Shimomuran Economics

Monday, 25 August 2014

The Key Relevance of the Writings of Professor Kenneth Kenkichi Kurihara

The English-Language gateway to the main growth-accelerating principle in Dr Osamu Shimomura’s “Economic Model of Japan”

1 Shimomuran economics is the key to higher growth macro-economics

It is my contention that several Asian economies have used, and are using, a superior understanding of the economic growth process in order to achieve great economic development and trading advantages. It is my further contention that that superior understanding is in turn based upon a Shimomuran analysis of US President FDR’s first economic miracle (1938–44) and from Japan’s Shimomuran interpretation and practice of that understanding to produce the second major economic miracle of Japan (1946–1975). Furthermore, it is difficult to imagine that the Chinese economic-growth-investigating teams (which visited Tokyo after the Sino-Japanese rapprochement of 29 September 1972) did not meet and talk with Shimomura. In my view, the ultimate root of the Chinese economic miracle is also probably based upon Shimomuran economics, whether these delegations spoke with him or otherwise.

The works of Doctor Osamu Shimomura are therefore very important in understanding how to bring about rapid economic development.

2 Western Economists have largely ignored Shimomuran Economics

The academics in most Western universities do not appear to understand the Shimomuran theory and practice of the processes used for several decades in Japan and China (to name only the two most prominent examples) to accelerate their rates of economic development. That is a tragedy for Western academics and a disaster for the populations of the Western economies.

3 Perhaps Because Shimomura’s writings are difficult to access in English

On 17 June 2013 I emailed the British Library and the Library of Congress to ask them whether they have (and if not, by implication to acquire) Shimomura’s eight major works, as listed athttp://www.dbj.jp/ricf/en/fellowship/ , to improve the material available to non-Japanese economic researchers. Within 24 hours, the US Library of Congress advised me that they had seven of these works, and that these have been “Romanji’ed” or converted to an approximate phonetic equivalent of spoken Japanese using Roman letters. These works are therefore only available to Japanese readers of Romanised Japanese pronunciation. I regret I have no such capability. The British Library, about six weeks later on 30th July 2013, thanked me for my inquiry regarding the works of Dr Osamu Shimomura in the British Library, and apologised for the delay in getting back to me, then added

“ As a general rule, the library has not acquired works on economics in Japan extensively, focussing mainly on economic history or broad trends, but would consider buying some of Osamu Shimomura’s works in Japanese if they would be used. We are currently looking into this and will get back to you when we have any news. In the meantime, please don’t hesitate to contact me should you have any questions or require further information.”
I have had no news since then.

(See https://en.wikipedia.org/wiki/Romanization_of_Japanese for an explanation of the method of using the Latin script (or Latin alphabet) to communicate spoken Japanese).

4 But Professor Kenneth Kenkichi Kurihara is the English language gateway to Shimomuran Economics

In these circumstances, how can Westerners understand Shimomuran economics? Perhaps principally by viewing his writings in the reflecting mirror provided by the great Japanese-born but American-educated growth economist Professor Kenneth Kenkichi Kurihara.

Professor Kenneth K Kurihara (1910–1972) was the Distinguished Professor of Economic Theory at the State University of New York in Binghampton. He wrote eight books and over 50 peer-reviewed journal articles and he taught macro-economics at Princeton and Rutgers, the State University of New Jersey, as well as being a guest lecturer at the universities of Oxford and Cambridge. The interesting insights of Professor Kenneth K. Kurihara’s greatest book “The Growth Potential of the Japanese Economy” (John Hopkins Press Maryland 1971) should have been integrated into Western macro-economic theory by now.

The above mentioned book was produced as one consequence of his sojourn as the Fulbright Visiting Professor at Tokyo Metropolitan University in 1965, and was one result of his intensive research on the growth potential of the Japanese economy, starting from a 1946 article for the American Economic Review and most intensively summarising his research from 1965 to 1970.

5 The Key Shimomuran Growth-Accelerating Amendment to Keynes’ Savings-Investment Equilibrium Equation

There are many key insights in that book, but the most significant of these is on page 77 where Professor Kurihara quotes the equilibrium condition of the central investment-funding equation of the Shimomura Model of the Japanese economy as S+D = Is+Id (Equation [3.1])

Or Saving (S) plus Debt (D, equal to investment credit created by investment credit at creation at the Bank of Japan) equals Is (Investment financed by saving) plus Id (Investment financed by debt)

That is, the investment level of Japan is increased by credit creation at the Central Bank of Japan. This equation replaces the classic and central Keynesian Savings-Investment equality with a more useful formula because (if the nation’s banks give a high priority to commercial and industrial investment) the government of a country can increase the nation’s investment level through investment credit creation at the Central Bank. So no-cost investment credit, created by the Bank of Japan, once transmitted through a co-operative banking system to industry, creates vast flows of wealth through industrial investment, higher employment and the continually updated production of better goods and services.

