The Competitiveness of Nations
in a Global Knowledge-Based Economy
October 200
3Peter Temin
Is it Kosher to Talk about Culture?
The Journal of Economic History
57 (2), June 1997
267-287.
Abstract
This
address considers the role of culture in economic history. It argues that Anglo-Saxon culture was an
important factor determining where and when industrialization began and spread.
The contrast between Anglo-Saxon
individualism and Japan’s more collective culture also is important in
understanding the differences between Japanese and American industrial
practices today. I predict that Japan’s
collective culture may give it an economic edge in the coming years despite its
current difficulties. And I advocate
greater attention to culture by both economists and historians in the practice
of economic history.
AT&T
announced at the beginning of 1996 that it was going to lay off 40,000 workers.
This prompted Robert Reich to write an
Op-Ed column in The New York Times taking AT&T and other companies
to task for not considering their obligations to their employees. He asked: how can we make corporations
socially responsible? [1] This
may not sound much like economic history, but I will use it as a springboard to
talk about the role of culture in economic history. I will make a point about the past, that is,
about economic history; a prediction about the future; and a recommendation
about methodology.
The
historical point is buried in Reich’s column. It seems so obvious to us that a corporation
is run for its stockholders that we hardly stop to think about it. We teach the division between labor and
capital in elementary economics courses, and we would be hard-pressed to find
an economic-theory or industrial-organization text that questions the supremacy
of capital in planning for firms. A
recent article, for example, asks why capital buys labor and not vice versa,
answering Paul Samuelson’s famous question. But like Samuelson, the author assumes that
one or the other must run the firm. [2]
Peter Temin is
Professor, Department of Economics, Massachusetts Institute of Technology, Cambridge, MA, 02139.
I thank John Dower, Barbara Finkeistein, Jeff Frieden, Avner Greif, Les Hannah, and
Richard Samuels for stimulating discussions and insightful criticism. All errors and omissions that remain are mine alone.
1.
The New York Times, January 3, 1996, p. Al; January 4, 1996, p. A21.
2. Dow, “Why Capital Hires Labor.”
267
It may
therefore be a bit of a shock to realize that this conception of the
corporation is a cultural construct. It
is one way of conceptualizing business organization, but hardly the only way. Large Japanese firms, to take an example not
at all randomly, are organized quite differently. Masahiko Aoki has described what he calls the
J-firm as a coalition of stockholders and labor. According to Aoki, “the body of stockholders
and the body of quasi-permanent employees are essentially in a symmetric
position within the J-firm.” [3]
My historical
point is that American corporations and other, complementary economic
institutions as we know them are creatures of our culture, which I will call
Anglo-Saxon culture. This culture has
been very good for the Anglo Saxons of this world and their compatriots. The industrial leaders of the last two
centuries have been Anglo-Saxon countries. First Britain and then the United States led
the way to industrialization and mass production.
I will argue
that the particular form of social capital I call Anglo-Saxon culture was
uniquely suited to the progress of industrialization over the past two
centuries. I then will contrast
Anglo-Saxon culture with another form of social capital to advance a hypothesis
about the future. Finally, I will make a
methodological point about a role for culture in economic history.
Culture is an
elusive concept. I use culture to denote
the distinctive attitudes and actions that differentiate groups of people. Culture in this sense is the result of and
expressed through religion, language, institutions, and history. The attributes that make up culture change
slowly, but they can and do change over time.
Max Weber was
the most celebrated advocate of the role of culture in economic affairs. His paean to Protestantism still speaks to us
after almost a century. But there is one
problem that comes up often in discussion. Weber inferred the spirit of Protestantism largely
from the writings of Calvin and other rebels of the sixteenth century. Weber quoted Luther, Calvin, Cromwell, and
Milton, all good sixteenth-century writers. He also examined their echoes in later figures
like Wesley, but he focused his discussion on the initial flowering of
Protestant ideology. [4]
Weber used
this construct to talk about the rise of capitalism, by which he clearly meant
industrial capitalism as described contemporaneously by Thorstein
Veblen and others. [5] Yet the rise of industry
came only in the late eighteenth and nineteenth centuries, about three
centuries after the Protestant movement he described. And it came initially in Britain rather than
on the continent of Luther and Calvin. How
can this delay of three centuries and shift in location be explained?
3. Aoki, Information, p. 154.
4. Weber, Protestant Ethic.
5. Veblen, Theory.
268
The delay may
be even longer. J. Bradford De Long used
a Protestantism variable in his regressions explaining growth patterns after
1870 in the 22 richest countries in 1870. [6] The presence of
Protestantism showed up loud and clear as correlated with economic growth after
1870. Other explanations for the British
Industrial Revolution also have a timing problem. Douglass North and Barry Weingast
argued that the Glorious Revolution of 1688 induced changes in English property
rights that fostered industrialization. But
Gregory Clark showed that stable property rights had existed for at least 200
years before the Industrial Revolution - a considerable delay. [7]
The
hypothesis suggested by the delay is that the culture of Protestantism only
provided its unique benefits in the presence of a particular industrial
technology and its needs for organization. In the age of hand-crafted products,
Protestants and Catholics were economic equals. But when it became necessary to invest in
factories and machinery to exploit a new technology, then the culture of
Protestantism was a decided advantage. The location of the first Industrial
Revolution suggests further that the kinds of Protestantism
found in the British Isles was especially useful in promoting the Industrial
Revolution.
