Interview to Professor Katsuhito Iwai
"Professional works supported by trust and ethics will increase in an advanced capitalist society"

Update: November 24, 2016

In November 2016, ICU Visiting Professor Katsuhito Iwai of Economics was selected for the distinction of Bunkakorosha (Person of Cultural Merit) for his cultural contributions in addition to his outstanding academic achievements, about his research to date and his views on the future of society.


―― Please tell us about your current research.

As I wrote in my academic autobiography, Universe of Economics (Keizaigaku no uchu) published in 2015, my research has been mostly outside the mainstream economics so I must say I haven't enjoyed much success within it. But I led a happy life as a scholar. Being an outsider in the academia, I had freedom to pursue what I was truly interested in, well beyond the framework of economics. I was able to find time to write essays on literature, arts and philosophy. That may be what led to my being selected a Person of Cultural Merit.

I was a science nerd when very young. I read almost any science book I could get my hands on. During the late 1950s while attending junior high school, Hayakawa Publishing Corporation launched "S-F Magazine" that led me to read science-fiction simply because they had the word "science" in it. Science-fiction literally played the role of bridging science and literature for me. I indulged myself in reading literature during my late teens and early twenties. When applying for university, it was difficult to choose between science and literature and I finally settled on social science which, I believed rather naively, included elements of both. I initially selected Marxian economics as my major, a "must" subject of study at that time among young people aspiring to be a "progressive intellectual".

After a brief stint as a student of Marxian economics, I began to harbor doubts about its scientific validity and switched my major to modern economics. Thanks to some great mentors I met in the university, I decided to proceed to graduate school to study economics. In that year (1969), both graduate and undergraduate schools were closed and admission examinations cancelled due to fierce protests in the University of Tokyo campus. Fortunately, my advising professors Uzawa, Komiya and Hamada had extensive overseas experience and encouraged me and three other students to continue our studies overseas and wrote strong letters of recommendation. All of us were accepted--I by Massachusetts Institute of Technology (MIT) and others by Stanford, Chicago, and Johns Hopkins. This was how I got to study abroad, something I'd never imagined in my wildest dreams.

"I didn't mean to deviate from the mainstream"

I spent twelve years in the United States, three years to complete the MIT graduate program, one year as a post-doctoral fellow at the University of California, Berkeley, and eight years as a faculty member at Yale University. MIT was at the top of the U.S. in the field of economics at the time, I had the privilege of studying under Paul Samuelson and Robert Solow who were my thesis advisors. I was considered a "rising star," and the mainstream economics papers I wrote during graduate school opened the doors for me to join Yale as assistant professor. However, when I truly came to understand the whole body of mainstream economics and began to scrutinize its theories more closely from the inside, I started to notice their intrinsic contradictions one after another. That led me to gradually question the basic tenets of the discipline.

When I first came to see the contradictions inherent in the doctrine of mainstream economics, I wondered if I had made some kind of mistake in the process of my theorizations. After agonizing for a couple of years, I suddenly came to a paradigm shift in my way of thinking and saw those contradictions not as an error but something integral to the mainstream theory. Young and confident, I was determined to turn the mainstream economics upside down and spent seven years in writing a monograph that eventually led to the publication of a book titled Disequilibrium Dynamics in 1981. As I should have known better, the book was not accepted by the U.S. economic academic community. I then thought it was the time to go back to my home country.

My questioning the mainstream economics while I myself was in its midst must have had something to do with my having read widely outside the field of economics, my having been an outsider in the U.S. society, and my having once studied Marxian economics. Of course, there were predecessors who had similar ideas such as John Maynard Keynes, the 20th century's most influential economist and Knut Wicksell, a leading economist in Sweden at the turn of the20th century. Their work had a great influence on me.

―― What were the contradictions that you found?

The pillar of mainstream economics is the idea of "invisible hand" as coined by Adam Smith, the idea that "in a capitalist society, as long as the market mechanism is working smoothly, the individuals' pursuit of their own interest will turn out to benefit society as a whole and contribute to both stability and affluence." To put it in extreme terms, it claims that a capitalist society has no need for ethics. This was indeed groundbreaking in that it reversed the traditional social belief (including that of Christianity) that "each member of society must be ethically good in order to build a good society."

