Table Of ContentAdvances in Japanese Business and Economics 3
Hiroshi Yoshikawa
Reconstruction
of Macroeconomics:
Methods of
Statistical Physics,
and Keynes’
Principle of
Effective Demand
Advances in Japanese Business and Economics
Volume 3
Editor-in-Chief
Ryuzo Sato, Stern School of Business, New York University, Tokyo, Japan
Series Editor
Kazuo Mino, Faculty of Economics, Doshisha University, Kyoto, Japan
Managing Editors
Hajime Hori, Tohoku University, Sendai, Japan
Hiroshi Yoshikawa, The University of Tokyo, Tokyo, Japan
Toshihiro Ihori, National Graduate Institute for Policy Studies (GRIPS), Tokyo,
Japan
Editorial Board
Yuzo Honda, Faculty of Economics, Osaka Gakuin University, Suita, Osaka, Japan
Jota Ishikawa, Graduate School of Economics, Hitotsubashi University, Kunitachi,
Tokyo, Japan
Kunio Ito, Graduate School of Commerce and Management, Hitotsubashi
University, Kunitachi, Tokyo, Japan
Katsuhito Iwai, International Christian University, Mitaka, Tokyo, Japan
Takashi Negishi, The Japan Academy, Tokyo, Japan
Kiyohiko Nishimura, National Graduate Institute for Policy Studies (GRIPS),
Tokyo, Japan
Tetsuji Okazaki, The University of Tokyo, Tokyo, Japan
Yoshiyasu Ono, Osaka University, Ibaraki, Osaka, Japan
Junjiro Shintaku, University of Tokyo, Tokyo, Japan
Megumi Suto, Waseda University, Tokyo, Japan
Eiichi Tomiura, Hitotsubashi University, Kunitachi, Tokyo, Japan
Kazuo Yamaguchi, University of Chicago, Chicago, USA
Advances in Japanese Business and Economics (AJBE) showcases the work
of Japanese and non-Japanese scholars researching the Japanese economy and
Japanese businesses. Published in English, the series highlights for a global
readership the unique perspectives of Japan’s most distinguished and emerging
scholars of business and economics. It covers research of either theoretical
or empirical nature, in both authored and edited volumes, regardless of the
sub-discipline or geographical coverage, including, but not limited to, such topics
as macroeconomics, microeconomics, industrial relations, innovation, regional
development, entrepreneurship, international trade, globalization, financial markets,
technology management, and business strategy. At the same time, as a series of
volumes written by Japanese and non-Japanese scholars studying Japan, it includes
research on the issues of the Japanese economy, industry, management practice, and
policy, such as the economic policies and business innovations before and after the
Japanese “bubble” burst in the 1990s.
AJBE endeavors to overcome a historical deficit in the dissemination of Japanese
economic theory, research methodology, and analysis. The volumes in the series
contribute not only to a deeper understanding of Japanese business and economics
but to revealing underlying universal principles.
Overseen by a panel of renowned scholars led by Editor-in-Chief Professor Ryuzo
Sato, AJBE employs a single-blind review process in which the Editor-in-Chief,
together with the Managing Editors and specialized scholars designated by
the Editor-in-Chief or Managing Editors, rigorously reviews each proposal and
manuscript to ensure that every submission is a valuable contribution to the global
scholarly readership.
All books and chapters in AJBE are indexed in Scopus.
Hiroshi Yoshikawa
Reconstruction
of Macroeconomics:
Methods of Statistical
Physics, and Keynes’
Principle of Effective
Demand
Hiroshi Yoshikawa
University of Tokyo
Tokyo, Japan
ISSN 2197-8859 ISSN 2197-8867 (electronic)
Advances in Japanese Business and Economics
ISBN 978-981-19-5263-0 ISBN 978-981-19-5264-7 (eBook)
https://doi.org/10.1007/978-981-19-5264-7
Translation from the Japanese language edition: “MAKURO KEIZAIGAKU NO SAIKOCHIKU:
KEINZU TO SHUNPETA” by Hiroshi Yoshikawa, © Hiroshi Yoshikawa 2020. Published by Iwanami
Shoten, Publishers, Tokyo. All Rights Reserved.
