Japan, Refutation of Neoliberalism
© Copyright 2004 Robert
No-one wants to talk about Japan these days.
The conventional wisdom is that the bloom went off Japan’s economic
rose around 1990 and that the utter superiority of neoliberal
capitalism was vindicated by the strong performance of the American economy
during the 1990s. Furthermore,
everyone is now convinced that China – whose economy is 1/8 the size of
Japan’s – is the rising economic power and therefore the appropriate object
But Japan is, despite everything, still one of the master keys to
understanding the future of the world economy, because Japan is the clearest
case study of why neoliberalism is false. Simply put, Japan has done almost
everything wrong by neoliberal standards and yet is
indisputably the second-richest nation in the world.
This doesn’t mean that neoliberalism is wholly meritless as an economic theory or as a development
strategy, but it does mean that its claim to be the only path to
prosperity has been empirically falsified.
Japan’s economy is highly regulated, centrally-planned by the state,
and often contemptuous of free markets.
But it has thrived.
What follows is for space reasons necessarily a sketch and exceptions,
subtleties, and refinements have been left out. Facts have been homogenized and caricatured
to make structural fundamentals clear.
But a reader who bears this in mind will not be misled, as detail
analyses are available elsewhere.
Are We Lied to About Japan?
Contrary to popular opinion, Japan has been doing very well lately,
despite the interests that wish to depict her as an economic mess.
The illusion of her failure is used by globalists
and other neoliberals to discourage Westerners,
particularly Americans, from even caring about Japan’s economic policies, let
alone learning from them. It has been
encouraged by the Japanese government as a way to get foreigners to stop pressing
for changes in its neo-mercantilist trade policies. It has been propagated by corporate
interests who gain from free-trade extremism with respect to Japan. And it is promoted by ideologues committed
to the delusion that only a laissez-faire
economy can prosper.
This is a formidable set of potential liars, equipped with money, technical
expertise, transnational reach and state
power. The Japanese government is
centralized, elitist, and quite capable of fudging statistics if it wants,
particularly since there are few Westerners who understand Japanese
accounting. National accounting is
notoriously susceptible to creative accounting anyway, as the world learned
at the time of the Asian Crisis of 1998.
So the assumption that the standard published figures about Japan’s
economy are true is dubious at best.
Japanese culture puts a premium on maintaining “face” and other forms of
polite public presentation that constitute literal falsehoods, or at least
fictions, so it is a natural instinct for the Japanese to tell the West what
it wants to hear about Japan’s economy.
Japan’s government is heir to a Confucian tradition in which the
public is told only what the rulers deem it should know. Journalists and academics, who in America
or Europe would have challenged its version of the economy by now, are loyal
collaborators of the system, not its critics. So from a Japanese point of
view, there is nothing immoral, unusual, or terribly difficult about
misrepresenting Japan’s economic performance.
In fact, because it is in the national interest, it would be
unpatriotic not to.
A Crisis Invented to Fit a Theory
The idea that Japan is thriving is not so different from the received
wisdom as one might think. The Western
press has over the last few years been full of stories about Japan’s deep gloom,
but in point of fact, the admitted
state of the Japanese economy – let alone its actual state – is simply not
that bad and in any other country would be producing mild expressions of
concern, not brazen crowing about a crisis sufficient to force change in the
fundamentals of the system.
Even the Japanese government admits that Japan is not actually declining
economically, but rather growing at about 1% a year (which has ticked up to
2% since these words were first written.)
This is a better performance than many other nations in recent years.
So even if one accepts the official statistics, Japan is not in anything like
the death-spiral that laissez-faire
mythology supposes. It is, at absolute worst, accepting all the
public mythology, stuck in a gentle stagnation of slow growth. And that it may now be emerging from this
simulated rut (partly because the truth was getting too hard to conceal
between the cranes on the Tokyo skyline) only reinforces this argument.
And this stagnation, even if one believes in it, is (or was) at the top of a
very high plateau of aggregate and per-capita GNP, so Japan is hardly
suffering by any reasonable international standard. It is, even
according to the official figures, the second-richest country in the
world. It is doing far better than
other economies which get better press because they conform more closely to
the globalist model of what an economy ought to
be. It is a vastly richer nation, for
example, than Britain, which globalist magazines
like The Economist like to depict
as an economic leader because it genuflects, at least in theory, to the right
Furthermore, the Japanese system is deliberately designed to contain the
usual forms of economic stress that produce shocks to the political system,
like inflation and unemployment, so Japan’s (quite mild, really) economic
problems are miles away from having the political consequences needed to
cause the radical revision of the system that see-what-they-want-to laissez-faire ideologues suppose. Is 5% unemployment, in the context of a
family structure more intact than in any Western nation, a crisis? In what
other nation would 5% be considered a crisis level?
