Japan in Their Own Words (JITOW)/日本からの意見

Major Industrialized Countries Must Return to Real Economics to Prevent Future Financial Crisis
ONO Goro / Professor Emeritus, Saitama University

October 27, 2008
"It is hoped that the major industrialized countries move forward with drastic reforms of the money/financial market before the hegemonic influence of the money game originating in the United States spreads untrammeled all over the world and disrupts the real economies of the newly emerging countries that are about to take off." Thus I concluded my previous entry titled "Draw a Sharp Line between Speculation and Investment."

In my view, the latest financial crisis was inevitable. And although such a crisis may be temporarily avoided by treating the symptoms, it will certainly relapse if major industrialized countries continue to ignore the fundamental proposition of separating speculation from investment and moving forward with drastic reforms of the money/financial market. Conversely, once the fundamental problem is resolved, the world will be freed from the fear of a recurring financial crisis.

Now, when a problem becomes as complicated and specialized as the one before us and obscures the big picture, it is best to return to basics.

Money is a product that changes hands in the financial market and has no value per se. It is nothing but a tool that facilitates the running of the real economy. The fact that the financial market has nevertheless expanded exponentially with respect to the real economy is abnormal to begin with.

How did this come about? The root of the issue lies in major industrialized countries and regions such as the United States, the European Union and Japan, which persist on economic growth, even though their economies have matured and can no longer expect the high growth that occurred during the "catch-up" phase. Seeing this, they gave up on the real economy with its low growth prospects and made a run for excessive credit creation using their past glory – with no real backup - as collateral. This led to the continuing expansion of the purely fictional financial market. Modern economics must be heavily blamed for lionizing the United States, which managed to create superficial growth out of such fiction.

Financial engineering, or illusory engineering, has served as the backbone for this fictional world. In the world of genuine engineering dominated by algorithms, the same solution applies under the same conditions. If financial engineering is indeed being applied to this same world, everyone participating in the same market would be handed the same solution, thus nullifying the market itself. In other words, financial engineering is a self-defeating exercise. The academic world of modern economics ignored this simple logic and went so far as to reward those who created this fictional world with a Nobel Prize.

Securitized products, which is another cause of the latest financial crisis, is said to have succeeded by diversifying the risks. True, if this were the genuine world of engineering, diversified risk might alleviate the risk of the entire system. However, the total risk of securitized products cannot be reduced by diversification. On the contrary, we should realize that diversification makes it more difficult to identify the risks and consequently raises total risk. Following this logic, the mechanism of the latest crisis becomes apparent.

If such a crisis were to be repeated endlessly without addressing the fundamental problem, sooner or later the global economic system itself would become too exhausted to absorb the risk, ultimately leading not just to depression, but collapse. No matter how growth-obsessed and greedy they may be, the industrialized countries would surely not wish to risk collapse in seeking further growth for themselves.

In conclusion, major industrialized countries and regions such as the United States, the European Union and Japan, which have reached economic maturity, should stop seeking their nonexistent growth prospects and instead satisfy themselves with the comparative affluence they have already achieved. Rather than depending on the superficial financial market, they should reconstruct their real economy, which faces intense competition from developing countries, into something that will retain its luster over time. And if, in the midst of such an effort, they can maintain their aspirations and hope for further improvement, they should realize that the pursuit of non-monetary, non-economic values is their only way ahead.

The writer is Professor Emeritus at Saitama University.
The English-Speaking Union of Japan

小野五郎 / 埼玉大学名誉教授

2008年 10月 27日









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English Speaking Union of Japan > Japan in Their Own Words (JITOW) > Major Industrialized Countries Must Return to Real Economics to Prevent Future Financial Crisis