6 A Few Comments upon Kenneth K Kurihara’s greatest book “The Growth Potential of the Japanese Economy”, John Hopkins Press Maryland 1971

This seminal book illustrates the greatness of Kurihara. For me, Kurihara almost visibly grows in stature due to his developing understanding as the book progresses — in the early chapters he initially tries to understand the Japanese economic miracle through his Western-educated Keynesian viewpoint. For example, at first he ascribes the high equipment investment level to personal corporate and budgetary saving (p28–9) but he is calculating that from results rather than from primary causes. As he digs deeper into the issues there appears in his writing a kind of dawning light showing that isn’t quite the right approach, so he keeps the basic premises of Keynesianism but works out relevant extensions and deeper insights to explain what’s actually going on from his real-world observations and his discussions with prominent Japanese economists, and his growing knowledge of the Shimomuran economic growth model. That process culminates in the Appendix where he suggests five “substantial observations” which Japanese economists may have overlooked.

7 Kurihara vs Friedman

The contrast between the illuminating practical excellence of Kurihara and the boring and theoretically irrelevant repetition of Milton Friedman could not be greater. Kurihara knows, to begin with, that he doesn’t fully understand what he’s looking at, so he suggests, at first tentatively, then with increasing force, fuller and more valid explanations. Friedman has an evangelical belief in freedom and the ways of the West, so after the most cursory look at any national circumstances, he sees the triumph of Western liberalism and freedom, no matter what is actually before his eyes. Friedman’s prejudices are so great that he cannot see what he is looking at — he is a perfectly acceptable intellectual parrot but an economic dead end. In his masterwork with Anna Jacobson Schwartz, A Monetary History of the United States, Princeton University Press, 1963, Section 10.2 (Period of Wartime Deficits) the great expansion of financial credit during the 1938–44 years is noted, but there is no comment upon the great growth of the USA during that period. As that book notes:

“The expanded defense program initiated in 1940 and lend-lease in 1941 produced a substantial increase in government expenditures. These were offset for a time by a rise in tax rates and tax revenues. By early 1941, however, the deficit had begun to rise sharply. For calendar 1941, cash operating outgo exceeded cash operating income by $10 billion or nearly half of total expenditures. Pearl Harbour brought a sharp intensification of these tendencies. Government expenditures nearly tripled from calendar 1941 to calendar 1942, and rose a further 50% from 1942 to 1943, reaching a peak of nearly $95 billion in 1944.

“Tax receipts also rose but more slowly and in no greater ratio. As a result, the cash deficit rose to levels without precedent, either in absolute terms or as a percentage of national income: to nearly $40 billion in calendar 1942, over $50 billion in 1943, over $45 billion in 1944 and over $35 billion in 1945 — sums averaging nearly 30% of the contemporary net national product. Government expenditures fell rapidly after the end of hostilities while tax revenues remained high. As in World War I, within six months of the end of the war the government was taking in more than it was paying out so that the period of wartime deficits came to an end about January 1946.”

Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, Princeton University Press, 1963, Section 10.2 (Period of Wartime Deficits) p556–7

FDR’s investment credit growth from 1938–44 conclusively shows that the US Government could and did increase the rate of economic growth through the Fed’s investment credit creation. Friedman either does not see or ignores that evidence, perhaps because it contradicts his often repeated view that governments cannot act to increase economic growth. But they can. No economy has had any higher growth due to the adoption of Friedman’s recommendations.

As Kenneth Galbraith has commented, Friedman’s misfortune is that his theories have been applied, and as Galbraith has politely refrained from observing, invariably with disastrous results.

The insights of Kurihara are useful and provide a practical prescription for higher economic growth with minimal inflation. I could say that Friedman provides no insights of similar magnitude, but in fact he provides no insights whatsoever into the process of economic development, whether slow, medium or fast. The Wikipedia entry on Friedman says:

“A survey of economists ranked Friedman as the second most popular economist of the twentieth century after John Maynard Keynes , [2] and The Economist described him as “the most influential economist of the second half of the 20th century…possibly of all of it.” [3]”http://en.wikipedia.org/wiki/Milton_Friedman

But if Friedman is regarded in many quarters as the most influential economist of second half of the 20th century, then that is a cultural tragedy to the economists who accept that and the governments they have advised. Friedman, however well regarded, is not responsible for any economic miracles. Shimomura is probably responsible for at least four (Japan, South Korea, Taiwan, and China). Positive economic growth results scorecard: Shimomura, 4: Friedman, nil.

