morning-glory Time to dare to part with reform for reform's sake and construct a new paradigm

Lately, arguments on market economy have sprung up in different segments of our society.

Drifts of those arguments can roughly be summarized in the following points.

Economic policy putting stress on non-profit mechanisms

  1. The economic theory upon which market economy is based is neo-classical economics, which makes the utilization of market mechanisms and improvement of productivity a principal. However, policies based on this theory have not been working and have allowed globalization to advance without any stoppers or firewalls. It is time to develop policies based on economic theories which stress selective actions in accordance with corporate ethics and non-profit mechanisms, such as one argued by Amartya K. Sen.

  2. The argument of "small government instead of big government" is merely a confrontation of relative concepts. As long as government attempts to let the market system work by public interference, there is no such thing as a market system under "a small government". Also, it seems to be illusional to think that "once a small government is established by national interference, the market system will plateau and start working well". Instead, this might end up creating an even larger government.

What companies should protect

  1. As a premise for market mechanisms to function, disclosure of information is needed. However, it seems that introduction of market mechanisms is hastened while the premise has not been fully achieved. Also, although governmental interference in the market should be conducted in a way that would work positively on mid- to long- term market mechanisms, the reality does not seem so.

  2. Who are the stakeholders that companies have to protect by pursuing a market economy? (Are they shareholders, customers and clients, local community or environment?) What corporate governance should be implemented to protect the stakeholders? What are the subjects of "governance involving governments to maintain and manage certain systems in the international community" (global governance) and what kind of rules are required?

Standardization by market economy

  1. The so-called "global standard" is adversary to diversity in terms of protection of indigenous traditional cultures. The world seems to be more and more standardized and losing cultural diversity, and as a consequence, fairness among regions might not be secured. Under a market economy, the "option value", the potential gain in the future if preserved, which does not seem to exist at present or before development (non-use value created when future options are secured), will not be secured, either. Furthermore, if following a so-called "global standard" is considered as a given, the world standard originating from Japan could not be created.

  2. The Asian financial crisis occurred after the market system and local community system were separated as a result of excessive conformity by each country with conditionality, i.e. structural adjustment program, under the IMF's (International Monetary Fund's) indiscriminatory guidance which has no consideration for the local characteristics of each region. This incident raised the question of what international organization should be. If an international organization which is supposed to set de jure international standard does not suit local reality, it might be necessary to entrust the matter to another international organization that knows the local situation well. Moreover, the fact that the fields of responsibility undertaken by international organizations and by private organizations are not clearly distinct might also contribute to moral hazard in developed countries.

Let us dare to re-evaluate Japanese-style management

  1. The concept of self-responsibility must be pursued in parallel with the improvement of the safety net. Since the concept of self-responsibility alone has been excessively adhered to and remedies including injecting public funds are always implemented as ex post facto measures, minimization of the sum of money to be allocated for the ailing segment of the economy by taking ex ante measures or reinforcing surveillance and management systems is needed.

  2. The "advantage of buffer effects (buffer mechanism)" of the economic management style of line organizations in Japan and Germany probably requires re-evaluation as a buffering measure for economic reform. After such extensive market failure, it is important to acknowledge the absence of buffer systems which would loosen the "impact by speed economy" as one of the causes, as well as to make the improvement of such buffer systems part of the political agenda, rather than focusing solely on the insufficiency of economic reforms, such as deregulation.

Progressive oligopoly without any rivaling powers

  1. In spite of the fact that the true age of deregulation has come, there are loopholes left in systems regarding suspension of wrongdoings, such as price cartels, and compensation for the loss. Also, the Fair Trade Commission does not seem to function as a watchdog of the market. So far, deregulation and the financial Big Bang have not achieved their original purposes of enhancing competitiveness, including producing a great number of entrepreneurs. Instead, they have resulted in nothing but the oligopoly of the market for corporate defense without any rivaling powers in the market.

  2. 10. Restructuring without fixing the permanent redundancy would be superficial and perfunctory, and as a result, the redundancy threatens the survival of the company even after restructuring. A market economy without a system to nurture human resources would consequently widen the Schere-like income gap between those who have marketable skills and those who do not have them.

These are the rough summaries of recent arguments questioning the market economy.

Groping for the third way

In the political world, it is not a generalized attitude to overtly raise questions against reform for reform's sake.

However, such a movement is looming.

In Germany, the SPD (Sozialdemokratische Partei Deutschlands), with Gerhard Schroder as its candidate for Premier won the general election in September 1998. The key word symbolizing the conflicting point in that election was "Reformstau", translated as reform blockage or reform gridlock.

During the election campaign, the SPD was attacked as a creator of "Reformstau". However, it was the very SPD which won the race. The SPD had been occupying a majority in the Bundesrat (the Upper House of Parliament) and abolishing tax reform related bills. It is worth analyzing further to find out what kind of complicated sentiments the German people had toward reform against the background of the SPD's unexpected obtainment of trust from the people.

