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LONG WAVES OF ECONOMIC GROWTH Past and future Yoshihiro Kogane

Postulating that the world economy is at the start of a new long wave, with the emergence of a new technological paradigm, this article considers the long-term future of economies in industrialized and developing countries. Analysis is based on observation of the long-term past to illuminate the mechanism of economic growth. Technological innovation and interrelated social and institutional change are seen as endogenous to the process of economic growth. Drawing on this analysis, strategies are put forward for sustaining growth in the future.

Economic growth occurs when a real increase in a country’s GNP or GDP is indicated in its national account statistics. The rate of economic growth, ie, its quantitative expression, is usually indicated by the annual percentage increase of GNP or GDP. Thus there are not only short-term rates of economic growth, such as yearly and quarterly increases, but also long-term rates which are obtained as annual average increases over IO,20 or even 50 years. As my purpose in this article is to analyse the mechanism of long-term economic growth so as to consider the long-term future of the economies of industrialized and developing countries, I consider average rates of growth over periods of more than 10 years. Although industrialized societies are characterized by a higher rate of longterm economic growth than that of pre-industrial societies, explanations of the cause of this increased growth rate are not necessarily convincing. The usual explanation is to break down growth rate to the increase in input of productive factors, for example labour and capital, and technological progress, as shown by the following equation: v = ak + /3/ + I where

v denotes

rate of economic

growth,

k increase

in capital,

I increase

in

Yoshihiro Kogane is at the Nikko Research Centre Ltd, l-l Marunouchi 3chome, Chiyoda-ku, Tokyo, Japan. The author is grateful to Andrea Boltho who provided estimated long-term growth rates for the USA, Western Europe and Japan.

001&3287/88/050532-17$03.00

0 1988 Butterworth

& Co(Pu blishers)

Ltd

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labour, r technological progress, and a and fl structural coefficients, respectively. In articulating theories to explain economic growth, the central focus of economic theoreticians-and policy makers-has been the accumulation of capital-the value of k, or net investment ratio. However, at least in the long run, technological progress seems to be essentially important and, moreover, interrelated with the development of economic variables such as investment and labour supply. 1 Empirical economists who have tried to explain the past economic growth of industrial countries by this model have always been embarrassed in obtaining such high numerical values of rthat economic growth seems to be determined mainly by technological progress taking place outside the economic system in question. 2 In short, models which ignore the (potential) endogeneity of technological progress in the growth process have not been useful tools for analysing the long-term economic development of either developed or developing countries. If technological progress is interrelated with the development of economic variables, these in turn could be interrelated with changes in non-economic or social factors, such as values and institutions. In order to discern how these interact, we need to observe developments in the long-term past, because the different realms of a society-technology, economy, culture and polity-each have their own distinct rhythms of change.3 Such historical analyses, treating various non-economic factors as endogenous, are indispensable for projecting the future of contemporary society from the end of a period of high economic growth to the beginning of the 21st century. As the current information-communication revolution brings about profound value changes in industrial society, with widespread radical deregulation and so on, no one realm of contemporary society can remain either independent of or dependent on the rest. In the same way, interdependences between industrialized countries with different values and institutions as well as between developed and developing countries will be unavoidable-techno-economic, cultural and institutional changes in one developed country will affect other countries, and changes thus brought about in these countries will in time affect the original country.

Bird’+eye

view of growth of industrialized

countries

In order to carry out an analysis of the kind described above we need to analyse samples or experimental data. Following the end of the oil crises, statistical data on long-term economic growth by period and by country have become available for advanced industrialized countries (AlCs), based more or less on common concepts and hence comparable intertemporally and internationally.4 Table 1 shows the rates of economic growth of the USA, Western Europe and Japan for the periods before, during (including post-war recovery), and after the Second World War, and after the oil crisis. Let us assume that these four periods represent four phases of a long wave which more or less coincides with the Kondratiev cycle ranging from the 1920s to the 1970s. As the USA almost always led economic growth in other AICs, fluctuations in growth rates of Western Europe and Japan during this cycle could be explained in relation to those of the USA. We may therefore characterize the four phases of the US long wave as follows:

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TABLE 1. RATES OF ECONOMIC GROWTH OF INDUSTRIAL COUNTRIES (AVERAGE ANNUAL PERCENTAGE CHANGES)

Country USA Western Europe Japan

1922-1937 %

1937-1953 010

1953-1973 vo

1973-1995 o/o

2.1 2.4 3.4

4.5(l) l.@) Almost zero

3.4 4.8 9.3

2.3 1.8 3.8

Sources: The European Economy: Growth and Crisis, Andrea Boltho (editor) (see reference 4). The figures therein have been extended to the USA and Japan and updated to 1985 by A. Boltho. 1. Long-term economic growth 7860-7970, US Department of Commerce, 1973; 2. Unpublished estimates by A. Boltho using data from A. Madison, Phases of Capitalist Development (Oxford, Oxford University Press, 1982) and other works.