Nevertheless, we are fed a neoliberal fantasy that
Japan is in a state of economic crisis and that this crisis is forcing her to
revise her economy to conform to the world-conquering American version of
Penetrating the Illusion of a Failing Japan
It is not hard to see through the illusion of a failing Japan if one
knows where to look. The key is to
look at indicators not susceptible to manipulation by the Ministry of Finance
in Tokyo. First among these are export
statistics, which are hard to conceal as they show up as imports in the
statistics of other nations. Some key
facts, not denied by the mainstream media, that make clear that Japan’s
economy is thriving:
1. Japan’s net exports for the decade of the 1990s, when she was supposedly
in decline, were 240% of those in the decade of the 1980s, when everyone
admits she was booming. How is this
possible if her economy is falling apart?
We are being asked to believe that in an export-centered
economy, exports are booming and yet the economy as a whole is failing.
2. The standard of living in Japan rose significantly during the supposedly
stagnant 1990’s, so that the Japanese are now among the world’s greatest
buyers of high-end consumer goods of all kinds, a fact visible in the
shopping districts and parking lots of every Japanese city.
3. Japan's foreign assets have continued to grow rapidly. IMF figures indicate they nearly quadrupled in the 11
years to 2000, an inevitable consequence of her relentless trade surpluses.
4. Although a declining Japanese economy would imply a declining yen, the
reverse has been the case.
5. Japan is the world’s largest exporter of capital, enabling her to play the
leading role in shaping the development of other nations. Americans
ideologues who crow about the “spread of capitalism” ignore the fact that in
large areas of the world, including its fastest growing region, East Asia, it
is Japanese-style capitalism that is spreading, largely through the
subsidiaries and suppliers of Japanese corporations.
6. Japan's supposed problems with its government budget are in a category all
their own when it comes to misunderstanding.
First, Japanese government accounting is very different from European
or American government accounting, and that what have sometimes been reported
as deficits are in fact surpluses.
Second, although Japan’s ratio of national debt to GNP is indeed
somewhat large, it is not grossly out of line with other nations whose
economies are not characterized as being in crisis, and given Japan’s higher
savings rate, she can finance this debt easily.
7. Western press reports about the
supposed crisis in the Japanese banking system are based on the false
assumption that Japan’s banks are similar to banks in the US and Europe. Because of their complex structural
relationships to Japanese industry and to government, explained below, they
are nothing of the kind. They have
sources of stability to tide them over temporary difficulties that Western
banks do not, and their rare failures cause far less disruption.
Japan’s Economic System Only Makes Sense as a Whole
The Japanese economic system does not make sense when viewed in parts, as
the significance of any one part of an economy is determined by its relations
with the other parts. Westerners naturally assume, when looking at one part,
that it exists in a context similar to the one it would inhabit in the
American capitalist economy. But in
Japan, it frequently does not.
For example, the Tokyo stock market, unlike the New York one, is an
economically-minor sideshow to the real action, because most capital is
allocated by banks, even when they use the stock exchange as a forum to
execute this. Its failure to be a real
capital market is made clear by the fact that the Ministry of Finance has on
occasion forced the shares of individual companies to hover at arbitrary
levels for various reasons.
The key to understanding the Japanese economic system is that it is not just
a system of economics, but a system of political
economy. This term – Adam Smith
never used the word “economics” – is
an older one and enjoys the key advantage of not covertly implying that the
economic system is an autonomous sphere of human activity operating, at most,
within a loose cage of politically-enforced property rights. This erroneous conception tends to further
the laissez-faire delusion that state
power is something alien that intrudes upon economic activity from without,
and that the only important economic choice is between more and less state
A Non-Socialist Centrally Planned Economy
Japan is something that is virtually impossible by definition within the
frame of reference of neoliberal economics: a
non-socialist state-directed system.
To over-simplify a bit, it is a centrally-planned capitalist economy.
Neoliberal economists are dimly aware of the fact
that fascist and Nazi economics were centrally-planned but not socialist, but
they tend to dismiss these economic systems because of the attendant
political horrors and have made precious little effort to develop rigorous
theoretical accounts of how they worked.
As we shall see, the Japanese system has achieved many of the things
the fascists wanted.
Modeling the Japanese System
The best way to model the Japanese system is to start from the
conventional models of free-market capitalism and centrally-planned socialism
and discuss how it differs from both.
In order to grasp what the Japanese have done, it is worth comparing it to
Western attempts to achieve the same thing.
For example, the Japanese have understood that the ambition of the
advocates of the “mixed economy,” like Hugh Gaitskell in the UK, to socialize
the “commanding heights” of the economy, has some rational basis, in that it
embodies the desirability for some government direction of the economy
without a total Gosplan-style takeover.
But this aspiration was misinterpreted in classic socialism, which understood
the commanding heights to be basic industries like coal, steel, and
railways. The problem with this,
however, is that these industries do not command
anything. Important though they are,
they do not constitute a lever by which the economy as a whole can be
controlled; they do not issue orders to the rest of the economy which
determine how it behaves. The supply of capital to business, however, does,
and this is under state control in Japan.
One way to think of the Japanese system is as a capitalist economy
with socialized capital markets.
