Learning From Japan

By George P. Brockway, originally published May 4, 1998

1998-5-4 Learning From Japan titleTHE ECONOMICS profession and the military are similar in many ways, but they differ in one important respect. Generals are notorious for planning and training for the last war, while economists, who do not believe in history, have only one basic prescription for whatever problem may befall.

I don’t mean economists deny that Caesar crossed the Rubicon, or that Columbus sailed the ocean blue, or that Paul Revere went for a ride. What they deny is that economics was any different in those years from what it is today or will be tomorrow. They recognize, to be sure, that people in prior eras had different ideas concerning the economy, but they regard these ideas as wrong or irrelevant and not worth bothering about. They note that the laws of physics and chemistry and other such proper sciences are understood to have worked in the days of Aristotle whether he knew it or not, and assert that the same is true for the laws of economics- which, they claim, were not properly formulated until a half century ago, or after the death of John Maynard Keynes.

As a consequence, Japan is now having a rough time. We are likely to have a rough time, too, if we don’t watch out.

At the end of the Good War, General MacArthur explained to the chastened Japanese that it was not polite to steal things from other countries, and that in the future they would have to make or buy whatever they wanted. Economists pointed out to them that in order to buy things from foreign countries they would have to sell things to foreigners. So they set to work to export textiles (the United States had sent warships under Commodore Matthew Perry in search of silk back in 1854), but soon decided to put what they had learned in the Good War to good use.

One important lesson they had learned was how to organize themselves. Everyone was prepared to make sacrifices. Since their land was not rich in resources (it especially lacked oil), they did not waste time and energy on producing items for local consumption and pleasure. Even their captains of industry led relatively modest lives-far more modest than those of their conquerors. As the country gradually recovered, everyone continued to live unpretentiously, and to save famously. Japanese saving became proverbial, the envy of Wall Street and MIT economists.

In fewer than 20 years they supplanted the West Germans as the wonder workers of the postwar world. Japanese radios and television sets took over the American market. Then came a great stroke of luck. The OPEC inflation and oil embargo of the 1970s hit the United States just as the Japanese were trying their compact and subcompact cars on the American market. Ford and General Motors and Chrysler relied on earlier market research indicating a strong American preference for long, heavy, powerful, chrome-encrusted gas-guzzlers. Recent experience has shown the market research was basically not far wrong[1], but the tiny Japanese cars were immediate hits, and their agile manufacturers have not lost their share of the American market.

For another 20 years Japan’s foreign trade balance grew, and still the country maintained its-parsimonious domestic life. To some extent the parsimony was cultural, but in any event, it was enforced.

We are so imbued with Ben Franklin’s ethics of a penny saved equaling a penny earned that we may mistakenly imagine Japan is the second coming of Tocqueville’s America. Indeed, it is not. Bribery of government officials and extortion by government officials are commonplace. Ordinary business is lubricated by expense accounts that put American extravagances to shame. Furthermore, the class distinctions are so strong that there is little protest when the cost of living (not to be confused with the rate of inflation) puts many conveniences and amenities beyond the reach of ordinary citizens. Japanese cameras are notoriously more expensive in Tokyo than in New York[2].

Those who read this column in the issue of June 14, 1982 (16 years ago, I ask you to remark), learned then that Japan was far from the ideal society being described by the Western business press. In particular, the “lifetime employment” the press continues to talk about covers only workers in the largest companies (less than 30 per cent of the total employment in the automobile business) and “runs only to age 55, whereupon the worker is either demoted, farmed out to a supplier of the giant firm, or turned loose with a couple of years’ severance pay. In each case he faces old age without a pension.” Although women were 36 per cent of the Japanese work force, they had none of the foregoing perks.

I went on to explain that “the Japanese economy is hierarchical in an idiosyncratic way.” Operations that in the U.S. would be performed by divisions of a company are performed in Japan by satellite companies that are technically independent but actually at the mercy of the giant firms. As a result, the employees of the satellite firms are paid low wages and are subject to sudden layoff and dismissal.

The vaunted “productivity” of Japanese automobile companies came from dividing the value of the finished cars by the number of employees of the major companies, excluding those of the parts suppliers[3]. “In spite of all of Japan’s ‘sunrise’ industries in steel and shipbuilding and textiles and electronics and optics as well as in automobiles, the Japanese GNP per capita is still well below ours.”

I also noted: “As Gus Tyler has shown (in ‘The Politics of Productivity,’ NL, March 22,1982), the notion that the Japanese are ‘catching up’ is a statistical flim-flam.”

