Because they believe in several wrong ideas.
I have recently tried to communicate Shimomuran economics to several economists by attending the Rethinking Economics Conference London (held at 28-29 June at University College, London). I have also tried to communicate with many economists throughout the world, via the internet, and have found that the educational brainwashing of Western-trained economists is so great that they cannot usually think outside the mental box fitted by their university education.
Virtually all Western-trained economists have several completely wrong fixed ideas and this brief article deals with the major one which inhibits their understanding of rapid economic growth.
That major wrong idea is that national investment must be funded by either domestic saving or foreign borrowing. That fixed belief makes them unable to see some of the situations they are looking at and it often makes their commentaries on some Asian economies quite ridiculous.
An essay from the book “Showa — The Japan of Hirohito”, edited by Carol Gluck and Stephen R Gruahard, Norton and Company, New York, 1992, illustrates the problem.
(See http://www.amazon.co.uk/Showa-Japan-Hirohito-Carol-Gluck/dp/0393310647/ref=sr_1_sc_1?ie=UTF8&qid=1368424747&sr=8-1-spell&keywords=Showa+-+The+Japan+of+Hirohita)
One of the fifteen essay contributors (Edward J Lincoln, the Senior Fellow at the Brookings Institute, Washington) makes this statements about high Japanese plant and equipment investment:
“The money for investment in plant and equipment must have come from somewhere in the form of savings. To say Japan was characterized by a high share of fixed capital formation in GDP implies that either Japan generated a high share of domestic savings or borrowed extensively from the rest of the world. Japan did not borrow heavily [in fact it did not borrow at all] from international capital markets, a feature that was reinforced by government policy in the high-growth years after the war (which essentially prohibited the private sector from borrowing abroad).”
Absolutely wrong — high investment was mainly funded by credit creation at the Bank of Japan, about which Mr Lincoln appears to know nothing. The money came from somewhere, all right, because it was created by the Japanese Government as an act of monetary policy in the form of investment credit creation through the re-discounting of the pre-existing bank loans by the Bank of Japan — but that does not appear to be a possibility that the mindset of Mr Edward J Lincoln can allow.
Mr Edward J Lincoln is not alone in his wrong, and not fully informed, thinking. I could find similar statements in almost any basic economic textbook and it is often an unstated assumption in other economic papers. That mistaken logic forms the basis for many of the incorrect statements in the economic reports about some Asian nations, produced by Western institutions such as the IMF, the World Bank, the OECD etc. It also features in the national debt tables of the CIA World “Factbook,” which lists the very real Greek government debts in the same table as Chinese and Japanese government “debts” (when these Asian “debts” are actually no-cost interest-receiving, income-generating assets as far as the central bank is concerned). The failure to discriminate between a debt (or money you owe to a third party it has been borrowed from) and an asset (or money owed to you by a third party, on which you are receiving interest) makes the CIA public debt tables at best misleading and at worst useless with regard to the Asian investment credit economies of Japan, China, South Korea and Taiwan, and perhaps several others.
The national government debt table in the CIA World “Factbook” should be reconstituted where required as two columns, one entitled “Government Domestic Assets” showing the loans created at the Central Bank for investment purposes (which are assets held by the Bank of Japan on behalf of the Japanese Government ) and a “Government Debt” column showing the borrowings of the Government from third parties. I have written to the CIA saying so, but perhaps my advice on this issue may not be entirely welcome. The highly qualified Western-educated recipients of the advice probably could not understand what I was saying. Still, these tables need correction, preferably soon.
Part of the confusion was created by the administration of Franklin Delano Roosevelt, which wrote down the balancing entry for the American 1938-44 investment credit creation as”The savings of the people” although the people had nothing to do with it. Other credit-creating governments have followed suit. Maybe less people should believe what they read and more people should investigate what they are being told.
Western economists need to recognise the fact that investment credits can appear in the economy as if it were foreign investment, created by the credit-creating activities of the Central Bank. These new credits are better than foreign investment because they are not narrowly focused on investments to provide exported output (as foreign investments usually are). Furthermore, these new funds can help all the industries and SMEs in a country, they do not create ownership by, and a stream of future repayments to, foreigners, and they have generally widespread and helpful economic effects, creating a country of abundant capital as in occurring in all the nations of the Tokyo Consensus and which could happen everywhere if Western and world economists brightened up. (A country of abundant capital is my generalisation of Shinzo Abe’s choice phrase “A Japan of Abundant Capital” as part of his vision for the future of Japan.)
Or Is (Investment financed by saving) plus Id (Investment financed by debt) equals Saving (S) plus Debt (D, equal to investment credit created by investment credit at creation at the Bank of Japan).
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 additional wealth through industrial investment, higher employment and the continually updated production of better goods and services.
Kenneth Kenkichi Kurihara has produced 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)
Why have Western economists ignored the fundamental insights of Dr Osamu Shimomura, who the Bank of Japan has referred to as “Japan’s most influential post war economist”? A large part of the reason for that is because many Western economists think they have a perfect understanding, that they know everything, and their discipline is on a par with Physics. But the Tokyo Consensus nations know one of the most important things in economics — about how to create an economic explosion, how to convert an economy from peasantry to industrial power within a few decades, and there are four major examples of that process in Japan, China, South Korea and Taiwan — and the above equation is the secret of that.
During the last fifty years I have frequently been told that these fresh-to-the-West Shimomuran insights are wrong. The Japanese have a lovely expession which covers that response. They smile sweetly and say
In other words, if you do not accept reality, events will educate you where your education and your prejudices have failed.
The major reason for the hole in the heart of Western economics teaching — by which I mean the absence of teaching of any prescription for the acceleration of economic growth — is because Western universities don’t teach Shimomuran economics. They should. I terms of a physics analogy, western economists understand the equivalent of Newtonian physics, while some of their Asian counterparts understand Einstein’s atomics. The West does not understand how to make economic explosions, the East does.
Western university teaching should include Shimomuran economics in the curriculum as soon as possible, and Western economists should realise there is a third source of investment funding — credit creation by the central bank — which could greatly assist US and EU recovery if they understood it.
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.
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