ISSN co7S-6407

BUSINESS
27th

REPORT
ANNUALlill:l"illliil"o2w

RESEARCH INSTITUTE FOR ECONOMICSAND BUSINESS ADMINISTRATIONKOBE UNIVERSITY
1981

'

KOBE
ECONOMIC & BUSINESSLREVIEW
1l

27th

ANNUAL REPORT

g;`i'E"Z.,t,..

RESEARCH INSTITUTE FOR ECONOMICSAND BUSINESS ADMINISTRATIONKOBE UNIVERSITY

1981

CONTENTS
Page
Accounting Systems of Non-Market Oriented Activities. . . . .Nobuko NossE

1....Hikoji KATANo

11. . . . . . .Isao NAKANO

37....Tetsuji SHIMoJo49

Current Situations of WorJd Economy andGlobal Adjustment of Industries ......................

Current Cost Accounting and the Conceptof Specific Purchasing Power Capital ................

An Input-Output Table for Evaluation ofthe
ShippingActivitjes ..,,..,,,...,...,,....,,...,.........

Iflsli

The Function of Modern Corporate Financial Reportingin a Mass Democratic Society .........................

.Hidetoshi YAMAJi 69

ACCOUNTING SYSTEMS OF NON-MARKET
ORIENTED ACTIVITIESNobuko NossE

1. Introduction

Surrounding socio-economic accounting, efforts for systematization and integration have tried on. As Towards an SSDS,i} a progress report on the subjects shows,socio-economic accounting contains various topics on human activities which havebeen excluded from economic accounting. Some topics such as education, social
mobility, time-budget and human environment are obviousiy important factors forsocio-economic performances and social welfare. But human non-market activitjes,
by their nature, have no measuring rods for their efforts and performance, neither
basic rules for estimating them. Accounting for measuring these actMties, therefore,
has much obstacles at outset. Moreover, experiences in this field are far poorer thanthose ofmarket-oriented activities in economic accounting, namely in SNA.2) Based on
growing requirements for raising socio-economic performance on welfare in a society,there is a pressing need for socio-economic accounting to be a firm tool for providing
precise information on non-market activities in a systematically arranged way. But inwhat direction and how could we improve the problem?As Towards an SSDS describes,
there are many approaches for various subjects from different angles. Could we manage

the vast extending fields into a system where such fields are co-ordinated with eachother?
Before getting a solution, it is at least necessary to look advanced fields on nonmarket oriented-activities and to scrutinize their "performances," i.e., their accounting

frameworks, the relationships set among variables and the unit selected for measuring
such activities, and then to ask their ability in consideration of integration. The aim of

our work is to do this both in demographic accounting and time accounting, the representative systems of socio-economic accounting.

For the purpose, firstly we consider the specific characteristics of demographic
accounting and its applied version and time accounting respectively. Secondly we reconsider the performances of these two systems from the view points : a view point ofintegration, which is a new wave for developing socio-economic accounting describedin UN reports3) and that of the implication for real economy. And finaily by surveying
MEW and social condition statements, the two representative constructs on social wel-2)

UNSO, Towards a Systeni ofSocialand Detnographic Statistics, l975.
UNSO, A System oflVationalAceounts, 1968.

3)

UNSO, Studies in the Integration ol'Social Statistics, Teehnicat Report, part Two, 1979.

1)

NOBUKO NOSSE

2

fare and finding some link between these constructs and socio-economic accounting.
By these we intend to make clear the meaning ofintegration and systematization in thesoclo-economlc accountlng.
2. Demographic Accounting, Its Sub-systems and Applicabilityof the Population Stock-fiow Matrix
Since socio-economic activities concern to population's activities or people's
aging phenomena in a society, it is natural that demographic accounting developed
earlier than other fields and has some pride of height.

Demographic accounting or social matrices4) geared by R. Stone, intends to record population stock and flow and its transition from one cohort to another cohort
year by year in a society. The intension of demographic accounting is to attain follow-

ing objects: i, to provide a definite accounting framework for aging population move-ments (or transitions) among cohorts and to arrange to show them in a population
stock-flow matrix, and ii, to extend the idea to all human aging activities and to accomodate the data in pseudo population stock-flow matrices as applied versions of theoriginal stock-flow matrix. Demographic accounting (and its application, for example,
education accounting) is based on the idea of transition of whole population age struc-ture where members of constituent groups become to be members of one year older
groups except that disturbing factors (such as death and emigration) prevent surviving
in a society. This regular relationship shown in the constant transition matrix in termsof C (where C is a matrix of coeMcients of survivors to population at the beginning of
the year), was developed as one application of Leontief's I-O matrix.5)

In extending the demographic models to human socio-economic activities, Stone
added some consideration for classifying the state ofthe population groups. For exarnple, in education accounting, student population are classified not only by age but also

by specific characteristics of institution to which they admit while in man-power ac-

counting labour population are classified not only by age but by also job status andby industry. Furthermore, these systems for human activities could be linked to eachother.6)

4) R. Stone, "A System ofSocial Matrices," in the Review of Income and Wealth, series 19, No. 2,

June 1973,pp. 143-66.Stone, Demographic Accounting and ModelBuilding, 1971. See, Towards an SSDS
also.

5) R. Stone, "The Fundamental Matrix of Active Sequence" in A. Carter and D. Brody (eds.),
Input-Output Techniques, 1972.

6) Stone explains relationship between demographic models and life sequence. Human life constitutes a Iife sequence which consists of active sequences (learning activity and eaming activity) andinactive (home and housing activity and health activity). These activities are associated with humanaging and relate to human life sequences. For example, learning activity in formal education starts five,earning activity starts fifteen, marriage or fertility starts about fifteen. And the theory of population fiow-stock matrices, provided socio-economic data arranged in a systematic way, make these subsystems into one integrated social accountjng system. Stone, "Social Matrices," ibid.

3
ACCOUNTING SYSTEMS OF NON-MARKET ORIENTED AcrIVITllES

Now we look the education accounting, the first and successful application of thedemographic accounting.7) As for taxonomy of education accounting, it is based on
demographic accounting but it developed a new classification principle in detail. Thisis the institutional classification which stratifies students by two dimensions: One isclassification by steps of education such as elementary school, secondary school, etc.
and another is classjfication by specific characteristics of educating activities, which are

not only based on differences in financing sources (such as private and municipal) but

have more roots. As Stone specifies, main objects (or main products) of activities
of school is to educate students to be graduates who are able to enter into certain
senior school year by year and the coefiicient of transition is stable. It differs fromanother school whose main purpose is to educate another sort of graduates to beenter another type of senior school; for example, in junior secondary modern school,
its main object is to teach pupjls to be graduates who are admitted to senior secondary
modern school,8> neither to be admitted to comprehensive schools nor to public schools.

There exist strong complementarities among schools which we called as academic
streams in a society9) and this existence of the relationship makes transient coeMcientsbe applicable in the sphere ofeducation activity.

We examine the idea of demographic accounting from its applied version. Education accounting intends to provide information on the formal education from thepoint ofview of numbers of students stratified by age, steps of edueatjon and educational institution classified by socio-economic characteristics. And it gives the leavers ofacademic streams in present and future (and past, if we use an admission coeMcientmatrix) instead ofthe transition matrix). To the institutional classification, Stone added
sub-classification by courses, test scores further. The information derived from students

stock-flow matrix are, however, not plenty in kind by simplicity ofthe structure.

Despite this it is seemed to be usefu1 for England to which Stone applied his
students stock-flow matrix. In England, there was a prevailed requirement of "social

demand for higher education" in the 1960's because there was scarcer opportunity

than the number of peopie who want to attend higher education. The number of
institutions for higher education was few and opportunity for entrancing was opened
exclusively forjunior students came up from limited schools, i.e. those entitled by theirleavership. The limited and unequal distribution of opportunity for education has been
one of social problems and this is background of raising education population study.iO)

And this accounting has another merit. The institutional classification applied heresuggests distribution of the quality of both teachers and institutions in a society while

7) R. Stone, "An Example of Demographjc Accountjng: The School Age," reprinted jn Stone,
Mathematical Models ofthe Economy and Other Essays, 1970. See footnote 4 and Towards an SSDS.
8) Stone, Demographic Accounting and Model Buitding, pp. 48-50.
9) Stone rocognizes the case ofsixformers who must have GCE examination and are confronted
with competitions. "The School Age," ibid.
10) P. Armitage and C. Smith, "Computable Models ofthe British Educational System," reprinted in M. Blaug (ed.), Eeonomics ofEducation, vol. 2, pp. 202-37.

NOBUKO NOSSE

4

it shows effects of social status of parents (father's income, school, job) on their sons'courses of learning. The former informations are usefu1 for education study and thelatter are suggestive for research on social mobility. Further, the information on thestudents transition flows in academic streams is able to link with the information on
another stages of life sequence of population. The parents' role on their sons' school

course mentioned above suggests that certain relationship between family's activity(inactive sequence) and son's learning activity (active sequence) exists. On the otherside, the relationship between the learning activity and man power's earning activity(another active sequence) could be observed if data on man power were classified byage and school and other socioeconomic characteristics of man power and be arranged
in a man power stock-flow matrix. The fact that Stone's education matrix has a deeproot in the society of England leads to the idea that demographic accounting system is

to be conceived as a core system in the whole SSDS.
But a reflection and criticism on this idea have risen up mainly fromU.S.ii) We lookthe issues first and then consider them from Japanese situation. The direct use of educa-tion accounting is to monitoring the number ofnew comers and ofleavers in academic
streams in present and future. Given stable transition coefiicients, the policy variables
there are numbers of educationai institution. The education policies are therefore, to in-crease the number ofuniversities which could be competitive to traditional one and to
shift or relax the fixed transition coeMcients (for instance, by opening the gates of Ox-

Bridge wider to the graduates of the comprehensive schools). The by-products of thispolicy are decrease of inequality in job opportunity and in income and a raise of social
mobility in a society. All comes from the idea of the rigid transition coeMcients, however, and this is possibly seen only where a sort of Leotief-universe in educating activity

exists.i2) But in the society where academic institutions are plenty enough and little

complementarity among them exists by severe entrance examinations like Japan after
the War, the situation is much different. Moreover, the difference between school costsof national schools and those of private is stight there and the relationship between
parent's social status (father's income, school, job, etc.) and son's course of schoolingis far more loose. Students are eargerly competitive for entrance examination. For sucha society where competitive relationship is predominant even on non-market activities,
the information provided by this type of education accounting is insufficient both foranalysis and policy making for education. People are interested in comparison of costsof whole schooling (including foregone income by schooling) with benefits of whole
schooling in terms ofpecunial income and inpecunial rewards, while both government
administrators and economists either are interested in estimating productivity of educa-tion as one source of economic growth, in making education budget, or, prefer to con11) Typically, this is giyen by R. and N. Ruggles. See R. and N. Ruggles, "The Measurement of
Economic and Social Performance" in M. Moss (ed.), The Measurement of Eeonomie and Social Perforinance, 1973, pp. 116-17.

12) M. Blaug, "ApproachestoEducational Planning," The Economic Journal, June 1967, pp. 26287.

5
ACCOUNTING SYSTEMS OF NON-MARKET ORIENTED ACTIVITIES

sider education as a means of raising earning powers of people in lower income of
discriminated social class from social welfare yiewpoints. Further, nowadays economists' interests in education have not been limited in the formal education but haveextended to "on the job training", "further education" and have concerned to analyse
relationship between earning and education in large sense, while they inquire contribu-

tions of non-education factors which seem to be influencial on earning such as working
experiences, students' IQ, and family's devoted time within home for children etc. andcompare the results with the effect of the education on income.

If we wish to make an extended student stock-flow matrix to accommodate more
specific items for recording some activities mentioned above, the cells of the matrix(where halfofthem are empty) must be enormousely increased. In spite oftremendous
dithculties to treat this, (I- C)-i, the matrix multiplier of transition, would not be so use-

fu1 in the societies where complementarity in academic streams has hardly been established. On the other side, recent tendency in SSDS is that does not exclusively rely on asimple source ofinformation such as data shown in the student stock-fiow matrix but

shifts to combine many informations derived from concerned various branches ofsocio-economic accounting according to analytical and government admmistrator'sinterests. For such a client group's approach,'S) information on education, i.e., precisely

defined and measured in a strict standard way which is to be linked with other kind of
jnformation is rnuch needed. But there is less need for getting estimates ofstudents flow
based on rigid transition coeMcients.

3. The Structure of Time Accounting and Its UseTime accounting, or time-budget study, has an earlier origin than aimost all SSDS,
but a progress in extended and regular scale was seen after the War. Both in capitalist
countries and socialist countries the accounting started in the 1960's and in developing
countries also it has begun to launch,i4) Besides, we have a great work ofSzalai's The Use
qf Time,i5) a project on ti rne-budget research in twelve countries in l972. By these pioneer

studies, know-how on constructing the framework for time accounting, such as definition of basic concepts, standard accounting conventions for measuring time use activities, procedures for recording etc. has been pooled on to a certain level. But time accounting still has been urged its rapid development.i6)

The object of time accounting is recording how population in a given society spent
their time for activities in a whole day i.e. in 24 hours. Here population are classified by

13) Studies in the Integration, ibid., pp. 41-42.

14) UNSO, Progress Report on the Development of Statistics: Statistics of Time Use. Report of
the Secretary General(E/CN. 31519), Apr., 1978. UNSO, Studies in Integration, ibid., Annex III,item IV.

15) A. Szalai, The Use of Time: Daity Activities of Urban and Suburban Populations in Tivelve
Counties, Report on the Multinational Comparative Time-Budget Research Project, 1972.
16) Statistics of Time Use, ibid., UNSO, The Feasibility of Welfare-Oriented Measures to Supplement the National Aceo"nts and Batances; A Technieal Report, p. 67, p. 69.

NOBUKO NOSSE

6

its specific characteristics say, by area, sex, age, job group, income level, and race.

Usually population use their time in a certain way and this pattern of time spending
differs in ordinary days and holidays. The recording oftime use is, therefore, observed
in. time-budget both in ordinary days and that in holidays. Accounting for time use in asociety is required by the following reasons: i. time is usefu1 and limited resources
owned by •human and time use is one of basic human behavior, ii. in observing people's

spending time, especially duration, timing, frequency and sequencial order, social
behavior is able to be analysed and iii. knowledge derived from time-budget statistics isserved for non-monetary activities to which money cannot be used as a yard-stick.
The main categories of time in time accounting are defined by activities for whichtime is spent. There are various activities for using time-personal necessary activity

such as sleeping and eating, working for job, domestic working for family, listening
radio for amusement etc. According to Bureau of Statistics in Japan,i7) for example,
time is devided in main three groups, and they have subcategories as the first groupconsists of working time, trip time to job, housekeeping time, and shcooling time,
and the second group consists of time for personal care, time for sleeping and for eating
while the third consists oftime for leisure, enjoying mass-media, etc. Broadly speaking,this way of classification of time use corresponds to that of other Japanese time use
studiesi8) and of Szalai. Here the problem is how classify simultaneous activities suchas nursing and listening TV into separate categories of time accounting. For solving this,the convention established by time accountants is to separate this into main activities
and subsidiary activities by duration of each time use and record them separately.

TiEl Tn+Tr •...(1)Tr =' Tw+Th+Tl ••••(2)
where Tis total time in a day, namely, 24 hours, T. is necessary time spent by people
for maintaining his life, for example, sleeping, and T. is (T- T.) which is divisible

total amount of time for time use decision by the people. T. is working time spend
forjob, Th is time for housing and domestic service and Tt is time spent for leisurerespectively. On the other side, research on behavior relationship on time use launchedby Human Capital economists in the 1960's,'9) has been developing. There are researches on i, choice ofspending time to be combined with consumption goods and services to
get a nevv goods or services (on fu11 income) by Becker- Lancaster,20) ii, choice between

labour time and leisure time or between schooling time and leisure time, iii, choice17) Bureau of Statistics OMce of the Prime Ministor, Syakaiseikatsu-Kihoncho'saho-koku (Surveyof Social Life), 1978.

18) Ecomomic Planning Agency, Seikatsufikan-no-Ko-zibunseki (Survey of Time Use), Annex,
1975.

19) G. Becker, "A Theory ofthe Allocation ofTime," The Economic Journal, vol. LXXV,No. 299,
1965, pp. 493-517.

20) Becker, ibid. G. R. Ghez and G. S, Becker, The Allocation of Time and Goods over the Life
Cycle, 1975. K. J. Lancaster, "A New Approach to Consumer Theory," Journal ofpolitical Economy,
Apr, 1966, vol. 74, pp. 132-57.

7
ACCOUNTING SYSTEMS OF NON-MARKET ORIENTED AerIVITIES

between time for housekeeping and labour time or between housing time and leisuretime, and iv, household production function of which-time constitutes as a factor•andis combined with durable consumption goods.2i)

The time budget in a given format derived from time accounting reports populations' pattern of time use in a certain year. Provided such a data was given on regularand standard basis, inter•-temporal comparison of time use pattern is feasible. If thecountry basis for measuring time use were internationally standardized, international

comparison oftime use pattern would also be expected. By time accounting together
with research on time use behavior relationship, we could have insight on the structure
oftime-budget and on the socio-economic life to which time relates. This is, say, direct

use of time accounting, or use as afinalproduct.

Time accounting's role is, however, more important in its intermediate use. It
provides jnformation on time to the other fields in SSDS such as analysis of education,
estimates of females activity in market and households, tec. The reason why the role as
an intermediateproducts is so important is by the fact that tjme is a human jnput and isserved as a surrogate for showing continuance of some human activities. Both of these
originate in specific characteristics of time : time is naturally homogenous, divisible into

many small unit (divisibility) and is easily summed up (additivity), while time is acommon unit for measuring general human activities, which is sometimes superior tomoney which is servable only for market-oriented activities. Time has been used as asurrogate of leisure activity, householding and volunteer activities which are real non-monetary activities but no measuring rod for them. .. ./.
Since the 1970's, time accounting has been oriented to standardization and has beenproceeded on the road. And demand for information on time is increasing as measuring
requirements for non-monetary activities have been rapidly increasing in all socioeconomic accounting. The scope and use oftime accounting are different from demographic accounting but by its nature it is much expected in recent direction of socio-

economic accounting.
4. Constructs of SSDS and Socio-Economic Accounting
The new wave of "client groups approach" requires to socio-economic accounting(including demographic accounting, education accounting and time accounting) to
proyide their data i.e. their products to be combined for various clients' multi-dimensional use. From this point of view, and from integration point of view on sQcio-econo-

mic accounting, we have a look on constructs in SSDS which are serving as supplement-' accounting.
'.
ing aggregatesof economlc' ' '' •These constructs have emerged (or throughly been revised) in the 1970's for pro`viding a portrait ofsocial welfare and social wealth. One is a condition statement whose

21) R. Gronau, "Home PrQduction-A Forgotten Industry,tistics, Aug. 1980, pp. 408-16.

" The Review of Economics and Sta-NOBUKO NESSE

8purpose is to estimate the main factors which constitute socio-economic conditions ata point of time. Another is a statement relating to social performance whose purpose isto estimate non-market activities performed during a year and show them in money
term. Both are shown either in aggregates or a part of the aggregates.

The statement of the former type is a sort of nation's social condition statement
or social balance-sheet, which is called as below the line statement by Saunders in a UN

report.22) Its coverage is wide-ranging from population to crime-, which includes
demographic situation, education and its transition, employment and its structure andmobility, protective association for employee, social security, nutrition and health,leisure time, religion and crime. So the system seems to be a grossary ofSSDS. By thenature as condition statements, the weight is mainly puton states of demographic factors

such as population, students, and man power, but data derived from time accounting
are few. The typical example of this type is "Social Conditions in England and Wales"by Carr-Saunders, Jones and Moser23) which accommodates almost all factors of SSDS,
while a conceptual framework for social wealth which consists of economic capital andnon-economic capital including human capital is presented by Juster24) and the social

capital sheet in along the line of Juster but only concerned for human elements are
estimated by Kendrick.25)
The latter type of statements for social performances is welfare-oriented measures

which estimate socio-economic performances produced or disproduced both by humannon-market activities and ecology, which is treated by Saunders as above the line statement.26) The coverage ofthis type ofstatements is also wide like below the line statement

and many topics are overlapped in both though in the welfare-oriented measures therole of the demographic element is slight (used only as a denominator for calculating
per head figures) but the role of time statistics for measuring non-market activities ismore important than in the case of below the line statement.

In the above the line statements, there are many variants, i.e. MEW,2') social eco-nomic performance statement by Ruggles,28) Kendrick's adjusted GNP,29) NNW30) in

22) UNSO, orelfare-Oriented Measures, ibid. p. 6.
23) A. M. Carr-Saunders, D. C. Jones and C. A. Moser, A Survey of Social Conditions in Englandand Wates as illustrated by Statistics, 3rd ed., 1970.

24) F. T. Juster, "A Framework for the Measurement of Economic and Social Performance,"in M. Moss (ed.), The Measurement ofEconomic and Social Performance, ibid., pp. 25-109.

2S) J. Kendrick, "The Treatment ofIntangible Resources as Capital" and "The Accounting Treatment of Human Investment and Capital," the Review oflncome and Mealth, Mar. 1972. pp. 109-25 andDec. 1974, pp. 432-68, respectively.

26) UNSO, Melfare Oriented Measures, ibid. 3-7.
27) W.D. Nordhaus and J. Tobin, "Is Growth Obsolete?", Economie Growth, Fifties Anniversary
Colloqui'um V, 1972.

28) R. and N. Ruggles, "The Measurement of Economic and Social Performance" in Moss (ed.),The Measurement ofEconomic and Sacial Performance ibid. , pp. 1 1 1-60.

29) Kendrick,ibid.

30) NNWMeasurementCommittee,NNPVAtarashii-Fukushisihyo-(MeasuringNetNationalWe]fare of Japan), 1974.

9
ACCOUNTING SYSTEMS OF NON-MARKET ORIENTED ACTIVITIESJapan etc. Taking MEW as a representative of this sort, the contents are the public
expenditure for regrettable necessities, subsidies from enterprises to their employees,
costs spent on commuting jobs, household production activities, leisure activities, andloss of amenity by environmental damage. The below the line statements, another typeof constructs involve also the element of ecology which is not included in SSDS but
is a theme of the System of Environment Statistics.

The differences between in two constructs are shown in their methods ofestimationand their arrangement. They are: i. in MEW activities are estimated and shown interms ofmoney by means ofimputation while in social conditions statement figures are
not throughly shown in money term but recorded both in physical terms and the money
term : and ii in MEW the items ofvariables are limited to current non-market activities

to be added to a single national aggregates and to be compared with GNP while insocial condition statements the items are not aggregated and the numbers of variables,

way of presenting the estimates are not uniform but open-ended.3i) These differences
are caused by their different purposes and approaches.

Estimation of MEW is taken by Nordhous and Tobin, the authors of MEW themselves. They adjusted the official social statistics which have been complied for admin-

istration purposes but not for economic research. The situation is the same in social

condition statement. Both they, however, would be derivable from socio-enonomic
accounting and should be if they were to keep a high standard of quality. Both they areconceived as special constructs of socio-economic accounting though their ways of
estimating, accounting and arranging data are different. The ideas of these constructs
based on socio-economic accounting have recently been accepted or at least accepting.

They are used in any country in any stage of development provided that data could be
supplied by socio-economic accounting in a standardized way.
On this line of thought, it is clear that the way we should do for proceeding socio-

economic accounting. The products of the sub-systems of this accounting, whether
they are as inputs for the below the line staternents or for the above the line statements

should be produced in a certain standardized way for reclassification and recombination to be processed to get estimates in a more comprehensive coherent system. The one
effort for this end is seen in the recent topic of "harmonization of concepts, classifica-

tions and definitions," which intends to establish the way for multilevel hierarchicalclassifications of the products of the accounting from multidimensional viewpoints.32)
This enlights the direction for proceeding integration of the fields in the socio-economic

accounting and for developing a function of socio-economic accounting as a providerof data base for all non-market activities, its performance and efforts and for social
wealth, as now SNA is served for market oriented activities.

31) Melfare-Oriented Measures, ibid., p. 6.
32) UNSO, Stttdies in the Integration, ibid., Part Three.

NOBUKO NOSSE

10

5. Summary and Conclusion
By surveying the leading fields of socio-economic accounting and the main constructs of SSDS, we get understand the issues of the socio-economic accounting. They

are summarized as foIjows:(1) The idea of education accounting which intends to show transition of thestudent population in the education matrix, a version of the population stock-flow matrix has well developed and is excellent both for constructing an accounting framework
concerned to learning activity which is one ofhuman life sequences and rnodel-building
for education planning. Its fu11 virtue has however been criticized because i, it would be
lessened ifrigidity oftransition coeMcients were lost and ii, the range of the systematiza-tion by the demographic accounting is too narrow for whole SSDS.
(2) Recently there has been rising "client groups approach" which requires theinformation from many fields of SSDS in a certain general and a standardized way tosecure possible reclassification and recombination from clients' view points. From thisview, time accounting is not only expected for providing time-budgets but also is expected for estimating various non-monetary activities. By its nature and the fact thatthe system is on developing stage, full standardization of accounting framework is expected.
(3) The two constructs ofSSDS, i.e., social condition staternent (below the line) andwelfare-oriented measures (above the line) have been popular and is expected to be ex-tended further. Though there are differences among their scopes, their methods of
estimation and of arranging the figures, both they cover many fields of SSDS and in
the coverage considerable parts are overlapped. Where the constructs could be derived
directly from the figures of a standardized socio-economic accounting and their fields,present troublesome estimation work from oMcial statistics would be Iessened andexactness of the resulted figures must be secured. This must open the road both forintertemporal and intercountry comparison ofthe estimates of those two constructs.

We like to add here. This new wave is welcomed from the scopeof the socio-economic accounting which provides objective measurement of non-market activities in welldefined way to all users. The tendency encourages not only systematization of the whole

SSDS but proceeding standardization of the framework and developing a new function
for serving as data base concerned social welfare and social wealth. This last notion is

expected for developing the socio-economic accounting to be one main sub-system ofnation's information system where SNA has been established as another main subsystem for market-oriented activities.

