The topic of my lecture today is “The Japanization of the European Union.” I would like to start with an observation Hayek makes in his Pure Theory of Capital. (Incidentally, through Unión Editorial, we have just published an impeccable Spanish edition, and I recommend it to all of you.) According to Hayek, the “best test of a good economist” is understanding the principle that “demand for commodities is not demand for labor.” This means that it is an error to think, as many do, that a mere increase in the demand for consumer goods gives rise to an increase in employment. Whoever holds this belief fails to understand the most basic principles of capital theory, which
explain why it is not so: Growth in the demand for consumer goods is always at the expense of saving and the demand for investment goods, and since most employment lies in the investment stages furthest from consumption, a simple increase in immediate consumption always occurs at the expense of employment devoted to investment, and thus, net employment.

I would add to this my own test of a good economist: the Professor Huerta de Soto test. According to my criteria, the best test to determine whether we are dealing with a good economist (and I do not mean to detract from Hayek’s test) is whether or not the person understands why it is a grave error to believe the injection and manipulation of money can bring about economic prosperity. In other words, the best test of a good economist according to Professor Huerta de Soto is understanding why the injection and manipulation of money are never the way toward sustainable economic prosperity.

As is logical, neither Keynesians nor monetarists would pass my test nor of Hayek’s test, and therefore, they would fail and would not move up to the second year. For instance, Keynes never understood that it is possible to earn money even when sales of consumer goods do not rise. You see, profit is equal to income minus cost. Income may remain unchanged, but if you reduce costs, you can still make money. And how does one reduce costs at the margin in an environment of normal economic growth? Well, one replaces labor (which is more expensive than capital equipment, relatively speaking) with capital equipment. And that capital equipment which is going to replace
labor in the stages closest to consumption must be produced by someone, and it generates a huge number of jobs: Machines never harm employment; on the contrary, they create it and on a massive scale.

This is something Keynes never understood, and hence, he would have failed both Hayek’s test and mine. The same thing would have happened to one of the figures who, together with Keynes, has caused the most damage not only to our discipline, economic science, but also to society. The damage occurred mainly because in his work, A Monetary History of the United States, he defends the notion that the Great Depression of 1929 resulted from the Federal Reserve’s failure to inject enough money; that is, its intervention or manipulation of the money supply was not sufficient. Obviously, I am referring to Milton Friedman (who is now so highly praised by all central bankers
in favor of ultra-lax monetary policies). He would also have failed my test of understanding that monetary injections and manipulation are never the way to sustainable economic prosperity.

History illustrates again and again the soundness of the essential question Hayek and I ask to determine whether an economist really knows what he or she is talking about. For example, we can look at the massive influx of precious metals into Spain after the discovery of the Americas. Far from generating prosperity, this influx made Spain a wasteland, a veritable economic desert which did not achieve the economic prosperity of its neighboring countries until many centuries later. In fact, the arrival of gold drove nominal prices up; that is, it sank the purchasing power of the monetary unit in Spain. As a result, Spanish products ceased to be competitive, and it became much
cheaper to buy abroad, so as soon as the gold entered the country, it left our borders to pay for massive imports. As a consequence of this process, the traditional products of the Iberian peninsula were no longer competitive, and their producers went bankrupt and were forced to emigrate. Remember that there were basically three professional routes a person could take in Spain at that time: “the church, the sea, or the royal household.” In other words, one could become a clergyman or enter a convent and live on ecclesiastical benefices, cross the Atlantic in search of one’s fortune in the Americas, or serve the king as a soldier in Flanders. All of this accounts for the traditional economic backwardness of Spain, its relative lethargy and underdevelopment for centuries.

Another historical illustration is provided by the emergence of fractional-reserve banking: another attempt – at first a private one, and later in cooperation with central banks and public authorities – to inject money, based on the notion that the economy benefits from such injections. In other words, the idea is that creating loans from nothing without the backing of real saving is something positive and favorable, and any number of economists have defended it – even such renowned economists as Joseph Alois Schumpeter, who, therefore, would not pass my test either
and would fail my exam. However, we will not now discuss the destabilizing effects fractionalreserve banking exerts on the economic system. You are already familiar with the content of my book, Money, Bank Credit, and Economic Cycles and the essential arguments developed in it.

Finally, another very clear illustration of the importance of our test can be found in the wild monetary manipulations and injections with which authorities around the world have reacted to the Great Recession of 2008. This reaction reaches its pinnacle in what we will refer to as the “Japanese economic illness” or the “malady of economic Japanization.” What does this syndrome or disease, this “Japanese economic illness,” consist of? We will first take a look at its symptoms and then theoretically analyze them from the perspective of the Austrian School. Then we will consider the extent to which this illness is contagious and a risk exists of transmission to other economic areas, specifically, to the European Union. But before we begin to analyze the symptoms of this sickness, let us outline the immediate historical background of the Japanese economy.



(1) Text of the opening lecture at the Twelfth Conference on Austrian Economics organized by the Juan de Mariana
Institute and the Universidad Rey Juan Carlos. The conference was held at the Vicálvaro campus of the latter on May 14 and 15, 2019.