Paul's message expresses the main reason why there has been such a high degree of "forgetfulness". Conceptually, standard economics is not equipped to deal with economic reality as a whole, but only a select part of it that can be used to confirm a set of basic assumptions; hence standard economics' enduring "Ricardian vice", i.e. its commonplace retrenchment into formal abstractions that reduce the scope of studied phenomena into manageable regularities, according to certain unqestionable or unquestioned principles. The enduring Ricardian vice runs so deep that it causes even major crises such as the one unfolding under our very nose to be effectively irrelevant vis-à-vis the fundamental assumptions of the discipline. Normally, such a conceptual limitation means focussing upon those aspects of economic life that fit well enough the given categories of thought, while leaving many others out of the picture. Whenever the mismatch between the two is too dramatic to be ignored, however, one either turns to non-standard prior (e.g. Veblen, Galbraith, Polanyi, Minsky) and/or peripheric (e.g. regulationists, Marxists, Keynesians) economists and schools of thought, or averts his/her gaze until the horribile visu has gone away. It is my impression that the vast majority of the profession has chosen the latter option, whether out of lack of better knowledge or out of non-Ricardian vices, e.g. habit-driven mental indolence, academic pride, professional vanity, intellectual dishonesty, pecuniary opportunity, tribal loyalty. Jonathan Shlefer, Norbert Häring, Niall Douglas and John McMurtry have written very good books of late on this matter.

P.S. I enclose a short & useful reflection by James K. Galbraith on those contemporary economists that were neither blind nor forgetful. Let's not be blind to them, lest we forget that that they--the few and marginal--may well have been right.

The inertia in any human system is enourmous; why not in economics? You may be interested in my recent book, which combine various approaches, and proves that Japan has succeeded best in providing decent living for citizens.

Book Missing a Decent Living for Everyone: Success and Failure in...

ISSUE: Economic crisis

ECONOMICS: In the study of economics, the subject matter of the study is economic production, not non-production. For instance, we report how much we produce in GDP, we not report what did not produce. Even when the GDP decreases, we still speak in terms of production, not non-production. Thus, economic growth is the norm for the economic analysis.

ECONOMIC CRISIS: Crisis by definition is a festering problem that spiral out of control. It is a short-term systemic error. Crisis of any kind is not a normal state; for that reason, in the human mind it (crisis) is not the focal point of analysis. Do economists know that there is such a thing as “economic crisis?” we all do; even non-economists knows about economic crisis. A janitor who got laid off from his job knows about economic crisis more than the man with a Ph. D. in economics because the jobless janitor lives and feels the pain of economic crisis. Then why do economists do not dwell on economic crisis? Or at least provide a tool for predicting economic crisis?---with such predictive tool, perhaps crisis could be averted or at least its effects be minimized/

   We do not pay attention to crisis in the making and its after-effect beyond the headlines when it happens because crisis is transient. The state of norm is non-crisis. The general public, economists included, elects (by conscientious choice) not to dwell on crisis. It is not because we don’t talk about it because of our forgetfulness. We choose not to talk about it because it is not a permanent or predominantly normal state of affairs in society. For that reason, we focus on economic growth because, by default, if the growth is stable (not over heated growth that would lead to inflation and on the road to crisis)---then potential crisis could be averted. A man, be he a city dweller or living in the jungle, ponders on how he could fell his belly not anticipating pain of hunger. Likewise a trained economist focuses on economic growth, and does not plan for the pain of non-growth.

If we know that XYZ explains economic growth, then the probability of growth to occur when there are XYZ in the system is the focal of the study. By default economic crisis becomes a secondary issue. If growth may be categorized into growth (yes = 1) and non-growth (no = 0), we would focus on the probability of growth of P(x), not 1 – p or q.

CAUSATION DIFFICULT TO PREDICT: If we look back in history and tabulate major economic crisis, we will see that the causation for each crisis tend not to be the same. If the causation for all crises is the same, then it would be interesting to study economic crisis. Therefore, it is relegated to de facto discussion---we discuss it after it has occurred.

We are into the "new normal" - secular stagnation.  And it has supply side characteristics that are more important than the demand side ones that we initialy thought about.

I don't think the crisis is over, indeed. Nor I guess such crisis can be overcome with the tools provided by conventional economic wisdom. There are, imho, reasons which explain why standard economics is both so powerful and useless. Can give you some bibliography but it is in French.

Thesis Théorie du développement territorial dans une économie de satiété

Paul's message expresses the main reason why there has been such a high degree of "forgetfulness". Conceptually, standard economics is not equipped to deal with economic reality as a whole, but only a select part of it that can be used to confirm a set of basic assumptions; hence standard economics' enduring "Ricardian vice", i.e. its commonplace retrenchment into formal abstractions that reduce the scope of studied phenomena into manageable regularities, according to certain unqestionable or unquestioned principles. The enduring Ricardian vice runs so deep that it causes even major crises such as the one unfolding under our very nose to be effectively irrelevant vis-à-vis the fundamental assumptions of the discipline. Normally, such a conceptual limitation means focussing upon those aspects of economic life that fit well enough the given categories of thought, while leaving many others out of the picture. Whenever the mismatch between the two is too dramatic to be ignored, however, one either turns to non-standard prior (e.g. Veblen, Galbraith, Polanyi, Minsky) and/or peripheric (e.g. regulationists, Marxists, Keynesians) economists and schools of thought, or averts his/her gaze until the horribile visu has gone away. It is my impression that the vast majority of the profession has chosen the latter option, whether out of lack of better knowledge or out of non-Ricardian vices, e.g. habit-driven mental indolence, academic pride, professional vanity, intellectual dishonesty, pecuniary opportunity, tribal loyalty. Jonathan Shlefer, Norbert Häring, Niall Douglas and John McMurtry have written very good books of late on this matter.

P.S. I enclose a short & useful reflection by James K. Galbraith on those contemporary economists that were neither blind nor forgetful. Let's not be blind to them, lest we forget that that they--the few and marginal--may well have been right.

Mainly agree with Giorgio. However, I would say no item could be more questionable than an unestioned assumption. Copernic did, in astronomy. Riemann did it, in geometry. Einstein did it, in physics. And so on. But questioning unquestioned principles is a revolutionary, tough process and very few of them end in success

Dear Veli Himan

I made a simple calucation using numbers enlisted in Appendix 1 in the Background Data of your book.

How big the discrepancies in GDP per capita are! Even in side of an area you have grouped for convenience, the richest country's income is 2 to 45 times over the poorest country one. Here is the reuslt:

South Africa 13080/290=45

North Africa and Middle East 49970/1880=26.6

Middle America 14580/1050=13.9

Asia 13570/1040=13.0

The Former Soviet Union 19680/1680=11.7

Middle Africa 2120/290=7.3

Eastern Europe 26640/6580=4.0

South Africa 12990/4140=3.1

Western Europe 53690/20640=2.6

North america and the Pacific 48520/24750=1.9

This is indeed a very big problem.

Could anyone explain a bit what does it mean south africa = 45 and again south africa = 3.1 as mentioned by Flemming

I fell the present times are only a lull....

I think in all state of affairs (exceptions are there) we are guided by the animal spirits. So everyone thinks let's enjoy what extent one can without caring about the harmful effects of our whimsical activities. Thus forgetfulness has appeared as a choice we follow, though in crisis we wake up and remember how mistaken we were.

who saw the latest projections and flash estimates for the EU?

these are hardly encouraging, and certainly suggest we are nowhere near the end

http://ec.europa.eu/economy_finance/eu/forecasts/2014_autumn_forecast_en.htm

Dear Flemming Bjerke,

I should have written correctly "Southern Africa" in place of "South Africa." Southern African region contains countries like Botswana, South Africa, Kenya, Zambia and Tanzania.

The top country in GNI(PPP)/capita is Gabon. The lowest country is DRC, or Democratic Republic of Congo. Average Gabon people gains 45 times as mush as average DRC people.

Gabon 13080$ / DRC(Democratic Republic of Congo) 290$ = 45

In his "The Great Crash 1929", John Kennteh Galbraith described an interesting cylce. i.e. the embezzlement cycle:

"There] is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth. […] At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s businesses and banks. [...] It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be disonhest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.

The stock market boom and the ensuing crash caused a traumatic exaggeration of these normal relationships. […] Within a few days [after the 1929 crash] , something close to universal trust turned into something akin to universal suspicion."

Regarding our Great Recession (from 2007-08 to nowdays) it seems that the Galbraith's embezzlment cycle does not work, especially in Europe.  I think that there is a significant correlation between embezzlment cycle and mainstream economics. Maistream economics cannot be really criticized when the rate of embezzlement grows. Surprisingly in our days of depression, the rate of embezzlement continues to increase! Maybe because European expansionary monetary policies are thought  just to sustain rentiers and not workers.

The first South Africa ought to be Southern Africa and the second ought to be South America. See attached tables.

Data Missing a Decent Living for Everyone: Background Tables for Appendix 1

Veli Himanen

Thank you for correcting my hastily made table.  Discrepancy in each regions is so great and this enforced me to change my rough conception on economic development of the world.

In answer to your question 'Is the crisis of Economics over?, If I have my way, this will be the terminal crisis for economics as we know it.

I am working on a book whose title tells it all: "Adam Smith and the Fatal Paradigm Switch, How a Moralist Sowed the Seeds of Global Conflict". 

My thesis is that Political Economy started in 1622, when the English Privy Council set up a permanent commission to solve the dire scarcity of money affecting England; Some members of this commission started publishing their analyses of the problem and began a public discussion about trade and money (the initial content of political economy). The initial solution to the problem--of the scarcity of money--was the well known, but impractical one, of achieving a trade surplus. Thirty yeas later, the real solution emerged--the institutionalization of credit--but it took another forty years, and three wars against the Dutch, for it to materialize with the creation of the Bank of England, in 1694.

During the first part of the 18th century, a Dutch emigre physician, published a fable in verse, with the title of "The Fable of the Bees", which took twenty years before it caused the angered response from seemingly every moralist and philosopher within and without England: His claim was that society had to choose between a life of virtue in poverty, and a life of vice in prosperity. He created a counter-current of economics, which I call 'amoralistic economics', and where he asserted the individual freedom from despotic government.

Political economy--which was basically a combination of monetary economics and amoralistic economics--continued developing throughout the first half of the 18th century, culminating with James Steuart's "Principles of Political Economy", 1767. 

Adam Smith, in 1776, with his appeal to individual freedom from all government, changed the then existing economic paradigm--based on the circulation of credit-money and the 'chain-of-harmony'--into the current paradigm of capital accumulation and 'dog-eat-dog' competition.

Keynes's "Complete Theory", was a valiant attempt to return to the monetary paradigm before Adam Smith; he failed because he was not fully aware of its existence; but I think he made meaningful progress, nevertheless.

I believe my attempt will fare better, although it may take more time than what I have in me.

I am currently in Australia, a country that liked to think it survived the GFC (a term it gave the world) rather well.  Indeed, it looked down rather disparagingly on most of the rest of the world - especially Europe.  Things are now different. Australia has just reported a technical GNI recession (not yet a GDP one).  But when China is suffering a cold, what sort of pneumonia will the country that sends 27% of its exports to it - mainly iron ore, coal, and education experience. I can already hear loud sneezing.

Giorgio Baruchello,

thank you for your comment. I apologize that I could not answer to your comment earlier.

As for your contention that it is the Ricardian vice which drive economics abstract and irrelevant, and hence so forgetful, I cannot agree with you. Let me explain. Your understanding is similar to Andrew Beattie his article "What is the Ricardian Vice." He writes as follows:

• The Ricardian vice refers to abstract model-building and mathematical formulas with unrealistic assumptions. In simpler terms, the Ricardian vice is the tendency for economists to make and test theories that aren't troubled by the complexities of reality, resulting in theories that are mathematically beautiful but largely useless for practical applications. The Ricardian vice is prevalent in economics and is named after David Ricardo, one of the first economists to bring mathematical rigor to the discipline. 

              http://www.investopedia.com/ask/answers/08/ricardian-vice.asp

This comment on Ricardian vice must be common, widely spread understanding of this expression. However, it does not give a right concept on Ricardian Vice.

The expression "Ricardian Vice" was coined by Schumpeter in his History of Economic Analysis. The expression appears 8 times in his History. Three passages are helpful.

- [Ricardo] set up simple one way relations so that, in the end, the desired results emerged almost as tautologies. ... It is an excellent theory that can never be refuted and lacks nothing save sense. The habit of applying results of this character to the solution of practical problems we shall call the Ricardian Vice. pp.447-448

- the Ricardian Vice, that is, with the habit of establishing simple relations between aggregates that then acquire a spurious halo of causal importance, whereas all the really important (and, unfortunately, complicated) things are being bundled away in or behind these aggregates. p.637

- the Ricardian Vice, namely, the habit of piling a heavy load of practical conclusions upon a tenuous groundwork, which was unequal to it yet seemed in its simplicity not only attractive but also convincing. p.1137

We may think the first one to be a definition and two others as explanations. Schumpeter never mentioned a theory-making "that are mathematically beautiful but largely useless for practical applications" (Andrew Beattie). Schumpeter's focus, when he speaks of Ricardian vice, does not lie on the abstract reasoning but on the causal relations which Ricardo used to find and reason.

