The Master Economist Dr Osamu Shimomura – Probably the Greatest Economist of the 20th Century After John Maynard Keynes

June 20, 2013 12:00 am Published by Leave your thoughts

Doctor Osamu Shimomura (1910-1989) was acknowledged, within Japan and during his lifetime, as the “Father of the Japanese economic miracle” which was the most successfully achieved national economic growth plan of the 20th century. Given that circumstance, it is surprising that his published works are not available (not even in the British Library) and his economic understandings are so little known, or discussed in the West. One would have thought that Western economists might have more deeply analysed precisely what occurred in Japan, and how Japanese economic understanding propelled Japan, in the course of a few decades, from being a war-damaged, impoverished country in 1945, into one of the most highly developed and greatest industrial economies in the world.

The Development Bank of Japan (DBJ) offers scholars and researchers a “Shimomura Fellowship” in honour of his memory. See

A short biography of Shimomura is also provided on that site, but the comments about the life and work of the master economist Dr Osamu Shimomura are compressed and sometimes perhaps need a bit of decoding and expanding. The bio begins:

“Osamu Shimomura was born in 1910 in Saga Prefecture. Upon graduation from the Economics Faculty of Tokyo Imperial University in 1934, he entered the Ministry of Finance.”

So Shimomura became a practising economist from the age of 24.

The bio continues: “After serving in the United States’

I believe Shimomura (like many others) travelled with the late 1945 and early 1946 Japanese delegations of businessmen and economists to the USA on the US-sponsored American-Japanese Businessmen Exchange Programme, when he intensively researched the economic understanding, political policies, Fed/FRB procedures and industrial-banking relationships that lay at the root of the US wartime (1938-44) economic miracle. On his return, “he became“, as his DBJ career summary points out,

a manager of the Research Department of the Price Bureau and became a member of the Policy Committee of the Bank of Japan.”

On one of his early visits to the USA, Shimomura may have met John Kenneth Galbraith, who had been working in the Office of Price Administration in the USA, and perhaps he sought and acquired a similar price-controlling post after returning to Japan. Maybe JKG told Shimomura about how the USA had stimulated massive growth through investment credit creation – the sparse evidence supports such a conjecture – and the USA perhaps wanted a capitalist bulwark against Chinese Communism.

However that may be, the historical record is clear: The 32nd President Roosevelt, who knew a great deal about economics and how to marry the needs of the state for economic growth with business acumen, died on April 12 1945 and his growth-accelerating Investment Credit Economics died (at least in America) with him. Whatever the skills of his successor, the 33rd President Harry S Truman lacked equivalent skills and obviously had no desire to continue with US investment credit for businesses.

During 1945/46, the post-war Japanese economy exploded into massive activity indirectly financed through credit creation at the bank of Japan, fixing the damaged infrastructure, housing, and industry of the country at an immense rate.

Shimomura returned to the USA many times during his later life as a master economist and guest lecturer at US universities. The bio continues:

From 1960 to 1966, he [Shimomura] served as a senior executive director of Japan Development Bank and as the first executive director of JDB’s Research Institute of Capital Formation from 1964 to 1974. Afterward, he became the chairman of Japan Economic Research Institute.”

Shimomura was the principal contributor and perhaps the editor of Japan’s first three or five “income-doubling plans” and he was instrumental in stressing the practical application of economic theory to real-life issues.

(For examples of how the Japanese use economics as a spade, instead of using it as a sub-group of largely-irrelevant-to-real-life mathematics, see any annual copy of the Japan’s Economic Planning Agency’s “Economic Survey of Japan”.)

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.”

Numerous followers in Japan, that is, prior to the 1970s, and probably numerous followers in China after the mid-1970s delegations of Chinese growth-investigating visitors to Tokyo.

The DBJ bio continues:

“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 post war 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 post war 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.”

Shimomura’s 1961 theory of economic growth was, and is, masterly, arguing that real investment can exceed saving by about 15% of GDP through credit creation at the BoJ. One of his favourite requests to Japanese economists was that they should abandon the “Static concept of investment-saving equilibrium” and replace it with a more dynamic “Investment exceeding saving through central bank debt/credit creation.”

The best interpreter in English of Shimomura’s work is Kenneth K Kurihara, in his

The Growth Potential of the Japanese Economy” [The John Hopkins Press, Baltimore1971] in which he explains and comments upon the Shimomura model of the Japanese economy as replacing the Keynesian saving-investment equilibrium condition with the equation

S+D = Is+Id

That is, Saving (S) plus Debt (D, equal to investment credits arising from investment credit creation at the Bank of Japan) equals Is (Investment financed by saving) plus Id (Investment financed by debt). In plain words, the investment level of Japan is increased by credit creation with its initial impetus in the Central Bank of Japan. This equation replaces the classic Keynesian Savings-Investment equality with a more useful formula because the government of a country can increase the nation’s investment level (and hence its future growth and prosperity) through government policy to produce investment credit creation at the Central Bank.

This produces a genuine supply side economics, but there are too many implications in that formula to pursue them all here.

The DBJ bio of Shimomura continues:

In the 1970s, Dr. Shimomura argued that the Japanese economy would slow down as it caught up with the other industrial economies of the U.S. and Europe. Following the first oil shock, he contended that a drop to zero growth was inevitable. “

More precisely, Shimomura calculated the diminishing returns to capital investment as shown by the annual increase in the capital-output ratio, and pointed out the likely consequences of a continuation of that trend. But he was calculating the diminishing returns to imitation, and not factoring in innovation.