8 Differences in viewpoint between Shimomura and Kurihara

Shimomura was a cyclops — he worked out what really mattered in a high-investing economy and how to bring that about. Some of the differences in viewpoint with Kurihara are due to their different understandings, and their backgrounds, because Shimomura stresses the key importance of equipment investment in manufacturing production from the viewpoint of a growing-by-imitation Japan in the mid 1960s, while Kurihara the American-educated economist knows that the ultimate boundary to growth is innovation in a more developed economy. And Shimomura was a patriot — he often addressed his comments to Japanese economists and his life’s work was centred on assisting Japanese economic growth — while Kurihara had the objective of explaining the high growth of the Japanese economy to the academics of the world.

Shimomura stresses the difference between the great effect of equipment investment in vastly improving manpower productivity and seems to regard “social overhead capital” such as transport systems and educational and health facilities as enabling rather than producing. Human capital and better education is also seen by Shimomura as enabling. Kurihara disagrees with some of this because in his view (and mine) higher education and a more skilled population is key to higher economic growth in developed countries. But Shimomura is on more solid ground than it seems, because some research indicates that in order to achieve economic take-off, perhaps only 40% of the population need to be acceptably educated. That in many ways is an appalling finding — the lack of education of women may not prevent economic take-off provided most men and/or a minority of women (whatever gets the country over the 40% barrier) are well enough educated (usually defined as literate). In the immediate post-war period, Japanese women were still largely absent in commercial and industrial companies. Shimomura’s attitude is quite consistent with the Japan’s post-war slogan of “economic growth first”, but he also stressed that the achievement of the highest national economic growth is only possible when all of the possible workforce in a country is fully employed.

Shinzo Abe has referred to this issue and quoted Shimomura approvingly in the fourth section of his 19 April 2013 speech at the Japan National Press Club:

“Dr. Osamu Shimomura, who set forth the theory of the “income doubling plan” during Japan’s period of high growth, said in a paper entitled “The Possibilities and Conditions for Economic Growth” that growth policy is the creation of “conditions that will bring into play to the greatest extent possible the capabilities actually held by the Japanese people.”

“Dr. Shimomura pointed out that 45 million persons in the labor force had “few opportunities to demonstrate” their creative abilities “even though they have extremely high levels of latent ability” and explained that the Japanese economy would be able to grow if only these “opportunities” were provided properly.”

“I consider Dr. Shimomura’s words to have universal value even now.”

Seehttp://www.kantei.go.jp/foreign/96_abe/statement/201304/19speech_e.html

9 Two Gravestones

I was born, brought up and educated in Edinburgh and many members of my family live there. On a few occasions during my time in Edinburgh, while wandering up and down the Royal Mile, I have naturally visited the grave of Adam Smith in the Canongate Kirkyard on Edinburgh’s High Street, and on a few of these visits it has been impossible not to notice several other visitors to the grave of the founder of economics.

The death of Kenneth Kenkichi Kurihara in 1972 was a great loss to the world. He was buried in Vestal Hills Memorial Park Broome County, New York, USA. See the record of his burial and the image of his modest gravestone at http://www.findagrave.com/cgi-bin/fg.cgi?page=gr&GRid=85004309

I have not yet managed to visit Kurihara’s grave, and I doubt that many do, but I believe if more economists understood what he has achieved, there would be a regular stream of visitors paying their respects.

10 High Growth Economics may have started as a state secret

Investment credit economics was first practised in FDR’s America from 1938 to 1945 and the process may have been an American state secret during wartime. But in the post-war period, the Americans were quite open about how they had produced their economic miracle. Perhaps the American establishment in 1945 thought that only they could do it, because only they had done it. Shimomura visited the postwar USA to examine the process, and he saw and understood it, and his economics then became effectively a Japanese state secret from 1945 to 1961. After 1961, Western economic and political complacency was responsible for not paying attention to the fact that the 1961 Shimomuran Economic Model of Japan model explained how to enable high economic growth through investment credit at the central bank, directed to industrial investment through the secondary banks.

11 Kenneth K Kurhara’s 1962 book — “Applied Dynamic Economics”

But not everyone ignored what Shimomura had to say. Alone among major western economists, Kenneth Kenkichi Kurihara produced a book, entitled Applied Dynamic Economics, George Allen and Unwin, London, 1963. It is not an accident that Kurihara dedicates this book to his personal friend Sir Roy Harrod, because this book, by replacing Keynes’ central savings-investment equilibrium equation with the addition of credit-creation as shown in the amended equation in Section 5 above, extends the range of the dynamic economics which was Harrod’s major contribution to macro-economics. The resulting dynamic macro-economics is precisely what Shimomura recommended, when he called upon Japanese economists to “abandon the static western concept of savings-investment equilbrium.” An exploding economy, growing rapidly through massive investment credits, with an economic dynamism brought about through higher investment credit creation at the central bank, is the natural result of that greater economic dynamism.