As to the corporate climate, both Germany and Japan have a line organization style of management.

What about Japan?

In the past six years, most Japanese political parties participating in the government have been committed to implementing reforms one after another.

Therefore, when it comes to reform for reform's sake, Japanese political parties are facing the "prisoner's dilemma" and cannot raise questions against reform -more so than their foreign counterparts. Especially in the political world, one would be extremely cautious not to be labeled an anti- or non-reformist.

While political parties are busy redrawing the territorial borderlines dividing them and crying out "liberalism" or "democracy" or "reform", Japan's economy/society is forced to survive in a "free market", which Japan had "no other option" but to adopt as it became the de facto system through globalization, and under a "democratically recognized framework which accepts free-loaders".

It is high time to shift our viewpoint from the "indefatigable advance toward reform" of the past six years to "beyond reform", changing our passage to "the third way" while structuring a new paradigm.

Light and shade of globalism

Market economy and globalism have both bright sides and dark sides.

Everyone can sense the disadvantage of globalism, and yet cannot deny the de facto globally accepted standard.

The problem is the lack of a paradigm which might include the light and shade of market economy and globalism.

The globalization section set up under the Economic Council of the Economic Planning Agency in February this year had eight meetings and recently submitted a report. The report is well balanced overall, however, with all due respect, it seems to end abruptly and the conclusion sounds incomplete to me and probably many other people. I wonder why this happened.

A detailed record of every meeting is available on the Internet. As you will see when you access them, there was a time in the process of discussion when members and the secretariat had to adjust their opinions over which side of globalization - light or shade-they should emphasize.

Their final decision was to write a chapter titled "Risk factors at the beginning of the 21st century and their countermeasures", which initially was to be the third, at last chapter, because at the sixth meeting, some opinioned that the chapter did "not connect well with the chapters before and after and, especially regarding data communications, the light part tends to be shadowed".

This is only one example to show the urgent necessity of forming a new paradigm which can include both light and shade of gloabalization.

Then, what kind of paradigm might that be?

Goods and information/finance -different market traits

I myself reserve some questions on market economy. These are regarding the "gap" between the traits of goods and information/finance in the decision process of markets. It is the difference of characteristics between the so-called conventional decreasing returns industry and increasing returns industry. It is similar to the questions raised regarding the effectiveness of public investment in the 1960s.

Back then, it was explained that the reason why the investment criteria of public investment were different from investment in goods in general was due to the following four traits:

First, the economy of scale is remarkable and a new phase of economic development can be achieved with a big push (taking measures to improve large-scale social capital at one time). Secondly, it is difficult to shift external economies and diseconomies to internal ones in a market. Thirdly, there is a problem of indivisibility held by the scale of investment, that is, if the whole is not complete the effect of the investment will not appear. And the fourth reason was that, as there is an incubation period till the appearance of the effect of the investment, there is a problem of differences in time preferences for realizing the effect of the investment.

By this analogy, when looking at the present situation, it will be clear that a comparison of conventional goods and information/finance has similar problems.

That is, first, the effect of the economy of scale in terms of information/finance can be realized in a moment, while conventional goods have a time lag that cannot be shortened between the time of the investment decision and the time of receipt of the benefit of the economy of scale, despite the fact that speed of distribution and settlement has more or less been improved. Even if we try to achieve the economy of scale via conventional means of enhancing the production of goods, due to the indivisibility of the scale of investment, large-scale expansion would narrow the period and number of time preferences of investment, and consequently, the economy of scale would not be achieved.

Secondly, finance unceasingly reiterates balance and imbalance based on settlements of dealings of infinitesimal units in a day's trading hours. Hence, finance can be described as always being in quasi equilibrium. On the other hand, conventional goods, except for futures, would achieve equilibrium once a day at most when one lot is dealt.

This means that in terms of both period and number of time preferences as well as the indivisibility of dealing a lot, there is a limitation on conventional goods because of their traits.

Thirdly, although information/finance themselves have nothing to do with external economies and diseconomies, conventional goods always face the threat of "internalizing external diseconomies and taking social responsibility".

Just by looking at the issues mentioned above, unless the market is redesigned so all kinds of goods can receive benefits from globalization, various disadvantages will occur, such as a permanent handicap for developing countries where producers' goods are not specialized.

Now, what kind of plan can be created for restructuring the market?

Three directions, three nuclei

The following is the outline of my idea (please refer to the chart):


First of all, I believe that there are three directions in which we should move for completion of the economic system.

Those are 1) an economy/society by globalization, 2) an economy/society which can realize sustainable development under global environmentalism and 3) a diverse and flexible economy/society brought about through the niche segregations.

Moving toward these three, the following three nuclei will achieve each function.

The main bodies supporting the economy are 1) market, 2) government and 3) citizen/NPO (not-for-profit organization), respectively working for 1') marketization, 2') promotion of public interests and 3') improvement of symbiotic society.

