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Tuesday, Nov. 12, 2002

The realistic path to reform


In the mid-1970s, Keynesianism came in for criticism in the world of economics, and neoclassical economics -- which sees the market as almighty -- became the mainstream theory. One underlying reason for this was the economic decline of the Soviet Union and other socialist countries.

In December 1991, socialism collapsed as the Soviet Union disappeared from the world map. The media said capitalism had "triumphed" over socialism. This perception prevailed at least through the mid-1990s. Former Soviet republics and East Asian countries promoted, with some success, market-oriented economic reforms. The triumph of capitalism over socialism was clearly visible.

However, capitalism has not won an absolute victory over socialism. The fact is that capitalism over the past decade has produced mixed results at best. Japan, which had been hailed as the most successful of the latter-day capitalist economies, has been locked in a deep slump since 1991. The United States, the paragon of capitalism, has been hit by a series of corporate accounting abuses since 2001. These incidents have exposed "contradictions" in an economy hooked on stock prices.

In Europe, moves toward revisionist capitalism are under way, as exemplified by British Prime Minister Tony Blair's "Third Way" initiative. Russia's experiment with a market economy has unleashed "anarchic capitalism," creating myriad problems such as hyperinflation, widespread poverty, declining birthrates and life expectancies, increases in alcoholism as well as murder and suicide, environmental pollution and destruction, recurring economic crime, and rampant exploitation by mafia groups.

In East Asia, market reforms initially made relatively smooth progress, or so it appeared. But the financial crisis of 1997 and 1998 brought to a head some of the vices of "crony capitalism." Now the region's economic future is clouded. The crisis stemmed largely from the global glut of manufacturing capacity created through the rapid industrialization of East Asian economies.

Economic policy, it is said, aims to create an efficient and fair society. But exactly what kind of society is this? We don't have to think of it in such abstract terms, for the meanings of "efficient" and "fair" are not always clear. In plain language, the aim of economic policy is to develop a society in which everyone can live well.

In the 1950s and 1960s, quite a few social scientists extolled the communist society as the "ideal society." Many people believed North Korea to be a "paradise." But communism began to lose its appeal in the late 1970s. The concept of the "ideal society" changed as market forces gained ascendancy. Now many, including the majority of economists here, aspire to a society where the market is the final judge.

The ideal society is a utopia, which is, by definition, practically impossible to achieve. Such a society, if it ever comes into being, will end up far removed from the ideal. Indeed, history is littered with examples of ideals gone sour.

The 21st century is likely to be a period with no ideal society. We learned in the late 20th century that it is no use pursuing ideals. To achieve reform in the new century we should anticipate future changes and adapt to them as best we can, instead of chasing the mirage of an ideal society.

Society changes as we continue to adapt. That is how reform should be achieved. For those who pursued dreams in the 20th century it must be sad to realize that there is no ideal society to pursue in the 21st century. In this sense, 20th-century social scientists were fortunate. But then we cannot ignore reality. "Adapting to change" is the key message for Japan as it strives for structural reform.

Takamitsu Sawa, professor of economics at Kyoto University, is also the director of the University's Economic Research Institute.


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