Capitalism Without Plutocracy
Another case in point: does capitalism require plutocrats? The classic capitalist answer is that
somebody has to own productive assets with a view to maximizing their profit,
some of those who do will succeed brilliantly, therefore somebody must be
But the Japanese see this as wasteful, so their system is designed so that
corporations, in essence, largely own themselves. Even when there are nominal outside owners,
corporations are managed so that the bulk of the wealth generated by the
corporation flows either to the incomes of present workers or to investment
in the future competitive strength of the company, making the workers and the
company itself the de facto or beneficiary owners.
Most corporate capital in Japan is owned by banks, and the banks are
principally owned not by shareholders, but by other companies in the same keiretsu or industrial group. And who owns these companies? Although there are some outside
shareholders, majority control is in the hands of the keiretsu’s bank and the other
companies in the group. So in essence,
the whole thing is circular and private ownership of the means of production
has basically been put into the back seat.
Actually nationalizing the means of production would produce all the problems
that led to the wave of privatizations in many nations in the last 20 years,
and is unnecessary anyway. The
Japanese system makes a sly mockery of both capitalism and socialism.
Forcing Growth by Forcing the Accumulation of Capital
One key way in which the Japanese system differs from American capitalism
is that it squarely faces a fact that neoliberal
economists admit, but tend to do nothing about:
The rate at which any economy –
capitalist, socialist, feudal, fascist or what have you – can grow is
dependent on how much of its production is saved and invested, rather than
America does almost nothing to increase its very low savings rate. Japan has a very high savings rate and this
is a result of deliberate government policy and the lynchpin of the entire
How do they do it? The architects of
the Japanese system understood that the socialist and communist way to
produce high savings, i.e. outright confiscation of wealth, is destructive of
people’s incentive to work (not to mention its other problems) so they did
not implement it. They understood that
by definition, savings = production – consumption, so they focused on
This means, for example, deliberately restrictive zoning policies that keep
Japanese houses small, and it means not having the various devices in place
by which America subsidizes borrowing and makes debt easy to assume. As a result, the populace of Japan is forced
to save a far higher percentage of its earnings than Americans do.
It is a mistake to attribute Japan’s savings rate, or many of its other key
aspects, to “culture,” as Japan had the same culture before WWII, when her
savings rate was low. It is the
interaction of culture with deliberate state policies, not culture itself, that is key. The use of “culture” as a
catch-all explanation by foreign analysts of Japan is an evasion of serious
Controlling the Economy by Controlling the Accumulation of Capital
The Japanese government deliberately channels savings into a limited
number of financial institutions under its control simply by making sure
there is nowhere else to put the money.
For example, it has seen to it that the Japanese cannot just open a
brokerage account at Merrill Lynch and invest their money in the American
This huge torrent of savings flows to a handful of major banks, which the
government has under its thumb because banking is extremely regulated in
Japan, enabling regulators at the Ministry of Finance (MOF)
to crack down on any bank at any time they see it doing something they don’t
want it to. So the banks are subject
to the whim of the government, which then controls the economy by controlling
how the banks allocate all this capital.
The net result is that the world’s second-largest pool of private investable capital is subject to the control of a few
hundred elite bureaucrats in Tokyo.
The leverage they exert by controlling where this capital goes is the
key to all their power.
How Japan Avoids the Problems of Soviet-Style Central Planning
The real genius of this system is that it is so indirect. These MOF bureaucrats are not stupid. They have read von Hayek, watched the
Soviet Union struggle, and understand perfectly well that classic Gosplan-style central planning is unworkable. So they do not even remotely attempt this.
They understand quite well that the day-to-day detailed operation of the
economy is best left to the invisible hand, just like Adam Smith said. They do realize, however, as Adam Smith
didn’t, that it is possible to manipulate an economy that is 99% capitalist
into being, essentially, a
centrally-planned economy if the
state controls the right 1%. And this
“right 1%” is the allocation of capital, especially big capital.
The MOF uses its stranglehold on the allocation of
capital to make the banks into willing servants of its mission to control the
Japanese economy. The banks, which in
this respect (but not others) function similarly to the classic universal
banks of Germany, handle almost all the detailed work of figuring out which
companies should be loaned money and for which projects. The MOF
essentially sits back, audits their performance, and rewards or punishes as
This elitism in the MOF’s control of the Japanese
economy explains why so many outside observers fail to see it at all, though
if one approaches the literature on Japan with this in mind, one quickly sees
which observers have grasped the game.
In the early days of the Japanese system, the government had to be more
involved in the details of deciding which industries to finance, because the
banks had not developed the necessary sophistication, and so a far larger
role was played by the Ministry of International Trade and Industry, the
famed MITI, which actually did perform the classic
industrial-policy functions of picking winners et cetera. But as Japan’s
private-sector banks have become more sophisticated, the need for this has
diminished, and the MOF has become the key to the
is still around, because there are some more speculative parts of the economy
that the banks are not expert in and so the government still needs it
What is All This Capital Seeking?
As noted above, the MOF’s key role is to audit
the performance of the banks in allocating capital. But what counts as
performance? In a conventional
capitalist system, that’s an easy question: maximizing return on capital. But in the Japanese system, this is not so.