CURRENT SITUATIONS OF WORLD ECONOMYAND GLOBAL ADJUSTMENT OF INDUSTRIES
Hikoji KATANo

I Introduction

Currently, the world economy has been severely suffered from two major problems:(1) stagfiation among the developed economies, and(2) severe income gap between the developed and the developing economies.
This paper will attempt to investigate the causes of these phenomena, and to showframework of our thinking that the solution of these djstortions jn the world economy

may need a global adjustment of industries within the world economies as a whole ofthe developed and the developing economies. Here we consider the long-term guideline
for a satisfactory development of the world economy. As of the short-term problems,
this paper does not examine them in detail, even if these are also very important pro-blems of the world economy.

II Stagflation among the Deyeloped Economies
A. Background ofStagflationa. Stagflation is considered as an economic situation that a high unemployment
ratio coexists with a severe inflation. As shown by Table 1 and Chart 1, the stagflation
has been appeared, more or less, among the developed economies after the oil crisis.

b. Through the l960's, the developed economies could maintain their satisfactory
growths, based on an abundant and cheap supply ofindustrial raw materjals and energies, a moderate level of wage rate, a warranted inflation to promote the growth, etc.

On the ecomnoic growth process of the deyeloped economies over the decade, themonetary relaxation policies have been gradually adopted for promoting growth.' The
rate of inflation has been gradually increased. Correspondingly, the unemployment
ratio could be gradually decreased through a trade-off relation of the ratio to the rateof inflation. In average among the major seven countries (Japan, the U.S.A., F.R.G.,
U.K., France, Italy, and Canada), the unemployment ratio was decreased from 2.9% at1962 to 2.3 O/. at 1969, while the rate of infiation was increased from 2.3 O/. to 4.9 O/. forthe same period.
c. At 1969, the rate of infiation approached to the level of5O/. per annum. So thegovernments of the developed countries adopted a monetary restraint policies. Sudden
decrease of effective demand happened in the developed economies. And a small scale
recesg. ion was generated in these economies at the middle of 1970. Immediately, certain

HIKOJI KATANO

l2

Table 1:

Real GNP Growth Rate, Unemployment Ratio and Rate of Inflation in the Developed Economy

(%)
Real

Unemployment

Rate of

GNP

Ratio

Inflation

Growth Rate
1962
1963
1964
1965
1966
1967
1968
1969
1970

I

1971

Il

1972
1973
1974
1975
1976
1977
1978
1979
Source :

III

5.4
4.6
5.9
5.4
5.7
3.7
5.6
4.5
2.7
3.8
5.6
6.3

2.9

2.3

2.9

2.4

3.1

7.6

-O.1

3.5

l3.3

-O.5
5.4
4.0
4.2
3.3

5.5

10.9

5.4
5.4

7.9
7.8

5,3

6.5

5.3

8.0

2,7

2.1

2.6

2.7

2.4

3.2

2.6

2.8

2.5

4.1

2.3

4.9

2.9

5.6

3.5

5.0

3.5

4.4

UN, Statistical Yearbook.

OECD, Economic Outlook.
Notes:

1) Averages of Major Seven Countries (Japan, U.S., Fed. Rep. of Germany, U.K., France,

Italy and Canada).
2) Rate of inflation is represented by a rate of increase of consumer price index.

policies were enforced again for a relaxation of the monetary restrictions. Thus the
inflationary tendency could still continue thereafter.

The apparent inflationary tendency, since the latter half of the 1960's, has fixed an

expectation of inflation among the people in the developed countries. Due to the expectation, a pressure of demand for higher wage has been gradually intensified, moreor less, in each country.

Since 1971, when the Teheran Agreement was concluded, the oil price has beensliding in relation to the world inflationary tendency. And the prices of agricultural andmineral products (excluding oil) have been sharply increased by bad harvest in the main
agricultural countries and the related circumstances. In these situations, the prices ofindustrial raw materials and energies have been sharply increased. The rate of infiation

might be accelerated accordingly.
On the recovery phase (197I-73) from the recession at the middle of l970, reflect-

ing the unfavourable situations mentioned above, and suffering from the newly industrialized countries' catch-up to the developed countries mainly in the labour inten-

sive industries, some industries in the developed countries have been forced, evendefensively, to adjust themselves or to select more labour saving technologies thanever before, Consequently, the unempioyment ratio has been increased upto 3.5 O/. at

13
CURRENT SITUATIONS OF WORLD ECONOMY AND GLOBAL
ADJUSTMENT OF INDUSTRIES

Chart 1.

Unemployment
Ratio (O/o)

75

(m) i
77

76

79

78

f

Growth Rate of Real GNP

5
(o/o)

N

.,.--,-,-,,-,-,-.-:

5'- g-sN.-.,.,,,--,.

'..b-,-,..

-•---•--..• ;

75 80

65 70
4

cll)

72 71

3

74 I

7

(I]
62 63
l 64

70

67

l65
Ii 66

68

69.

Rate of
Inflation (O/o)
2

5

10

HIKOJI KATANO

141971 and 1972. And it was 3.1 O/, at 1973, when the last boom was recorded before theoil crisis.

d. At 1974, the OPEC have monopolitically raised their oil prices about four times
in relation to the previous level. The sharp increase of the oil price has shot up theprices of the industrial raw materials and energies. Accompanied together with theincrease of wage level, this has inevitably generated a sharp increase of input prices forindustrial production. Thus a hyper-inflation has been generated among the developed
countries after the oil crisis.

Policies for restriction of aggregate demand was adopted against the hyper-inflation. These policies could be effective for repressing the hyper-inflation, while a big

depression has been generated and the unemployment ratio has been increased. Currently, after 1974-75 of the most severely depressed year, the developed economy asa whole has been still suffered from both about 8 O/. of the rate of inflation and theunemployment ratio over 5 O/. in the average of the major seven countries.

B. Causes of Stagflationa. The developed economies recorded their satisfactory growths over the 1960's
and until the oil crisis. However, on the growth process, a gap between production
Table 2: Increase Rate of Investment, Rate of Profit and Rate of Capacity Utilization(%)
U.S.A.

Japan

1962
1963
1964
1965
1966
1967
1968
1969
1970
1971

1972
1973
1974
1975
1976
Sources:

A

B

C

A

B

C

5.3

3.17

20.0

3.71

5.5
9.6

3.31

13.5

2.71

29.3

3.58

29.5
23.8

4.19
3.94

16.1

4.27
3.64
2.39
2.92
3.93

4.56
4.72
5.24
5.59
5.57
5.04
5,08
4.78
4.03
4.12
4,30
4.72
5.44

11ZO
1132

-6.4

85.2
84.2
89.4
84.2
89.8
97.2
1oo.2
102.6
1oo.O

-1.6
3.6
18.6

-6.1
-6.9

1.83

1.4

o.oo

3.1

1.42

16.7
10.6

94.3

-2.0
4.0
5.6
-3.7
-1.5
7.8

94.9

10.0

98.5
90.2
76.9
83.3

1.0
-9.0
4.1
9.3

UN, Yearbook of National Income Statistics.

OECD, Main Economic Indicators.
Bank of Japan, International Comparative Statistics.

Notes:

1) A: Increaserateofinvestment
B: Rate of profit
C: Rateofcapacityutilization
2) investment is a private investment in plants and equipment.
3) Profit does not include tax.
4) Rate of capacity utilization is a index; 1970 = 1oo.

111.2
110.6
110.8
107.9
107.0
104.8
1oo.O
98.8
1oo.4

4.51

101.9
97.0
92.4

5.28

94.6

15
CURRENT SITUATIONS OF WORLD ECONOMY AND GLOBAL
ADJUSTMENT OF INDUSTRIES

Chart 2.

JAPAN

30

N.xN
/t... r-'NN
1/ Å~""'.sN XX

20

"

hLX

'

.-. ..

ts

Å~'/
l

N

N

st
xti
Xl

10

N

t

X/x
NsN.- :.L

!s /

NVI /

1
70z

x tt

V 65

o

x

x
N

N

x

IN>,;-}.N

M //
N.N

7

/

IXI /
Actual-10---p------U.S.A.

20

i/'

10

x!

A Ir
Estimates

Estimates

A Il•
for 1962-69.

- nt ---Estimates

A Ir,
for 1970-76

Sl

st

v

;-'""'N'-"x Ax

3ix. .-...-.: x1o"y Nv'7

65Xlv

x-./a,ts

7.7t- Sxtw,

NxNiof75'""-'

NXXe7Ns, N tij
N",x 7o"
Xx ;-'N7t
NN
NN\ ltt

v

t
l
i`

-10

capacity and effective demand might be generated in the developed economy as a whole.

This might, in turn, cause a severe competition among the developed economies, especially since the latter halfofthe 1960's. As the results of the growing severity of competi-tion, either a rate of profit or a rate of capacity utilization has been decreased. The

decreases of these elements might reduce an investment inducement. This has formed
one of the main causes of the current stagfiation.

a-i As shown by Table 1 and Chart 1, the growth rate of real GNP of the developed
economy as a whole had a tendency to decrease since the Iatter half of the 1960's
and until the oil crisis,

HIKOJI KATANO

16

The growth rate of GNP depends mainly on an increase rate of investment. Of

a-ii

the investment, the most infiuential part is played by a private investment in plants

and equipments (PIPE). As shown by Table 2 and Chart 2, the increase rate ofreal PIPE had been tended to decrease, at least, since the latter halfof the 1960's.

The decreasing tendency of the growth rate of real GNP may be mainly related
to the decreasing tendency of the increase rate of real PIPE.

An econometric analysis of the investment behavior shows that the increase

a-iii

rate of real PIPE (I) is closely related to the rate of profit (r), its future expectation(Ar), the rate of capacity utilization (u) and its future expectation (au). As theactual data of Ar and Au are not available, so these are substituted by an increment(or a decrement) of the current rate to the succedeing year's rate, where we assume
that an investor may correctly expect the change as it may.

The analysis is concerned only with the cases of Japan and the U.S. This ismainly due to the data availability. But these two countries have large infiuences

to determine the movements of the developed economy as a whole, because they
are the leading countries in the developed economy and their shares of GNP arevery large. As a matter of fact, the analysis is desirable to include the case of F.R.

G., but could not do it due to the lack of some important data of the country.

Results of the analyses, on the cases of Japan and the U.S., are shown by
Table 3 and Chart 2. The results and the related considerations induse a general
conclusion that I becomes small as either (1) r and dr or (2) u and Au become small.
a-iv

The decreasing tendency of I had begun at the latter half of the 1960's, eventhough there were some differences in the beginning years by countries. Anyhow,

Table 3: Estimates of I == ao+air+a2u+a3dr+a4du
ao

al

a2

a3

a4

R2

2.966

O.437
(1.104)O.190(O.809)-1.711(-O.414)
4.911(1.911)24.267(5.144)2.076(2.903)2.033
C7.e63)

O.897-3.319

O.988

Japan

1962-76-39.162(1.074)-oo271

1962-69

15.298(3.774)203.363

1970-76

23.232-2.802(4.207)(-3.461)

O.995(-3.775)

U.S.A.

1962-76-53.962

1962-69
1970-76

17.935-190.251

2.354

O.472

5.245

1.846

(1.054)(3.176)(2.138)(3.924)

4.246-O,290l4.562

O.369(O.337)(-O.314)1.569(5.108)(O.955)(O.099)8.730(4.434)

Notes :

5.250

2.876

(3.806)(8.521)

I: increase rate of real private investrnent in plants and equipments,
r: rate of profit,
dr: future expectation of rate of profit,
u: rate of capacity utilization,
du: future expectation of rate of capacity utjlization.

O.897
O.906
O.991

17
CURRENT SITUATIONS OF WORLD ECONOMY AND GLOBAL

ADJUSTMENT OF INDUSTRIES
the important point to be recognized is that this sort of tendency was begun before
the oil crisis happened. As explained above, the decreasing tendency of I has beencaused mainly by the increasing gap between production capacity and effective
demand. Then, eyen if the oil crjsis had never happened at 1974, a big depression(not a stagflation) might attack, sooner or later, to the developed economies
through the decrease either of the rate of profit or of the rate of capacity utiliza-

tion, when a certain effective measure was not adopted for controlling the increaslng gap.
The rate of profit decreases as the price of product can not increase more thanb.

increase of the mput price, because the price ofproduct is composed of the input priceand the corresponding marked-up profit.
Table 4 shows the price ajdustment ratio of the manufactured products, that isdefined a ratio ofpercentage increase of the price of product to percentage increase of
the input price, in the cases ofJapan and the U,S. Thus the ratio less than unity meansa decrease of the rate of profit.
b-iJapan : The price adjustment ratio was rather increasing from the beginning of
the 1960's to the latter half of this decade. Accordingly, for the period, the rate ofprofit had a tendency to increase. Growing competitiveness of Japanese manufactured products could realize to increase the rate of profit, even in the situations

that the world market competition had been raising its severity. However, theprice adjustment ratio has begun to decrease since the latter half of the 1960's.

Table 4: Price Adjustment Ratio (Manufacturing Products)

US.A.

Japan

1962
1963
1964
1965
1966
l967
1968
1969
l970
1971

1972
1973
1974
1975
1976
1977

Price of

Input

Adjustment Priceof

Input

Products

Price

Ratio Products

Price

Ratio

(a)

(b)

(a)/(b) (a)(b)(a)/fo)

94.7
9S.8
95.6

94.9

1.015

95.6
96.6

96.8

O.998

96.7

96.6

95.9

96.1

95.6

O.999
1.007
1.oo5

84.0
83.7
85.0
87.9
89.0

1.019

95.8

O.998
O.923
O.998

84.5

I03.8

97.2
1oo.O
98.2

96.4
1oo.O
loo.O

98.1

99.1

109.5

85.8
85.6
85.8
87.5
90.4
90.6

Adjustment

1.025
1.029
1.028
1.018

92.8
96.4
1oo.O

90.8
94.8

1.022

1oo.O

1.000

O.982
O.990

103.1

102.8

1.oo3

107.8

107.0

l.oo7

108.8

1.oo6

122.0

1.013

142.5

145.7

145.0

146.2
152.2
153.8

152.9

O.978
O.956

120.4
142.3

O.974

158.0

O.973

157.4
162.5
172.5

1.oo6

156.3

158.4
165.7
175.9

1.008
1oo.O

Source: Bank of Japan, International Comparative Statistics.
Note: Base is the price adjustment situation at 1970.

1.017

1.019
1.020
1.020

HIKOJI KATANO

18

Raising the price of products oyer increase of the input price could no longer
maintain the strong competitiveness of Japanese products in the world market.
Maintenance of the established market share and its expansion could be realized
only by a sacrifice ofthe decreasing rate ofprofit, that is generated by the decreaseof the price adjustment ratio.
b-ii

The U.S.: Since the early 1960's to the latest years, the price adjustment ratio

has shown a cyclical movement; even though the amplitude of fluctuation was not
so wide that the corresponding remarkable fluctuation of the rate of profit was
generated. The rate of profit has been maintained at rather stationary level. Thismeans that the price of product has been satisfactorily adjusted to the correspond-

ing increase of the input price. However, the competitive situation in the world

market have been becoming more and more severe for the manufactured productsof the U.S. The U.S.'s manufacturers have selected their strategy to decrease therate of capacity utilization (the strategy of capital strike) in order to satisfactorily

adjust the price to the corresponding change in the input price and to maintainthe rate of profit rather constant. As the results, the competitiveness of the U.S.'s

products might be decreased in relation to that of the Japanese products that theprice has a tendency to relatively decrease in the world market.
c.

Chart 3 shows the relative movements ofthe rate ofprofit and the rate of capacity

utilization in e
thcases of Japan and the U.S. Here is a typical difference between thesetwo cases.
Japan: The increasing (or decreasing) tendency of the rate of profit is corre-

C-1

sponding to the increasing (or decreasing) tendency of the rate of capacity utilization, except for the period of 1967-70 when the decreasing rate of profit was corresponding to the increasing rate of capacity utilization. Roughly, the rate of profit
was increasing with the increase of the rate of capacity utilization from the beginning of the 1960's to the latter halfof the decade. For the period, the increase rateof real PIPE was increasing. However, the rate of profit began to decrease smce
1967, while the rate of capacity utilization was still continuing to increase until 1970

and turned to decrease thereafter. Nevertheless, the increase rate of real PIPE has

begun to decrease since 1967. The small scale recession at 1970 forced to decrease
both the rate of profit and the rate of capacity utilization; the both rates at 1971
were very Iow in relation to the corresponding rates at 1970. Towards the last boom

years before the oil crisis, the both rates had been again increasing. Correspondingly, the increase rate ofreal PIPE was increased. But, after the oil crisis, both ofthem have been sharply decreased, even though there is a little recovery since 1976.
c-ii

The U.S.: There is no apparently corresponding movement between the rate
ofprofit and the rate ofcapacity utilization. The rate of profit has been maintainedat rather stationary level, whjle the rate of capacity utilization has been gradually

decreased. And the increase rate of real PIPE has a tendency to decrease. However,in more detailed observations, the rate of profit has a very narrow amplitude ofcyclical movement; an increasing tendency for 1962-65, a decreasing tendency

l9
CURRENT SITUATIONS OF WORLD ECONOMY AND GLOBAL
ADJUSTMENT OF !NDUSTRIES

Chart 3.
69

67
Rate of
4

73

Profit

os
63

(e/o)

66

70

6tl

62

Japan

72

3

65

71
2

74

1

76

Rate of77

CapacityU•ti"zation(%)

7Jr

o

80

1oo

9.0

65

Rate of/

74

ProfitU.S.A.

(e/o)

66

76
64

e77

68

5

67

69

63

73

62

75
72

71

Rate of4

7•(}

Capacity
Utilization(ele)

oo

loo

110

HIKOJI KATANO

20

for 1966-70, and again increasing tendency since 1971.

d. The price of product is composed of the input price and the marked-up profit.
The marked-up profit may be determined at the acceptable rnaximum level under thecompetitive situations that have become more and more severe since the Iatter half ofthe 1960's. And the rate of profit has never shown an apparent increasing tendency forthe period. Then the increase of the prjce ofproduct depends mainly on the increase of
the input price. The changes of the input price and its components are shown by Tables
Table 5:

Input Price in Manufacturing Industry(1970 :-:

Input

Raw

Personnel

Price

Materials

Cost

Depreciation

Financial

Cost

1oo)

Misce1laneous

Cost

Japan
1962

1963
1964
1965
l966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
U.S.A.
1962

1963
1964
1965
1966
l967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977

90.7
96.8

94.9

87.2

103.8

98.1
94.4

92.1

96.7
98.3

96.2
94.4

107.8

92.3

96.9

93.3

95.8
96.8

961
95.9
95.6
96.4
1oo.O
100.0

110.1

101.8

113.8

116.6
112.0

85.4

124.8

107.2

95.7
90.7
91.5
66.6
95.2
96.1

108.6

99.2
92.5
91.3
92.3
100.0

97.6

94.3

1oo.O

1oo.O
104.9
107.0

108.8

97.7
96.3
106.9

118.0

145.7

147.2

151.5

1OO.7
96.3
117.1

152.9

155.6

158.3

125.0

156.3

179.8

158.7

117.0

158.0

166.5

163,9

115.2

99.1

84.5
84.0
83.7
85.0
87.9
89.0
90.8
94.8
100.0

84.8

93,4

84.1

92,2

84.4
86.4

90,9

88.8

85,2
87,2

t05.8

115.6
105.5

93.8
92.8
91.6
1oo.O
11O.3
101.7
102.5

155.9
176.7
166.4
l50.4

39.9
40.8
41.1
49.0
63.6

89,9
1oo,O

102.8

92.7
95.6
1oo.O
105.6

107.0

109.7

1oo.4

80.8
80.3
80.0
80.0
82.4
88.0
89.3
90.8
1oo.O
104.4
107.8

120.4
142.3
157.4
162.5

123.9

106.8

1132

168.1

150.4

127,7

200.7

172.5

88.3

89.4

88.0

99,1

169.7

138,3

116.2
136.6

192.6

143.4

136.3

188.1

154,4

142.8

68.1

83.3
114.8
1oo.O

80.5
92.9

156.5
136.3
180.1

Source: Bank of Japan, Internationat Comparative Statistics.
Note: Prices of input elements required for producing one unit of manufacturing products.

1oo.O
1oo.O
101.1

113.2
143.0
143.9
96.7
142.0

80.6
81.1

80.3
81.4
93.6
97.5
89.8
95.9
1oo.O
101.0
108.9
119.7
130.5
l46.3

98.4
150.0

21
CURRENT SITUATIONS OF WORLD ECONOMY AND GLOBAL
ADJUSTMENT OF INDUSTRIES

5 and 6 and Chart 4.
Both in Japan and in the U.S., the largest component of the input price is and-i

expense for raw materials.

However, as shown by Table 7, the most infiuential component, that affects tod-ii

raise the input price, is a personnel cost in Japan, while an expense for raw materials in the U.S., that are measured in terms of an input price eleasticityof eachcomponent.
An increase ofthe expense for raw materials does not always reflect fu11 of thed-Liiiincrease of raw material prices, especially of oil price. The increase of raw material

prices has induced to develop technologies for saving raw material consumptions.
Specially, since the oil crisis, the development oftechnologies to save oil consump-•
Table 6:

Contributions by Elements composing Input Price

Input

Raw

Personnel

Miscel-Materials

Cost

Depreciation

Financial

Price

Cost

laneous

94.9

50.5

10.9

5.2

4.6

23.7

103.8

56.8

11.6

5.5

3.8

26.1

95.8

54.7

11.1

5.3

4.8

19.9

968

56D

11.5

5.1

5.2

19.0

96.7

56.9
62.4

11.3

4.7

4.7

19.1

ILI

4.3

4.2

l3.9

56.1

ll.2

4.3

42

19.8

56.5

11.3

4.3

4.1

1oo.O

57.9

12.0

4.7

4.5

20.2
20.9

1971

loo.O

1972
1973
1974
1975
1976
1977

99.1

108.8
145.7

56.6
55.8
61.9
85.2

152.9
156.3
158.0
84.5

Cost

Japan

1962
1963
1964
1965
1966
1967
1968
1969
1970

95.9
95.6
96.4

12.6

5.0

5.0

20.8

12.8

4.7

4.6

212

14.2

4.5

4.6

18.2

5.5

7.0

23.6
29.8

90.1

19.0

5.9

8.0

29.9

104.1

19.0

5.5

7.5

96.4

19.7

5.4

6.8

20.2
29.7

46.8
46.4
46.6

19.9

3.0

1.1

13.7

19.6

3.0

1.1

13.9

19.4

3.0

1.1

13.6

47.7
40.0

19.0

3.0

1.3

14.0

18.1

3.0

1.7

16.1

48.7

18.6

3.3

1.8

16.6

51.2
52.8

18.7

3.3

22

15.4

19.1

3.4

3.1

16.4

552

21.3

3.7

2.7

17.1

58.3

21.1

3.9

2.2

17.3

60.6

21.4

4.0

2.5

18.5

68.4
83.0

22.7

42

4.5

20.6

27.2

4.3

5.4

22.4

93.7
106.3

29.5

5.1

4.2

24.9

30.5

5.0

3.7

17.0

103.8

32.9

5.3

4.9

25.6

U.S.A.

1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977

84.0
83.7
85.0
87.9
89.0
90.8
94.8
1oo.O
102.8
107.0
120.4
142.3
157.4
162.5
172.5

HIKOJI KATANO

22

Chart 4.

Japan

Input Price

150

Miscellaneous Cost
Financial Cost
Depreciation

Personnel Cost

100'
Raw Materials
JrO

()

65

70

75

Input Price
U. S.A

Miscellaneous Cost
Financial Cost

150

Depreciation

Personnel Cost
100

Raw Materials
50

o

65

70

7Jr

23'
CURRENT SITUATIONS OF WORLD ECONOMY AND GLOBAL
ADJUSTMENT OF INDUSTRIES

Table 7: Estimates of LC = ao+aiLR+a2Lor+a3LD+a4LF
ao

a2

al

a3

a4

R2

Japan

1962-77

O.614

1962-69
1970-77

1.109

O.410

O.422

O.468

O.292

-O.090

O.997(6.256)(6.193)(4.537)

O.994

O.079

O.692

O.163

(-1.636)-O.153(1.794)(6.282)(6.843)(-Z938)

O.409

O.599

O.574

-O.262(3.447)(4.166)(1.264)(-O.895)

O.495(7.193)

O.317

O.109

O.059

(3.950)(1.721)(4.583)

O.999

U.S.A.

1962-77

O.636

1962-69
1970-77
Notes:

2.024-O.152

O.107

O.024

O.136

(1.369)(O.289)(3.465)

O.706(-O.601)
O.375(4.845)

O.323

O.314

O.084

(3.100)(3.186)(5.449)

O.999
O.998
O.999

LC: logarithn of input price,
LR: logarithn of expenses to raw materials,

LW: logarithm of personnel cost,
LD: logarithm of depreciation,
LF: logarithm of financial cost.
tion has been accelerated.
d-iv

The similar tendency has been true for the personnel cost. The increase ofwage rate has caused to decrease a labour input for producing one unit of product,as shown by Table 8. This has been promoted through the transition of industrial
structure from the labour intensive industries to the capital intensive industries, orby introducing more labour saving technologies into an industry. Estimates of alabour input elesticity of wage rate are shown by Table 9. Either in the case ofJapan or ofthe U.S., the tendency to save labour input was promoted more strongly in the 1960's than after 1970, even though the raise of wage rate has been realized

more sharply after 1970 than in the 1960's. In Japan, the transition of industrial

structure had been almost completed in the l960's. And, either in Japan or in the

U.S., the power of the labour union to resist unemployment has become more andmore strong in the 1970's, especially after the oil crisis. Thus, in Japan, the labour

input elesticity of wage rate become about a half in the 1970's in relation to thatin the 1960's. While, in the U.S., it became almost zero in the 1970's, even though
it had a larger value than that of Japan in the 1960's; this means that there is no
more decrease ofIabour input due to the raise ofwage rate in the U.S.
d-v

As a whole, as shown by Chart 4, either in Japan or in the U.S., the input pricehas been sharply increased after the oil crisis. This is mainly caused by the sharp
increase of the oil price that has a character of the monopolistic raise of price.

Then the input price for industrial production in the developed economics has
been sharply increased with their downward rigidity. This has created the hyperinflation in the developed economies. Through the world trade and financial net-

HIKOil KATANO

24

Table 8 :Personne] Cost,

Employment and Wage Rate in Manufacturing Industry(1970 -= 1oo)Japan

U.S.A.

