Culture and Economics: Looking at Deflation from another corner
May 16, 2014
**Note: This is a first draft only. I have yet to read through it thoroughly, but I will do. There will be more contents added and mistakes corrected in the 2nd version**
This article will mark my first attempt to really connect culture and economics and to produce, at best, some surmises about these two distinct social elements and their correlation.
Culture certainly has a broad meaning. I myself would have a hard time defining it without the help of online dictionaries. I think the definition that really suits what I would like to convey in this article is the one that defines culture as collective ideas, customs, and behaviors of particular groups of individuals ranging from a whole society within a nation to its sub-sets which can even be that of a group of workers/students. Please note that culture is not a biological inheritance. That means a British who were born in Mexico is highly likely to be influenced by Mexican culture, not British culture. It has to do with one's surroundings, the things that a person most frequently encounters in life, that shape the mindset and define the cultural characteristics of that one person.
Why are we doing this? How does culture have anything to do with Economics in the first place? Based on my first article, I have clearly given you my own definition of Economics. I also specifically mentioned the scope of this particular discipline, the large area it encompasses.
That is why there is a branch of economics called "Cultural Economics" that studies the relation between culture and economic outcomes. Well, I myself am not well-versed on this particular area, but I think it does not hurt to try using the fundamental economic knowledge we have discussed so far to see the economic side of culture, and by the same token, the cultural side of economics. Just a warning though, whatever I typed down here is not to be used as reference, but you can read it for fun. Still, I will try my best to really engage in logical and meaningful thoughts, not just random, out-of-nowhere ideas.
You see, from the first time I understood some of the basics of Economics and its applications, I have been amazed by the distinct characteristics of the Economic systems, practices and thinking in each country. Even following an identical economic ideology, each country almost always developed its own unique economic traits that really set itself apart from the others. If my perception is not distorted by what I want to believe, a national culture really helps shape the economic frame of a country, and this means that an economic model that works well for a society will not yield the exact same outcome for another.
Allow me to explain through an example. Let us consider the case of Japan. Now what I am trying to do is to link this article to the previous one about deflation. We are not concentrating on the causes, but rather, the factors that help nourish and sustain deflation to continue its reign over Japan.
I think the issue is connected to both Japanese traditional and modern cultures . This really is an intricate problem, and merely scratching its surface will not be enough to really grant you an understanding of its correlation with deflation, so bear with me as I go through it step by step.
I remember reading an article about Japanese workaholism. Yes, workaholism has become a Japanese culture, probably a modern one. It really portrays the hard working nature of the Japanese.
However, working comes with the cost of time. When people work that hard, they end up with less time for themselves, their family, and to be frank, for reproduction, which is worsened by gender issue. That is, women at the age of marriage (expected to bear children/go through pregnancy) and those who have children have a hard time finding employment. This problem is tied with the Japanese traditional culture (though not clearly visible in its modernized state) which regards men as superior who take the leading role in family while women are given the caring role. So when they have children, and thanks to the expensive childcare service, women either have to stop working or work less (as it is extremely difficult to manage both working life and maternal life simultaneously). Also, though I do not know if it is true, Japanese men takes their job seriously. They work really hard for wealth and status, but at the same time, provide little help with taking care of their children and inside their household (no offense to any Japanese men out there). As a consequence, all the factors described above force women out of the labour force. Having children limited freedom and poses financial burden, especially for women. Because of this, women in Japan who are highly educated, those with non-traditional way of thinking who want to liberate themselves from the culturally dictated role, they prefer to either marry late and/or have fewer children than the previous generation did.
