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Monday, March 9, 2009

Mainstream ebb and flow


It is a well-known fact that a number of schools of thinking exist in economics, the major ones being neoclassical economics, Keynesian economics, institutional school and monetarism.

Generally speaking, Keynesian economists and institutional school members profess to be liberals, while neoclassical economists and monetarists see themselves as conservatives.

Economic conservatives attach utmost importance to free and competitive markets, favor "small government," regard income disparities as a matter of course, and think it desirable to relax the progressive taxation system and raise the consumption tax rate. Those who follow economic liberalism, on the other hand, insist that imperfections of the market demand governmental interventions through fiscal and monetary policies to eliminate "imbalance" and "instability."

There are even wider ideological differences when it comes to social matters. Conservatives attach importance to order and traditions and seek to dispel heresies, whereas liberals are generous toward their adversaries, including the socially weak, and more apt to accept diversity.

In the United States, which is governed by two major political parties, there is a clear-cut ideological difference between the liberal Democrats and conservative Republicans. Former President George W. Bush, the champion of conservatism in invading Afghanistan, dared to lead his nation into the Iraq war quagmire and sought to dispel his archenemy of Islamic fundamentalism. In stark contrast, President Barack Obama proved himself to be the champion of liberalism on the campaign trail, when he said the U.S. must be prepared to accept ethnic and religious diversity.

The consistency in the positions taken by conservative U.S. lawmakers was worthy of admiration last October when the House of Representatives rejected the Troubled Asset Relief Program bill to bail out, with taxpayer money, commercial banks that were losers in market competition. The bill had to be amended before it could pass both houses of the Congress.

Another bill, to rescue General Motors and Chrysler, died in the Senate, and as a result, the two automakers had to be bailed out within the TARP framework. In both cases, the voting patterns of the conservative politicians were fully in line with market fundamentalism.

In Japan, two former prime ministers, Yasuhiro Nakasone and Junichiro Koizumi, defied their opponents to promote market-oriented programs such as privatization of public corporations and tax reform. At the same time they proved themselves the champions of conservative causes to defend order and traditions when they visited, in a virtually official capacity, Yasukuni Shrine, where Japan's war dead, including Class-A war criminals, are enshrined.

Meanwhile, economists in the U.S. proclaim themselves as either neoclassical economists or Keynesians while remaining conscious of their support for either the Republican Party or the Democratic Party. During the 1960s, when most economists followed the teachings of John Maynard Keynes, a group of scholars such as Milton Friedman and Friedrich August von Hayek bitterly criticized Keynesian fiscal and monetary policies as ineffective.

Yet, James Tobin, Lawrence Robert Klein and Paul A. Samuelson, among others, refused to fall into line with neoclassical economists who comprised the mainstream after market fundamentalism regained influence in the late 1970s.

American economists are fully aware that the various schools of thoughts are supported by their respective political ideologies. In Japan, however, many economists fail to see this relationship, as they simply believe that a mainstream economic theory is the result of scientific progress. In other words, those Japanese economists think they must not miss the boat by failing to accept the latest theories.

The fact of the matter is that those economists who are in sync with the political policies and ideologies of the government in power gain the mainstream position. Economists who have always wanted to be in the mainstream do not hesitate to change their positions and to fall in line with the predominant position. This is analogous to a scientist jumping from classical physics to quantum mechanics. Such a shift in position proves how indifferent Japanese economists are to the political winds directing the economic theories.

I have long been critical of market fundamentalism. In 2000, when I wrote the book "Shijo-shugi no Shuen (The End of Market Fundamentalism)," published by Iwanami Shoten Co., I was condemned for saying that something had ended. Between the 1840s and the 1870s, a classic liberalism spread throughout Britain. After a subsequent recession hit Europe, however, many governments in the region shifted from the pursuit of laissez-faire policies to building a welfare states. In his 1926 book "The End of Laissez-Faire," Keynes was critical of the fact that ideologies favoring laissez-faire lingered in the 20th century. He built the basis for Keynesian economics in his 1936 book, "General Theory of Employment, Interest and Money," in which he demonstrated that market interventions by governments were inevitable because of the very imperfections of the market.

From the 1980s to about the middle of last year, market fundamentalism was glorified both at home and abroad. Amid the global recession triggered by the international financial crisis, however, Keynesian economics, which had been "murdered" in the 1980s, has made a comeback. As a result, virtually all economists are insisting that big government spending is a prerequisite to economic recovery. They must not forget, though, that true Keynesian economics calls for "smart" government, rather than "big" government.

Takamitsu Sawa is a professor at Ritsumeikan University's Graduate School of Policy Science and a specially appointed professor at Kyoto University's Institute of Economic Research.


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