Employrnent

Personnel

Cost
1962
1963
1964
1965
l966
1967
1968
1969
1970
1971

1972
1973
1974
1975
1976
1977
Source :

Note:

Wage

Personnel

Rate

Cost

90.7
96.8

250.6

36.2

247.1

392

92.1

180.7

96.2
94.4
92.3
93.3
94.3
oo.o
104.9
107.0
118.0

175.4

1oo.O

51.0
54.8
60.2
66.4
75.4
88.5
1oo.O

93.4
92.2
90.9
89.4
85.2
87.2
88.0
89.9
1oo.O

93.0

112.8

99.1

832

128.6

75.9

155.6
197.0

1oo.4
106.8

156.9
139.1

123.8
106.5

151.5

76.9

158.3

73.4

158.7

66.7

163.9

63.9

215.7
237.9
256.5

Employment Wage
Rate
140.8

66.3

134.8

68,4
70,7
73.8
74.7
77.8
82.6
87.7
1oo.O

128.6
121.1
114.1
112.1

106.5
102.5

1oo.O
93.4
88.7
88.2

106.1

113.2
121.1

127.7
138.3

987
98.2

129.4
140.8

143.4

94.2

1522

154.4

93.7

164.8

Bank of Japan, International Comparative Statistics.
Personnel cost and employment are concerned with the requirements for producing on unit ofmanufacturing products.

Table 9 :Estimates of LN = ao+aiLW
ao

Japan
1962-77

3.421

al

R2

-O.687

O.976(-16.816)
1962-69

3.964

-0996

O.997

(-34.036)
1970-77

2.815-O.415

O.963(-8.724)
U.S.A.

1962-77

2.843-O.411

O.843(-5.859)

1962-69
1970-77
Notes:

4.269-1.169

O.975

1.964

(-10.684)
O.oo5(O.046)

O.O19

LN: logarithm of employment,
Lw: logarithm of wage rate.

works that closely connect each country to the others, the infiation can be easily

diffused over the world; the world-wide inflation is created. However, the OPEC
countries may raise the oil price so as to slide itself with the world-wide inflation.

This, in turn, again accelerated the world infiation. Here, the developed economies,

25
CURRENT SITUATIONS OF WORLD ECONOMY AND GLOBAL
ADJUSTMENT OF INDUSTRIES

the non-oil-producing developing economies also, can not escape from a sort ofvicious-cycle, unless the increase of input price is checked by a development ofalternative raw material and energy sources and the other effective measures.
This is one of the main causes ofthe stagilation after the oil crisis, joined together
with the relative decrease of effective demand.

Affected by the growing severity of competition, Japan has accepted the decreasee.

of profit, while the U.S. has selected the decrease of the rate of capacityof the rateutilization. This has resulted the gradually decreasing relative price of the price of Japa-

nese products to the price of the U.S.'s products. This might be one of the reasons why

the Japanese competitiveness could become more and more strong than that of the
U.S. Accordinglty, as shown by Table iO, the sales of manufactured products of Japan
have been largely expanded, while that of the U.S. have been stagnant, especially after
the oil crisis. This has, in turn, accelerated the decrease of the rate of capacity utiliza-tion of the U.S.

As shown by Chart 5, the gap between production capacity and effective demandhas been expanded at one stroke after the oil crisis, mainly due to the restrictive policies

of aggregate demand that were adopted for controlling the severe infiation. This hascaused to decrease the investment inducement in plants and equipments more severely
than ever before.

f. Here we conclude, even roughly, that the real causes of the current stagflation are(1) the gap between production capacity and effective demand in the developed economy as a whote, that has been grown since the 1960's and severely strengthened after theoil crisis, and the related decrease ofinvestment inducement in plants and equipments,and(2) the vicious cycle of the world inflation and the oil price, that was started by the oilcrisis.

Table 10: Quantity Index of Sales of Manufacturing Products

Japan
1962
1963
1964
1965
1966
l967
1968
1969
1970
1971

1972
1973
1974
1975
1976
1977

U.S.A.

29.8

64.1

31.4

68.1

45.1

54.5

72.9
79.4
86.5

65.3

89.7

47.5

76.5

96.1

91.7

101.7

1co.O

100.0

107.8

102.8

l20.6

111.2

137.9

117.7

134.5

104.9

132.9

96.6

146.2

104.0
108.0

152.0

HIKOJIKATANO

26

Chart 5.

Capacity
Total

150

Production

Consumption
100

Capacity

Japan

150

Production

Consumptioti

100

Capacity
U.S,A.

150

Production

Consumption
100

Capacit.v

E.E.C.

150

Production

100

COIISUMPtiOll

7075

CURRENT SITUATIONS OF WORLD ECONOMY AND GLOBAL 27
AI)JUSTMENT OF INDUSTRIES
g. In addition to these main causes of the current stagflation, we should also consid-

er the other changes of economic situations, surrounding the developed economies,
that brought about the stagflation.
g-l

Through the satisfactory growth process of the deyeloped economies over the
l960's, the industrial structures of these economies have generated a resemblanceamong themselves. As the resuits, some of the industries of each economy hasturned themselves into a comparatively disadvantageous position. According to
the economic rationarity in a free market, whenever an industry becomes comparatively disadvantageous, this industry should be adjusted so as to compose theindustrial structure only of comparatively advantageous industries. Otherwise,some distortions can be generated in the industrial structure that may cause certain

diMculties among the economies concerned. Actually, the positive adjustments
haye never been taken satisfactorily. So some frictions in international trade andthe other diMculties have been generated among the developed economies. Thesemight, in turn, accelerate the severity of the stagflation in the developed economy
g-ii

as a whole.
As a result of the sharp increase of the oil price, the OPEC countries could geta great ability to earn foreign exchange, So far, their balance of payment has been
set the keynote in favour of themseives. Then the increase of oil price has accelerat-

ed to accumulate a Iarge amount of forejgn exchanges in the OPEC countries,
while the same amount of foreign exchanges has been flowed out of the non oil
producing countries, either the developed or the developing countries. This meansa leakage ofpurchasing power out of these countries. Recycling of the oil money,
that is controlled by the OPEC countries, is strongly requested by the oil importing

countnes.
Among the oil importing countries, different degrees of influences of the increase of oil price have been realized. Even in the developed countries, some of thecountries have been severely affected by the increase of oil price, and the others

have had a Iittle influence. Consequently, differences in an economic power between the strong and the weak countries, that had been built up over the 1960's

and upto 1973, have been expanded, depending on whether they could get a big
recycle of oil money or not. The economic power of the strong countries (Japan,

the U.S., F.R.G., etc.) has become more strong, while more weak of the weak
countries (U.K., Italy, etc.). Bipolarization in the developed countries has been
generated.
This is one ofthe severe results ofthe oil crisis. And this, in turn, has accelerat-

ed the stagflation in the developed economies. Actually, a distortion in industrial

structures of the developed economies should be one of the most fundamental
bases of the difference of economic power among the developed economies. Thisdistortion has been generated due to some unavoidable circumstances; a country
could not abolish industries, that became comparatively disadvantageous on theprocess of economic growth, due to some domestic needs for maintaining a certain

HIKOJI KATANO

28

Ievel •of employment, etc.
However, in any case, this sort of distortion should be only a frictional matterfor a development of stagflation in itself. The distortion can be disappeared

through a positive adjustment of industries among the developed economies,
even including the economies of the newly industrialized countries. Nevertheless,even if the distortion is cancelled through the positive international adjustment ofindustries, the stagfiation arnong the developed economies may not be disappeared,
because it is not the real cause of the stagflation.

C. Measures to Curb Stagflationa. Considering these situations surrounding the current stagfiation, the most funda-

mental measures to curb the stagflation should be considered in the following two
aspects:a-1

To generate the satisfactory and stable effective demand for products that are

corresponding to the production capacity of the developed economy as a whole.
Otherwise, the developed economy may not escape from either the decrease of
rate of profit or the rate of capacity utilization. And the investment inducement
may not be satisfactorily generated for a warranted growth of the developed ecoa-ii

nomy as a whole.
To develop an alternative resources to the oil and the other industrial raw
materials that the prices have been sharply increased after the oil crises. Other-wise, the developed economies can not expect to check the inflation mainly due tothe monopolistic increase of the oil price.

M Income Gap between the North and SouthA. Current Situation of the Income Gap
a. Main target of the North-South problem is to close the income gap between thedeveloped economy and the developing economy.
As shown by Table 11, at 1960, an income level, measured by a per-capita GNP,of the developed economy as an average was US$2,O05 in terms of 1970 prices, while

US$164 ofthe developing economy (excluding the OPEC economies). The income gap
ratio, defined as a ratio of the former to the latter, was 12.2 at 1960.

Over the 1960's, the income Ievel has been increased either in the developed econo-

my or in the developing economy. At 1970, the income level of the developed economy

became US$2,898, while US$195 of the developing economy. The income gap ratio
was 14.9. This means that the global income distribution had a tendency to become un-favourable to the developing economy over the decade.
Since 1970, the income gap has never showna favourable tendency to the developing economy, even though a little favourable change was faintly appeared only for two
years after the oil crisis, when the developed economy was in the big depression and thegrowth rate ofreal GNP was nearly zero.

29
CURRENT SITUATIONS OF WORLD ECONOMY AND GLOBAL

ADJUSTMENT OF INDUSTRIES
Table 11: Gap between the Developed Economy (DE) and the Developing Eoonomy (LDE)

GNP

income Level[US$/Person}

Population[Mil. persons]('70 prices)[Bil. US$]

1960
1970
1971

1972
1973
1974
1975
1976
1977
1978
1979

DE

LDE

DE

LDE

DE

LDE

1,275

220
337
354
374
404
428
445
468
489

636
704

1,342

2,oo5
2,898
2,943
3,O14
3,180
3 ISO
3,125
3,266
3,378
3,487
3,578

164
195
199
205
216
223

2,040
2,122
2,224
2,366
2,366
2,366
2,489
2,591

2,692
2,780

511

534

(Percentage Distribution)

1960
1970
1971

1972
1973
1974
1975
1976
1977
1978
1979

85.3 14.7
85.8 14.2
85.7 14.3
85.6 14.4
85.4 14.6
84.7 15.3
84.2 15.8
84.2 15.8
84.1 15.9
84.0 16.0
83.9 16.1

1,731

721

1,775

738
744

1,821

751

1,916
1,945
1,975

757
762
767
772
777

1,868

2,029
2,083
2,139

(Percentage Distribution)
32.2
67.8
28.9

71.1

28.9

71.1

28.8

712

28.5

71.5

28.2

71.8
72.0

28.0
27.8
27.4
27.0
26.6

72.2
72.6
73.0
73.4

ng
237
241

245
250

(Gap Ratio)

12.2
14.9
14.7
14.7
14.7
14.1
13.7
13.8
14.0

142
14.4

Source: UN, Statistical Yearbook.
Note: (Gap Ratio) - (Incorne Level of DE)1(Income Level of LDE).

b. Over the 1950's of the East-West tension, there was an aid competition, either
economic or military, between the U.S. and the U.S.S.R. In this period, a large amountof economic aid of the developed countries had flooded into the developing countries.
But, unfortunately, the most part of the amount was wasted in vain. At least, the eco-nomic aid could not contribute to promote an industrialization of the developing
countrles.

After the period, in the l960's, a positive performance of economic aid of thedeveloped economies to the developing economies had been disappeared. The developed economies had never taken a serious consideration of a development of the develop-

ing economies, and concentrated their efforts to raise their own economic activity
Ievels. Not only of the economic aid to the developing countries but also of the prices

ofprimary commodities exported by the developing countries, the developed economies

had controlled them for promoting their own economic growths. Aggravation in theincome gap through the 1960's was mainly caused by this sort of lack of positive contri-

bution ofthe developed countries to the developing countries.

HIKOJI KATANO

30

c. The aggravation in the income gap over the period and the lack of the positive
contribution for improving the gap have accumulated a dissatisfaction of the develop-

ing countries to the developed countries. And this accumulated dissatisfaction gave
the OPEC countries and excuse for sharply increasing the oil prices. Moreover, thishas generated a very strong demand of the developing countries to establish the newinternational economic order (NIEO).
Considering the situations, it should become more and more important problem
in the world economy to improve the income gap between the developed countries andthe developing countries.

B. Basic Startegies for Improving the Income Gap
a. We have an empirical theorem that an increase of income level is closely related
to a degree of industrialization. The degree of industrialization is usually measured interms of a ratio of GNP originated by manufacturing industries to total GNP (anindustrialization ratio). Chart 6 shows the relation of the industrialization ratio to theincome level, Using a cross-section data at 1976 of the 14 developing countries and the

6 developed countries. The dotted line, drawn in parallel with the horizontal axis,
indicates the world average of income level at the year. Most of the developing coun-tries are located below the dotted line; two exceptional cases are of Hong Kong andSingapore. Among these developing countries, the higher industrialization ratio corresponds to the higher income level, even though a certain difference in national condi-

tions may produce some divergences from the standard, shown by the bold line.
Ususally, the industrialization has been considered as a process to raise the in-dustrialization ratio of an economy. However, more widely, this should be considered
as a process to accumulate capital in the economy. Through the process, an economy,
mainly depending on 'an agricultural production, can develop to an economy that iscomposed of the more wide range of industries. Correspondingly, a supporting energyof the economy is transfered from the lower natural productivity to the higher capital

productivity. At the same time, a productivity in the agricultural production can beincreased by the higher capital productivity. This is easily understood by the fact thatthe productivity in the agricultural production in the U.S. is much higher than that in

the Asian agricultural countries.
These conditions show generally that the industrialization may increase the income
level. However, this is not always true for every countries. Some of the post industrial
countries may increase their income levels as the industrjalization ratio decreases dueto the 'relative expansion of service industries. But, as of the developing countries, thetheorem can be true without exception.

b. The developing economies have three bottlenecks for their own developments;
capital, technology and market. By their own abilities to accumulate capital, to develop

technology and to expand market, their economic growths can not expect to improve
the income gap. Naturally, for the purpose, they need the economic aid from the developed economies in these aspects.

31
CURR.ENT SITUATIONS OF WORLD ECONOMY AND GLOBAL
ADJUSTMENT OF INDUSTRIES

Chart 6.

1,OOO US$
Income Level
10
lerJ

1",'

i'

8
5

e
16

.
19
.
' •l

- "-----t'-"---

--10r

i'

i
i'

1'

:,

1

4

2

:s

lr3

O.Jr

:

3

el

!

5
g

O.1
lndustrialization

Ratio

%
10

1:
2:
3:
4:
5:

.20

15

Brazll
Chile

16

Japan

17

18
19

Germany, F.R.
France14

EcuadorMexico15USA

20 : Canada

Indonesia
Malaysia

6

Korea

11

7

Hong Kong

12

Philippines

8

lndia

13

Singapore
Thailand10

PakistanArgentina

9.

30

25

35

UK

So far, many economists have discussed about an ineMciency of the aid performances. A large part of the economic aid has been leaked out in vain. And the expected

performances have never been realized. Surely, there are many cases that were scandalous. Therefore, we have to examine some measures to raise an eMciency of the aid
performances. Generally, an accumulation of a social capital in the developing econo•-

mies should be assisted by the aid of oMcial base. And, for accumulating production
capital, transfering technology and expanding market, the private direct investment andthe related assistances are desirable.

c. Even though the industrialization is progressed by the assistance of the developed
economies, the economic growth of the developing countries may not be realized satisfactorily, unless the expansion of market can be done so as to fully absorb the productsof the developing economies. A domestic demand of the developing economies for their

HIKOJI KATANO

32

products is very small due to the very low level of income. So, after the production

capacity exceeds a certain level that an excess demand over the domestic demand isappeared, an export expansion becomes inevitable for absorbing the excess demandand growing the economies satisfactorily.
So far, many economists considered that the import-substituting industrialization

was a main strategy of development of the developing countries. Certainly, they had
this sort of time in the past. But, now, many ofthem haye been over the time. They are,at present, doing their best for expanding their export markt. And some of them, thenewly industrialized countries, are getting their satisfactory competitiveness in theworld market, and catching-up the developed countries; even of the limited kinds ofmanufactured products. However, the most of the developing countries have been
trying to expand their market with their rather weak competitiveness in the world
market.
For assisting the export expansion of these developing countries, the special pre-ference and the other measures have been adopted. Nevertheless, the expansion of anexport share of the developing countries has never been remarkably progressed. Unsatisfactory adjustment of industries (or defencive adjustment of industries) in thedeveloped countries has caused to check the expansion. This might be caused by theprotectionsim of the developed countries. And we have to recognize the fact that theprotectionism has been checking the satisfactory industrialization of the developing.
countnes.
As a matter of fact, the protectionism has been caused by some of the domestic
conditions of the developed countries, and be also inevitable at the situations that thedeveloped countrjes have performed in the past decade. Then a sudden enforcementof the positive adjustment of industriaes may cause a large number of unemplOyment,
and generate a depression in the developed countries. So the gradual enforcernent was
desirable for them.

d. As shown by Table 12, the export share of the developing countries to the world
was 11.9 O/. at 1970, and increased upto 12.1 % at 1978. As of the manufactured products, the share was 6.3 O/. at 1970, and also increased upto 8.2 O/. at 1978. In relation to

the corresponding shares of the developed countries, these shares are very small. And
the increases of the shares are not so enormous that the industrialization of the develop-

ing countries can be remarkably promoted. As shown by Table 11, the income gap
ratio has never been improved for the period from 1970 to 1978. So we consider that
this degree of the export share increases can not remarkably improve the income gap

ratio under the current situations. The improvement of the income gap through industrialization in the developing countries needs more rapid promotion of the indus•trialization than it was so far and more satisfactory transfer of market than ever before.

The share of manufactured product exports from the developing countries to thedeveloped countries was increased from 4.40/. at 1970 to 5.3O/. at 1978 in the world
market ofthe manufactured products. Most of the change in the share might be realized

by the export expansion of the newly industrialized countries. This means that the33
CURRENT SITUATIONS OF WORLD EC..ONOMY AND GLOBAL
ADJUSTMENT OF INDUSTRIES

Table 12:

Strutures of World Trade Network(World Total = 1oo)
World

DE

LDE

OPEC

CPE

World, 1970 .

Joo.o

70.6

16.2

3.1

10.1

1oo.O

66.7

16.3

7.5

9.5

DE1978
1970

71.8

552

11.4

2.5

2.7

67.4
11.9
12.1

47.7

102

6.1

3.3

8.5
8.1

2.2

O.3

O.9

2.4

O.8

O.8

5.7

12

9.5

4.4
8.3
2.6
2.5

World 1970

1oo.O

69.5

1oo.O

64.7

DE1978
1970

83.6
83.1

LDE , 1970

OPEC
1970
1978

(All Commodities)

1978

LDE, • ., ',1970•

1978

OPEC 1970

O.1

02

1.3

O.3

6.4

1.3

O.4

5.2

16.5

3.7

10.3

15.7

9.7

9.9

63.3

l3.9

32

3.3

57.7

12.8

8.5

4.1

6.3

4.4

1.4

O.2

O.2

82

5.3

1.9

O.8

O.2

O.2
O.2
9.9
8.5

O.2

11.1

CPE ' 1970

.10.5

1978

O.1

2.4

1978

(Manufacturing Products)

1978

1978

•CPE . 1970
1978

O.1

O.I

1.6
1.6

12

O.3.

6.8

O.9

0.4

5.6

Sources : UN, Yearbook of International Trade Statisti.cs.

UN, Monthly Bulletin of Statistics.

Note:

DE = Developed Economies
LDE =: Develop'Economies
CPE =. Centrally Panning Economies

export expansion of the other developing countries is needed for improving the income
gap as a whole of the developing countries. For this purpose, it is desirable that the

global adjustment of industries between the developed countries and the developing
cotintries is more positively promoted than ever before.

IV GIobal Adjustment of Industries

a, In Section II, we explained that the developed economies have faced to the very
severe problem to escape from the stagflation in themselves. And, in Section III, we con-sidered that both the developed and the developing economies have to do their bestfor improving the income gap between them.
b. For the developed economies, that should escape from the stagflation,(1) they have to take necessary actions for checking the continuously increasing prices
of industrial raw materials and energies in relation to the world inflation, and(2) they have to develop the satisfactory and stable market to fully absorb their own
products.

HIKOJI KATANO

34

The first point is mainly concerned with the technology development that contributes
to save consumption of raw materials and energies; utilization of atomic power, subterranean heat, and the other sources of energies, and the other sources of industrial
raw materials than petroleum. This sort oftechnological development may contribute tocollapse the raison d'e"tre ofthe OPEC that is based on a Iarge dependence of the devel-

oped economies' oil consumption on the OPEC's oil supply.
The second point is rather economic problem. The new effective demand may be
developed within the developed economies by themselves. If it is possible, they canpartly escape from the current stagflation. A part from the measures to create the new
effective demand in the developed economy as a whole and their effectiveness, if thecurrent stagflation can be dissoived by any internal measures within the developed
economy and the economy devotes itself to do its best for the purpose, the income gap

between the developed and the developing economies may be left in unsolved. We haveto consider a synchronized approach to these two aspects of the current problem.

c. A fundamental guideline of the synchronized approach is considered as :(1) To increase the economic development aid to the developing economies from thedeveloped economies so as to promote the industrialization in the developing economies,(2) To raise the income level in the developing economies in relation to the income
level in the developed economies so as to improve the income gap between them, and(3) To create more effective demand for the products of the developed economies in
the world market that includes both the developed and the developing markets.
Here, we consider, it may take a lot of time to complete Phases 2 and 3, mentioned

above. In the meantime, the increased economic aid may contribute to increase anexport of capital goods, produced in the developed economies, to the developing economies, when the most part of the aid is effectively directed to a funds for importing adevelopment materials of the developing economies from the developed economies•
Thus the effective demand for the products of the developed economies may be increased so as to improve the situations in the developed economy as a whole.

However, for completing these processes, an international adjustment of industries is inevitably needed. The industrialization in the developing economies can bepromoted due to the shortage of effective demand for their products, unless the transi-tion of market from the developed economies to the developing economies is promoted. When the industrialization is progressed and their supply of products exceeds
their domestic demand, if the developed economies is defensively against an importof the products from the developing economjes, the indusnialjzation may be checkedin vain. And the expected guideline may be interrupted. Thus the industrialization in
the developing economies and the international adjustment of industries in the devel-

oped economies should be synchronizedly promoted. We call this a global adjustment
of industries.

d. The global adjustment of industries is a sort of reorganization of the international system of division of labour that is carried on in the framework of the world

CURRENT SITUATIONS OF WORLD ECONOMY AND GLOBAL 35
ADJUSTmaNT OF INDUSTRIES

economy as a whole. Consequently, for effectively promoting the global adjustment ofindustries, the leading principle should be the principle of comparative advantage.

V The Long-Term Perspective
a. Here we consider the strategy of global adjustment of industries that may givea simultaneous solution to both (1) the stagflation among the developed economies and(2) the income gap between the developed and the developing economies. However,one may refuse this consideration. He may say that this sort of strategy may have thelimit, sooner or later. The market, that is developed and expanded by the global adjustment of industries, may become relatively small in the near future as the production

capacity of the world economy as a whole is accumulated. Considering this sort of reputation, we may have the other strategies to generate a new source ofeffective demandthan the global adjustment of industries.

b. However, what we consider in this paper is not only to generate the newly developed effective demand for the products of the developed econornies, but also to improve

the income gap between the developed and the developing economies.
As a matter of fact, we have to suffer again from the gap between production capacity and effective demand in the near future, even though we may escape from thecurrent gap problem through the newly developed market in the developing economies,
that is created by the global adjustment of industries. Expecting this sort of consequ-ences, it is desirable now to make an effort for developing the other sources of theeffective demand. But, by concentrating our efforts only on it, we can not neglect toimprove the income gap that is one of the very important problem of the world econo-my. (30 September 1980)

CURRENT COST ACCOUNTING AND THE CONCEPTOF SPECIFIC PURCHASING POWER CAPITAL
Isao NAKANOI Introduction

In recent years, the current cost accounting has become predominant in accounting theory and practice. The U.S.A. and England have been the first to adopt it in theirstandards for inflation accounting.i)

lfwe rather arbitrarily select some of the characteristics which are shared by many

forms of current cost accounting so far internationally proposed, the following points
can be cited.

(1) The assets on the balance sheet are to be valued at their replacement costs on
the closi.ng date.

(2) Current revenue should be charged with the costs and expenses which are valued
at their replacement costs at the respective dates of sale or at the average replacement

costs during the current year. This aims to calculate the so-called "current operating
profit" in the income statement.
(3) Especially in both the German proposal and the English standard for current
cost accounting,2) the historical acquisition costs, and not current costs, are stipulated

to be the valuation basis for that part ofcurrent expenses which are deemed as financed
by debts rather than by (shareholders') equity capital.

The purpose ofthis paper is to argue that a specific current cost accounting modelwith the above four elements in it can be better understood as an accounting system
based on the "specific purchasing power capital" concept rather than that predicatedon the maintenance ofphysical capital (or productive capability) of the firm.

II The Concepts of Physical Capital and Specific Purchasing Power Capital

The annual income of a firm may be said to mean an increment during a fiscal
year of the "capital" (in some sense) which has been invested in the firm except for
the inerement from the capital transactions. In the current traditional accounting

1) ' Financial Aocdunting Statidards'Board, Financ'ial Reporting and Changing Prices, Statementof Financial Accounting Standards No. 33, 1979. The Institute of Chartered Accountants jn Englahd
and Wales, Current Cost Accounting, Statement of Standard Accdunting -Practice No. I6, Accountancy, April 1980.
2) As for the English proposal, see the literature cited in footnote (1) above. The German ac-

counting model is contained in: Stellungsnahme HFA 2/75: Zur BerUcks'ichtigung der Substanzerhal' tung bei der Etmittlung des Jahresergebnisses, Die WirtschaftsprUfung, Heft 22, 1975.

ISAO NAKANO

38

system, the periodic expenses are being valued at historical acquisition costs. Thisimplies that the sum ofnominal units of money invested in the past are being regarded

as capital (i.e., "the nominal capital concept"), with its increment during the year
treated as annual income (viz., the income concept as an increase in nominal capital).