This focus is understandable, because Schumpeter, as an ardent Walrassian, was never critical of abstract theory per se, but wanted to emphasize that everything is dependent of everything. Indeed, this is the essence of Walrassian general equilibrium framework.

English tradition was not in the Walras-Schumpeter line of analysis. Marshall knew Walras' contention but did not formulate his theory a la General Equilibrium Analysis. Marshall adopted what is usually called Partial Equilibrium analysis. He did this consciously as he knew that economic relations require different time lags before they will become actual. This is the reason why Marshall preferred Partial Equilibrium Analysis, or in a more appropriate expression Partial Process Analysis (Clower [1975] after Leijonhufvud).

Keynes, who was himself in a deep English tradition, believed the virtue of Partial Process Analysis, even though he did not use this terminology. This explains why Schumpeter condemned Keynes contending that the General Theory was "a striking example of what we [Schumpeter] have called ... Ricardian vice." (History of Economic Analysis, p.1137. After this part comes the above third citation.)

Your contention is based on an erroneous understanding of Ricardian vice. This does not mean that what you intended to say is also wrong. It is true that over-mathematization is one of the main causes of economics’ illness. Ricardo, on the contrary, is one of keys to the reconstruction of economics.

Bernard H Casey and all other readers

Newspaper is reporting rapid depreciation of Russian ruble. Some described it a "free fall."  If Russia come to default, side effects will be great. I remind of the effectual bankruptcy of LTCM. It was the story of 1998.

One year before, there was Asian Financia Crisis. The crisis started by the attack of hedge funds on Thai Baht and spread to many Asian countries as an epidemics. Similar syndrome is appearing as the general fall of many Asian currencies.

Yes, Bernard. There is now a possibility of a second GFC (Global Financial Crisis). 

Jorge Moromisato,

thank you for your information on the origin of political economy. You are as audacious as Nicholas Kaldor who stated that economics went wrong at the middle of the fourth chapter of Book I of Wealth of Nations. (Kaldor, 1972, The Irrelevance of Equilibrium Economics, Economic Journal § II)  

 I was also interested  in your career. What has driven you to study economics after a long research life in high energy physics? As a high energy physicist, how do you think of my discussion in the question "Is saving necessarily invested or not? How can this contradiction in Keynes be solved?" 

https://www.researchgate.net/post/Is_saving_necessarily_invested_or_not_How_can_this_contradiction_in_Keynes_be_solved

Thanks for your comments; although I cannot be called ‘audacious’, I think, because I am retired and my livelihood does not depend on any good will from other economists. I studied Math and a bit of Physics in college—in Lima, Peru—and after working in High Energy Physics for almost 30 years, I consider myself a scientist; I am convinced that I know and understand science, and what passes for economics is anything but.

I have not read Kaldor, but I have recently read Henry Dunning Macleod, and was delighted to know what he thought about ‘capital’ (one of Adam Smith’s fatal paradigms):

“[T]he distinction between capital and currency … is one of the most profound delusions that ever existed”

The other two delusions are of course ‘saving’ and ‘investment’, as they relate to capital. Which brings me to your question about Keynes ‘theory’ of saving. I have not read your related discussion, but I can tell you my understanding of the relationship between savings and money flow: Before 1971, savings were the source of lending funds; after 1971, the Fed could in principle generate all the lending funds—through a 100% reserve requirement—but it is content with just supplementing them in times of currency—or liquidity—shortage. The relationship between money flow and ‘investment’—whatever the latter means—follows logically. Rivers of ink have flown and entire forests have been felled to discuss the ‘savings-investment’ nonsense, thanks to Adam Smith’s misunderstanding and confusion regarding money and credit—It took me some time to finally figure out that his economy was a ‘barter economy’, which happens to be an oxymoron (there can be no economy without money).

How did I get into economics? I was born and educated in Peru, which is still a ‘less developed’ country, and even while in college, majoring in Physics, I had to suffer the social, economical , and political upheavals associated with such status. I was lucky to be offered a scholarship to do my graduate studies at Northeastern University, in Boston, and also lucky to be hired by its High Energy group, about five years after my return to Peru. A few years before I was to retire, I decided to get a M.A. degree in economics—2003--; I thought I could solve the problem of unemployment—How hard could it be!

It didn’t take me long, after graduating, to realize that economics did not have a single solution; it had—and still has—hundreds, if not thousands of them, and the harder part was to try and figure out how to find at least a plausible one. It turns out that economists don’t seem unduly worried by such proliferation of points of view; they seem, rather, to welcome it—the more the merrier! In fact, the current trend in economics seems to be a ‘healthy’ respect for ‘plurality’—everybody is entitled to his or her own opinion—and thus, unemployment remains a misunderstood and consequently an unsolved problem, together with all the other problems in the economy that profoundly affect our lives. I eventually found the real cause, and the most likely solutions, which I published in 2010 (“The Denver Plan to End Unemployment”).

With my fourteen years of studying economics and the economy, and with my forty-plus years of scientific activity, I am confident that I can rescue the pre-classical monetary economics, which has benefited with some advances made by Keynes, and formulate a true science of economics—I have already made a start, in 2007, with my first book “The Origin of Wealth and Poverty”. I know all this sounds very presumptuous, especially coming from a totally obscure writer; can’t be helped it, I am afraid.

By the way, in case you are interested, the solution to Japan’s current predicament lies in a positive balanced fiscal budget (see my book, “A Theory of Tax Fairness”, 2014), and a full reserve requirement (“The Money-Sovereignty Recovery Act, (A Proposal)”, 2014). I’ll be happy to send you courtesy copies of those books, if you want them. (My email is [email protected]).

Jorge Moromisato,

thank you for a long explanation and for your generous offer to send me your books. Your books are available at Amazon, and I ordered yesterday your first book. It has not arrived yet, but I have read first pages of the book on the Amazon "Look Inside" corner.

I liked your contentions. The following three sentences are remarkable in particular.

The first citation is just related to what we (Giorgio Baruchello and I and others) are talking under the title of Ricardian Vice. The Ricardian Vice, in its original meaning (by Schumpeter), is an inclination and a power to detect a few strong causal relations by abstracting other influences. Schumpeter coined this term to give it a pejorative meaning, as Schumpeter believed after Walras that a right method in economic reasoning is to analyze the result of 'everything is related to everything,' i.e. General Equilibrium. You have criticized in the preceding part of citation (1), that economists are misunderstanding approaches to complex phenomena.

Schumpeter’s attitude and what he supported can be named Walasian Vice, if we make a parallel to Ricardian Vice.

As you know very well, general equilibrium framework is now penetrating almost ubiquitously in every field of theoretical arguments. A typical example is Dynamical Statistical General Equilibrium (DSGE) model which is the basis of Real Business Cycle theory. Those who employ this model claims that their model is General Equilibrium one, even though in fact they assume "representative consumer," "representative firm" and that economy produces and consumes only one kind of goods. They don't even use the term "representative good," since one good model is something so natural to them that there is no need to mention it explicitly.

Citation (2) is related to over reliance to mathematics. As you depict it, many economists are interested in elaborating more refined mathematical arguments but are not concerned to the reality of their assumptions. Indeed, their work is very close to a religion rather than a science (citation 3).

I have opened a new question box "Is Ricardian vice really a vice?" Please watch this question box and post your opinions if any.

https://www.researchgate.net/post/Is_Ricardian_Vice_really_a_vice

Yoshinori Shiozawa says "Yes, Bernard. There is now a possibility of a second GFC (Global Financial Crisis).".  Actually, I don't think we've come out of the last one yet.  Indeed, "we haven't seen half of it yet"

Bernard H. Casey,

do you want to say that GFC (Global Finacial Crisis) is still continuing from  2008? In that sense, it may be true that "we haven't seen half of it yet."

In your paper "From pension funds to piggy banks: (Perverse) consequences of the Stability and Growth Pact since the crisis," you have analysed the European problem with regards to budget deficits and the sustainability of pension systems. 

We have a similar difficult problem with pension system in Japan. As Japan is approaching to a most "advanced" aged society, how to design sustainable pension system is vital to the well-working of Japanese economy. Abenomics, it seems to me, is giving a focus too much on redressing business cycle by financial means, i.e. inducing inflation rate higher and currency  devaluation. By now after almost two years of Abenomics prescription, Yen has devalued to 2/3 (80 Yen per U.S. Dollar to 120 Yen per Dollar). Monetary base increased from  128　Trillion Yen (as of  October 2012) to 156 Trillion Yen (October 2014) whereas Bank of Japan (BOJ) current account balance increased 42 Trillion Yen to 165 Trillion Yen at the same period. As a result money stock (M2) increased "only" 58 Trillion Yen from  November 2012 to November 2014.

The BOJ and the Government set their inflation target at annual 2 % (to raise the annual inflation rate from about minus 0.5 %) and yet  inflation rate is still around 1 %. They hoped to stimulate Japanese economy by inducing inflation, but it seems an opposite result is happening.

By  increasing monetary base, they could not induce inflation in an intended way. Here, we should distinguish two kinds of inflation: demand pull inflation and cost push inflation.  Governor of BOJ Mr. Kuroda  and Prime MInister Mr. Abe wanted to induce demand pull inflation but what they have invited is cost push inflation. It is not yet appeared in numbers, but price rise announcements are numerous and small enterprises are suffering from the cost ups of imported materials. In the coming quarter, a clear inflation comes out but it is sure it will be cost push inflation.

Evidently, cost push inflation is depressive and demand pull inflation is stimulating. It is quite doubtful if Abenomics will be effective as it is intended. There was also a miscalculation. Everybody (including me) supposed that a big devaluation of  Japanese Yen will increase the export  from Japan and thus stimulate the economy. In reality, the actual export increase was negligible and did not have the power to change  the stagnant Japanese economy.

We have not come to the end of Abenomics. We are just at the half of it, if I borrow your expression. As Liberal Democratic Party has won the General Election, Abenomics will continue at least two more years and we will see what will be the result of  it.

For the moment, we can say that the economic theory which supported the reflationist policy (induce positive inflation rate) is a part of the New Consensus Macro (NCM). One of its three equations tells that the current output gap or GDP gap corresponds negatively to real interest rate. On the base of this "theory," reflationists claim that the output gap will be narrowed and the economy returns to potential growth path, as real interest rate will be negative if inflation rate will become positive and interest rate will remain near to zero.

The result we have observed during two years of Abenomics is totally different from the refationist's expectation. Abenomics is an experiment which is unintendedly a test of these theories (Reflationist thesis and NCM model).

As far as theories are concerned, it is the question inside of the academic circle but the stake of this experiment is gigantic. The commercial banks' money piled up in the BOJ current account is really  tremendous (165 Trillion Yen as of October 2014 as noted above). It has not so far pulled out of the BOJ. But if once it starts to go out from the BOJ and be poured in the financial  and asset market, an uncontrollable bubble will be invited. At the time of its crash, It may trigger a free fall Japanese Yen and Japanese as well as people of other countries will suffer enormously from Global Financial Crisis.

It is urgent that we construct a new theory and consensus. If not, the world will be put at the edge of a precipice. 

Pensions systems funded with employment taxes are doubly bad for the economy, because they increase production costs and reduce personal income. Pensions should be funded from government’s general revenue. The general belief is that government cannot possible pay for those expenses, or that the nation cannot afford the higher taxes they would demand; that is wrong, because money does not disappear or wear out: Every dollar, or yen, that government spends goes into the pockets of the people, and ends up into the financial accounts of the very rich; a ‘totally’ progressive tax (as recommended in my book, “A Theory of Tax Fairness”) would not only recover 100% of the government expenses, but by reducing the tax burden on the general population, would increase overall demand—which is the key to a resumption of economic growth.

Speaking of taxes, it is to be hoped that Japan’s government has definitely desisted in increasing sales-taxes—they are the most regressive taxes possible, and would certainly reduce overall demand further.

The way I see it, Japan’s main problem is its huge fiscal deficit (8% of GDP), which feeds its gigantic public debt (230% of GDP)—more than twice the corresponding debt in the U.S., which is also on the high side. I find it outrageous that any government would cede control of the nation’s monetary flow to, and be forced to borrow from, private interests—especially after 1971, when fiat money became the norm—when it can be easily fixed by the establishment of full reserve lending (as described in my “The Money-Sovereignty Recovery Act ,A Proposal”).

