Economic Policies for an Incoming Labour Government – Part 4
Economic Policies for an Incoming Labour Government
By Bryan Gould and George Tait Edwards
Part 4 of 9 – Shimomuran Economics
The body of developed policy that underpins Asian industrial and economic
success is not understood in the West, yet it was clearly foreshadowed in
the work of the greatest western economist of the twentieth century, John
Maynard Keynes. It is a sad reflection on western economists that the
Keynesian insights were most fully developed by the great Japanese
economist, Dr Osama Shimomura 1910-89, whose work has only recently
come to the attention of western economists by virtue of the sustained
efforts over four decades by the second author of this paper.
An indication of the extent to which Shimomura has been overlooked in the
West is the fact that his works have never been translated Into English
except by the Indian Statistical Institute1, (and even in that work the
Development Bank of Japan has edited out Shimomura’s key formulae).
Shimomura enjoys, however, a towering reputation in his own country. The
Development Bank of Japan offers a “Shimomura Fellowship” to
commemorate his life on the basis that “during his long career as an
economic scholar and critic, Dr Shimomura rose to become Japan’s most
influential post-war economist, founding a school of thought based on the
“Shimomura Theory,” which attracted numerous followers.”2
He was acknowledged, within Japan and during his lifetime, as the “brains
behind the Japanese economic miracle” – the most successful national
economic growth plan of the 20th century. Five of his published works
became available in the British Library last year but there seems to be little
interest in how Japan, in the course of a few decades, progressed from the
war-damaged, impoverished country of 1945 to become one of the most
highly developed and powerful industrial economies in the world.
Shimomura’s major contribution to macro-economics is his economic growth
model, the basis of which was that the total level of Japanese investment is
equal to the natural investment level (that is, investment financed by
savings) plus the additional investment financed by credit creation
originating at the Bank of Japan. The model illustrated the range of that
additional credit-created investment as no less than 10% to 15% of national
income a year.
It is generally agreed by most economists, following Keynes, that
investment is the major key to economic development and growth.
Shimomura’s economic model applied an extension of the Keynesian
analysis and showed that an economy could selectively increase its
investment level through an increase in investment credit at the central
bank, if that credit was earmarked for commercial and industrial
investment. The rapidity of Japanese industrial development in the 1960s
and 1970s, in apparent response to the stimulus provided by investment
credit-creation by the Bank of Japan under instructions from the
government, is widely seen in Asian economies as a vindication of
Shimomuran policies.
Professor Kenneth K Kurihara (1910-1972) – the Distinguished Professor of
Economic Theory at the State University of New York in Binghampton,
teacher of macro-economics at Princeton and Rutgers, the State University
of New Jersey, guest lecturer at the universities of Oxford and Cambridge,
and author of “The Growth Potential of the Japanese Economy” – was one
of the most influential interpreters of Shimomuran economics; he also had
the great advantage of being able to write in English. He concluded that
“if, therefore, greater investment can be financed partly by credits, there
is no need for that ‘abstinence’ which the classical economists considered
necessary for economic progress, any more than there is for that ‘austerity’
which some present day underdeveloped countries impose on already
under-consuming populations at the constant peril of social unrest. Nor is it
difficult, in such credit-creating circumstances, to agree with Keynes’
observation that investment and consumption should be regarded as
complementary rather than competitive.”3
After more than two decades of persistent stagnation, during which
Shimomuran policies were lost sight of, and supplanted by policies urged on
the Japanese by the IMF and western economists, Shimomura is now back in
favour in Japan. The Prime Minister of Japan, Shinzo Abe, announced on 19
April 2013 in a speech to the Japan National Press Club that Japan is once
again implementing Shimomuran economics – he explicitly made two
references to Dr Shimomura – in order to end the Japanese depression and
restore high growth to create once again what he described as “a Japan of
abundant capital.”4
Western economists, however, seem to be unaware of this revival of
Shimomuran economics. On the rare occasions that they have been invited
to consider the issue, they have maintained that correlation is not
causation, and that there is no evidence that the new credit created by the
Bank of Japan “caused” the observed growth in the 1960s and 1970s, or
that the cessation of that growth was the consequence of abandoning credit
creation. And there the argument might have rested except for two recent
developments.
First, the British economist Sir Clive Granger produced, in a 1969 paper in
Econometrica, a new statistical technique called Granger Predictive
Causation Analysis – an achievement that led in 2003 to his award, along
with his colleague Robert Engle, of a Nobel Prize for contributions to
economics. The Granger Causality Analysis tests the validity of predictive
causative links between two economic factors; using Granger predictive
analysis, it can be shown whether there is a predictive link between two
items of economic time series.
Second, and more recently, detailed and expert work on the course of the
Japanese economy – both its period of sustained and almost unprecedented
growth, and its subsequent period of stubborn stagnation – was undertaken
by Professor Richard Werner, professor of economics at the University of
Southampton. Professor Werner originated the term “quantitative easing”
and in 1991 predicted the imminent ‘collapse’ of the Japanese banking
system and the threat of the “greatest recession since the Great
Depression”. He is a specialist in the Japanese economy and became the
first Shimomura Fellow at the Research Institute for Capital Formation at
the Development Bank of Japan where he spent ten years in the 1990s.
Professor Werner has applied Granger Predictive Causation Analysis to the
Japanese data over a long period and has shown in his book “New Paradigm
in Macroeconomics” – that there is a clear Granger causation predictive link
between investment credit creation at the Bank of Japan and subsequent
rates of Japanese economic growth, both positive and negative. He also
found that the causative link that is so clear in the case of investment
credit creation does not hold good in respect of any other of the
candidates, such as interest rates, structural changes, and so on, that are
often advanced as potential explanations for the vagaries of the Japanese
economy over five decades. Significantly, Werner also found that excessive
credit creation where that credit is not earmarked for use in new
investment in productive capacity will finds its outlet in speculation and the
creation of asset bubbles, as occurred in Japan from 1986-91.
Werner’s use of the Granger technique and the conclusions he is able to
draw allow us to say with certainty that the use of investment credit
creation has been the essential element in determining the rate of growth
for the Japanese economy. Empirical observation and the analysis of the
observed data allow for no other explanation. It is on that basis that we can
extrapolate from the Japanese experience, as identified by Werner, to
western economies, and say that – since advanced economies function very
similarly, whether in Japan or elsewhere – the solution to the poor
performance and lagging development of western economies is the adoption
of investment credit economics, which is fully capable of reversing the ill effects,
including the damage to personal incomes and the social fabric, of
austerity.
1 A reference to that inadequate translation of what is perhaps Shimomura’s most significant
books, Seicho Seisaku No Kihon Mondai (Basic Problems in Growth Policy, 1961) can be found
http://books.google.co.uk/books/about/Basic_Problems_of_Economic_Growth_Policy.html?
id=DyNjHQAACAAJ&redir_esc=y
2 See http://www.dbj.jp/ricf/en/fellowship/
3 See “The Growth Potential of the Japanese Economy” (John Hopkins Press Maryland 1971), pp.
137-138
4 http://www.kantei.go.jp/foreign/96_abe/statement/201304/19speech_e.html