The well-known model of monetary capital circulation

G-w-G• IGtg
can best represent these capital and income concepts. (In that formula, G and G' mean

the amounts of invested and recovered nominal monetary capital respectively, whereas
g denotes income as an increment in nominal capital (that is, G' less G).
In contrast, the physical capital concept will dictate "capital", the measuring rod
for business income, as the quantities of various kinds of goods in the firm rather than

the amount of money invested in the past. In other words, annual profit is allowed toemerge only after current realized revenue has recovered enough fund for replacing
those goods and services which have been consumed in relation to the earning of therevenue and which will serve to maintain the same level of the firm's productive capability as before. Annual income is considered as the difference between the revenue andthat fund under this theory. Accordingly, the required valuation basis for the expense
items is ideally their actual or prospective replacement prices on the date the replace-ment was (or will be) made. That is, it is required here to value the expenses at "thereplacement costs on their replacement dates". The capital circulation formulaw-G"W' {Gradequately represents the business income under the physical capital maintenanceconcept. (In this formula, W-G is the realized revenue, and in the stage G-W', G-W
denotes the recovery ofthe consumed productive capacity through current price valuation of the expenses, while g signifies the profit under this theory which is the excess of

the revenue after the recovery),

Finally, we will try to explain the specific purchasing power capital concept andits maintenance which is the focal point in this article. In a technical sense, this conceptof maintenance is to be achieved by the matching with annual revenue of periodic expenses which have been valued by their "replacement prices on the dates of sales",not on the days of actual or prospective replacements. Obviously, this charging results

in recovery of the specific purchasing powers (with respect to the firm's consumed setof productive factors) as of the sales dates and not necessarily as of the replacement

dates, because sales and replacements may be made on different days and hence at
different prices.

This capital concept differs from the general purchasing power capital concept(associated with the price-level accounting) in that purchasing powers "specific" to thefirm's production factors are stressed rather than a broad cross-section of the economy'.s

price spectrum. Secondly, the difference between the specific purchasing power capitalCURRENT COST ACCOUNTING AND THE CONCEPT OF SPECIFIC 39
PURCHASING POWER CAPITAL
and the physical capital concepts may be considered to Iie in difiering views as to thedegree of freedom on the point-in-time when management will replace the consumed
productive factors. If the actual or planned replacement dates are immovable andinevitable in the sense that replacing on other dates would have damaged the businessactivities seriously, then the fund recovered from the revenue are doomed to reinvest-

ments on the specific replacement dates, so that the purchase price on replacement
dates wi11 be the logically inevitable valuation basis for the expenses. However, if nosuch rigid restrictions are assumed to exist on the firm's replacement behavior andmanagement can consider repurchasing the consumed goods and services on any dates
around the days of sales (i.e., the time when the fund flows in) within some limited time

domain, we find some room for price speculations. In other words, the firm can attempt
to benefit from repurchasing on deliberately chosen dates at hopefu11y minimum prices.
In this model, the difference between sales day prices and replacement day prices obtains
the character of a price speculation gain or loss which will reflect the extent of successor failure of the speculation activity by repurchasing on other than sales dates. Since
this is an element of profit or loss, supporters of this model will say that it is not to be

excluded from disclosure by the valuation on replacent-date-purchase prices.

We have no evidences for deciding which model and which capital concept will be
more close to the actual business activities. Our point is to assert in the following thatthe current cost accounting model introduced above will be better explained by the
specific purchasing power capital concept than by the physical capital theory (or by anyother accounting theory for that matter).

M The Year-End Asset Valuations and the Specific Purchasing Power CapitalThis section aims to demonstrate that the valuation of non-monetary assets attheir year-end replacement prices on the balance sheet-the usual procedure requiredby our current cost model-can be bestjustified by the specific purchasing power capitalconcept.
First, under the "physical capital" concept, capital is defined as no other thanphysical objects (or productive capability) ofthe firm, which are embodied in the collection ofthe assets on the debtor side ofthe balance sheet. Physical or technical attributes

are the concern of this theory. Accordingly, the assets per se must logically be viewed

from the physical side. An implication of this is that no unambiguous valuation basis
derives from such requirement for representation of physical or technical attributes,•
because physical quantities can only be expressed by a physical unit and not directly`

reflected
by any monetary amount. .;In other words, the point is that since the physical or technical attributes cari bemost adequately represented by physical quantities, the assumed requirement forphysical capital information is inconsistent with the proposed "monetary value" (i.e.,

replacement cost) balance sheet instead of "physical-measure"-based balance sheet.

Then, we will next proceed with examining the propriety of "specfic purchasing

ISAO NAKANO

40

power" concept. In this theory, assets are viewed as embodiments of the specific purchasing power capital sacrificed to acquire the assets. If so, the attribute to, be measured

as the logical consequence ofthis capital concept must be the amount of that sacrificed

specific purchasing power as expressed under the economic conditions (including theprice-level) at the year-end. Obviously, this amount is to be measured by valuing theassets at their year-end replacement prices, because if this amount of money, and notthe (non-monetary) assets per se, were on hand in the firm on the balance-sheet date
this money would bejust enough to purchase the assets involved at the year-end (thatis, it has presently the same amount of the power to repurchase the goods as the origi-

nally invested monetary capital possessed at the time the assets were bought). Accordingly, we see that this capital concept is consistent with the replacement cost valuationof assets on the balance sheet.
In the literature, however, this valuation basis is usally supported by other theories :(1) the view that replacement costs represent the discounted present values of the cash
flows which will be generated by the asset in the future,3) and (2) the view that replacement costs reflect "value to the business" or "deprival value" of the asset.4) The follow-

ing discussion is an attempt to refute them,On the former view, modern economic analysis proves that the same asset does
provide different sizes of present values to different firms, and even to different piecesof the same asset in a firm. And when an equilibrium is being established between
supply and demand, leading to a certain trade prjce P, the amount of present value
estimated by a firm which pay the price to buy the good will be equal or greater than P.
The good with the present value ofjust P will be the Ieast profitable one bought by theleast profitable (i.e., marginal) firm of all traders which participate in the purchase.

All other goods bought possesses present values more or Iess exceeding the asset's
current replacement price.5) This demonstrates that the year-end replacement priceis usually too small for a measure of the present value of the asset.

Certainly, a so-called "long-run equilibrium" is also conceivable in which active
perfect competition and the firms' long-range adjustment by way of addition to or saleof their plant assets have resulted in the asset's excess value (between the present value
and the current replacement price) being totally cut off. In this state, the average present

3) Committee on Aocounting Conoepts and Standards, Accounting and Reporting Standards
for Corporate Financial Statements 1957 Revision, in: Accounting and Reporting Standards for Corporate Financial Statements and Preceding Statements and Supplements, American Accounting Association. J. S. Cook and O. J. Holzman, Cur rent Cost and Present Value in lncome Theory, Accounting
Review, Oct. 1976. P. T. Wanless, Reflection of Asset Valuation and Value to the Firm, Abacus,

December 1974.
4) David Solomons, Economic and Accounting Conoepts ofCost and Value, in: M. Backer (ed.),Modern Accounting Theory, Prentice-Hall, Inc., 1966. Report of the Inflation Aecounting Committee,
lnflation Accounting, (Sandilands Report), Her Majesty's Stationary OMce, 1975. Inflation Aocounting
Steering Group, Current Cost Aocounting, 30 Nov. 1976, ED 18.

'5) A. D. Barton, Expectations and Achievements in Income
Theory, AccoUnting Review, Oct.

1974, p. 670.• •, ' .• ,,. • ... ••41
CURRENT COST ACCOUNTING AND THE CONCEPT OF SPECIFIC
PURCHASING POVVER CAPITAL

value ofa unit of the asset throughout all firms becomes equal to the single current
replacement price. In this case alone, replacernent price can be considered an accurate

measure of the asset's present value.6)

From the above analysis, we see that under a less than perfect competition ormonopoly, or if a perfect competition does hold but the long-run equilibrium does notexist at the balance sheet date it is possible thatthe average present value (per unit) of an asset t" its current replacement price.

On the "depriv.al value theory. The "vaiue to the business" or the "deprival value
concept is said to emanate from J. C. Bonbright. It is stated that "the value of aproperty
to its owner is identical in amount with the adverse value of the entire loss, direct andindirect, that the owner might expect to suffer if he were to be deprived of the property."7) In applying this idea to accounting valuation, it is insisted that in some cases

the "deprival value" as the "value iflost" is to be approximated by the asset's replacement price. Its logic is that if the discounted present value of the net cash inflows of theasset or its net realizable value is larger than its current replacement price the firm willin case of the loss of the good immediately replace the same kind of the good to obtaina gain between its present value (or its net realizable value) and its current replacement

price. Accordingly, under that condition the good wi11 be replaced. It follows that theamount of loss incurred from the assumed deprival is only the expenditure for the repurchase (viz., the current replacement price). In this sense, the replacement cost valuation of an asset is insisted to reflect its "deprival value" as an aspect of the value complex.

Admittedly, "the loss if deprived" can be said to measure a sort of benefit fromholding, not losing, the asset, and hence deserves to be called a kind of value. A serious

problem, however, is that even under the above-mentioned conditions the replacement
price cannot become an accurate measure ofthe "deprival value" of an good for followlng two reasons.

(a) It is unreal to assume that if a good has been deprived the firm will always
repurchase the same kind ofasset.8) For example, a shipbuilding company may change
its deprived assets to a plant of automobile manufacture which promises to bring ahigher profitability, that is, to incur a smaller total costs for the recovery of the originallevel of present value. In this case, the deprival value must be the replacement cost of

a car-manufacture plant assuring the original present value, not of shipbuilding
assets. Consequently, the replacement cost valuation ofassets which measures the form•-er plant price does not produce an accurate measurement of deprival value.

(b) In case of asset deprival, replacement can not be made timelessly. A time lag
inevitably occurs between the two events, which may possibly generate a large additionalloss by causing the business activity to stop (especially in case ofplant assets).

These two points demonstrate a great deal ofcomplexities which surrounds a meas-

6) J. S. Cook and O. J. Holzman, op. cit.
7) J. C. Bonbright,The Valuation ofProperty, McGraw-Hill, 1937, p. 71.
8) R. J. Chambers, Value to the Owner, Abacus, June 1971.

.ISAO NAKANO

42

urement of total loss from (assumed) deprival and the impossibility of estimating it
accurately by the year-end replacernent cost of the asset itself.

We may thus conclude that all explanations other than that based on the "specMc
purchasing power capita1" concept does not succeed in justifing replacement cost valuation. This in turn may be said to confirm the validity ofthat concept.

IV Periodic Expense Valuation on Sales-Dates or Year-Ayerage
Replacement Costs and the Specific Purchasing Power Capital
For the purpose of maintaining the "physical capital" (or productive capability)'of the firm, each periodic expense item must be valued by the replacement price on
repurchase dates, that is, by the price at which the good or service consumed was (orwi11 be) actually replaced. In other words, sales (or consumption) and repurchase areusually made on different dates, so that especially when replacement follows sellingetc. and current buying prices are rising, the monetary fund recovered from "sellingdates" replacement cost valuation ofthe expenses is insufiicient for the repurchase of

the goods and hence for the maintenance of physical capital. This purpose cannot
always be achieved except by the expense valuation on replacement-date prices. Thisin turn implies that "physical capital" theory cannot well explain the income determination which is based on selling-dates expense valuation.

By contrast, under the "specific purchasing power capital" concept, the amountto be charged to annual expenses should be what would have to be paid to replace theconsumed goods as of the selling dates. Therefore, the expense baluation vased on"selling-day-replacement prices" is necessary and suMcient here. Hence, the expense
measurement method in our current cost accounting model has been well explained bythe "specific purchasing power capital" concept.

The foundations for this capital concept has already been developed in section 2.
Its gist lies in the assumed freedom with respect to the time-point at which management

wi11 replace the consumed (or sold) asset items. A possible price differential between
selling-day replacement price and repurchase day price is a reflection of the extent of

success of failure in purchasing at a minimum price. This speculation gain can berevealed by the selling day valuation model, but not by the physical capital model with

its replacement day expense measurement.
Apart from the theories based upon capital maintenance concepts, accounting
literature contains several different approaches to the selling-day replacement cost
valuation ofexpenses. One of them has been developed by Edwards and Bell.9) Aocording to them, replacement cost changes between the acquisition time of an asset and theirconsumptionlsale date represents a "holding gain" or "cost saving" from the firrn's
holding activity of the good, not a profit from production or selling efforts. Segrega-

9) E. O. Edwards and P. W. Bell, The Theory and Measurement of Business Income, Universityof California Press, 1961, pp. 73-74.

43
CURRENT COST ACCOUNTING AND THE CONCEPT OF SPECIFIC
PURCHASING POWER CAPITAL

tion of this element from annual net income by selling-day replacement cost valuation
ofthe expenses is claimed to serve to produce a net income as a pure representation of
production-selling gain.

We do not believe this theory is correct. Actual production and selling activities
inevitably demand a certain length of time, and hence the replacement price variation
during this time interval firmly relates to those business activities, that is, the pricechange is so firmly associated with these activities that it cannot be separated from theprice variation owing to the holdjng activjty. In this sense, the "holding gain" partly

includes that price change which has been inevitable in carrying out the productionl
selling operations per se. In other words, the net income number net ofthe insisted hold-ing gain does not contain the inevitable price differential as an expense-or price risk-

for those operations. Our conclusion therefore is that it is not a correct measure for

productionlselling outcome.
A second argument in support of selling-day price valuation specifically concerns
the inventory asset. A minimum level of jnventory assets required for business opera-

tions is said to be an "involuntary investment", and any replacement cost change on
this stock cannot be avoided as far as current business activity is concerned, because thatinventory has to be continually replaced and maintained. Accordingly, it is claimed

that the eMciency of current business operation should be based upon a net income
number net of that price change which cannot be avoided from a short-run point-ofview.lo)

Example. Assume that the acquisition cost of the stock of a certajn merchandise
is 1,ooO,OOO yen and its selling day replacement cost 1,300,OOO yen. The acquisitionin the past of the goods at a price by 300,Ooo yen chieper than the current price is anaccidental result of the routine inventory acquisition activity and by no means reflect
the extent of management's superior ability in inventory policy.

Consequently, the difference 3oo,ooO yen should be eliminated from annual net
income. Conversely, if the selling-day replacement cost should drop to be 8oo,Ooo yen,

any inethcient acquisition policy can never be inferred from the price differential
200,OOO yen (= 1,OOO,OOO-8oo,OOO). In any case, then, such irrelevant price change
from the acquisition date to the selling day had better be excluded from annual net
income by valuing the expenses at their selling day replacement costs.

However, this line of thought is also susceptible to the following objection. The

maintenance of a minimum inventory level is obviously not any externally forced
destiny for the firm but a deliberately chosen management policy. This self-evident
fact implies that the business income number could better perform its e.Mciency meas-

urement function if the management's decision on the inventory policy (or its priorjudgement that it would be economically more advantageous to commit to the maintenance than not) could be evaluated a posteriori in terms of the size of the realized

annual income.
10) E. Schmalenbach, Dynamische Bilanz, 13. Auflage, K61n und Opladen, 1962.

"

ISAO NAKANO
Then, what will be the benefits and costs associated with the inventory maintenancepolicy? Its advantage may be said to consist in assuring a relatively smooth productionlselling activities, which wi11 come to be reflected in the level of current annual

realized revenue. On the other hand, the disadvantages of that policy include the incurrence ofstorage costs and the interest charge as well as the price change risk relating

to the required continuous replenishment of the goods. The former burdens will resultin an increase in the amount of those expenses, whereas the Iater finds its expression in
the difference between the actual acquisition cost and the selling day replacement costof current annual cost of sales, If this price differential shows a plus (in a period ofrising inventory price), it indicates that the price risk has incidentally produced a result

favorable to the firm (i.e., a cost saving). But in case the difference has proven to be aminus, we see that a price decljne has forced the firm to pay a higher acquisition pricethan the replacement price as of the sales date, viz., that the price risk has produced
an unfavorable result to the firm.

Consequently, a correct measurement of business income as an indicator of management eMciency calls for reflecting the above-mentioned price differential in current

net income. This in turn shows that annual expenses must be valued by historicalacquisition costs, not by selling day replacement costs.

A third argument advanced in support of selling day replacement cost valuationof the expenses stresses the "random, uncontrollable" nature of the above price differential because it comes from external price changes. Furthermore, this characteristic is contrasted with the "normal" income element of the current operating profitthe difference between the realized revenue and selling-day-price-valued expenses.
The point here is that ifthe random holding gains (or losses) are eliminated from annual

income, the residual "normal" income will better facilitate a prediction of future income numbers of the firm.ii)
Admittedly, this is a very interesting hypothesis, which has to be tested by empirical researches. However, the results ofsuch studies has not so far supported this hypothesis conclusively.i2)

As a conclusion for this section, we can say that the specific purchasing power

capital concept alone can adequately explain the expense valuation by selling-day
replacement costs and that the other arguments are not free from various unsolved
problems.

11) J. C. Burton, Financial Reporting in an Age of Infiation. Joumal of Aocountancy, February
1975. L. Revsine and J. Wygandt, Accounting for Infiation: the controversy, Journal of Accountancy,
October 1974.
12) See the articles by the fo]Iowing authors. Frank, Journai of Accounting Research, Spring 1966;
Greenball, Joumal of Accounting Research, Supplement No. 6 (1968); Estes, Journal of Accounting
Research, Autumn 1968; Brenner, Journal ofAccounting Research, Autumm 1970; Mclntyre, Accounting Review, July 1973 ; Kratchman, Malcom and Twark, Accounting Review, October 1974.

45
CURRENT COST ACCOUNTING AND THE CONCEPT OF SPECIFIC
PURCHASING POWER CAPITALV The Maintenance of Nominal Capital with Respect to

LiabMties

and the Specific Purchasing Power Capital
The Opinion Statement ofthe Institute of German Public Accountantsi3) as well asa series of Statements by the Institute of England Chartered Accountants (the HydeStatement,i4) Exposure Draft 24i5) and the Statement of Standard Accounting PracticeNo. 16i6)) contain a unique measurement rule relative to the debt capital of the firm.
According to it, the application of current replacement cost valuation of the periodic

expenses and the resulting maintenance of the firm's productive capability is to be
restricted to that part of the assets which is considered as the shareholders' contributions. With respect to the assets assigned to the liability to the firm, the rule aims tocalculate annual income on the basis of the maintenance of the nominal capital by
returning to the historical cost valuation of the relevant part of expenses. Hence, theproblem emerges how any logical explanation wi11 be possible of such coexistence of

two sorts of capital maintenance rules in a single accounting measurement system.
The purpose of this section is to show that a successfu1 coherent understanding of thismeasurement structure will be possible by the "specific purchasing power capital"
concept, but not by the "physical capital" concept.

Example. A complete exposition of the yarieties of techniques adopted by each
proposal to assign the expenses to the two capital sources must be resigned here for agoncise development of theoretical issues. Therefore, only the numerical example in
the Hyde Statement will be cited here.
(l) The case where the firm's total liabilities exceed its monetary assets.

(a) Total monetary assets

300 pound (Å~ 1,ooO)(b) Total liabilities (short-term andlong-term)

756(c) Owner's capital (including the difference

between the historicai and current costsof fixed and inventory assets)

684(d) Gearing ratio (the ratio to total capitalofIiability capital assumed to be mixed
in the periodic expenses)
net liabilities (net of monetary assets)

net liabilities+owners'
capital(b)-(a)/[(b)-(a)+(c)](756-3oo)/(756-300+684)
456/1,140 - 40 O/.
13) The articie in footnote (2) above.

14) Aecounting Standards Committee (England). Inflation Aecounting-An
mendation, Accountancy, December 1977.
15) Exposure Draft 24, Current Cost Accounting, Accountancy, May 1979.
16) The second article in footnote (1).

lnterimRecom-ISAO NAKANO

46(e) Difference between current-cost adjusted
and historical-cost-based depreciations(average replacement cost less historical

cost)

70

(f) Difference from adjusting the cost ef

sales

80

(g) Adjustment of current-cost expenses for.
gearlng=- [(e)+(f)] Å~(d)- (70+80)xO.40 -=60This adjustment for the expenses 60 represents that part of the total replacement

gost adjustment 150 (= 70+80) which, though necessary for the maintenance of the
productive capability ofthe firm, are not required for keeping the nominal capital of
the liabilities intact for their final redemption. From this yiewpoint, this adjustment
60 is to be added back to business profit after non-operating items in the income state' 'which results in an increase in the annual net income.
ment,
,1,•/

Note that in item (d) of the above example the liabilities entering the gearing

caluculation is to be "net liabilities" after deducting the monetary assets. The reason
for this calculation probably is the assumption that liability is first of all assumed tobe applied to acquire monetary assets and that only the residue of it, if any, is mixed

with the owners' capital, the homogeneous mixture being applied to the inventory and(non-monetary) fixed assets. Of course, this is an arbitrary assumption, and leaves
room for alternative hypotheses.
(2) The case where the firm's total monetary assets exceed its total liabilities.

In this situation, a "net residual of monetary assets" is to be computed as thetotal monetary assets less total liabilities. Then, some appropriate price index is applied
to this to obtain a purchasing power loss (ifthe prices are rising) of the residual mone-tary assets. Accordingly, this amount is to be an expense in the income statement• Its
purpose is to reflect in the current expenses the increase in net monetary assets which
is necessary to maintain the firm's operating capability.

Now, Iet us investigate an underlying theory, if any, of this measurement. Notethat the non-monetary assets of the firm are divided into two parts-a part financedby the shareholders' capital and the other part financed by liabilities. Such dichotomiz-

ing of the assets seems inconsistent with the "physical capital" concept, because if theassets are according to this concept viewed as physical entities (or technical, productive

capability) we can only divide them under the "physical" or "technical" dimension
but not from the "value" point-of-view. For example, it is possible to identify the assets

to " production", "transportation service", "repair", "power supply" and so forthfrom a technical standpoint-that is, under the "physical capital" concept. But nomatter how long we may stare at these physical entities, we cannot grasp any clue-or

rather any logical foundation-for dividing these assets from a "value" or "fund" dimension. This kind of division is only possible if we are in advance considering the47
CURREMT COST ACCOUNTING AND THE CONCEPT OF SPECIFIC
PURCHASING POWER CAPITAL

assets as "monetary" or "value" entities rather than physical objects. In other words,
the alleged dichotomizing of assets into the owners'-capital-financed and the liability-

financed is logically allowed only when we define those assets as embodiments of thefunds, that is, as "value or fund" in essence which is transitorily taking the exterior formof non-monetary assets. The crucial point is that only "monetary existence (monetaryamounts)", not "physical objects" does logically allow any dMsion according to capital (or fund) sources.

By contrast, our "specific purchasing power capital" concept defines "capital"and "assets" as monetary (i.e., as embodiments of invested money funds) and not as"physical", so that ours is not logically inconsistent with the idea of separation of assets

according to the fund sources. If we admit this capital concept can survive in this two-

dimensional accounting system, our tentative interpretation of the measurement might
be that the replacement-cost-valued expenses deriving from the shareholders' capitalis based on the maintenance of specific purchasing power capital whereas the liability-

financed expenses valued by historical costs is dictated by the maintenance of nominal

capital. But the question immediately arises of how we can coherently explain such

two-dimensional income measurement system with two kinds of valuation bases andtwo kinds of underlying capital concepts.
Sieben and Schildbach is stressing the significance of the disclosure of the debtors'

purchasing power gain in times of inflation") -item (g) 60 in the above example. Thisis the difference between the amount of maintained specific purchasing power capitalfrom replacement-cost-based valuation of liability-financed expenses and the amountof its nominal capital to be maintained and returned at the redemption date. In a periodof rising prices the former is larger than the latter, resulting in a positive difference.

This js a purchasing power gain accruing to the firm because of its being a debtor.
Sieben and Schildbach seem to be emphasizing the usefulness of revealing this actuallyaccruing gain from the disclosure point-of-view.

But remember that the maintenance of the firm's productive capability cannot
be assured unless that difference (60) is retained in the firm. Accordingly, we will have to

make a stronger case than pointing out the usefulness of the disclosure for substantiat-

ing inclusion of the debtors' gain in annual business income.

In our opjnion, debtors' gain consists in a "gift" of specific purchasing powerfrom the creditor to the debtor, although it is a legally forced and involuntary gift. If

we ignore for a moment the existing laws on debtor-creditor retatiens and regard
creditors as being on the same footing with shareholders, we can find no particulardifferences between liability and owners' capital. Hence, if the amount equivalent to

the original specific purchasing power capital is being maintained and returned withrespect to the shareholders' capital, then the same should logically be done for theliability capjtal. Jn this case, no purchasjng power gain wM accrue to the debtor "firm"17) G. Sieben and T. Schildbach, Substanzerhaltung und anteilige Fremdfinanzierung,wirtschaftliche Forschung und Praxis, 25 Jg., Nr. 9, October 1973, S. 592.

Betriebs-

48

ISAO NAKANO

from holding liabilities during inflation. This gain does accrue because the existing law

allows the firm to return on redemption only the nominal amount invested and to force
the creditor to resign the receipt of, and give to the firm gratis, the difference between

the real value and nominal amount he lent.

This "gift" theory of purchasing power gain has the following implication for
the understanding of the two-dimensional accounting system. This accounting measure-ment really is not a combination of the maintenance of specific purchasing power
capital and of nominal capital but at the first stage wholly directed toward the former

maintenance goal-even with respect to the liability of the firm, making at the second
stage a recording of the purchasing power "gift" from the creditors to the firm whichindicates a partial liquidation of the firm's purchasing power capital into a profit.

Concisely, this income determjnation system is (a) based upon the maintainingof specific purchasing power capital of the firm, (b) with a modification concerning thecreditors' equity so as to faithfu11y reflect the partial liquidation (and deprival) of theirinvested purchasing power into the net income attributable to the shareholders

VI Conctusion
We have selected three characteristics which are shared by a number of current
cost accounting proposals in the world, and conceived of an accounting model contain-

ing them simultaneously. And we have attempted to demonstrate that that model canbe more consistently explained by the "specific purchasing power capital" concept
than by the "physical capital" concept or by any other theories so far advanced.

