Class – I am no expert on Japan but I have visited there twice thanks to grants from the Japan Study Foundation. Here are some thoughts based on the economics I know and the things I saw in Japan.
RISK DEFINED – the first topic of the first real class in business 105 risk. Life and business are about risk. Risk is the probability that something bad will happen such as an earthquake or a tsunami or a failed business. Risk produces social losses such as destroyed or misused resources. In Japan, there were risks of earthquakes and tsunamis and those events have now occurred.
PRECAUTIONARY COSTS — Risk can be reduced but not avoided. No amount of money can be spent to make anything completely safe. The issue is how much money will be spent to reduce risk and the potential losses from the risk. Money can be spent on precaution and safety but spending cannot guarantee safety. There have been three major earthquakes recently – Haiti, Chile and Japan.
PRECAUTIONARY COSTS AND STRUCTURAL DAMAGE – Notice the differences in destruction in the three nations. Haiti had massive destruction and death from the earthquake; Chile had some destruction from the earthquake and Japan had very little destruction from the earthquake (the destruction and death in Japan are from the tsunami not from the earthquake. Economics, risk analysis and precautionary costs explain why this happened. Haiti is poor – no free markets and very little wealth (remember the quote from Business 105 — “poverty does not have a cause” — wealth has a cause – poverty is the natural state of humanity.) Haiti cannot afford to build safe buildings – safe buildings cost extra money to build – the opportunity costs are too high – a society cannot spend all of its resources on safe buildings when it does not have food, clothing, education and medicine; therefore, Haiti is more vulnerable to risk. Safety is a luxury good purchased by rich people and rich societies. Chile is in the middle. More economic freedom; more wealth; more precautionary spending and more safety than Haiti. Chile had a medium amount of building destruction and a medium amount of death. Japan is a rich nation. It makes more economic sense in Japan to allocate resources to expensive building techniques to absorb the shocks of earthquakes. Modern buildings in Japan have special hydraulic units in the support columns to absorb vibration and eliminate or reduce shaking to the building. Notice that Japan has very little structural damage from the earthquake even though Japan had the strongest of the three earthquakes. Wealth comes in many forms and one form is safer buildings. Summary: it makes economic sense for rich individuals and rich nations to protect themselves from risks that poor individuals and poor nations must incur.
PRECAUTIONARY COSTS AND TSUNAMIS – there are no “cost-justified” precautions against tsunamis. The economics do not add up. The coast is too long, the devices and technologies (if they exist) are too expensive and tsunamis are too infrequent. The damage in Japan is not from structural failure of buildings, it is from the wall of ocean water that caused destruction. Even a rich nation like Japan is not rich enough to protect itself from this risk.
POPULATION DENSITY AND INVENTORY IN JAPAN – Japan has a very high population density. Land is a scarce commodity. The whole society and culture are shaped around the relative scarcity of land (economics). The people live in small houses and apartments (land is precious). People grow labor intensive crops – small rice paddies worked by hand (land is precious). Human bodies are usually cremated instead of buried (land is precious). People live in cities instead of suburbs (land is precious). People take public transportation (rail and bullet trains) instead of driving cars on highways and having parking lots at work and at the mall (land is precious). When a society has very little land, they use it carefully. Because the homes are so small and the cities are so compact, families keep very little “inventory” in the home – very little food in the house. They shop daily, they eat fresh food, the buy small portions, there are small convenience stores everywhere – sometimes three or four in the same block. Seven Eleven is one of the biggest corporations in Japan. I went into the grocery stores and saw lots of single serving packages. Bread was sold in packages of either four or six slices – I did not see full loaves of bread for sale. I did not see 24 packs or even 12 packs of beverages – I am not sure I remember seeing 6 packs – single drinks of Coke, milk and beer. There are beverage dispensing machines all over the place – maybe fifteen or twenty machines on one block. One day we went to McDonalds’ for an Egg McMuffin. While we were there a small truck arrived and delivered the food for that day’s lunch. The delivery came in the front door and was unloaded over the counter. The clerk told us that when they were serving breakfast they did not have enough room for the lunch food that they would be selling within an hour. They had to wait until they sold the breakfast food to have room to bring in the lunch food. Land is precious and they cannot afford space for storage in homes and McDonalds’ (Just in Time Inventory was invented in Japan for this reason). Because they buy in such small quantities and they buy frequently, food tends to be a higher percentage of their overall budget.
POPULATION DENSITY AND TRANSPORTATION IN JAPAN – Driving and parking are major issues in a nation where land is scarce. Public transportation is essential, efficient and ubiquitous. The trains run on time. If you are a minute late for the train, you miss the train because it is gone. Cars are an expensive luxury. While in Kyoto, we visited a Toyota dealership and we were told “We cannot sell a car to customer even if they have cash unless they have a certificate of parking from the government.” To buy a car, you have to prove that you have a parking place. Parking is limited and expensive. Japan has many ingenious devices to park cars in very small spaces – these systems make economic sense in Japan but are not cost-effective in the US. A society that relies upon public transportation needs for that system to operate in order to work, produce and eat. Japan has to get its public transportation system working again quickly.
THE TSUNAMI & HAWAII & FIVE DAYS OF FOOD & A MARKET ECONOMY & HAYEK – I was watching the cable news networks before the tsunami reached Hawaii and the “talking heads” were discussing the possible consequences of the tsunami in Hawaii. One of the speakers said “if the tsunami destroys the loading docks it could cause major problems because at any one time Hawaii only has five days of food.” Think about that – lots of people and five days of food. Economics is about the social coordination between strangers to create and distribute valued goods and services. The price system operates as a giant communication device and incentive system to organize behavior without central planning. Could there be a better example? Hawaii has five days of food – people could starve. Who is in charge? How can disaster be avoid? The spontaneous order of the market process is the answer (Nobel Prize winning economist Hayek). The price system coordinates the food supply of Hawaii – rejoice and be glad.