Finally, Prof. Shiozawa, I am sure that your worries about an “uncontrollable bubble” are unfounded: in the U.S., the Fed had quadrupled the monetary base after the Great Recession and the only way that that money can enter the economy—enhanced by the bank multiplier, naturally—is through bank loans, whose flows are easily controllable by any central bank. It is true that currently that would cause a recession, but with a full-reserve-lending regime government can maintain a regular flow of money into the economy through public investment, while restricting inflationary private investment without causing a recession—on the other hand, the application of the full-reserve-lending would soak up any bank reserve surplus that may exist.

Jorge Moromisato,

thank you again for your detailed explanation. I am still waiting your book to come.

The following has nothing to do with the main topic but I am interested by your name.

Are you descendant of Japanese immigrants to Peru?   

Moromisato is a Japanese name which comes 5,863th from the top in the order of popularity of family names. It is reported that about 1,800 people call themselves Moromisato (In Japanese 諸見里 if you have Japanese font). This name is most populous in Okinawa or Ryukyu, where about 1,700  people live there. So if your ancestor came from Japan, it is most probable that they came from Okinawa.

If my conjecture is wrong, let me know if the family name like Moromisato is popular in Peru or any other place other than Japan.

Shiozawa

Thanks for the interesting statistics about my last name. My parents were indeed born in Okinawa and emigrated to Peru in the 1930s; and you are right about the Kanjis in my last name. My first name is Yasunori, which I assume shares the same suffix as yours. 

 And thanks for ordering my book; I hope you find what you expect there. You may find many of my ideas at REIdenver,org. I am also completing a book about the' 4 key technologies for economic growth and development', to be published by summer.. 

I've been out of the loop for Christmas, but I had to comment on Yoshinori's reference to Abenomics (or "Abeconomics" as I prefer to call it).   Those of you who get the Financial Times will recall a letter from me a few months back.  a copy is attached.

This leads me back to not yet having seen half of it.  Initially, the view was that the consequence of/response to the GFC (or the great recession, as I prefer) would be inflation.  I predicted --and this was back then -- deflation.  This is what we are now recognising, and this is "the next half".   Of course oil price falls are promoting this further, but they are a mere symptom.   The Eurozone is definitely on the way to deflation if not yet there.  The US has very low inflation, hence the continued hold ng of interst rates low by the Fed.  Japan, depite Abeconomics is still mired in it.  Debasing the currency might well prompt china to devalue, and this will hardly help the rest of the world, and certainly not prices.

There was an old Testament prophet called Jeremiah.  Few listened to him.

Bernard H Casey, 

thank you for teaching me your letter to Financial Times. Yes, the Pension problem is far more important one than the ephemeral ups and downs of stock market. Mr. Abe is mistaken in mobilizing Pension funds in order to promote stock market. Pension System should be designed in long term perspectives.  

Jorge Moromisato,

your book arrived two weeks ago. I am sorry I did not have time to read it immediately. I could give a coup d'oeil (sorry again) on it this morning.

I have many points that I disagree with you, but I totally agree with your basic characterization of the market economy. Yes, we are living in an economy of surplus and not in an economy of scarcity (p.244). The society's material wants are limited.

I am thinking in a similar fashion. You do not talk much about system structure. In the world view of General Equilibrium Theory, peoples'  wants are are unlimited and and all the resources are exploited to full. I oppose to this GET system view that of Dissipative Structure.   

 I have written a short paper on this with the title Economy as a Dissipative Structure. I was read in Keihanna Prigogine Conference in May, 1996. 

For those points I disagree with you, give me more time. I will come back in a week.

Conference Paper Economy as a Dissipative Structure

Jorge Moromisato,

I have read your book The Origin of Wealth and Poverty. My reading may not be sufficiently deep and careful and you should object to points that I have misunderstand you.

These are the points I highly appreciate in your book (in addition to your concept that we are in a surplus economy).

(1) General attitude

You question very basis of the conventional economic. I think this is the necessary attitude which is required now for every economist who wants really to renew economics, because our present economics is seriously ill.

(2) Money hoarding (pp.330-31) and Saving Myths (p.169)

Question of money hoarding is important, although the point I want to stress is different from yours. I opened two question boxes on this point:

Is saving necessarily invested or not? How can this contradiction in Keynes be solved?

https://www.researchgate.net/post/Is_saving_necessarily_invested_or_not_How_can_this_contradiction_in_Keynes_be_solved

The point is that the saved money may not be invested immediately. If this hoarded or idle money is accumulated, it postpones consumptions and investments and represses business and production.

Are there any papers or books which examined historical change of the concept "hoarding"?

https://www.researchgate.net/post/Are_there_any_papers_or_books_which_examined_historical_change_of_the_concept_hoarding?_tpcectx=profile_questions

The question of hoarding is related to another one i.e. if equality S = I always holds and without conditions? Before Keynes's General Theory, many scholars (including Robertson and Keynes himself) wondered what would be the effects of hoarding. It was Keynes who wiped this mode of thinking away. I owe much to Keynes but on this point I doubt if Keynes's solution was right.

(3) Limited Demand (p. 236) and Market Saturation (p.129)

Apart form the question of money hoarding, demand is limited by various reasons. You mentioned to time restraints. This point was emphasized by Ian Steedman. This is a very new point of view in the tradition of economics in considering demand constraint. This is important because it operates to the rich people. We may consider many other constraints as well.

Steedman, I. (2003) Consumption takes time: implications for economic theory. Routledge.

Other people are analyzing the effects of demand saturation or satiation:

Aoki (Masanao) and H. Yoshikawa (2002) Demand saturation-creation and economic growth, Journal of Economic Behavior & Organization 48(2): 127–154.

Witt, U. (2001) Escaping Satiation / The Demand Side of Economic Growth, Springer Verlag, Berlin.

(4) The Conservation of Money (pp.129-130)

Total amount of money remains constant through transactions. It can change only when banks lends credit to someone who borrows and when the debtors return their borrowed money to the bank.

This is named endogenous money theory and fully emphasized by circulationists.

Graziani, A (2003) The Money Theory of Production, Cambridge University Press.

(5) The Modified Say's Law (p.30 and p.114)

This is an excellent account of Say's Law, although I have an objection to it.

Your formulation is this:

Supply releases into the economy sufficient money to purchase itself.

I want to add a phrase "before profit" (You may have a better expression). When a producer finishes the production of a certain amount of products and brings it to the market, the producer had already released all the cost of the production except of his or her profit.

If there were no mechanism which supply this amount of money (for profit), the buyers might not have enough money to buy the producer's product. Therefore, your formulation is not very exact but clarifies the point Say and Ricardo wanted to say. I think this new interpretation of Says’ Law is very important and useful for further development of the effective demand theory.

(6) Phase by phase analysis

You acknowledge different phases of market and try to make a proper analysis to each of them. For example in p.124 under the title How supply and demand interact, you summarize your point as follows:

a) In times of scarcity, demand follows supply.

b) In times of abundance, supply follows demand.

In the conventional economics, these two phases are combined to give way to equilibrium where demand is always equal to supply. Real markets are not in such situation. Normally, the capitalist market economy observes long supply and short demand. If there is enough (effective) demand (backed by money) for the product, the producer has no problem in producing and supplying more without raising the product price.

This is the situation described by P. Sraffa (1926) On laws of Returns under Competitive Conditions Economic Journal 36(144): 535-550. See p.543 in particular.

The question we should pose is why this "state of abundance" continues to exist for almost all times and is observed in almost every market. Janos Kornai named this Pressure Economy.

Kornai, J. (1980). Economics of Shortage: Volumes A and B. North Holland.

This must be a kind of dissipative structure in which "state of abundance" is reproduced by the very structure of the economy itself.

I am very grateful that you took the time to read my first book “The Origin of Wealth and Poverty”, and especially to write those enlightening comments.

I started to work on “The Origin”, 2007, almost as soon as I got my M.A. in Economics and after I retired from my research position in Physics. I thought that economics was very similar to Newtonian physics in that it consisted of a simple interaction between a buyer and a seller, where a good is exchange for money—there are only two basic elements in economics!. In physics, of course, two point objects interact through something called a ‘force’, which causes changes in the movements of the two objects. People use the features of the physical interaction in order to manipulate and control the movement—or non-movement-- of objects for a variety of purposes; and people use the features of the economic interaction to obtain a money-income, and to satisfy some need. Soon after I started to analyze the features of the economic interaction, I convinced myself of two things: the first one—while remembering the ‘pet-rock’ phenomenon—was that goods are not just indefinable, but they are rather unimportant in the economic exchange; that money was the defining element of economics—precisely the opposite conclusion from Adam Smith’s teachings, that money is unimportant, and goods are the real wealth. And the second thing was that money is a conserved quantity.

While writing my second book, “The Coming Age of Freed Money”, 2010, I realized that money is not what everybody thinks—namely a ‘token of value’, such as currency or a bank-note; what we think of as money is in reality a quantity of purchasing power, or what I call ‘buy-right’; and the things we associate with money are merely vehicles to transfer those buy-rights. Modern money is no longer a ‘thing’, it has become an abstract concept, whose only embodiment are digital records in banks ledgers. Buy-rights are what are exchanged for goods; buy-rights are conserved, buy-rights are stored in banks, etc.

After “The Origins”, I have written five other books, deepening my understanding of economics in the process. Just last year, for example, I came to the realization that my basic approach to economics was essentially following in the footsteps of the 17th century English political economists, who were given the task of solving the then pressing problem of the scarcity of money; by their efforts, they eventually gave rise to the ‘invention’ of credit-money, which is the basis of our modern financial system, as well as the main cause of the British Industrial Revolution—the paradigm of economic development to which we owe our present prosperity. One of my forthcoming books is about how Adam Smith managed to replace that ancient wisdom with his erroneous conception of economics, which is now being used to concentrate the wealth of the world in the hands of tiny minorities.

I also would like to comment about a few of the points you made:

(2) Savings are ‘stored’—in the form of ‘buy-rights’--in a bank, or other financial institution, and the ‘vehicles’ that brought them in are then used to create loans. These loans are spent into the economy, initiating the flow of money that sustains the economic activity of the nation. Whether these expenditures are called ‘investment’ or ‘consumption’, it is truly irrelevant. I really do not see any mystery or contradictions regarding the connection between savings and investment—and if any remains it is due to the capitalistic misconception about the singular virtues of ‘investment’. I am convinced that my statements agree with reality, and they are not just ‘one person’s opinions’—I could be wrong, of course, but I don’t think so!.

Also, I have reconciled myself with the reality of saving, or ‘hoarding’; now I believe that saving is an existential compulsion—I know of nobody who does not do it, in one way of another. And since the financial system replaces the money saved with newly created money, the only effect of such saving is to increase the overall stock of money in the economy—the money created by the central bank is actually a tiny portion of the total amount of money created by the financial system.

(3) My new thinking about ‘limited demand’ is that it has a dual cause: first, the rich cannot spend all their income; and second, the poor have little income to spend. Thus, it turns out that from the perspective of the saver, there is over-abundance of goods; while from the perspective of the poor there is scarcity of money. Of course, this issue of ‘under-consumption’ has been and remains a matter of economic controversy since Lauderdale, and was revived by Keynes in his “Complete Theory”, 1936, but it refuses to go away—I think this refusal to acknowledge the existence of under-consumption has to do with the general confusion of individual perception versus the systemic reality.

(5) It is interesting that you singled out ‘profits’ as a subtraction from the money released by the producer, while ignoring ‘salaries’--I consider ‘profits’ to be an artificial creation of the capitalistic doctrine. In reality, both profits and salaries are part of the producers’ income, and may not be released into the economy before the completion of production-sales; however, the producers’ income is supposed to be spent, in a manner similar to that of the costs-funds—unless, of course, one introduces savings into the picture. It is savings, and not ‘profits’, what disrupts the ‘chain of prosperity’.

Up until last year—yes, not many months ago—I thought that the logic of my arguments would be able to push forward my reform agenda; now, after reading one of the papers you mentioned at the beginning of this discussion, which reminded me that the new economic orthodoxy is the ‘anything goes’ approach, I believe that the present economics is beyond reform (it no longer constitutes a coherent set of shared opinions)—In reality, it had long since been captured by the moneyed-man interests, and can never be used to solve humanities’ grave problems—at least until this unsustainable trend stops, as it must.

I shall continue to write books denouncing erroneous economic thinking—with the hope that, someday, Economics will be replaced by Political Economy; but I will turn most of my efforts towards applying my ideas in finding and proposing solutions to the problem of world development and economic growth, as well as that of the excessive concentration of wealth.

Thank you for your comments. As we have started our economics from a very different situation and tradition, it is normal that we have many points of disagreements on various concrete points, but as we have the same or very similar basic stance toward economics I think those differences will not be a cause of endless disputes but will help to make clear theoretical ambiguities of our economics.

As for comments you made on three points (2), (3) and (5) in my post, we may come back again to discuss them. Before that, I believe it is important and necessary to clarify our basic difference. It is concerned with the theory of value or prices.