Moreover, each subject has intermediary bodies.

Namely, 1) between "market and government", there are "markets promoting the public interests and marketed government sectors", 2) between "market and citizen/NPO", there are "green, ecology, symbiosis-oriented markets and marketed symbiosis" and 3) between "government and citizen/NPO", there are "improvement in government sectors, such as public works, in terms of symbiotic society and participation in policy-making decisions by citizens and NPOs".

Also, there are sub-systems under the government segment which function in accordance with the three directions and interacts with the three nuclei. The purposes of these sub-systems are acceleration and supplementation of the economic system, control, risk management, creating international rules for global governance and securing a safety net.

Securing diversification through niche segregations

Under this plan, several things will become clear.

First, globalization and sustainable development among the three directions in which we should move to both impose either de facto or de jure standardization of the economic system. However, niche segregations allow the existence of something minor that could be called "niche standard" which applies to local situations.

In this way, the buds of cultures and industries inherent to certain areas or regions can be left intact. At the same time, there is a possibility that the "niche standard" created and delivered from small areas or regions to the world can unexpectedly turn into a "global niche standard".

This is also has the potential to directly connect the "local market" with the "global market".

This is how the direction toward the niche segregations can compensate the negative aspects of globalization that would destroy minor social economic elements (developing countries, minorities, gender gap, indigenous languages and cultures, diversity, etc.).

Also, the two directions of sustainable development and niche segregations can be consolidated for the greater purposes of the economic system. For instance, local cities of the world can be linked under "Local Agenda 21" to create a market for environmental business.

Establishment of the niche standard can be a huge thrust as well for regionalization of Asian countries and in other regions, federation of Fu (Osaka and Kyoto prefectures) and Ken (other prefectures except for Hokkaido) in Japan and federations of local spheres.

The niche standard has the potential to develop into a confronting power against the global standard as it was seen in the case of the European Monetary Union.

Small but powerful government is necessary

Secondly, reinforcing the functions of the sub-systems under the government sector will provide a new third concept added to the cliche of opposing concepts; "either large government or small government".

Pressures for globalization do not appear just as an international pressure toward standardization.

Resolutions adopted at signatory meetings of international treaties can also be silent international restrictions.

Along with the enlargement of realms that are objects of global governance, such as environment, population issue, water resources and nuclear power, new rules will be necessary. For that, greater active engagement of the government sector will be required.

Thus, to move the economic system in the three directions including globalization, substantial expansion of the government sector will be sought -setting aside quantitative expansion for qualitative expansion.

As the force pushing forward marketization grows stronger, the ability of the government sector to control it must also be enhanced.

At the same time, in the process of control, a "mechanism for controlling a market using the market itself to prevent it from crashing" will have to be built in by taking measures, such as the creation of international rules.

As to the control of the sustainable development, built-in systems, such as environmental tax incentives or surcharges, are always necessary in terms of internalization of external diseconomies.

What is necessary now is not a theory of small government described by simple numerous targets but the existence of a "small but powerful government".

Self-fulfilling motives at the market

Thirdly, the conventional trigger for market participation is profit making by acquiring money. However, contemporarily emerging trend is to fulfill individual altruistic desire, which is not based on monetary motives, by making use of the market economy.

The market should be able to respond to such desires, as well.

So-called "community businesses" put priority on fulfillment of individual social purposes and self-realization through market activities rather than the elements of profit.

As more and more "community businesses" participate in the market, the government sector can entrust to them its own purpose of pursuing public interests, and as a result small government can be realized.

Furthermore, it is possible that the "community business" will germinate into a real business to participate in the conventional business sector.

Fourthly, marketization of the public sector must aim to contribute not only to improvement of efficiency but also to the sustainable development.

For that reason, it has to be directed in accordance with the purpose of true public interests through control by a government sector having international viewpoints.

The marketization of education, as well, needs to be re-though, such as "realizing education in line with the OECD's (Organization for Economic Cooperation and Development's) concept of environmentally friendly schools by marketization".

The age in which heads of local governments, who are from the private sector and have market sense, striving to improve the efficiency of the public sector and winning applause from the public is now gone.

Expecting active roles of citizen/NPO

The above are my own ideas regarding the necessity of structuring a new paradigm beyond reform.

In those days when the planned economy was still working, there were times for arguing issues involving market and state utilizing concepts of dual economy and mixed economy. In a sense, this age can be described as the age of triple economy and complex economy.

In the process of the bursting of the bubble economy, both market and government failed. Here, I would like to anticipate the emergence of an altruistic and self-fulfilling citizen/NPO as a new sector.

Although inefficiency of the government sector in the past is admittable, qualitative enforcement of the government sector is a must for strengthening the functions of the economic system.

I believe that our future lies with "resolute bureaucrats, risk-taking entrepreneurs and healthy citizens/NPOs" organically supporting the economic system within each others' capabilities and moving toward the realization of a global, diverse and resilient economy/society with sustainable developing power.

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