Published by EH.Net (July 2013)
Mark Metzler, Capital as Will and Imagination: Schumpeter?s Guide to the Postwar Japanese Miracle. Ithaca, NY: Cornell University Press, 2013. xvii + 295 pp. $50 (hardcover), ISBN: 978-0-8014-5179-9.

Reviewed for EH.Net by Carl Mosk, Department of Economics, University of Victoria.

As I worked my way through this volume, the feeling of consuming a sandwich kept assaulting my senses. Why? Because Capital as Will and Imagination consists of two disparate parts, two slices of bread ? one involving Schumpeter, Austria and Germany; the other Japanese policy making under the American Occupation authorities and during the Miracle Growth era, 1955-1973 ? held together by a jelly/peanut butter mixture centering on the eponymous school of Japanese Schumpeterians.

In fashioning the Schumpeterian slice Metzler hones in on Schumpeter?s notion of capitalism as credit creation. Credit creation unleashes innovation and inflation. In doing so it spawns forced savings. At the outset of the process financial investment channeled through banks authorizes firms to carry out physical capital accumulation. To Metzler the fact that banks operate on a fractional reserve principle (loaning out most of the funds entrusted to them, holding only a small portion back to meet the demands of savers withdrawing their deposits) seems magical. Indeed he reaches back to Goethe?s Faust quoting from the capital-creating scene: ?The stuff lies there; the problem is to win it/That calls for art, and who can now begin it?? Incipient capital accumulation springs forth to win it, propelled like a rabbit out of a hat by the flourishing wand of the financial magician.

Once funded, industrial innovators ? business entrepreneurs ? are freed up to secure the machines, buildings, and land required for expanding material production. Investment surges. Prices get pushed up, notably consumer prices. Consumption goods play second fiddle to producer?s capital goods as the structure of output swings toward capital accumulation. The resulting inflation forces the working class to ?pay? for the investment. In effect the rank and file worker experiences precious little ? if any ? gain in effective purchasing power despite the rise in real per capita income caused by the investment boom. Savings rises to equal investment by dint of the forced savings arising from the surge in the consumer price index.

The process is dynamic, not static. Distribution away from workers toward capitalist innovators is crucial. Credit-creating banks are at the center of the drama, exploiting fractional reserve requirements to unleash the pent-up energies of the business entrepreneurs. In this interpretation of Schumpeter the entrepreneurs consist of two groups: bankers (including government when government provides banking services) and business people.

Embodied in the other side of the Metzler sandwich are the intricacies of policy making in Japan from 1945 through to 1973. Viewing the process as an historian, Metzler focuses his attention on the inflation of 1946-50 and the imposition of the Dodge Line aimed at bringing it under control. Viewing the process from a Schumpeterian economist?s point of view Metzler emphasizes the importance of the Bank of Japan?s ?over-loan? policy (effectively allowing big city banks and main banks to run negative reserves while pressuring smaller banks to toe the line on the official reserve ratio, pouring their reserves into the central bank) and on the Industrial Bank of Japan. Basically Metzler argues that government policy was the driving force behind credit creation during most of the three decade period from 1945 to 1975. Although his emphasis is on banking not industrial policy, Metzler does support the view set forth in Chalmers Johnson?s MITI and the Japanese Miracle (Stanford University Press, 1982) that Japan became the world?s first Development State. Unlike Johnson, who popularized the idea of the Ministry of International Trade and Industry (MITI) as the most important Development State bureaucracy, Metzler shifts the reader?s attention to the credit-creation role played by the Bank of Japan and the Industrial Bank of Japan.

The question naturally arises: why is Schumpeter so important in this tale? This is where the jelly and peanut butter comes in. Metzler?s thesis is that Schumpeterian economists became key policy makers during the American Occupation and its aftermath:? figures like ?kita Sabur?, Shinohara Miyohei, and Tsuru Shigeto. Steeped in Schumpeterian reasoning they promoted the credit creation doctrine as a way to kick-start high speed growth, as a mechanism for promoting chemicals, heavy industry and machinery.

To be frank I found Metzler?s sandwich a bit difficult to digest. Perhaps this is because I am an economist trained to appreciate the insights in Schumpeter?s theory from a completely different perspective. To this reader the Schumpeterian tale is a story primarily revolving around technologies applied by business people. Latching on to new ways of harnessing these technologies is central to total factor productivity growth. The embrace of the just-in-time inventory principle in automobiles, the competition to secure the Deming Prize by innovating in quality control, the focus on exploiting basic oxygen blast coupled with continuous rollout of billet and slab castings in the iron and steel industry, and the obsession with driving Japan IBM out of the domestic computer market all spring to mind. Investment led growth blossomed in Miracle Growth Japan because the rate of return on fresh capital formation was extremely high, particularly in the industries where the gap between prewar Japanese practice and Western practice loomed large. Once Japan closed the technological gap with the West around 1975 the rate of return on new capital construction plummeted, bringing investment levels down with it. Banks, once the indirect beneficiaries of the total factor productivity growth pioneered by industrial enterprises, were forced to turn to other areas, notably real estate and non-performing loans, a factor that helped precipitate the bubble economy of the 1980s.

Again, speaking frankly, I cannot credit the idea that investment exceeds savings. Economists appreciate the fact that savings consists of three components: private savings, government savings and rest of the world savings. During the American Occupation and Miracle Growth rest of the world savings was virtually zero. But government emerged as a positive saver.

Beyond my concerns with a story that stresses banking and the financial system in Japan, I have serious doubts about the degree to which Schumpeterian reasoning had much if anything to do with the way policy making was carried out in Miracle Growth Japan. The Ministry of Finance (MOF) and the Ministry of International Trade and Industry (MITI) were the heavy hitters, the critical government players, not the Economic Planning Agency (EPA) where Schumpeterian oriented economists were ensconced. The decision makers in MOF and MITI tended to be bureaucrats trained in law and government, not economics. They were hardly intellectuals interested in the fine points of economic doctrine. Whether they were conversant with Marx, with Keynes, or with Schumpeter really did not carry much weight. What mattered was trying to work closely, ideally in tandem, with the business community in forming cartels, targeting industries, trying to pick winners and losers, extracting foreign technology from American and European firms at bargain basement prices. When cooperation failed they fought with business; in some prominent cases they even lost the battle, for example when they took on Sumitomo Metals that resisted joining a MITI-engineered cartel.

In sum, I learned from ingesting all three of the components of the Metzler sandwich. That said I was not convinced that what I was digesting was credible in terms of economics, or to be more precise in terms of the economics I teach and employ in my own research.

Carl Mosk is Professor of Economics at the University of Victoria. His most recent books are Traps Embraced or Escaped: Elites in the Economic Development of Modern Japan and China (World Scientific, 2011) and Nationalism and Economic Development in Modern Eurasia (Routledge, 2013).

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