The most
important aspect of this culture is its celebration of the individual. Anglo-Saxon culture includes the motives for
industry and saving noted by Weber as well as the “Faustian ethic” toward
nature described by David Landes. [8] But individualism is the
key to the discussion here. Adam Smith
set the tone for later discussion by opening The Wealth of Nations with
a discussion of the division of labor. The
isolation of tasks and the separation of individuals performing them were the
keys to productivity in the pin factory. This idea has proved so
powerful as to virtually exclude favorable discussion of group activities in
Anglo-Saxon economics.
The division
of labor required organization. Although
Smith talked as if the pin factory organized itself, someone had designed the
division of labor, someone - possibly the same person
- guided its operations, supplied raw materials, and disposed of the product. [9] The flip side of the atomistic
division of labor therefore is the hierarchical control of an organization. Britain proved to be the soil in which
factories grew most rapidly in the late eighteenth and early nineteenth centuries.
Theory follows practice, and individualism has been
celebrated by a succession of economists. It can be seen clearly in the writings of that
paragon of early industrial Britain, John Stuart Mill. Mill wrote on economics, government, and
philosophy. Through it all went his
celebration of the individual. True, as
H. L. A. Hart commented, Mill’s individual has the calm dispo-
6. De Long, “Productivity Growth.”
7. North and Weingast,
“Constitutions”; and Clark, “Political Foundations.”
8. Landes, Prometheus.
9. Temin, “Entrepreneurs.”
269
sition and the settled tastes of a middle-aged man. But this individual is at the center of Mill’s
analysis of varied topics. Mills’ great
polemic, On Liberty, celebrates individual liberties. There is almost no discussion of groups except
to argue for the rights of individuals to form groups to advance joint
interests. Mill saw individuals and
society as antagonists, competing for the same jurisdiction over actions. Positive interactions between them were not
important.
But it is in
modern economics that individualism is most familiar to us. The identification of the solitary individual
as the decision maker of the economy has become so ingrained in our views that
we find it hard to recognize it as a cultural artifact. Let me cite two disparate examples from recent
Nobel Laureates in economics that illustrate the point. Gary Becker opened his Treatise on the
Family with a defense of individualism as a point of view. In his words: “The combined assumptions of
maximizing behavior, market equilibrium, and stable preferences, used
relentlessly and unflinchingly, form the heart of the economic approach as I
see it.” [10] Economics
according to Becker does not explain stable preferences; it only assumes that
each individual maximizes with reference to them. And the important interactions of individuals
are through the market. Other forms of
human interconnection in shaping preferences, communicating, and being social
are ignored.
Shifting our
attention to the previous Laureate, I want to recall a famous calculation of 20
years ago. In Time on the Cross, Robert
Fogel and Stanley Engerman
tried to assess the role of physical punishment in the governance of American
Negro slaves. They argued that slaves
were whipped on average only 0.7 times a week. [11] (I and others have
disputed the accuracy of this observation, but that is not the issue here.) [12] This way of presenting
the data was based on the assumption that control of slaves was done on an
individual basis. The calculation
assumes that each slave calculated the frequency with which he or she would be
whipped. There is no family or group
solidarity in this number. I choose this
example not to be contentious but instead to show how we mistake the particular
attributes of our own Anglo-Saxon culture for universal attributes. For this attitude was not projected onto
Anglo-Saxon residents of the United States but rather upon African Americans
who might well at that time have avoided assimilating into the dominant
Anglo-Saxon culture.
Individualistic
culture - its celebration of individual accomplishment and mastery over nature
- was particularly well suited to the economic activities of the British
Industrial Revolution. The new firms
generally were small in
10. Becker, Economic Approach, p. 5.
11. Fogel and Engerman, Time, vol. I, p. 145.
12. David, et al., Reckoning.
270 Index
scale,
and individual endeavors were the backbone of the new industry. As Joel Mokyr and
others have emphasized, the British advantage at the beginning of the
nineteenth century was not in the discovery of new knowledge but in its application.
[13] Applied
science or even engineering, not pure science, was the British strength. Samuel Smiles wrote Lives of the Engineers,
not lives of the inventors. [14]
Anglo-Saxon
culture may have given Britain an advantage in the discovery of new
technologies, but that is not necessary to my argument. It certainly gave Britain a head start in
their application. The nature of the
British Industrial Revolution supports the importance of Anglo-Saxon culture,
as opposed to the impact of one or two technical innovations. For this change was not simply the result of a
few technical changes in the production of textiles and iron; it was a
widespread change in the British economy. I have shown recently using
international-trade data, that other, smaller
industries kept pace with the industrial leaders during the first half of the
nineteenth century. As Thomas Ashton
reported, the British Industrial Revolution was a multifaceted transformation
that was a function of the entire British economy. [15]
A London hat
factory, for example, employed 1,500 people in extraordinary division of labor.
