The destruction of the American industrial base is not only bad for the United States, it is bad for the world.  Theories of a global, borderless economy and of economic interdependence only console those who seem unaware of the political forces at play.  The jubilation, as American industries close down, of highly ideological partisans of laissez faire, who see in this the wonderful work of market forces, creating ever greater efficiency and benefits for consumers, is witness to the poverty of the conceptual apparatus with which these developments are regarded.

The threats earlier in this century to freedom and independence were more easily visible.  And even though there was disagreement as to the true nature of the communist menace, we used a widely shared vocabulary that possessed the strength to engage the imagination.  We do not have such a vocabulary to deal with the force that Japan represents, a force certainly not under control of the Japanese people, or--and here I do differ with Hollerman--their administrators.

Japan adds a volume roughly equal to the entire GNP of France to its economy every four and a half years.  Tokyo cannot satisfactorily explain to other countries where it thinks this will ultimately lead and cannot dissipate international doubts about Japanese motives.  Japanese power-holders cannot explain where they stand on some concrete world problems that others consider most urgent, and they appear paralyzed when others expect action.  They cannot make clear what they hope to do when Japan passes the United States as the largest economic power in the world, which at the current rate of expansion may happen around the turn of the century.  The combination of incredible economic might with apparent indifference to the well-being of the world is becoming one of the main sources of international tension and conflict.  But political scientists, with few exceptions, do not ask the proper questions with regard to this Japanese force because they are misled by the appearance that it is an economic subject.

The discrepancy between Japan as a world power and its diplomatic invisibility is not new.  Indeed, one would think that the stubborn persistence of this discrepancy would have caused Japanologists to look more seriously into the possible causes, especially after the three or four years during which Japanese representatives have, at the annual summit meetings and other international forums, repeatedly assured everyone that Japan is ready to take on a broader and more responsible role.  The explanations with reference to interwar America or an alleged inexperience are not convincing and fly in the face of history; Japan's diplomacy of the Meiji period demonstrated that it needed no decades of experience to be effective.

Economists, by and large, have ignored crucial Japanese phenomena when these do not fit the conventional categories of their conceptual world.  The dominant school of academic economics accepts the axiom that a successful economy must be based on free market principles.  Strengthened in this belief by the official demise of Soviet-type command economies, most economists have also missed the fact that it is possible to have interwoven public and private sectors and to have an effective economy at the same time.

Serious attention to actual (as distinct from formal) institutional links would force economists to acknowledge structural incompatibilities between the Japanese and Western economic systems.  The conventional separation of private and public sectors has become close to irrelevant in Japan, at least where large corporations are concerned.  The entire system thrives on a continuous exchange of political protection, enabling devotion by individual firms to shared long-range goals.  The market in this setting plays an ordering role, but is rarely allowed to determine ultimate economic outcomes.  (If it did, we would regularly have industrial and banking crises, because underneath their political protection many of Japan's manufacturers and financial institutions have been at times, by Western standards, in very deep trouble).

A small detour is needed to put this into perspective.  The political underpinnings of postwar economic organization represent a significant shift when compared with Japanese economic organization earlier this century.  In the 1920s the Japanese economy was almost a model of laissez faire when compared with what emerged after the war.  This change came about gradually as a result of the demise of genuine entrepreneurialism, the subordination of the profit motive during the militarist period, bureaucratic visions of a New Economic Order dating from the late 1930s, bureaucratic experiences with economic experiments in Japan's Manchurian colony, and organizational and financial innovations in the war years.  After 1945 new economic organizational centers for monitoring, coordinating, and guiding the manufacturing industries were formed by the same people who during the war had played important roles in the wartime cartels operating under government auspices.  These organizations, the [mdit]Keidanren,[med] the [mdit]Nikkeiren,[med] and the [mdit]Keizai Doyukai,[med] took over from the prewar [mdit]zaibatsu[med] (industrial conglomerates controlled by holding companies) as centers of gravity for economic decision-making.  Rather than representing private businesses, they were inspired, established, and shaped by bureaucrats, and they have functioned as solid connectors between the economic bureaucracy and the business hierarchy.

VERY IMPORTANT in the informal merger of the private and public sectors were two major organizational novelties.  Hollerman mentions one that has recently received attention by the United States government in its negotiations with Japan: the keiretsu ``families'' of corporations.  The keiretsu structures are collective safety nets for large individual firms operating in different industries.  Through the pivotal keiretsu banks they almost always ensure success in the launching of new and higher value-added industrial pursuits.  Formally glued together through large-scale cross-holding of stocks, the keiretsu companies own each other.  Since no one is in charge of the keiretsu clusters, and no one is ultimately responsible for them, they remain sufficiently amorphous to facilitate bureaucratic interference.

Such interference is channeled through the other major innovation, consisting of a large number of overlapping, guild-like, and strongly hierarchical industrial federations that monitor, coordinate, and guide activities in every industrial sector.  These industry-wide political entities enjoy strong extra-legal sanctioning powers over all the firms in a sector, because enforced membership entails obligatory conformity to unwritten rules limiting policy-making options.

The combination of these two institutions, the [mdit]keiretsu[med] and the industrial federations, sets the stage for tremendously effective informal control over economic processes.  Even Hollerman appears to be insufficiently aware of this.  He speaks of ``Japan, Disincorporated'' and ``Japan Reincorporated,'' postulating a phase of genuine economic liberalization in the 1970s and 1980s.  I have always thought this to be a weakness in his otherwise admirable work, as I can only see a gradual--and even now ongoing--consolidation of informal power tying ``public'' and ``private'' sector administrators together.

The informal control is vital to Japanese postwar financing methods, arguably the single most important factor in creating the new type of international competitiveness that the bankruptcy-proof large Japanese companies have pioneered.  These methods make periodic phases of very cheap to virtually costless capital possible.

Probably the single biggest factor fuelling the forced growth in the early stages of the economic ``miracle'' was a system of financing called overloan, whereby the [mdit]keiretsu[med] banks could increase their lending to the members of the corporate ``families'' without being required to have deposits with the central bank in proportion to these increases.  For most of the postwar period, loans from and discounts with the central bank exceeded the deposits of the commercial banks.  With the substitution of banks for the old zaibatsu holding companies, a network of inexhaustible financial pumps was established, whose survival was guaranteed by the central bank.  Overloan is not practiced at the moment, but another even more audacious financing method took its place, reaching a peak in the late 1980s when it provided conditions for a vast expansion of investment capability.

Some ten years ago, Japan's administrators realized that together they commanded so much informal control that they could insulate a horrendous inflation in capital assets from the consumer economy.  They set about to greatly increase Japan's asset base.  In the beginning of fiscal 1987, all land in Japan was worth 2.4 times as much as all land in the United States, but at the end of that year it was worth 4.1 times as much (the United States is 25 times larger than Japan).  In that same year, the increase in the nominal value of land and stocks was as great as the entire GNP plus a further two fifths of the GNP.

These stupendous additions to the paper wealth of Japan's large corporations (portrayed in the West as merely wild waves of speculation) were used as collateral, against which various financing methods were applied that reduced the real cost of capital for large firms to practically nothing.  A very elaborate network of personal connections, whose members can be relied upon to behave predictably, props up money-manufacturing methods and prevents the kind of calamity that would be that method's inevitable result in any genuine market economy.  The politics of Japanese economic power are extra-legal and take place beyond the scrutiny of external and impartial regulators.  When Japan's financial power-holders are, as it were, exchanging blank checks with each other, no one is sounding the alarm.  The Central Bank does not operate as a referee, as central banks do in the West; it is an informal participant in this successful endeavor.

Essay Types: Essay