The 70s sees the beginning of an era where countries stand up and decide they want to succeed. The first great nation to stand up from the ruins of the early 20th century is Japan. Eventually we’ll see China and India stand up too, as do smaller countries in East Asia and traditionally weak European countries like Ireland.
First for a little context. Japan in the 16th century was a country that was ripped but magnificently proud of its 500 year history of war without end. The leader to emerge victorious as shogun is Tokugawa Ieyasu, who showed brilliance at musket strategy and political maneuvering. He took advantage of Japan’s weakness following a disastrous invasion of Korea, which the Koreans won by exploiting Japan’s weakness at sea. An ironic aside of history is that Korea disregarded land warfare despite its proximity to China and the Mongols, while the island Japanese had never bothered to develop naval tactics. Tokugawa successfully exploited the gun in a mountainous country where fighting with swords was inconvenient to say the least, but he remained terrified that someone else would figure it out, particularly the Christian missionaries advising opposing daimyo. So to remain in power and not be overthrown, Tokugawa gave up the gun and then crucified all Christians. He played it off as a win-win: Christians went to heaven and foreign influence was gone. He extended samurai culture to the extremes we know today – as an aristocracy that had a monopoly on weapons that could itself be controlled through absolute loyalty or suicide.
It’s great for controlling the country but not so great for development. Japan stagnated at the same level of technology until the 1850s, with inventions being closely kept secrets. This created a problem when Europeans came back with 200 years of military history and invention under their belt. The samurai were terrified and amazed, then they did the most magnificent thing. Rather than be pushed out of power, they decided to leap forward and embrace the West. The motto became European technology with Japanese spirit. It’s the Meiji Restoration, which threw out the Tokugawa shogunate and rationalized a new system of taxes.
Emperor Meiji was a little confused by the system and accidentally made the country better by taxing feudalism out of existence. By 1900, Japan has no landed aristocracy living off of rents but instead has an entire nation of workers, with the samurai’s sole advantage being education and leadership. It created a remarkably even distribution of income and an effective meritocracy. Industrialization comes at just the right pace, so peasants go directly from the farm to the factory as they are replaced by machines, with amazingly little friction. This is Latin America’s wet dream that never comes true.
At the dawn of the 20th century, understandably proud of their accomplishments, Japan looks outward and sees an Asia in tatters. The Japanese are astonished at the stupidity of the Koreans and the stubbornness of the Chinese, that they have been reduced to pawns. They also want to be a Great Power, but they are humiliated to find that the West lumps Japan as just another Asian country, and Teddy Roosevelt rubs it in by bragging about how he got the Japs to give back most of their conquests from the Russo-Japanese war. That he wins the Nobel Peace Prize for it doesn’t do the world any favors as the Japanese seethe. It’s the greatest folly of the Nobel committee until they give the prize to Woodrow Wilson for the Treaty of Versailles and the League of Nations, for which the Germans seethe. (Let’s hope Barack Obama has better luck, lolol)
The US compounds its error in the interwar period by making an agreement with Britain about the size of their naval fleets. The US considers itself and Britain to be the only two countries with great fleets, so they just backhandedly tell the Japanese that they can have 3/5. As observant students of US history, the 3/5 clause does not go unnoticed in Japan as the same unfair proportion tossed at freed slaves. The Japanese never obey the clause, but they don’t advertise it until Hitler does. The Great Depression is much more mild and painless in Japan than the rest of the world. They don’t have any particular attachment to the gold standard or to non-Keynesian policies, so they manage to solve the problem rather quickly. But it knocks Japanese politics wildly askew.
In the 1930s, Japanese generals decide that it isn’t Parliament who should guide Japan’s fate; the bureaucrats had only succeeded in driving Japan to humiliation and a depression. The generals tell the bureaucrats to build for war, and they mistakenly believe that the industrial complex is powerful enough for a successful invasion of China and that as long as the US and Britain have to worry about Hitler, they can fight the US and Britain too.
It is one of the worst miscalculations in a century filled with bad miscalculations, and it costs Japan everything. World War II leads to the Japanese being bombed so mercilessly that they decide that their 5000 year warrior tradition was a huge mistake. Japan ends the war without a single building taller than two stories, 3 million citizens killed, and no will to fight. Emperor Hirohito considers himself lucky that the United States didn’t turn Japan into a giant concentration camp and that he doesn’t share the fate of Hitler and Mussolini.
Afterward, Douglas MacArthur is appointed proconsul and the rural bureaucrats come to power; all of the industrial bureaucrats were killed by bombing and all of the generals were killed by hanging. MacArthur wanted a fresh two-party system and a vibrant democracy like the US, but can’t find anyone competent who doesn’t want to form a single giant coalition. They form the Liberal Democratic Party, which would stay in power until 2009. It rules in the interest of stability, economic growth, a relatively equal distribution of income, and a meritocratic bureaucracy that delivers pork to constituents. It’s really just a process of elimination – as long as the US won’t allow them to build an army or go abroad, why not just build a good government at home?
The Japanese also decide that if the US is going to break up their zaibatsu holding corporations because they are led by families at the top, they’ll just group together in keiretsu with professional managers at the top. The zaibatsu stayed in power by holding a controlling interest in their own stock, while the keiretsu keep each other in check by buying a controlling interest in each others’ stock. They agree to vote each other as managers for not dumping the stock. It’s a system that economics tells us should lead to extremely slow growth – it’s a pure incentive system to collude and hoard profits, sort of like the US car industry in the 2000s. What doesn’t change is the Ministry of Munitions, which guided Japanese war production. It is converted to the Ministry of International Trade and Industry, and it still guides large investment and production projects, which economics also tells us is suboptimal to a free exchange stock market which allocates funds (it should create bubbles)
Japan defies history again because the system works. MITI scours American history for its sequence of industrialization, and they do it faster and better. They have discretion to provide special funds or pull the plug, and they manage to choose wisely. Japan from 1945-1980 grows faster than anybody had ever seen, although it is eventually passed by Korea, Taiwan, Singapore, Hong Kong, and today China. It was a miracle in its own right though.
The Japanese government stumbled onto a lot of these things, inadvertently creating a pro-market environment. First, they allowed a lot of monopolies outside of MITI purview, which created higher prices and unfriendly industries everywhere outside of manufacturing and exports. It caused a very pro-investment attitude, with the externalities associated with that, from increased tax revenue to higher wages.
But for rumblings of trouble, it creates a dual economy. You have a very sophisticated manufacturing and export economy, where in the 1980s, Japanese workers have productivity that is at least 100% of US workers. Even accounting for the undevalued yen, it is clear that Toyota and Honda are doing well because their workers can make better cars in greater quantity than US auto workers. But you have a darker underbelly, the monopoly workers who have little incentive to gain skills and have been guaranteed lifetime employment, and they become adept at lobbying bureaucrats to avoid foreign competition.
Japan seems to have trouble after 1980 when a new transition comes in: respect. The US suddenly changes its view and points to Japan as a model country, of how the US rewards its allies. But with respect comes resentment, and Reagan starts complaining about Japan’s trade surplus while the Japanese start scoffing about stupid American consumers who spend more than they save. The Japanese also run out of US history to study and realize they’re part of the future. They stumble hard making these transitions and the bureaucrats at MITI start making some poor decisions, especially under pressure from other Asian tigers with very smart bureaucrats.
In the end, Japan is a marvel. While everyone says they have a savings-oriented economy guided by prudent bureaucrats who create an evenly divided society of meritocratic workers, Japan means it, and they influence the rest of East Asia to mean it too.