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Knowledge Co-Creation - Profiles of researchers

Taking a hard look at actual economics
Linking the past and present with economic history

Masazumi Wakatabe
Professor of the Faculty of Political Science and Economics, Waseda University

Lessons learnt from 3 economic crises

I received the 31st Ishibashi Tanzan Prize in 2010 for "Economic Crisis and Policy Management: why it happens, what we learn" published in 2009. An economic journalist who was also a politician, Tanzan Ishibashi is one of the men I respect the most. The prize named after him is "presented to essays or books on politics and economy, international relations, society and culture etc., published that year and deemed to contribute the most to the continuation and development of Tanzan Ishibashi's ideology of liberalism, democracy and world peace."

I have consistently majored in "economic history" since my student days in the School of Economics and in the last 5-6 years, I have not only researched past economic history, but have gained an interest in researching from the viewpoint of what lessons have been learnt from the past to the present. "Economic Crisis and Policy Management" links the past to the present, and is a book written in a new approach from what we have seen before, so I am thrilled to receive this award.

Ishibashi Tanzan Award winning "Economic Crisis and Policy Management: why it happens, what we learn" (August 2009, Nippon Hyouronsha)

"Economic Crisis and Policy Management" picks up four economic crises from the past to present--(1)the Great Depression of the 1930s, (2)the Great Inflation of the 1970s, (3)Japan's economic stagnation since 1990, and (4)the financing and economic crisis of the 2000s, and starts by putting together stories from economists, politicians and businessmen involved in the crises from three eras in the past. In the case of the fourth crisis which is still continuing, comparisons of the current crisis and crises of the past are made while examining lessons that can be learnt from the past.

Why did I narrow my theme down to economic crises? Because Japan has recently been suffering a deflationary economic downturn. Economic crises themselves have occurred numerous times throughout history, and have proven difficult to prevent. But the type of economic policies put in place to confront an economic crisis, how quickly the crisis is resolved, and economic stability leading to favorable conditions as possible, is vital.

31st Ishibashi Tanzan Prize Ceremony held on October 1, 2010. Photograph courtesy of © Ishibashi Tanzan Memorial Foundation

In that sense, it is important to look back at what measures were taken in the past eras and use them as suggestions for today. As an example, aggregate demand was extremely low in the 1930s Great Depression as it is in today's crisis, a common factor in the most important characteristic. Of course, when going into finer detail, the current crisis stemmed from a credit crunch, a different route to that of the Great Depression, and the mechanisms of credit transactions greatly differ today from back then. While thoroughly and precisely sorting out points in common and points that aren't, learning from the past and thinking of appropriate policies is probably the most basic fundamental.

When looking at the present state of Japan, since the Lehman Shock, even if compared to European and American countries whose economies have recovered, although we may be returning to former levels, conditions are not very good. Deflationary tendencies continue, and credit and financial policies to counter these give an undeniable appearance of irrelevance. Another problem is why Japan's economic growth rate has kept so low since the 1990s. Developed countries have achieved a nominal growth rate of around four percent. In spite of this, Japan's economy has remained at a virtual standstill. Why is this so?

The flagging economy and economic policy failures

Looking back, Japan's economic policies in the 1990s alone, have been an accumulation of failures. At the time of the Plaza Accord 25 years ago, the Japanese government, with a demand from the US government, set a strong yen policy. I believe this was the beginning of the failures. Economic policy targets should, in the first place, lie in unemployment and inflation rates, and exchange rates should be left to adjust themselves naturally. But Japan set exchange rates as a direct economic target. This is straying away from the basics of economics.

Since the Plaza Accord, although a deep down turn due to the strong yen was taking place, monetary relaxation policies were put in place. That result has been said to be linked to the bubble economy. This led to credit squeezing as a bubble countermeasure, but the tightening was too harsh, triggering deflation in the mid 1990s. To counter this, further credit squeezing and financial policies were set, in 1997 the consumption tax rate was raised, and since 1998, any policy aimed at halting the credit crisis has resulted in a continuous string of failures. Topping it off was the Bank of Japan's raising of interest rates in August 2000. Why raise interest rates in a time of deflation - something unheard of in economic commonsense. This is where I thought that Japan's economic policies are fundamentally ridiculous.

