10 February 2014
I am an expert on the financial-industrial system of Japan, and I have co-authored two books with John Carrington and written another two, but this book escalated my detailed knowledge of that system by several orders of magnitude.
This is an astonishing, timely and well-written book. Not only does it set out the Ministry of Finance/Bank of Japan investment credit creating policies that lie at the root of the Japanese economic miracle, but it also explains how the Japanese asset price bubble happened because of BoJ speculative credit creation. It discusses how the "lost decade" of the 90s occurred because the "Princes of the Yen" running the Bank of Japan sat on their hands and did not create the credit that would have put an early end to that long depression. The "Princes" did that because the BoJ had the objective of "Structural reform" - of creating in Japan a US-style hire and fire economy, lowering average and median wages and prioritising profits, with privatisation and less welfare through reduced government spending - the entire inept and depression-creating neo-classical recipe for running an economy not for the benefit of the majority of its population. The book therefore corrects several prevalent misconceptions. Economists need to understand that money is not just a neutral medium of exchange, for the creation of money by the central bank is not neutral, it can be earmarked investment credit, stimulating productive investment and economic growth, or it can be speculative credit, forcing asset and land prices up and creating a subsequent misery-creating recession, with the possibility of the central bank not creating the necessary credit creation that can end depressions. This book argues that all central banks need to operate under democratic control and should not be independent, because if they are, they may (as the BoJ did) adopt and practise policies to the detriment of the economy and to all those who make their living by working in it. The failure of Japan's growth during the 1990s was not, as many western commentators assume, the failure of the Japanese investment-credit-creating growth model, but the predictable failure of Western neo-classical economics when the BoJ tried to force these policies upon an unwilling Japan. The additional topics that this book covers are many, but just to give a few headlines that can be covered in a brief review: this book illustrates a better investment-credit-creating method of running an economy; shows how the boom-and-bust cycle which is the blight of many economies could be reduced by limiting the central bank's credit creation for speculation; names the names of those responsible at the BoJ for the "Look no hands" credit-reducing depression-lengthening policies of the 1990s; indicates that the current AsIan zone of high economic growth are the countries which were occupied and controlled by the Japanese during the war, when the local leaders (mainly in South Korea and Taiwan) learned growth-accelerating investment credit creation during the wartime Japanese administration; and points out that the economic growth procedures adopted in post-war Japan were implemented by the same personnel who had piloted them during wartime while working in the Manchurian Railway Company.
Werner’s observations have a direct relevance to the European and American contexts. The Reichsbank has been reborn as the ECB and its processes of credit creation are outside democratic accountability and control. Europe’s long recession is being extended by the ECB’s obsession with low inflation when, as Werner points out, the ECB should be creating earmarked investment credit to produce higher investment, growth and employment. Werner observes that the independent Reichsbank previously caused the mass unemployment in 1930s Germany by insisting on the impossible - that firms which had invested bank loans in plant and equipment should nonetheless repay the loans earmarked for that purpose - with the inevitable result of bankruptcies, mass unemployment and the destruction of economic capacity. Werner argues that the independence of the central bank is no guarantee of their practice of appropriate policies and that inflation control is not the only economic objective. He concludes that whatever the failures of politicians, they are the elected authority which have the democratic right to determine the country’s economic policy, and central bank independence is unlikely to deliver that objective, because adequate investment credit has never been created by an independent central bank. The post-war German-Japanese financial-industrial systems created great economic growth.Werner shows how the Bundesbank was successful not because of its independence from the government, but because of its reduced independence compared to the unaccountable Reichsbank: the Bundesbank was made accountable to parliament (Bundestag) and its legislation, such as the stability and growth law of 1967. Bank independence has not produced comparable results. The American Federal Reserve is similarly not subject to any democratic accountability except for Alan Greenspan's and his successors' occasional talks to Congress
Above all, Werner uses the relatively recent technique of Granger Causality analysis to show that investment credit creation is the predictive egg that precedes the subsequent chickens of growth, and thus provides calculations of the predictive causality about how bank-generated finance can create real growth or speculative asset bubbles. (Sir Clive Granger, along with his colleague Robert Engle, was awarded a Nobel Prize for contributions to economics, perhaps for his development of Granger Causality Analysis, which tests the validity of predictive causative links between two items of economic data).
The author of this book - Richard Andreas Werner - was the first 1991 Shimomura Fellow but the Japanese, following their usual practice of concealing Dr Osamu Shimomura's (1910-89) great contribution to economic growth theory and practice from Westerners, apparently did not tell Werner who Shimomura was and why he was "Japan's most influential post-war economist." No matter - Werner has competently worked things out for himself, independently arriving at understandings similar to the Shimomura model of Japan, and producing these by inductive reasoning from the economic data and demonstrating their validity through the Granger calculations. Werner's book reports upon more extensive results than Dr Osamu Shimomura's model of the Japanese economy does, because Shimomura only (only?) deals with how BoJ investment credit creation increases economic growth while Werner also points out how growth in central bank credit creation can be misused to fund the speculation of an asset bubble, and how the lack of appropriate credit creation following a recession can create a long lasting depression. Werner's work could not be more relevant to today's economic circumstances.
If you are a student of economics, buy this book. Your teachers and lecturers, trapped in the prevalent neo-classical mindset, are unlikely to tell you anything as relevant as this book will. Challenge their complacency. And if you are a Professor of Economics, get yourself re-educated by buying, reading and understanding this book. If you are a member of the public or a civil servant or anyone interested in economic policy and how we could have a more flourishing economy, buy this book - it tells you about that. Finally, if you are a politician, please read this book, for it contains better growth-assisting policies than any being currently taught, reported upon, or practised in the West, and you should learn about these and how to to apply them.
A truly great book and a curtain-raiser for Werner's "New Paradigm in Macro-Economics" which is equally excellent."