Will a shrinking economy eliminate the economic divide? -The Historical Relationship between Japanese Liquidationism and Catastrophes-

Will a shrinking economy eliminate the economic divide? -The Historical Relationship between Japanese Liquidationism and Catastrophes-


HIdetomi Tanaka (Professor, Jobu University)


A film based on French economist Thomas Piketty's "Capital in the 21st Century" has been released. When Piketty came to Japan, he appeared on TV, etc., and was featured in various media outlets, and there were policy debates in the Diet and elsewhere. To mark the release of the film Capital in the 21st Century, let us place this "economic disparity" controversy brought about by Piketty in the history of Japanese economics.

 The economic disparity debate in Japan is famous for the last 20 years or so, but in fact there was a unique debate before World War II as well. At the time, Thomas Piketty was not in France, he was in Italy. Vilfredo Pareto (1848-1923). He is a man who has made great contributions in fields as diverse as economics, sociology and philosophy. In economics, for example, he is famous for his contributions in consumer choice theory. There has long been an absence in economics of a measure to assess whether, for example, some people's circumstances have improved in an economic sense or not. Before Pareto, economic growth was judged by how much the class interests of capitalists and workers had increased or decreased. Pareto neutralized such class interests, so to speak, and considered the situation in which one person's situation could no longer be improved without worsening the situation of another person as "optimal”. The concept of "Pareto optimality" still reigns at the core of economics today.

 He also worked in sociology with elite theories and statistical methods, especially the so-called "Pareto's Law," which is still well known today. This law is like a rule of thumb, and Pareto has demonstrated that 80% of the wealth of society is concentrated in the 20% of the members of society, and the remaining 20% is earned by the 80% of the members of society. There was a debate over Pareto's "law" in pre-war Japan (1920s) about "growth and disparity".

 Based on this "Pareto's Law", Pareto himself argued that the only way to increase the income of the lower income groups in society in absolute terms is to increase the national income. This idea of Pareto seems to be very close to the idea of "Pareto optimality" mentioned earlier.In classical or Marxian economics before Pareto, for example, it was proven that as society developed, the interests of one class were in sharp conflict with the interests of other classes. Pareto, however, believed that while the wealth of society was unevenly distributed, those who had the least to offer would be able to benefit fully as the economy grew. In other words, the idea is that while the wealth situation of 20% of the people in society will not worsen, the situation of the remaining 80% of the people will improve as the economy grows. This was not only an idea, but Pareto was trying to demonstrate it in reality.

 There were people in pre-war Japan who argued against this idea of Pareto's growth advantage. Fukuda Tokuzo (1874-1930). Fukuda was one of Japan's leading economists at the time. Fukuda's achievements are many, but he is known today as a pioneer in introducing the idea of a welfare society and the national minimum (right to life) to Japan.

 According to Fukuda, in the first place, Pareto's Law does not accurately capture the situation of the lower income brackets of society. The situation of those at the lower end of the income spectrum, the majority of society, is not necessarily improved by growth, as Pareto argued. Rather, he pointed out, the economy as a whole could become poorer in the process of growing. Keep in mind, as I'll get to the point later, that Fukuda thought that even when the economy is experiencing negative growth, the situation for low-income people can get better.

 If the situation of those in the lower income brackets of the majority of society could not be improved by economic growth (which Fukuda was convinced of), he thought it would be better to focus on the disparity itself and redistribute income from high-income earners to low-income earners. Tax the high-income earners and give their share of the tax to the low-income earners. Specifically, Fukuda thought that various social security systems (pension, medical care, unemployment insurance, etc.) would be enhanced.

This conflict of opinion between Pareto and Fukuda can be summarized in a diagram as growth (Pareto) versus disparity (Fukuda). To illustrate the diagram further, Pareto argues that even if the size of the pie does not change, if the size of the pie increases, the amount of food eaten by people in the lower income bracket will increase accordingly. On the other hand, Fukuda thought that if he didn't correct the way the pie was cut, he might lose money even if the whole thing increased.

 Fukuda and Pareto did not directly argue. It was not until after the Great Kanto Earthquake of 1923 that Fukuda passionately criticized Pareto's claims, and by this time Pareto was no longer in the world.Fukuda was a foreign language prodigy, and he was at the level of being able to write a paper in French. If Pareto had survived and social networking services had been developed as they are now, it might have been possible for the two to argue directly.

 By the way, this criticism of Pareto had convinced Fukuda that the elimination of the disparity could in fact be achieved even with a shrinking economy. Fukuda's criticism of Pareto came at a time when the economy and society were being "shrunk" by the disaster of the Great Kanto Earthquake. Fukuda attempted to demonstrate statistically the possibility that "economic disparities narrow when the economy is shrinking" during the Great Kanto Earthquake. In fact, Fukuda mobilized his students to go to temporary housing in Ueno and other areas of Tokyo to survey the living conditions of the victims.

 Fukuda focused on the fact that the earthquake had caused an immediate decline in property inheritance, which had encouraged the uneven distribution of wealth. There were people who lived richly without having to work because they had inherited property, while those who had no or little inheritance had to work hard. What's more, those with little inheritance have little access to satisfying education and employment opportunities, so they have no choice but to settle for a low income even if they work hard. The earthquake, however, brought an opportunity to reduce this "economic disparity" in society by reducing the inheritance to ashes. Fukuda's plan was that the government should not miss out on this opportunity and use it as an opportunity to improve the conditions of the poor here, rather than to restore the economy to its former state.

 Fukuda applied the idea that the situation of the low-income people could actually be improved by taking advantage of the shrinking economy - this was called "liquidationism" - to the situation of the deflationary recession of the time. This liquidationist notion persists in today's Japanese society.There are those who are in favor of policies that are friendly to the vulnerable members of society while at the same time leaving or pushing for a deflationary recession that is shrinking the entire economy. The debate between the "liquidationists" and those on the Pareto-like growth path is still going on.