AN INPUT-OUTPUT TABLE FOR EVALUATION OF
THE SHIPPING ACTIVITIES
Tetsuji SHIMoJo

I Forewords-three methods to evaluateThis paper wiIl discuss and propose a slight modification of the input-output
table for the sake of correct evaluation of contribution of the shipping industry to thenational and international economy of a country. In ordinary input-output table formost countries, their ocean shipping industry is usually placed offshore from its natiye
land, for its activities are evaluated only as exports and not as domestic transaction. It

might be caused by a fact that all shipping activities to carry the import goods arecounted into the import amounts of the other jndustries as the freights paid for the
shipping seryices ofnational and foreign merchant marine. We are going to investigate
for the appropriate method to evaluate the raison d'e"tre and contribution of the ocean

shipping industries on the national economy and the international balance of payments•
It was true that the ocean shipping industry had been the most important industry
for most developed countries in their modernization process. Although the most appar-

ent reasons for these countries to possess their own merchant fleet are not merely
economic but also political, it can not be denied that their economic expansion was
greatly depending upon the national shipping activities. Even if we would eliminate
non-economic effects of the shipping industry such as military and psychological, acountry can enjoy much more effects of owning their own merchant marine on thenational income through freight earning, opportunity of employment of their nation,and impulses to the other industries.i)
Let us investigate these effects by using the terminology for input-output analysis;

Yi: gross domestic production of i-th industry
JIVid: inter-industrial transaction from i-th to,f-th industry

Fi : final demand (consumption, government, investment) for i-th products
Ei : exports of i-th products

Mi : imports of i-th productSV,• : value added in ILth industry.

These concepts have the following relations;

Xi = Zi PVij+Fi+Ei-M,j

Xj -- Z W,d+ Vj.
i

The gross national products G?VPis expressed by F+E-M, and the balance of pay-

1) Sempei Sawa, TIie System ofShipping Theory, Tokyo, 1949, pp. 206--234.

TETSUJI SHIMOJO

50

ments BOP by E-M.
And let us prepare the following abbreviated concepts to express the shipping
activities for a country ;PVAG: wage received by national seamen from foreign shipping industry
HEX: exports of ship services or receipts of charter hire

HIM: imports of ship services or charter hire paid abroad
PEX: exports of port services or receipts of port charges

PIM: imports of port services or port charges paid abroad
NEX: freights earned by national shipping for carriage of export goods
NIM: freights earned by national shipping for carriage ofimport goods
FIM: freights paid to foreign shipping for carriage of import goods
NCR: freights earned by national shipping in cross trades
NPS: passenger fares received by national shipping from residents
IVFP: passenger fares received by national shipping from foreigners
FPS: passenger fares paid to foreign shipping from residents.
EArT: costs paid by other industries to operate their own ships
The ocean shipping sector consists of three subsectors, ship-owning, ship-operat-

ing, and ship-maneuvoring,2) though the last one does not so far constitute an inde-

pendent industry in most countries. Needless to say, the ship-owning sub-industry
supplies ship services by chartering its own ships to another, and it earns charter hire

and pays ship expenses to the other industries. The ship-operating sub-industry bears
all expenses to operate its ships chartered from the ship-owning sub-industry. The expenses to operate ships consist of port charges, cargo handling and fuel expenses. It
earns, in turn, freights for carriage of import and export goods as well as in cross trades.

The ship-maneuvoring sub-industry, if any, may be thought as an independent sector
that supplies ship-maneuyoring services of seamen, but it is ordinarily considered tobelong to and to receive wages from the ship-owning sub-industry.

A country which has no sufficient domestic industry to employ its nation, andwhich has no suMcient external commerce to be carried by ships, can only have an"industry" to sell seaman labor power abroad. Then the industry can earn an amountof money in a form of wages. The amounts of wage are deemed as production, value
added, and, at the same time, export of the industry. This connection is expressed as
fo11ows;

Xs=Es=Vs=WAG
Fs == M, = "(,j =O (1'= 1, 2, 3, ..., n).•. GIVP, = BOP, = WAG
where the suMx s means the shipping industry, and GIVP, and BOP, are deemed asa contribution of shipping industry to the whole amount of GIVP and BOP respectively.

If the country mentioned above has another industry who owns ships and supplies
2) Tetsuji Shimojo, Economic analysis ofShipping Freights, Kobe Univ.,

1979, pp. 9-13.

51
AN INPUT-OUTPUT TABLE FOR EVALUATION OF THE SHIPPING AerIVITIES

ship services to the domestic and foreign ship-operating industries, the ship-owningindustry can earn charter hire from these ship-operating industries. Its production,
therefore, is the amounts of charter hire, a part of which is passed on to the domestic
ship-operating industries and the rest is exported. A part of its earning, on the other
hand, is paid to the other industries as its expenses, and the rest is the yalue added. We

can express the case;

Xs == Es == HEX

ZIVis+V,=HEX, Wss:::'LOtFs = Ms -- O.'. GNPs =::: BOPs = HEX•
It must be noted in this case that the shipping contribution to the other industries are
represented by Wi, (i lii s), and, at the same time, that imports of the other industries

may increase according to their capacity to supply.

Ifthe country owns ships and can operate them but has no suthcient external trade,a ship-operating industry ofthe country can operate its ships only on the routes between
foreign ports. The freights earned from its activities in the cross trade are deemed as anexport of the shipping services. The productjon of the jndustry is the amount of frejghts

earned, most of which is treated as an export of the industry. Meanwhile, in this case,it must be noted that the industry has to pay a part of its earning to not only domestic
industries but foreign sectors as various expenses for port, cargo and fuel. The relation

may be expressed as fo11ows ;Xs = Es ==' AICR

X Wis+ Vs === NCR, Wss =:=: O
i#s

Ms::=PIM, Fs=O,,'. GNP,==BOP, ==- IVCR-PIM.

The PIM above may have to be treated as import of port services and not of shipping
services, but it is apparently caused from existence of the national shipping. By the way,some amounts may be transacted between ship-owning and ship-operating sub-industries, but they are offset at a time of aggregation into the shipping industry.

As far as the country has no external commerce to be carried by ships, the shipping
industry can apparently contribute the country's balance of payments as in the manners
we have investigated. But, as has been seen in the third case above, a problem is left in

a comparison between revenues and expenses of the industry. If the country owns noship and operates only ships chartered from foreign countries, then the expenses may be
increased by the charter hire to be paid abroad.

We can calculate and compare X,, GNP,, and BOP,, for various assumed casesin this manner. Where an external commerce is assumed to exist in the country, where
all national cargo are carried by ships chartered from foreign country, or where, on thecontrary, all national cargo are carried by nationaJ-own shipping, all such cases can beevaluated by means of our notations. Especially, if the country has some volumes of

TETSUJI SHIMOJO

52

external commerce to be carried by ships, then the situation will change significantly. In
the most general case we can express the actjvities of the shipping industry as follows,3)

E, :== NEX+NIM+.?VCR+HEI+NFP
M, =: -HIM-EPS
Z PV,j -- EN T, M,,= HIM
j'#sF, == FPS+NPS

X, = NEX+NIM+NCR+HEX+AIPS+?VFP+ENT
GNP, = NEX+7VCR+HEJkr+NPS+NFP+NIM-HIM

BOP, = NEX+NCR+HEI+IVFP+MM-HIM-FPS.
Here we find some problems with regard to the effects of existence of the shipping
industry. Firstly, as we have mentioned aboye, it was for the sake of convenience that

we absorbed PIM into the imports of shipping services. The same reason requests us
to add PEX to E,. But PEX can not be an effect ofexistence of the national shipping.
Let us, therefore, treat PIM as well as PEX as the imports and exports of port sector
respectively. The effect of the national shipping on port and other industry sectors,
in any way, can be evaluated in the course ofanalysis using the whole I-O table.

The second problem is a treatment of flM. In an ordinary I-O table freights for
carriage of import goods FIM+NIM are contained in CIF value of import amounts,
so FIM is deleted from M, in order to avoid double account while ?VIM is added toE, instead. Consequently, all the shipping activities, excluding passenger fares received

from resident, can be treated only in the overseas sector, and their transaction withother domestic industries fail to be expressed explicitly.

This is due, needless to say, to the fact that imports of commodities are reckonedin CIF values. All other values in the I-O table are reckoned in producer prices. Imports

also should be reckoned in producer prices, or FOB values. If imports are reckoned

in FOB values, imported cargo will become national cargo at the moment they areshipped from foreign ports, and all the freights will be transacted domestically whether
they were loaded on national or foreign ships. The part of freights to be paid for foreign

ships may be treated again as imports of shipping services.

This assumption will change the figures as follovvs;

Es = NEX+NCR+HEX+NFP
M, = -FIM- HIM-FPS
Z M,j -- FIM+NIM+ENT, M,, == HIM

i#sF, == FPS+Nps,

GNP, = IVEX+NCR+HEX+NFP+NPS-FIM-HIM
BOP, = NEI+NCR+HEI+IVFP-FJM-HIM-FPS
while X, does not change. It is important for us that both the GNP, and BOP, seem tohave reduced by the amounts of import freights FIM+NIM in this definitions. But
3) Tetsuji Shimojo, "Econometric Analysis of Shipping Balance of Payments",
Kobe University ofMereantile Marine, No. 18, 1970, pp. 25-47.

The Review of53
AN INPUT-OUTPUT TABLE FOR EVALUATION OF THE SHIPPING ACTIVITIES

this implies that those amounts for the shipping services or the exclusive products ofshipping industry have been transfarred from the oversea sectors to the entogenous
segment in the I-O table. And this is the reason why I, remain unchanged.
By the way, evaluation of the shipping freights in the national income statistics isalmost same as the manner is the ordinary I-O table we have previously seen. Only adifference is treatment of NIM in E, and M,. In the national income statistics, NIM
that is contained in the amounts ofimports is substracted from import amount ofshipping services. If the amount of imports of shipping services HIM+FPS are less than
the amounts of NIM like, say, Japanese case, M, will be positive in spite of the otherfigures ofimports being negative. Expressing this manner ofevaluation in our notations,
we find''E, -= ?VEX+NCR+AIFP+HEX
Ms := -HIM-FPS+HIM,
which are easily obtained by transfarring NIM from E, to M, in the original I-O table.
For the sake of further investigation, let us identify these three methods in evaluat-

ing exports and imports of shipping services; hence we call the original method as CIF

method, our proposed method as FOB method, and the Iast as NIS method.

II Comparison among the three methods
In the input-output tables of Japan in 1970 and l975, the ship-owning and shipoperating sub-industries are consolidated into an industry, the ocean shipping industry,

while they were treated as two independent industries in 1965 table. The reason why
they were consolidated in later tables is explained that the principle to classify industries

is according to the users of the respective production equipments.

In any way, the production of ship-operating industry is the amounts of total
freight earning minus charter hire paid to dornestic and foreign ship-owning industries.

And, on the other hand, the production of ship-owning industry is total charter hire

received from domestic and foreign ship-operating industries minus charter hire paid

to foreign ship-owning industry. Consolidating these two net productions, we canobtain the production ofthe ocean shipping industry by offsetting the amount ofcharter
hire transacted between domestic ship-owning and domestic ship-operating industries.
The result figures are shown in Table 1.
From these figures we can calcuiate the outputs ofthe ocean shipping industry )r,,
E, and M, according to our definition. In the calculation of X, there is no difference

among the three methods mentioned in the previous chapter. The figures may become
as follows;

X, -- ENT+IVEX+NIM+NCR+NFP+NPS-FHEX -- 406,994 in 1965
946 244 in 1970,
2,038,937 in 1975
All of the figures are different from those in the {-O tables of the respective years. In

TETSUJI SHIMOJO

54

Table 1. Revenues and Expenses of Ocean Shipping

Item

1965

1970

1975

NEX
NIM
NCR

99,969271,232
24,934

239,760
585,72087,840569,072
981,421
231,895

3,645

720
266

942
850

NFP
NPS

424

FPS

2,196

1,080

1,592

FIM

227,9oo

HEX
HIM
ENT

5,737

493,2oo
31,680183,6oo

780,584
253,150
738,256

258
o

1,607

SLF

55,152

1,053
42,362o(Source) Activity of Ocean Transport, MOT, Japan.
and Balance of Payments, Bank of Japan. ENT and SLF
were estimated from I-O table of each year.

(Unit) MillionYen.
order to investigate the causes we tried to estimate the definitions used to make those

figures. In the I-O table in 1965 the NIS rnethod was applied, and the figures seem tohave been calculated by the following definitions;X, -= EIVT+SLF+IVEX+7VIM+IVCR+NFP+NPS+HEX -: 449,356

E,-NEX+NCR+7VFP+HEX -134,285
Ms== NIM-FPS-HIM =:= 213,884
Here we find a considerable difference between the figures and ours, and the cause isthat an amount as large as 42,362 Mn. of internal transaction within the shipping in-dustry is taken in account. The internal transaction within a certain industry, likebetween the ship-owing and ship-operating sub-industries, should be offset in order toavoid double account at the time of aggregation. It is agreeable, however, that a small

amount of transaction between the ocean shipping and the other industries may exist as

the item EAJTlisted in Table 1, because of the operating expenses of ships owned andoperated by the other industries, although they are not the genuin production of theocean shipping industry.
It may be noted that the figures of E, and M, are accurately same as our definitionin the NIS method. In contrast, in the I-O table of 1970 the CIF method was appliedinstead ofNIS. But there are some problems in the figures of X,.

X,==NEX+NIM+NCR+NFP+?VPS+HES-= 945,986

E,-NEX+NIM+NCR+NFP+HEX =- 945,720

M, == -FPS-HIM -= -l84,680

We can not find EIVTto be taken into account of X, even if the amount is very small.
This may be a mis-definition. But, we could not help a trouble we faced to at the timeof calculation of NPS, NFP and FPS, for which information can be obtained only
from the "Activity of Ocean Transport" edited by MOT Japan, in classification ofentrance, departure and cross trade. This may cause the confusion in these figures of

55
AN INPUT-OUTPUT TABLE FOR EVALUATION OF THE SHIPPING AerIVITIES

passenger fares.
A similar confusion is taken place in the E, of 1975 I-O table. In this table, thedefinitions seem to be as follows;

X, -= NEX+NIM+IVCR+NPS+NFP+HEX - 2,037,330
E, - NEX+NIM+NCR+NFP+HEX-FPS - 2,033,281

M, == -FPS-HIM == -739,848
Neither we can find ENT, amounting \1,607 Mn. in the definition of X,. Meanwhile,
it is suspicious that the FPS or the same amount was substracted from E,. We areafraid this may be caused by the confusion in concepts of passenger fares. In any way,
we should be carefu1 to treat these figures, at least, for the ocean shipping industry.

As a primary analysis, let us calculate import coeMcients and endogenous demandcoeficients with the figures quoted in the I-O tables, leaving their apparent mistakes.

The coeMcients are as follows;

Import coeMcients = M,!X, =: O.476 in 1965
-O.195 in 1970
-O.363 in 1975
EndogenousdemandcoeMcients = Z] PV,jlX, = O.224 in 1965

jO.194 in 1970
O.267 in 1975

It is clear that the import coeMcient in 1965 is not appropriate as it is positive. If the

CIF method is applied to 1965 figures, the import coeMcient becomes -O.127. All thefigures, however, would be too small for Japan, because the transportation of Japanese

export and import cargo are depending more strongly on foreign shipping activities.

The endogenous demand coeMcients theoretically express the degrees to which thetotal demand for the shipping services from the domestic industries are satisfied by thenational shipping capacity. Thus, the endogenous demand coeMcient of the Japanese
ocean shipping must be much greater in view of the Japanese present status.

such apparently erroneous coeMcients come from the inappropriate treatment ofimport amounts both in the ocean shipping and the other industries. The freights
received by Japanese merchant marine is interpreted as savings of foreign currency in

NIS method and as export of shipping services in CIF method. Whichever it may be,
however, evaluation of imports in CIF values has pushed the Japanese ocean shipping
activities out of Japan. The International Monetary Funds suggests to count both
exports and imports in FOB values for the sake of eliminating international leakage inbalance of payments accounts. By evaluating the international transaction in FOBvalue, the freights paid for carriage of import goods can become domestic transaction
amount of shipping services between the shipping and the other industries whether the
goods may be carried by Japanese or foreign ships.

In 1975, total \2,777,178 Mn. of shipping services (2,037,330 produced and739,848 imported) were supplied, out of which only 26.7 O/. or \741,454 Mn. were de-manded by domestic industries, or, moreover, only \1,607 Mn. were sold to the otherTETSUJI SHIMOJO

56

industries. Japanese industries excluding the shipping industry imported as much as\l9,905 Bn., which include the shipping services amounting \1,762 Bn or 8.9%, of
total amounts for the carriage of these imported goods. It must be noted that almosta half of the amounts was supplied by Japanese ships, and that this fact can not beread from the I-O table compiled under the CIF method.
The imports of non-shipping industries, \19,905 Bn., include \1,762 Bn. of shipping services which are never the products of non-shipping industries. Every row of
I-O table should indicate the amounts of only product purely produced by the respective industry. The shipping services, the exclusive products of the shipping industry,
must be supplied by the shipping industry, or must be imported by them, if necessary.
According to this idea, let us redefine these amounts of shipping and non-shipping
lmports.

Non-shipping imports = 19,905,802-1,762,oo5 -- \18,143, 797 Mn.
There leaves a problem of insurance, but we would neglect it for the sake of convenience. As we have defined before, the shipping imports should be expressed as follows;

M, (FOB) = -HIM-FIM-FPS== -HIM-FPS+NIM-(NIM+FIM)- M, (in NIS) -(NIM+FIM)
This means that the shipping imports in FOB method are easily calculated from theshipping imports in NIS method by subtracting total freights paid to Japanese andforeign ships for carriage of import goods. Thus the figure in 1975 will be;

M, = -739,848+981,421-1,762,O05 -- \-1,520,431 Mn.

(M, in CIF) (NIM) (MM+FIM)
The corresponding figures in 1965 and 1970 are calculated as follovvs;

M, (1965) = 213,884-271,232-227,9oo - \-285,248 Mn.

(M, in NIS) (NIM) (FIM)
M, (1970) = -184,680-493,2oo -= \-677,880 Mn.
(M, in CIF) (FIM)
where difference of the methods used for these two original figures of imports causes
the difierence in calculating methods, but the results are based on the same bases. The

import coeMcients calculated from these new figures ofimports are shown below;

Import coeMcients == M,/X, = -O.634 in 1965== -O.717 in 1970
= -O.746 in 1975.
It seems more reasonable to understand that the share of Japanese shipping industry
in the whole supply of shipping services is only a third or a quarter, because, as weknow well, though a half of the export and import goods is canied by Japanese ships,
the most recently, a half of the share depends on the ships chartered from abroad.

Thus the amounts received by Japanese ships are rather small when the payments ofcharter hire are taken into consideration.

For the endogenous demand coeMcients, we must consider a farther procedure toANINPUT-OUTPUTTABLEFOREVALUATIONOFTHESHIPPINGACTIVITIES 57
correct the amounts of transaction within the endogenous segment as well as the final
demand sectors. The introduction of FOB imports to the I-O table implies to discountthe import amounts by the freights for carriage of import goods. If all the amounts on
the rows ofnon-shipping industries must not include the freights, we should devaluate
these figures by the amount of freight paid for carriage of their respective import goods.

M Modification of 1975 I-O Table
When the import table attached to the I-O table is available, it is rather easy tomodify the I-O table into a new table such that all the transactions therein do not include

the freight needed for carriage of their import goods. Only a diMculy to overcome
before the process is to estimate the amounts offreight contained in the values of respec-tive commodity imported by the non-shipping indistries.
Here we will prepare a new Input-Output Table for 1975 in order to test our own
theory to evaluate the effects ofJapanese shipping industry on national economy. Let
us start from the original table of 61 industry sectors. We have before all separated the

shipbuilding from the transport machinery industry and divided the transport industries

into seven subsectors, i.e., railway, road transport, ocean shipping, inland shipping
including port services, air transport, other transport and warehousing. Thus we have
prepared a 68-sector I-O table.4)

The firstjob ofour modification of the I-O table from CIF to FOB basis is to estimate the freight amounts paid by the respective industry sectors for carriage of theirimport cargo. For some particular cargo, such as coal, iron ore, crude oil, lumber andgrain, we can obtain the freight amounts paid to Japanese owned and operated ships
along with the tonnage carried by them. We have calculated the ratios of freights in thewhole amounts of CIF import for these iterns ofcargo by means ofthe average freightrates per ton carried by Japanese ships. The ratios of some other items of cargo can be

estimated if we can assume that they have been carried by liner shipping. And the rest
items of cargo the ratios were estimated referring to the investigation of the Japan Mari-time Research Institute in 19695) and other fractional data available from various
sources. The results of our estimation are as shown in Table 2.6)

The ratios of freights to CIF import amounts of i-th products are calculated by:ri = filMi
wherefi denotes the freight amounts paid by i-th industry for their imports. If an importtable [MiJ•] is given, by multiplying a diagonal matrix [R] consisting of ri from the left
4) Government ofJapan, 1975 Input-Output Tables, Tokyo, 1979.
5) Japan Maritime Research Institute, Investigations to Freights and Insurance in Export and Import Prices, Tokyo, 1969.
6) These figures were revised from those estimated for 1970 I-O table by ourselves. Many remarkable differences have been noted during the estimation. Generally speaking, the ratios of freights in 1975

were much less than those in 1970, for the shipping market in 1975 was considerably depressed. One of
the effects can be seen in the value added coethcient for 1975.

TETSUJI SHIMOJO

58

Table 2.

Industry Sector

CIF and FOB Values of Imports and Freights 1975

CIF

FOB

Freights

Per cent

1,985,443

1,772,173

128,214213,270
19,88510.7%

148,099o105,O16
15,874
122,381
208,053
54,168390,142
49,18632,16920,801
1,764
67,917
15,721
1,623
8,214

2.

Field crops
Stock-raising

3.

Agri. service

o

o

4.
5.

ForestFishing

690,108
177,338

6.

Coal

1 024 865

7.

lron ore
Non-ferrous ores

670,393504,282

585,092
161,464
902,484
462,340
450,1146 087 217

5 697 075

11.

Crude oil & N.G.
Other mining
Slaughtering

12.

Processed fish

13.

15.

Grain flour
Edible products
Drinks & liquors

16.

Tobaoco17.

Ntr. fiber yarn

18.
19.

Chm. fiber yarn
Fabric & dyeing

20.

Apparel21.
22.

Wooden products
Fumiture

274,738
359,374
232,374
13,137758,734
175,624
36,255
114,701
2,709
272,079
134,167
254,197
22,21823.

Pulp & paper

24.
25.

Printing
Leather & fur

26.

Rubber27.

Basic chm. prod.

28.

Synthetic fiber

29.

Other chm. prod.

30,

Petr. refinery

31.
32.

Coal products
Non-metal prod.

33.

Crude iron & steel

34.

Prim. steel prod.

35.
36.

Non-ferrous prod.
Metal products

37.

General machinery

38.

Elect. machineryTransport machin.
Precision machin.
Other manufact.

225,552
327,205
211,573
11,373690,817
159,903
34,632
106,487
2,515
259,902
128,162220,066
20,229136,364
33,69933,12635,8oo215,964
3,885
314,495
636,564
5,532
26,130138,432
11,791
517,60762,594
449,056
419,186
289,540
210,427
192,949

1.

8.
9.
10.

14.

39.
30.

41.

(Souroe)See text.

}})}

155,9oo
37,O12(Unit)

36,38339,320263,059
4,732
383,076
775,379
6,390
38,051
152,042
12,701
541,859
64,321
461,448430,754
297,530
216,234
198,273Is

194
12,277

6,oo5

13.4
15.2

9.0
ll.9

31.0
IO.7

6.4
17.9

9.0
9.0
13.4

9.0
9.0
4.5
7.2
7.2
4.5
4.5

34,131
1,989
19,537
3,313
3,257
3,520
47,095

13.4

9.0
12.5

9.0
9.0
9.0
17.9

847

17.9

68,581
138,815

17.9

858

13.4

11,921
13,610

31.3

910

7.2

24,252
1,727
12,392
11,568
7,990
5,807
5,324

4.5
2.7

i7.9

9.0

2.7
2.7
2.7

2.7
2.7

Million Yen

side ofa coupled matrix of endogenous and final demand sectors (including the export
column) of the import table, we can get a rectangular matrix of import freights [P] ; i.e.

[P] =- [R] [M. i•, M,] ,...........(1)A new table not containing import freights is obtained by further subtraction of [P]from the same size portion oforiginal I-•O table [PV i/ F] ; i.e.

59
AN INPUT-OUTPUT TABLE FOR EVALUATION OF THE SHIPPING ACTIVITIES[PV i• F]* - (rv l F]-[P] ............(2)The row sums of [P] must be added to the shipping row as the amounts of shipping
services purchased by the other industries, and column sums of [P] must be subtracted

from the import column as the eliminated freights having been contained in CIF
amounts. And lastly sum of all import freights is to be added to the import of shipping
industry. These processes are expressed as follows;

M*, = M,-IP]1[Wls l' Fs]' = [Ws l Fs]+1' [P] •••••••-.•••(3)

M"s = Ms+1' [P] 1,
where 1 is a column vector and 1' is a row vector all eiements of which are l.

These processes (1), (2) and (3) can alternatively be expressed in a process byredefining the matrix [R] as follws;[R] --rl
-r2
o

-r3
o

rl r2 r3 •

.

o.

o

rn

-row of shipping industry-rn

As this matrix will make a negative freight matrix by multiplying the import matrix, the

new I-O table assessed in FOB method is produced in a process;[Dii F]' === [Wl' F]+[R] [Mw I' Mf]• ••ny•••••••••(4)

VVe should better suggest to use the original I-O table assessed in NIS method and notin CIF method, the reason of which has been discussed before. As may have been clear,almost all figures on the shipping row will be created by this correction process, andthe amounts of export and import for shipping will be revised as follows ;E', = NEX+NCR+IVFP+HEX
M", == -HIM-FPS-FIM
and, in addition to the above,

Zva',j=NIM+FIM, rv,,=HIMj'"eare realized.

By the way, we should discuss a substitutive method to make the new I-O tablecompiled in FOB method in the case where there is no import table available. Then, we
have to assume that the import amounts are equally distributed in all transactions with-in the endogenous and final demand sectors including the export column. Namely, inorder to make an assumed import table, the following ratios have to be calculated;Miqi === zmid-+Fi for all i's excepti4sjTETSUJI SHIMOJO

60

It is easy to understand that the figures denote the ratios of import amounts to thetotal demands for the respective industries. Multiply a diagonal matrix consisting ofqi to the same size portion of original I-O table, and we get a rectangular matrix of same
slze: 1.e.

