Blinded by the Sun


Looking at the Sun: The Rise of the New East Asian Economic and Political System, by James Fallows, New York: Pantheon Books, 517 pages, $25.00

Japanophobia: The Myth of the Invincible Japanese, by Bill Emmott, New York: Times Books, 261 pages, $25.00

Ever since Matthew Perry's first contact with Japan almost 150 years ago, the United States has been remarkably ambivalent toward the Land of the Rising Sun. As Japan has adapted and mastered elements of Western civilization ranging from wearing tuxedos to manufacturing high-tech consumer goods, we have been at turns flattered and fearful.

Over the past 25 years or so, as Japan emerged as the most ferocious—and ostensibly unstoppable—Asian economic tiger, Americans have been particularly edgy on commercial grounds, worried that the Japanese shred U.S. businesses like so much raw meat. James Fallows's Looking at the Sun and Bill Emmott's Japanophobia represent the latest additions to the long-running debate about Japan and American economic policy. Although neither book is exhaustive, each takes a provocative position on the Japanese experience and its relevance for other countries.

Fallows, the Washington editor of The Atlantic Monthly, is a prominent member of what's known as the "revisionist school of thought on Japan. Although their views differ in significant ways, all of the revisionists agree on a fundamental premise: Japan is radically different from Western nations. Hence, they argue, it is a serious mistake to try to understand Japan in terms of American social, economic, and political history.

In part, the revisionist movement was a legitimate reaction to the naive and condescending postwar American perceptions of the Japanese as simply junior Americans who were gratefully and diligently absorbing the gift of our tutelage in democracy. Revisionist writers have focused on the ways in which the underlying reality of Japanese life differs from both surface appearances and American expectations.

Scholar Chalmers Johnson, for example, in his MITI and the Japanese Miracle (1982), traced the continuities between pre- and postwar Japan, not only in specific government policies but in organizational functions and even in the actual individuals who held positions of power. Dutch journalist Karel van Wolferen's The Enigma of Japanese Power (1989) explored in detail the web of corruption underlying Japanese party politics; the nearly autonomous, self-perpetuating bureaucracy that lies behind the facade of parliamentary democracy; and the complex of beliefs and attitudes among the Japanese people that makes the whole mess so resistant to reform.

For all of its insights, the revisionist movement would have been of purely academic interest were it not for the coincidence of two developments: the meteoric rise of Japan's economy in the years since the war and the apparent stagnation of the American economy in the post-Vietnam era. Revisionists have responded with both a diagnosis and a prescription for our own economic malaise. Japan, they argue, is guided by a world view that sees economics as merely a tool of national strength, while America clings to a false religion of neoclassical economic theory. Japan's system works stunningly well, while ours falters. Indeed, Japan literally feeds off of our blind adherence to such outdated concepts as "consumer welfare," "free trade," and "global allocative efficiency." If America is to have any hope of thwarting Japan's rise to global politico-economic leadership, proclaim the revisionists, it too must adopt a protectionist trade policy and an interventionist domestic industrial policy.

Looking at the Sun stands on these familiar revisionist foundations but, in its hemispheric reach and conceptual pretensions, is an altogether more ambitious effort than even van Wolferen's quasi-encyclopedic Enigma. Fallows argues that East Asia, with Japan at the lead, has evolved a form of political economy that is systematically more effective than a free-market approach at producing sustained economic growth and the geopolitical power that eventually follows.

Seeking the source of Asia's success, Fallows locates the roots of the "new Asian system" in old-style mercantilism. He draws on the writings of the early 19th-century German political economist Friedrich List, repeating the familiar litany of what's wrong with free-market, or "Anglo-American," economics. It encourages consumption today at the expense of productive capacity tomorrow and indulges individuals at the expense of the community and the national interest, says Fallows. Above all, it's totally unrealistic as an account of the way the world works. Every nation that has enjoyed a period of global dominance achieved it via interventionist policies.

Eager to apply the coup de grace to the free-market position, Fallows adds a new twist to the old arguments. Anglo-American economics is discredited, he asserts, because it fails the test of history, the test of theory, and the test of current experience.

The free-market position fails the test of history, says Fallows, because it does not explain how England and then America rose to power (both Britain and America, after all, violated free-market precepts routinely). It also fails the test of theory because it "do[es] not explain how one country can take a lead over others in technology or productivity" (the mathematical models of modern economics tell us only about the efficient use of resources at hand, not how new ones are created). And it fails the test of current experience because it cannot explain why Asian economies have grown faster than any others in the last generation (something the Asians themselves proclaim, now that they've emerged from America's shadow and have developed the self-confidence to speak for themselves).