0

0 0 0

:low growth First phase (before the war) Second phase (during the war) :high growth Third phase (after the war) :medium growth Fourth phase (after the oil crisis):low growth

Fluctuations in the growth rates of Western Europe and Japan can be explained as follows. Before the war they were hindered by the low US growth rate; during the war they were crushed by the high US growth rate due to the zero-sum game of economic growth, whose major players in the West were the USA, West Germany and Japan; after the war they achieved a high growth rate due to US assistance; after the oil crisis their period of high growth ended, as US growth potential was used up (but new potential accumulated during the post-war growth period had begun to generate a new long wave during the oil crisis period).

Technological

innovations

as the generator

of long waves

If the locomotive of economic growth in the industrialized world from the end of the First World War to the second oil crisis was the US economy, what was its main engine? Post-war economic theoreticians have long been ignoring even the existence of long waves or Kondratiev cycles. Now, however, long wave theories seem to be revitalized, and the most predominant theories attribute the emergence of long waves to the impact of technological innovations. They refer to fluctuations in economic growth rates as the determinant of technological Mensch asserted that radical innovations are innovations. For example, prepared during periods of deep depression,5 whereas Freeman proved that they have been promoted during periods of prosperity.6 Such theories may explain why and how economic trends foster or suppress technological innovations but do not refer to the inverse movement-that is, why did technological innovations bring forth depressions, or, if this was not the case, why did depressions take place regardless of technological innovations? In this connection, I agree with Shinohara, who considers that the ups and downs of long waves cannot be explained simply in relation to technological innovations or developments on the supply side, but that at the same time they should also be examined from the demand side.7 In order to analyse developments on the demand side, one has to examine the cultural, institutional and monetary aspects of the society and economy

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concerned. It should be noted, however, that technological innovations could also affect the demand side, by introducing new products or radically reducing the prices and improving the quality of traditional products. Here is the merit of distinguishing product innovation or the creation of new products, from process innovation or the creation of new production processes. To distinguish consumer goods or end-products from producer goods or intermediate products is also useful. Inventions of new end-products or fundamental renewal of traditional end-products will direct the long-term development of demand, which is indispensable for sustainable process innovation and intermediate product innovation. As well as the user’s point of view, we should also examine the point of view of the producer, in order to distinguish the different impacts which various types of technological innovation may exert on long-term economic growth. In this sense, Freeman’s four categories of technological innovation are useful for clarifying their relationship with economic and social developments. His four categories are: incremental innovation; radical innovation; change in the technology system; and change in the techno-economic paradigm, or technological revolution.8 Incremental innovations are often the outcome of inventions and improvements suggested by engineers and others directly engaged in the production process, and are particularly important in the follow-through perod after a radical breakthrough innovation. Radical innovations are discontinuous events and in recent times have usually been the result of deliberate research and development activity in enterprises and in university and government laboratories. They are important as a springboard for the growth of new markets or for major improvements in the cost and quality of existing products. Changes in technology system are far-reaching changes in technology, affecting several branches of the economy, as well as ultimately giving rise to entirely new sectors. All ‘generic’ technologies give rise to one or more new technology systems, examples being synthetic materials and petrochemicals introduced in the 193Os, 1940s and 195Os, or the cluster of electrically-driven household consumer durables innovations. Technological revolutions are the ‘creative gales of destruction’ that are at the heart of Schumpeter’s long wave theory. They have such pervasive effects on the economy as a whole that they change the style of production and management throughout the system. A new technoeconomic paradigm, once established as a dominant influence on engineers, designers and managers, becomes a ‘technological regime’ for several decades. Thus, we may assume that a long wave, or long-term economic growth ranging over 50 to 60 years, is generated by the emergence of a new technological paradigm.9 Specifically, the long wave from the 1920s to the 1970s was initiated by the birth of the mass production/mass consumption regime and terminated when this regime was no longer legitimate. This revolution was triggered by the appearance of a US factory with a conveyor system or assembly lines. Analysis of the long wave in the recent past From industrial

revolution

to mass production/mass

consumption

revolution

In order for analysis of the long wave from the 1920s to the 1970s in the AlCs to have some universality, or to be applicable to other periods and regions, it has to be comparable with analysis of other long waves. Unfortunately there is no other

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comparable data available, but we can review the history of industrialized society after the industrial revolution, focusing on the emergence of a new technological paradigm or the alteration of the technological regime. With respect to the nature of product innovation, the century after the industrial revolution may be defined as the age of intermediate product revolution. Most new products invented during this period belong to the category of intermediate products, such as the thermal engine, and railway and machine tools, major exceptions being the sewing machine and the bicycle. When such products were used for extracting, processing and transporting traditional end-products such as foods, clothes, minerals, firearms, etc, the resultant radical cost reduction and quality improvement brought a tremendous increase in demand. In the following century new intermediate products were successively invented such as electricity, synthetic materials and computers. The fundamental difference between this century and the preceding one, however, is that many new end-products were invented and supported the increase of demand during this period-examples are consumer durables such as cars and electrical appliances, as well as new services such as cinema and radio or TV broadcasting. Thus, we can define this period as the age of end-product revolution. The rapid increase of both demand and supply during these 200 years was made possible by the appearance of four new technological paradigms with an interval of about 50 years, which more or less coincides with the emergence of Kondratiev cycles or long waves (see Table 2).l” These

technological

regimes;

but once

they

revolutions

were

had started

to take

prepared place

within they

TABLE 2. LONG WAVES AND TECHNOLOGICAL

the

crossed

old over

technological the

border

of

REVOLUTIONS

Era

Actor(s)

