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

Global Economic Turmoil - An Inevitable Outcome Dictated by Logic
ONO Goro / Professor Emeritus at Saitama University

August 24, 2012
The essential purpose of a theory is to explain the "why and how." Logic and proof are merely part of the requirements that constitute a theory. Yet, owing to the elevated status currently enjoyed by econometrics, many profess to a "theory" when all they have to show is probable statistical significance. Economists who make indiscriminate use of mathematical formulas either do not understand the true meaning of a mathematical formula, or are deceiving the masses by taking advantage of their fondness for "experts."

By nature, economic statistics are intentional results premised on existing systems and customs. It is inappropriate to generalize such results into a theory or discuss issues based on a simple analysis of economic data in our world today, which is in need of a paradigm shift. Neither is economic data as refined as data used in the natural sciences. Results may differ greatly depending on the initial conditions. As the Chaos Theory says, "a butterfly fluttering its wings in Beijing will start a chain reaction that results in a hurricane stirring up in the Caribbean" Moreover, intellectuals tend to set the initial conditions to ensure that the end result will be music to the ears of the masses.

Consequently, most proposals are produced by setting a "desirable" goal and backing it up with reasoning that at first sight seem quite authentic. And people are left to choose what they consider to be the best option. The general public and policymakers are equally averse to hearing a painful scenario. This tendency has led experts to present unrealistic options and have allowed optimism to dominate. Incompatible demands have thus been made from time to time as if it was the perfectly normal thing to do. For example, in Japan the general public has demanded that a stable supply of electricity be maintained without raising the price, while at the same time opposing the reactivation of nuclear power plants. And in Greece, people sought to remain within the European Union but were nevertheless opposed to fiscal austerity.

The most persuasive yet most dangerous of these propositions is one that acknowledges the need for financial reform while recognizing the possibility of sustainable development even now, when it is already an impossible dream for the advanced countries. This forces people to choose from fictional options based on the misguided assumption that growth is still possible.

Judging from the historical fact that a time of decline came even for the Roman Empire and the British Empire, growth will eventually grind to a halt in the advanced countries. Not only will they experience an ebb in notable new technologies and industries, but they will also experience a dramatic drop in their growth rate, even as the absolute value of their GDP growth remains unchanged. This is because in advanced countries the denominator will continue to expand, while they will also face competition from countries that had formerly supplied them with resources and markets for their products.

In other words, the advanced countries are not emulating Japan's "lost two decades." They are simply following their own path of historical inevitability. To say that no one can argue against growth because it is tantamount to arguing against peace is an act of adulation that conceals the fact that excessive emphasis on economic growth can destroy peace from time to time.

The U.S. economy, which had shown signs of decline in the 1980s, did seem to have made a comeback by the 1990s. However, that was made possible by creating a financial bubble and covering it up by passing on the effects to other countries on its strength as a key currency nation. To do so required financial engineering based on the gold standard, where symbolic credit was traded for physical money, which could only be an illusion. This is evidenced by how the market actually treats the yen as a stable currency, despite the fact that Japan's finances is in shambles. Those responsible for manipulating the LIBOR are scarcely aware of having done any wrong, and this becomes understandable once we realize that the current financial market is itself built upon illusions.

Inevitably, erroneous assumptions and options such as these make fiscal reform impossible in advanced countries. I can offer a logical expression to prove this reasoning. However, a simple explanation would be to say that tax increases and fiscal restraint are more likely to cause individuals to focus on the direct losses they will suffer, rather than the indirect benefits of fiscal soundness. Where democratic procedures are in place, voters tend to favor tax cuts and pork barrel policies. And by the time people discover the errors in candied premises and feel the adverse effects of fiscal imbalance, it is too late.

As economist John Kenneth Galbraith has pointed out, today we are dominated by conventions based on pleasant words that are given the guise of reason by intellectuals. While this feeds people's expectations, dissatisfaction over the fact that such expectations are nowhere closer to being met makes them even more unhappy.

Conversely, those who call themselves an intellectual should seek to correct this bias towards optimism, which is a fundamental flaw of democracy. They should educate the masses by offering words that are harsh on their ears, rather than cater to the self-indulgent goals of the masses by providing the reasoning. To do this, an intellectual must speak the truth by returning to square one to offer logical consistency rather than probability, which is a tool used by various experts to fortify their theories. It is a task better suited to a generalist in the Keynesian sense, who is knowledgeable about things in general, rather than an expert who throws around theories that at first sight seem refined.

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

2012年 8月 24日







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English Speaking Union of Japan > Japan in Their Own Words (JITOW) > Global Economic Turmoil - An Inevitable Outcome Dictated by Logic