For a start, the capital in question, although nominally privately owned, is
“captive” capital in that it has nowhere else to go if it is unhappy with its
return. This seemingly minor fact
changes the whole dynamic of the entire economic system, because it means
that capital, rather than chasing the highest return, can be made to obey
political directives. Obviously, from the point of view of enriching
individual investors this makes no sense, but this is not the MOF’s objective.
The investors don’t have their money stolen from them – Japan is not a
Marxist society – and they certainly get some
return, but they do not get the maximum possible return.
What the MOF does want is to supply huge
quantities of cheap capital to Japanese industry to build up its long-term
productive capacity. The MOF wants
capital to be paid a low return so that Japanese companies will enjoy the
competitive advantage of access of cheaper capital than their European,
Asian, and American competitors. In
capital-intensive industries like the advanced manufacturing in which Japan
specializes, this is a huge advantage.
From the MOF’s point of view, neoliberalism
is designed to selfishly benefit the investors at the expense of the nation
as a whole. And the investors
themselves lose in the long run as their greed for high returns bleeds
industry by imposing on it a high cost of capital, undermining these
industries in the long run. In the
Japanese analysis, the return to society as a whole of having strong
industries (high wages paid, secure employment, a strong balance-of-payments)
is more important than returns to individual investors, though these must be
respected to some extent.
A Successful Planned Economy
The natural question a neoliberal economist
asks at this point is, how can the MOF make
rational capital-allocation decisions?
Isn’t it an article of faith, vindicated by years of experience, that
governments are bad at this and markets good?
Well, yes, which is why the MOF intervenes at only
the very highest levels of this process, most of the work being done by banks
and the large corporations beneath them in this hierarchical system. Banks in Japan are attached to large
industrial groups called keiretsu, meaning
that they are both tied into sophisticated networks of industrial expertise
and have several layers of administration below them to do the detail work.
Much of the Japanese system operates similarly to similar corporate
structures in the West, though it faces a deliberately altered set of
incentives. Because these incentives are just a fact of life to most of the
corporate managers facing them, they don’t even have to know where they came
from or why. Most of the system
doesn’t even know that it’s centrally-planned, and doesn’t need to.
If there is any question as to whether they have been able to make these
high-level decisions correctly for the last 50 years, one has only to look at
Japan’s relative economic performance, which has made her by all accounts the
second-richest nation in the world and possibly soon to be the richest.
Simply put, laissez-faire theory is
just plain empirically wrong: a planned economy can work. Period. Empirical
facts trump abstract theories.
Unfortunately for the political left, Japan’s success equally makes a mockery
of socialism, which may explain why her system has attracted so little
affection in the West. It does not
flatter anyone’s ideological religion, left or right.
Wall Street Works, But Isn’t It Awfully Expensive?
Essentially, the architects of the Japanese system looked at the classic
capitalist economy and reached the exact same conclusion as the average
member of the Western world: that most of it is rational, but that an
absurdly high proportion of national income is wasted rewarding the tiny
elite that performs the capital-allocation function. Wall Street types do their jobs reasonably
well, but why not replace them with elite bureaucrats who will perform the
same function for $90,000 a year apiece, rather than people who earn ten, or
even a hundred, times that? After all,
one can teach bureaucrats the same technical skills of economic analysis.
In the Japanese view, investment banking is a business which, because of its
structural monopoly on extremely valuable information, tends to produce
grossly excessive returns for those engaged in it. The capital allocation function is
irrationally priced because the intrinsic bottlenecks of information make it
impossible for new entrants to drive down returns. Therefore the market cannot be relied upon
to rationally price it. Capitalism,
paradoxically, is rational except at its very pinnacle.
But Aren’t All Bureaucrats Idiots?
At this point in the argument, neoliberal
ideologues object in one of two ways:
1. By making some snide comment about the rule of elite bureaucrats.
An acceptable point, but one should not confuse the effectiveness of economic
bureaucrats with the cultural and social mischief perpetrated by bureaucrats
in other areas of government. The cold
fact is that even the economies of those nations that most closely conform to
neoliberalism, like the United States, are
regulated by elite bureaucracies such as the Federal Reserve Bank, the
Financial Accounting Standards Board, the Treasury Department, and the
Interstate Commerce Commission.
2. By claiming that without paying the elite bureaucrats at the MOF huge returns directly proportional to the performance
of the businesses they allocate capital to, they have no incentive to do
their jobs well.
This is just empirically false. The
performance of the Japanese economy shows that they do their jobs very well,
and the key to this is something the architects of the Japanese political
economy have understood that American economics tends to lose sight of:
Economic rewards are not the only
effective incentives for economic action.
Exploiting the Power of Non-Economic Incentives
The Japanese are well aware that a successful economy requires the
motivating effects of pay differentials and opportunities to accumulate
private wealth. They are not living in
a hippie socialist fantasy. But they have understood, as neoliberal
economists, with their purely economic view of the economy, have not, that
economic rewards operate in a social context and that social rewards for
economic achievement can be as effective as cash.