Technological

177Os-1620s

UK

Factories (mines, farms) with machines driven by energy extracted from mineral fuels in place of ‘natural’ energy of man, animal, wind, water, and so on

Industrial revolution US independence French Revolution Wealth of Nations (1776)

162Os-1670s

Europe, USA

Railway network as transportation infrastructure integrating production units, markets and residences of workers

American Civil War Formation of German empire Meiji Restoration Das Kapital(l867)

167Os-1920s

Europe, USA, Japan

Electric power network as energy infrastructure

Germany and the USA catch up with the UK First World War Russian revolution

192os-1970s

Europe, USA, Japan, NlCs

Automated (with conveyor belts) factories in place of factories which are simply containers of machines

Second World War Japan catches up with Europe Independence of excolonies Oil crises

197Os-2020s ?

Europe, USA, Japan, NICs, some LDCs

Information-communication network as information infrastructure integrating producers and users of information and services ?

Communications satellites Financial revolution

revolutions

Historical landmarks

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the original sector and impacted on other sectors with different disciplines. They also spread to those regional peripheries of the industrial community which were willing to accept the same technological paradigm. Thus, the long waves discussed in this article could be seen as the process of diffusing technological revolutions from their origin to the sectoral and/or regional peripheries, accompanied by innovatory sophistication of key technologies, eg from mechanically controlled conveyor belt to electronically controlled factory automation system. To date, this process has usually been accompanied by substantial fluctuations in the rate of economic growth from one phase to another, as shown in Table 1. During the course of diffusion, a technological revolution may stimulate changes in values and institutions or, particularly in earlier phases, cause serious frictions with old values and institutions. Thus, the ups and downs of long waves can be seen to show the interactions between the substructure, or technoor politico-cultural structure, of economic structure, and superstructure, industrial society.11 The Model T Ford factory upset the traditional concept of a factory-one in which productive equipment was immobile so that workers had to move around with heavy materials and half-finished goods. Furthermore, it implied a certain cultural revolution in undertaking to make ordinary people purchase new endproducts which had formerly been assigned to the privileged class as luxury goods. This idea could occur only to the Americans who were free from traditional class values and attitudes, but nevertheless it was difficult even for them to make their institutions adapt to the discontinuous rise in productivity brought about by the dissemination of the technological revolution.

Destruction

and reconstruction

of the demand-supply

relationship

The dissemination of the Model T Ford (automated factory) paradigm at first gave rise to a serious demand-shortage depression in the USA which spread to other parts of the industrialized world. After the Second World War this disequilibrium was solved universally, half spontaneously and half deliberately, as institutions adapted to mass production technology and the mass consumption culture. Development paths varied from country to country. USA. Although the average rate of growth during the first phase was low, huge growth potential must have resulted from the technocultural revolution. In fact, growth during this phase was not steady but characterized by a sharp fluctuation as shown in Figure 1.12 In the beginning of this phase both supply and demand increased rapidly. Entrepreneurs tried to expand their productive capacity by fully exploiting the benefits of the new technological paradigm, whereas workers-consumers enjoyed an increase in labour income and a higher consumption level, enabling 1922-29

4.7%

1929-33

-8.6%

2.1% --I

1933-37

9.5%

0%

Ik

Figure 1. Average annual rate of growth in the USA, 1922-l

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Long waves of economic

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them to realize the ‘American way of life’. There was a boom which was shortlived, since increase in production capacity was so rapid that it surpassed increase in demand for end-products. Demand for new end-products should have been stimulated in order to make the growth of supply sustainable, but the purchasing power of the general public was not sufficient for that. The monetary assets accumulated during past economic growth were too few to meet the supply capacity to be constructed. Moreover, the underdevelopment of consumer credit and social security systems constrained the spending of people in economically hazardous situations. In such an environment, when business failure and unemployment began to prevail, the decline in labour income reduced production and income and hence caused another decline in demand. Monetary and fiscal policies left this vicious circle to deteriorate for four years of continuing depression. In the international sphere, imports from other industrialized countries were suspected of being responsible for the depression, and radical protectionist measures were taken in order to cope with them. Combined with the decline of US internal demand, this amplified and extended the US depression to the rest of the world. The fact that the average rate of growth was zero over the period of deep depression and sharp recovery (1929-1937) suggests that technocultural growth potential at that time was eliminated economically by the shortage of demand, even if demand management had been more proficient. This demand shortage was finally dissolved by the Second World War, which brought about an explosion of demand and raised the US growth rate to 8.6% during the period 1937-1944.1s After the war, institutions were adjusted to conform to the new technological regime. Western Europe. Although West European countries had to import the mass production/mass consumption revolution, it was not difficult technologically. For these countries there were two problems-economic and cultural. Firstly, there was the balance of payments deficit to the USA. They had to import both new end-products and intermediate products composing new production systems, whilst their own competitiveness in traditional products was declining due to the lag in introducing the new technological paradigm. Secondly, there was a shortage of internal demand which was more deep-seated than in the USA because of sociocultural or psychological resistances to the paradigm of mass consumption of new end-products. European producers tried, almost instinctively, to utilize the productivity gains accompanying the introduction of new production systems for increasing their production of traditional end-products, which made their supply seriously excessive. Their attempt to resolve this problem by increasing exports brought about a repercussion of protectionism which diminished world trade. Needless to say, the war increased the domestic demand of individual European countries, but eventually it became a zero-sum game between Germany and the USA and ended in the physical destruction of Europe’s production system. It was after the war and the reconstruction that the American way of life was widely accepted by Europeans as an agreeable model. This time the demand for new end-products was potentially so large that a rapid increase in production investment was not expected to cause a serious demand shortage. Furthermore, the policies of the Welfare State were directed towards full employment and the perfection of a social security system, preventing any

