What is an economy for?

 

 

What is an economy for?

 

We know the answer: to grow so that we can all buy more and keep the world economy spinning. Asians have a different answer: to grow so that a country can produce more--whoever buys the goods--and keep the country's, not the world's, economy spinning

 

by James Fallows

 

EVERY country and culture is unique, and the "Asian" economic system naturally is something different in Singapore from what it is in Thailand or Japan. There are comparable variations among European and North American styles of capitalism. In their emphasis on industrial guidance and national policy, France and Germany are more Asian than they are American. In their approach to leisure and the good life, the Europeans are less like the new Asian model than like Americans. Still, four main patterns distinguish the Asian system from the prevailing Western model. Some of them are descended from old clashes between the German and Anglo-American philosophies of economic competition which were outlined here last month. They involve:

 

The purpose of economic life. In the American-style model the basic reason for having an economy is to raise the consumer's standard of living. In the Asian model it is to increase the collective national strength. Ideally, the goal is to make the nation independent and self-sufficient, so that it does not rely on outsiders for its survival. The American-style goal is materialistic; the Asian-style goal is political, and comes from long experience of being oppressed by people with stronger economies and technologies.

 

The view of power in setting economic policies. Anglo-American ideology views concentrated power as an evil ("Power corrupts, and absolute power ..."). Therefore it has developed elaborate schemes for dividing and breaking up power when it becomes concentrated. The Asian-style model views concentrated power as a fact of life. It has developed elaborate systems for ensuring that the power is used for the long-term national good.

Discuss this article in the Global Views forum of Post & Riposte.   The view of surprise and unpredictability. The Anglo-American model views surprise as the key to economic life. We believe that it is precisely because markets are fluid and unpredictable that they work. The Asian-style system deeply mistrusts markets. It sees competition as a useful tool for keeping companies on their toes, but not as a way to resolve any of the big questions of life -- how a society should be run, in what direction its economy should unfold. This is, in Western terms, a military view of economics. Within the American military the Army competes with the Navy for funds, and competition within each branch keeps both the Army and the Navy sharp. But the services don't cast votes or place bids to decide where the nation should fight. Decisions like that are not left to a market.

 

The view of national borders and an us-versus-them concept of the world. People everywhere are xenophobic and exclusive, but in the Anglo-American model this is thought to be a lamentable, surmountable failing. The Asian-style model assumes that it is a natural and permanent condition. The world consists of us and them, and no one else will look out for us.

 

Consumers or Employees?

 

BY the tenets of post-Second World War Anglo-American economics, "What is an economy for?" isn't a very difficult question. In fact, it answers itself. Economic development means "more." If people have more choice, more leisure, more wealth, more opportunity to pursue happiness, society as a whole will be a success. In theory, any deal that the market permits will in the long run be good for society as a whole.

 

The Anglo-American system is long on theories. It is easy to pick up any English-language textbook and find theories proving that whatever gives more to the consumer is best for everyone. The Asian system is not so explicitly theoretical. Yet the fundamental purpose of the Asian model is evident from its performance. Its goal is to develop the productive base of the country -- the industries either within the country or under the control of the country's citizens around the world. When it comes to a choice between the consumer's welfare and the producer's, it's really no choice at all.

 

In countless ways the most successful of today's Asian societies reveal their bias in favor of the producer. A few illustrations:

 

Japan and Korea are famous for protecting their rice markets. Even though the small plots, high land prices, and aged rural work force together make the cost of rice several times as high as it is elsewhere in the world, neither country gives its consumers the option of buying from overseas. In the Western world this is usually taken to be a quaint affectation. After all, Japanese and Korean spokesmen usually defend their policy in emotional terms ("our precious heritage"), and even if the markets were thrown wide open, there is a limit to how much foreign rice the Japanese or the Koreans could eat. (Because of crop failures following last year's wet summer, the Japanese government will allow emergency rice imports this year, but says it will close the market when the emergency has passed.)