In fact, because of the diminishing marginal utility of money, it is irrational for an economic system to
rely on purely economic incentives.
If all you pay people in is money, it gets awfully expensive to
maintain their motivation as you go up the income scale. How much money does society have to dangle
in front of a billionaire to get him to allocate another five hours a week
from leisure to the work needed to run the part of the economy he owns?
That is to say, money is an efficient motivator (measured in terms of what
society has to pay relative to what it gets for its money) under some
circumstances, which is why we have capitalism, but inefficient under extreme
conditions (which is why the Japanese deliberately limit it.) It is no accident that Japan has one of the
lowest levels of economic inequality of any major nation at the same time as
it has one of the most hierarchical cultures.
The incomes of the top fifth of the Japanese population are only 2.9
times that of the bottom fifth, compared to 9.1 times in the US.
The income differential between a Japanese CEO and
an assembly-line worker in his company is much less than in America, but the
social-status difference is much greater. This does not consist in a system
of static class differences not identical with economic differences, as in
Britain, which the Japanese rightly see as producing class antagonisms which
harm social cooperation. It consists
in a dynamic social status system
embodied in such oddities as the fact that Japanese grammar itself expresses
the difference in status between the interlocutors, the Japanese reverence
for hierarchy, and a lot else.
The Japanese have understood that what people are largely pursuing in the
workplace is not so much money as the respect of the people around them, and
therefore maintain a sophisticated – indeed, bizarrely over-elaborate to the
Western eye – economy of respect in addition to the economy of
money. They have understood that a
large part of what money-seeking individuals really want is just to spend
that money on purchasing social respect, though status display or whatever,
so it is far more efficient to allocate respect directly.
Did you really think people as obviously intelligent as the Japanese were
doing all those odd-looking bows for nothing?
Sure, these behaviors are derived from
tradition, but there’s a reason they kept these traditions and the West
hasn’t. Interestingly, this
understanding on their part of the need for unapologetic status differentials
contradicts the emphasis in Western socialism on a culture of
It also follows that if society is to maintain status differentials without
suffering withdrawal of social cooperation due to the resulting resentment of
low-status individuals, society must contain these status differentials
within strong overarching sentiments of social unity. Naturally, the Japanese are famous for
this, too. It all fits.
Platonic Guardians of an Eternal Japan
Why are Japan’s bureaucrats so effective?
Well, an American can start by looking at those American bureaucrats
who are generally conceded by most people outside the far left to be
effective: the military. The two
salient characteristics of the military hierarchy in the US are that it has a
governing ideology of nationalism and it is motivated by non-economic
rewards. Japanese bureaucrats at the MOF are the
same. Like 5-star generals, they are
no more than reasonably paid, but their real reward is in the form of status:
they are recognized everywhere as outranking people hundreds of times richer
than they are. They can demand to be
recognized as equals by anyone in their society and as superiors by all but a
Plato would have recognized such men as Platonic guardians, who were produced
in his Republic by a process the
Tokyo University men who run Japan would recognize: an elite education,
followed by long apprenticeship and combined with relative material
asceticism, ruthless scrutiny by the other guardians, a tight in-group esprit de corps, and a guiding
ideology of nationalism. Anyone who
knew the pre-1960s Jesuits will also understand what is going on here.
The Long Time Horizon
One of the key advantages of Japan’s
system is that it enables the imposition of an exceptionally-long time
horizon on economic decision-making.
Few American corporations think more than 5 years ahead; the Japanese
routinely think 15 years ahead and the architects of the system obviously
thought 50 years ahead. Because
capital is allocated, at the end of the day, by MOF
bureaucrats and not impatient shareholders and mutual funds, there is no
pressure for short-term returns. MOF bureaucrats know they will be judged by whether they
succeed in building up Japanese industry in the long term, so this is what
they aim for.
What Does it Mean to Build up Industry?
The key thing the Japanese have understood, which America, among others,
has forgotten, is that a nation’s long-term ability to pay high wages to its
citizens depends on its having a strong position in monopoly industries. Monopoly industries are industries that
have the strongly-entrenched competitive positions that enable them to charge
superior prices on the world market. Boeing and Microsoft are the classic
examples in the USA.
The core Japanese belief is that the benefits to society at large – in the
terms of classical economics the positive externalities – of having these
industries are so large that the free market on its own will misprice their value and not produce enough of them. Therefore it is rational for government to
artificially direct capital into them, whether or not they produce the best
short-term return to investors.
The Usefulness of Cartels
If one’s objective is a strong competitive position for the industry as a
whole, cartels immediately recommend themselves as a means to this end.
Cartels are a device of industrial policy that has essentially been
repudiated by neoliberal economics, for two
1. Within a neoliberal framework, profits from a
cartel will just be captured by private interests, so there is no public
interest in allowing them.
2. Neoliberal economics has an a priori
obsession with vindicating free competition as the best policy.