[M.iMf]* == [e] [W l, F]
where the left hand side is the assumed import table. The assumed import table should
be substituted into the formula (4) above in the next process ofcalculation.

A series of these procedures can be combined into a step of multiplication, i.e.

[rvlF]* - ([I]-[D])[PV i• F]

where[I]-[D] -

1- d,

1-d,

o
1- d,

o
d,

d,

d,

dn

1

<-row of shipping

industry

o

1- dn

and

fi

di= Åíwid+Fi 'j

We have applied this formula to the I-O tables of 1965 and 1970 as we could notcollect the import table for these years, and we applied it, for reference, to that of 1975

as well. Now we have seven tables to compare with each other.

Table 3 shows these seven I-O tables in the form of 2-sector table, and Table 4shows the principal elements and coeMcients produced from different tables. ComparTable 3.

Seven Different 2-secter I-O Tables

1965 CIF

N

T

s

EX

F

N

359,815

1,679

361,494

335,804

S

10

997

1,oo7

4

T
V

359,825

2,676

362,501

335,808

335,998
695,823

1,817

4,494

337,815
7oo,317X

32,971
4,054
37,025xIM-34,444 695,283-572 4,494-35,O16 7oo,317

1965 FOB

N
N
S

3,702

T

359,825

1,672
1,O04
2,676

v

335,998
695,823

4,494

X

F

T

s

356,123357,795

334,679

4,706

1,128

362,501

335,808

1,817

337,815
7oo,317EX
32,803
1,511
34,314IMX-29,454 695,823-2,851 4,494-32,305 7oo,317

6I
AN INPUT-OUTPUT TABLE FOR EVALUATION OF THE SHIPPING ACTIVITIES1970 CIF

N
N

850,087s

3Tv

850,090755,630

Å~

1,605,717

FTs

853,359 756,753

3,272
1,836
5,108
4,349
9,460

1,839 ll

855,198 756,764

EX
75,9939,457
85,450M

X-80,388 1,60S,717-1,847 9,460-82,235 1,615,177

759,979
1,615,1771970 FOB

N
N
s

9,540

T
V

850,090X

843,819 755,646

3,269
1,839
5,108

755,630

4,349
9,460

1,605,717

FTs

840,550

11,379 1,107
855,198 756,764

EX
75,851
3,742
79,593

M

X-69,599 1,605,717-6,779 9,460-76,378 1,615,177

759,979
1,615,177

1975 CIF

N

N

s

T

1,757,495

8,735
7,398
16,134

1,766,230 1,554,328 180,435

s

16

T
v

1,757,511

1,544,424 4,239

X

3,301,935 20,373

FEX

7,415 24 20,333

1,773,645 1,554,353 2oo,767

IMX-199,058 3,301,935-7,398 20,373-206,456 3,322,308

1,548,664
3,322,308

1975 FOB

N

F

T

s

N

1,748,649

8,691

1,757,340 1,546,506

s

8,861

16,304 7,847

Tv

1,757,510

7,442
16,134

1,544,424 4,239

X

3,301,934 20,373

1,773,643 l,S54,352

EXIM

179,526
11,427i90,953-181,438 3,301,932

X-15,204 20,373-196,642 3,322,305

1,548,663
3,322,307

l975 FOB*

X

N

s

T

F

EX

IM

N

l,741,466

1,750,160

1,S52,777s

16,044
1,757,510

180,434
10,519190,953-181,438 3,301,932

T
y

8,69S
7,439
16,134

X

1,544,424 4,239
3,301,934 20,373

23,483

1,575

1,773,643

1,554,352-15,204 20,373-196,642 3,322,305

1,548,663
3,322,307(Note) 1975 FOB is calculated with the assumed import table and 1975 FOB " is made fromthe
actual import table.

ing these figures annually we can see quantitative and qualitative changes in the ocean

shipping industry of Japan, and comparing these figures by methods, we can observe
the difference in implication of these coeMcients. As we have discussed above, generallys
Table 4.

Principal elements and ooeMcients of several I-O tables

1965 CIF

1965 FOB

1970 CIF

1970 FOB

1975 CIF

1975 FOB

1975 FOB*

Endogenous total output

1,oo7

997
10
4
4,054

1,839
1,836

10,492

To own industry

4,706
1,O04
3,702
1,128

O.4043

21,348
7,489
13,8592,911
11,319-15,205
20,373
16,1348,645
4,239-O.7463
O.2081

23,483
7,439

11
9,457
-1,847
9,460
5,108
3,272
4,351
-O.1952
O.4600

1,885
8,607
1,751
3,996
-6,779
9,460
5,108
3,223
4,351
-O.7166
O.4600

7,415
7,398
17
24
20,333-7,39820,373
16,1348,736
4,239-O.3631
O.2081

8,699
4,239-O.7463
O.2081

H
tn
H
ua
ctr

O.2240O.19881.0472O.6407

O.1944
O.1626

1.1091
O.6461

O.3639O.26701.ou79O.60001,1527
O.6601:-Kogo

O.9243
O.6676

1.0477
O.6011

O.8632
O.5439O.8688O.77581.1905
O.5554

1.1892
O.8348

O.98731.0003
O.5878O.7784
O.4621

O.7853
O.5420O.5158
O.4616

O.8372
O.5271

O.6082
O.4686

O.6094
O.5071

O.9772
O.5753-O.5658

O.9873
O.5843-O.4887

O.7221O.5004-O.9986

O.7847
O.6257-O.5537

O.7646
O.4840-O.9946

O.8751
O.6083-O.6268

O.8851
O.6466-O.oo67Item

To other industries
Final demand (excl. export)

ExportImportGross domestic products
Endogenous total input
From other industries
Value added
Import coef.
Value added coef.

-572
4,494
1,817
1,679
1,817
-O.1272
O.4043

1,511-2,851
4,494
1,817
1,679
1,817

-O.63"

3

16,O04

1,575
10,519-15,204
20,373
16,134

Endogenous demand coeÅí
to gross domestic output
to total domestic demand(I-A)
index of dispersion powerindex of dispersion sensitivity

1.1903

a-A+M)
Index of dispersion powerindex of dispersion sensitivity(I- (I-M) A)
index of dispersion power
Index of dispersion sensitivity

Import coef.**(Note) 1975 FOB' is made by the actual import table not assumed one. " Import coef.
Mt/(Z orsJ'ÅÄFs) where Fs excludes export.

jin the last row is defined asua

63
AN INPUT-OUTPUT TABLE FOR EVALUATION OF THE SHIPPING ACTIVITIES

speaking, the FOB method seeems more appropriate in expressing the shipping activities than the other method.

The endogenous transaction on the row of shipping sector XW,j• has expandedjsignificantly with this correction, and the endogenous demand coefiicients reckoned
from these figu'res have also become more reasonable for Japanese actual situation:
the figures are as follows;

Endogenous demand coeflicient == Z PV,jlX, == 1.047 in 1965j1.203 in 1970
I.153 in 1975.

That all the figures are greater than 1 implies that the whole capacity ofJapanese ship-ping industry to supply the shipping services is rather smaller than the domestic demand, or that the whole demand for the shipping seryjces can be satisfied only by thefu11 capacity of the national shipping even ifall exports are postponed. This leads, how-ever, not always to a conclusion that more merchant marine should be built immediately.7)

In contrast, the endogenous demand coefficients to the total domestic demand
represent the ratio of the shipping services utilized by the other industries as raw mate-rials for their production to the total domestic demand for the shipping services. The
exogenous demand of the shipping services are deemed as the final products such as thepassenger fares. In view of the structure of Japanese external trades, the ratio of raw
materials is considerably Iarge so that the coefiicients must be more than a half. In 1975,

for example, Japanese merchant marine carried 518 Mn. tons of cargo and earned\1,782 Billion offreights. Ifwe suppose all cargo carried by liners being final products,

as liners carried only 19 Mn. tons and earned \484 Bn., the ratios are only 3.60/. intons and 27 O/. in Yen. Thus the endogenous demand coeMcients calculated with figuresin FOB table are likely more reliable.

IV Evaluation of Shipping Aetiyity
For the investigation to the direct and indirect effects ofan industry it is convenient
to utilize the I-O table. The I-O table expresses the inter-industrial transaction during acertain period, and from the table we can obtain many information such that, for ex'
ample, how much shipping services an industry needed for a unit of its production,and how much of its products were demanded by the shipping industry. The shipping
services needed for production ofother industries, however, can not be read suMciently

from the I-O table compiled by the CIF method. We must prepare more convenientI-O table reproduced by means of FOB method, for the sake of investigation into theeffects of the shippjng industry.

Here we have prepared l7-sector I-O tables for years 1970 and 1975, by selecting7) This view was pursued in the paper quoted in 3).

TETSUJI SHIMOJO

64

some industries of comparatively close connection with the shipping industry, and bycombining them with some other industries closely connected in view of their raw
materials respectiyely. The relation between this classification and the 68-sector I-O

table mentioned before is shown below''
1. Field crops; 2. Stock-raising; 3. Agricultural service;
1. Agriculture and foods
5. Fishing; 11, Slaughtering; 12. Processed fish meat;

13. Grain cleaning & flour; 14. Edible products; 15.
Drinks & liquors; 16. Tobacco.
3.

Coal
Petroleum4.

Iron & steel2.

6. Coal;31. Coal products.
9. Crude oil & natural gas; 30. Petroleum refinery.
7. Iron ore; 33. Pig iron & crude steel; 34. Primary steel

products.
5.

Non-ferrous metal

8. Non-ferrous metal ore; 35. Non-ferrous metal products; 36. Metal products.

6.

Miscellaneous products

10. 0ther mining; 32. Non-metallic mineral products;
41. 0ther manufacturing.

7.

Fiber

17. Natural fiber yarn; 18. Chemical fiber yarn; 19.
Fabrics & dyeing; 20. Apparel; 25. Leather & fur; 26.

8. Wooden

Rubber.
4. Forest; 21. Wooden products; 22. Furniture; 23.
Pulp & paper; 24. Printing; 59, OMce supply; 60. Packing material.

9.

Chemical

27. Basic chemical products ; 28. Synthetic fiber material ;10.

Machinery

37. General machinery; 38. Electric machinery; 39.

29. 0ther chemical products.

Transport machinery; 40. Precision machinery.

IL Construction

42. Building construction; 43. 0ther construction.

12.

Power, gas & water

44. Electric power; 45. Gas supply; 46. Water supply.

13.

Commerce

47.'Wholesale & retail; 48. Finance & insurance; 49.
Real estate; 50. Real estate rent.

I4.

Other transport

51. Transport (excluding Ocean shipping and Iniand
water transport).

15.

Ocean shippjng

16.

Inland water transport (includ

ing port service)

I7.

Other

52. Communication' 53. Public administration' 54.

ep

Education; 55. Research institute; 56. Medical service& social insurance; 57. Private non-profit institute; 58.
Other service, 61. Activities not classified.

Table 5 shows the input

coeMcients collected from the row and column of theshipping industry of 1978 and1975 I-O tables, all of which are compiled by the FOB
method. Output in Table 5 means the row elementsin the respective input coefieientmatrix and input means the column elements. It is remarkable that the coal, petroleum

65
AN INPUT-OUTPUT TABLE FOR EYALUATION OF THE SHIPPING ACTIVITIES

Table 5. Input CoeMcients for the Shipping Industry

1. Agri.&foods
2. Coal
3. Petroleum
4. iron & stoel

Input

Output

Input

49332

o

56336

556813307186137833o264802260885102377oo

Output574176

o
9892
7992
61817
40046
8835

11. Construction

63059
64359
41734
6oo67
846oo
29984
50723

12. Power, gas & c.

134922

13. Commerce

348029

14. Transport

12265
45149

15. 0ceanshipping

1992348

16. Inlandship'g

54485
22175

5. Non-fer.metal
6. MisoeI.product7. Fiber

8. Wooden
9. Chemical
10. Machinery

17. 0ther

1975*

1975

1970
Industry

296876

5345
4313

o
8164
6687
44821

"920

17875

66195
19275
29560

2867088030
6018
738487

1992348
19547663675703

54282

18618

3675703
1708423
1795oo

47322

66969
51593
71185
88060
74901
6641
7091

9030

2529
74836

42432

81596
5804I94560331252031189775

41727
38947
30142

105931

Output114945

443
7745

64045

3651542

34316
11292

(Unit) 10-7. (Note 1975" means the table calculated by the actual import table.
I975" Input was omitted forits similarity to that of l975.

and iron & stecl industries have considerable dependence on the shipping services fortheir production, and that other industries have no more than 1 % of dependence on
the shipping services. Such dependence, however, may be much different in the view
from the shipping interest, namely, an industry having the biggest contribution to theshipping is the petroleum, and the second is the agriculture & foods in 1975. In any way,

it may be very interesting to investigate such dependence on and contribution to theshipping services of the other industries, but here we have to postpone these problem

to another occasion.
The most popular analysis using the I-O table is to observe its inverse matrix. The
inverse coeMcients Biy• are said to express the degree of influence that a unit of increasein demand for products give the.i-th industry. The shipping row of the inverse matrix

produced from CIF I-O table consists of nearly zero elements except the shipping
element,8) that implies that the shipping industry receives no influence from the other8) After the inverse matrix computed from the Leontief coeMcient matrix consisting all other industry sectors except the shipping, let us place a new row and a column for the shipping at the lowest row
and the rightmost column, then the matrix can be expressed as follows ;Bi-C"'i'"/t--i--'where B denotes the inverse matrix, C the newly added shipping column of minus input coeMcients, D
the newly added shipping row, and E the shipping-shipping element of Leontief matrix which seems
nearly 1 by the reason mentioned in the text. Farther prooess of inversion to the matrix will result;

DO == DIE
EO -- 1/E
BO == B-- CDO

CO == -CEO
If D is nearly O and Eis nearly 1, then there wil] happen no change in the matrix.

TETSUJI SHIMOJO

66

industries. On the contrary, however, in general, the shipping industry has been thought
to depend much on its external circumstances. This fact seems to tell us that the importvalues in the I-O table should be expressed by FOB rather than CIF.
In the analysis ofinverse coeMcients, a problem is what formula has to be used for

the Leontief coethcient matrix. If the import coeMcient is not taken in account, theimport of every commodities are deemed to be independent to the production of them,and all deficits in the commodity are to be imported. This case equilibrates as in;

M -= AX+F+E-X.
Thus the LeontiefcoeMcient matrix will be represented by (I-A) and the inverse matrixby (I-A)-i.
In contrast, there is another idea that the import is proportioned to the amount of
production. If the ratio of the import to the production is supposed as

mi = MilXi,
then the equilibrium equation will beA
X-AX+MX== F+EA M denotes a diagonal matrix consisting of mi. Thus, in this case, the inverse
where

AA

matrix will be expressed as (I-A+M)"i. As the matrix M is a diagonal one, the differ-ence between (I-A) and (I-A+ fi) arises only on the diagonal elements, in which, inother words, the import coeflicient has been eliminated from the imput coeMcient of
the transcation within the respective industry. This fact leaves a serious problem withregard to the shipping industry as we will discuss later.
Again, it is also insisted that the import must not be influenced by the export if allcommodities represent their respective industries. Should the import be independent
from the export, the import coeficient must be defined asmi - Mil(AX+F)i ,and the equilibrium equation may be

AA - F- MF+E
X-AX+MAXA
and the inverse matrix will be expressedin (I-(I-M) A)-i.
With regard to only the shipping industry, the first case is the most reasonable,
for the import ofthe shipping services arises because ofshortage in the domestic supply-ing capacity. Ifthe import ofshipping services is proportioned to the domestic production, and ifthe CIF I-O table is applied, then the element A,, will be almost equal to m,,

A or shipping-shipping etement in the Leontief coeMcient matrix is not
and I-A,,+M,
other than 1, as the transaction within the shipping is constituted by only the importof ship services or charter hire. Export of an industry products should not include
import the same products, but the shipping industry in the I-O table is constituted by
two sub-industries, the ship-owner and the ship-operation, and the two products, ship
service and shipping service, are combined into one product. Therefore, the export ofshipping industry includes the shipping services produced by the activities of ships

67
AN INPUT-OUTPUT TABLE FOR EVALUATION OF THE SHIPPING ACTIVITIES

Table 6.

Accumulated indirect effects in 1975 FOB"

Row

Coiumn10753755901

l.

Agri. & foods

3703992.

250153723812101119887

3.

Coal
Petroleum4.

Iron & steel5.

Non-fer. metal
Misce1. product
Fiber

6,

7.
8.

Wooden9.

ChemicalMachinery
Construction

10.
11.

48579340648736808839527058045925259525870891404862546
6050487613470275331
1926221247862271203373622028131105923

126033
154986

12.

Power, gas & c.

13.

Commerce

14.
15.

Transport
Ocean shipping

16.

Inland ship'g

16345294 16345294
410979 2887015

17.

Other

176930Total 1

Total 2A
(I-(I-M)A)A(I-A+M)(I-A)
Industry

Row Column Row Colum108203495"129827131236812974898911
114126
12840613758164517
66588
l82oo5

13224
88083

30602
9238
928813

89988
53189
38247
85058
10849954848
418949

46074
43476

11714230

909710

64172
42134

8591821321127277941
107993530677427835278 33316273
11269984 16970979

9621719234377811562925
428498413524262
181oo32

22725523778187277941(Unit)

10-7. (Note) 1975 FOB' means the table calculated by the actual import table.

Total lis the total of all coeMcients and in total 2 the 15th element is eliminated.

48737
14437

75996
453301337949202028
9oo97
64636
75387
85678
90319
41505
41599
113803
8303
55406

47162
26863

1454516

14069783564
60697
135097l7295686489
66354873691
69052
1376578

21113411714230
171619049013718511750
6797520

chartered from abroad. Thus this treatment of the shipping industry differs from that

A A). As we have aggregated several industries into 17 super-industryfor (I-(I-M)
sectors according to main raw materials, the similar situation is considered in our
analysis. Taking these situations into consideration, we would prefer the inverse matrix(1-A)-' in our farther discussjon.
In Table 6 the shipping row and colmun in the inverse matrix (I-A)--i derived from1975 FOB" are shown along with thoseAA
in (I-A+M)"i and (I-(I-M) A)-' for reference. Before all, we can note that the row sum and column sum in(I-A)miare the greatest in comparison with other definitions ofinverse matrices. Total 1 in Table 6 denotethe sums of coeMcients in the respective columns and Total 2 denote the sums of them
excepting the shipping elements. These figures indicate that the shipping industry havea slightly larger influence to and a slightly lower dependence from the other industries.

Needless to say, from the inverse matrices derived from the CIF I-O tables, we can notfind such conclusions.

V Epilogue
Many other methods of analysis using the l-O tables are proposed. Only purposein this paper is to propose the FOB I-O table to be applied to those analysis in which
existence of the shipping industry is regarded as important in any sense. It is partly the

68

TETSUJI SHIMOJO

same reason why the International Monetary Funds suggested to count both export andimport in FOB for compilation of the balance of payments. The international couplingofI-O tables among several countries will need to treat the import values in FOB prices
in order to include all shipping activities on the seas between these countries.

Even in the FOB I-O tables, the shipping activities for carriage of export goods are
not evaluated as the contribution to the exporting industries, but as the export ofship-ping services. This point must bear in mind at the investigation to the evaluation ofshipping industry. We are separately preparing an investigation to the raison d'etre of

the shipping industry from the view point of loading shares of the national merchantmarine. The most remarkable contribution of the shipping industry is that for thebalance of payments of the country. Many deveioping countries insist to reserve theirown merchant marine in order to overcome their inferiority in currency status. How
effective their own shipping capacity may be for their objectives has presented a prob-

lem to us. Some analysing tools we have referred to in the beginning of this paper aswell as the FOB I-O table were inyented for this purpose.9)

9) Tetsuji Shimojo, Katashi Taguchi and Hidetoshi Nakayashu, Economic Effects of Maritime
Investment Policies in the Developing Countries, submitted to Transport Poliey and Decision Making,1980.

THE FUNCTION OF MODERN CORPORATEFINANCIAL REPORTING IN A MASSDEMOCRATIC SOCIETY
Hidetoshi YAMAJi

I Introduction
Today, corporate firms in advanced capitalistic countries issue financial and managerial reports to the public. This phenomenon is taken as a matter of course. Indeed we

can find the fact that already in the old history ofdouble-entry bookkeeping or earlyaccounting, there existed simple financial statements which seemed to correspond to
those of our times. But, in reality, it is a recent event that corporate firms came to dis-close their financial and managerial information to the public. That js to say, in theearly capitalistic economy, venture firms and early corporations had already disclosed
simple financial statements to a few stockholders and a few creditors, but not to a great

many anonymous people. We can not find even in the United States corporate disclosures to the public until the latter halfofthe 19th century and the century-turned times.

In other capitalistic countries the phenomenon appeared many years later. The main
theme of this study is the analysis of the economic and social foundations of the phe-nomenon that in the modern capitalistic countries, big corporations disclose theiraccounting information to the public. In the following description, we refer to this as"the corporate publicity", and to the problem why this corporate publicity has appearedin modern society as "the corporate publicity problem".

Now, turning to accounting researchers, what kind of hypothesis (resolution)
have they presented concerning the corporate publicity problem? For the present, twohypotheses have been developed in American accounting literature. The first hypothesis is as follows; corporate firms disclose accounting information to obtain suMcient

capital funds in the security markets. On the other hand, the public needs them toinvest parts of its incomes in securities. Thus, corporate publicity is thought to haveappeared only in the modern capitalistic society where the security markets had alreadydeveloped to maturity. We refer to the first hypothesis as the security investment decision-oriented-hypothesis.

The second hypothesis is as follows; corporate management has the accountability
because of its managerial stewardship, so it must measure the results of the firm's
economic activities and report them to the stockholders. On the other hand, the stockholders have a right to know the results of the economic activities of the firm on thebasis that t•hey entrust their funds to the management. That is to say, corporate publicity

is thought to have an old history from early capitalism, and in modern society it mereiyHIDETOSHI YAMAjl

70

increased in size, but didn't change in its nature. We refer to the second hypothesis as

the accountability-oriented-hypothesis. In short, as the security investment decision-oriented-hypothesis regards the public as being security investment decision-makers,
so the accountability-oriented-hypothesis looks on the public as stock (equity) holders.

The common feature of the two hypotheses is the understanding of corporate publicjty
in connection with stock.

In Section II, we reexamine the above-mentioned two hypotheses and point out
some of their limitations. In Section III, we will propose our new hypothesis on thecorporate publicity problem. In Section IV, we interpret the historical materials in the

United States from the viewpojnt presented in our hypothesis. In Section V, our conclusion will be applied to the historical facts concerning Japanese corporate financial

reporting, and mention the differences between the social foundations of the two countries which affect the corporate publicity of the two countries.

II Reexamination of the Two Hypotheses
Il-1 Survey of the two hypotheses

It may be appropriate that before entering into the reexamination of the two
hypotheses we should make their characteristics clearer.

In the "Report ofthe Committee on Foundations ofAccounting Measurement",i)Professor ljiri pointed out that there were two areas in the accounting field. One isoperational accounting and the other is equity accounting. Generally speaking, operational accounting is related to the aspect that the accounting system gives usefu1 infor-•mation to decision-makers. Equity accounting emphasizes the aspect that the account-ing system measures the movement of the equity for stockholders and creditors andreport it to them.

By employing the division of the accounting field proposed by I'rofessor Ijiri, weare able to characterize more clearly the two hypotheses which have been developedin our Introduction. In our opinion the security inyestment decision-oriented-hypothesis may correspond to operatjonal accounting, thus the accountability-oriented-hypothe-

sis perhaps corresponds to cquity accounting.
We start with the security investment decision-oriented-hypothesis.
Professor Ijiri says;

Operational accounting means accounting designed to aid...investment decisions by investors. Since the decisions made by...investors are primarily resource
allocation decisions or economic decisions, alternatively this subset of accounting

may be called accounting for resource allocation or accounting for economic
decisions. ...Financial accounting system designed to communicate the economic
progress of the firm to the financial community serves as an input to resource
allocation in the securities market. ...Operational accounting focuses on the pre1) A. A. A., "Report of the Cornmittee on Foundations of Accounting Measurement," Supplement to Vol. XLVI ofAccounting Review.

71
THE FUNCTION OF MODERN CORPORATE FINANCIAL REPORTINGIN
A MASS DEMOCRATIC SOCIETY

dictive value of informatioR. That is, information about the results of the lastperiod is usefu1 oniy insofar as it reduces the user's uncertainty about futurechanges in the aspects of the firm ofinterest to him.2)

By using the description by Professor Ijiri about operational accounting, we cancharacterize more finely the security investment decision-oriented-hypothesis. In the

hypothetical circumstance surrounding the corporate financial reporting which operational accounting and the security investment decision-oriented-hypothesis may suppose, the management discloses accounting information about its firm to the security
markets in order to obtain funds with which it intends to buy equipments. Accounting
information in this case has the function to let the decision-markers predict favorably the

future of the firm concerned. That is to say, the management issues future-suggestedinformation with future-oriented-purposes. Turning our attention to the public (public
isinterpreted as the financial community in the writings of Professor ljiri), it invests

its current incomes in securities to secure its own much more future consumptions.

Namely, it needs future-suggested-information with future oriented purposes, too.
In such conditions corporate financial reporting works to aid the achievement of future

purposes of both sides. And it seems that the security investment decision-orientedhypothesis explains the appearance of corporate publicity by establishing a financial
relation between big corporations and the investing public.

Let's advance our discussion to the second hypothesis. We quote again the description of Professor Ijiri to characterize more clearly the accountability-orientedhypothesis.

... Equity accounting, on the other hand, focuses not on prediction but on thereconciliation of the equities of various interested parties of the organization.
Equity accounting includes custodianship accounting; but it extends far beyond
the custodianship function and control over the resources and activities of anorganization, because it utilizes accounting measurement as a basis for achievinga state of affairs consistent with perceived social equity.... In this sense equity
accounting may be described as accountingfor social andorganizational eguity.3)

In such an accounting area (hypothesis), how does modern corporate financial

reporting operate? Corporations (or management) measure the movements of theequities of various interested parties, since they have the accountability to reportthem to creditors and stockholders, that is, to equity-holders. They assume this accountability because they are entrusted with the capital fund by the equity-holders. For the
public, it is characterized as equity-holders in this accounting area (hypothesis). In otherwords, the public considered as equity-holders wants to know the amounts of its
dividends and interests, and the security ofits own equities and incomes. In these circumstances, corporate financial reporting establishes itself as an institution. According

to this hypothesis, corporate financial reporting can exist insofar as stewardship between management and equity-holders exists. Thus corporate financial reporting has in2) Ibid, pp. 6-7.
3) Ibid, p. 7.