 

In fact rice policy reveals a major, consequential pro-producer bias. Especially in Japan, but also in Korea and Taiwan, farm protectionism is the crux of a sweeping anti-consumer social bargain. If there is a single factor limiting consumption in these countries, it is the extremely high price of land; and if there is a single force that keeps the price up, it is the system that sets aside so much land (one quarter of the nonmountainous land in Japan) for the production of very expensive crops. "High land prices have caused the Japanese to act in ways they would not have otherwise," Susan Hanley, of the University of Washington, wrote in 1992. "It is not Japan's Asian cultural heritage that sets it apart ... so much as the result of its artificially high land prices."

 

The more successful the economy in Asia, the more likely it is to have a rigged, anti-consumer, high-priced retail system. Japan's is the most successful, and its retail economy is the most cartelized and expensive. It's not simply that imported goods are expensive; Japanese-made goods are too. According to a survey at the end of 1991, clothes cost twice as much in Tokyo as in New York, food about three times as much, gasoline about two and a half times as much, and so on.

 

Anglo-American economic theory can explain why Japanese prices are so high: the retail system is full of cartels and monopolies. A network of laws, contracts, and commercial agreements in Japan discourages discounting and price competition. Until it was relaxed in the early 1990s, Japan's famous dai ten ho, or "big store law," effectively outlawed supermarkets, since it required that small local merchants give their approval (or be bribed into doing so) before a big store could be built. It is hard for familiar economic theory to accept that such an inefficient and anti-consumer system might last for many decades, with the apparent approval even of the victimized population of consumers.

 

The immediate reason the system lasts is the political power of small merchants, who -- along with farmers and the construction industries -- are big donors to the powerful Liberal Democratic Party in Japan. The more basic reason it lasts is that it helps producers, and in ways that offset the penalty to consumers. When competition in Europe or America pushes down the price of VCRs, cars, and semiconductor chips, Japanese producers can maintain high prices within Japan. In effect, producers wring monopoly profits out of their own people in order to build a war chest for competition overseas. When the yen doubled in value against the dollar from 1985 to 1988, retail prices in Japan should have fallen significantly -- but they barely budged. Japanese corporations were taxing their own people with artificially high prices so that they could maintain artificially low prices in export markets in Europe and North America. In return for this tax the Japanese got strong organizations and full employment. This may not be an attractive bargain from the Western viewpoint, and no individual Japanese or Korean likes paying higher prices. But as a social bargain it is seen as keeping the nation's producers strong and thereby keeping the social fabric intact.

 

The closest counterpart in American experience is AT&T before its breakup. Ma Bell penalized consumers in many ways. Rates were higher than they might have been. All equipment had to be "authorized" by AT&T. At the same time, Bell used the money to fund its research labs and all its other operations. This is a version of everyday practice in Japanese business: consumers have fewer choices than they might ideally have, and corporations absorb and redeploy the money they save.

 

In their own role as consumers even corporations in Japan and Korea reveal the anti-consumer bias of the Asian system. Their workers have for several decades traded artificially low wages for the promise of full employment. The wages are artificially low because through much of the postwar era earnings have lagged behind the increase in corporate productivity. By Western economic logic wages should have been rising much more rapidly. Similarly, Japanese and Korean corporations have traded artificially low profits for their equivalent of full employment, which is an ever-growing market share. In 1991 a business survey listed the thirty most profitable large companies in the world. Twenty-three of them were American, four were British, and none were Japanese.

 

The parts of Japanese, Korean, and Taiwanese life that encourage consumption are made difficult. The parts that encourage savings, investment, and deferred gratification are made easy and attractive -- the way it was in America during the Second World War. The automobile market in Japan, for instance, is dominated by the shaken racket. The word shaken (pronounced "shah-ken" rather than like the English word "shaken") literally means "car ticket." In effect a shaken is a reinspection certificate that each car in Japan must have in order to remain legally on the road. The shaken policy originated during the infancy of the Japanese auto industry, when domestic cars were such unreliable rattletraps that bureaucrats thought it would be dangerous to let them on the road without constant safety checks. The public-safety rationale for reinspections obviously no longer applies. Nonetheless, after three years and then every two years thereafter Japanese drivers must take their cars in for a new shaken, and every two years they are saddled with hugely expensive "necessary" repairs. By the time a car is three or five years old, it can cost so many thousands of dollars to meet shaken standards that it makes sense to buy a new car, even though new cars themselves cost much more than the same models outside Japan. It is a way to turn the population into a captive market for producers.

