The Shimomuran Economics Solution to the Western Economic Crisis

August 30, 2013 1:15 am Published by Leave your thoughts

The Prime Minister of Japan, Shinzo Abe, gave a speech to the Japan National Press Club on 19 April 2013 about Japan’s new growth strategy. Among the positive growth and other investment funding intentions of the Japanese Government, Mr Abe highlighted the comments about Japanese economic growth by only one economist, the master economist Dr Osamu Shimomura. Prime Minister Abe mentioned the “father of the Japanese Miracle” twice in his speech. Shinzo Abe’s speech can be found at:

A brief biography of Dr Osamu Shimomura can be read on the website of the Development Bank of Japan (DBJ) ( where a DBJ fellowship is offered and named in honour of Dr Shimomura’s contribution to Japan’s economic success. As that website records, Shimomura developed a dynamic theory of high-rate economic growth. My more extended biography of Shimomura can be read here

It is my contention, developed over four decades of study of the policies, procedures and practices of higher-growth economies, that the high growth economics first practiced in FDR’s USA from 1938-44 (see, and the Shimomuran economics developed from it, lie at the root of the two historically important and most recent Asian economic miracles of Japan and China and could help the rapid recovery of the Western economies, if they understood and practiced it.

In Japan in 1945-6 the American advisor to the US occupation authorities, the American banker Mr Joseph Dodge, recommended a balanced budget policy to Japanese authorities who were obliged to follow this policy. The post-war Japanese government was therefore denied any Keynesian government debt-financed route to economic recovery. Fortunately the then Mr (later Dr) Osamu Shimomura was at hand and he recommended to the Japanese Government the adoption of an expansionary monetary policy at the Bank of Japan (BoJ) to compensate for the restrictive fiscal policy. See for more details about that.

What precisely did Shimomura do? He recommended that the Bank of Japan should create a vast amount of investment credit and canalise these funds through the Japanese secondary banks to Japanese industry in order to finance what Professor Tsuru has called “Japan’s gigantic industry-funding programme.”

It used to be difficult during previous decades to explain the procedure of credit creation to British economists because it was alien to their mindset. Perhaps the sole advantage of the credit crunch is that credit creation is now easily explainable, if not readily understood. As John Kenneth Galbraith has accurately observed, “The creation of money is so simple that the mind is repelled”). The procedure for the creation of that credit by the BoJ was identical to the current quantitative easing practiced recently by the Bank of England – the re-discounting of pre-existing bank loans in order to increase the liquidity of the banks.

Keynes made two observations which explain precisely the theoretical foundations of what his disciple, the Keynesian economist Shimomura, did. The first is in the “General Theory”:

“While there are intrinsic reasons for the shortage of land, there are no intrinsic reasons for the shortage of capital” (John Maynard Keynes, “The General Theory of Employment, Interest and Money,” Book 6, Chapter 24, Section 2, p. 376).

Keynes’ second great insight was his statement that savings can be created to fund investment prior to the returns which justify them.

These two 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.

For the most part, western Economists have largely ignored Shimomuran-Harrodian growth-accelerating economics, probably because his works are difficult to access in English, because Shimomura was a Japanese patriot who wrote only in Japanese, and because his intention was to create a comparative economic advantage for the Japanese people (which he certainly did).

But there is one exception to that general observation – the eminent American-Japanese growth economist Kenneth Kenkichi Kurihara (1910-1972) studied intensely and understood thoroughly the Shimomura economic model. As Kurihara explains it, the Shimomura model of the Japanese economy replaces the classic Keynesian saving-investment equilibrium equation with:

S+D = Is+Id

Kenneth Kenkichi Kurihara, “The Growth Potential of the Japanese Economy” [The John Hopkins Press, Baltimore,1971, p77

Where S= Saving and D= Debt. Together they are equal to Is = investment financed by saving + Id =Investment financed by debt. In other words, the investment level of Japan is increased by credit creation with its initial impetus in the Central Bank of Japan. This modified equation produces an exploding economy, in the Keynesian sense, for investment is fixed continually above the natural savings rate. That is not a minor observation. See .

However, it doesn’t have to work that way. The creation of credit at the central bank could be targeted towards any one or any mix of three objectives and will have different economic outcomes depending upon that targeting.

