The following Post-Autistic Economics Review article, from March 2005, is an investigation of Japan’s enduring economic success by Robert Locke.  It was sent to me by Wintermute who urged me to read the whole thing.  It’s long ... some 8,000 words.  So I will not reproduce it in its entirety here.  But if you want to understand how the Japanese function economically, and whether they have a better way of doing things than our market-driven approach, I do urge you to read the article in full at source.

The basic picture of Japan is of a non-socialist but nevertheless centrally-planned economy.  The central planning, however, is not the proscriptive unreality of Gosplan.  It is subtle and it does not over-reach itself.

And in case you are asking why Wintermute would be interested in the Japanese, here’s what Locke has to say about Fascist and National Socialist economics:-

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.

My own somewhat kneejerk reaction is to retreat into genetic determinism and point to our inherent individualism, with its clear concomitant in the free market.  Could the Japanese system function for long among a people who did not naturally exhibit high degrees of conformism?

Read, and see what you think.

GW

Japan, Refutation of Neoliberalism

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 of attention.

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 neoliberal theories.

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 capitalism.

{snip}

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 rich.

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 consumed.

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 system.

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 repressing consumption.

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 analysis.

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 stock market.

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 appropriate.

{snip}

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.

{snip}

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.

{snip}

Practical Implications

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 amateurs.

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 Japan’s means.

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.