© Iwanami Shoten, Publishers 2022
This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether
the whole or part of the material is concerned, specifically the rights of reprinting, reuse of illustrations,
recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or
information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar
methodology now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication
does not imply, even in the absence of a specific statement, that such names are exempt from the relevant
protective laws and regulations and therefore free for general use.
The publisher, the authors, and the editors are safe to assume that the advice and information in this book
are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or
the editors give a warranty, expressed or implied, with respect to the material contained herein or for any
errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional
claims in published maps and institutional affiliations.
This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd.
The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721,
Singapore
Preface
COVID-19 has been with us for more than two years and has clouded every inch
of our economy. In the United States, the unemployment rate which was 4.4% in
March 2020 skyrocketed to 14.7% the following month. The growth rate of the
world economy abruptly fell to –9.1% (2020Q2). It was the worst drop in growth the
world had experienced after the war.
As in the Great Recession following the 2007–2009 global financial crisis, govern-
ments around the world expanded expenditures in unison and prevented the down-
fall of the economy. It was fine. The problem is the wide gulf between such policy
actions and mainstream macroeconomics. Fiscal expansion in a time of recession is
the ABC’s of Keynesian economics, but neoclassical macroeconomics, such as real
business cycle theory, does not endorse it.
Modern micro-founded macroeconomics emphasizing the role of expectations
allegedly provides monetary policy with solid theoretical foundations for avoiding
deflation and achieving healthy growth and a 2% inflation target. The achievement
was once hailed as Great Moderation. However, the 2007–2009 global financial crisis
turned this confidence to a great disappointment. Facing a zero interest rate bound,
the macroeconomics profession has advocated unconventional monetary policies that
were supposed to lead the macroeconomy to a stable growth path with the targeted
2% inflation. And yet, in reality, monetary policy failed to achieve this goal. As of
March 2022, the U.S. Consumer Price Index rose by 8.5%, a 40-year historical high.
Today’s neoclassical macroeconomics, which is taken by the profession to have
solid micro-foundations, fails. The reason is simple: The methodology is wrong.
The macroeconomy, consisting of many households and firms, cannot be under-
stood by analyzing optimization of micro-agents. In analyzing macro, we must use
methods of statistical physics. The spirit is that we must purposely disregard details
of micro behavior. Here lies a fundamental difference between macroeconomics and
microeconomics. The confusion lasted more than 50 years. It should be the agenda
of epistemological study.
Chapter 3 explains that methods of statistical physics provide Keynes’s principle
of effective demand with robust micro-foundations. It is a great encouragement for me
that Professor Robert M. Solow endorsed this analysis. Aggregate demand changes
v
vi Preface
much more swiftly than technology and becomes the effective constraint on the
macroeconomy. The profession has purged demand from macroeconomics, and fallen
into a state of confusion.
I owe this work to a number of people. I long ago learned Keynesian economics
from my mentor, the late James Tobin. His wisdom should still be a guide today. The
late Masanao Aoki, a pioneer in this field, introduced me to methods of statistical
physics. Professor Katsuhito Iwai has always inspired me with his disequilibrium
dynamics.
I have worked with a group of econophysicists, professors Hideaki Aoyama,
Hiroshi Iyetomi, Yoshihisa Fujiwara, Yuichi Ikeda, and Wataru Souma, and learned
a great deal from them. Some of the materials presented in this book are outputs of
my joint works with them. Professor Didier Sornette, one of the world leaders in
econophysics, kindly read a part of the manuscript and gave me useful comments
which saved me from errors. Professor Ryuzo Sato has always encouraged me. This
time, I learned from his early works on technical progress. Dr. Yoshiyuki Arata
performed an illustrative simulation shown in Chap. 3.
Ms. Shuko Miyakawa so ably prepared the manuscript and figures. Mr. Hiroshi
Takahashi and Ms. Juno Kawakami as editors professionally transformed the
manuscript to book form.
I dedicate this book to my wife Setsuko, who has supported me for nearly a half-
century.