You have summarized your theory on prices in the form of five Laws of the Market (pp.123-126). Except Law IV i.e. Law of market Saturation, I cannot agree with four other laws. As you have written five more books after The Origin of Wealth and Poverty, some parts of your theory may have been changed. In that case, please tell me that. In this post, I argue on the assumption that you have not changed this part of the theory on how market works.

I admit that you have avoided unrealistic formulation of neoclassical price theory. Namely, you do not use the concept of aggregate supply and demand functions. You have also avoided characterizing market price as the crossing point (in the form of Marshallian scissors) or equilibrium point of two functions (in the form of Walrasian equilibrium point).

These are very good modifications of neoclassical price theory towards more realistic price theory or market process analysis. In spite of this, I should say that your price theory is too much influenced by the neoclassical economics and have not separated yourself from its dominant influence. Neoclassical economics has a wide and strong range of "magnetic field" which absorbs almost every effort to escape from it. Or "black hole" may be a better expression. 

My basic point is that of David Ricardo. His theory of value is unique in the sense that it is opposed to most of classical economists including Smith and all neoclassical theorists like Marshall and Walras. Of course, there are many deficiencies in Ricardo himself but his theory can be developed into a systematic modern theory. See for example my paper

https://www.researchgate.net/publication/269393496_The_Revival_of_Classical_Theory_of_Values

Ricardo's price theory can be called "cost of production theory of value". Ricardo includes profits among constituent elements of “costs.” At this point Ricardo is ambiguous because he could not give clear explanation on how the profit as cost is determined. This point was made clear later in mid 20th century by a person called Piero Sraffa. I myself call the theory (modernized and developed theory in the tradition of Ricardo) classical theory of value in order to make sharp contrast with the neoclassical theory of value (or so-called price theory). Indeed in the history of economics there are two sharply opposed theories of value.

You have cited Ricardo on many pages and criticized him. Your points are only two. One is the denial of general glut. The other is Ricardo's free trade advocacy. As for the first point Ricardo was simply wrong and it is necessary to see where he went wrong and what lead him to that belief. As for the Ricardo's theory of international trade, you should distinguish his theory and policy implications. It is not generally true that a theory implies a concrete policy. Ricardo's theory of trade gave a firm starting point to the theory of international trade, although it was desperately incomplete and deeply distorted by John Stuart Mill and his followers.

Ricardo recommended and advocated free trade, since he believed that the Corn Laws were hurting and would hurt industrial people including workers and industrial capitalists (as you put it in p.295). I know that mainstream textbooks explain that Ricardo's theory made clear the gains from trade and, by consequence, free trade is justified (without conditions). As you have argued that international trade "will benefit the whole of the society but only if total employment have been achieved" (p.244), gains from trade are conditional. If I use the conventional comparison of two situations, closed economy and open economy, the transition to an open economy is beneficial to those people who continue to be employed and to be able to expand their business but a nightmare for those people who are fired or (in case of industrialists) forced to discontinue their business.

Neoclassical theory considers equilibrium state and supposes that it will be achieved very soon. In that theory, there is no place of unemployment and therefore no trade conflicts. In reality, trade conflicts have been one of the most important political problems both for USA and for Japan.

If you are for free trade or against it, you need a theory on international trade and that theory is not necessarily limited to one that excludes unemployment. I worked long time on Ricardo's theory and succeeded to extend it to much wider situation in which firms choose better production process (or techniques) and inputs are traded. See my papers

https://www.researchgate.net/publication/266737921_On_Ricardo%27s_Two_Rectification_Problems

https://www.researchgate.net/publication/233943493_A_New_Construction_of_Ricardian_Trade_Theory--A_Many-country_Many-commodity_Case_with_Intermediate_Goods_and_Choice_of_Production_Techniques

I have also written a book on this question but in Japanese. If you read Japanese, please read this book as my theory is explained much more systematically. It contains also a long account on the history of trade theory and gave the reason why it remained for a long time in a very retarded and erroneous state. The table of contents (on English) is given in

https://www.researchgate.net/publication/269519877_A_Final_Solution_of_the_Ricardo_Problem_on_International_Values

My theory on international trade gives a clear account on the nature of gains from trade. Freer trade is beneficial to those who continue to be employed but hurts workers who would be fired and industrialists who would be forced to discontinue their business. This is possible because new theory of value (or classical value theory) does not suppose full employment.

In your first book you have cited many authors including "dissenters" but no Post Keynesians names in the Sraffian strand appear. After Sraffa, Pasinetti and many Italians and others developed the price theory in the Ricardo tradition. In the United States Fred Lee (who passed away last year) has written a good historical account on this tradition. The title of the book is Post Keynesian Price Theory. I feel shame that you had no chance to know the deep significance of classical value theory.

The opposition between classical and neoclassical theories of value is not a pure doctrinal dispute. It is pertinent to the question of unemployment. Keynes introduced (or more correctly revitalized) the concept of effective demand. However, Keynes developed his idea on the base of neoclassical theory of value (mainly Marshall’s one). As this framework is not suited to the new concept, his definition of the Principle of Effective Demand (Chapter 3 of General Theory) is disastrous. This was one of the reasons why Keynesian theory in 1970's had to surrender its influential position to New Classical Economics of various types (monetarist theory and real business cycle theory and others).

Conference Paper The Revival of Classical Theory of Values

Conference Paper On Ricardo's Two Rectification Problems

Article A New Construction of Ricardian Trade Theory--A Many-country...

Book A Final Solution of the Ricardo Problem on International Values

I want to add one more point on the price theory, or opposition between classical theory of value and neoclassical theory of value.

Moromisato has emphasized in his first book The Origin of Wealth and Poverty that the economics should restrict its focus on the economy and opposed to making economics a kind of (pseudo-) psychology. He concedes that "there is certainly a place for biography in the study of economics but continues in this way.

"The economy is ... not about human behavior, motivations or incentives. If economics is ever to be a science, a systematic and reliable understanding of the economy ... it must by necessity restrict its scope to the subject itself, and not include the unfathomable nature and Psychics or the individual."(p. 15)

He is opposed to constructions like preferences and rational expectations (p.14). Flemming Bjerke expressed a similar opinion in an answer (Sep 4, 2014) to my question. The opposition between classical and neoclassical theories of value is concerned to this very point.

https://www.researchgate.net/post/Why_has_the_concept_of_effective_demand_disappeared_in_the_mainstream_economics

As everybody knows, neoclassical theory of value was first constructed on the notion of utility. Stanley Jevons denounced J. S. Mill but his philosophy is deeply rooted in utilitarianism. Jevons explicitly used the word utility and emphasized that his theory of value was subjective. Concept of utility was reformed into preferences and expectations but it continues to be subjective theory of value.

In contrast to the neoclassical theory, the classical theory of value is "objective" one. To be more precise, it considers that social conditions determine values. In the capitalist economy, the firms are competing to sell their products cheaper than their competitors (if the qualities are the same). This competition leads firms to set their prices by the full cost principle with a predetermined profit margin. Ninety nine percent of firms set prices on their products or services. Mainstream economics explains that "administered" prices are adopted by monopolistic firms but this is a misconception. All modern retailers of everyday goods put a price tag on their articles and sell at that price as far as costumers want to buy. The concept of monopolistic competition or incomplete competition is totally misconceived for this is the normal and widely spread method of retailing. There may be a severe negotiation between a provider and a procurer if the product is an industrial input good. Even in this case, the price is normally determined in advance and providers supply as much as procurer demands at the predetermined price.

Almost all transactions of today are done in this way. Ricardo was a precursor of this image when he wrote:

It is the cost of production which must ultimately regulate the price of commodities, and not, as has been often said, the proportion between the supply and demand. (Principles of Political Economy and Taxation, Chapter 30; Sraffa ed. p.382.)

He denied explicitly the perpetual theory that prices are determined by demand and supply. In his opinion, the price is determined by the cost of production (for most of the time and for almost all industrially produce commodities). Law of demand and supply existed long before Adam Smith and persisted all along classical economics days like undercurrent and revived in neoclassical days.

Moromisato make us remember geocentric theory of the universe (p.14). We know now that the heliocentric theory is more correct than the geocentric theory. We may compare the history of astronomy and economics. The geocentric theory was dominant almost all ages before the 17th century but from the Alexandrian age heliocentric theory was known. It was Aristarchus of Samos who advanced a heliocentric theory and it seems that this theory was accepted by a learned circle of people. Wikipedia confirms this in this way:

The fact that Pliny the Elder[5] and Seneca[6] still referred to planets' retrograde motion as an apparent phenomenon, suggests that heliocentrism was an accepted theory still by their times. (Aristarchus of Samos, Wikipedia)

There are close parallelism between astronomy and economics. Cost of production theory of value and heliocentric theory were known for a long time but subjective theory of value and geocentric theory were dominant for a long time and the first remains to be so even today.

I must confess that I find the subject of ‘value’ quite uninteresting; but, since you are actually talking about ‘price’, then I have a simple argument that should demonstrate that price is a property of the market, or economic system, and not of the goods themselves. I start with decomposing price as the sum of incomes received by all the contributors to the production-sale (I believe that sales are integral part of production) process:

Price = Cost + Value Added

Where ‘Cost’ can be decomposed into the prices of all production-sale inputs

Cost = Sum (input prices) = Sum [ Sum (sub-input costs) + Sum ( Value Added to each input good)]

And, since each cost can be reduced to a smaller cost plus Value Added by each of the producers of the input, sub-input, sub-sub-input, … goods, we can write

Price = Value-Added + Sum (sub-Values-Added) + other Sums of Values-Added

Value Added is another name for Income; thus,

Price = Sum (producers Incomes)

Sum (Prices) = GDP = Sum (Incomes)

Thus, since GDP is determined by the market, it follows that price—collectively, if not also individually--must also be determined by the market. {Q.E.D.}

---

In regards to conventional trade theories—including Ricardo’s and all versions of ‘free trade’—I considered them utterly incomplete: they all ignore the zero-sum nature of the flow of global or international money that sustains international trade, and is the main cause of the crushing debt afflicting rich and poor countries alike. In addition, it is misleading, I feel, to present the trade options as a dichotomy between ‘closed’ and ‘open’ economies; when in truth, the only rational option is, or should be, balanced trade. The problem of trade is in reality that of the management of global currency—where the state has paramount interest.

As you can see, the foundation of economics, in my view, rests not in any property of ‘goods’—value, production, capital, investment, distribution, …--but on the properties of money and income. I am sure that this view has been evolving since I wrote “The Origin”, and I have been meaning to update it; but as I said before, the state of economics, especially in the U.S., is in such state of disarray and confusion, that puts it beyond any hope of reform (I remember that Piketty wrote something similar about French economists). Therefore, I feel my efforts may be more fruitful in other directions.

Before I read your extensive comments about Ricardo’s theory of values, I never felt the need to examine my own views in that regard; now I have a clearer understanding of them. I am very grateful for the opportunity you have offered me to exchange ideas.

Moromisato,

I am not surprised to know that you are disinterested in value. Your reaction is the most often repeated one when I talk about theories of value.

Your understanding on value or on my theory of value is wrong, because  I do not suppose that "price is a property of ... the goods themselves." 

I admit that the price or value of a good has been considered long to be a property of the good. Typical example is the substance theory of value which majority of Marxian economists support. However, I am not thinking like them. I am thinking that price or value is determined by an entire structure of an economy including exchanges in the market and production processes.

When you say that price is a property of the market or economics system, there is no big  difference from my understanding except for minor differences of expressions.

Only one problem in your "demonstration" or proof is you are implicitly assuming that prices of goods are determined. When you write

  Price = Cost + Value Added,

you must be thinking of goods in the market that are sold at certain prices. You are supposing that they "have" their prices and you do not want to know how these prices are determined.    

When you write 

Sum (input prices) = Sum [ Sum (sub-input costs) + Sum ( Value Added to each input good)],

you must be thinking of a production process in which some good is produced by means of various kinds of inputs. Each input has its price and you subdivide the prices of inputs into sums of sub-input prices and so on.

At each purchase by the part of producers they pay the price of inputs and this payment becomes income of suppliers. What you are describing is the flow of income and money. Income flow is generated by transactions and when a transaction is concluded, a price is determined by the consent of  two parties.

How are these prices (or exchange rate between goods and money) are determined? By the equation of demand and supply? If you are not satisfied with this formula, how do you determine the price in each transaction? 

If you have no theory on prices or values, most of your book's readers will think that you are implicitly assuming the same theory of prices or value as that of the neoclassical economics.   

Some of your Laws of the Market (pp.124-125) are very vague. For example, take the Law of Competition:

a) Competition among sellers keeps a downward pressure on prices.

b) Competition among buyers keeps an upward pressure on prices.