The most significant part of that 1962 book is in the Appendix to Chapter 5 entitled “Japan’s Credit-Supported Growth and Linear Programming”, page 60, where Kurihara says:

“In a significant footnote to his controversial paper Dr H [sic] Shimomura (of the Japanese government-owned Development Bank or Nippon Kaihatsu Ginko) reveals a key to Japan’s high-saving high-investment dynamics.

There, he urges such a dynamic financial policy as to enable Japan to liberate itself from the traditional static concept of savings-investment equilibrium, though he fails to demonstrate a functional relation between such a financial policy and the amazingly high target investment ratio of nearly 30 percent envisaged in his growth model.”

The footnote to which Kurihara refers is at Shimomura, “Basic Problems in Growth Policy”, Economic Studies Quarterly, March 1961.

Kurihara then produces five formulae demonstrating that if Japan’s natural investment rate is 15% and if Bank of Japan credit creation produces another 10% of debt-financed investment, and if the capital-output ratio is 2.5, then 25% of GDP investment will result in an economic growth rate of (25%/2.5) or 10% pa. It is pretty clear from these formulae that the functional relation not demonstrated by Shimomura is the addition of investment-funded BoJ-created bank credit to the underlying more normal savings-funded investment level of Japan. Kurihara then produces, for the first time, the central insight of his understanding of the Shimomura model in the immortal words:

“In the light of such financial arrangements in Japan as described by equations (1.1) — (1.5) it is not at all surprising that Shimomura should make a seemingly paradoxical reference to Japan’s ‘rate of (capital) accumulation remaining very high despite her rising consumption level.’ 1 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.” 2

1 Shimomura, op.cit.

2 Kurihara, Op. Cit, p61.

12 Conclusions

Shimomura acted like an economic Prometheus — he went into what Churchill called “The gigantic boiler” of the postwar United States economy, understood the process of high economic growth, and took these secrets back to the eternal and divine nation of Japan. Shimomura, like most Japanese, was a patriot — he only wanted an advantage for Japan, and he appears to have had no interest in convincing the economists of any other countries about his understandings. Shimomura wrote only for the Japanese, and only in Japanese.

The current non-availability of his writings in translation, over half a century after his most significant work and almost a quarter of a century after his death, testifies to the continuation of that policy by his Japanese successors, and that discreet silence is now also maintained by the Tokyo Consensus economies now practising Shimomuran economics.

And the two key references to Dr Osamu Shimomura in Shinzo Abe’s 19 April 2013 speech at the Japan National Press Club shows how highly Shimomura is still regarded in Japan.

Kenneth Kenkichi Kurihara was entirely different. He understood the implications of the Shimomura model in 1962, a year after Shimomura went public about his growth-accelerating system, and Kurihara wanted to convince the world about it. He wrote a seminal article in Kyklos, Vol XV, 1962, and expanded it in above-quoted Appendix to Chapter 5 of his 1963 book.

He then further repeated and expanded his observations in his 1971 book.

Kurihara did his best to deliver investment credit economics to the world.

Given the immense economic difficulties currently being experienced by Western economies, it is astonishing that even now Western academics fail to understand, and Western politicians fail to practice the highly effective investment credit economics that he taught. It is not as if they have no need of him and his lucid interpretations of the Shimomuran economic model and its no-debt investment credit creation, higher growth macro-economics, and the national wealth it produces.

Because if any nation wants the most prosperous future for all of its people, there probably is no better way.

Note: George Tait Edwards has published a book about “Shimomuran Economics” at http://www.lulu.com/shop/george-tait-edwards/shimomuran-economics/paperback/product-21688864.html and much else elsewhere during the last four decades.

Shimomuran Economics is the Most Significant Advance Ever Made in Economic Understanding and the West Still Doesn’t Get It

1 An Introduction to Shimomuran Economics

Shimomuran economics is the name I have given to the collection of no-debt, high-growth economic understandings practised in post-war Japan and post-rapprochement China. Technically that economics — investment credit economics — was invented by the third administration of Franklin Delano Roosevelt in about 1937, and was based (as it still is) on the fundamental economic principles set out by John Maynard Keynes in the General Theory and The Tract on Monetary Reform and elsewhere as briefly explained in paragraph 3 below. But Shimomura studied what the Americans had done and not only did he persuade Japanese politicians and bankers to practice his fresh high-growth economics, but also he set out, developed and published (in Japanese) the main principles of an investment credit creation (or ICC) economy in several locations.