HIDETOSHI YAMAJI

72

reality an old history from the medieval times.

Thus far, we have drawn up the features of two hypotheses on corporate publicity,by referring to the division of the accounting field as proposed by Professor Ijiri. Subsequently their limitations should be mentioned for the purpose of bringing into relief
the superiority of our hypothesis.
II-2 Some limitations of the security investment decision-oriented-hypothesis

It seems that the point of view contained in the security investment decisionoriented-hypothesis has already appeared in the early statements of accounting principles issued during last thirty years by the American Accounting Association. Somestatements of accounting principles by the A. A. A. assert that corporate financial
reporting aids the investing public in buying and selling securities in the markets con-cerned. For example, a certain statement says that;

In view of the facts that short-term creditors and governmental administratiye
agencies will typically have the power to require information specific to purposes
and that no important differences in the basic informational requirements of theother interests cited seems to exist, the traditional emphasis on the requirementsof the stockholder group appears to be sound. In considering disclosure standards,
therefore, the Committee has been concerned primarily with the use of the financial statements (1) in the making of investment decisions and (2) in the exercise ofinvestor control over management.4)
The use by investors ofpublished financial statements in making investment
decisions and exercising control over management should be considered ofprimary
importance.5)
Further we can quote W. A. Paton and A. C. Littleton ;... Capital should flow into those industries which serve the public interest, andwithin an industry into those enterprises in which the management is capable ofusing capital effectively. If capital in an enterprise is earning a return over a con-siderable period, this probably indicates that the capital is being capably employed in an industry serving an existing demand; if the capital is not earning a
return over a period of time, this probably indicates the capital is lodged in inca-

pable hands or in an industry whose service is not in continuing demand.6)

Judging from the above-quotations, it seems that the viewpoint of the security
investment decision-oriented-hypothesis is a generally accepted one in American accounting theories. But can we corroborate this hypothesis? By referring to the historicalmaterials about corporate publicity, we can point out that there are many diMculties
in regard to the corroboration of this hypothesis. It is said that the time of the appear-4) A. A. A., Standards ofDisclosurefor Published Financial Reports, Supplementary Statement,
No. 8.
5) A. A. A., Accounting andReporting Standardsfor Corporate Financial Statements, (1957 Revision).

6) W. A. Paton andA. C. Littleton, An Introduetion to Corporate Accounting Standards, A. A. A.,
Chicago, 1940, (A. A. A. Monograph No. 3), p. 3.

73
THE FUNCTION OF MODERN COR]PORATE FINANCIAL REPORTINGIN
A MASS DEMOCRATIC SOCIETY

ance of modern corporate financial reporting is the time extending over the latter halfof the 19th century to the early years of the 20th century. From this time on, corporate

publicity exists consistently in the American economic society. Thus, we must find thedeterminant of the establishment of corporate publicity which continues to exist fromthe latter half of the 19th century to 1980. The security investment decision-orientedhypothesis regards the establishment of the financial relation between big corporations
and the investing public as the determinant. This determinant contained in the hypothe-

sis can explain the situation concerning corporate publicity from the 1930's to the
1960's. It can not explain, however, the conditions of corporate financial reportingfrom the latter half of the 19th century to the early years of the 20th century and theconditions after 1970. That is to say,Figure I
19th century

1900l
not explainable
by this hypothesis

1930

1970

1980

)t"tt.it

explainable
by this hypothesis

not explainable

Then, for what reason, do we think that the above-mentioned two periods are
unexplainable periods by hypothesis? (The two periods are indicated as the whiteparts in Figure I.) Because in these two periods there emerged corporate publicity in aplace where the investing public and the security markets didn't enter. We can enumerate several examples. In regard to the times from the latter half of the 19th century to

the early years of the 20th century, two cases will be referred to in the following as

typical cases where corporate publicity emerged but the security market problem
hardly aifected.

The first case is the agricultural movement in the latter half of the 19th century.
In particular, our attention must be paid to the Granger Movement which was the first

big movement and generated the first big organization of American farmers. In thedeveloping process of the movement, there appeared two groups of states. The states
belonging to the first group had laws which regulated the maximum fees for railroad
corporations were called "strong" states. The other states belonging to the second
group had only publicity requirements which required railroad corporations to reportwere called "weak" states. But contrary to our expectation, the "strong" states where

the Granger Movement developed aggresively, failed to regulate railroads. And the"weak" states where the relation between railroad corporations and the public wasin a stable condition and a modern mass dernocratic society came true, succeeded toreguiate railroads. Still more the anti-railroad and anti-monopoly atmosphere in theAmerican society, which was due originally to the agricultural movement, led the Congress to the establishment of the Interstate Commerce Commission. The I. C. C. regulated the railroad industry by requiring railroad corporations to disclose their financial

statements. In this case, corporate publicity, which had not yet spontaneously emerged

HIDETOSHI YAMAJI

74

in the railroad industry, had the functions of reducing the discontent of the farmers(the public) and ofchecking the excessive managerial activities of railroad corporations.
It was not related to the security markets.')

The second case is the disclosure of financial statements of the United State SteelCorporation in 1903. This disclosure was the first for the U. S. Steel since its merger in

1901. It was the Price Waterhouse and Company and H. Gary that planned this disclosure. H. Gary was the financial executive in U.S. Steel of that day. Then what was
the purpose of the financial disclosure carried out by H. Gary? We can consider sev-

eral purposes. For example, there might have been the intention of selling wateredstock of the U.S. Steel on the side of the board of directors. But it seems to me that

H. Gary intended more strongly to reconcile the anti-monopoly public opinion. That
is to say, in this case, corporate publicity also worked to reconcile public opinion andwas not mainly concerned with the stock market problem. In other words, the functionof corporate publicity to reconcile public opinion may include the one to satisfy the
information needs of the inyestors in the security markets.8)

These two cases tell us that from the latter half of the 19th century to the eariy
years of the 20th century, corporate publicity mainiy functioned to check monopolistic
corporation activities on the public side, and to calm the anti-monopoly public opinion

on the big corporation side. Namely it was not directly related to security market

problems.
Next, it is necessary to mention shortly corporate publicity after 1970. After 1970,

in the American economic society there emerged two new socio-economic problems.
One is environmental pollution and the other is the conglomerate merger movement.
Needless to say, these two phenomena existed already in the 1960's. Indeed, the extensionof corporate financial reporting was required to counteract the anti- pollution and anti-

monopoly movements. In these cases corporate publicity was used to calm the antipollution and anti-monopoly movements, on the corporation side, and it was used tocheck the activities of big corporations on the public side. In neither of the cases after

1970, can we find that corporate publicity is exclusively related to the security market

problems.
Judging from the above mentioned three cases, we can not consider the establishment of financial relation between the investing public and big corporations as the7) S. J. Buck, The Granger Movemen4 University of Nebraska Press, Lincoln, (Originally pub•lished in 1913).

A. T. Hadley, Railroad Transportation; its history and its laws, New York, Putnam, 1903.

8) D. F. Hawkins, "The Development of Modern Financial Reporting Practices among American Manufacturing Corporations," contained in J. P. Baughman, ed., The History ofAmeriean Management, N. J., Prentice-Hall, 1969.
J. D. Glover, The Attaek on Big Business, Boston, The President of Fellows of Harvard Coliege, 1954, (2nd ed.).

I. M. Tarbeil, The Life ofEtbert H. Gary, New York, Greenwood Press, 1969, (reprint). R.
Hessen, Steel Titan, New York, Oxford University Press, 1975.

75
THE FUNCTION OF MODERN CORPORATE FINANCIAL REPORTINGIN
A MASS DEMOCRATIC SOCIETY

determinant factor for the appearance of corporate publicity. We must find another
determinant factor which may fit a broader view and enable us to explain corporate
publicity from the viewpoint of public relations,II-3 Limitations of the accountability-oriented-hypothesis

Many accounting researchers explain external financial reporting on the basis
ofaccountability which has its origin in the manorial system of medieval tjmes. In the

English manor, the master of the manor transfered his authority to manage it to thesteward, and in turn the steward had the duty to report the financial conditions of themanor to the master at a certain time point. The relation between the master and thesteward is called "stewardship". Then in accounting, such stewardship has been analogized with the relation between management and stockholders in modern capitalism.
This analogy can often be seen in American accounting theories, so that we can quote
several authors as examples;"Examples of these users and of the types of evaluations...for which theyuse financial accounting information are: Owners...evaluate the use and steward-

ship of resources by management."")"The objectives of accounting are to provide information for the following
purposes: ... 3. Maintaining and reporting on the custodianship of resources."iO)"What are financial statements trying to present? Are they primarily an
account of management stewardship, or primarily for investor guidance?"i')"Perhaps the most universal justification for holding [the historical cost]
doctrine is the so-called stewardship notion, the import of which is that business
managers are accountable for the money tokens that come into their hands. No
doubt they are, but a cash account is all that would be required to serve this function. The superstructure of accounting processes and financial statements generally
would have no justification if this were the primary function of accounting."i2)"The traditional view, again, is that financial statements represent a stewardship report by management in which it accounts for its use of the resources
entrusted to it by the owners of the company. The report has thus been used asa basis for determining whether that stewardship has been adequately discharged
or not. In other words, how effectiye has management been? What is the natureof its accomplishment?"i3}
We quote here only five authors though P. Rosenfield gives quotations concerning the9) Aocounting Principies Board Statement, No, 4, Basic Concepts and Accountins Principles
Underlyitrgr Financial Statements ofBusiness Enterprises, October, l 970, p. 44.

10) A. A. A., Committee to Prepare a Statement of Basic Accounting Theory, A Statement of
Basic Accounting Theory, 1966, p. 4.

11) A. I. C. P. A., Report ofSpecial Committee on Opinions ofthe Accounting Principtes Board,
Spring, 1965, pp. 12-13.

12) R. J. Chambers, Accounting Evaluation and Economic Behavior, Englewood Cliffs, N. J.,
Prentice-Hall, Inc., 1966, p. 354.

13) W. F. Frese and R. K. Mautz, "Financial Reporting by Whom?" Harvard Business Review,
March-April, 1972, p. 8.

HIDETOSHI YAMAJI

76

stewardship concept from works of seventeen authors.i4)

In spite of the support by many accounting researchers, we doubt that the conceptof stewardship of the medieval times is useful to explain the relation between the mana-

gement of big corporations and their stockholders in modern capitalism. Indeed as a

steward was entrusted the manor by the master, so the management is entrusted thecapital by the stockholders. So a trusteeship can be recognized in both cases. But wemust note that there are great differences between the situations surrounding these twotrusteeships. Notwithstanding the fact that the reporting from the steward to the masterof a manor is seemingly similar to the reporting from management to stockholders,the meaning of the two reportings becomes quite different, when we analize them bytaking into account sociai structure surrounding them. The reporting by the steward
was based on a personal and individual relation and this relation perhaps continued
to be the base of corporate financial reporting in the early capitalism. On the otherside, the reporting by the management of modern big corporations is not based on
personal relations but on impersonal and material relations. Thus, it is very diMcult to

explain modern corporate financial reporting based on material relations from the con-

cept of stewardship duty which originated essentially from the personal relation. We
must study the relation between the management of big corporations and stockholders(or the public) in the setting of the social structure produced by modern capitalism. We

dare say that modern big corporations do not publish their financial statements tostockholders considered as equity holders but to stockholders as the public. That is tosay, in regard to the corporate publicity problem, the concept of the stockholder is notimportant as an equityholder but important as the public which means a great many
people pursuing common interests. The accountability-oriented-hypothesis may fit theperiod from early capitalism (or medieval times) to the first halfofthe 19th century but
not the period from the latter half of the 19th century to the present.
Figure II

1800•,i• .• -,•trtA-ltReete.

explainable
by the hypothesis

1900
:

:

1980
i
not explainable
by the hypothesis

Subsequently we wish to outline the historical materials concerning corporate
publicity in the U.S. which is thought to refute the accountability-oriented-hypothesis.

We can enumerate several cases in modern times since the end of the 19th century
where the government (federal or local) intervened in the private sector to extend corpo-

rate publicity. For example, the Interstate Commerce Commission, the Federal Trade
Commission, and the Securities Exchange Commission respectively utilized corporate
14) P. Rosenfield, "Stewardship," contained in Obj'ectives of Financial Statements, (Vol. 2, se!ected papers), compiled and ed. , by J. J. Cramer, Jr. and G. H. Sorter, AICPA, 1974. By the way, quotations from (9) to (13) are from Rosenfield's paper.

THE FUNCTION OF MODERN CORPORATE FINANCIAL REPORTING IN 77
A MASS DEMOCRATIC SOCIETY
financial reporting as the means ofa regulation policy. What meanings they have, theseexamples? Judging from the fact that when stockholders and other interested parties

wanted more ample and more accurate information about big corporations, and their
management didn't disclose them timely, it seems that it didn't publich financial state-ments with stewardship duty (accountbility). The government intervened when theextension of corporate publicity, that is the accountability of the management, wasrequired. Since the management didn't assume the accountability (duty), it was necessarythat the government intervened to extend corporate financial reporting. Viewed fromthis angle, the accountability-oriented-hypothesis doesn't fit the time after the latter
half of the 19th century. On the other hand, in Section IV we will be able to point out

the case where perhaps there appeared corporate publicity without the accountability

duty of management or government regulations. These cases will be made clear only
by our new hypothesis.
In the above description, we didn't mean that the hypothetical social relations
which two hypotheses supposed can not be recognized in the real world, but that there

must exist a determinant for the emergence of modern corporate financial reportingwhich involves the relations supposed by the two hypotheses as particular subsets ofthe main social relations (social structure).

Figure III
governmental

anti-pollution

regu!ation

movement

anti-monopoly
rnovement

myestment
decision

accountability
relationa broader social structure = determinant

III Presentation of New Hypothesis
In the above two sections, we have analized two hypotheses regarding corporate
publicity and pointed out some of their limitations. In this section, we wish to present

a new hypothesis which should cover those limitations.
The essence of our hypothesis is as follows; corporate publicity emerged in a situ-

ation where, on one hand, big corporations (or management) wanted to acquire thesupport of the public for their (its) activities concerning a certain economic problem,on the other hand, the public needed information about activities of big corporations
in order to observe and criticize them. This situation (or social structure) does notprevail throughout history. It seems to have emerged in the U.S. between the latter
halfofthe 19th century to the early years ofthe 20th century. In the following, we shallgo into more detail.

We may all recognize that there was a big changing point in politics and economy
at the turn of the century in the United States. What did the change bring to the Ameri-can society? Indeed the answer to this question is deeply related to the understanding

78

HIDETOSHI YAMAJI

ofthe social functions ofcorporate publicity. Our answer is as follows ; the change trans-

formed the American society into a "mass democratic society" where certain classes
had to acquire the support of the public (the mass), if they wanted to safegard theirpower in competitive conditions. In other words, the acquirement of the public's
support became a significant means of victory in free competition and search for thecontrol power over other classes. On the other hand, the "masses", which is identicalto the "public" in this context, obtained the power and opportunity of observing theclasses competing for the leadership, by organizing themselves. But such a general
understanding of the situation must be at least supported by works of sociology or of
economics, if it should be accepted as a rational hypothesis. We may indicate the works

ofJ. Schumpeter, V. Pareto, C. W. Mills and others. Their works extensively focus on"the theory of the elite". Thus "classes searching for the leadership or the control
power over other classes" in our text may correspond to "elite". The elite in politics isthought to be individuals or political parties searching for the people's votes, as in Capi-talism, Socialism andDemocarcy by J. Schumpeter:
It wi11 be remembered that our chief troubles about the classical theory
centered in the proposition that "the people" hold a definite and rational opinion

about every individual question and that they give effect to this opinion-in a
democracy-by choosing "representatives" who will see to it that that opinion iscarried out. Thus the selection of the representatives is made secondary to theprimary purpose of the democratic arrangement which is to vest the power ofdeciding political issues in the electorate. Suppose we reverse the roles of these

two elements and make the deciding of issues by the electorate secondary to theelection of the men who are to do the deciding. To put it differently, we now takethe view that the role of the people is to produce a government, or else an intermediate body which in turn will produce a national executive or government. And
we define : the democratic method is that institutional arrangement for arriving at
political decisions in which individuals acquire the power to decide by means of acompetitive struggle for the people's vote.
----t------•-----------------------------------------------------------t----------------------

Second, the theory embodied in this definition leaves all the room we may
wish to have for a proper recognition of the vital fact ofleadership. The classicaltheory did not do this but, as we have seen, attributed to the electorate an alto-

gether unrealistic degree of initiative which practically amounted to ignoring
leadership. But collectives act almost exclusively by accepting leadership-this is
the dominant mechanism of practically any collective action which is more than arefiex. Propositions about the working and the results of the decmoratic methodthat take account ofthis are bound to be infinitely more realistic than propositions
which do not. They will not stop at the execution of a volonte' ge'ne'rale but will gosome way toward showing how it emerges or how it is substituted or faked. What
we have termed Manufactured Will is no longer outside the theory, an aberration
for the absence of which we piously pray ; it enters on the ground floor as it should.i5)15) J. Shumpeter, Capitalism, Soeialism and Democracy,
New• York, and Evanston, 1962, pp. 269-270.

(Third Edition),

Harper Torchbooks,

79
THE FUNCTION OF MODERN CORPORATE FINANCIAL REPORTINGIN
A MASS DEMOCRATIC SOCIETY

And indeed we think that the classes searching for leadership positively empioy
the information disclosure as the means ofacquiring the support ofthe public. Natural-ly the concept of information disclosure includes corporate financial reporting, But
the concept itself has a broader meanings, that is, political, sociological and economic

meanings. Therefore the corporate publicity problem must be analized from the viewpoint ofinformation disclosure in the mass democratic society.
Attention must be given to the fact that the word "classes" is used here in a broader
sense, that is to say, not that in Marxism. The classes searching for leadership in freecompetition doesn't necessarily mean "bourgeoisie," and neither does "public" necessarily mean "laborer class." We have more concrete and individual sense. In a case of"classes searching for leadership" jt means "groups of big corporations," and "public"means "stockholders, consumers and workers critical forward them." In an extreme
case, "classes" means "big corporations" and "an union of laborers", and "public"means "the rest of the people." Of course, in the political situation, the classes areequal to political parties searching for leadership, which is the situation iliustrated by

J. Schumpeter.
We shall next discuss more minutely the public side whose conceptual components
perhaps vary with the ones ofleading classes. Generally speakjng, the development ofa democratic atmosphere increases the opportunities to check and to criticize theactivities ofthe classes searching for leadership. These opportunities comprisejournal-

ism, civil movements, establishment ofuniversal suffrage, and so on. In each of them,
the public demands information disclosure of the classes searching for leadership•
Repeating ourselves, the classes searching for Ieadership thus disclose their own information in order to acquire the public's support and the public demands disclosureof the leading classes in order to check them, or, in the current sense, to participate in
the competition as critics or judges.

The social structure ofthe "mass democracy" does not always appear historicallyand relative to different countries. It can be said that the above-mentioned social struc-ture applies only recently to even such advanced capitalistic countries as France, Ger-

many and Japan. Therefore for these cguntries the corporate publicity problem is acurrent problem. But in the United States, the social structure emerged at the turn ofthe century. Judging from these facts, the requirements of the emergence of corporate
publicity seem to be the following;i) extensive emergence of big corporationsii) establishment of a middle class as the major part of the publiciii) enhancememt of democracy both in the area of political institutions and in-dividual valuesiv) development of traMc and communication systems
Stating reversely, corporate publicity becomes a social problem only in modern society
to the extent that big corporations disclose their financial information outside, that is, tothe public, only in a society fu1fi11ing these four conditions. Namely the corporate pub-licity problem is part of the "publicity problem in the mass democratic society."

HIDETOSHI YAMAJI

80

The verification of the hypothesis proposed by us regarding corporate publicity
must be carried out in empirical and historical study, properly speaking. But this will
be partly done in Sections IV and V, and here will we enumerate the results of other dis-

ciplines which suggest the same idea about the social structure of mass democracy
as ours. They serve to verify our hypothesis, too. These disciplines concern industrial

democracy, business history and public relations.

First, let us mention industrial democracy. From our viewpoint, it is importantthat in the U.S. there emerged democratic relations and institutions between big corporations and laborers in the times from the latter part of the l9th century to the earlyyears of the 20th century. The emergence ofcollective bargaining and employee partici-

pation should be pointed out in this connection.i6) These phenomena in the area ofindustrial relations are the first participation problerns of our times, and it seems thatthey may have a common social basis with the demand of the public for information
disclosure.

Secondly, we shall discuss the function and image of modern management inbusiness history. Traditionally, many researchers of business history support the
progressive historical view. According to it,...society is divisible into two classes, One is the good class, that is to say, thegovernment representing the public opinion which has contributed to social progress, and the other is the bad class, namely, big business and its management
representing conseryatism which deny social progress. And history is interpreted
as a continuous suecession of struggle between the two classes, the victory of thegood class and social progress carried out by the good class.")
But thereafter the progressive historical view was substjtuted by the revisionist histori-

cal view, and in turn, by the organizational synthesis view of A. Chandler, Jr. In thisdevelopment of business history, the function and image of modern management of big
corporations gained gradually importance.i8) That is to say, the image of old-fashioned

management which oppressed iaborers and the public has been substituted by the image
ofnew management which is sensible to public opinion and politicai affairs, and positively responds to them. As a typical example ofthis new management, we can pointout H. Gary, the financial executive of U.S. Steel in the early years of the 20th century.

He used many modern management policies in which corporate financial reporting
was involved. Postponing a detailed analysis to another paper, we can say that one of

the reasons why H. Gary was able to utilize modern management poiicies would consist
in the structure of mass democratic society as defined in our hypothesis.

16) KazuyoshiKOshiro, AmericaSangyominshuseino Kenkyu, (The Study ofAmerican Industriat
Democracy) (in Japanese), Tokyo-daigaku Shuppankai, 1966.
17) Cf Satoru Tsujihara, "Big Business oyobi Leader-Kan no Shiteki Hensen," C`Historical Views
ofBig Business and its Leader-With Special Reference to the Chandlerian School in American History(1), (in Japanese), The Economic Review (Otaru Uniyersity of Commerce), Vol. XXX, No. 2, (Octo--"ber, 1979), pp. 41-42.

18) L. Galambos, "Parsonian Sociology and Post-Progressive History," Social Science Cuarterly,
Yol. 50, June, 1969.

81
THE FUNCTION OF MODERN CORPORATE FINANCIAL REPORTINGIN
A MASS DEMOCRATIC SOCIETY

Thirdly and finally, we may mention public relations. In his book, E. L, Bernays
points out that the practice of public relations in American industries emerged at theturn of the century.'9) Public relations were established as engineering for obtaining

a consensus in the situation where big corporations were emerging, becoming monopolistic and anti-monopoly public opinion appeared. It seems that the basis for theestablishment ofpublic relations lies in the structure ofthe mass democratic society.
Still more, the political situation at the turn of the century must be made clear for
supplementary data. T. Roosevelt and U. Wilson, belonged to different political parties,

but both utilized the publicity policy in the election campaign for the presidency. In
particuiar, U. Wilson asserted as campaign promise that purification of politics would

be carried out by means of information disclosure about governmental activities. The
reason why both presidents could use this publicity policy in the election campaign
Iies also in the structure of the mass democratic society of those times.20>

The findings of these three disciplines, which are all deeply related to the phenom-

ena in the real world based on the social structure of mass democracy, may be able tosupplement the verification of our hypothesis. Thus, we can consider corporate publicity

as the same phenomenon as those treated by the three disciplines, and explain the cor-porate publicity problem on the base of the social structure of mass democracy. Thisview may be supported by some researchers. But there remains the task to verify our
hypothesis through historical analysis.

IV Historical Study of the Corporate Publicity Problem in the United States
In this section, the task to interpret the historical materials about the corporate
publicity problem in the United States is given to us. But only cases of Sections II and

III which were used to disprove two hypotheses will be treated. And each historicalcase will be briefly anaiized. More rninute case-studies will be found in future articlesof this author.

IV-1 Corporate financial reporting of the American railroad industry in the latter
halfof the 19th century

The first railroad corporation in the United States, which was incorporated in
1827, was the Baltimore and Ohio Railroad Company. This railroad was establishedmainly with municipai funds. And this case became typical for the 1830's to 1850's.
That is to say, in those years relatively small and local railroads were incorporated,
and they were not always financed by private funds of stockholders, but on the contrary,chiefiy by municipal funds.
19) Yoshinori Ide, "America ni okeru Seifu PR no K6z6 to Kin6," C`Public Relations in the Administration ofthe United States : Structure and Function,") (in Japanese), Tiie Journal of Social Science,Vol. XVI, No. 6, (March, 1965).
20) Encyclopaedia qfSocial Sciences, ed., by E. R. A. Seligman, New York, The Macmillan Company, 1934, "Publicity," by E. Grueing.

HDETOSHI YAMAJI

82

ln such a situation, the municipal governments required that these railroad corporations published financial statements. For the public (in this case the public was residentsof the citizens whose funds and taxes were invested in railroad corporations), it didn't

demand the disclosure of information about the railroads, since the railroads in thisperiod were thought to be essentially managed by municipal governments, and it was
not necessary for the public therefore to check by themselves the managerial actjvitiesof the railroads.

But soon after these small and local railroads merged reciprocally and became big

trunk line railroads which came to raise funds necessary for their own expansion in
the security markets. At the same time, the financial disclosure ofrailroads increased inimportance since the railroads utilized the funds of a greater number of people than theearly railroads. Thus the relation between security investment decision and accounting
information drew the attention of the public. So far as we have already seen, in thiscase it seems that the arising of corporate publicity was related to the establishmentof the security markets, that is to say, the security investment decision-oriented-hy-

pothesis may be truely able to explain the corporate publicity problem. But we findthis view mistaken when we analize the situation concerning the security markets by
taking into account the writings of H. V. Poor.2i)

H. V. Poor edited the American Railroad lournal from 1849 to 1862, and publishedthe Manuat of the Railroads of the U. S. Therefore, he was an expert in analizing corporate financial reporting of the railroad industry of that time. His direct motivation toanalize it was to render usefuI information to the investing public which invested its
money in railroad securities, When the investing public which used to invest in local

and small firms changed its investments from these to the big railroad corporations,

it could no longer depend on such sensory experience as its acquaintance withthe management of the small firms, and needed accounting information about therailroads. Thus corporate financial reporting became significant. On the other hand,
the railroad corporations disclosed their information to obtain suMcient funds in the

security markets. On this condition has already been based the security investment
decision-oriented-hypothesis.

