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Japan’s system, capital allocation, respect, mimetic... Japan’s system, capital allocation, respect, mimetic eagerness and...

Japan’s system, capital allocation, respect, mimetic eagerness and sustainability. Part 1: Japan’s macroeconomic architecture


I just finished reading Thorstein Veblen’s The Theory of the Leisure Class (first published in 1899) and will write up an article on it soon. For now, apart from Veblen’s analysis of the nature of work, I have one other criticism: his distinction between the super-rich, unproductive, decadent parasites on the one hand and the hard-working, rational and creative engineers and scientists who incarnate progress on the other hand seems to me dead-wrong. Characteristically, Veblen was not consistent in this. He is, of course, also the author of The Higher Learning in America, a book he wrote after moving to the University of Chicago, after seven years of unemployment and playing the farmer in Wisconsin. The subtitle of the work on higher learning, A Study in Total Depravity was axed by the publisher.

I am not a specialist on Japan or its political economy. Any analysis of Japan’s recent economic performance must be left to others. Recently, Flassbeck, Spiecker and Steinhardt wrote up a report on the European debt crisis and its consequences for global economy. This text also contains a short chapter on Japan – it can be found here (in German – an English translation will be available soon)). A great deal can be learned from looking at the Japanese system and its accomplishments. A short review of Japan’s macroeconomic architecture turns out to be extremely relevant for an evaluation of our economic institutions.

Part 2 deals with the theory of mimetic eagerness. It asks the question if it is in some way possible to transform this destructive mechanism into a strategy that serves socially desirable goals, such as climate change mitigation. It might perhaps be possible, although many questions remain on how to make such a strategy concrete and viable.

Japan and the Western’s academic class

Robert Locke writes that the academic class in the West has mis-represented almost everything we assume to know about Japan (see here and here). Japan has done everything wrong by neoliberal and globalist standards, yet today it is the second-richest nation in the world. For many years, laissez-faire ideologues propagated the delusion that Japan is caught in a death-spiral, that it is yet another example of a dysfunctional “mixed economy”. The fact remain that, today, Japan is much richer than, for example, the UK, still we are being fed the neoliberal fantasy that it is Japan which needs to be saved – from “government” of course (see here).

As Locke writes, the picture becomes outright ludicrous if one looks at some of Japan’s achievements: net exports in the 1990s – when it was in decline according to “theory” – were 240% of those in the 1980s, when everybody admitted that she was booming (see here). During the “stagnant” 1990s, standards of living continued to rise and today inequality in Japan is lower than in any other developed nation. IMF figures indicate that that its foreign assets nearly quadrupled between 1989 and 2000 (see here). It is of course true that growth in Japan has slowed down, just as in all other G20 countries. Japan has 5% unemployment, which is high to its standards, but low compared to Western countries (Sweden has 6.8% and in the US 4% is considered full employment or “near full imployment”). Aside from this, Japanese unemployment exists in the context of a family structure which is far more intact than in any Western nation. Is this a crisis then? As Locke says, it is a crisis invented to fit a defunct theory. He leaves no doubt: “Simply put, laissez-faire theory is just plain empirically wrong, a planned economy can work. Period” (see here).

The Japanese system

The Japanese model is a system and, more than that, it is one that is virtually impossible to define within the framework of neoliberal economics or western-style traditional social democratic theory. “One way to think of the Japanese system is as a capitalist economy with socialized capital markets,” Locke writes (see here). But state control of capital allocation is only one component of the Japanese political economy. As Locke explains, the system is designed in such a way that corporations largely own themselves (see here). Corporations are structured and managed in such way that the bulk of profits flow either to wages or to investment for added competitive strength of the company. Most corporate capital in Japan is owned by banks and these banks are principally owned not by shareholders, but by other companies in the same industrial group (called keiretsu). Majority control is in the hands of the keiretsu’s bank and other companies in the group (see here).

The Japanese government channels savings into a limited number of financial institutions under its control, simply by making sure there is nowhere else to put the money. This is the theory anyway, as nowadays Japan struggles enormous evasion. However, the fact remains that the Japanese cannot open a brokerage account at, for example, an American bank and invest in the American stock market. Instead, the enormous torrent of savings flows to a handful of major banks, which the government controls. In short, the government controls the banks and the banks control the economy. Indirectly, the government controls the economy by controlling how the banks allocate capital. As Locke says, the genius of this system is that it is indirect. The banks handle most of the detailed work, figuring out which companies should be loaned money and for which projects. The MOF sits back, audits performances and rewards or punishes as appropriate (see here).

What counts as performance is not maximising the return on capital. The capital in question, although it is nominally privately owned, is ‘captive’ capital in that it has nowhere else to go. This means that capital, rather than chasing the highest return, can be made to obey political choices (see here). Investors certainly get some return, but they do not get the highest possible return. The MOF wants capital to be paid a low return so that Japanese companies will enjoy the competitive advantage of access to cheaper capital than their European, Asian and American counterparts. In capital-intensive industries this is a huge advantage (see here).