Shimomuran economics is therefore the same as the Rooseveltian economics which won the Second World War for the Allies by producing the explosive economic growth of America from 1938-44, when the USA doubled its economic output. It is the Shimomuran understandings set out in his seminal book “Seicho Seisaku No Kihon Mondai” (Basic Problems of Growth Policy) in Riron Keizaigaku, March 1961) which propelled Japan, in the course of a few decades, from being an impoverished war-damaged economy into one of the major industrial economies of the world. And the adoption of Shimomuran economics in China has produced the largest economic miracle and potentially the major preponderant superpower of the 21st century.

According to the Development Bank of Japan, Dr Osamu Shimomura (1910-89), who was the “Father of the Japanese economic miracle” also “rose to become Japan’s most influential post war economist, founding a school of thought based on the “Shimomura Theory,” which attracted numerous followers” and “Dr Shimomura was well known for the development of a theory of economic growth based on a dynamic view of Keynesian economics.”

See http://www.dbj.jp/ricf/en/fellowship/

2 What Shimomuran Economics is

Shimomuran economics is new branch of high-growth, low-inflation macro-economics. It is a direct development of Keynesian Economics. It almost certainly had its beginnings from Shimomura’s observation of the Rooseveltian practise of investment credit creation in the USA during the 1938-44 period, which it resembles in every respect. It was implemented in Japan from 1945, in order to restore the prosperity of Japan after the devastation of World War II, and was further developed into an explicit economic model by Dr Osamu Shimomura (1910-1989) between 1946 and 1961. Shimomuran economics was intended to provide Japan with a semi-permanent trading advantage, based upon abundant, low-repayment-cost capital for investment in private industry, and it succeeded magnificently in doing that for decades. Shinzo Abe is trying once more to reintroduce Shimomuran economics into Japan after the disastrous attempt by the “Princes of the Yen” to follow Washington Consensus economics after the collapse of the Japanese asset bubble. After a “lost generation” in Japan, caused entirely by the wrong-headed attempt to “restructure” Japan along Washington Consensus lines, Japan is now re-establishing the economic systems which founded Japan’s first post war economic miracle.

3 The Three Keynesian Foundations of Shimomuran Economics

Shimomuran Economics is the natural development from three of Keynes’ observations. These three are set out below.

3.1 “While there are intrinsic reasons for the shortage of land, there are no intrinsic reasons for the shortage of capital” J M Keynes, “The General Theory…” Book 6, Chapter 24, Section 2, p.376

3.2 “Saving can be created in advance of the return on investments which justify it..”These observations are fundamental to the practice of Shimomuran economics. Or as Kenneth Bieda has written:

“The Japanese monetary policy, in fact, applied one of the Keynesian principles: saving does not have to precede investment in conditions where there is unemployment, but investment acts financed by bank-created money can precede savings.”

Kenneth Beida, The Structure and Operation of the Japanese Economy, John Wiley and Sons Australasia Pty Ltd, Sydney, 1970.

3.3 Central Banks can purchase no-debt assets by making claims against themselves In the Tract on Monetary Reform Keynes recognised that a Central Bank “may itself purchase assets, i.e. add to its investments, and pay for them, in the first instance at least, by establishing a claim against itself.”
J M Keynes, Tract on Monetary Reform, p. 21

This is exactly what the Central Banks of all the “economic miracle” countries have done (the USA 1938-44, Japan 1946-75, China mid-1970s to now) and they do not simply do this in the first instance but over decades, as a deliberate act of long-term economic policy. The assets created at the Central Bank do not need to be sold to the financial markets or sourced by foreign or domestic borrowing. If these created credits were debts, they would need to be financed, but as they are assets, no borrowing to support them is necessary, although a fictional entry of “savings of the people” is usually generated to preserve the double-entry nature of national bookkeeping.

3.4 The irrefutability of Shimomuran Economics All of the above three statements are obvious and undeniable. There are no intrinsic reasons for the shortage of capital, “saving” or investment credit can be and has been created in advance of the returns which justify it, and central banks can, and have, created credit by discounting pre-existing loans, buying these assets from the banks, by establishing a no-cost “done in the public interest” claim against themselves.

4 The Practice and Objectives of Shimomuran Economics

Shimomuran Economics is therefore based upon no-debt Investment Credit Creation at the Central Bank, where credit is canalised through the national banking system to long-term, low-cost loans for all kinds of private industry in every part of the country, in order to create a long-term boom in capital investment and widespread prosperity as evidenced by high and continually increasing productivity, in a full employment, high wages and excellent social benefits economy.

