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Monday, Feb. 21, 2011

Swan dive into the strait dividing economic views


Since last April, I've been spending my weekdays in Hikone, a city of Shiga Prefecture located by Lake Biwa. One day, while driving to my university, I was surprised to find four black swans in the outer moat of Hikone Castle.

These black swans, having red beaks with white at the tip, are identical in size and shape to white swans that live in the same moat, except in the color of their contour feathers. I asked why at the Tourist Bureau of the Hikone Municipal Government, and how those black swans had come to live in the castle's outer moat. Here is what I learned:

On March 3, 1860, Naosuke Ii, ruler of the Hikone Han (domain) as well as a "great elder" of the Tokugawa Shogunagte, was assassinated by soldiers who had defected from the Mito Han, outside the Sakurada Gate of Shogun's castle in Edo, now Tokyo.

This incident infuriated the Hikone soldiers so much that the confrontation between the two domains lasted for decades. Even after the Meiji Restoration and the subsequent abolition of feudal domains and establishment of prefectures, the cities of Hikone and Mito remained bitter enemies.

The two cities reconciled in 1970 by concluding a friendly cities agreement. Ironically, serving as mayor of Hikone at the time was Naoyoshi Ii, a great-grandson of the assassinated Naosuke. As a symbol of the bilateral friendship, swans from Hikone Castle moat were sent to Mito, which in return presented Hikone with plum tree saplings.

In 1987, when Hikone Castle hosted the World Ancient Castle Festival, black swans were presented from Mito City to Hikone City and they started living in the latter's castle moat.

Having been told this much, I asked further how those black swans had existed in Mito in the first place. The answer was that in 1978, Ube City in Yamaguchi Prefecture presented a pair of black swans, then living at its Tokiwa Park, to Mito City, and the black swans made Senba Lake within Kairakuen garden in Mito their home. I was also told that the black swans at Ube's Tokiwa Park had their roots in the city of Newcastle of New South Wales, Australia, which had presented them to Ube in commemoration of their becoming sister cities.

Being an economist, I was reminded by this episode of the book titled "The Black Swan," written in 2007 by Nassim Nicholas Taleb. In Europe, a swan had long been conceived as a white bird. But a surprise came after 1770 when Captain James Cook from Scotland landed in Sydney, Australia, and declared dominium over the area. After that, settlers started to come to Australia. One of the things that surprised settlers most was the existence of black swans in Australia, something they had thought was impossible. The etymological origin of black swans goes back to that time.

This is why Taleb started describing as a black swan anything that is almost impossible to happen but would have major consequences should it happen.

It seems to me that the basic difference between the perspectives of Europeans and those of Japanese is indicated in the way they look at black swans.

When Europeans saw black swans, they regarded them as white swans that are black, which in their mind are an unexpected phenomenon because in their mind swans could only be white. Japanese saw black swans not as white swans that are black but just as another species of bird the size and shape of which are identical to white swans but the color of which is black.

Thus they named them "kokucho," literally black birds, as diffentiated from "hakucho," literally white birds, the Japanese name for white swans. This story shows that the existence of black swans did not come as as unexpected or exceptional to the Japanese.

I attribute this difference in perception to the fact that Europeans have been influenced by Platonism while Japanese have not. Platonism is the doctrine holding that objects of perception are real insofar as they imitate or represent ideas that will never undergo any change whatsoever through all eternity.

To the mind of Europeans, whose perceptions tend to be based on Platonism, a swan must have the form of a totally white bird with a long beak and a long neck. Over the centuries, they have seen millions of white swans and have taken them for granted as having a solid form. Therefore, they were utterly shocked to see their perception of swans completely overturned by just one observation of black swans.

It may be of interest to note that in Japan, natural sciences had not existed in any form until the Meiji Restoration of 1867, whereas in Europe, and in Britain in particular, Newtonian physics had already been born in the late 17th century. The existence of Platonism in Europe led to the birth of Newtonian physics there. Such physics was not born in Japan because it lacked Platonism.

Still, certain people are of the view that Taleb predicted the emergence of the global financial crisis of 2008 on the grounds that he worked as a financial engineer on Wall Street after graduating from the Wharton School, University of Pennsylvania, and that the 2008 crisis can be likened to the "black swan."

The fact of the matter, however, is that what Taleb is trying to say is that it is impossible to make predictions, especially on economic matters, on the basis of a model or a form or a pattern. The reason is simple: It is quite likely that one would encounter a "black swan."

Europeans and Americans, whose perceptions are based on Platonism, accept Taleb's teachings as most reasonable and understandable. Economists in Japan, on the other hand, do not think that an unexpected or exceptional "black swan" will come up. Therefore, they predict without any worry or concern a macroeconomic trend 10 years into the future or forecast exchange rates or stock market prices 12 months from now.

Moreover, the general public in Japan trust those predictions and forecasts coming from economists. This is because most Japanese do not think that a black swan is an exceptional thing and instead simply accept the bird as it is and as known by the quite descriptive, nondisturbing name of "kokucho" (black bird).

Takamitsu Sawa is president of Shiga University, Japan.


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