"Showa Depression Research"(Edited by Kikuo Iwata, 2004, Toyo Keizai; Recipient of the 47th Nikkei Economic Book Prize)

As a researcher, I became totally focused on these real economic problems in the 2000s. Economists don't always conduct economic research because they have an interest in what is happening in the real world. Rather, the great majority are researching areas detached from reality. What economists think about actual economic issues and how they should be solved - this type of issue awareness is, surprisingly not foremost in the minds of most economists. I used to be one of those economists. Through many coincidences, I managed to gain the experience of writing "Showa Depression Research" with excellent economic scholars and private economists with a rich sense of reality, and through exchanges and discussions, I became to clearly think about "what is economics?"

Thinking about and facing reality as an economist was a huge turning point for me. I used to think the words of Adam Smith and Keynes were dictums from a distant past, but now I think otherwise, and have begun to think what meaning those words carry when placed in the reality of today's society. Like a doctor when treating illnesses, past clinical experiments should be thoroughly analyzed, and the parts that can be used should be used. In research trying to get involved in reality, one needs to be considerably prepared and resolute. How does one carry issue awareness in the real world and efficiently use economics to think about correct interpretations and solutions. This tests the attitude confronting my own research.

In times like now, when economic crisis suddenly grips the whole world, differences in policies appear from country to country, and different results can be seen. The value of economic policies becomes clear right in front of us. The economic policies Japan is trying to implement now will be a litmus test for economic recovery.

Journalist and public literacy is essential

Through research, it doesn't necessarily mean I can propose policies to be applied to real economy. Even if I propose a highly practical plan, whether it can be put into action politically or not is another question. Conversely, putting aside the possibility of being used in a political sense, some think economists' strengths should lay in writing prescriptions for appropriate economic policies.

From an academic viewpoint of combined economic and political research, Japan is still weak. At this university's School of Political Science and Economics, both sets of students have been placed in the same faculty, giving it strength in an academic sense, but, even so, it is still quite difficult to establish a field which can be clearly called "political science and economics". For example, America's George Mason University is regarded a leader in the field which should be called "political studies of economic policy". In the more than half century taken to establish this field, there is a well-stocked line up of researchers covering a wide range of interests. What sets it apart from other universities is the large number of enthusiastic researchers in inspiring economic activities, positively dispatching economics into society. Take the academic Russell Roberts, for instance, who is active as a novelist, writing novels with an economic theme. I was at George Mason University in 2004-2005 as a researcher. Just by experiencing that unique academic research atmosphere provided me with huge stimulus.

I have an interest in the role the media also has to play in economic policy. I am in charge of a lecture titled "An Introduction to Economics for Journalists" in the journalist course at the Graduate School of Political Science. In this class I teach basic concepts that journalists need to know, and aim to provide a deep understanding of what specialist knowledge can be found in economics. Today, it is considered indispensable that every journalist has some economic knowledge, but generally speaking, journalists don't have the opportunity to learn specialized economics. They tend to learn through on-the-job experiences. But that can be a very dangerous thing.

Coming back to the current strong yen problem, there are clearly many problems in Japanese newspaper commentaries. What is written doesn't have any factual grounding from the beginning and the debates are extremely dangerous. About Japan's economic stagnation, I believe a major reason the economy isn't going in the direction it should be is that the media isn't playing its role in steering it in the right direction. At the very least, it is the responsibility of the media to promptly report on areas where we mustn't make mistakes in terms of economic policy.

It is also important to raise the general public's interest in the economy. I also strongly think that it is essential to teach basic economic logic to primary school and junior high school students. When talking of economic literacy, we tend to relate it to the study of investment and interest rates. Investment education is, of course, important, but not only that, I strongly feel that we need to teach the basic role of money in an economic society as the minimal standard of public literacy.

Masazumi Wakatabe
Professor of the Faculty of Political Science and Economics, Waseda University

After graduating from the Economics Department, School of Political Science and Economics, Waseda University, he completed his studies after gaining his Doctorate from Graduate School of Economics, Waseda University and Department of Economics, University of Toronto. Entered his current position in 2005 after time as an assistant, full-time lecturer and Assistant Professor of Waseda University. Research Fellow of Cambridge University Clare Hall College, 2003-2004. Research Fellow at the James M. Buchanan Center for Political Economy at George Mason University, 2004-2005. Won the 31st Ishibashi Tanzan Prize in 2010 for "Economic Crisis and Policy Management: why it happens, what we learn" and the 47th Nikkei Economic Book Prize for his coauthored "Showa Depression Research". Other publications include "Economists Battle: Archaeology of Economics," and "Reformatory Economics: Economic Policy Conditions for Bringing about Recovery."

WASEDAResearch Promotion Division, Waseda University  http://www.waseda.jp/rps/