Finally in the 1980s, Dr Shimomura criticized U.S. fiscal deficits as a cause of the global economic imbalances and stressed the importance of disciplined economic management.”

But he never convinced US or Western economists to listen. The Western contemptuous attitude to Shimomura was deeply based – they did not like his major joke at seminars, which was,

I am glad I never went to a [Western] university – if I had, I would never have understood economics!

That always got a laugh, and was delivered with a modest obsequious “ohoho” laugh from Shimomura. Perhaps it should be noted that the Japanese distinguish between five kinds of laughter. These are reported by Richard Hughes, the great Australian correspondent, as follows:

“We talked about the mysterious Japanese laugh, which is apt to confuse gaijin when used politely in moments of personal grief or shock. Aso-san explained that we must learn to distinguish between five special categories of Japanese laughter: ahihi (merry), ihihi (vulgar), uhuhu (derisive), ehehe (synchophantic), and ohoho (modest).” Richard Hughes, “Foreign Devil – Thirty years of Reporting in the Far East”, Century Publishing, London, 1984, p81.

Quite. Incidentally, Japanese laughter is never described as “He he” because the Japanese “He he” translates as “Fart fart” in English.

Finally, the conclusion of the DBJ summary of Shimomura’s life records “Dr. Shimomura died in 1989.”

I invited Dr Shimomura to the 1985 “Japan Conference” at Magdalen college, Oxford. He replied saying his doctor had advised him not to travel outside Japan, and apologised that he could not attend. I still have his letter.

The DBJ then places on the record their view of Shimomura’s contributions to economics:

Dr Shimomura published numerous influential volumes and studies on economic topics, including Economic Fluctuation and Multiplier Analysis (1952), for which he was awarded a doctorate in economics. His major works are listed below:

Keizai Hendo no Jyosu Bunseki, 1952 (Economic Fluctuation and Multiplier Analysis)
Keizai Seicho Jitsgen no tame ni, 1958 (Achieving Economic Growth)
Nippon Keizai Seichoron, 1962 (A Theory of Japanese Economic Growth)
Nippon Keizai wa Seicho suru, 1963 (The Japanese Economy Will Grow)
Keizaitaikoku Nippon no Sentaku, 1971 (Japan’s Choices as a Major Economic Power)
Zero Seicho Dasshutsu no Jyoken, 1976 (Conditions for Escaping from Zero Growth)
Nippon Keizai no Setsudo, 1981 (Discipline and the Japanese Economy)
Nippon wa Warukunai, 1987 (Japan Is Not at Fault)

I have a bit of a problem with the DBJ summary of Shimomura’s life. It is a very brief and inevitably minimalist summary, not presenting more than a very limited picture of the man and his key role in the delivery of the Japanese economic miracle. It presents Shimomara as an intellectual explainer, rather than as an activist, yet he is recognised as the key advocate, main architect and active promoter of the financial-industrial technology of Japan’s economic development and the Japanese Government/ BoJ management of that, particularly because of his starring role as an advisor on the Policy Board of the Bank of Japan.

The brief summary may be not fully representing the historical reality. The Japanese economic miracle, which Shimomura fathered, began in 1946. How could he be its father if he was mainly active from the late 1950s and early 1960s, as the DBJ summary implies? The truth is that the Japanese made the ICC procedures almost a state secret for fifteen years – from 1946 until 1961, when Dr Shimomura presented his Model of the Japanese Economy and its equations to the joint meeting of the Japanese Economic Association and the Japanese Econometric Society. His presentation was then published under the title “Seicho Seisaku No Kihon Mondai” (Basic Problems of Growth Policy) in Riron Keizaigaku, March 1961. We should not confuse or conflate the start of the high-growth process in 1945/46 with its much later explanation in 1961.

I am pretty well certain that after the post-September-1972 settlement between China and Japan, the growth-investigating Chinese economic and business delegations to Tokyo met with Shimomura in the mid-1970s and he also became the indirect father of the Chinese economic miracle. Perhaps that’s not an acknowledgement or a connection the DBJ would like to make.

None of Shimomura’s eight major works are available in English, nor are they available in Japanese on the internet outside Japan. I think it likely that there are copies translated into Chinese in Beijing.

The easiest way for any English-speaking economist to gain access to Shimomura’s work is by acquiring a copy of Kenneth K Kurihara’s great book, The Growth Potential of the Japanese Economy, The John Hopkins Press, Baltimore and London, 1971.

And, lest we forget, the towering conclusion of that book is

“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.”

(Kenneth K. Kurihara, Growth Potential of the Japanese Economy, Baltimore, John Hopkins Press 1971 page 138)

“Greater investment financed partly by credits” – now there’s the solution to the West’s current economic difficulties, and the EU and the USA need to learn and adopt Shimomuran economics asap. No need for abstinence – now that will be news to the currently suffering Greeks, Italians, Spanish and French! No need for austerity – well, that again will certainly be news to the IMF, the ECB, the World Bank, and the British Treasury.

These days it’s the so-called “developed” nations of the West that have had an “austerity” package imposed due to a high-places faulty understanding of economics, at the peril of great social unrest, as the news media report daily.

Yes, Dr Osamu Shimomura was probably the second greatest economist in the 20th century, and he was an avowed Keynesian, because Keynes was by far the first. Shimomura is enormously significant because he is really not only the “Father of the Japanese miracle” but also the father of the rise of all the other the high-growth Asian economies.

The West has a lot to learn from Shimomura. Isn’t it about time the West acknowledged that, and acted accordingly?

Who else has any effective answers?

© George Tait Edwards 2013

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This post was written by George Tait Edwards

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