But there seem to be two meanings in the idea of H. V. Poor regarding the corporate publicity problem. First, since his motivation was communication of usefu1 finan-cial information to the investing public, he criticized the financial statements ofsome ofrailroad corporations as being misleading or wrong. For example, he criticized theErie, the Hudson River, the New York Central and others. Because of these efforts,
he was strongly supported by the inyesting public.

Then, what meaning can we attribute to the activities of H. V. Poor? It does not21) A. D. Chandler, Jr., "H. V. Poor: Business Analyst," Explorations in Entreprenearial History,
Vol. II, No. 4, (May 15, 1950). "H. V. Poor, Philosopher of Management, 1812-1905," contained in
W. Miller, ed., Men in Business : Essays on the Historical Role ofthe Entrepreneur, New York and Evans-ton, Harper and Row Pub., 1952. Henry Varum Poor: Business Editor, Analyst and Reformer, Massachusetts, Harvard University Press, l956.

THE FUNCTION OF MODERN CORPORATE FINAN. CIAL REPORTING IN 83
A MASS DEMOCRATIC SOCIETY
seem that the financial statements published by railroads of those days were useful fromthe viewpoint of supply and demand of funds to both the investing public and the rail-roads. On the contrary, for railroad corporations which published misleading statements, their image worsened so that they had more difiiculties in obtaining funds. It

was important that the relation between the railroad corporations and the investing

public changed in nature from a simple supply-and-demand relation of funds to a
democratic relation thanks to H. V. Poor. That is to say, the investing public became

able to check the financial management of railroad corporations by means of the information communicated by him. As for the railroads, they intended to refine theirfinancial statements and managerial activities in order to acquire the support of the

public. It is interesting to note that in American corporate publicity there emergedsuch a critic against big corporations as H. V. Poor, who brought the relation between

the corporations and the public from the one-way communication to the two-way
communication demanding the extension of the disclosure of the corporations. In these
conditions, corporate financial reporting has developed.

As a second and supplementary significance of H. V. Poor, we can mention his use
ofpubiicity policy in another area. He knew the importance ofpublicity. Therefore heused it (i) to check the railroads and (ii) to acquire the support of the public. (i) has

already been stated. As an example of (ii), we can point out the fact that he employedpublicity policy to get the support of the public for the development of the railroadindustry. Namely he found it regrettable that the anti-railroad movement and anti-

monopoly movement opposed a sound development of railroads, and demanded the
publication of true statements of the railroad corporations for the purpose to silence
the anti-railroad movement. This fact does not prove that in reality the railroad corporations utilized financial disclosure to acquire the support of the public, but it provesthat there had already emerged a social structure where publicity policy could be usefuI to get the support of the public.

This analysis shows us that even the relation between security investment decision
and accounting information disclosure must be considered as part of the establishingprocess of democratic relations between big corporations and the public.

IV-2 Agricultural movement and corporate publicity
From the 1860's to the 1880's, the railroad system in the United States developedin a way that the rajlroad corporatjons became powerful enough to ignore the pubiic.
In particular, the railroads exploited farmers by using differential rate systems which

demanded high rates from farmers and low rates from infiuential people (for example,
the legislature, newspapermen and others.)
General}y speaking, the discontent of farmers came from the following factors.22)i) ... As the world grows richer there is a more rapid increase in the demand for22) E. W. Bemis, `'Discontent ofthe Farmer," The lournal ofPotiticatEcononu,(March, 1893).

,Vol. 1, No. 2,

HIDETOSHI YAMAJI

84

the finer products than in the demand for raw material.... This means more
growth of cities, factory towns and railroads than of farmers.
ii) A second cause of the farmer's relativeiy poor situation and therefore of his
discontent, especially in the south, is lack of thrift, energy and intelligent in adopt-

ing improved methods of farming.
iii) A third cause of the farmer's ills... has been unforeseen natural difficulties,

such as drought and grasshoppers.
iv) Greater blessings of government in cities, such as better schools and roads.

v) Unequal taxations ofcity and country.
vi) Then, in an age of combinations of both labor and capital, the farmer sufferfrom the difliculty perfecting a strong organization.

viD Farmers are also naturally made discontented by such rapid accumulations oflarge fortunes as haye been ajded by secret railway rates or by securing for almosta song from the public valuabie quasi-public franchises.
viii) The farmer also complains ofthe high rate ofinterest he must pay.
ix) The farmer feeis aggrieved at the supposed forcing down of the prices of his
products at harvest time by large sales by the "bears" for future delivery ofproducts not at the time in the procession ofthe speculator.
x) ...the farmer complains ofthe general fall in agricultural prices in recent years,

which has made his mortgage-loan, contracted when prices were high, more andmore burdensome.
These factors of farmer's discontent are originated exclusively from the activities of
big corporations, except for natural factors. And in this period the word "big corpora-tion" was synonymous with "railroad corporation," therefore the farmers used to
criticize the railroads. Then came the Granger Movement among mid-west farmers
based on farmer's complaints against railroads and monopoly. This agricultural movement created the atmosphere of anti-railroad and of anti-monopoly. At the beginning,many local governments where the movement prevailed, regulated raiiroad corporations

by various policies among which corporate financial reporting was included. In
particular, weak states had publicity regulations which required railroads to disclose

accounting information. On the public side, corporate financial reporting functioned to check railroad management and on the railroad side, it worked to conciliate the public opinion and therefore the discontent of farmers and to avoid more
direct and more oppressiye governmental policy against the railroads. But soon after
the regulation of interstate activities of corporations by the states was judged a violation of the constitution by the supreme court, and the anti-railroad regulations at thestate level were involyed into federal regulation. This was the "Act of Regulate the In-

terstate Commerce" which established the Interstate Commerce Commission. The commission also made use of corporate financial reporting to regulate the railroad corpora-tions. In this situation, we can recognize the emerging social structure mentioned in
Section III, while the voluntary disclosure by the railroad corporations themselves is
not yet seen clearly. The outline of the agricultural movement from the 1860's to the1880's told us that corporate publicity having its origin in the establishment of a mass
democratjc social structure, did not appear necessary through the establishment of the

85
THE FUNCTION OF MODERN CORPORATE FINANCIAL REPORTINGIN
A MASS DEMOCRATIC SOCIETY

security markets.23)

IV-3 Management policies in the view of H. Gary
As we have already stated, H. Gary was the financial executive of U.S. Steel andplanned to publish minute financial statements in 1903. We can say that he was thefirst manager who noticed the importance of the public (or public opinion) and utilized

this for his own purposes. We will show two cases concerning H. Gary's management
policy.

The first case is the overthrow of C. Schwap who belonged to the camp ofCarnegy
at the time ofincorporation ofU.S. Steel and was the first president ofthe U,S. Steel.

The nature of management by C. Schwap and Carnegy was characterized as old fashioned because they ignored the laborers and the public. In other words, they cannot
recognize the existence of the public. On the other hand, H. Gary, who reckoned withit, brought about C. Schwap's downfall by using public opinion, that is, by making ascandal about Schwap in the press.
The second case concerns the extension of financial disclosure. When U.S. Steelwas incorporated, the anti-trust movement gained force. Thus if U.S. Steel didn't adopt
any policies to persuade the public, the firm would be devided into various smaller firms

as in the case of Standard Oil. But in reality H. Gary adopted the publicity policy withthe purpose to assert the rationality of his corporation. It seems that the financial re-

porting of U.S. Steel was part ofthis policy. The reason why H. Gary was able to carryout this policy is thought to lie in his timely recognition ofthe importance ofthe public.

V The Development of Corporate Financial Reporting in Japan
It was in l873 (the 6th year of the Meiji period) that Western double entry book-keeping was for the first time introduced to Japan. In this year, there occured two
events concerning the modernization of accounting in Japan. One is the pubiication of
Cho-ai no ho' (Hovv to enter in an account book) written by Yukichi Fukuzawa and theother is the enforcement by the First National Bank of double entry bookkeeping
which was planned by A. Shand. The former is the beginning of the modern accountancy
in Japan and the latter is the beginning of the modern accounting practice in Japan.

For our interests, the modern accounting practice, in particular, modern corporate
financial reporting must be mentioned in the following.

The First National Bank, which kept double entry bookkeeping for the first timein Japan, was also Japan's first corporation. On December 31st of the 6th year of the

Meiji period the Bank published its first semiannual report which consisted of two
statements, that is, a balance sheet (Hanki Jissai H6koku) and a profit and loss and23) More detailed research wM be made in my article,"19 seiki Kohan no America GasshUkokuni
okeru Tetsudogaisha Kisei to Kaikeijohokokai," ("The Regulations and Aocounting Disclosure ofAmerican Railroad Corporations in the Latter Half of the 19th Century,") (forthcoming) (in Japanese).

HIDETOSHI YAMAJI

86

appropriation statement (Hanki Riekiwariai H6koku). Of course, the publication of
the two statements by the Bank was not carried out spontaneously but according to the

National Bank Act which was enacted on November 15th of the 5th year of the Meiji
period.

It is necessary to describe the nature of the First National Bank Incorporation
for the purpose of understanding the function of financial disclosure by the Bank. The

Bank was originally established as the "Mitsui-Ono Partnership Bank" in the suinmer
ofthe 5th year ofthe Meiji period. But as the National Bank Act was enacted on 15th
November the 5th year of the Meiji period, the Mitsui-Ono Partnership Bank became
the base of the First National Bank. At the time of the establishment of this Bank,
stocks were offered for public subscription. But the people of these times had no knowl-edge about banking systems, so that the stocks were not sold in suflicient number. For
this reason, the greater part of the Bank's stocks were held by the Mitsuis and the Onos.

And the management of the Bank, in particular the presidency of the Bank, was carriedout by Hachiroemon Mitsui and Zensuke Ono in monthly alternation.
In the Meiji period, Japan as an underdeveloped country, was in the process ofenhancing the economy and organizing political institutions. With regard to the econo-

my, the establishment of corporations was carried out by the government and such
Zaibatsu as Mitsui, Ono, Sumitomo, Yasuda and others. The case of the First National
Bank was a typical one. That is to say, the government gaye financial and legal aid to

the Zaibatsu. Therefore the modernization of Japan's economy was led by the state
and the Zaibatsu. And for politics, the modernization of political institutions wasequally conducted by the state. In economic history, Germany and Japan are characteized as the modernized countries "from above," while England and the United States

as modernized "from below."
In these economic conditions, the government checked the economic activities ofcorporations established by the Zaibatsu, for the purpose of protecting the interests
ofstockholders and creditors. Therefore, the corporations had to report their financial

statements first of all to the government and secondly to the public (stockholders).
Still more, the financial disclosure by the corporations was not carried out according

to the public's need, but according to the National Bank Act or the Commercial law
enacted by the state, Allowances for interests to stockholders, creditors and depositors

were made by the state, not by the Bank, corporation and equity holders themselves.

The corporations organized by the Zaibatsu published their financial statements
as did the corporations of the United States but they differed from the corporate pubIicity in the U.S., when we take the above mentioned situation into account. As we havealready seen, when on the one hand the public wanted to check the activities of big

corporations, on the other hand the big corporations' purpose was to acquire thesupport of the public, there appeared modern corporate financial reporting as a twoway communication on the basis of the social structure of mass democracy in the
United States. These phenomena emerged in the times from the latter half of the 19th
century to the early years of the 20th century. For Japan, the public (or the mass) in87
THE FUNCTION OF MODERN CORPORATE FINANCIAL REPORTINGIN
A MASS DEMOCRATIC SOCIETY

the Meiji period lacked the democratic feeling for checkingby themselves the activitiesof the government and of the corporations organized by the government, because mod-ernization was undertaken by the government. Therefore, the financial statements
published by the corporations established by the government and the Zaibatsu were
usefu1 to only a few businessmen with political afliliations, but from social viewpoint

they had only a ceremonial meaning. The corporate financial reporting in the Meiji
period was indeed a one-way communication between the corporations and the public.
The main reason for such a limitation seems to be that in the Meiji period no mass
democratic society was established yet. In our opinion, the reality of a mass democraticsociety and the consciousness of the public of democracy is a recent phenomefion in
Japan.24)

In the near future we will develop more detailed case studies concerning the devel-

opment of corporate financial reporting in Japan.

24) Japan Accounting Association, Kinciai-Kaikei

Hyakunen, (Modern Accounting History inJapan), (in Japanese), 1978.

Ichiro Katano, Nippon Ginko-Kaikei Seidoshi,
Japanese Banks), (in Japanese), DObunkan, 1977.

(Revised Edition),(Aceounting History of&REVIEW
KOBEECONOMICBUSINESSCONTENTS
NO. I9 (1972)
Pattems of Export Trade of Argentina and Brazil :AComparativeStudy ........,.......,,..................,.......................FukuoKawata
EntrepreneurshipinAmerica.............,,........,,......................,..,..................TadakatsuInoue
Generalization of Two-Gap Theory ....,...............,.........,........,.,.....................Hikoji Katano

Accounting Measurement and Homomorphism ......,.............,.,.........................Isao Nakano

An Interpretation of Two Stage Least Squares
Estimators as Indirect Least Squares
Estimators in the Overidentified Case ...,......,.,.......................Hiroshi Sadamichi
A Note on the One-dimensional Random Search ...................,......................Komayuki Itow

Exchange Rate Systems and Distribution of
Seigniorage ..........................,,..,................,........................Kazuhiro Igawa

NO. 20 (1973)
An Analysis of the Brazilian
Balance ofPayments: 1960-1972 ..................,..........................Fukuo Kawata

International Money Flow and
the Multinational Corporations ..,..........................................Masahiro Ful'ita

Estimation of Investment Allocation
RatiosofJapaneseEconomy: l960-1969 .................................HikojiKatano
Available jobs and Employment inJapanese Foreign-going Shipping....................................,.,Hiromasa Yamamoto
Homornorphism and Business Income Measurement ................,.........................Isao Nakano
Assets Choice and Optimal Intemational Reserves,,..........,.............................Kazuhiro Igawa

NO. 21 (1975)
Regional Development Policies of japan in Recent Quarterof the Twentieth Century .,......,...,,...................................,.......Minoru Beika

National Income and Expenditure
at Factor Cost in Japan 1955-1970:
A Macro-Accounting for Growing Economy .....,....,...................Nobuko Nosse
Ethciency and Acceptability in Optimal Growth Path ..........................,.........Hikoji Katano

An Equitable Distribution of the Costs and Benefits of Economic
Integration..................,..........,...,.........,.............,...,.......YoshiakiNishimukai

Japanese Business Abroad: Past, Present and Future ....................................Hideki Yoshihara

NO. 22 (1976)
Pioneering in Australian Direct Trade
Life ofF. Kanematsu, 1845-1913 .............................................Tadakatsu Inoue

Productivity Bargaining and the Change of Labour
Management Relations in the Japanese Foreign-going
Shipping: 1965-1973 .................................,......,.........,., fliromasa Yamamoto
On an Interpretable Depreciation Method .,............,.,......,.,............................Isao Nakano

A New Type of Data Banking System-BEICA System- ..............,........,....,.....................,......HiroshiSadamichi
Expectation in the Shipping Exchange .......,..............,,.................................Tetswfi Shimojo

International Capital Movements andReal Capital Accumulation,....,...........,.....................,..............Kazuhiro Igawa

Legal System of the Free Movement of Workers and Migration
Trends in the European Economic Community ................................

NO. 23 (1977)
Alternative Approaches to the
Aocounting for Education.........................................................IVobuko IVosse

Personnel Management of Japanese Companies
in Thailand: A Field Paper ...............................,................Hideki Yoshihara

Evaluation of Performance Using
Multiple Criteria .........,......,.................................................KomayukiIto",

Some Bargaining Process Models in
the Shipping Exchange............................................................Tetsnji Shimojo

Asset Diversification under the Flexible
Exchange Rate System .........................................................Kazuhiro Igawa

NO. 24 (1978)
The Dernand for International
Currencies and Reserves ................,........................................Masahiro Fujita

Nobuo Miyata
Studies for the Prediction of Shipping Markets-A Survey and their Applications- .......,...............................Tetsufi ShimoJ'o

A Note on the International Transmission of
Policy Effects under Flexible Exchange Rates .........................,....Kazuhiro Igawa

A Control Estimation Approach toTime-varying Pararneter Models ................................................Yukio Uchida

NO. 25 (1979)
Redundancy of Seafarers and the PracticeofPermanentErnployment .............,...............................Hiromasa Yamamoto
Japanese Multinational Enterprises:
AView from Outside .........................................................H7ideki Yoshihara
A Comment on the Bayaraa's Algorithm ............................................,.........Komayuki Itow

Effects of Ship's Size and Cargo Lotson the Ocean Freight Rates .............,.,...................................Tetsul'i ShimoJ'o

Direct Foreign Investments and Foreign Exchange Rate:
A Model of Specific Factors and Non-tradable Goods...,..............Kazuhiro Igawa

NO. 26 (1980)
Economic Policies under the Flexible Exchange
Rate System: a Stock Approach and a Long-run
Govemment Budget Constraint ................................................Kazuhiro Igawa

Estructura de las ventajas comparativas ypolitica comercial-El caso de las exportaciones deproductos industriales en el Brasil .............................................Shoji Nishi'ima

Technological Progress and Capital Aocumulation ...................... .. ....Kazuo Shimomura.Kunio So h

KOBE UNIVERSITY ECONOMIC REVIEW 25, 1979
Edited by Faculty of Economics,
Kobe University, Kobe, JapanCONTENTS
Exchange Factors and Non-exchange Factors

Determining Income Distribution-A Consideration from the Point ofView'

of a Class Theory-................................................
Japanese Multinational Companies in Singapore ...,..............................

............Toshimasa Mukai...........AtsushiMurakami

A Re-examination ofthe Fertility Model by Age and Marriage Duration:
Using Estimated Japanese Data ,..............................

...........ShinichiTakahashi

Price Competition and Technical Choice.........,...................................

............ Takeshi Nakatani

t"t"+,tt'iilltlen",,adr"ll!111v""til-tlllttt"nhw,iltlltll,"',,te,'ltlMti,"',ei'illllllli"i--'tllMlp"',,+t"tlllUli,eh,"t,`Itlllli,iih-bt-llMt:,thh,ti'liMtp"'-,it'[ltTMe

THE ANNALS OF THE SCHOOL
OF
BUSINESS ADMINISTRATIONKOBE UNIVERSITY 1980
Edited by the School of Business Administration,

Kobe University, Kobe, JapanCONTENTS
Grundlagen der Reproduktion desArbeitsverm6gens im Sozialismus . . . . . , . . . . . . . . . . . . Hanna Grabley and Ekkehard Sachse

The Principles of Wage-Payment under Socialism..............................,....................Susumu Kaido

Flexible Exchange Rates and Macroeconomic Management:
A Study of the Japanese Experience, 1973-78 ..............................Akihiro Amano
A Test of the "Bigger Fool" Thought of Conglomerate Valuation .....................Shigeki Sakakibara,elht),.qtMttt.ltl41villllMl,illhLvtlll"Pt"lhLt-,ltll]Illl•IIIintatlllllti",--,1•,ISIIUIb,lti,-v,tl[Mp,ll,-,1+itlMll-ith,,Il,ILIUIilithh--,llllltll,lt,,m,11tlll",dl-,,,t,tulntl+t

KOBE UNIVERSITY LAW REVIEWInternational Edition No. 13, 1979
Edited by Faculty of Law
Kobe University, Kobe, JapanCONTENTS
Pressure Groups in the Diet Elections of Postwar Japan-The Role of Trade Unions and Business Groups- ............,...........Kazuo Indo
Legislation concerning Security of Some Business

Areas for Small and Medium-Sized
Enterprise and Antimonopoly Act .............................,......,........Akira Negishi

RESEARCH INSTITUTE FOR ECONOMICS AND
BUSINESS ADMINISTRATION, KOBE UNIVERSITYHISTORICAL SKETCH
In 1919, a research organization named the Institute for Commerce was foundedin Kobe Higher Commercial School, one of the chief predecessors of Kobe University,with a gift made by F. Kanematsu & Company, a leading mercantile firm in Kobe. The
organization was designed to carry on and facilitate integrated research on business andcommerce and to formulate and publish the results of these studies and investigations
in such form as to make them available to the business community.

With the founding of Kobe University of Commerce, successor of Kobe Higher
Commercial School, in 1929, the Institute extended its research activities by adding

several divisions. One was the famous Latin-American Library, which soon became thecenter of research in this field in Japan. A room for statistics equipped with various

computing machines was established and began publication of 1dyo- To-kei Keizai
monthly and Sekai Bo-eki To-kei annually. A filing room was prepared to deposit press
clipping files systematically arranged by topics and dates. Another room was designed
to become the center ofall possible original records and data having to do with the be-ginning and progress ofJapanese business.

On the campus of Kobe University of Commerce, another organization named theInstitute for Business Mechanization was founded in 1941 utilizing business machines
donated by the IBM Corporation and others. With Professor Yasutaro Hirai as its heada broad and forward-looking plan for business mechanization in Japan was developed.

In 1944, Kobe University of Commerce changed its name to Kobe University ofEconomics. After the War, however, the University was consolidated with three othercolleges in Hy6go Prefecture to become Kobe University. With this development, thetwo Institutes were also amalgamated into the Research Institute for Economics andBusiness Administration, Kobe University. At present, the Institute, with its twenty
four fu11-time professional staff members, carries on studies and investigations in inter-national economy, business administration, and information systems in Japan.

LOCATION AND BUILDINGSThe Research Institute for Economics and Business Administration is located on
the campus of Kobe University, Rokko, Kobe. It consists oftwo three-storied buildings.

One is named the Kanematsu Kinenkan and has a floor space of about 2,9oo square
meters, which includes a president's room, forty-one ofuces, six rooms used as a library,a room for statistics, etc. Another is built in 1964. It has a floor space of about 1,900

square meters, which is chiefly used as the Documentation Center for Business Analysis,

a library and a conference room.

ORGANIZATION
Under the directorship of the president, the Institute operates with two researchgroups. Each research group and its sections are as follows:

A GroupofInternationalEconomy(1) InternationalTrade(2) InternationalFinance(3) MaritimeEconomy(4) Latin-AmericanEconomy(5) OceanianEconomy(6) International Labour Relations

B GroupofBusinessAdministration(1) InternationalManagement(2) Business Administration and Information Systems(3) Accounting(4) Business Statistics
Besides the regular work of the Institute, research committees may be created tocarry on any special work requiring thejoint study of academic and business circles. At
present, there are five standing research committees, as follows : Experts Group on theWorld Trade Structure, Committee of International Finance, Committee of Informa-tion Systems, Committee ofOceanian Economy and Committee ofMaritime Labour.
For convenience and greater efficiency in carrying out its research activities, theInstitute has a general oMce which is responsible for 1) the collection and preservationof a comprehensive collection of books, periodicals, pamphlets, and original records
and data of finance, trade, commerce, industry and business generally; 2) the classifica•

tion, cataloguing, indexing arranging, annotation and compilation of these researchmaterials ; and 3) the formulation and publication of the results of the investigations andstudies accomplished by the professional staff members of the Institute.

As an affiliated institute, the Documentation Center for Business Analysis has been
established in 1964. It is the first systematic information facilities in the field of businessadministration in Japan that has been recognized and authorized by the Ministry of
Education. The purpose is to collect and to make intensive control of all kinds of materials on business administration and to make them available to scholars, universities,

governments, and business world with the aid of modern documentation techniques.

l;,

II EcoNoMIcs&Bu$INEss
RESEARCH INST}TUTEFORADMINIsTRAT]ON

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l[ KoBE uNIVERSITYii Director: Masahiro FuJITA: Secretary:Jisaburo TARuMoToiI: .t-.-t-u-tt-ttttt-tLttttttt-tttTL--ttttttttttttttttt-tttttttttttt"-ttt---L-tt-L--------rl]pll' GROUPOFINTERNATIONAL l GROUPOFBUSINESSi ECONOMICRESEARCH i ADMINISTRATIONRESEARCH
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Seij'r SAsAKI

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Masahiro FvJLTA

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Economics,i/Dr. of Economics:: Akio MoRt
professor of internationai I

Akira NEGfsHt

professor of lnternational I

Trade I

Yoshiaki NlsHIMUKAI

Dr. of Business

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Tetsuji SHIMoJo

Kazuhiro IGAWA

Dr. of Business Adminis.

Profcssor of Accounting

America ( Komayuki tTow

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Administration
Associatc Professor ofInternational Management
Associate Professor of
Business Statistics

Ph. D. in Econometrics
Associatc Professor of

Business Administratien

itand Inferrnation Systems

Maritime Economics l
i Hidetoshi YAMAJt

Rcsearch Associate of

Associate Professor of :Accounting

internationai Trade I

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tratlonDr. of Economics i Isao NAKANo

Associate professor of l'lStatistics

Ph. D, ln Statistlcs l

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Labour Relations
I Hideki YosHIHARA
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Professor of Political :Economy: i Hiroshi SADAMIcHI}
professor of Regional l
study on Latin llil

FinanceDT, of Busintss Adminis-

Professor of Business

Professor of Jnternational i
Hiremasa YAMAMoTO

Kojiro NIINoitProfÅësser of Business

Professor ef Ecenomic i Nebuko NessEi

Hikoj{ KATANOManagernent

tratlon

Law l

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Professor of International

FinanceDr, of Economicsil
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Professor ofMarit{me : Tadakatsu lNouE

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Kenichi IsH[GAKI

Asseciate professor of lShoj{ NlsHIJIMA

Research Associate of i

Kazuo SHIMoMURA

Latin Arnerica ilResearch Associate of lJ]

Oceanian Economy :iRegional study on li
Oceanian Economy
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Office : The Kanematsu Memorial Ha!1

KOBE UNJVERSJTYROKKO, KOBE JAPAN't