Southampton academic draws up new economics theory from boom-bust experience in Tokyo

A new controversial theory that could transform the world of economics has been drawn up by a University of Southampton academic. Professor Richard Werner, Chair in International Banking, has used his extensive experience in working for research institutes and the financial sector in Tokyo over ten years to debunk existing mainstream economic policies.

In his book New Paradigm in Macroeconomics, Professor Werner investigates the many puzzles surrounding the world's second largest economy - Japan - which traditional macroeconomics could not easily explain. In the process, Werner not only solves many of Japan's enigmas, but also presents a new approach to macroeconomics.

Concerning Japan's long recession, Werner points at the role of credit creation and the lack of policies aimed at stimulating it. The Bank of Japan, Japan's central bank, is criticised for adopting misguided policies that first created then lengthened the recession in Japan. Werner also draws worrying parallels to the UK housing market.

"Current economic theories revolve around the use of interest rates as a tool to manipulate and predict the economy," he says. "This just doesnt work in the real world. In a nutshell, my theory is all about the quantity of credit creation, a much better predictor and policy tool." Werner points to his extensive use of the approach in other Asian and European economies and its success in forecasting.

He claims conventional theory has become divorced from reality: "Economics has become an esoteric discipline using abstractions that are nothing like the world we live in. Traditional economics assumes infinitely lived people make decisions with perfect data and markets clear.

"In reality, imperfect information means markets don't clear. They are rationed. This requires a different approach to economics, based on quantities, not prices."

The book has won praise from Professor Charles Goodhart of the London School of Economics, a former member of the Bank of England's Monetary Policy Committee.

He said: "Richard Werner's exploration of the reasons for Japan's long stagnation is simultaneously stimulating and controversial . . . It is both a powerful and important book, which challenges both much received wisdom and the role of the Bank of Japan."

Professor Werner was selected as Global Leader for Tomorrow by the World Economic Forum in Davos in 2003. Highly rated by investor surveys such as Institutional Investor, he has been advising institutional investors and previously worked as chief economist at Jardine Fleming Securities (Asia) Ltd.

New Paradigm in Macroeconomics will be launched at the Daiwa Anglo-Japanese Foundation in London on Tuesday 3 May at 6pm. Professor Werner will give a presentation at the event which will be chaired by University Vice-Chancellor Professor Bill Wakeham. Tickets can be obtained by contacting events@dajf.org.uk .