This is a far cry of the Western capitalist system and it proves several things. As Veblen said a long time ago, the leisure class is a class of parasites and barbarians. “The technicians are indispensable to productive industry, the Vested Interests are not,” he wrote (see here). As usual, not being in a mood to make prisoners, Veblen defined vested interests as “marketable rights to get something for nothing” (see here).  He continues: “The business man’s place in the economy (…) is to “make money”, not to produce goods,” a statement considered axiomatic today’s Western capitalist ideological environment (see here). Veblen explains that the fortunes that some have accumulated are not justified rewards for their visionary or exemplary entrepreneurship, but a penalty that they are able to extort from a hapless population via the wage and the price system. In early 20th Century America, which worshipped success and celebrated efficiency as the highest value, Veblen argued that its economic elite, the leisure class, was utterly inefficient, that it was in fact outright useless, decadent and dysfunctional, that their greed for high returns bled their own industries by imposing on it high costs of capital, thereby undermining these industries in the long turn. In pre 1929 America, capital had won and labour had lost, but the price of this victory was utter dysfunction. Veblen died, only a couple of months before the crash of 1929 after which American capitalism had to be saved from the profiteers in order to survive (see here) (I will come to this critique soon).

In Japan, however, because of a series of complex social reasons, labour did not lose out to capital because the autocratic state understood the necessity of social cooperation and recognised its manifold advantages. As they saw it, the return to society of having strong industries lies in high wages, secure employment and a strong balance of payments. These factors are considered more important than returns on capital for investors, although these must be respected to some extent (see here). In fact, much of the system operates similarly to corporate structures in the West. But it sets different goals and it works with an altered set of incentives.

Today, an absurdly high proportion of national income is wasted rewarding the tiny elite that performs the capital-allocation formation. Why not replace Wall Street with elite bureaucrats who perform the same function for, say, $ 90.000 a year, rather than people who earn ten or even hundred times that, asks Locke (see here)? It is an extremely relevant question. After all, technical skills of economic analysis can be taught. Capital allocation is so expensive because of its structural monopoly on extremely valuable information, which produces excessive return. This function is priced irrationally, because the intrinsic bottlenecks of information make it impossible for new entrants to drive down returns. Aside from that, there is another key insight that the Japanese political economists have understood better than their colleagues in the West. That insight is that “Economic rewards are not the only effective incentives for economic action” (see here).

Economic rewards are not the only effective incentives for economic action

Whoever proved that financial rewards are the only effective incentives for economic action? This is not some hippie, pseudo-socialist, question. It amounts to a critique of much of political economy. The Japanese are well aware that a successful economy requires motivating effects, which are pay differentials and opportunities to accumulate wealth. But these financial rewards are not the end of the story and economic rewards operate in a social context that can be as effective as cash. Locke goes even further. “In fact,” Locke writes, “because of the diminishing marginal utility of money, it is irrational for an economic system to rely solely on purely economic incentives” (see here).

One reason for that is that it simply does not work: if all you pay people in is money, it gets awfully expensive to maintain the motivation of those who go up the income scale. How much shall we pay a CEO? How much money shall we dangle in front of a billionaire to get him to allocate another five hours of non-golf needed to run the part of the economy he owns? The Japanese understood that social context can be just as effective as cash, or even more. This explains why Japan has one of the lowest levels of economic inequality of any major industrial nation, while at the same time it is one of the most hierarchical cultures (see here). According to Locke, the incomes of the top fifth of the Japanese population are only 2.9 times that of the bottom fifth – in the USA this was 9.1 before the financial crisis (see here). Since a full 98% of all income growth has gone to the top one percent since the financial crisis, this figure is undoubtedly higher today (see here). The income differential between a Japanese CEO and a blue-collar worker is much less than in the USA, but the social states difference is much greater. And THIS is what the Japanese understood: what people are pursuing is not so much money as the respect of people around them. The Japanese economy is therefore an economy of respect in addition to an economy of money. This is an incredibly constructive insight: since a large part of what money-seeking individuals really want is just to spend that money on purchasing social respect through status display, it is far more efficient to allocate respect directly (see here).

Mimetic eagerness

It is one of Veblen’s great achievements that he has laid bare the utter depravity of conspicuous consumption. Veblen was not the first to write about it. In the meantime, theory has advanced. One of the more important advances was made by Girard and his theory of mimetic eagerness. Nowadays, mimetic eagerness finds a place in heterodox economics. The New Economics Foundation funds research on it (see also here and here). The concept found fertile ground in many disciplines, from economics, sociology and political theory to social epidemiology and inequality studies. For example, it prominently figures in the important book by Wilkinson and Pickett, The Spirit Level. Why More Equal Societies Almost Always Do Better (and see also here for a famous example in social epidemiology – Marmot’s Whitehall study)

The ‘theory’ itself is not difficult to explain. Let me use one of Girard’s examples, Goethe’s Die leiden des jungen Werthers. The novel starts when Werther arrives in town, meets the beautiful Charlotte, and falls head over heels in love. There is only one problem, Lotte is engaged to Albert, the count. But Werther cannot stand that Albert is “in possession of so much perfection”. What follows is a bitter struggle between Werther and Albert, but one would be mistaken to assume that it is about Lotte’s ‘hand’. It becomes very clear that both men are engaged in a fight in which the original “object” – Lotte – gradually moves to the background. Lotte is so interesting, precisely because neither of the two men can accept that the other will “have” her. It all ends very badly – Werther commits suicide and Goethe ends with the suggestion that Lotte may die of a broken heart. Of course, Goethe was far from the first to document such relationships. Girard writes that it can already be found in Augustine. Mimetic eagerness is not a characteristic of capitalist development, although it obviously fuels conspicuous consumption.