 

The experience of the past generation has taught most Asian countries one dramatically clear lesson. They can't really go wrong by giving consumers too little, but they can easily go wrong by giving consumers too much. During the collapse of Japan's bubble economy, in 1991 and 1992, government officials said privately that an atmosphere of hardship was useful. Consumerism had been getting out of hand, and the bubble's collapse would have a tonic effect -- without imposing real hardship on Japan or endangering Japan's long-term prospects. (Business-failure rates among Japanese manufacturing and construction firms were actually lower during the "crash" years of the early 1990s than they had been on average during the booming 1980s.)

 

In Korea the late 1980s were heady, pro-consumer years. The 1988 Seoul Olympics did for the country what the 1964 Tokyo Olympics had done for Japan. Anything seemed possible. In the fashionable parts of Seoul young women wore miniskirts and young men hung out all night. By 1990 the trade surplus was heading for the cellar, and the government had to fight back with a huge "anti-luxury" campaign. With economic growth slipping, the national tax office announced that "extravagance beyond one's reported means" would invite tax scrutiny. In effect this meant that anyone who bought a Mercury Sable, Lincoln Continental, Mercedes, or BMW could expect to be put through the tax wringer -- a more serious threat in Korea than in some other countries, because so much business is off the books. Tariffs and other barriers had already raised the price of these cars to more than twice what they would cost in the United States. That hadn't choked off sales, but the tax threat did; sales of the Sable virtually stopped after the tax men stepped in.

 

Beyond all these economic calculations is a question of human nature. Anglo-American economic theory boils people down to their roles as consumers. Life experience, even in America, tells us that people have more in mind than getting the cheapest possible price and the highest possible wage. In certain circumstances people like to work hard, and save, and sacrifice themselves. Even though lottery winners typically don't have society's most desirable jobs, many of them decide to keep working even after they have cashed in. For years and years studies have shown that people who own small businesses behave in a self-exploitative, economically irrational way. They typically work longer hours than normal employees and earn less money than they could if they sold off their assets and invested the proceeds. Decisions like these are oddities in the Anglo-American economic world, where they are explained away with little theories about the "utility" of work. They are central to the Asian model of individual and collective life.

 

The Emperor's Legacy

 

IN the United States the effort to break up political power and the attempt to prevent the concentration of economic power have been seen as parallel steps toward liberty. The United States has a three-branch government because of fear that any one branch will become too dominant. The great reformers in the American tradition have generally risen to strike down excessive concentrations of power, from Jefferson (in his battle with Hamilton) to Andrew Jackson to Teddy Roosevelt to Ralph Nader to Ronald Reagan, in their varying ways. The people who have argued for centralizing and exercising power have generally had the excuse of wartime: Abraham Lincoln, Woodrow Wilson, Franklin D. Roosevelt, John F. Kennedy, and Lyndon Johnson.

 

The deepest criticism of Japanese politics, made by the Dutch writer Karel van Wolferen, is that it lacks a definable center of political accountability. In the French or American system a President must finally make big choices, whereas in the Japanese system (as Van Wolferen explains it) the buck never stops anywhere.

 

The classic illustration of this problem is Japan's apparent paralysis during the first month after Iraq invaded Kuwait. The standard critique outside Japan was that the country was not doing its fair share. This entirely missed the point. Eventually Japan came up with quite a large sum of money, when it could have made the case for not contributing money at all. (The case would have been that it was foolish to go to war over this issue, and that if other countries had emulated Japan, by conserving their use of oil, they could have afforded to take a longer-term view.) Rather, the problem was that Japan seemed incapable of deciding what its position was. The Foreign Ministry announced one policy, the Finance Ministry disavowed it. The Prime Minister at the time, Toshiki Kaifu, was scheduled to go on a trip to the Middle East. Officials in the Foreign Ministry called the trip off. Feuding occurs in any government, but in this government not even the Prime Minister had the authority to resolve it.