Then what happens? There are always competition among sellers and that of buyers. Are prices determined by this Law? Or are prices determined randomly under the pressure of these pressures? This Law contains very little theoretical contents. Don't you think something is missing? I think this missing something is the theory of prices or value. 

Dear Prof. Shiozawa:

You do not seem to question my ‘proof’ that Price is equal to Income, so I take it that when you demand that I explain what determines Price, your are really asking me to explain what determines Income. And I have already given you my answer: the economic system does it! Which you also seem to accept. Even, more specifically, you explain to me that ‘price is determined by the consent of two parties’.

But, nevertheless, you still want me to tell you ‘what determines Price?’. Are you actually asking me what determines ‘the consent of [the] two parties’?

In my conception of Political Economy, Price is an income demand made collectively by the producers of the particular good, to the buyer. That price varies with the producers, but also with the buyer; it varies with time, with the season, and with the geographic location where the sale takes place.

Then there is the Average Price of individual items, which is a statistical abstraction, and which fluctuates as the sale-prices do.

In the entire world, there are millions of transactions for any particular product, every single day, with each transaction determining a price point; to try and explain every single one of these prices, for every one of the millions of distinct products in the market, for every single day of this year, and for every day of every year since Creation, is a task that I gladly leave to someone who really cares about a theory of value.

Another reason for my disinterest in Price, perhaps a more fundamental one, is that price is a feature of products, or goods; and, as I have mentioned before, I believe that the great error of any and all versions of economics is their obsessive focus on goods and on all the properties associated with them—as opposed to a focus on money and its properties. I believe that goods, in contrast to money, are indefinable, as are any of their assigned properties, including Price.

I am convinced that trying to understand the economy by following the flow of money and income is a doable project; but trying to understand the production process and the properties of goods, is both, an impossible and pointless undertaking—as demonstrated by the more than two centuries of wasted effort.

In the second half of the 19th century, H.D. MacLeod, a now forgotten writer, championed the ‘exchange theory of value’—in opposition of both Adam Smith’s ‘labor theory of value’, and Ricardo’s 'theory of production value', without making much of an impression on the economic community--except for the not inconsiderable feat of changing, singled-handedly, the name of the discipline from Political Economy to Economics. MacLeod was convinced that economics could be made into a science almost as coherent as physics, but only if the theory of value was accepted as its natural foundation; and that theory of value had to be, naturally, the ‘exchange theory of value’, which he indefatigably promoted. I was initially impressed by his treatment—a detailed and thorough one--of credit-money, as well as for his scientific bias, but then he started developing his theory of money as debt, of present-value of future ‘goods’, and other debts, he lost me for good. Later, I realized that I was not a suitable believer in ‘theories of values’, after all.

You said that I should have a theory of values because of what my readers would think; clearly, that cannot be a sufficient reason; do you happen to have a better one?

Your equality  

  Sum (Prices) = GDP = Sum (Incomes)

is well known equivalence relations for GDP. If we put aside a various minor adjustments,  GDP can be calculated by three different methods: production approach, income approach and expenditure approach. See for example,  page Gross domestic product  in Wikipedia.

As far as these are different methods of counting the same set of transactions, it holds inevitably. We call these equality accounting identity.

Accounting identity holds for any situation. However, any accounting identity does not tells you how this or that quantities are determined. Economic analysis aims at determining how Sum (Prices) (and at the same time Sum (Incomes) ) is determined. To claim that Sum (Prices)  is equal to Sum (Incomes) is not a real analysis of what is happening in the economy. You are telling the same thing by a different expression. This kind of paraphrasing is often useful but if you stay in this level you are repeating true but tautological propositions. 

The  word "determine" is sometimes ambiguous. For an example,  the above cited Wikipedia page writes 

GDP can be determined in three ways, all of which should, in principle, give the same result.

In this case, the author is simply speaking of calculation procedure. What I want say by the word "determine" is of course causal determination.      

Flemming Bjerke is more or less correct in listing the consequences of existing ‘the monetarisation imperative’—but the avoidance of savings is certainly not one of them, because savings are currently the foundation of the entire credit-money system (also, ‘spending savings’ is clearly an oxy-moron). The existing monetary-financial system has been corrupted by its reliance on conventional economics and its ignorance of the true monetary understanding developed by the British Pre-Classical economists—which Keynes was unsuccessful in reviving. The monetary system I propose is based on returning the money-creation power back to the state—to its central bank. In the new system, private financial institutions will be required to deposit 100% of their customers’ deposits into reserve accounts at the central bank, and to borrow from it all the lending funds required. Central bank mandate would continue to be the maintenance of an adequate flow of money into the economy, but there would be a public flow—at zero interest—in addition to current private flow, which would be regulated, as now, by the level of the Central Bank interest rate.

I expect the following consequences:

1. The end of economic fluctuations including ‘business cycles’;

2. The state would be empowered to create as many public goods as the nation demands;

3. Savings may continue, but they would be unnecessary for the national flow of money. Government would create special ‘saving-bonds’, with zero, or negative yield.

4. Fiscal budgets would be balanced, and fiscal debts would be purchased by the central bank, thus eliminating the debt burden from government.

5. Balancing fiscal budgets would require governments to collect most of its taxes from the rich.

A tax reform, eliminating employment as well as business taxes, and making it totally progressive—namely, tax rates increase, without limits, with income—may be found to be needed in order to end excessive inequality as well as incapacitating poverty.

The common reaction I have gotten so far is that my ideas sound good but are extremely unrealistic. And that invariably remains me of the saying: “Only a crazy person can believe that he can change the world; but he is the only one who might go ahead and do it”. Since I am retired, I have nothing to lose; also, I have nothing better to do.

I want to concentrate on theory. Policy may be very important but I believe good policies come from good theory and analysis of present state. We may have another question page but let us concentrate on theory. When I say theory, it stands for understanding actual movement of market economy conventionally called capitalism. We need this cool-headedness even for prospecting another economics system other than capitalism.

Reading Moromisato's The Origin of Wealth and Poverty, I feel that he has a warm heart but lacks a sufficiently cool head in his analysis of the economy.

For example, let us take an example how he treats profits in his book. I sympathetically understand that he wants the role of profits be minimized. As a hopeful description, it is all right but it is not realistic to minimize the role of profits in the analysis of capitalist economy. It is one of the major forces which derive capitalist economy or most of our present day market economies.

He knows this. In page 83, in a column, he writes "[t]hey (firms) are motivated by the pursuit of profits." In page 122 he writes "firms only care profits." In page 219 he writes "[a]s in any other economic activity, profits are the mains motivation of importing firms." In page 321 he writes "if a firm consistently fails to make a profit, it will go out of business." The last assertion is cited in a negative context, as this expression appears when he mentions Milton Freedman's opinion. In the first assertion, Moromisato compares Old and New view and the assertion is cited as an example of the Old View.

In a column in page 94, Moromisato writes:

"The centrality of capital in conventional economics discourse goes together with that of profits. The idea that the rate of profits, as return on capital investment, determines the well-being of the economy is clearly wrong: the economy's output is the aggregate value-added (VA), and profits are only the owners' share of the VA. The belief that higher profit rate benefits society is as misguided as the belief that capital is, and should be scarce."

Moromisato knows the "centrality" of profits (and of capital) but he does not want to study profits. He does not want to analyze who capital is accumulated in the capitalist economy. He hopes that the share of profits in GDP decreases. It must be a common idea for many of heterodox economists but many of them agree that we should not confuse wishful thinking and cool analysis. In order to analyze capitalism, it is necessary to analyze how profits are determined and how profits determine firms’ behavior (on investment in particular) and how capital is accumulated and returns to capital (in a form of profits, dividend, interest and others) are determined. Without these analyses, we cannot tell the result of accumulation of capital. Theoretical analysis if income inequality increases or not are constructed (at least in part) on these analyses.

Despite of this "centrality" of profits, Moromisato does not discuss profits as a subject matter except for passing-by mentions. To prove this is not difficult. In the Index of the book he cites 24 pages. Except four pages, the word "profit" or "profits" appear only one time (there are 2 or 3 pages no times). In two pages (p.204 and p.321) they appear twice, in page 244 three times, and in page 251 four times. There is no analysis how the amounts of profits are regulated and no analysis on how managers (who acts as representative of owners) decide the volume of productions, employment and investment.

It is astonishing that he even want to minimize the share of profits. In a column in page 42 (this page does not appear under the head of profits in the Index), he writes "in any company with more than a handful of employees, the profit corresponds to a small part of the value added. " However, as most of economists know, operating surplus (i.e. profit and rents and others) represents about 25 to 35 % of all value added (i.e. GDP) in most of developed countries. 

One of reasons why this kind of things happens can be explained by the fact that he lacks or ignores theory of prices or values. Without having basic theory of price or value it is impossible to examine profit rates.

Moromisato's economics has full of good features. He is deeply critical of mainstream neoclassical economics. He has a good prospectus for future economy. It is unfortunate that he had no occasion to encounter a theory of prices or value which is fundamentally different from the neoclassical theory of value.

Prof. Shiozawa:

Thanks for pointing out the many times I mention the word ‘profits’ in “The Origin”. I think I will reduce that number, substantially, in a future 2nd edition.

I think you started your recent posting with the best of intentions: “We need this cool-headedness even for prospecting another economics system other than capitalism.”

Unfortunately, even before this call to ‘cool-headedness’—which I take it to mean ‘objectivity’—you write “When I say theory, it stands for understanding actual movement of market economy conventionally called capitalism.” I think it must be crystal clear to any reader that you consider ‘capitalism’ to be the correct description of ‘a market economy’, but nothing could be further from the truth.

What I wrote in “The Origin” was from the vantage point of a hypothetical ‘objective observer’—and definitely not from that of a capitalistic economist.

In the real world, the value added, or personal income, is the reason-d’être of the economic activity—you may call it ‘a theory of the centrality of the value added’. The usual definition of ‘profit’, as the specific income of the owner of the firm, is a creation of the capitalistic ideology. It is regrettable—though quite understandable--that you seem to be unable to separate the ideology—the capitalistic fiction—from the objective reality.

In the real world firms can survive, and even prosper, without profits—remember your own Alma-mater and the plethora of other non-profit organizations; but it is materially impossible for any firm to survive without value added (net income).

On the other hand, it is undeniable that the legal framework in all countries of the world privileges the owners of money—or ‘capital’ in the language you are more familiar with—and forces ordinary people into subservient positions.

I for one consider it my duty as an economist to analyze the economic and social reality the way it is and not view it through the tinted glasses of an inhuman—or at least anachronistic—conception of society. Don’t you?

I am not a proponent of capitalist economy. I only want to be a cool observer of capitalism. We should distinguish normative propositions and descriptive and analytic propositions. I have an impression that you some times confuse these two propositions.       

Do you think that actual market economy is not capitalistic?  How do you explain recent (in these decades) emergence of shareholder value maximization pressure from the side of shareholders? Why do some top managers get some hundreds of million dollars a year?  Because they are backed by shareholders. You should question these ideologies.

To build  an economics of capitalist economy is not supporting capitalists'  ideology. To know what exists is the first step to change it.   

You are arguing on a moral and ethical base. It is one way of persuading people and you may change people's thinking. But I think these moral persuasion is not always strong enough.

You want to realize an economy in which capital receives minimal profits. I do not deny your good intention. If your political program  gains power, it is wonderful. But, as there are many people of many situation and of different interests, it is also necessary to know in a positive way (and not in a normative way) how an economy evolves and analyze how it develops. This study will provide powerful reasons to persuade people in a direction you want. My belief is that normative propositions and persuasions work better when they are accompanied and backed with positive observations and analyses. 

I am sorry that you misunderstand my position: I have never said that capital should receive minimal profit, even less that it should receive none; and I had made no references to how value added should be distributed—these would have been ‘normative’ propositions.

What I am trying to say is that I refuse to use the biases language of capitalism. For example, I believe that singling out the owners’ income as essentially different from the employees’ income can cause irreparable damage to society--as companies ‘outsource’ their labor, depriving the local people of much needed jobs. On the other hand, from the ‘capitalistic’ perspective; outsourcing is perfectly acceptable, and even praiseworthy, for a company’s sole purpose is the pursuit of profits. Which is the objective view, and which the biased one? And, since there are very many schools of economics, their views may very likely differ from the two presented here; and the answer as to which of all the views is correct, becomes more complicated.

This little example made me change my mind about my understanding of the economy being objectively correct. It would seem that I am also looking at the economy through the lenses of my own economic theory; just as you perceive the economy through the capitalistic lenses. Both our views are biased; though in different manner—psychologists would say that one cannot perceive what one does not expect it to be there.

I am convinced that we both can agree on one thing: at least one of the two views is closer to reality than the other--and we both know positively which one it is.

Although it saddens me that it had happen, I knew that we would come to an impasse—I read it in “A Conflict of Visions”, by Thomas Sowell.