In short, some Japanese may live abstemiously because of their upbringing; some may live abstemiously because they have to; and some may live abstemiously because consumption is discouraged in other ways. Jean-Baptiste Say, who wrote, “It is the aim of good government to encourage production and of bad government to encourage consumption,” would have loved modern Japan.

The trouble with good government as defined by Say is that you soon have more money than you know what to do with. The citizens have their little nest eggs, and the big businesses have their big profits, and the government has an enormous “favorable” balance of trade. Modern economists nod their heads approvingly because exports are a positive factor in the Gross National Product, while imports are a negative factor. Nevertheless, this is not an unmixed blessing.

Japan became (and remains) very rich by almost any definition; yet despite its riches, the economy began to go sour with the worldwide recession that set in after the Gulf War. In fact, Japan’s success in exporting all over the world led to its present weakness. Building its economy completely on the world market, Japan necessarily faltered when the world market faltered.

At this point, a feature of the Japanese economy that has captured the admiration of American observers came into play. Japanese banks, which are not restricted and regulated the way American banking is, naturally became the depository of industry’s enormous profits. Lists of the 10 or 20 largest financial institutions in the world were therefore dominated by Japanese banks. American bankers were (and are) envious of how intertwined giant industries and giant banks were. Banks owned and speculated in common stocks and real estate, and thus owned industrial corporations. The latter owned bank stocks and speculated in them. From time to time the central bank joined in the fun.

As world trade languished, and as Japanese forays in foreign investment from Radio City in New York to the Pebble Beach Golf Course[4] in California proved disappointing, bankers and indeed the whole of the Japanese economy devoted all available wit and energy and money to speculating in domestic securities and real estate. The stock market shot up faster and farther than Wall Street has ever managed, and the newspapers were filled with stories of lots 10 feet square in central Tokyo selling for a million dollars. Memberships in fashionable golf clubs also were said to cost a million dollars. Besides playing the markets for their own account, bankers lent vast sums to other high rollers. Speculation spilled over to Korea and bubbled around the Pacific rim.

THE HOME BUBBLES burst first, years before the current debacle in Southeast Asia. Japan’s economy has been essentially flat for most of the present decade.

Economists know what to do in such situations: increase saving, control consumption, raise the interest rate, cut taxes, balance the budget, and deregulate. As we have seen, however, Japan was already very much the sort of state advocated by Jean-Baptiste Say.

At the same time there were puzzling differences in details. Unemployment remained well under 3 per cent, yet inflation was close to zero (a situation similar to the one in the United States that is currently bewildering the Federal Reserve Board). The interest rate was below 2 per cent-as it had been in America in the decade ending in 1951-yet there was so much money around that raising the rate proved to be difficult. The regulations that the U.S. most objected to were those that made imports difficult and hence restrained consumption.

Well, it’s a long story and includes political plots and subplots and dark tales of gangsters (for some reason not known as the Japanese Mafia), but here I merely want to mention one detail. Evidently to appease sternly anti consumption economists, Japan introduced a national sales tax a couple of years ago. The latest “reform” package included extensive corporate and personal income tax cuts, but the sales tax was left intact.

There is, I think, very little chance that Japan will recover from its extended stagnation without a fundamental change of policy. Japan had a brilliant postwar run from destruction and demoralization to the second largest economy in the world. As we observed at the beginning, modern economics has a one-track mind, and Japan followed it. The economic advice that enabled the country to achieve riches is now hampering the recovery. It is as successful a supply-side economy as the modern world has seen, and as such its difficulties should be a warning to the United States.

A one-sided economy is unjust and, in the end, is inefficient. Adam Smith was a true citizen of the Enlightenment. He wrote, “Consumption is the sole end and purpose of all production, and the interest of the producer ought to be attended to only as far as it may be necessary for promoting that of the consumer.”

Keynes had a broader understanding of the needs and purposes of modern life. He wrote, “The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.” Japan came close to correcting the first fault, and we are nearer to it than we have been in modern times. But Japan has overlooked the second fault and is checkmated, and we are increasingly in danger of the same fate.

The New Leader

[1] Ed:  An example of what Steve Jobs, among others, hated about “market research” in that it echoed what people already knew about cars not what was possible about cars…

[2] Ed: “Yodobashi Camera is two blocks south of the Kamiyachō station on the Hibiya subway line.  Yodobashi Camera means BIG savings!”

[3] Ed:  Note that this is exactly paralleled in the US practice of using outsourcing to reduce headcount vs revenue thus presenting productivity gain by not counting the now, outsourced, jobs.

[4] Ed:  A great place to shoot 79 by playing the last 5 holes in one under par…

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