What is Lotte thinking when the two protagonists court her as the object of their non-desire, obsessively analysing every move the other makes, immediately planning a better one? Lotte is not outside the unholy triad of mimesis. Clearly, the ‘winner’ only succeeds after a long and exhausting competition. While his ultimate victory does not prove love, it proves the ability to endure, deceive, lie, pretend, even to abstain from morality at the right moment – Albert borrows two pistols to Werther, he subsequently uses one to shoot himself). These are all low and even despicable human qualities that are in rather great demand. Does Lotte consider the possibility that this mimetic episode will ultimately be to her advantage? In general terms, is it possible for mimetic eagerness to create beneficial social outcomes?

The insight that it is possible to tame mimetic eagerness by a culture of respect has – as far as I know – never been considered. The reason may be that it flies in the fact of one of our most cherished ‘values’: equality. For respect to work, one needs equality and hierarchy and this sounds incomprehensible to Western ears because we regard stratification, and hence hierarchy, as antithetical to equality. Shouldn’t we all be equal? Even our constitutions say we are.

Hierarchy, as de Tocqueville analysed, is a weird phenomenon: people will obey a small minority for centuries as long as no cracks occur in their position – the perception will be that the nobility are all powerful or that they have no power whatsoever (the same goes for armies in the colonies, which were militarily always incredibly outnumbered everywhere). As de Tocqueville wrote, poverty can be accepted and made to feel as it is an inalienable fact of life. Humiliation, on the other hand, always creates resentment, anger and hatred and can lead to ruthless violence. The French revolution started as a bourgeois revolution, but it degenerated into a depraved feast of cruelty led by proto-totalitarians such as Robespierre. In other words, the fall of traditional hierarchy, explains one of the defining events in the history of the West.

And here we return to where we begun: if society is to maintain status differentials without suffering withdrawal of social cooperation due to the resulting resentment of low-status individuals (for whatever reason), society must contain these status differentials within strong overarching sentiments of social unity. This is, of course, what the Japanese managed to do. This model cannot be emulated, as it is a result of a very long historical process that is very much different from our own. As Locke writes, “(Japan) is a socially conservative, hierarchical, technocratic, orderly, pagan, sexist, nationalist, racially pure, anti-communist (…) and anti-Semitic society” (see here). He goes as far to call it a (soft) “fascism without the fascism.” Going down this road, it is at least equally reasonable to call Western societies “democracies without democracy.”

Relevance for economics 

It would be very wrong to ignore the proper economic relevance of all of this. As Locke writes, the bureaucrats at the MOF are no more than reasonably paid (compare with Wall Street), but their real reward is in the form of status: they are recognised everywhere as outranking people hundreds of times richer than they are (see here).

One of the key advantages of this system is that it enables the imposition of exceptionally long time horizons on economic decision-making. There simply are no impatient shareholders. Building up the Japanese industry long term is the goal.

And as Locke also writes, the core Japanese belief is that the benefit to society at large – increasing returns – of having these industries are so large that the free market on its own will mis-price their value, not produce enough of them and, indeed, foster their destruction. This, again, is very Veblen-like: capitalism is too serious to be left in the hands of nitwits whose fortunes do not prove anything else than that they are first rate kleptomaniacs (see also here). What the Japanese do is inherently rational: government directs capital to where it is considered needed, regardless of whether this produces the best short-term return to investors.

The capital allocation of the MOF fit into a larger system of cartels. A cartel is a device of industrial policy that has been repudiated by neoclassical economics because it leads to monopolist positions or highly oligarchic systems that distort “free” markets. But what is wrong with monopoly industries if the government forces them into paying their workers well and building up its productive capacity so that it can do the same in the future (see here)? As for “free markets”, this ideology for textbooks, not the way to run a country.

In conclusion, what does all of this mean? Since the Japanese system is a system, one cannot copy a piece of it and expect it to work outside its original, overall, context. Some pieces of this system, however, may be imitable. As Locke writes, the lynchpin of the system, the politicized capital allocation probably cannot function in a Western-style democracy, as it would result in plants being built in the districts of powerful politicians. Investments would be made whose payoff does not exceed an election cycle and kleptocratic oligarchies make such politicised capital allocation impossible.

You can read in Part 2 how mimetic eagerness can be used to create social benefits.