But seriously, I believe that theoretical impasses are signs of the non-scientific nature of at least one of the theories in contention.

I thank both of you for your posts.

Moromisato believes "that singling out the owners’ income as essentially different from the employees’ income can cause irreparable damage to society--as companies ‘outsource’ their labor, depriving the local people of much needed jobs."

I do not oppose the proposal to classify private or family firm’s owners' income among compensation to their works. To conserve the category profit has little relevance to it. This accounting procedure is already taken in the System of National Accounts. Even if we count in this way, the operating surplus (which excludes "owners' income") represents an important portion of GDP. The operating surplus is not equal to profits, as it includes rents and interests. But in a theoretical abstraction, we normally identify operating surplus and profits. (I admit that the concept of profit is ambiguous indeed. Accountants prefer to use the term return.)

Let us examine the facts.

There are many firms unincorporated and operated by households. Let us call them "family firms." USA holds many of these family firms and income related to this category is large. It is an agricultural country as well as it is extremely financialized country. As I have no data for USA, let me cite Japanese data.

In the System of National Accounts, the income of family firms' entrepreneurs are classified as "mixed income." In case of incorporated firms, even if they are family enterprises, the entrepreneurs’ income is divided between operating surplus and remuneration and the latter is counted as "compensation to employees." In this case, owners of the firm, when they receive remuneration, are treated as employees.

The following is the shortest extract from the recent statistics from Japan's SNA (for the year 2013, in Billion Yen)

Compensation of employees 207,343

Operating surplus and mixed income, net 92,213

of which

　operating surplus 79,862 (86.6%)

   mixed income 12,350 (13.4%)

The ratio of operating surplus (net) over wage and salaries is 38.5%. The mixed income counts 13.4% among total of operating surplus and mixed income.

Let me repeat that the System of National Accounts already includes enumeration of firms' owners (except family firms) among compensation of employees. Even though, the operating surplus of corporate firms represents more than one third of the compensation of employees. To ignore this part of value-added is a serious flaw.

Dear Bjerke:

Your ‘admonition’ to leave aside ‘diverging approaches arguments’, followed by your resort to authority—Marx’s approach—somehow reminds me of Churchill’s fable of ‘The Universal Disarmament Conference’, where an assembly of all Earth animals are discussing which weapons to ban for good; after the most powerful animals argue to ban only the weapons of the other great beasts, the turn comes to the great bear who argues for the elimination of all weapons, except for the embrace, the universal symbol of peace and fraternity.

About your thoughts on ‘Absolute monetary sovereignty’, I could assure you that my thoughts about the monetary aspects of the economy are definitely not what your label implies—if I only knew exactly what.

I find it curious that you consider my dismissal of Shiozawa’s remark, about the impossibility of examining profit rates without having a basic theory of price or value; perhaps I didn’t make myself clear: my approach doesn’t need a ‘basic theory of price or value’ and could not care less about ‘examining profit rates’.

Let me state my reasons for rejecting both of these concepts—besides my appeal to Occam’s Razor:

Price or value—the fact that they must be mentioned together should tell us something about the hang-ups of the speaker—fluctuates from sale to sale due to a variety of factors, most of them possibly unknowable, but certainly immeasurable. In addition, price is associate to goods, in the indefinable manner just mentioned; but goods are themselves indefinable: before something is shown to have an adequate demand—to be ‘profitable’ in the capitalistic lingo—it cannot be called a good! Thus, Shiozawa’s insistence on the crucial importance of a ‘theory of price’—or ‘value’--amounts to wanting to define an indefinable characteristic of an indefinable concept! I sincerely doubt that such feat is at all possible; but even if it were, why, in God’s name, even bother to try it?!

Dear Zhiozawa:

I think we have reached agreement in our little controversy about ‘profits’: what you wrote about profits, “To conserve the category profit has little relevance to it”, is more or less my whole point.

But your closing sentence: “To ignore this part of value-added is a serious flaw.” Is a misunderstanding of my position: My approach does not ignore ‘profits’—it just rejects the capitalist, as well as the Marxist, approach to single it out to be the reason-d’être of the economic activity.

I believe that both, the capitalist and the Marxist—as well as all existing schools of economics, that I am aware of--have distorted and counterproductive approaches to the economic reality. But your willingness to engage in this little ‘exchange of views’ makes me a little hopeful that eventually a more realistic approach may be generally adopted—for the sake of our grandchildren, and especially those of the billions of struggling people in the world.

I have the hope that in the end, after all is said and done, one particular approach will be left standing, just like in any bona fide science. I believe that such approach will have to be closer to that of James Steuart--of the Pre-Classics and of the “Complete Theory”’s Keynes--and almost opposite to that of Adam Smith and any of his many followers, old and modern.

Dear Bjerke:

Thanks for your kind words about my ‘approach’.

And I am glad you found the fable ‘cute’: I introduced it as a way to lighten up the discussion; and not to deviate it away from the actual subject. However, your outright rejection of mi little reference to psychology prompts me to return to what I believe is at the core of our discussion: the nature of ‘approach’, argumentation, inference, and above all—or underneath it all—the issue of ‘Truth’.

Perhaps you have had no time to think about it, but ‘approach’ is another word for ‘bias’; and ‘truth’ is—besides any reference to ‘reality’—a mental process. Our beliefs, or cherished convictions—except those based on science—are based not on logical processes, but on feelings (Does it feel right? Or not?). How do I ‘know’ this? Through the writings of the people that study how the human mind—or brain—‘functions’. I refer to such kind of knowledge, as ‘psychology’, but perhaps I should have said ‘neuro-science’ or ‘brain-science’. So, I was not avoiding ‘scientific argumentation’, but using scientific findings to round up my argument; just as I was using those findings to mention the uselessness of logical argumentation to settle a bias issue—this is, by the way, the simple explanation for the proliferation of economic beliefs (even within the same individual).

For example, when you claim that I have not ‘argued thoroughly’ my position you may have committed a perhaps involuntary mental bias known as ‘Cherry picking’: you have simply neglected my several arguments, including my most basic one that goods are indefinable.

Let me reiterate, as briefly as I can, my basic position:

I believe that the economy is at its essence, a simple exchange of two elements: money and goods. In the real world, each one of these elements comes in a variety of forms and types; but, in a well structured economic science they must be abstracted to their conceptual essence. Thus, money is a token of ‘purchasing power’, or what I call ‘buy-right’; and goods are whatever has an adequate demand for it (quite indefinable, as you can see).

But, I also believe that the social purpose of economics is to solve, or alleviate, the pressing problems of human kind: poverty, unemployment, and gross inequality, among others.

What is poverty: it is the life struggle of those with insufficient ‘economic elements’. All economists-without exception—believe, to the core of their beings, that it is ‘goods’ what the poor lack. And I say, they are obviously wrong: they lack money, or the means to acquire it. And that brings us to our second problem: Unemployment.

Unemployment is the lack of an opportunity to obtain ‘an income’. All economists—again without exceptions—believe that, after breaking up its number into different categories, unemployment is caused by a variety of reasons, each of which is perfectly understandable, though admittedly ‘difficult’ to solve; and that a sizeable portion of unemployment is in fact ‘voluntary’: to me, unemployment is the natural result of the ‘freedom of competition’, or the ‘lasses-faire’ bias of the economists themselves. Which clearly means that Unemployment cannot be solved until economists change their bias—which as I have mentioned in the beginning, they cannot do because such bias is unrelated to logical reasoning—that explains the witty saying that ‘sciences progress from funeral to funeral’, which in the case of economics, not being a science, it is hard to notice.

Finally, the third problem, ‘gross-inequality’, seems obviously a problem of the distribution of Wealth—or even of money; but I now believe that it is more specific than that: is a problem of unfair taxation.

This is the first time that I have attempted to squeeze my conception of economics and its purposes into such a brief summary, and I am not unhappy with the result.

Have you ever tried to do the same with yours?

In regard to your personal reference:’ you put yourself in the position as the only one who really knows the TRUTH’: You accuse me of arrogance, which everybody else does, and I can only conclude that the whole world has gone mad! :-)

But, seriously now, I was aware that I sounded precisely as you said--as if I knew the truth and nobody else did--and that is why I added my references to James Steuart, the Pre-Clasics, and Keynes, which in another instance of Cherry-picking, you chose to ignore.

In reality, I am convinced that the present understanding of the economy, whichever the school of thought, is plain wrong—as demonstrated by the reality of poverty and underdevelopment throughout the entire world. I also know that, in contrast, ‘my theories’ yield realistic solutions to the world problems, and deserve at least to be considered.

It became clear that Moromisato (the last post in the first 50s) wanted to emphasize that it is an error to "single it [profit] out to be the reason-d’être of the economic activity." Few economists insist (I assume) that the profit motive is the unique cause which drive capitalist economy. Workers' motive to earn wages in order to consume various commodities is another important motive which lies under the capitalist economy. If there were no such motives, entrepreneurs cannot employ workers and it is impossible to operate firms of any size except family ones. We can even say that the change of people's motive to work for wages prepared the arrival of the Industrial Revolution. See for example de Vries's Industrious Revolution: Consumer Behavior and the Household Economy, 1650 to the Present.

Profit motive of capitalists and of managers of firms is one of many motives which drive capitalist economy but it is an important one when we want to analyze capitalist economy. Whether you like profits (and profit motive) or not does not matter. They exist and we should analyze them first. Policy arguments should come after.

Let us return to the main theme. Does theory of value or price matter?

Differences of opinions on foreign trade will be a good example. Moromisato's attention is focused on monetary aspect and he emphasizes that trade is a zero-sum game (p.229 in The Origin of Wealth and Poverty). Any transactions except borrowing from banks are in this sense a zero-sum game. We have the Law of Conservation of Money which he compares with the Law of Conservation of Energy (p.129 ibid.). In foreign trade, the same law holds even if we may have in this case two species of currencies. Moromisato is right when he says that foreign trade is a zero-sum game in money wise. But the problem does not stop there.

Let us examine the so-called Gains from Trade. Moromisato wants to deny it because he is only looking trade money wise. Beware that I have no intention to recommend free trade. I am aware also of Losses from Trade. It is necessary to know (with a cool head) what happens in the economy when you open your country or make the trade freer. If we admit that firms set their product prices with the full cost principle (i.e. price = costs plus markups), the workers' real wage of all trading countries becomes higher (See Section 4 Gains from Trade and the Origins of Trade Conflicts of my 2007 paper. See the linked file below.). But this proposition is conditional. The proposition is true only for workers who continue to be employed. We can also prove that if the world demand remains constant, unemployment is inevitable at least in one country (ibid.).

In the standard neoclassical treatment, gains from trade is normally affirmed without any conditions because neoclassical economists assume that economy arrives at equilibrium very fast and do not bother what happens before equilibrium.

Similar trouble happens to industrialists. Firms of "loosing industry" are forced to close their businesses or forced to switch to other profitable products. This means for managers and workers of that industry to abandon their skills which is accumulated in the industry and useful only for it. This is a big damage for those people. These are major causes of the trade conflicts. Thus proper price theory (applied to foreign trade) reveals why trade conflicts occur.

Please note that my theory on trade is based on Ricardo’s trade theory. Many people believe that Ricardian trade theory inevitably implies free trade. It is a pure misunderstanding. A theory does not generally imply a concrete policy. Policy depends on various factors and situation that a theory cannot determine.

The lesson from above example is that we can know many things when you have a suitable price theory.

To admit the usefulness of price theory is not to deny the thesis that money plays prime role in any economic transactions. In the above examination money continues to function as prime mover of all transactions. But there are many aspects that you cannot know when you are concentrating only on money side of transactions.

Article A New Construction of Ricardian Trade Theory--A Many-country...

Dear Shiozawa:

I thought, for a brief happy moment, that we agreed, in the doctrinal sense, that it is irrelevant what we call the income of the firm’s owner; alas, that is not the case. It also saddens me that now you are distorting my words ‘reason-d’être of the economic activity’ into ‘motivation of the producers’; I guess, we’ll have to disagree on that as well.

I used the phrase ‘Cherry-picking’ in my previous response to Bjerke’s posting, and I am afraid I have to use it even more frequently with your latest as well as previous postings.

You keep quoting my book to try to undermine my arguments, while ignoring altogether my very specific and, I believe, to the point remarks, made throughout my postings.

You are trying very hard to convince me that a theory of price—and thanks for dropping the ‘value’ bit—is of paramount importance to the proper understanding of the economy, even though I have told you in no uncertain terms that my approach needed such theory ‘as much as I need a hole in my head’.

On top of that, you haven’t been able to produce a single relevant and coherent argument for the importance of a ‘theory of price’. Your latest efforts are either wrong, non-sequiturs, or explain it as ‘we can know many things with it’—which I can understand would produce for you enough intellectual satisfaction, but what does it have to do with the real economy? How does it help in the solution to poverty, unemployment, and gross inequality?

