Macroeconomics and the Japanese Economy

Macroeconomics and the Japanese Economy

Macroeconomics and the Japanese Economy

Macroeconomics and the Japanese Economy


This work proposes a new approach to macroeconomics which draws upon the experience of the Japanese economy. The approach is similar to the Old Keynesian view: it rejects the Walrasian approach, and singles out real demand as the fundamental determinant of output in the economy as a whole. However, by maintaining that real demand constraints are important not only in the short-run, but in the long-run as well, it goes beyond what is normally understood as the Keynesian approach. It is also very different from the New Keynesian Economics; in particular, it regards the rigidity of nominal wages/prices as of secondary importance. The work is extensively illustrated by almost 200 figures and tables of data.


Does science retrogress? Looking at the state of macroeconomics in the past two decades, I cannot help but feel that it sometimes does. Some economists believe confidently in the march of progress; macroeconomics has become more 'dynamic', 'endogenous', built on proper 'optimization' or whatever. I do not share this view.

The research of the past two decades (culminating in the real business cycle theory) has simply made macroeconomics akin to Walrasian microeconomics. Dr Pangloss in Voltaire's Candide or Optimism (a caricature of Leibniz, the progenitor of the neoclassical theory), once believed to be dead in the realm of macroeconomics has returned to life. in the midst of calamity, the great earthquake in Lisbon, he consoles people with the assurance that 'things cannot be otherwise for it is impossible for things not to be where they are, because everything is for the best'. For all misfortunes, he teaches Candide that 'the pre-established harmony is the most beautiful thing in the world'. the term 'optimum', the key concept for neoclassical theory, incidentally originates in Leibniz's philosophy. Macroeconomics today evidently has many admirers of Dr Pangloss. But like a sailor in Candide, I am very sceptical of his doctrine.

Instead of following Dr Pangloss, I have searched for a 'new' approach to macroeconomics, which draws upon the experience of the Japanese economy. This book is the outcome. It is Keynesian in spirit, but departs from the 'New Keynesian' economics.

The neoclassical theory grants well-known market failure; and it is natural for economists who wish to avoid the restrictive neoclassical conclusions to turn to those market failures. But for the purpose of macroeconomics, they seem of secondary importance. Discussing the possibility of market failures is one thing, and building macroeconomics is another. To me, imperfect competition seems much more relevant. a step forward, and we reach real demand constraint. the role of money and price flexibility in the economy is also an issue which has intrigued economists for a long time. For the reasons explained in Chapters 1 and 9, on this issue, too, this book departs from the 'New Keynesian' economics.

The ousted prince in mainstream macroeconomics is real demand constraint. Many economists seem to believe that taking as exogenous a part of real aggregate demand is ad hoc, and is intrinsically wrong. On the other hand, they believe that taking factor endowments as exogenous, as in the neoclassical theory, is legitimate, presumably because it appears to be an undeniable fact that production factors are physically given in each period. However, if it is indeed a fact that production factors are physically given . . .

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