Dr Osamu Shimomura replaced the I=S Keynesian Investment-Saving equation with a more useful formulation in his Model of the Japanese Economy (published 1961, under the title “Seicho Seisaku No Kihon Mondai” (Basic Problems of Growth Policy) in Riron Keizaigaku, March 1961) by specifying the more dynamic equation

Is +Id = S+D where
Is= Investment financed by Saving
Id = Investment financed by Debt
S=Saving and
D=Debt

This produces the prime equation for an exploding economy in which investment vastly exceeds saving or I>>S due to investment credit creation with its initial impetus in the Bank of Japan.

Dr Shinohara, at first a critic and doubtful advocate of the Shimomura insights, became a strong but appraising supporter, publishing “The Secret of Accelerated Growth” in late 1961. Shinohara in particular disagreed with Shimomura’s prediction of 10% pa economic growth in Japan during the 1960s and thought the 7.2% pa forecast by Japan’s Economic Planning Agency was likely to more correct. Economic growth in 1960s Japan turned out closer to the Shimomuran forecast than the EPA one, and the prestige of the economist Dr Osamu Shimomura (1910-1989) increased within Japan accordingly, with the great doctor becoming the leading economic advisor to the 1960s Ikeda adminstration. Or as the Development Bank of Japan puts it at their Website:

“Dr. Shimomura was well known for the development of a theory of economic growth based on a dynamic view of Keynesian economics. In the early postwar period, he was convinced of the value of the technological innovation then being produced and in the late 1950s entered the controversy over economic growth with a theory of high-rate economic growth. Applying a historical perspective to the postwar Japanese economy, Dr. Shimomura was the first to accurately predict the coming period of sustained high-rate economic growth. In the 1960s, Dr. Shimomura served as a top economic policy adviser in the Ikeda administration and helped set in place the income-doubling plan.”

This quotation is from the DBJ website athttp://www.dbj.jp/ricf/en/fellowship/

So Shimomura was a Keynesian basing his understandings on the dynamic recasting of the Keynesian economics by the great English economist Sir Henry Roy Forbes Harrod (seehttp://en.wikipedia.org/wiki/Roy_Harrod)and the Russian-American economist Evsey Domar (1914-1997 — seehttp://en.wikipedia.org/wiki/Evsey_Domar) who both independently developed the Harrod-Domar model (seehttp://en.wikipedia.org/wiki/Harrod%E2%80%93Domar_model) on which Shimomura’s “Model of Japanese Economy” is solidly based, with the crucial modification of the savings-investment dynamic equilibrium, as set out above, at its centre.

5 The major effects of Shimomuran Economics

Shimomuran economics, considered in the round, has six major effects, First, it drafts the unemployed into the capital goods sector, converting labour (which would otherwise run to waste) into capital goods to enrich the operation of the economy and the wealth of the nation. Second, it provides the funds to continually modernise the plant and equipment in the key capital goods sector and in all other sectors of the economy by regularly increasing the level and the quality of the capital investment at the elbow of the already working population. Third, produces the essential upskilling of the employed by funding the necessary training to enable the operation of the continually-updated production machinery. Fourth, it funds and accelerates the rate of invention in universities and laboratories and the research and development in companies. Fifth, it funds the fresh innovations (which are the embodiment of inventions into the updated equipment on the factory floor and in the offices of the service industries of the economy) which drive economic growth forever upward. Finally, it provides the vast flows of no-cost, long term capital which enables governments to fund major capital-intensive projects to enrich the nation, and to cope with the increasing incidence of national disasters by providing timely and appropriate capital investment to protect the lives and assets of the nation and to replace assets lost through such major events and hence assist a faster recovery from any damage done.

So, in brief, Shimomuran economics:

a) Enables full employment
b) Improves labour productivity through higher investment in new and existing facilities
c) Provides upskilling of the workforce through training
d) Funds higher invention and R&D
e) Funds innovation and increases economic growth
f) Assists government by providing the capital funds for major projects and to provide the restorative capital required in the aftermath of national disasters.

Shinzo Abe certainly knows all this, as does the Chinese premier Li Keqiang. Why doesn’t Cameron? Why doesn’t Merkel? Why doesn’t Obama?

Ruskin was absolutely right when he said “There is no wealth but life.” The number and skills of the people in a nation and the level of equipment provided at the workplace to practice these skills determines the final boundary level of national income. The full use of the best skills of all the available people — full employment for all the working population operating at the highest level of skill each can attain, employing the best up-to-date equipment to maximise warranted output — is the route to the maximisation of national wealth.

Governments can channel national capital investment into key directions — into better green technologies, as Obama has, or into an attempt to bring about a society of “Good Health and Longevity” as Shinzo Abe has. Or they can just pointlessly blunder about, aimlessly wittering on about the need to make economies because of the inherited fiscal position of the government, as all the useless Cabinet members of the British Coalition Government do.