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shortage sumers.

of demand

due

to the

economic

precariousness

539

of workers-con-

&an. Japan’s advantage over the USA and Europe was that demand for traditional end-products was strong because of the low standard of living of ordinary Japanese people. Furthermore, it was easy to increase the productivity of traditional products using the old production system simply by improving and increasing technological and capital inputs. Japan’s disadvantage was that it could produce few new end-products and, moreover, had to import many new intermediate products such as production equipment and semi-finished goods in order to establish the new production system. In order to import one has to export. As Japan had neither natural resources nor new products to export, it tried to increase exports of traditional manufactured goods even if this meant repressing domestic demand. This attitude was criticized by other industrial countries as ‘social dumping’, but from the Japanese point of view there was no other option if Japan was to avoid being left behind. Of course this practice could not prevent world trade from diminishing. Moreover, it exacerbated world-wide protectionism by frightening US and European producers, who had becomevulnerable to Japan’s increased output of low-cost manufactured goods. Such circumstances facilitated the Japanese militarists’ attempt to encroach upon North-East China in order to secure markets and natural resources without depending on unreliable external factors. This brought about the worst outcome for Japan-economic sanctions against military invasion, ie the embargo on strategic materials such as oil and steel by the USA, the UK and The Netherlands, which chased Japan into the Second World War.14 The superhigh growth of post-war Japan was generated by the technological innovation of shifting from traditional to new products and production systems. This was realized by an extremely rapid accumulation of production capital, but such a high investment ratio would not have been economically feasible if it had not been accompanied by a rapid expansion of exports and strong internal demand. The former was possible in an environment of rapidly expanding world trade, and the latter was based on a nation-wide aspiration to catch up with the level of consumption of advanced countries.

Role of institutional

reforms

in high economic

growth

institutions as the basis of high economic growth. Changes in the institutional framework fostered the high economic growth of the post-war industrial world. Domestically, the form these changes took differed from country to country according to differences in culture and stage of economic development. Intrinsically, however, they had in common the fact that they provided ordinary people with sufficient purchasing power to absorb the rapid increase in productivity. For example, the Employment Act was enacted in the USA, the Welfare State was established in Western Europe, and the reforms of the Occupation authorities were welcomed in Japan, especially those related to the priority of increasing production and distribution of consumer end-products in contrast to the prewar priority given to military affairs. Internationally, the Bretton Woods system, launched in 1944, became the basis of a new international economic order. It not only facilitated the recovery

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of the European economy but also provided the institutional framework for high economic growth among Western industrialized countries as a whole. Schematically, this regime benefited Western Europe and Japan on the supply side, and the USA on the demand side. In Western Europe and Japan demand had been increasing faster than supply, so these countries had tended to suffer from a shortage of dollars with which to import intermediate products from the USA. Thus, the Bretton Woods system triggered a rapid growth of their economies by providing dollars at fixed exchange rates. Meanwhile, the USA was facing a (potential) shortage of demand after its high-growth period, ie wartime, and was looking for a stable and growing outlet for its enlarged production capacity. This system became the guarantee for US producers to expand their exports under favourable conditions. Taking such situations into consideration, we may attribute the success of the Bretton Woods system to the synergy which existed between the lender and the borrowers of dollars. Another important aspect of this system was its encouragement of free trade which, allegedly, removed the fear of protectionism and stimulated investment demand. It is undeniable that the liberalization of intra-European trade has reduced the risk of a breakdown of the European market and has favoured the development of a European economy. But global free trade such as imagined in the Bretton Woods system does not necessarily ensure an expansion of exports and production for all member countries. If the overall increase in production capacity were to surpass that of final demand, the free trade rule would favour strong competitors to the detriment of weak ones. This would neither save nor reduce the number of victims of a zero-sum game, which was not the case for immediate post-war world trade. In this sense, too, the significance of this system was a guarantee of free expansion for US exports which was not protested by the importers. Maturing of post-war economic growth and its institutional framework. In the beginning of the period of post-war economic growth in the USA, most of the ‘new’ products and production systems of the pre-war period had already become the norm or mediocre-many new products and production processes which appeared were basically dependent on knowledge accumulated before and during the war. There was another group of inventions made possible by post-war scientific progress-for example, computers, semiconductors, optical fibres, nuclear reactors, space rockets, and so on. But their users were generally limited to scientists in research institutes or to specialists in large organizations such as the armed forces and global enterprises. Without being utilized by ordinary workers-consumers, these products hardly interacted with macroeconomic and social development. Meanwhile, the increase in demand from ordinary Americans began to shift to human services which could not be satisfied by material end-products. Technological innovations in end-services were not remarkableperse, but nevertheless their production was improved considerably by an increase of and improvement in material resources. Thus, a large part of the increase in national income was absorbed by spending on services such as education, medical care, research, leisure, construction, and so on, either individually, or collectively through the intervention of the public sector. The remaining excess production capacity for material products was dealt with, as mentioned above, by increasing exports