First, it could be financial credit creation (FCC) as the BoE has practiced so far, providing additional liquidity to prevent domestic bank collapse. This is a useful objective but is limited and serves no productive function. Second, it could be investment credit creation (ICC): new money created and channeled through secondary banks for the purpose of providing long term, low repayment, low-interest rate loans for industrial development, thus increasing economic growth and general prosperity. Third, the additional credit could be used by the merchant banking arms of the banks as speculative credit creation (SCC), enabling the banks to gamble on another asset bubble and enrich the chosen few with large bank bonuses. Examples of the above are present day FCC by the BoE; ICC by Japan from 1946-75 and in China from the mid-1970s to the present day; SCC for the financing of the Japanese asset bubble (1986-91).

Let there be no doubt about this issue: an understanding of Roosevelt-originated, Shimomuran-practised, Kuriharan-explained investment credit economics is the diamond that is bigger than the Ritz. The Western economies and their populations are still suffering from the malign effects of the credit crunch.

By far the best and, perhaps the only, effective response to the credit crunch is the adoption and practice of Shimomuran economics.

Investment credit creation continually recruits the unemployed into the capital investment sector and thus improves not only the prosperity of the people of the country but improves the fiscal position of governments and removes the case for the continuation of austerity measures.

Some illustrative numbers can help explain this consequence. Suppose the Bank of England creates £100bn of no-cost investment credit and canalises it through the domestic secondary banking system to provide industrial and commercial investment credits, which once the multiplier of about 2 is taken into account would result in a final expenditure on plant and equipment and work in progress of about £200m. Assuming a UK tax take of about 42%, this would result in extra revenue income to the Treasury of about £84bn over about two years – not a bad early return from no-cost credit creation at the central bank. Furthermore, the additional capital investment of (say) £150bn would produce, assuming a capital-output ratio of about 3, a permanent increase in national income of about £50bn, or about an extra 3.3% of economic growth after two years. Wages and salaries would increase by about £35bn a year and assuming a £26,500 average wage and salary level, unemployment might decrease by about 1.2 million to 1.3 million, thus halving the current official unemployment rate of 7.8% or 2.5 million, saving further unemployment benefit costs of about £5bn a year. Additional income tax might raise a further £12bn a year and VAT on the additional wealth produced would add about another £10bn a year to Treasury income.

So no-cost investment credit of £100bn would therefore benefit the fiscal balance by an initial tax return of about £84bn plus a gain to the economy of about £40bn a year, with an annual gain to the British Treasury of about £27bn a year. A Shimomuran investment credit creation policy is obviously the best way to run an economy. Central bank creation of investment credits cost nothing except for the movement of electrons in a modern banking system. Consequently, countries do not have to borrow from abroad in order to create an investment boom. The USA didn’t, Japan didn’t and China doesn’t.

The most important social effect of investment credit creation is the reduction of unemployment but the greatest economic effect is the reduction in under-employment. The updating of the plant and equipment to modern standards enables the workers to become much more productive. The contribution to economic growth by updated plant and machinery and the removal of under-employment has a greater effect on GDP then reducing unemployment. Part of the statement from Bieda, that

“saving does not have to precede investment in conditions where there is unemployment,” could usefully be amended to read:

“saving does not have to precede investment in conditions where there is unemployment or underemployment, because the scope for economic improvement does not only come from the employment of surplus labour but from the employment of surplus labour at the highest available level of machine-assisted technology plus the raising of the productivity in existing employees – both employed and underemployed – through new investment in the best available technology.”

There is no such thing as a “Post-Industrial Economy.” The whole idea that there might be was based upon the mistaken impression that the manufacturing industry was a phase that economies pass through on their way to becoming maximally developed. But human ingenuity, the continual advance of science, the continual improvement in human understanding about all aspects of this astonishing universe and our place in it, continually enables the production of much better productive capital producing much better goods and greatly improved services to meet more fully our needs.

Investment Credit (or Shimomuran) economics has so far produced produced three economic miracles – FDR’s USA (1938-44), Japan (1946-75) and China (mid 1970s to the present day). It could stimulate a rapid economic recovery in the USA, the EU and in all of the Western democracies.

There is not much choice in this matter. The Western democracies can no longer choose to ignore Shimomuran economics than they could ignore industrialisation. The question is not if, but when; not whether, but only sooner or later.

In my view, the world is now teetering on the edge of another period of more rapid growth, more widely-based than any previous economic revival, as the Western economies adapt and adopt the FDR-practiced, Shimomuran-developed, Kuriharan explained investment credit economics in the interests of all their peoples and to promote the future peace and prosperity of the world.

© George Tait Edwards MBE 2013


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