The process of hat-making was subdivided
into many different activities done in separate rooms and buildings. Some activities to prepare the wool and fur
were reminiscent of the textile industry, employing steam engines and machines
of various sorts. Other activities were
made more efficient by the specialization of labor and mechanical devices, like
a frame that dyed over 100 hats at a time. [16]
The key to efficient hat production was the
organization of activity rather than a new hat-making technology.
I do not want
to assert that the Industrial Revolution was led by hat-making rather than
cloth-making. The point rather is that
the innovations of both machinery and organization noted so widely in the
textile industries were applied widely in British manufacturing. Without the new technology of the cotton
industry, organizational innovation often was the key to progress in other
industries. The sense of individual
freedom and empowerment pervasive in Britain was part of the culture that
promoted innovation and increased efficiency even in unlikely places like the
manufacture of beaver hats.
The role of
culture is apparent also in the spread of the Industrial Revolution outside
Britain. Let me contrast two regions,
both replete with water power to be exploited. Neither had the climate to grow cotton, but
both were near the sea and even to cotton-growing regions. Neither had much local
13. Mokyr, “Editor’s
Introduction.”
14. Smiles, Lives.
15. Temin, “Two Views”; and
Ashton, Industrial Revolution.
16. Dodd, Days.
271
coal,
but both had an active urban culture connected - perhaps tenuously at times - to
that of northern Europe. Yet
industrialization spread from Britain to New England virtually instantaneously
while taking a century to reach northern Italy.
In Italy
industrialization was still far in the future in the first half of the
nineteenth century. Industrialization
had only begun to reach northern Italy by 1900. Only after that time did the Italian regions
with abundant social capital develop economically. Economic historians have debated at length the
solidity of Italian industrial growth before World War I, but its existence is
not in doubt. Culture has been cited to
explain the variation between the economic fortunes of northern and southern
Italy. But even the more favorable
culture of northern Italy was not as conducive to industrialization as that of
the northern United States. [17]
National data
show the United States also was an agricultural country in the early nineteenth
century. But the United States is
comparable to Europe as a whole-which surely was agricultural in the early
nineteenth century. It is more
appropriate to compare the industrial northeast of the United States with
Britain. There Oliver Evans introduced
the high-pressure steam engine at the same time that Trevithick
did so in Britain. Nathan Appleton
introduced the power loom shortly after it had been developed in Britain. And, as we all know, industry prospered in New
England.
In fact,
Anglo-Saxon individualism was even more apparent in the United States than in
Britain. Even though current
multiculturalists emphasize the diversity of origins of the immigrants who
settled the new lands, Bernard Bailyn was right to
stress the essentially British nature of the culture into which they fit. It is no accident that even at the end of the
nineteenth century, almost all business leaders were
white Anglo-Saxon Protestants, that is, WASPs. [18]
The sheer
size of the United States encouraged individualism. Free land has been celebrated as a determinant
of American political and economic progress. [19] Let me add - among other
influences - culture: the source of Yankee ingenuity. The size of the country, the mobility of the
population, and the extent of immigration meant that nineteenth-century
Americans had contacts with many varied people. And in many cases, the opportunities for
repeated contacts were less than in more concentrated and settled places like
Britain. The chance to
set up the conditions of the game-theoretic Folk Theorem by repeated
interactions were markedly less in the United States than in Britain. In ordinary language, the opportunity to build
up trust in
17. Toniolo, Economic
History; Putnam, Making Democracy Work, and Zamagni,
Economic History.
18. Bailyn, Peopling; and
Miller, “American Historians.”
19. Hartz, Economic
Policy; Habakkuk, American and British Technology; Diamond,
“Values”; and Temin, “Free Land.”
272 Index
one’s
neighbor through repeated giving and taking was smaller in the larger, more
mobile United States.
The
individual became the central focus of culture. The frontiersmen, Daniel Boone, Davey Crockett, and Sam Houston, were the heroes of the
American civilization. Even men who were
enmeshed in local networks often were lionized as rugged individualists. David Fischer recently has argued that the
essence of Paul Revere’s contribution to the American
Revolution was exactly the opposite of his famous isolated midnight ride; it
was his multitudinous memberships in all sorts of revolutionary groups that
made him a critical coordinator of group actions. [20]
Yet he has been remembered for two centuries as a
lone horseman.