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to Western Europe and Japan for a while. However, European and Japanese productivity and competitiveness increased faster than that of the USA, due to a rapid increase in total demand on the one hand, and a jump in techno-economic efficiency based on the technological revolution, on the other. The former differences between the USA, Western Europe and Japan therefore began to diminish rapidly, causing a sudden maturing of the post-war high economic growth period and its institutional framework. More specifically, the symptoms were as follows. First, the spread of new endproducts to ordinary people made economic growth in Western Europe and Japan increasingly dependent on exports, particularly to the USA. The Bretton Woods system facilitated this trend, but it could not last long since Europe and Japan’s surplus and the US balance of payments deficit were increasing rapidly. The rule of free trade under pegged exchange rates, and the convertibility of dollar to gold, were abandoned, ending the regime’s control over increases in international liquidity. Second, the technological foundation of the Welfare State came under threat as the paradigm of mass production spread to all the AICs. It was based on assigning fixed plants to replicate constantly vast numbers of standardized, homogeneous (particularly material) products, paying little attention to differences and changes in the needs of end-users. The producers therefore had to renew their heavy plants frequently as market requirements became increasingly diversified and changeable. Increased demand for investment and consumption resulted in a more wasteful input of energy, raw materials and manufactured goods and, combined with an increased demand for services, exacerbated inflation and pollution and gave less satisfaction to consumers. In short, the regime seems to have exhausted its technological and economic potential, both internationally and domestically, to absorb the shock of the oil crisis when it broke out in 1973.

lnformatization

today and tomorrow

Three aspects of the new long wave The post-war period of high economic growth fostered a number of so-called high technologies, among them computing, software, microelectronics and telecommunications, which have been integrated into a generic technology called ‘information technology’ (IT) .I5 They began to shape a new technological paradigm in the USA in the 197Os, and hence a new long wave, which may be termed ‘informatization’. Technological nature of the information infrastructure. It was initially anticipated that computerized control and communication systems would enable mass production technology to distinguish and respond to individual demands without incurring significant additional cost. To deal with a vast amount of information of many kinds, however, requires the help of a special infrastructure to mediate the flow of information between different agents. As the use of personal computers spread and they became linked up via satellites, a new hardware network began to take shape in the USA during the 1970s. It was able to deal simultaneously and interactively with various forms of

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information, such as voice, image and data, accumulating, processing, transmitting and distributing it. The emergence of this network is reminiscent of the emergence of the railway network 150 years ago, which did not remain simply a transportation facility, but changed lifestyles in industrialized society. Organizational changes as the social background of informatization. During the high growth period, particularly in its last stage, the AlCs underwent farreaching social and organizational changes on various levels. Without these changes the hardware network mentioned above would not have emerged, due to lack of motivation. On the global level, the development of world politics and global enterprises has urged the formation of an information infrastructure. Politically, the oil crisis stimulated multilateral discussion among the leaders of industrialized countries, such as seen in annual summit meetings. Economically, the continuous growth of multinational enterprises has increased and intensified in-house but worldwide circulation of information. On the local level, increased participation of women in advanced industrial societies has caused and is exacerbating the functional disability of traditional communities and families. This has generated new needs which could be difficult to satisfy without the aid of the new information infrastructure. Homebanking, home-shopping and the like may respond to a limited number of such needs. On the individual level, the number of professionals requiring the support of information services such as databanks and data processing has been increasing rapidly and will continue to do so. Such services also depend on the new information infrastructure. The above trends have not only Emergence of new network industries. stimulated technological innovations and physical investments related to informatization, but have also triggered the emergence of new network industries. The term ‘network industry’ denotes an industrial sector which is particularly concerned with the use of a specific physical or human network; according to traditional terminology, it would cover the service industries such as transportation, communication, commerce, public utilities, and banking.‘6 Among these sectors I note certain changes regarding those which have special links with the information network. First, the nature of big corporations engaged in the construction and maintenance of communication neworks has undergone radical change. Examples may be seen in the cases of ATT, NTT and British Telecom, which have recently been divided or privatized and have therefore become exposed to market competition, being expected to lead innovations in information-communication-related technologies. which connects different Second, the emergence of a new industry information networks should be noted. For example, VAN (value added network) services make it possible for groups with different computer languages to communicate with each other. Suppliers of TV programmes to cable TV networks in different communities may also belong to this sector. Third, the productivity of traditional network industries other than communication, particularly finance and distribution industries, has been (actually or potentially) radically increased by informatization. This is natural, as the efficiency of services mediating the flow of capital, material or labour is largely

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determined by the quality and quantity of information circulating within the network concerned. Among these services the increase of efficiency in the finance industry has been outstanding to date.