Because the Japanese system, as noted above, forces the profits of monopoly
industries into either paying its workers well or building up the industry so
it can do so in future, reason #1 is inoperative, and reason #2 simply never
interested them. Once one has these
two factors out of the way, the many benefits of cartels can be tapped into:
1. They enable the individual firms in a monopoly industry to avoid
fratricidal competition that would only benefits foreign customers, not the
2. They enable the extraction of additional investment capital from the
domestic consumer market by imposing higher prices.
3. They enable scale economies in research and development and
standards-setting, crucial advantages in high technology.
4. They enable Japanese industry to avoid bidding wars in buying foreign
technology and raw materials.
5. They enable Japanese industry to share out scarce sales in times of
recession, avoiding bankruptcy of weaker firms. Naturally, these firms will pay a price in
terms of losing control and will be whipped into shape, but they, and their
workers, will not incur the traumas and layoffs of bankruptcy.
6. By enabling government-led control of prices and profits, they enable the
government to pump in subsidies to favored
industries with the confidence that these will go to building up the industry
and not simply “wasted” as private profits to the shareholders.
Naturally, the Japanese are wise enough to the benefits of some competition
that they don’t simply agglomerate entire industries into “national
champions,” as several European nations have sometimes tried to do. A regulated cartel delivers the best of
Corporate Behavior Through Corporate Structure
Japan’s key banks each sit at the apex of a pyramid of cross-shareholding
companies called a keiretsu. This
has a number of important consequences, each coordinate with the overall aims
of the system.
1. Because each keiretsu links companies with their upstream suppliers and
downstream customers, this biases customer-supplier relationships towards
long-term relationship-based, rather than short-term transaction-based,
profit-seeking. The former is a key
advantage in high-tech industries in which companies must make huge
irrecoverable investments in research and development that will only pay off
if they can count on stable relationships with customers and suppliers.
Compare this to the American bias in favor of
short-term business relationships, a bias that then leads to short-term business
thinking that is mutually-reinforcing.
2. The keiretsu system helps force
companies to select their suppliers from within the keiretsu, not from foreign companies who may offer lower bids.
Although this is superficially inefficient, because it deactivates the “exit”
option American-style companies have in their dealings with their suppliers,
it is in the long term efficient because it enhances the “voice” option
Japanese companies have to enlist the aid of the entire keiretsu in whipping an underperforming supplier into shape.
3. Because each keiretsu contains
within itself companies in a wide range of industries, the bank at its apex
can draw on a wide range of reliable and proprietary expertise concerning
appropriate allocations of capital.
4. Because each company in the keiretsu
is on a leash to its bank, policies that the bank (puppet of the Ministry of
Finance) wants imposed, can be. For
example, policies to keep desirable high-value-added jobs in Japan. When Japanese jobs move to China, they are
jobs that the MOF wants Japan to shed so her
workforce can move up into ones with higher value-added and thus higher
sustainable incomes. Naturally,
pressure from the bank alone isn’t enough to bring this about, and this
policy depends on all the other policies that combine to make it economically
feasible to pay Japanese wages for these jobs.
5. Because the keiretsus
in effect create a monopsony for the purchase of
elite executive labor, they can avoid the problem
that American companies have of getting into expensive bidding wars for
executive talent. This helps drive
down economic inequality without all the problems of redistributing income
through taxation. The emphasis in
Japan on teamwork and consensus decision-making also helps prevent the accumulation
of valuable proprietary knowledge inside any one head, which would then have
excessive leverage to extract wealth.
Taking State Capitalism Seriously
State capitalism (of one degree and structure or another) is not unique to
Japan. What is unique to Japan, or
taken to its greatest extreme there, is serious thinking-through of what
state capitalism means and what is required to make it work.
The French government, for example, would dearly love to be able to order
companies to keep their plants in France open to serve its full-employment
goals. But, consciously or
unconsciously infected with a socialist class-struggle mentality, it
considers the cost of doing this “the company’s problem,” not its own, with
the predictable result that it barks orders at companies that simply cannot
afford to do what the government wants them to.
The Japanese government, by contrast, understands that if it expects
companies to provide full employment, it must provide them the wherewithal to
achieve sustainable competitive advantage, and it does so by guaranteeing
them a supply of cheap capital, as explained above, by protecting them from
foreign competition, and by other means.
Sustainable Competitive Advantage In Hard Industries
I have thus far only described Japan’s economy in the abstract. The
concrete consequence of her policies is an emphasis on advanced manufacturing
as a sector, because:
1. Advanced manufacturing is that sector which is most able to pay sustainably high wages to ordinary workers.
2. Advanced manufacturing is that sector which is most susceptible, because
of the proprietary know-how involved, to the acquisition of sustainable
3. Advanced manufacturing is that sector whose produce is most exportable, a
key consideration for a nation that must import most of its raw materials and
Lifetime Employment Aligns Incentives
Japan’s famed lifetime employment system for core workers seems to the neoliberal eye inefficient, as it supposedly interferes
with efficient hiring and firing. But
it has a key benefit in a system designed around maximizing long-term rather
than short-term success: it aligns the interests of the worker and the
company to a much greater degree than under a hire-and-fire system. (Of course, Japanese companies have ways
of disciplining bad employees short of firing them.) And since their long-term orientation leads
to an emphasis on maintaining sales, not profits, in slack times, they tend
to avoid the layoff cycles that Western companies endure.
