Shimomuran Economics is the Most Significant Advance Ever Made in Economic Understanding and the West Still Doesn't Get It
Fri 20th Dec 2013
Photograph of Dr Osamu Shimomura from the
cover of his 1987 book “Nippon wa Warukunai”,
(Japan Is Not at Fault!)
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 (see paragraph 2 of the immediately previous article, “Western Economic Manufacturing Decline is Because Western Economists and Politicians Have Ignored Shimomuran Economics”).
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.”
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.
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 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 more accurately, 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) with the more dynamic equation
Is +Id = S+D where
Is= Investment financed by Saving
Id = Investment financed by 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 at http://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 (see http://en.wikipedia.org/wiki/Roy_Harrod) and the Russian-American economist Evsey Domar (1914-1997 - see http://en.wikipedia.org/wiki/Evsey_Domar) who both independently developed the Harrod-Domar model (see http://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 in the capital goods and 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 the 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 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 green technologies, as Obama has, or in bringing 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. 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 a diamond 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, 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. 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 highly 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 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.
© George Tait Edwards 2013