The United
States was blessed with more than rugged individuals. Abundant, fertile land produced the food that
made the new Americans so tall. And the
coal, iron, and other minerals below the land provided cheap inputs for
American industry. Free land, however,
was the product of both geography and culture. The influx of Europeans created the
opportunity for free land, but we know from Argentina that the same physical
endowment could have been organized in a way that did not make land free. [21]
Resources are
only valuable if exploited. Brazil after
all has abundant resources but a very different economic history. The United States grew rich because of the
conjunction of three influences: abundant resources, Anglo-Saxon individualism,
and mass production. It was the fit
between culture, technology and organization that allowed the resources to be
exploited. This fit was expressed in the
American policies of free land - contrasting with South America - and
federalism - contrasting with the uniformity imposed on other large countries. These policies encouraged individual
initiative first in agriculture and then in industry. [22]
American
resources were exploited through the agency of what Alfred Chandler has termed
the managerial corporation. These large
firms were able to carry out the complex economic projects needed to develop
the North American continent. But
although the essence of these firms may have been the middle managers that
performed the myriad necessary functions, nineteenth-century corporations were
the means to implement the visions of strong individuals. Chandler, no less than Veblen,
personifies the corporation and tells its story as the expression of individual
will.
Just as
individualism was stronger in the United States than in Britain, so the
managerial corporation was more of an American phenomenon. [23] It surely is too great a
stretch to explain the Robber Barons as Anglo-Saxon culture run riot, but there
is an element of truth in the linkage between indi-
20. Fischer, Paul Revere’s
Ride.
21. Potter, People; Wright,
“Origins”; and Solberg, “Land Tenure.”
22. Temin, “Free Land.”
23. Chandler, Scale.
273
vidualist culture and The Chapters of Erie. The ninneteenth-century
American economy was exceptional, and at least part of its undoubted and
unusual success was due to the influence of Anglo-Saxon individualism.
This marriage
of culture and opportunity carried the United States successfully through the
twentieth century as well. Helped by
being away from the battlefields of the two world wars, the organization of the
American economy was the model for the great postwar expansion that has made
convergence such a popular research topic. The cult of the individual and his - and now
her - expression in the form of corporate leadership were seen as necessary
ingredients to mass production, which were in turn the keys to economic growth.
However, part
of the postwar convergence resulted from a different organization of the economy.
The extraordinary postwar growth of
Japan transformed a marginal producer of textiles into one of the giant
economies of the world. As with the
United States a century earlier, this economic “miracle” was the result of the
synergy between culture, technology and organization.
But Japanese
growth was not an application of American technology and organization of
production. As many people have
commented, the Japanese introduced a different method of production. Having advanced a sweeping hypothesis about history, let me now turn to an equally broad view of the
future. Anglo-Saxon individualism has
been the source of industrial leadership for two centuries. I suspect it may well not assure leadership in
a third. A comparison of US and Japanese
production techniques exposes the central issues.
I will focus
on the organization of production more than on the physical capital used,
starting with a very specific Japanese industrial practice. The kanban
system, also known as the just-in-time delivery system, is a prominent
feature of modern Japanese industrial production. It has been recognized widely as a
productivity-enhancing element in the Japanese context and even tried as a
means to increase productivity in the United States. [24]
The origin of
the kanban system, however, is not
Japanese; it is American. Japanese
observers, seeking to rebuild their economy after World War II, noted how
American supermarkets cut down on inventory costs by scheduling deliveries as
close as possible to the time of sale. The benefits to supermarkets of freshness for
produce and in economizing on shelf space for groceries are clear. Also clear is that in the American context,
this mode of operation was specific to supermarkets. [25]
The Japanese
innovation was to generalize the American process to manufacturing. They saw that this procedure could be used
widely and that it would cut down on inventory costs in industry as well as in
supermarkets.
24. Womack, Jones and Roos, Machine.
25. Aoki, Information, p. 24.
274
The generalization
of a specialized process and its application to industry echoes the British
development of French inventions in the eighteenth century,
a process enshrined in the eighteenth-century proverb that said for a thing to
be perfect, it must be invented in France and worked out in England. [26] It also recalls the
British application of steam engines and carding machines to nontextile production as noted above for hats.
The kanban system promoted quality control and
design changes by sharply decreasing the delay between the perception of a
problem or opportunity at the end stage of production and the time that inputs
could be improved or adapted to new requirements. [27] Whether this and other
added advantages were anticipated when the kanban
system was first tried is unknown - and rather doubtful.
These added
advantages of the kanban system come
about through synergies between it and other aspects of Japanese production. For example, it is taboo on an American
production line for any worker to halt the flow of goods. If there are problems with the run, they will
flow through the entire production process to be caught by the quality
inspection at the end. This is the
essence of F. W. Taylor’s scheme for quality control, setting the inspectors as
policemen to constrain the production workers.
Japanese
workers, by contrast, are encouraged to halt activity when a problem appears. They are encouraged to search for the source
of the difficulty and communicate back through the production process and chain
of suppliers. No matter how far back the
source of the problem, there is only a small volume of defective goods in the
pipeline. The need to abandon defective
goods in process consequently does not impose large costs on the supplying
subcontractor when correcting the problem.
To give this
added authority to the Japanese worker, Japanese firms have had to invest in
the training of the workers. Not
training in specific activities, but rather generalized training to allow
workers to appreciate the role of a particular part or process in production. Japanese workers (in large firms) consequently
are rotated among different activities to give them added perspective on their
own actions. Job specifications are far
looser in Japan than in the United States.