Lifetime employment also gives companies an incentive to invest in giving
their workers expensive technical training, since they know the workers won’t
just jump to a competitor once they have it.
Since a highly-trained workforce is one of the absolute keys to
success in any advanced sector of the economy, this is very important. And lifetime employment forces executives at the company to care
about its long-term success, rather than just to pump the company for quick
profits during the few years they are there.
Furthermore, the architects of the Japanese system understand that as a
sociological and political matter, providing lifetime security to a core
group of male “breadwinner” workers confers stability to society as a whole,
especially when combined with a traditional male-dominated society that has
stronger inter-generational obligations (to care for the old, for example)
than most contemporary Western nations.
Ending the Marxist Curse of Alienation
Lifetime employment helps nourish the emotional bond between the worker
and the company, which is also expressed by such things, which seem silly to
Western eyes, as company songs. These
make perfect sense within the context of Japanese culture.
Americans tend to forget that Marx wrote so much about alienation, (which we
tend to associate with teenagers with purple hair, not with serious economic
questions) for a reason: he saw this as the key psychological phenomenon, in the head of the individual
proletarian, that makes him a revolutionary.
Alienation is important.
The Japanese were acutely aware of the Marxist challenge to capitalism, and
they internalized this problem by taking seriously the elimination of
alienation. The West really has not,
choosing to smother it with consumerism while doing nothing about the
phenomenon itself, resulting in the central weirdness of Western culture
since the 1960s: the fact that our culture, from rock music to academia, is centered on the institutionalization of rebellion.
Unsurprisingly, Japan had no “60s” on our scale, and maintains levels of
traditional morals (their traditions, remember, not ours) and deference to
authority that remind most Americans and Europeans of the 1950s. This
achievement is under certain stresses, as Japan is not immune to the
corrosive forces of modernity any more than any other society, but it remains
intact to a remarkable degree.
Fascism Without the Fascism
If the use of non-economic incentives sounds familiar, it is because the
last time this issue was seriously addressed in the West in the context of a
modern economy was by Peter F. Drucker in his 1940
book The End of Economic Man, which discussed how the Nazi system was
based on creating a non-economic power structure to resolve the social
conflicts that had been irresolvable within capitalist European society. This, in his view, was the sick genius of
Nazism and the reason it had been able to come within a hair’s breadth of
creating a world-conquering social system.
The political economy described above is the product of thinking that
originated among Japan’s colonial bureaucrats entrusted with the
industrialization of Japan’s colony of Manchuria in the 1930’s. They published their Economic New
Structure Manifesto in 1940 as a result of their experience of the inefficiency
of traditional capitalism as a development strategy. In the short run, the elite Zaibatsu capitalists of Japan vetoed
their ideas, but in the long run, partly as a result of the American
occupation’s assault on the big property owners, a product of their New
Dealers’ conviction that industrial concentration was an abettor of fascism,
they were able to triumph.
One way to describe the Japanese achievement is to say that they have
achieved what the Nazis wanted to achieve but didn’t, largely of course
because they were mad serial killers obsessed with a lot of things other than
economics. Ironically, Asiatic Japan
comes closer than any nation on earth to what Hitler wanted. It is a socially conservative,
hierarchical, technocratic, orderly, pagan, sexist, nationalist, racially
pure, anti-communist, non-capitalist and anti-Semitic society.
Of course, it would be unfair to
describe contemporary Japan as Nazi-like in any of the senses that are
notorious (though one cannot help observing that she has never been contrite
about her WWII actions the way Germany has.)
More correctly, the architects of the Japanese system learned from
their disastrous experience in WWII that the kind of society they wanted could
not be achieved through a totalitarian predator-state and they calculated
that it could be achieved through the forms, though not the content, of
liberal democracy, which is how Japan presents itself.
The Japanese Model Makes Democracy (Almost) Irrelevant
One of the consequences of Japan’s long-term orientation that is least
palatable to the Western liberal mind is that it has the effect of making
democracy almost superfluous. The
reason is simple: if the objective of the government is the long-term
well-being of the nation, the means to this end have already been figured
out, and execution has been entrusted to a bureaucracy with a track-record of
success, then there is very little for democracy to do. What is there for the elected
representatives of the people to debate?
Particularly since serious debate about these questions turns on
economic expertise they do not possess.
As a result, the Japanese Diet is essentially relegated to the “Tammany Hall”
functions of a democracy: interceding with the bureaucrats on behalf of
individual citizens and co-opting potential troublemakers by dispensing
corruption. In fact, the bureaucrats,
who control the spigot that dispenses the grease, like to keep the elected
officials corrupt so that they can be disciplined at any time by the threat
of running to the police. As a result,
the supposed “democracy” in Japan is a trivial and compliant rubber stamp for
the bureaucratic elite, who operate under enabling laws that give them the
legal basis to do as they see fit.
