Posted 1:30 PM by Robert

... and Keynes Wittily Replied, "In The Long run, We'll All Be Heavily Discounted!"

In the 1970’s and 1980’s one heard much about the deepest secret of the then-enviable Japanese economic success: long term planning. American companies were dismissed as obsessed with what was sometimes described as their even puerile attention to short term profitability. Americans just would never understand that the secret was market share – not profitability. Infinitely wise septuagenarian and octogenarian corporate and government bureaucrats meditated from Tokyo that profitability was for the long term. First, the wise business had to plan for the long term and acquire market share. The septuagenarians and octogenarians probably never actually addressed the pathetic and awestruck American journalists before them as “grasshopper,” but it was implied.


American business? Doomed. Doomed. All doomed. The most that could be hoped for was that the Japanese industries could be pressured into locating some assembly plants among the bean fields.

It was all cultural, you see. “Asian values.” “Long term planning” seemed to follow naturally, perhaps from traditional Asian veneration of the aged. America could never compete.

And to make matters worse, there was that phrase: “long term planning.” Where had we heard that before? Yes! It was the Stalinists – the Communists – in the 1930’s! Western private capitalism is incapable of long term planning, they said! The Commies had been right, after all. They just hadn’t gotten down every nuance – but now the Japanese had figured that out, too. They figured it out in the same infernal way they managed to get all the knobs to stay on indefinitely in their cars – not like Ford or GM, where the knobs fell off right away if the car was made on a Monday or a Friday.

Despite all that, as Emperor Hirohito once said, recent developments have not necessarily been to Japan’s advantage. What happened? There is obviously no one thing that has happened, but I would like to focus on one very powerful and strangely overlooked parameter: interest rates. In particular, I would like to focus on the fact that interest rates paid by the export sector of the post-war Japanese economy were generally very low compared to what a market economy would have set. That is, the rates of interest paid by such export sector companies were rigged by the Japanese government to be low. In fact, for substantial periods – once the effects of other financing devices, such as stock warrants, are included - such interest rates were slightly negative.

So what?

Well, applying basic economic principles to irreducible “culturally determined” phenomena can sometimes produce a giddiness like what one feels seeing aqua regia applied to gold. Works of Gary Becker, which allow for such things as accounting for tastes and examination of the economic substructure of family values, can feel uncomfortably like swimming in a pool of universal solvent.

Interest rates determine what a Dollar (or Yen) today is worth compared to a Dollar (or Yen) tomorrow. Does a company pay annual interest of 5%? Then the company would just as well take $.95 now or $1.00 a year from now. So as the interest rate payable by a company gets very low, the company will be satisfied with taking more and more of its profits in the future – not today. And when real interest rates payable become negative, then the company will want to take all of its profit in the future. Management can become very wise and philosophical because it is no longer necessary to make money.

Of course, it can't last. Real interest rates in Japan were never generally as low as the export sector (and other favored sectors, such as construction) paid. Those favored sector rates were being subsidized. By whom? By long suffering Japanese families, who had very few places to put their savings, all of which paid preposterously low returns. But as the favored sectors grew inexorably, it all eventually had to end. And it is likely that a good many of those infinitely wise septuagenarian and octogenarian bureaucrats knew that it had to end.

Long term planning is much beloved by septuagenarian and octogenarian bureaucrats, because the turnover in that demographic is, shall we say, rather brisk. When the consequences of those long-ago investment decisions mature, the people who made them will no longer be around to be held to account.

And how about those Commies? Well, it’s probably not a coincidence that interest rates in the 1930’s were very low all over the world. And just the way a rising stock market makes every investor look a genius, very low interest rates make “long term planners” shine – at least for a while.

But the reason market interest rates would have been higher than the ones the government chose is that interest rates correspond to risk. If rates are too low, then there eventually will be a banking crisis, because the banks aren't charging enough for their loans for the risks involved. Further, when the cost of capital is inefficiently low, investments in capital-intensive projects such as factories seem to make a lot more sense than they should, so a lot more capital spending tends to go on than is economically efficient - which diverts capital from more efficient but less favored uses. And, sure enough, Japan went through a huge capital spending boom and now has a huge banking crisis, and fewer business philosophers. And it has been there for more than ten long years.

And the Commies? Well, what's to be said?

I believe it was Benjamin Franklin who observed that a real interest rate of twelve percent would draw money from the moon. Ben was right. But an interest rate of .0012% has done something even more amazing. It has drawn philosophy from Japanese and Stalinist bureaucrats. You get what you pay for.