Problems

and solutions

The foregoing analysis of economic growth during the period from the 1920s to the 1970s leads me to conclude that a technological revolution is able to generate long-term economic growth but unable to make it sustainable. The reason for economic failure in the prewar period was twofold. Firstly, growth in demand for end-products always lagged behind growth in supply potential. Secondly, international economic friction arising because of the different stages of development of the major economic powers, together with misinterpretation of the problems, brought about grave mistakes which resulted first in the Great Depression and then in the Second World War. In this connection, there are remarkable similarities between the past and the present. Shortage of demand for end-products. The informatization mentioned above could revolutionize the efficiency of the mass production/mass consumption of industrial paradigm, if it were to survive. Its impact on the economies countries is comparable to that of the emergence of railway networks, particularly from the 1820s to the 1870s when factories, mines, farms, harbours and the residences of workers-consumers were integrated into a growing production network of Western industrial powers. It is no wonder, then, that the economic growth generated by today’s informatization suffers from a chronic disease of shortage of demand and unemployment, just as 150 years ago the same disease was prevalent in spite of the strong pressure of demand caused by poverty and warfare. As there is no consumer durables, in longer any shortage of material goods, including advanced industrial societies, an explosion of demand for material end-products such as that seen in post-war Europe and Japan is not likely to reappear in the AICs. Obviously the solution of war is not acceptable today, so another option should be sought in order to make current growth sustainable. lnformatization and international economic frictions. Problems arising out of differences in stages of development between Japan, Western Europe and the USA are not as severe as they were in the prewar period. Nevertheless, it is increasingly feared that economic friction between these powers could grow, making current growth unsustainable. A real danger seems to exist in the widening gap between the USA and Japan which stems from the heterogeneity of the informatization process among AICs. Among the main factors relevant to informatization, Japan’s advancement in hardware-related technologies is conspicuous. For example, except for the production of satellites, which is subject to spatial constraints, Japan’s productivity or production capacity of components for the new information infrastructure is increasing at a remarkable rate. The USA, on the other hand, shows a trend of deindustrialization which inevitably slows down productivity growth for these products. With regard to organizational changes, Japan’s response is slow. On the global level, it is still passive and remains a net importer of information; on the

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local level, communities and families are still heavily dependent on women’s devotion; on the personal level, most professionals are still confined within large organizations and dependent on their facilities. In contrast, US advancement in these areas is outstanding. Assuming that the degree to which network industries have developed has no influence, the above differences would inevitably make supply of IT-related hardware surpass demand in Japan, whereas demand would surpass supply in the USA. The trend towards a Japanese export surplus and a US import surplus could exert grave influences on economic growth worldwide, through policies implemented to cope with balance of payments imbalances. Lack of measures for reducing imbalances of the economic superpowers. If the international economic order is to sustain present economic growth over the coming decades, Japan’s export surplus and the USA’s import surplus will have to diminish substantially, if not disappear. Orthodox economists’ answer to this problem has been that the USA should reduce domestic demand, and Japan should increase it. But this ignores the importance of supply factors-that is, the competitiveness and structure of industry-as a determinant of long-term trends for exports and imports.17 In order to remove excess demand in the US economy, curtailment of the government deficit will be indispensable. But a drastic reduction of military expenditures, even putting aside the political problems involved, would discourage the advancement of high technology, thereby diminishing the USA’s remaining advantages over Japan. Moreover, if a cut in welfare-oriented expenditures or an increase in tax on ordinary people’s income and wealth were chosen and drastically implemented, a potential shortage of demand would immediately materialize, thus reproducing the catastrophe of 1929-1933. It seems probable that an increase in Japan’s domestic demand would have a substantial impact on its export surplus. However, Japan’s export surplus today is mostly generated in the trade of cars and IT-related hardware including videotape recorders and audio equipment, which is hardly affected by fiscal and monetary policy measures. Liberalization of trade and appreciation of the yen can be effective measures, but they normally reduce surplus by evicting comparatively weak industries, so they could reinforce Japan’s competitiveness in the longer run. Political coercion may suppress the export potential of Japan’s high-tech industries, but it could distort the development of the world economy, as seen, for example, in the shortage of semiconductors in 1987-1988, caused by the US-Japanese semiconductor agreement. With regard to the export by Japan of direct capital investment in IT-related industries in the USA, this would not be welcomed by the Americans because of the strategic importance of such industries.

Strategies for the future Assuming that a new long wave started in the AlCs at the end of the 197Os, it will enter the phase of demand shortage sooner or later, as the technological revolution is diffused. The present regime would not permit the vicious circle of demand shortage to advance to the acute stage of the Great Depression. But nevertheless, if a discontinuous rise in productivity were to take place spontaneously, a chronic disease of underemployment at least would be inevitable,

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unless special measures to revitalize demand were deliberated and implemented. Furthermore, it is improbable that the present international trade and monetary system could continue to function well under a persistent disequilibrium of the major industrial powers. The plunge of the stock markets in October 1987 does not seem irrelevant to current world-wide concern over the future of the long wave.