Tokyo, Japan Hiroshi Yoshikawa
April 2022
Acknowledgments
I am grateful to Professor Daniel Kahneman and the American Economic Associa-
tion for allowing me to reprint some paragraphs from D. Kahneman, J. Knetsch, and
R. Thaler (1986) in this book. My thanks also go to the Econometric Society for
allowing me to use Fig. 3, “UK business cycle index (1855–1877)” from Eugen
Slutzky (1937); the American Economic Association for Fig. 1 from Nicholas
Gregory Mankiw (1989); J. C. Fisher and R. H. Pry for Fig. 9 (b) (1971); the Univer-
sity of Texas Press for Chart III-2 from W. W. Rostow (1978); the Cambridge Univer-
sity Press for Fig. 4.3 from R. Mantegna and H. E. Stanley (2000); and Taylor &
Francis for Table 1 from M. Newman (2005).
I have also obtained full reprint permission for all citations and reprints of
illustrations from works either single-authored or co-authored by myself.
I am grateful to the Research Institute of Economy, Trade, and Industry (RIETI),
Tokyo, for support in preparing this book. This work is partially supported by
Grants-in-Aid for Scientific Research (KAKENHI), Grant Numbers 20H02391 and
20H01480, by the Japan Society for the Promotion of Science (JSPS).
vii
Praise for Reconstruction of Macroeconomics:
Methods of Statistical Physics, and Keynes’
Principle of Effective Demand
“It (Chap. 3) captures analytically a good part of the intuition that underlies the
Keynesian economics of people like Tobin and me.”
—Robert Solow, Emeritus Institute Professor of Economics, Massachusetts
Institute of Technology, Nobel Laureate in Economics, 1987
“Professor Hiroshi Yoshikawa provides a unique synthesis of statistical physics and
macro-economic theory in order to confront the dismal failure in economics and in
finance to understand how an economy or a financial market works, given the hetero-
geneous decision making of many different individual interacting actors. Economics
has failed in this regard with the naive and often misleading concept of “representative
agents”. The author presents many insights on the historical development, concepts,
and errors made by the most illustrious economists in the past. This book should be
essential readings for any economics students as well as academic researchers and
policy makers, who should learn to bring back good-sense thinking in their impactful
decisions.”
—Didier Sornette, Professor on the Chair of Entrepreneurial Risks at the Swiss
Federal Institute of Technology Zurich (ETH Zurich)
ix
Introduction
What impedes the progress of science is not the
ignorance of the layman, but the lack of awareness of the
mission and essence of science by the scientist himself!
(Torahiko Terada, 1933).
Over the last 50 years, macroeconomics has drastically changed. Born in the midst of
the Great Depression, it was once synonymous with Keynesian economics. However,
under the flag of micro-foundations, it has turned to neoclassical macroeconomics.
Modern micro-founded macroeconomics is proud of its solid micro-foundations
by which the profession understands that optimization of a micro-economic agent
such as the household or firm is explicitly analyzed. In this book, we maintain that
standard micro-foundations are on the wrong track. Ironically, modern macroeco-
nomics, which emphasizes the significance of micro-optimization so much, takes it
too carelessly.
The fundamental problem is that modern micro-founded macroeconomics rests on
representative agent assumptions. In the case of real business cycle (RBC) theory and
endogenous growth theory, this is obvious, for a literally single representative house-
hold/firm is assumed. In contrast, in the case of Lucas’s rational expectations model,
labor search theory, and more recent mean field games, the problem is much subtler
because in these models, apparently heterogeneous agents are assumed. However,
economic agents differ only to the extent that the realization of relevant stochastic
variables is different. They are assumed to face a common stochastic distribution
with which they optimize. We contend that the assumption that all the economic
agents share a common stochastic environment, namely, the assumption of repre-
sentative constraints, is wrong. It is essentially nothing but a stochastic version of
representative agent assumptions, not worthy of micro-foundations.
In modern micro-founded macroeconomics, aggregate demand has been purged
as a determinant of the level of macroeconomic activity. This makes macroeco-
nomics more or less Walrasian if on the surface it is different from Walras’s original
xi