 

Most other Asian societies do have a center of power. Indeed, this center has often been one dominant figure -- a military strongman, as in Thailand, Indonesia, and often Korea; a statesman-leader, epitomized by Lee Kuan Yew, of Singapore; a sheer tyrant, as in North Korea and Burma; or a political boss, as in Malaysia and often Taiwan.

 

But whether the center of politics has been weak, as in Japan, or strong, as everywhere else, the political system as a whole has generally been authoritarian in Asia. Compared with any Western societies, and especially the Anglo-American system, Asian states have been less embarrassed and more explicit about the government's role in shaping society. The contrast is obviously sharper with America than with, say, France, which operates a Japanese-style dirigiste system without the social control. The Japanese system also resembles the most successful parts of government-business interaction in the United States, such as nuclear-weapons design and medical research. And it has analogues in many parts of Asia.

 

Some scholars contend that the heavy hand of government is the living legacy of Confucius. Anglo-American ideology warns against the abuse of power, and therefore tries to restrict Kings, Prime Ministers, and Presidents. The traditional Confucian "mandate of heaven" approach assumes that there will be an Emperor, asking only whether he exercises power well or poorly. Other scholars argue that such theories are merely cultural window-dressing, used by ruling groups to rationalize their hold on power.

 

Either way, the history of powerful governments in East Asia has made most governments both more competent and more legitimate when they work with businesses. They are more competent because the great prestige of the civil service continues to attract the best-educated people in the country. For a variety of historical and social-status reasons, jobs in the government bureaucracy are still among the most desirable ones in Korea, Japan, Taiwan, and other Confucian-influenced East Asian societies. Ambitious young graduates compete for positions in the Japanese Ministry of Finance or with the Korean Economic Planning Board the way ambitious young Americans compete for jobs at what we drolly call "investment" banks. (In 1990 Wasserstein Perella & Company, the mergers-and-acquisition house that was spun off from First Boston, received more than 30,000 applications for eight positions for college graduates.)

 

Today's Asian bureaucrats always complain that the thrill is gone, that they're not paid enough, that the long hours are driving out the real talent, and so on. For instance, early in 1992 the Yomiuri Shimbun, Japan's largest paper, said that the bureaucrats were groaning because they were about to be switched to a mandatory work week of five (rather than six) days, as part of Japan's efforts not to work so hard. Their grievance was that it would just mean more overtime during the regular week. Still, by international standards the Asian governments attract very skillful people into their ministries, and the ministers have both personal and institutional legitimacy.

 

A Fundamental Mistrust of the Market

 

THE dynamic view of economics is connected to the main spirit of American culture. People's lives should change! The future should be full of surprise!

 

This is not the spirit of most Asian societies, least of all Japan. The more familiar you become with Japanese customs, the more you are impressed with the virtue of doing the expected thing. (Letters to friends in Japanese, for instance, are always supposed to begin with comments about the weather.) The ideal Japanese life is one from which uncertainty has been removed as early as possible -- by getting into the right school, by joining the right corporation. In 1989 pollsters asked citizens in seven countries to react to the statement "It is boring to live like other people." In America 69 percent of respondents agreed with the statement. In Japan only 25 percent did.

 

In a much broader sense, the Asian systems mistrust the uncertainty the market brings. The Asian and Anglo-American models both trust the market to decide which products will succeed or fail, which companies will beat which others. The Anglo-American model trusts political and economic markets with larger decisions as well: what is a good society, what is the right course for economic growth. The Asian model shrinks in horror from this possibility -- as American parents would shrink from the idea that "the market," in the form of music videos, TV shows, and shopping malls, should teach their children what is right and wrong.

 

"The peoples of China, North Korea, South Korea, Japan, and other Confucian cultures deeply believe that the state ought to provide not only material wherewithal for its peoples but moral guidance," the Korean scholar Jung-en Woo wrote in 1991. "By and large, Westerners have no way to understand this point except to assert that the Asian countries suffer from a series of absences: no individual rights, no civil society, no Enlightenment, and thus a weak or absent liberalism." The individual may sometimes feel these lacks, but what is more important is that the system roll on.