If you believe that your economic approach is only good to understand the economy ‘as you think it is’, and has not yet advanced to the point of proposing solutions to real world problems, then, I have to tell you, with all due respect, that we both are wasting our times with this exchange—although your efforts might be fruitful in the future. For example, Adam Smith considered unemployment to be a natural—and unchangeable—feature of the economy, and by no means ‘a problem’ anybody should be concerned with; but he described at least three 'important' problems, and suggested solutions for them: Monopolies, the ‘free-loaders’, and of course government interference.

As I said in my recent reply to Bjerke, that was the first time I had to connect my first principles to the real world problems; which among other things confirmed, at least to myself, that nothing important was missing in my general approach—not even a theory of price.

I would also recommend the same exercise to you. It may clear your mind.

Dear Moromisato,

you were for a long time a high energy physicist. Do you think that your research in high energy physics contribute directly to the welfare of the common people at the moment we live now? We believe it will do in the future and we continue our research even if it does not contribute directly to the human welfare for the moment.

My study in economics has the similar characteristics. I believe it will contribute to our well being in the future but for the moment I do not pursue a direct result as concrete policy recommendations. I am fed up with such policy recommendations which usually follow as "policy implications" in the end of many papers. I cannot believe that a pure theory can produce a good policy without detailed study of the actual situation. A theory may provide tools to analyze the situation and we should not confuse two phases of our research.

My theory on foreign trade provides also such an analytic tool when we discuss trade problems: gains from trade, losses from trade, why trade conflicts occur and how to solve or attenuate the suffering of the people. My  theory on trade clarifies various aspects of trade phenomena including  unemployment.  It provides a better framework to consider on trade problems than the previous, say,  factor proportion theory.

You posed me a question: How does it help in the solution to poverty, unemployment, and gross inequality?

Have you read my post? I was talking about unemployment. I proved that unemployment is inevitable in certain situation. This gives good information for policy making. I have not expressed a direct message or policy recommendation but it will contribute to make a better policy and that policy will be (I believe) more persuasive for wider range of people.

Dear Bjerke:

-I am sorry that you had to bend yourself like a pretzel and stretch logic past its breaking point in order to demonstrate that goods are important—of course they are! And even more important than gold, as the mythical King Midas found to his own chagrin. When I said that goods are ‘rather unimportant’, it was from the analytical perspective: in contrast to money, goods cease to exist as economic goods as soon as they are sold—there are the exceptional goods that last longer; but they have in general several other characteristics that make them ‘rather un-important’ in the economic discourse.

You lost me when you ascribe to me the difference between humans and non-humans; and you were illogical when you mentioned the difference between, for example, goods that can be bought and those that cannot be—the second category is empty by (economic) definition.

-Then you berated me for believing that there is—also--no difference between investment and consumption, which I believe it is true, without presenting any argument.

-I am glad that you agree with me—at long last!—even though it is a caricature of my conception of money that you are agreeing with.

-But I must comment on your description of ‘Martian Theories’ as either ‘interesting’ or ‘problematic’. I thought that for any ‘thinker’, ideas are either ‘true’ or ‘false’; or are believable or not; but I guess calling them as you do is a non-committal way of showing approval or not. Sly, but rather cute!

-Regarding your reaction to my ‘revelation’ that our convictions are based on feelings, I must confess that I felt the same way when I read it the first and second times; but I had to yield to the convincing new findings in the field of brain-science. I believe that you have a few things to learn from it as well.

-And finally, a few words about science. The scientific method is perhaps the only one of the intellectual bequests from the Greeks that has not been improved by the countless generations of humans that have followed them (Euclid’s Geometry is still the paradigm of a scientific theory). It consists, basically, in a technique to elevate individual subjective beliefs into systematic and objective understanding; or, put it in other words, to arrange subjective individual knowledge into objective collective knowledge. The word ‘objective’ is used here not in its general meaning of ‘real’, but in its more restricted acceptation as ‘non-subjective’. A scientific theory consists of a collection of ‘believable’ pronouncements—regarding some aspect of our world--derived logically from each other or from a set of premises and definitions. And there you have it! Not only there no mysteries, but there are not complexities either; and the results of the scientific endeavor, or ‘findings’, are simply pronouncements that are more believable than any ordinary empirical ‘observation’. There can be no claims that such ‘findings’ are ‘The Truth’, as you erroneously put it. Another common mistake—very widespread—is to assume that either premises or pronouncements can, or even must, be ‘corroborated’ by experiments; Bacon was wrong when he associated science with experimentation. That may leave open the question of why isn’t there a proliferation of sciences even on one particular subject, as people come up with their own sets of premises and definitions; the answers is simple: it is very unlikely that someone could come up with a set of premises and definitions that yield believable—that is ‘realistic’—and coherent pronouncements. Believe me, many, many people have tried—even in economics where all have failed, so far.

Dear Bjerke:

-I apologize for the harsh words I used to criticize your arguments in my latest reply; I will try to be more careful next time.

-And if you allow me one last suggestion, please take a closer look—this time with a ‘cool-head’, as Shiozawa likes to remind us—at what I wrote about conviction and science. In fact, I consider those two bits of wisdom, the ideas that ‘conviction is based on feelings’ and that ‘science is a way to convert individual subjectivity into collective objectivity’, to be the most important of modern findings—at least in the field of knowledge—that I have ever encountered; indeed, they have opened my eyes to the real limits, as well as to the unlimited possibilities of the human mind.

Dear Shiozawa:

I have just perused your article, and I commend you on your thoroughness and dedication at the task you set yourself to do. I could admire in particular your careful use of the scientific approach: You set N traded goods and M countries, each with one particular production technique, and each technique characterized by a pair or input and output vectors; the wage-rate for each of the countries are arranged in a column vector, and the corresponding minimum production-price in a line vector. An important new feature of the theory is the assumption that the goods traded are in general intermediate goods, including capital goods. I can understand now that a theory of price, as well as of the determination of profits, would be concepts very near to your heart.

Since you now know my economic bias—namely my approach—you can guess at my opinion, which I will offer nevertheless. Basically, you are building a computer model of international trade based on Ricardo’s ‘minimum-cost’ approach to price determination, using input output matrices, fixed or common technologies and a host of other simplifying assumptions, including those about price determination—in order to make the model, which already involves enormous matrices of more than 10,000 elements each, ‘more’ manageable. And as you conclude, ‘Many problems remain to be solved; … the effects of tariffs … wage rate improvement and so on. These are vast subjects …”. In fact, they are; even in their much abstracted and simplified versions. I have no doubt that all those missing aspects of the model may eventually be included; but, to what end? If I were you, I would never have started such project; on the other hand, if I were in your place today, I would redouble my efforts to start getting results from the model, just to prove ‘that pesky critic’ wrong.

And, although no one can tell with any degree of certainty, at the present state of its development, the odds of success for your theory, I for one wish you the best of lucks.

-It is an interesting coincidence that the book I am in the process of writing also examines—in a far less rigorous manner, to be sure—the effects of global trade on both, the economic growth of the developed countries, and the economic development of the rest. More specifically, my approach is to try and understand the effectiveness of what I call the 4-technologies for development: credit, taxes, trade, and governance. These technologies, I believe, determine the separate flows of global money and of domestic money within each of the 143 countries—with population larger than 2 million. A variety of data—of parameters or indexes associated to the 4-technologies, is collected for each of the countries, in particular the per capita income, the growth rate, fiscal revenue rates, fiscal deficits and debts, account balances, interest rates, etc. The countries are grouped into six levels of development: From D + SD (Developed and Super-Developed), to UD2 (Under-developed Level 2). Then within each level, different country-parameters or indexes are correlated with the growth-rate, as well as with the per-capita income. Once such correlations are ascertained, the determination of the causal relationship may be determined through an economic analysis of such relationship as well as from the correlation results.

Dear Moromisato,

thank you for reading some of my papers and I hope your research plan will produce a good result.

You have written in a posting 2 days ago:

You are trying very hard to convince me that a theory of price—and thanks for dropping the ‘value’ bit—is of paramount importance to the proper understanding of the economy, even though I have told you in no uncertain terms that my approach needed such theory ‘as much as I need a hole in my head’.

I never said that my theory of price is of "paramount importance." I think it is an important and necessary part of economics (and consequently to the proper understanding of how economy works) but I admit there are many important questions to be studied including theory of monetary or financial aspects of the economy.

Last year I started with my friends a small study group on money and finance. I am not thinking that my theory on international value is sufficient to explain all economic problems. Our knowledge and theories are extremely limited and we should be aware of this fact. A major part of neoclassical economists' arrogance comes from lack of this acknowledgement. I believe that I am freer than neoclassical people from that arrogant belief.

Even if my theory is not almighty and may not be best, it is sometimes informative and can be a powerful theory in correcting former erroneous policy implications based on a wrong theory.

I have posted in a question page

Is the varieties of capitalism approach (VOC) conducive for analyzing global financialization?

the following argument under the title Why I am dissatisfied with VoC.

This proves (I believe) that my theory on international value is much better than the old but prevalent and sometimes influencing factor proportion theory of trade.

***********************************************************************************

Why I am dissatisfied with VoC.

Why am I dissatisfied with VoC's fundamental research program? Before putting my points, I want to add a few words on what points I agree with it. To be brief, I itemize my points.

(1) Institutions matter.

(2) Institutional complementarities are important.

(3) Varieties of capitalism or differences of structures and networks of institutions may continue to exist. The neo-liberal convergence thesis is not supported.

(4) Dichotomy between Liberal Market Economy and Coordinated Market Economy is one of many other possible classification of national economy types. Typology is a convenient way of presentation but not a true method of analysis how market economy evolves.

Here are the points (among many) why I am dissatisfied with VoC research program. I focus my arguments on the explanations and reasoning of Hall and Sockice in their Introduction (mainly section 6 Comparative Institutional Advantage)to their book Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (2001).

(1) They (Hall and Sockice) are still based on 2 by 2 simple model of comparative advantage. Although they know there are many objections and facts which refute Hecksher-Ohlin-Samuelson theory (HOS theory), or factor proportion theory (FPT) of comparative advantage (including Hecksher-Ohlin-Vanek theory), they are still arguing based on the analogy of this factor proportion theory.

(2) The basic flaw of the FPT lies on the assumption that trading countries have the same technology, or system of techniques. Once we admit that there are differences of technologies for each country, the factor proportion plays very little role except for exhaustible resources like crude oil or iron ore.

(3) The FPT has a very bad policy implications and they are sometimes fatal in making or thinking of industrial policies.

Let me explain the last point.

Take an example of India. It has a very large army of highly skilled engineers in the ICT or other edge technologies. But, as Indian population is huge (1.3 trillion people), the proportion of skilled engineers may be smaller than say the USA. Given this, is it right that India has comparative advantage in low skilled industries? Do firms in India have no chance of succeeding in the ICT or any other edge technology based industries?

The FPT tells yes. This conclusion is, however, a total error. Competitiveness first operate on firms, not on nations. If a firm can produce a unique product that no other firms can produce, that product may conquer the world. If several firms are competing to sell similar products of the same quality, it is the price (then the production cost) which determines which firm's product can take the dominant position.

In the case of India, a firm in the ICT or any other edge technology has a special advantage than those in the USA, because they have large enough number of excellent and talented engineers (for a firm) and they work voluntarily with relatively cheap wages. The only thing they lack may be experience. Then the government may take a strategic industry policy in promoting edge technology industries.

As a conclusion to my brief intervention, let me add tree points.

(1) International trade is a business which straddles national frontiers but the principle does not differ with other trades inside of a nation. It necessitate some extra knowledge and costs but the competitiveness lies on the quality and price of the product (or service). Most of textbook knowledge of comparative advantage are erroneous and demand a total revision.

(2) A new theory of international trade is already provided. See some of my papers below.

(3) Main analysis of VoC approach can be adjusted if one understands real nature of international trade and competition.

*****************************************************************************

https://www.researchgate.net/post/Is_the_varities_of_capitalism_approach_VOC_conducive_for_analyzing_global_financialization

Dear Shiozawa:

-“… I hope your research plan will produce a good result.” Really?! Is that all you can say in exchange for the half page long comments I wrote for you? I must confess I did it with some trepidation, because I didn’t know if you would choose to take it as a personal attack, rather than as the ‘tough love advice’ it was meant to be. And I can fully understand your non-committal comment; however, I would have preferred, and I still hope for, your candid evaluation of the work I described.

-You write that you have recently started to study ‘money and finance’, which is a subject dear to my heart. Since I have over 10 years of experience on that subject, allow me to at least suggest some reading material: If you are interested in the history of the financial system, I think you should definitely read “Casualties of Credit: The English Financial Revolution, 1620-1720” by Wennerlind, Carl; but for a modern understanding, you ‘must’ read my two most recent books: “The Money-Sovereignty Recovery Act, A Proposal”, and “A Theory of Tax Fairness”. Both are, I am convinced, applicable to the Japanese situation, although the first book is more specific to the U.S., the issuer of THE global currency (both are quite inexpensive, under $10 the first one, and … oops, I ‘ve just remember that the second one has a hard cover ($17 list price)).