Since anyone seriously interested in running the country went into the
bureaucracy long ago, there are few representatives in the Diet with any
inclination to challenge this system, which gives them the perks and
popularity that elected officials really want.
Japan is not Really a Liberal Democracy
In terms of the fundamentals of contemporary political philosophy, the
key issue this all raises is whether Japan has refuted the idea that running
an advanced society requires freedom.
This assumption, which is not without evidence, is the absolute
cornerstone of the contemporary Western assumption that the increasing
economic development of the world may be presumed to have an ultimately
benign political outcome. It impinges
on a whole host of crucial issues too numerous to discuss here.
Japan has preserved, of course, the nominal forms of liberal democracy. But she has systematically drained them of
content, just as she has drained capitalist institutions like the stock
exchange of content. But if these forms are not necessary to the system, then
both Peter F. Drucker, who has argued that an
advanced society must be a free society, and Francis Fukuyama, who has argued
that liberal democracy is the ultimate state of human ideological evolution,
are wrong. The significance of this is
Japan is thus a far more important example of the famous Asian
“soft-authoritarian” model made famous by Singapore, and the challenge of
this model is far more profound than people realize. This is particularly so given that China is
desperately trying to construct a sustainable regime without risking the
national disintegration that she quite reasonably fears attempted democracy
Not only has economic history not stopped, but the range of alternatives exceeds
the conventionally assumed one between capitalism and socialism. Perhaps the Japanese system is capitalism
of a sort, but if so, it is a capitalism in which private capital is not the
dominant organizing principle of the economy, so I would dispute this.
As nationalists, the Japanese only want their system to serve them and have
no interest in winning ideological arguments. They will not make significant efforts to
disabuse foreigners of their economic theories, especially when these
theories make foreign nations accept their trade surpluses.
Japan’s economic achievement refutes the proposition that neoliberalism
is the only route to economic success.
This does not mean, however, than all neoliberal
theory is false. Clearly, within
rationally-defined limits, much of it is true.
This does not all mean that nations setting economic policies can ignore neoliberal prescriptions willy-nilly and expect not to
pay a price. The Japanese system is a sophisticated construct that requires
some of the world’s most skilled economic managers. Outsmarting capitalism is not a game for
The Japanese system is a system, so one cannot just copy any piece of
it and expect it to work outside its original context. But some pieces depend upon things that are
sufficiently similar in other economies that they are plausibly
imitable. For example:
1. Any nation can usefully increase its savings rate, not necessarily by
2. Any nation can prop up working-class wages by not importing cheap foreign labor.
3. Advanced nations can benefit from carefully relaxing anti-cartel laws to
allow cooperative R&D, as in the Sematech
consortium in the US.
Other policies, like lifetime employment and cartel price-fixing, would clearly
be a disaster if simply imposed, because they need constraints supplied by
the rest of the system to ensure that the benefits are socially diffused and
not just captured by narrow interests.
The lynchpin of the system, politicized capital allocation, probably cannot
work in a democracy, as it would just result in plants being built in the
districts of powerful parliamentarians and would not make investments whose
payoff exceeded one election cycle.
Naturally, kleptocratic oligarchies wouldn’t
be good at it either; politicized capital allocation is only likely to work
under highly Platonic systems like the MOF. And even then, there is no guarantee: power
still corrupts and one can easily imagine such a system becoming inbred and
perverse. Japan’s achievement is an
empirical fact, not a guarantee to all eternity.
Other policies fall in between the imitable and the inimitable, like the
emphasis on advanced manufacturing, an extremely complex topic.
Still other policies, like protectionism, can only be rationally evaluated in
the context of a general debate on the topic of which the Japanese case is
but an important part.
1. Ozaki, Robert. Human
Capitalism: The Japanese System as a World Model.
2. Fallows, James. Looking At The Sun: the Rise of the New East Asian
Economic and Political System.
3. Kenrick, Douglas. Where Communism
Works: the Success of Competitive Communism in Japan.
4. Gerlach, Michael. Alliance Capitalism: the
Social Organization of Japanese Business.
5. Fingleton, Eamonn. Blindside:
How Japan Won the Race to the Future While the West Wasn't Looking.
6. Wade, Robert. Governing the Market: Economic Theory and the Role of
Government in East Asian Industrialization.
7. Fruin, Mark. The Japanese Enterprise System:
Competitive Strategies and Cooperative Structures.
8. Calder, Kent. Strategic Capitalism: Private Business and Public Purpose
in Japanese Industrial Finance.
9. Johnson, Chalmers. MITI and the
Japanese Miracle: the Growth of Industrial Policy 1925-75. & Japan: Who
Governs? The Rise of the Developmental State.
10. Drucker, Peter F. The End of Economic Man.
Robert Locke, “Japan, Refutation of Neoliberalism”, post-autistic economics review,
issue no. 23, 5 January 2004, article 1, http://www.paecon.net/PAEReview/issue23/Locke23.htm