 

According to most Western political theory -- displayed in America at its extreme -- the state has no legitimate power to say what makes a good life or a healthy economy. Everyone makes such choices for every day; the choice for the society emerges naturally from these decisions. If everyone wants to avoid taxes, taxes stay low. If people want to buy computers -- or guns, or X-rated videos -- that industry flourishes. The genius of this system is that it can use people's hungers and jealousies as a tool. It perfectly melds political and economic theories: political liberalism and economic laissez-faire, each of which says to leave the individual alone.

 

The flaw is that the system suffers from "market failures," as economists and political scientists call them. Most people would be better off if the society invested more in schools or roads, but no one wants to vote for higher taxes. Everyone feels worse off when there are very wide social divisions, but no individual can make choices that narrow them.

 

In reality, the largest questions of right and wrong have been settled outside the market system -- through religion, or family prejudice, or patriotism, or ethnic loyalty. But it is hard for the American-style system to argue that anything profitable is wrong if a willing seller and a willing buyer can agree on a price. No government in Asia believes such things. Many individuals do, people being the same everywhere. But governments, with the possible exception of Hong Kong's, think that they, not individuals, should make the big decisions of right and wrong.

 

Time and again the visitor to Japan hears the phrases "confusion in the market" and "excessive competition." These are shorthand for the dangers of letting market forces get out of control. Each time these phrases come up, they raise intriguing translation problems. You can almost hear the interpreters saying the phrase as if it had quotation marks around it in English -- "confusion in the market." There are no comparable terms in English, because the very concepts do not exist. What the Japanese and Koreans call "excessive" competition is what Western economics texts call "perfect" competition.

 

A deeper idea is the fundamental distinction between the market as a means and the market as an end in itself. Every healthy society knows that market incentives are necessary -- real price competition, failure for products that don't make the grade, reward for innovation and enterprise. But only in the Western model is nothing besides the market necessary.

 

IN the early stages of their economic development, especially after the Second World War, Asian governments found it easy to set targets and plans. Above all else they had to catch up to the Western lead. Even now Asian systems reveal their faith that the goals should be chosen, rather than left to the market to decide. For example:

 

The Korean government has for decades divided up the work of national development among Korea's major companies. One group of companies must run the shipyards; another must collaborate with the Americans on semiconductor projects. In Taiwan the government requires companies to set aside a certain share of their sales revenue for research-and-development expenses. "Such measures would probably strike those South Koreans [and Taiwanese] who have absorbed the political ideals of the Anglo-Saxon model as flagrant violations of liberty," the economist Alice Amsden wrote in 1991.

Yet this is a very Anglo-Saxon view of democracy, not a universal one. It could just as well be argued that to leave in private hands investment decisions that have the potential to make a major impact on the welfare of society is itself inherently undemocratic.

The Anglo-American system tries to permit as many deals to be made as possible. In general, anything that's profitable should be legal, unless there's a compelling argument against it. The only loyalties that are not supposed to be for sale are within a family and to the country. More generally, friendship is supposed to operate outside the market system. But in Asia, and especially in Japan, business relationships are also supposed to operate outside the market, with loyalty to one's employer being more important than whether the relationship is immediately profitable or not. A Japanese scholar named Michio Morishima pointed out, in Why Has Japan "Succeeded"?, that

the "loyalty" market is opened only once in a lifetime to each individual, when he graduates from school or college. It is in this market that those who are able to provide loyalty meet those who are looking for it, their "lords."

During the Japanese stock market's long slide from 1989 to 1992, Japanese analysts contended that computer-program trading, introduced into the Tokyo stock market by American firms, was driving the market to daily lows. This strengthened the general feeling that the way to save the market was to restrict its flexibility -- to make it more regulated again rather than to perfect its market forces. A Japanese report at the time said, "Deregulation of brokers' commissions in the US caused securities industry profits to fall and forced many firms into high-risk areas, such as aggressive mergers and acquisitions, a report by the Securities Industry Council charged." That is, letting too many decisions be made by the market created instability for all.