Japanese
management can make this investment in the workers for two reasons. First, the workers have enough formal
education to appreciate the patterns they see in taking different jobs. Second, the workers will stay on the job long
enough for the firm to recoup the benefits of their added human capital. This job attachment is the lifetime employment
system of the J-firm, to recall Aoki’s abstraction. As Aoki noted, this job attachment gives the
workers a stake in the firm and leads to their role in the firm’s governance.
26. Mokyr, “Editor’s
Introduction,” p. 33.
27. Aoki, Information.
275
The kanban system in Japan and AT&T’s layoffs
in the United States, therefore, are each part of a complex of behavior that
distinguishes production methods in the two countries. No single practice or aspect of the production
process is key by itself, but rather the collection of practices in each
country are complementary to each other, generating a stable set of behaviors. Phrased differently, adopting the kanban system in an ordinary American firm
and laying off massive amounts of employees from the typical Japanese firm
would not produce anywhere near the gains that might be expected in the other
country. [28]
Recall the
opening of Saturday Night Fever where John Travolta asks his boss at the
hardware store for a day off. The boss
refuses, so Travolta quits. If that is
the normal model of employment in America, there is not much loyalty of workers
to the firm. The expected job tenure
does not encourage it, and the workers do not acquire it. There is no inducement for Travolta’s
boss to train him.
The contrast
between shop-floor experiences in the Anglo-Saxon and Japanese factory were
chronicled vividly over 20 years ago by Ronald Dore. His most relevant observation for this
discussion is that “on the shop floor, British workers are more individual
workers; Japanese workers are more members of a team.” [29] Dore
recognized that this teamwork was both a cause and an effect of the production
process just described.
This team
aspect of Japanese business extends beyond the shop floor. As Aoki noted, Japanese workers shared in the
governance of their firm. Dore reported the affective corollary: Japanese workers
were more likely than British to express pride in their work and to accept
their firm’s legitimacy. British workers
by contrast were more likely to see their employment as a system of
exploitation and consequently to resist managerial authority. [30]
The preceding
observations have been drawn largely from times of Japanese prosperity. It is easy to honor an implicit contract for
life-time employment when demand is rising. The question is whether this kind of contract
will be honored when times are poor. The
past few years of macroeconomic difficulties in Japan provide some data to
answer this question, and the answer appears to be yes. Large Japanese firms remain committed to the
implicit contract with their workers even in the troubled 1990s. As expressed in American newspapers - and in
contrast with AT&T - the Jfirms do not lay off
workers even in bad times. [31]
Recently
also, the attempt to introduce Japanese-style Quality Circles to the United
States has been problematical. In an
attempt to make these activities palatable to American workers, managers have
thought it necessary to
28. Milgrom and Roberts,
“Complementarities.”
29. Dore, British
Factory, p. 261.
30. Ibid., p. 262.
31. Sugawara, “Japan Inc.”
276 Index
distort
history to present them as American, not Japanese innovations. Even with this distortion, the movement to
distribute decision making to the shop floor has stalled. [32] This specific experience
can be generalized. Japanese
multinationals, who are in the best position to export Japanese productive
practices, are only partially successful. They have lower productivity outside Japan
than inside. [33]
The
Anglo-Saxon mode of production places individuals in competition with each
other and engaged in pursuit of aims that often conflict with those of their
employers. The Japanese mode stresses
the cooperative nature of production both within the working group on the shop
floor and between that group and the management of the firm. Both systems clearly contain a mixture of
competition and cooperation. The
contrast is not black and white; it is in the proportions that define a
culture.
Mark Granovetter applied this insight to the problem of the
American managerial corporation. Coase contrasted hierarchical relations within firms with
market relations between them, giving rise to an extensive literature. This distinction clearly exists, but Granovetter argued that the firm boundary is not the sharp
distinction that appears in Coase’s work. Granovetter emphasized
that the personal relations within firms extend as well through their
boundaries. [34] This
is true for Japan as well.
Japanese
relations within firms are echoed by relations between firms. Many Japanese firms are combined into
groupings known as keiretsu. Firms in a
keiretsu are neither subsidiaries of a single firm nor arms-length competitors,
neither Adam Smith’s invisible hand nor Chandler’s visible one. They are bound together by means other than
those used in the Anglo-Saxon economy.
One way is
reciprocal ownership. Ownership of
public companies is far more concentrated in Japan than in the United States. The top ten shareholders of Japanese firms
hold twice the proportion as their American counterparts - almost 40 percent. And these major stockholders are more stable
in Japan as well. Fully four-fifths of
the top ten Japanese shareholders are stable-in the sense of continuing in that
group over successive periods - whereas only one-quarter of the American top
ten are stable. And although almost none
of the top ten share holdings in the United States are reciprocal, about one-fifth
of those in the top 60 Japanese are. [35]
Ownership is
just one aspect of the keiretsu relationship. Lending is done largely within the keiretsu. [36] And often purchases
are more frequent among keiretsu members than among other similarly situated
firms. For example,
32. Cole, Strategies.
33. Sako, “Training,” p. 113.
34. Granovetter, “Economic
Action”; Coase, “Nature” and Nature.