As a result, Japan has become a country with rapidly aging population and low fertility rate causing its population to decline rather fast. Japan birthrate is 1.37 births per woman, much lower than the replacement fertility rate set at the global standard of 2.1 births per woman. This means that a Japanese couple (wife and husband, 2 people in total) during their marriage life only produces a little more than 1 offspring. Now put it on a national scale, this means that the next generation in Japan will be much less in number comparing to the former generation. With the shrinking number of the younger generation, Japanese population pyramid has changed its shape, inverted from one
with larger base and narrow top to narrower base and larger middle and top sections. When you think about it logically, in whatever we construct, the ideal structure is the one with larger base so it can support its top. Same goes for the population pyramid. By having larger top, meaning more retired old people who are depending on pensions and other benefits from government services, and narrower base, meaning less young people to work, demand (consume), pay tax and drive the economy onward, the whole system is out of balance. The few is now providing for the many, and as you can imagine, this is problematic for the Japanese economy. With less younger people, the drive to demand and consume for the Japanese economy is getting lower and lower as well. Furthermore, since women are also an important part of the labour force, having less women working (women are not counted in the labour force) means weaker labour force which translates into less production for the whole economy.
With lower demand for goods and services and weaker force to propel the economy in the long run, producers who want to sell their products have to lower their price, and this leads to deflation which persists in the long run.
The good thing, or so most people would think, is that the Japanese lives, on average, much longer than the rest of the world. The food culture in Japan creates a healthy diet for its people. The Japanese culture in general also results in a healthy way of life. This is good for its people, but as already mentioned, the problem is that it builds up a strong demand for government spending as people who live long consume less, pay little tax, and depending on the retiring age, their absorption of pensions and other government services might last longer than it should, which leads to another problem, bequest.
Bequest is the property & money (wealth) passed on from one generation to the next normally when the former deceases (vertical bequest). Sometimes, it also occurs within the parallel generation (horizontal bequest). Since their culture is one that encourages thrift, the Japanese saves a lot and accumulates wealth over time. Most of the time, the parents bequeath their wealth to their children. However, due to the longer lifespan, by the time the children inherited the wealth, they also turn old, and as a result, there will be no much use of the wealth received, and thus, only little increased consumption and investment in the economy.
That per se is not a deadlock for Japan because it can always allow more immigration to make up for the declining population. This will also allow it to absorb more skilled workers that are currently in high demand in Japan, especially, healthcare workers to serve its ailing elders. However, cultural barrier makes this to be quite hard to achieve. Japan, as a country, is made up of a homogeneous population. The Japanese culture is so unique on its own that it even develops "galapagos syndrome". Wiki defines it as an isolated development branch of a globally available product. To some degree, the Galapagos syndrome has isolated the Japanese market from the rest of the world. It creates a market demand so unique in Japan that the suppliers who produce the products to meet the domestic demands find it hard to tailor their products for the international market, and likewise, foreign suppliers find it hard and costly to adjust to the Japanese market. This isolated market further diverges the Japanese consuming culture from other countries'. As a result, when domestic economic downturn happens, Japanese producers are not well-prepared to buffer the effects through the use of export function. This particular characteristics of Japan is intriguing, and to say that it only yields negative effects would be an ignorant statement. Nonetheless, in one way or another, it is troublesome. Due to this homogeneous culture (everyone and everything is Japanese), in addition to the Japanese policy to support and preserve such culture, it really hinders the inbound migration flow, which might otherwise be beneficial for the Japanese economy.
So you see, Economics is strongly tied to the cultural aspect of a country. Problems like shrinking population in Japan is not a cultural problem, but it still stems partly from the Japanese cultural practice. All that have been discussed so far have, I believe, to a certain extent, contributed to the prolonged deflation clinging to this nation for the past 2 decades. Is expansionary monetary policy enough to solve the problem? I doubt it. In Economics, we have to really deal with the roots. Superficial treatment will most likely only be a short-term remedy. An immediate solution that I would suggest is to first discourage the cultural practice that fosters gender inequity. By creating a strong policy foundation that supports women who have or plan to have children and bring them back to the labour force, this will certainly contribute to additional percentages in Japanese economic growth. Second, it is crucial to seek alternative sources of demand and income. If immigration is not a feasible goal in the near future, then the best bet is to promote tourism. Only by dealing directly with the heart of the problems can we expect to obtain substantial positive outcomes. This is the rules by which I abide, and I feel strongly that it is one of the ground rules that all economists must keep in mind. Trace the problem to its root, and that is where actions should be taken.