03 June 2006

David Friedman on Japan's Economic Miracle

      The Misunderstood Miracle:
      Industrial Development and Political Change in Japan
      David Friedman, Cornell University, 1988

Generally speaking, explanations of Japan's extraordinary economic performance (1955-1975) fall into two categories. One is the market regulation hypothesis, while the other is the bureaucratic regulation hypothesis.1 According to the first, the industrial "take-off" of Japan was the result of soound, free market policies. According to the second, Japan's successes reflect the wisdom of a symbiotic relationship uniting state bureaucracy, industrial management, and finance.

(A third common explanation, common after WW2, was that the Japanese had certain ethnographic traits that were ideal for industrial efficiency. Social scientists no longer take these ideas seriously.)

Friedman quotes from Johnson frequently; in part this is because, while he is critical of Johnson's conclusions, he is influenced by his methods and body of evidence on MITI. Johnson characterized postwar Japan as "a developmental state," in which the state and polity are primarily absorbed in the task of development. In Japan, it is generally accepted that the leadership was concerned heavily with economic strength, and suffused the whole of society with its goals. Since the object was to catch up to other nations, like the United States, on certain measurable accomplishments, a market-planning system was not entirely necessary; for one thing, much of the price mechanism was determined by Japan's open economy.

Friedman examines the actual record of intervention by the Japanese bureaucracy, beginning with the prewar version of MITI, MCI.

In the late 1920's several measures were taken to stimulate industry. The country was known to suffer from military vulnerabilities, and the scope of the country's industrial output was alarmingly small. In 1929, the Ministry of Commerce and Industry was founded; it would be revived after WW2 as MITI (1949), with similar policies. With the passage of the Major Industries Control Law (1931), MCI staff tried to induce the industrial firms to merge. It was widely assumed at the time that the future was in mass production of homogenous goods using large, costly, specialized machinery.

To put matters simply, Friedman describes the endeavor as a failure. He provides an exhaustive review of the machine tool industry, will all of th e legislation and all of the industrial responses. In no case did the MCI policy work as planned. In each case, the bureaucracy was determined to cause mergers and acquisitions. The bureacuracy was determined to get firms to select a product and focus on that. The bureaucracy was determined to restrict market entry to prevent cutthroat competition in which firms sold at below cost. At no point did any of these efforts succeed.

For example, by 1941, the Japanese authorities—in essence, the military ideologues—were desperate to improve the ability of domestic industry to produce heavy equipment. Their vision was US-style Fordism in trucks, tanks and armored vehicles, artillery, and shipping.1 To this end, the government instituted the töseikai (control councils) as mandatory "cartels." The government set objectives, and the töseikai enforced those objectives. Please recall that Japan already ha a significant share of enterprise under the control of zaibatsu, or family-dominated conglomerates. The zaibatsu were blamed by the militarists for having managed to avoid building up heavy industry during the earlier years of Japan's industrialization, preferring instead to either import heavy machinery from Europe or North America, or else channel investment into light manufacturing and industrial services. Organizationally, they consisted of great hierarchies of firms, with elaborate holding arrangements culminating in the family trading company (sögö). The zabatsu, in other words, were imagined to have created these giant cartels with government assistance (early in the Meiji Restoration) and squandered their market power on short-term profit. Yet the töseikai merely detached the lower-tier zaibatsu subsidiaries. Otherwise, they were entirely thwarted by the existence of several power, business associations formed by industrial managers of the small and mid-sized firms.

Consequently, there was little correlation between any of the military's wartime objectives and actual execution. And Japan was, indeed, a totalitarian society during the period 1941-1945!

Friedman includes a case study of regional contributions to the success of the small, flexible manufacturing firms. In particular, he examines the case of Sakakai, a small town in the highlands of Nagano Prefecture. Sakakai is actually one of those famous success stories that one occasionally hears about; while visually not as prepossing as either the anime character of the same name, or bullet trains wizzing past Mount Fuji, it is a very durable and admirable achievement.3 The town is filled with literally hundreds of the smallest possible industrial firms, some with as few as three employees, yet these firms possess the highest levels of technical sophistication anywhere. Friedman explains the role of the shökökai (chambers of commerce), which have been responsible forsecuring government loans for fledgling manufacturers, and insuring those firms against business downturns.

One of the more interesting conclusions that one can draw from Friedman's study is that Japan's industrial successes (closer in character to those of Taiwan and the Republic of Korea, than to the US model) was the result of unintended, but neverlessless benign, consequences of voluntary industrial cooperation (within regions) and MITI's persistant efforts to "rationalize" industry. Japan has succeeded by learning to imitate a school of sardines rather than a whale.

(Cross-posted at Hobson's Choice)
NOTES: 1 Market regulation hypothesis: David Friedman's terminology. Proponents of this [furnished by Friedman] include William W. Lockwood, The Economic Development of Japan (Princeton Univ., 1954); Elizabeth Schumacher and G.C. Allen, The Industrialization of Japan and Manchukuo (MacMillan, 1940); and more recently, Gary Saxonhouse and Kozo Yamamura, Law and Trade Issues of the American Economy (Univ. of Washington Press, 1986).

Bureaucratic regulation hypothesis: the main proponent of this is Chalmers Johnson, in MITI and the Japanese Miracle (Stanford Univ., 1982). Another version of the theory appears in T.J. Pempel's "The Bureaucratization of Policy Making in Postwar Japan," American Journal of Political Science, 1974. This argues that the Japanese bureaucracy used cartels as the key instrument of industrial policy, thereby leading industry to rationalize production.

Finally: to the best of my knowledge, author David Friedman is not the person as David D. Friedman, the anarcho-capitalist.

2 It's interesting to note that, according to Clive Pointing (Armageddon, Random House 1996), Allied shipping losses to Axis submaries were around 6 million tonnes, whereas Japanese shipping losses to Allied subs were around 8 million tonnes. The OKW initially expected their sinking of Allied ships would exhaust the ability of US and British shipyards to keep up. Obviously, the comparative burden on Japan was much greater.

3 For those interested in how this phenomenon has played out in other locales, Mark Lazerson has published a study "A new phoenix?: modern putting-out in the Modena knitwear industry" (1995).

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