The term "invisible hand" is a metaphor of the price adjustment mechanism of the market. In thinking through it, I eventually realized that it lacked a theory of the price adjustment mechanism itself. At first, I was simply dissatisfied with such a lacuna and tried to strengthen the theoretical edifice from the inside. In my process of theorization, however, I encountered the contradictions that you asked about. In the end, I reached the conclusion that "the capitalist economy will become wholly unstable if we allow it operate in its purest form, by letting the prices (including wages) adjust itself freely in all the markets." That's when I discovered that the mainstream thinking needs to be turned upside down.

What I mean here by the capitalist economy being "unstable" is that it will start off a hyperinflation like the one in post WWI Germany when aggregate demand exceeded aggregate supply, or plunge into a great depression like the one after 1929 stock market crashed in New Yok, or the one after the 2008 Lehman shock when aggregate demand fell short of aggregate supply. However, we all know that such disasters have rarely occurred in history. Why has the real-world capitalist economy been able to maintain a certain level of stability? Here again, I had to turn the mainstream thinking upside down. Contrary to the idea of the "invisible hand," the economy was able to maintain its relative stability only because there are various impurities in actual markets that prevent the prices from adjusting freely. One such impurity is the government's fiscal intervention or the central bank's discretionary monetary policy. The anti-laissez-faire economic policies, I demonstrated, are essential to counter the instabilities inherent in capitalism.

―― Can you tell us about your current theme of research?

The basic thesis of Disequilibrium Dynamics was this: "the capitalist economy is inherently unstable because money it uses allows aggregate demand to deviate from aggregate supply." My interest moved on to the next question, "What is money?" My first publication on this theme was a mathematical paper in English and then the 1993 Ontology of Money (Kahei Ron) in Japanese. Just a few months ago, I was interviewed by the Japanese version of the WIRED magazine about "Ontology of Money: Twenty-three Years on." Times have changed and accordingly my thoughts and ways of expressing them have changed as well but my basic ideas about capitalism and money have remained the same since I wrote the book.

"Capitalism has become unstable as a result of pursuing pure capitalism"

I feel that the spread of globalization and the Internet has made the actual capitalist economy closer to the theoretical model presented in my Disequilibrium Dynamics and Ontology of Money. From the late 1980s to early 1990s, the Berlin Wall and the Soviet Union collapsed and as a result, capitalism prevailed as the only world economic order. According to Adam Smith's idea of the "invisible hand," when the entire world becomes a huge single market economy, capitalism is destined to deliver both stability and affluence to the world. Everything is supposed to work better; the more flexible labor markets become and the more freely capital moves across borders. But look what happened. The once-in-a-hundred-year crisis! Globalization was a grand experiment of the invisible hand, and the Lehman collapse was the grand manifestation of the experiment's grand failure.

―― How do you see the future?

I have been involved in studies that are totally different from my past works. My current interests are in the theory of corporations and the theory of fiduciary relationships. I became interested in them when I was teaching Japanese economy at the University of Pennsylvania and Princeton University from 1988 to 1989. That led me to examine the seemingly peculiar features of the Japanese corporate system. I was then struck by what strange entities corporations are. Here at ICU, I teach a class called "Business and Society in Japan" in the spring term, in which I start with the following question.

"Don't you think a corporation is strange? In real life, it is not a human being but an abstract entity comprising a group of people, but legally it is given a personhood just like a real human being. We often hear the saying "the corporation belongs to the shareholders" but that is nonsense. If shareholders get hold of corporate assets for their personal use, they will be arrested as thieves. It is not shareholders but the corporation as a legal person who owns the corporate assets and enters into contracts with suppliers, buyers, employers, etc. What shareholders own are merely shares of the corporation as a thing that can be bought and sold independently of the underlying corporate assets. Shareholders are not the sovereign of the corporation."