The government of each country has a duty of care towards the majority of its population. That is what democracy implies. Many Western governments are failing to practice their duty of care. The cost-cutting, austerity-practising economies of the West are chasing the recession down into a spiral of permanent loss. The waste of lives, the loss of labour output which can never be recovered, the damage to the personal lives of the people through an unnecessary austerity, the destruction by increased poverty of their personal “golden hours, each set with sixty diamond minutes”, the foolish and appalling impoverishment of families, the unnecessary suffering brought about by confusing economics with economies by politicians who ought to know better, should all become things of the past.

Shimomuran economics provides the road to national riches where politicians understand it. At present, only a few do understand it but that dawning light is sure to illuminate the future of mankind for it is, in Scott Fitzgerald’s memorable words “the diamond that is bigger than the Ritz”.

At present, Britain would be better economically managed if it became the 24th province of China than it is being managed by the current Coalition government. The programme of cuts are endless and pointless. The economic stupidity of Cameron and Osborne, running the economy only for the benefit of the rich, and selling part of Britain’s future — the generation of electricity from atomic power — to China, cannot be justified. It is a deal which needs to be undone from a Government that needs to be voted out of office. The creation of credit at the Bank of England and the provision of that credit to British or European energy generation investors to serve the same purpose, is a much better Shimomuran solution, and that solution should be applied to all British industries. The economies practising Shimomuran economics are going to dominate the future of the world, because only they will be the most innovative and prosperous.

Only Shimomuran economics provides a solution to the credit crunch. Western politicians are sure to eventually realise that. Western economists, following as usual in the train of political action, will eventually adopt Shimomuran economics so thoroughly that they will pretend to forget they ever thought otherwise.

Shimomuran economics fulfils the Keynesian objective of making economists as “useful as dentists” — providing effective remedies to the pains of poverty and a future ease of richer living to most of the population. It could even give some currently vilified bankers a useful role in the economic progress of the country. Competent politicians would have the starring role. But they would all need to understand Shimomuran economics first, and in the West and at the minute, they don’t get it.

This article has been written with the intention of improving their economic understanding and in the hope that they might get it, soon.

They eventually will, one way or another. This issue is never going to go away, nor should it. The promulgation of this understanding is one of the central issues of my life.

As a Scot, I was brought up with the story of Bruce and the spider illustrating the value of never surrendering any viewpoint which is right. Lately, I too have been further inspired by Shinzo Abe’s telling of the story of Ino Tadataka, who said:

“No matter how difficult a challenge may seem, it is always possible to overcome it provided you have a strong will never to give up.There is no such thing as “too late” to take action.”

Politicians and economists please note.

Note 1 : George Tait Edwards has published a book about “Shimomuran Economics” at http://www.lulu.com/shop/george-tait-edwards/shimomuran-economics/paperback/product-21688864.html and much else elsewhere during the last four decades.

Note 2: This article, which has been slightly updated, was first published in the London Progresive Journal on Friday 20th December 2013 athttp://londonprogressivejournal.com/article/view/1688/shimomuran-economics-is-the-most-significant-advance-ever-made-in-economic-understanding-and-the-west-still-doesnt-get-it. It is a key article which needs to be fully appreicated by its readers, and I hope and intend it will be.

The West Is About To Lose The World Because Of Faulty Economic Understanding With neo-classical economics, everybody loses

The United States of America is about to be knocked off its hegemonic perch by the upcoming challenger of China. If peace persists, and unfortunately there is no guarantee that it will, then the decline of the USA is unlikely to be mourned by most of the developing world because China understands and can deliver what developing countries want — faster economic development for most of their people. The neo-classical economists of the West have amply demonstrated during the last third of a century (1980-2013) that they have no idea about how to help deliver higher growth in less developed countries. In fact, they do not even know how to, and cannot even help, produce higher economic growth in the USA.

The late Alice Hoffenberg Amsden (1943- 2012) has made several highly significant observations in her book “Escape from Empire — The Developing with the World’s Journey Through Heaven and Hell.” From the very first paragraph, Alice sets out the accurate looking-glass tone of her book:

“For more than half a century after World War II, first one American empire and then another dominated a territory larger than that imagined by King Solomon or Alexander the Great. The first lifted all boats, the second lifted all yachts. In one case, prosperity and growth were graced by Heaven. In the other, inequality and stagnation were squired by Hell. Whatever we can say about the rise and fall of American imperialism, it was not black and white, and it saw big changes. The new economic stars that are forming in the firmament. constellations like China and India, will rapidly alter survival patterns here on Earth.”

Op. cit, p1.

From 1950 to 1980, the Americans permitted every nation to set their own economic agenda and to grow as best they saw fit. This policy resulted in “lifting all boats”, in the greatest period of widespread economic growth ever experienced by developing countries. The USA was accurately seen as a permissive, enabling angel, the midwife of greater prosperity and the source of higher world living standards. American economists and politicians were the object of great popular affection. The American culture was then as it is now — enormously attractive.