35. Gerlach, Alliance
Capitalism, chap. 3.
36. Hoshi, “Economic Role.”
277
keiretsu
members typically serve only the beer made by the brewery in their keiretsu. When my colleague Michael Piore
visited Japan as a Mitsui Professor he found that he could not get a beer. When he was asked to order, he ordered the
only Japanese beer whose name he could recall: Kim, which happens to be a
Mitsubishi beer. His hosts would not
dishonor the Mitsui Professorship by allowing him to be seen drinking
Mitsubishi beer. [37]
The implicit
contracts - to use Western terminology - between firms are parallel to the
implicit contracts between workers and owners within firms. Just as worker turn-over
precludes many such bargains in the Anglo-Saxon firm, so hostile take-overs and other changes in company ownership preclude
implicit contracts between firms in the United States. [38] Insider-based corporate
governance in Japan, therefore, is complementary to the other aspects of
Japanese corporate life chronicled above. It complements lifetime employment by allowing
management as well as labor to uphold the implicit contract for shared control.
[39]
The
compensation of managers also differs markedly between Japan and the United
States, with CEOs being paid far more highly here than there. Low managerial compensation is another aspect
of the Japanese implicit contract, whereby managers trade short-term gain for
long-run stability and income. American
economists have argued that large CEO salaries are justified as incentive
devices, but their arguments expose the underlying cultural assumptions. The regressions documenting the incentive
effects relate compensation in any year to the company’s fortune in that same
year. There are corrections for
heterogeneity and measurement error, but not for the influence of history. The bargain within which CEO compensation
operates is a short-run bargain. [40] The parallel and complementarity with employment relations at the bottom of
the firm are clear.
The
cooperative nature of interaction within and between firms in Japan extends
also to the relations between firms and their government. The Japanese development state often is
contrasted with the American (and European) regulatory state. There is no parallel of MITI in the United
States. The Japanese government in its
various guises is more interested in aiding business firms than in controlling
or curbing them. [41]
The J-firm
grew up only after World War II, and the modern Japanese government also is an
artifact of the postwar period. Many
characteristics of both Japanese firms and their government grew out of the
specific problems of Japanese reconstruction after the war. But while the problems of Japan in the 1950s
were real enough, the solution went along traditional Japanese
37. This is one example of a wide-spread practice. Gerlach, Alliance
Capitalism, introduction.
38. Shleifer and Summers, “Breach of Trust.”
39. Sheard, “Interlocking,”
p. 311.
40. Tevlin, “CEO Incentive Contracts.”
41. Johnson, MITI and Japan.
278 Index
lines. The keiretsu today are largely the linear
heirs of the zaibatsu of earlier years. The
relations between firms in the new groupings are similar to those in the old - as
noted already. MITI, far from being a
new construct, was an expansion of the wartime Ministry of Munitions, freed of
its competitors by American pressure on the military and the zaibatsu. The Economic Planning Agency of 1955 was a revised Economic
Stabilization Board from 1946, which grew in turn from the Cabinet Planning
Board of 1937. [42]
Western
economists and sociologists debate how much of the postwar Japanese economic
institutions were the results of the specific circumstances of Japan in the
late 1940s and 1950s and how much was due to Confucianism, samurai attitudes,
and the nature of the Japanese family. [43] Business historians do
the same. [44] Other
historians debate questions of Japanese culture more generally. There does not seem to be a stable viewpoint
in the English-language literature at the moment between the stereotype of unchanging
Japanese culture, by which Tokugawa culture often is meant, and the stereotype
of a fragmented society. [45]
These
polarities are beside the point here. Current
Japanese economic culture, as I am using the term, is the product both of
long-standing Japanese ways of acting and thinking and of specific decisions
made to solve specific historical problems. History and institutions both embody and
create culture. The J-firm was at the
same time a product of preexisting Japanese culture, a response to a particular
constellation of economic needs, and a component in the formation of current
Japanese economic culture.
The
corporation is a cultural construct because it exists in a culture, as do banks
and the government. And the history of
these institutions in turn affects the culture. To cite just one example apparently far
removed from the Japanese corporation, immigration
policies in Japan and the United States are far different. The large size of the United States has
affected our culture, as argued above, by making repeated contacts less
frequent and trust therefore more difficult. Our long-standing policy of being a nation of
immigrants works in the same direction.
The argument can be taken further. For the Japanese pattern of cooperation must
also be a pattern of exclusion. The
participants in the J-firm are distinguished from workers and firms outside it.
And the Japanese as a people distinguish
themselves from others. They restrict
immigration to preserve a relatively homogeneous society. Anglo-Saxon individualism does not need to
draw these boundaries because there is no network of interactions specific to a
stable group. American business
practices are complement-
42. Dower, “Useful War.”
43. Johnson, Japan; and Dore, Taking Japan Seriously.
44. Abe and Fitzgerald, “Japanese Economic Success.”
45. Dower, “Sizing Up.”
279
tary to American immigration and land policies as
Japanese business practices are to the comparable Japanese policies.