There are certainly contemporaneous writers on money and finance—Echengreen, for example—who give reasonable histories of financial crises; while others, such as Burton & Lombra, have written textbooks on the subject; and there are others much older and famous—Keynes, Irving Fisher, Milton Freedman, …--who have written volumes on the issue. Unfortunately, none of them really understood the nature of ‘credit-money’, nor of the ‘fiat money’ system—that started in 1971--which are the norm in the world today. One of the best description of ‘credit-money’ was produced by Henry Dunning Macleod, a mid-19th century thinker—almost totally forgotten today, except for the fact that he ‘changed’ the name of the discipline, from Political Economy to Economics; nevertheless, his books are still readily available, even in free-of-charge digital version. Come to think of it, perhaps you may not want to read Macleod: he rejects off hand the Ricardian theory your are so fond of.

In regards to your critique of VOC, I truly have nothing to contribute.

Dear Moromisato,

I thank you for a long list of my future reading. You "have over 10 years of experience on" money and finance. I have myself over 40 years of experience in economics (I am not boasting. It's a joke.) and yet have many field I am not well versed.

I have no much interest in the history of the financial system. As you are dissatisfied with almost all writers except you and MacLeod, I am dissatisfied with almost all books and papers except a few. I want to find a few more and I hope MacLeod will join my short list of my favorites.

In almost of all posts you wrote, there were misunderstandings on my research and its intentions. I have no time to correct all of them and it will not be useful for both of us. The same must be true for your side. Our long discussion revealed how it is difficult to understand with each other when we have different long histories as our backgrounds.

Your style of research and efforts to make your policies implemented may be successful by chance (but probably with an extremely small probability). I feel you are marching alone without seeking any help from others. That's OK. It is one of American ways of life. My intention in making discussion is different. I wanted to find out from our discussion new knowledge and hints for my (and possibly your) future research.

I am writing these posts not only for you but also for more than 20 followers of this question page. I intentionally neglected some of your misunderstandings and tried to explain our followers how theory can and cannot contribute to our final objective of economics. The long citation of my previous post in another question box (on VoC) is to show that my theory and HO theory have different policy implications (three paragraphs after "Let me explain the last point." line) and you have skipped it just as I had expected. I know you are not interested in the VoC approach. The reason I cited that long post is not to make you interested in it. A new theory sometimes reveals the old theory's wrong policy implications. As you are not interested at all in this role or function of theory you don't understand me at all.

As a result of our long discussion, we came to know that your and my research programs are very different and it will be difficult to combine them so as to make them complementary. Endeavor to find truth requires long time and trial and error. I do not hope very much it will become possible in near future. You have your freedom to continue your research plan and I do my own.

You firmly believe that money system (or its reform) will solve everything. I don't believe there is such a panacea. You are dreaming to be an economic alchemist. There were many such trials and pretensions including development theory.

I was reading today Lindaeur and Pritchett (2002):

Lindaeur and Pritchett (2002) What's the Big Idea? The Third Generation of Policies for Economic Growth, Economía 3(1): 1-39.

This is a history on how different sets of economic policies could not solve the question for economic growth. I want to be humble on these facts. Economics as science develops, I believe, with humble spirit and not by pretension as an almighty oracle teller.

Dear Shiozawa:

Thank you very much for your candor: You see, it was not that painful, now, was it?

Now I have a better idea of what you think, and perhaps, clarify some of my positions. Though, much that I would’ve love to, I am not going to answer many of your points, except for the few that follow.

-You said, “I feel you are marching alone without seeking any help from others. That's OK. It is one of American ways of life.” And you are right, but it is not by choice: I have sent some of my books to each one of the four economic departments in and near Denver; I have talked to the chairmen in two of them, while the one in a third one would not answer my phone calls, nor my emails; I have sent copies of each one of my six books to the AEA, and at least in two occasions, I have submitted abstracts of talks I have offered to present at their meetings, which were rejected without explanations; I have sent a one-page descriptions of my basic ideas to every single senior economist in the U.S.—close to two thousand--and of the only two replies I got, one was from a Professor at Stanford University, who ended his note with ‘F*** You!’. So I am sorry you believe that it is “one of American ways of life.” it is certainly not mine.

-You said “Endeavor to find truth requires long time and trial and error.” I am sorry to hear that; and I really don’t envy your infinite patience. You seem to take economic discussions as if they were about philosophical issues to enlighten the spirit or a quest for an elusive and indefinable truth. I started studying economics, when I was about to retire from my first career, to help in solving the pressing problems of the world today: millions of people are suffering—including close relatives of mine--and hundreds of thousands infant children are dying even as we chat; and all because economists—you and I among them—do not dare to propose, nor to support plausible solutions until they are 110% sure that they are the right ones. And they will never be, because they are also convinced that it “requires long time and trial and error.”

-And, finally, you seem to imply that I am not humble enough. You are quite mistaken: I consider myself to be the most humble individual that ever lived! Besides, humbleness is overrated, as Golda Meir said, 'Don't be so humble - you are not that great.'

Dear Flemming Bjerke,

thank you for your kind offer. I want to continue our discussion on demand theory in the question page  Why has the concept of effective demand disappeared in the mainstream economics? (link below).

I think demand is the least developed field of economic theories. Many of economists are blinded by the utility maximization formula. We should find out a coherent demand theory which is both useful for (or at least not in contradiction to) marketing practice and for economic theory in general (and hopefully for a theory of effective demand).

I must also thank you for your patient discussion with Moromisato. It is a shame that he has no technique to induce other scholars in a discussion. It is understandable that he could not find even a few number of economists who are interested to discuss with him.

Most scholars are arrogant and have no ears to listen to others' opinion. This is often necessary characteristics when one is really near to destroy an old authentic theory. But, in order to get somebody interested in a new theory, it is not sufficient that one tells a truth. One should show where the new theory differs from old one and give a strong argument that the new theory is better than the old one. Moromisato believes too much in his doctrine and has no patience  to examine the old wrong theories and discuss how they are wrong.

If he works in this way, he will be enforced to stay in the state of intellectual isolation hereafter. I hope that the experience of our discussion in this page will teach him a lesson to get a technique to induce people in a discussion.   

https://www.researchgate.net/post/Why_has_the_concept_of_effective_demand_disappeared_in_the_mainstream_economics

Dear Bjerke:

Thanks for your kind words.

And yes, I believe I have learnt a great deal from our discussions; thanks for engaging in that as well.

I wish you well in your present and future endeavors.

Dear Shizawa:

Thanks also for your direct and honest criticism—I know well how difficult it must have been for you; and for putting up with my style of discussion for this long.

I have truly enjoyed this exchange of ideas—it gave me the chance to exercise my ‘little grey cells’ (as the fictional Monsieur Poirot would say). And it saddens me that you had the opposite experience—for that, I apologize.

I also wish you well in your present and future endeavors.

-I’ve just realized that I have misspelled Shiozawa’s name: my apologies, once again.

-I meant to mention this before: I believe that you would really benefit by reading,

“The Art of Thinking Clearly” Paperback – May 6, 2014, by Rolf Dobelli (Author).

It contains 99 different biases, and erroneous way of thinking, to which we—humans—are exposed.

Many of them are well known, and a few do not even belong; but they are all described in a straightforward and even entertaining manner-the author was constrained by page length. Throughout our lengthy discussion, I was aware that we, all three, have been guilty of many of those biases. The book will certainly not cure us from them—many of them are ‘hard-wired’ into our neural system—but in making us aware of their existence, it may help us devise our own way to combat them.

I had just finished reading it—was a recent x-mas gift from my daughter—and I believe I did learn quite a few things from that exercise (in spite of my advanced age)—for example the ‘cherry-picking’ argument I used with Bjerke.

What a provocative question! Pertinent even when economics is "not in crisis".

The crisis in economics, like the crisis in much of civilization, still persists:

1. Because history repeats itself and economists really need to read history, the economic history of nations and the history of economic thought. And not just to rely on reports from the field in the form of business news, market performance and the like. Black swans and tail risks seemed to have lulled some into a state of denial, that history no longer matter (in fact there is no memory of it sometimes):

"Those who cannot remember the past are condemned to repeat it.’" George Santayana

Rationality is crippled when memory is faulty or non-existent.

2. Because even though economic thought has come a long way, since being forged in the furnace of turmoil and historical turning points (e.g. industrial revolution, Great Depression), economists continue to revel in the use of sophisticated tools and in the proliferation of fads. Which is a partial move in the right direction. At the same time this needs to be tempered by an equal zeal in returning to our philosophical seed bed (i.e.the philosophy of economics).  This is not the case now. Heterodoxy in economics is frowned upon (e.g. the typical need for a "median forecast of economists"). Beware, efforts to promote a heterodoxy will be met by pragmatic quips such as this: 

"Give me a one-handed economist! All my economics say, ''On the one hand? on the other.'' Harry S. Truman.

Heterodoxy is not confusion, it is a chance to move in the direction of wisdom rather than tyranny.

Thank you for visiting this question page and posting  an answer.

As you are interested in philosophy of science, please visit other questions of mine. Economics must be an interesting object for philosophy of Sciences.

Why are researchers working on international trade not interested in theory questions?

https://www.researchgate.net/post/Why_are_researchers_working_on_international_trade_not_interested_in_theory_questions?_tpcectx=profile_questions

What's wrong with economics and what's right with it?

https://www.researchgate.net/post/Whats_wrong_with_economics_and_whats_right_with_it

What is happening in economics? Are we all adapted to the new normal without any radical change in theory?

https://www.researchgate.net/post/What_is_happening_in_economics_Are_we_all_adapted_to_the_new_normal_without_any_radical_change_in_theory

Why has the concept of effective demand disappeared in the mainstream economics?https://www.researchgate.net/post/Why_has_the_concept_of_effective_demand_disappeared_in_the_mainstream_economics

Return to Keynes, is it sufficient? (2)

https://www.researchgate.net/post/Return_to_Keynes_is_it_sufficient_2?_tpcectx=profile_questions

is there also crisis in Abeconomics?

why does one not learn from previous experiences with consumption taxes?

and had the fiscal expansion arrow not, as a result, become a fiscal contraction arrow?

Dear Bernard,

it is still difficult to say anything definitive about Abenomics, but this must be true. It did not worked as many proponents of Abenomics imagined at the time it started. 

Abe launched three arrows:

(1) Bold monetary policy

(2)  Flexible fiscal policy

(3)  Growth strategy to encourage private investment

In monetary policy (1), it was quite bold. Prime minister nominated Mr. Kuroda as the top of Bank of Japan and the latter did boldly what he can (Quantity Easing at a different dimension). In spite of his,  the price stagnates and the 2 percent inflation objective is far from achievement. In growth strategy (3),  a set of rudimentary deregulation policies and others were launched but we do not see any remarkable effects. Fiscal policy (2) worked as it was planned. A huge money was invested in the restoration of Tokoku region, including tremendous operation for decontamination. As a result, labor power in construction became stringent and wage rate of lowest level was raised.

Firms are accumulating a huge profit and retained earnings. Oversea tourists have increased. Unemployment rate decreased a bit, but real wage level of middle class has decreased. Stock market went up (almost doubled) at the starting point but now its volatility is extremely big. 

These situations are far from what the proponents of Abenomics imagined two and half years ago. What was most effective was the fall in the exchange rate of the Yen. This was among the three arrows. At least it was not announced as such. Yen went down from 80 Yen to 120 Yen per US dollar.  If we count GDP per capita, Japanese peoples income went down to 2/3.

The policy to work on expectation failed definitely (although there are still many reflationists who argue that we should and can).

To the economics, the last point is most important, because it is the key of New Consensus Macro. Abenomics has provided a good (counter) experiment with regard to the relevance of  economics of expectation.   

Yoshinori,

While the uncertainties continue in the developed world, Prof Steven Radelet 2015 pulled on World Bank empirical data to demonstrate that the developing world has been experience a great economic surge over the last two decades (1995-2915).

https://www.georgetown.edu/radelet-2015-development-book

https://www.researchgate.net/publication/299747565_Towards_a_talent-driven_outward-oriented_globally-competitive_SME_framework_Discussion_Paper

https://www.researchgate.net/publication/305687139_Priority_policy_recommendations_for_transforming_individual_productivity_and_SME_competitiveness_in_Jamaica

https://www.georgetown.edu/radelet-2015-development-book

Technical Report Towards a talent-driven outward-oriented globally-competitiv...

Technical Report Priority policy recommendations for transforming individual ...

Dear Silburn Clarke,

thank  for your post. You post may revitalize this old, but I believe important question.