Economic Policies for an Incoming Labour Government (Part 4 of 9 – Shimomuran Economics

The body of developed policy that underpins Asian industrial and economic

success is not understood in the West, yet it was clearly foreshadowed in

the work of the greatest western economist of the twentieth century, John

Maynard Keynes. It is a sad reflection on western economists that the

Keynesian insights were most fully developed by the great Japanese

economist, Dr Osama Shimomura 1910-89, whose work has only recently

come to the attention of western economists by virtue of the sustained

efforts over four decades by the second author of this paper.

An indication of the extent to which Shimomura has been overlooked in the

West is the fact that his works have never been translated Into English

Development Bank of Japan has edited out Shimomura’s key formulae).

Shimomura enjoys, however, a towering reputation in his own country. The

Development Bank of Japan offers a “Shimomura Fellowship” to

commemorate his life on the basis that “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

He was acknowledged, within Japan and during his lifetime, as the “brains

behind the Japanese economic miracle” – the most successful national

economic growth plan of the 20th century. Five of his published works

became available in the British Library last year but there seems to be little

interest in how Japan, in the course of a few decades, progressed from the

war-damaged, impoverished country of 1945 to become one of the most

highly developed and powerful industrial economies in the world.

Shimomura’s major contribution to macro-economics is his economic growth

model, the basis of which was that the total level of Japanese investment is

equal to the natural investment level (that is, investment financed by

savings) plus the additional investment financed by credit creation

originating at the Bank of Japan. The model illustrated the range of that

additional credit-created investment as no less than 10% to 15% of national

income a year.

It is generally agreed by most economists, following Keynes, that

investment is the major key to economic development and growth.

Shimomura’s economic model applied an extension of the Keynesian

analysis and showed that an economy could selectively increase its

investment level through an increase in investment credit at the central

bank, if that credit was earmarked for commercial and industrial

investment. The rapidity of Japanese industrial development in the 1960s

and 1970s, in apparent response to the stimulus provided by investment

credit-creation by the Bank of Japan under instructions from the

government, is widely seen in Asian economies as a vindication of

Shimomuran policies.

Professor Kenneth K Kurihara (1910-1972) – the Distinguished Professor of

Economic Theory at the State University of New York in Binghampton,

teacher of macro-economics at Princeton and Rutgers, the State University

of New Jersey, guest lecturer at the universities of Oxford and Cambridge,

of the most influential interpreters of Shimomuran economics; he also had

the great advantage of being able to write in English. He concluded that

“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

After more than two decades of persistent stagnation, during which

Shimomuran policies were lost sight of, and supplanted by policies urged on

the Japanese by the IMF and western economists, Shimomura is now back in

favour in Japan. The Prime Minister of Japan, Shinzo Abe, announced on 19

April 2013 in a speech to the Japan National Press Club that Japan is once

again implementing Shimomuran economics – he explicitly made two

references to Dr Shimomura – in order to end the Japanese depression and

restore high growth to create once again what he described as “a Japan of

Western economists, however, seem to be unaware of this revival of

Shimomuran economics. On the rare occasions that they have been invited

to consider the issue, they have maintained that correlation is not

causation, and that there is no evidence that the new credit created by the

Bank of Japan “caused” the observed growth in the 1960s and 1970s, or

that the cessation of that growth was the consequence of abandoning credit

creation. And there the argument might have rested except for two recent

developments.

First, the British economist Sir Clive Granger produced, in a 1969 paper in

Econometrica, a new statistical technique called Granger Predictive

Causation Analysis – an achievement that led in 2003 to his award, along

with his colleague Robert Engle, of a Nobel Prize for contributions to

economics. The Granger Causality Analysis tests the validity of predictive

causative links between two economic factors; using Granger predictive

analysis, it can be shown whether there is a predictive link between two

items of economic time series.

Second, and more recently, detailed and expert work on the course of the

Japanese economy – both its period of sustained and almost unprecedented

growth, and its subsequent period of stubborn stagnation – was undertaken

by Professor Richard Werner, professor of economics at the University of

Southampton. Professor Werner originated the term “quantitative easing”

and in 1991 predicted the imminent ‘collapse’ of the Japanese banking

system and the threat of the “greatest recession since the Great

Depression”. He is a specialist in the Japanese economy and became the

first Shimomura Fellow at the Research Institute for Capital Formation at

the Development Bank of Japan where he spent ten years in the 1990s.

Professor Werner has applied Granger Predictive Causation Analysis to the

Japanese data over a long period and has shown in his book “new paradigm

in macroeconomics” – that there is a clear Granger causation predictive link

between investment credit creation at the Bank of Japan and subsequent

rates of Japanese economic growth, both positive and negative. He also

found that the causative link that is so clear in the case of investment

credit creation does not hold good in respect of any other of the

candidates, such as interest rates, structural changes, and so on, that are

often advanced as potential explanations for the vagaries of the Japanese

economy over five decades. Significantly, Werner also found that excessive

credit creation where that credit is not earmarked for use in new

investment in productive capacity will finds its outlet in speculation and the

creation of asset bubbles, as occurred in Japan from 1986-91.

Werner’s use of the Granger technique and the conclusions he is able to

draw allow us to say with certainty that the use of investment credit

creation has been the essential element in determining the rate of growth

for the Japanese economy. Empirical observation and the analysis of the

observed data allow for no other explanation. It is on that basis that we can

extrapolate from the Japanese experience, as identified by Werner, to

western economies, and say that – since advanced economies function very

similarly, whether in Japan or elsewhere – the solution to the poor

performance and lagging development of western economies is the adoption

of investment credit economics, which is fully capable of reversing the illeffects,

including the damage to personal incomes and the social fabric, of

austerity.

1 A reference to that inadequate translation of what is perhaps Shimomura’s most significant

books, Seicho Seisaku No Kihon Mondai (Basic Problems in Growth Policy, 1961) can be found

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

3 See “The Growth Potential of the Japanese Economy” (John Hopkins Press Maryland 1971), p.

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

© Bryan Gould and George Tait Edwards 2015