A graphic
illustration of the contrast between the United States and a country like Japan
came when Mike Doonesbury’s daughter said to Mike’s girlfriend in March, “Kim,
are you American? You don’t look
American.” She replied, “Well, actually,
everyone looks American, Alex, because Americans are from everywhere. Myself, I was born in Vietnam.” And since this is a Doonesbury cartoon, Alex
then said, “That’s in Michigan, isn’t it?” [46]
The point of
these casual stories is that culture is revealed in the ordinary business of
life as much or even more than in the decisions of large corporations. The experiences of Mike Piore
and Mike Doonesbury illustrate by their pettiness how difficult it will be to
change the dominant culture of the United States and Japan.
This leads me
to my prediction for the future. The
organization of production is changing rapidly away from the mass production on
which America is built toward customized products and shorter production runs
that fit more easily in the Japanese than in the American corporation. The progress of computers
and associated changes in technology have been noted widely for many
years; the downsizing of American companies is attributed in part to it. But downsizing will not transform American
companies into Japanese ones. Just-in-time
delivery, adopted by itself, also will not do the
trick. I predict that industrial
leadership will continue its path westward, being located in Japan and perhaps
other Asian countries in the next century.
There are
many problems with this as with any prediction, but I will deal with only a few
of them here. A code word for this
change in production patterns is that we are becoming an information economy:
the wave of the future is in “knowledge” industries rather than in the
production of goods. [47] But
we should not forget the impact of information technology on the supply of
goods. Information technology allows
goods to be tailored more precisely to individual wants, not only leading to
shorter production runs, but also promoting a greater sophistication of
manufacturing. This in turn both increases
the utility of traditional goods and works to substitute goods for services. Take-out food replaces restaurants. Home videos replace live performances. Tailored goods obviate the need for services
to personalize them.
In fact, it
is good to remember that although the share of employment in services has grown
by leaps and bounds in the twentieth century, the share of services in
constant-price GDP has not risen at all, as Victor Fuchs noted almost 30 years
ago. In constant prices, manufactures
are not being replaced by services. Fuchs opined that the income elasticity of
demand for services
46. Trudeau, “Doonesbuty.”
47. Negroponte, Being Digital.
280 Index
was
offset by the price elasticity as the relative price of services rose. [48]
In addition - when
talking about international leadership - manufactured goods are far more likely
to be traded internationally than services.
The diverse
American culture that inhibits implicit contracts within firms, it is argued,
makes for an explosion of energy in knowledge-based activities. The very aspects of culture that I have been
decrying represent in fact an advantage that the United States has over the
rest of the world. After all do they not
watch our television shows and use our software?
These
contrary voices may be right. But it may
also be that the production of software is not so different from the production
of cars. Microsoft is the flagship of
the knowledge armada; its practices show that American firms can still take on
the world. But Microsoft does not
demonstrate that new software can be created over the internet, that employee
relations have become a matter of individuals communicating only by e-mail. Microsoft is located in a single place, in a
suburb of Seattle. It has grown
phenomenally, but it has not grown geographically.
Why not? Because it is easier to
solve problems that arise in designing software by face-to-face interaction.
The problems are not the same as those
arising on the manufacturing production line. But the personal interactions needed to solve
them are. Microsoft’s geographic
concentration is a deliberate matter of policy. As Bill Gates put it, “our all being, with
very minor exceptions, here on one site, so that whatever interdependencies
exist you can go see that person face to face... [is]
a major advantage.” [49]
This example
suggests that companies operating in the new knowledge industries will have
problems similar to those in manufacturing companies and that they will solve
them - or not solve them - in similar ways as well. The qualities of the J-firm that reduce the
costs of eliminating defects and accommodating design change also reduce the
costs of finding bugs and adapting to new specifications. Microsoft, for example, has adapted the
Japanese strategy of unifying the interests of employees and stockholders. Instead of the Japanese implicit contract, it
has used stock-purchase plans for employees as a way to effect
a slightly different contract between workers and management. [50] It is too soon to know
which institution will be the most efficient.
Another
problem with this prediction is the doleful condition of the Japanese economy
at the moment, long mired in a continuing recession and banking crisis. Poor economic conditions and stock-market
performance in Japan contrast sharply with prosperity and a stock-market boom
in the
48. Fuchs, Service Economy, pp. 35-45.
49. Quoted in Cusumano and
Selby, Microsoft, p. 26.
50. Cusumano and Selby, Microsoft
Secrets.
281
United States. It is hard to find Americans worried about the
Japanese economic power-house today.
Current
Japanese problems, however, are on the demand side. As such, we expect them to be temporary,
albeit not over instantaneously. In
addition, my argument is about the supply side of the economy, about the
conditions of work and doing business. Current
trends in American economic policies appear to push our economy further in the
individualistic direction, shredding the safety net and loosening restraints on
individual actions both in employment and business decisions. These trends - which are consistent with the
long-standing world view I have described here-appear to be durable. They contrast sharply with policies and
implicit contracts in Japan.
