RIETI Report August 2016

Law and Economics on Market Quality

At the beginning of FY 2016 in April, RIETI introduced Makoto Yano as the new president and chief research officer, replacing Masahisa Fujita in this position. President Yano was formerly a senior research advisor at RIETI and is a concurrent professor at the Institute of Economic Research, Kyoto University. His research expertise is in dynamic economics, law and economics, and market organization. Yano will continue the tradition of putting forward various policy proposals based on academically-rigorous research and innovative ideas and dedicate his utmost efforts to develop RIETI further as an international forum for policy research. In the August issue of the RIETI Report, we present the summary of his BBL seminar "Law and Economics on Market Quality" on May 24, 2016.

Yano discusses the interaction of law and economics on market quality, stressing an evidence-based approach to form ideas based on scientific evidence. He looks at the stagnation in the Japanese economy as well as market quality and contrasts it with the success seen in the United States. Yano then breaks down the dynamics of market quality, and discusses his hypothesis that a high-quality market is indispensable to the sound development and growth of an economy. The quality of a market is determined by two factors: efficiency and fairness, and ensuring free entry and competition is crucial to maintaining free enterprise activity. Yano then continues with a look specifically at the Japanese automobile industry, showing that freedom of entry to the market was the reason why it has been able to remain the global leader for the past several decades. Finally, Yano emphasizes the need to create a society that can promote innovation by making effective use of the market, and he is confident that Japan should be able to rebuild it. A Q&A session followed his presentation.

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Law and Economics on Market Quality

YANO MakotoPresident and Chief Research Officer, RIETI

Introduction

A century ago, Louis D. Brandeis, an associate justice of the U.S. Supreme Court, quoted Professor Charles H. Henderson as saying, "A lawyer who has not studied economics and sociology is very apt to become a public enemy." This is a very thought-provoking statement. In Japan, law scholars and economists are not properly communicating with each other. This situation is very problematic for the Japanese economy.

In social science, a method that appears to have no direct relation is often considered to be an effective way of achieving a goal. This concept, called the "theory of roundaboutness," had an enormous impact on legislation as well as on 20th century economics and social sciences particularly in such fields as corporate governance and mechanism design.

However, it is no good taking a roundabout route in a haphazard manner. We need to find an efficient way of doing so. What social science tells us is to take an evidence-based approach to form ideas based on scientific evidence such as statistical data.

Stagnation in the Japanese economy and market quality The Japanese economy has been stagnant for a prolonged period of time. During its bubble period, Japan's gross domestic product (GDP) per capita reached a level closest to that of the United States, but has been faltering ever since the burst of the bubble. I believe that the absence of a high-quality market is the reason.

A market is a pipe channeling new technologies and resources to people's lives. If the pipe is straight, clean, and in good quality, natural resources and science technologies will be channeled through and lead to better livelihoods. However, if the pipe is bent, rusty, and in poor quality, things clog up and stagnate.

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http://www.rieti.go.jp/en/events/bbl/16052401.html

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