New products

or renewal

of old products

The Great Depression took place in prewar USA where strong potential demand existed for many kinds of new end-products-what was lacking was the money to purchase these products. The solution, therefore, was to create institutions for supplying and distributing cash income to the general public. In contemporary AICs, people have enough money, but there are not many attractive new end-products. One entirely new end-product for consumers could be the personal computer, but its real value lies in enabling access to global, national and local information networks. Moreover, information does not satisfy human needs directly, it simply increases the efficiency of input of resources such as energy and material. As it is improbable that technologies such as biotechnology and superconductors will become available as the means of manufacturing in the near or medium-term future, an end-product revolution comparable to that which occurred at the end of the 19th century will not take place until the second half of the 21st century. A feasible strategy to stimulate demand during the intervening decades would be to revitalize traditional end-products, making better use of nature and the human body and brain. The production system based on mass production technology extracted vast numbers of standardized homogeneous end-products from resources and made them increasingly scarce and expensive. Information infrastructures and network industries could mediate between producers and end-users so as to reduce such waste, thereby drastically improving the cost and quality of traditional end-products. The similarities noted between the development of the railway network and that of the information network can also be discerned between the birth of highly productive agriculture in the past and that of traditional end-products in the future. Candidates

for renewed

growth

of demand

The candidates for such a revival are not limited to the products of modern manufacturing. Demand for pesticide-free natural foods or handicraft goods responding to individual taste, for example, could increase drastically if adequate services for information, transportation, payment, and so on, became available. Particularly promising areas are ‘value services’ or ‘merit goods’ which respond to people’s aspirations in terms of health, knowledge, human relations, cultural heritage, physical environment, and so on. For most of human history, these services were either self-produced in families, communities, and so on, or granted by rulers. The Welfare State was expected, for the first time, to supply such services cheaply and abundantly. However, consequent increase in demand resulted in a radically increased tax burden and government deficit;

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despite the low quality of the services production costs were not reduced, due to the bureaucratic management of production systems. A regime based on the IT paradigm could cope with this problem better than the previous one. With respect to ‘public goods’ or collective consumption, such as administration, legislation, defence, and so on, which do not produce values directly, a high growth of demand may not be expected. From an international point of view, the existence of many less developed countries (LDCs) with a vast reservoir of unsatisfied demand for standardized homogeneous end-products seems to offer a great opportunity to producers in AICs. But simply increasing exports to LDCs cannot be a solution either to the LDCs’ supply shortage or to the AICs’ demand shortage, since it would only increase the former’s debts and the latter’s credits. Furthermore, it is almost certain that financial and technological assistance to improve productivity of the LDCs will be extremely inefficient, unless it is accompanied by home-grown technological innovations. LDCs have to produce goods which either fulfil their own demands, or which they can exchange on favourable terms of trade in order to obtain the products they need. The classical international division of labour between AlCs producing manufactured end-products and LDCs producing primary intermediate products will no longer hold if technological innovations are to continue in AlCs and not in LDCs. The latter will also need a change of technological paradigm in order to achieve a discontinuous increase in productivity. Otherwise, the physical and human capital input necessary for rapid economic growth will be too high, leaving LDCs unable to sustain their daily life, despite a large amount of aid from AICs. For LDCs a change of technological paradigm does not mean accepting that of the AICs, whether old or new. Instead they need ‘creative gales of destruction’ which are acceptable to their own politico-cultural structures. This is not an easy task, but if it were achieved, the new or renewed traditional products of LDCs would find a growing demand in the world market, accompanied by favourable terms of trade. Such an achievement may prove impossible, but nevertheless AlCs must provide LDCs with the necessary aid for subsistence and moderate economic growth, in order to mitigate the negative external effects of their technological revolution. They could also stimulate the efforts of LDCs towards their own, home-grown technological innovations by supplying them with the knowledge and information necessary to increase efficiency. This may be one of the value services which AlCs could offer the international community.

Adaptation

of institutional

framework

In order for a technological revolution to be diffused throughout the society concerned, a far-reaching change in the institutional framework is needed. Depressions represent periods of mismatch between the emerging technological paradigm and the institutional framework. Institutional adaptation is obviously important for realizing technological innovations.18 When supply potential is already exceeding effective demand, however, a more effective means may be to change institutions so as to urge potential demand to materialize. Examples of such changes in institutional framework are legislation on the Welfare State and adoption of Keynesian policies to stimulate domestic

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demand,

the

creation

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organizations

to supply

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international

liquidity to deficit countries, and so on. In contemporary AICs, deregulation may have a marked effect on the stimulation of demand. Although it does not affect purchasing power quantitatively, it increases the options available for potential beneficiaries to transform their aspirations into effective demand. As can be seen in the recent rapid growth of parcel mail services, the capacity for meeting demands by adjusting the means of supply is far greater in free markets than in state or monopolistic corporations. State monopoly is still necessary for some public goods, such as defence, police, administration and so on, but the development of information infrastructures and network industries has been rapidly changing the circumstances of ordinary value services. The development of information industries will also help to realize the potential demand for value services by making the general public better informed about the available options and their cost and utility? In order to achieve efficient supply and use of value services in the international community, the rules of the game should be modified here too, taking into consideration the development of a global information infrastructure. Existing institutions for international trade and financing should be modified to make them compatible with the new regime.

