the starting point. The producer makes the

CHART 3

Digitalization flipping the perspective 180°
Industrial capitalism

Automobile
manufacturingindustry

MerchandiseUse

Utility

Privately-owned
vehicleDriving

TravelDigital capitalism

Privately-owned
vehicleCar-sharing
BicycleRailway
Source: NRI

26 Japan SPOTLIGHT • November / December 2018

MaaS

Driving
Sharinga ride(Mobility as a Service)

TravelCOVER STORY 6

product by procuring materials and the complex distribution channel
leads to consumers at the end. There, the preferences of theindividual consumer were given relatively little consideration. The“masses” were supplied with mass-produced merchandise.
By contrast, in digital capitalism, the user is the starting point. The
needs and references, the payment capability, indeed every elementof each user is analyzed using artificial intelligence (AI), thenreverse-engineered to find the optimal solution. Here, there is nosuch person as a standard-issue member of the “masses”, just awide variety of individuals that are connected by a wide variety of
networks so that they are both “I” and “we” in a mandala-like world(Chart 3).
The term “industry” will gradually lose meaning in a world likethis. “Industry” is a word used from the perspective of “what isbeing manufactured”, whereas “what kind of utility is being provided
to users” is the key perspective in digital capitalism.

From Labor Society to Action Society
The role of humans also changes under digital capitalism. Let’s
explore this point using the framework provided by Hannah Arendt,
one of the most representative philosophers of the 20th century. In
her book The Human Condition, Arendt divides “active life” into three
types of activity: “labor”, “work” and “action”. She defines labor as
repeated processes, work as having a clear beginning and end, andaction as the means by which we disclose ourselves to others. She issaid to have explained the difference between labor and work as“kitchen and typewriter”. The kitchen is where labor takes place andthe typewriter is where writing, or work, is conducted.
Arendt goes on to call the industrial capitalism of the 20th century
the victory of “animal laborans” and states that among the three
categories, the proportion of labor has grown overwhelmingly large.
Then what has been the effect of the ongoing digital revolution on
the role of humans, or “labor”, “work” and “action”? First, labor iscoming to be replaced by machines and AI. Human labor is being
pushed out of the workplace, much as farmers were pushed off theland by the Enclosure Movement at the dawn of the Industrial
Revolution. Meanwhile, action by humans is increasing dramaticallyunder digitalization, albeit in cyberspace and many actions are still
done by hiding identity. It covers a wide range of activities usingsocial network services such as posting one’s activities andcommunicating with others on social networking sites as well as
posting reviews on Amazon, TripAdvisor, and the like.

Moreover, you are disseminating information on your activities
unintentionally such as where you are going through yoursmartphones and your preferences and interests through your online
searches.
Take the YouTuber, an emerging job category. YouTubers arepeople who make a living with the advertisement revenue from thenumber of views of the videos that they post on YouTube as theirmain source of income. They became a hot topic in Japan in 2018,
when they came in third in an annual survey of occupations thatelementary schoolchildren wanted to take up when they grew up.
The content and quality of the actions aside, this is an area that is
becoming increasingly active in the digital revolution. An actionsociety is emerging here.

Digital Capitalism & the Role of Japan
Finally, I would like to offer a few perspectives on the role thatJapan is playing in the age of digital capitalism. As I stated at the
beginning, I believe that the invisible value created by free digital
services (consumer’s surplus) is extremely large in Japan. Japanesebusinesses may be very slow to digitalize, but Japanese consumers
are highly receptive to digital technology and generally like newservices. In other words, Japan may play the global role of testing
ground for new digital services. Hosting the 2020 Olympic Games inTokyo will propel Japan in that direction.
Another major role that Japan is likely to play is as a global
showcase for the different ways that digital technology can be used.
It is widely believed in the developed countries in Europe and North
America that machines and AI threaten to replace humanity, but
Japan has a long history of using tools for extension and support of
the human being. This is a technological culture that complements
humans. Of course, it is not always appropriate to use technology tocomplement humanity. It will become necessary to use technology
selectively for both replacement and support. It is my belief that theways that digital technology is used in Japan will contribute to thesearch for that balance.

Takeshi Mori is a senior researcher at the Nomura School of Advanced
Management.

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