The dominant economic genius of the first American empire was the benign ghost of John Maynard Keynes, realistic, encyclopaedic, compassionate, helpful. American visitors peddling economic advice found out a thing or five about local circumstances before discussing how aid could help. American advice was soundly based on local priorities and political and social consent.

But in 1980 with the election of President Reagan, everything changed. The US policymakers decided, perhaps having seen too many Hollywood films, that the Americans would be “No more Mr Nice Guy.” In Alice Amsden’s words, the first American empire’s slogan for the developing world was (You) “Get Smart” while the second empire’s self-seeking command was (We) “Get Tough.”

The dominating presence of the second American empire was the malign thinking of Milton Friedman, whose monetarist policies always caused an immediate economic collapse and consequent misery with the declared intention of limiting inflation and producing eventual faster growth. Subsequent growth did indeed often occur, usually to about the immediate peak of the pre-monetarist policy, but that growth spawned much larger income inequality, higher unemployment, and did not facilitate higher long-run growth. As John Kenneth Galbraith (15 October 1928-29 April 2006) accurately observed, “Friedman has had the bad luck that his remedies have been tried” and as JKG was too polite to observe, “invariably with disastrous results for most of the population.”

The economic decline of America — like the economic decline of the UK — has been produced by applying the same rules within these previously hegemonic countries than have been previously applied within their empires. These invalid neoclassical economics are now destroying the productive foundation of the home economies, in an intellectual economic version of the rules of the empire striking back.

The dominating practice of the American-financed international institutions has been the insistence that in return for financial assistance from the IMF the recipient country must adopt the *American way” — privatisation, “free” (but oddly preferential-to-the-US) markets, less government, spending cuts, tax cuts for the rich, etc, etc, the whole nine yards of nonsensical neoclassical economics. And, says the OECD and its American sisters, no helpful measures to assist job creation and manufacturing industry (which changes, they do not say, are the real basis of widespread future prosperity).

Neo-classical economics has its many defenders, nearly all of them in the yacht-owning ranks of the rich or super-rich who are the main beneficiaries of the practice of that kind of economics, or paid-for economists piping a neoclassical tune. The two terms presidency of Barak Obama has failed because his administration has continued to practice the defective understandings of neoclassical economics. George Osborne, the UK’s Chancellor of the Exchequer, has produced through wage cuts a British economy in which living standards are declining because most growth is directed to the pockets of the rich. The UK’s Prime Minister, David Cameron, recently met many British and often living-offshore billionaires to get the funding to try to win an election to continue to run Britain for the benefit of these many expatriate rich people and their kith and kin. The opposition to a realistic economics or to a fair election in the UK is very well funded.

One review of Alice Amsden’s book puts this very well:

“Alice Amsden argues that the more freedom a developing country has to determine its own policies, the faster its economy will grow. America’s recent inflexibility — as it has single-mindedly imposed the same rules, laws, and institutions on all developing economies under its influence — has been the backdrop to the rise of two new giants, China and India, who have built economic power in their own way”

See the first review in http://worldcat.org/identities/lccn-n80-49958/

I am unsure if Alice aways gets it right. For example, she has said:

“With the awakening of Giants, global absolute power has become a relic of the past. Absolutism cannot be preserved by the United States, nor can it be acquired by China. No longer can a single country enjoy it. What will empower an Empire now is how “great” it is, meaning how much it promotes global economic development.“

I hope the observations in the first and second sentences of this quote are correct, but I am not sure that all world leaders have become mature enough to stop competing for the advantage of hegemonic power. All recent history (or a mathematical analysis of the last 500 years) suggests they have not.

China could become great, given the development-assisting criterion of greatness, because it could create investment credit to enable economic development in many countries of the world. The United States of America cannot promote global development so long as neoclassical economics is its dominant paradigm.

And yet, and yet…if the Americans understood Shimomuran economics, then not only the people of the United States but many of the people in the nations of the developed and developing world could become richer faster. After all, it was the administration of Franklin Delano Roosevelt that invented the policy of investment credit creation which Dr Osamu Shimomura practised in post-war Japan and explained in his many works.

The Chinese and the Japanese cannot be allowed to have a monopoly in their understanding of high-growth macroeconomics. Less developed countries want the investment credits and the manufacturing technology which produces economic growth, and if the US and the EU do not provide it, China or Japan will. As Alice Hoffenberg Amsden unerringly puts it:

“The Second American Empire is now in decline, possibly from immoderation but principally from a lack of greatness: it has made little contribution to economic development due to what may be described as a closed mind. Can its way of thinking be changed, or it is too late?”