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What made me wonder next was what is referred to as "duty of loyalty." A corporation has a legal personality, but in reality, it is not a person. It is only an abstract being without a brain or a body. It can act as a person only through the brain and body of real human beings. That is the role played by corporate managers. For instance, a contract signed by managers as managers is regarded as the contract by the corporation. Hence, any contract between managers and a corporation is actually the managers' contract with themselves. If they were bad people, they would be able to fabricate contracts that would give them personal advantages. This is why corporate law obliges managers to work solely in the best interests of the corporation, which is called the "duty of loyalty." This is a duty that prioritizes the interest of others over one's own interest. This duty is nothing other than what Kant called an "ethical" duty.

All this made me realize that capitalism does need ethics as an integral part of its system. Ethics has thus entered into my research agenda. The material basis of modern society is built on capitalism, which in turn is based on profit-seeking corporations, but the managers who operate corporations are bound by ethical duties of loyalty. Here again, the fallacy of Adam Smith's "invisible hand" has been shown.

In fact, the "duty of loyalty" is required not only in the relation between managers and the corporation, but between the specialist and non-specialist because there is asymmetry between knowledge and ability of the two. For example, if I become ill and go to a doctor, the doctor knows my illness much more than myself. Any contract the doctor forms with me contains an element of the doctor's self-contract so that the doctor must use his knowledge and ability loyally in the best interests of the patient. Without this duty of loyalty, I wouldn't be able to entrust the doctor to treat my body.

In an advanced knowledge-based society with highly developed capitalism, technology and knowledge have become so complex that much of human relationships has become those between a specialist and a non-specialist, meaning paradoxically that the ethics of the "duty of loyalty" has become most important. .

"You inevitably arrive at ideas outside of conventional academic disciplines"

Since I am a scholar, I have always tried to describe the world only through logic without relying on ethics or ideology. As I pursued my theory of corporations, however, I could not avoid the issue of ethics as a logical consequence. By the same token, the logical pursuit of one specialized field would often lead you to ideas outside of conventional academic thinking.

One of the reasons that I wanted to teach here at ICU is because it is a liberal arts college. As I carried on with the critique of mainstream economics, my own research has begun to include elements shared by the liberal arts. You see, in a liberal arts college, I feel free to teach subjects that deviates from the conventional disciplines.

Actually, I grew aware of the importance of liberal arts when I was studying at MIT. Some of my classmates came from small liberal arts colleges. At first, they had less specialized knowledge and were often poor at mathematics, but by the time we started working on our doctoral thesis, they had acquired as much specialized knowledge as any of us (due to their diligence). They in fact had advantage over other students because they had a wider background and flexibility in thinking, which benefitted them in their studies. Up until the age forty or so, anyone can acquire specialized knowledge if one concentrates on it. It's more important to be exposed to various fields when young.

The other reason I wanted to teach at ICU is its emphasis on opening the students' mind to the world outside Japan. I had a chance to attend a graduate program in the U.S. and to live in Europe and the U.S. but I still have difficulty communicating in English. Our society today cannot be separated from the rest of the world. ICU is a truly international university, rich with many faculty and students of various nationalities. If you hear my awkward English, you will realize how lucky you are to be here in an international environment from such an early age. I hope my lectures will play some role in nurturing those who will take active roles in the international community.

IWAI, Katsuhito

Katsuhito Iwai was born in Tokyo in 1947. After graduating from University of Tokyo in 1969, he went on to study economics at MIT and received Ph.D. in 1972. He taught at Yale University, University of Pennsylvania, Princeton University, and University of Tokyo. He is currently Visiting Professor at International Christian University and Emeritus Professor of the University of Tokyo. His fields of interests encompass disequilibrium dynamics, foundations of monetary theory, evolutionary economics, theory of corporate personality, corporate governance, fiduciary principles, and history of social thoughts. He has published Disequilibrium Dynamics (Yale University Press, 1981) and many academic articles. Concurrently with these academic works, he also wrote books and essays (mostly in Japanese) on global capitalism, post-modernity, civil society, money and language, and literature. He received the Grand Prix of Nikkei Economics Books Award, Suntory Academic Award and Kobayashi Hideo Award, and delivered the 9th John Whitney Hall Lecturer at Yale University and 12th Clarke Lecturer at Cornell Law School. He was also awarded Honorary Doctorate from the University of Belgrade and the Purple Ribbon Medal by the Japanese government. Last year he became a member of the Japan Academy.

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