Notes and references 1. A number of economists have admitted that technological innovations are endogenous to the process of economic growth. The fact that this theory has not joined mainstream economics may be due to the difficulty of mathematical formulation. Modern economics has so far been dependent on the mechanical determinism of classical natural science. 2. There have been numerous attempts to establish numerical values for the structural coefficients of the Cobb-Douglas-type production fuirction: among them E. F. Denison’s may be the most well-known. He tried unsuccessfully to reduce to a negligible amount the value of r as the residual, by quantitatively assessing the relation between qualitative change of inputs (eg, change of composition of labour force by sex, education, age etc, and of equipment by age) and growth of outputs of industrial countries. Similar attempts by other economists brought forth more or less the same result. 3. In analysing US society at the end of the high growth period, Daniel Bell arrived at the conclusion that these realms of modern society have begun to be disjointed. See D. Bell, The Cultural Contradictions of Capitalism (New York, Basic Books, 1976). 4. A quantitative, analytical comparison between the pre-war low growth and the post-war high growth of Western Europe, accompanied by interstate comparison, was at first attempted by Andrea Boltho. See A. Boltho, ‘Growth’, in A. Boltho (editor), The European fconomy: Growth and Crisis (Oxford, Oxford University Press, 1982). In my paper, ‘Economic growth before and after the oil crisis and the possibility of deindustrialization’, in H. F. Didsbury Jr (editor), The Global Economy: Today, Tomorrow and the Transition (Bethesda, MD, USA, World Future Society, 1985), I tried to extend this analysis to the wartime and post-oil-crisis period, as well as to the USA and Japan. By doing so, I hoped to distinguish a complete Kondratiev cycle, distinct from the new one emerging during the oil crisis period. 5. G. Mensch, Das technologische Patt (Frankfurt, Umschau, 1975). 6. C. Freeman, J. A. Clark and L. L. C. Soete, Unemployment and Technical Innovation: a Study of Long Waves in Economic Development (London, Frances Pinter, 1982). 7. M. Shinohara, ‘80 Nendai to ChBki Had&on (The 1980s and the long wave theories), Nihon Keizai Shimbun, l-8 January 1988. 8. C. Freeman, ‘The challenge of new technologies’, in Interdependence and Cooperation in Tomorrow’s World (Paris, OECD, 1987). 9. According to Thomas Kuhn, scientific paradigms are ‘universally recognized scientific achievements that for a time provide model problems and solutions to a community of practitioners’. A paradigm is the commitment shared by group members, consisting of a certain worldview and value system as well as a set of models of a specific way of doing things. Paradigms can be found not only in the community of scientists but also in the society of ordinary people. The paradigm shared by engineers, designers and managers in a society would fix the standard way of pro-

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duction in that society. See Thomas S. Kuhn, The Structure of Scientific Revolutions (Chicago, University of Chicago Press, 1962, 1970). IO. A number of political scientists, eg, George Modelski, Robert Gilpin and Shunpei Kumon, propose various ways of distinguishing global cycles. In order to carry out a long-term economic analysis, Y. Murakami’s approach seems to be particularly useful since it focuses on the alternate appearance of new technological paradigms. The division of eras adopted in this article more or less follows that of Murakami; see Y. Murakami, ‘Tenkan Suru Sangyb Bunmei to 21 Seiki eno Tenbo’ (Evolving industrial civilization and a perspective to the 21st century), Ekonomisto, 5 April 1983. 11. To regard long-term social and economic developments as the interactions between substructure and superstructure is the methodology used in an OECD lnterfutures study, Y. Kogane (editor), ‘Changing value patterns and their impact on economic structure’ (Tokyo, University of Tokyo Press, 1982). 12. See Long-Term Economic Growth 7860-7970 (US Department of Commerce, June 1973), page 105. 13. Ibid. 14. In order to clarify the process by which Japan was drawn into the catastrophe of the Pacific war,

15. 16.

17.

18. 19.

which had not been intended by the legitimate decision makers, achronological approach to the history of pre-war Japan seems to be useful. See Y. Kogane, Nihon no Sentaku: Kaikoku/Sakoku no Rekishi to Mirai (Japan’s choice: the past and the future of opening-closing the country) (Tokyo, TBkai Daigaku Shuppankai, 1985). C. Freeman, op tit, reference 8. See, for example, Toshihiko Hayashi, ‘Kisei Kanwa de Yureru ‘Dens6 SangyB” (‘Carrying industries’ being stirred by deregulation), fkonomisto, 25 December 1984, and ‘Haiteku Nettowlku to Sangy6 Shakai’ (High-technology network and industrial society), Ekonomisto, 11 February 1986. The steady and continuous shift from almost constant deficit to persistent surplus in Japan’s balance of payments, in contrast to the opposite trend in the USA, can be explained in the long run by the foreign trade structure of these two countries. See Y. Kogane, ‘Trade as a factor in our futures’, in BlindPartners (Lanham, New York, London, Wilson CenterINIRA, University Press of America, 1985). See C. Perez, ‘Structural change and the assimilation of new technologies in the economic and social systems’, Futures, 75, (5), October 1983. In fact, the idea of deregulating value services occurred to the Nikko Research Center project team when it was examining policies for stimulating Japan’s internal demand and reducing its export surplus. It could stimulate demand for improving the quality of life in other AICs, too, by reducing the wasteful use of material goods and human services. SeeY. Kogane, ‘Technological revolution and social trends in Japan: from manufacturing-driven growth to service-driven growth’, Futures, 79, (I), February 1987.

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