It is
possible, of course, that demand and supply conditions are not so separate. As noted above, poor economic conditions in
Japan put strains on the implicit contracts in the economy. They may fray them or even lead to a wholesale
shift to a more individualistic, American pattern. [51] If so, then the recent
history I have described will be a misleading guide to the future. But if the Japanese culture is indeed durable,
then the collective enterprise described here may continue to promote
industrial progress. Only time will
tell.
In the
meantime, let us turn to my final point on methodology. If, as I have argued, culture is important
both to understand the past and predict the future, then we should include it
within the view of our studies. If we
do, then the skills of economists and historians will be highly complementary.
This address
has given a very thin description of Japanese and American culture. Historians are occupied today with various
questions of culture. They are well
suited to give us a thick description that can inform economic history. The trick for historians is to tie their
investigations of culture into some economic activity.
Historians
need to make these connections themselves to get through the plethora of
information and communicate with economists. Fischer’s book on Paul Revere, for example, is
not about economics at all. It is a
vivid reconstruction of a political and military event. But precisely because of its vividness, it
provides a window on the culture of the American colonies. If Fischer - or his readers - are aware of the economic discussion of social capital by
Moses Abramovitz, Robert Putnam, and others, then he
or they can make the connection between the detailed case study he has done and
the general question of culture. [52]
This does not
mean that historians should turn into economists nor
that they should be the servants of economists. It does mean that historians
51. Milgrom and Roberts, “Complementarities.” They argue that no compromise is possible. The pervasiveness of national cultures - complementarities
in their term - force a choice between them rather
than a combination of them.
52. Abramovitz, “Catching
Up”; and Putnam, Making Democracy Work.
282 Index
should
be aware of the currents within economics and economic history to make
connections with them. Far be it from me
to suggest changes in Fischer’s splendid book. Instead I suggest that a separate paper could
make the connection between the historical narrative and more general concerns
about economic development.
Economists in
their turn need to become more aware of the concerns of historians. This is happening generally within economics
and should be encouraged by economic historians. Too many economic historians are using
economics from their elementary classes. And unhappily, elementary economics gives few
clues to adventures at the frontiers of knowledge. The full-information model of competitive
industry that we teach in elementary micro bears little resemblance to the
conception of the firm that exists in the economics and management literature.
Let me give a
small sampling to whet your appetite without straining your patience. One strand of thought has been formalizing and
exploring the concept of complementarity that I have
invoked above. Paul Milgrom
and John Roberts often use lattice theory in their expositions, making their
work hard to follow for the average historian, but they also have made attempts
to explain their theories in simple language. [53]
Two activities are complements in their theory if
doing more of one makes it more profitable or advantageous to do more of the
other. The theory can handle qualitative
and discrete changes in activities as well as the more familiar continuous
ones.
Another
strand of thought has tried to model the growth of firms, asking how firms
learn and whether past success affects future progress. This literature has a number of names, from
evolutionary theory to transaction cost economics to theories of corporate
coherence. [54] The
multiplicity of names exposes the variety of approaches that are being tried. Theory here is in an early stage, where ideas
change and apparently unrelated ideas turn out to be highly similar. There is much to choose from; if one paper
does not attract you, another may.
The diversity
of this strategic literature offers a particular opportunity to historians. The presence of economic ideas provides a hook
on which to hang your explorations. And
the diversity of these economic ideas means that they should not constrain your
historical imagination. How can you know
which variables are relevant if the theorists disagree? History then can provide stories that suggest
new and overlooked variables or connections between them. History should expand theory, not be
constrained by it.
A final
strand is the study of culture itself. Here the tools are various, although they
focus on game theory, similar in spirit to those used in other
53. Milgrom and Roberts,
“Economics” and “Complementarities.”
54. Nelson and Winter, Evolutionary
Theory; Williamson, Economic Institutions; and Teece,
et al., “Understanding.”
283
social
sciences. A young theorist at MIT who
works on general-equilibrium problems apparently far removed from economic
history has written a paper on the economics of cultural transmission analyzing
the role of parents in determining the preferences of children. [54] This JOURNAL published an
article on the role of culture in demographic history. [55] And the Journal of
Political Economy, that bastion of Chicago-style, Anglo-Saxon economics,
published Avner Greif’s
paper on cultural beliefs. [56]
Greif’s paper brings us back to my prediction for the
future. As I have done here, Greif contrasts economic activity in an individualist and a
collectivist society - albeit a millennium ago. Greif argues that
the collectivist society had options open to it that the individualist society
lacked and was-at least in the short run - more efficient. But while I have extrapolated Japanese
manufacturing efficiency into the future, Greif
argued that the individualist, Italian economy was able to innovate in ways
that more than offset .the collectivist advantage. Perhaps the United States too will find new
institutional forms that will allow it to leapfrog over the Japanese.
54. Bisin and Verdier, “Economics.”
55. Gjerde and McCants, “Fertility.”
56. Greif “Cultural Beliefs.”
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The Competitiveness of Nations
in a Global Knowledge-Based Economy
October 200
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