All three of these "failures" amount to the same argument, which has two parts. The first is indeed a historical point. No nation that has risen to economic and political leadership followed a pure laissez-faire policy. Unfortunately for Fallows's argument, neither has any other nation. If "Anglo-American economics" explains too little, Listian mercantilism explains too much. Why did England and America rise to power, how do some countries take a lead over others in technology, and why have Asian economies grown faster than any others if governments of other countries intervened as much or more? To claim that the winners simply did it better is to beg the question of why—and of whether apparent successes can be reproduced elsewhere.

Fallows himself characterizes France, for example, as operating "a Japanese-style dirigiste system without the social control." Yet not only is America not swimming in French cars and VCRs, but the French government is hobbled by the financial wreckage of its subsidized "national champions." Perhaps then it's really the social control that accounts for East Asia's success? "The most successful Asian societies are, in different ways, fundamentally more repressive than America and most of Europe are," writes Fallows, "and their repression has so far been a key to their economic success."

Yet Fallows cannot bring himself to carry his own logic to its natural conclusion. His liberal sensibilities take over, and he beats a hasty retreat: "The Asian model is not 'superior' in any sweeping sense. After all, it is more confining for individuals. It has so far proven inferior in generating new scientific knowledge and fostering lone creative talents and it is hard on the weak, minorities, and outsiders. It could not be applied in most Western countries, especially the United States." (Emphasis added.)

Despite that telling admission, Fallows remains committed to the notion that we have something fundamental to learn from the Asian model. So what lesson does he draw? That America needs more dirigisme. Have faith, and all will be well.

The second part of the "failures" argument has to do with economics and its role in explaining the world. Astonishingly, Fallows betrays not the faintest awareness of recent work on the economics of growth and neoclassical updates of comparative advantage models, some of which he might have used to bolster his case. So while it's certainly true that the explanatory power of economists' models is rather less than they fancy, Fallows, because he seems so ignorant of contemporary research, is hardly in a position to make the charge stick.

But let us grant Fallows his point, while recognizing that he has set fire to a straw man. Neoclassical economics cannot explain every aspect of economic growth, but we shouldn't expect it to. Free markets are not the same thing as neoclassical economics at all, nor are they logically reducible to it. A predilection for free markets is not in any way incompatible with a recognition that exogenous factors of culture, individual idiosyncrasy, and historical accident can have a major impact on development.

Indeed, the staying power of free-market ideals in America has less to do with an irrational attachment to abstract economic principles than with a rough-and-ready, pragmatic judgment of what seems to work. That judgment itself is informed by a more fundamental, exogenous moral/ethical belief that, to the extent possible, people ought to be free to live their lives as they see fit. Fallows is not entirely off base when he charges that for Americans political economics is "an essentially religious question," though he seems to have forgotten the proverbial advice to people who live in glass houses.

The urgency of Fallows's efforts to buy respectability for interventionist policy by placing it on a philosophical foundation—indeed, the entire appeal of the revisionist approach to anyone beyond the community of Japan scholars—rests on a vague but profound fear that America has lost the secret of perpetual economic growth, and Japan has found it. Yet the fantasy of a Japanese philosopher's stone vanishes upon a closer look.

Fallows, for instance, offers a capsule history of the rise of the Japanese semiconductor industry. He portrays it as the crowning glory of a coordinated strategy of massive capital investment that with military precision captured the business of memory-chip production, dominated collateral industries, and trapped the United States in a position of dependence for both commercial products and military components.

In choosing the semiconductor industry as his example, Fallows plays to the current fashion of seeing chips as the source of economic salvation. Yet the commodity-chip markets dominated by Japan make for a profitless business and the market share Japan purchased by brute force can be—and is being—bought in turn by South Korea and Taiwan. The United States itself could always buy it back if there were a compelling need. But there isn't one now.

Despite the industrial-policy gurus' neat theories of planned technological development, "success" in memory chips has failed to bring with it the expected collateral impacts. Japanese companies haven't made much of a dent overseas in the microprocessor, computer, or software markets despite massive investment and government R&D subsidies. Within the past two years, an invasion by American producers has thrown even Japan's domestic PC market into turmoil, wrecking a cozy oligopoly in which Japanese vendors used fat profits from overpriced PCs based on backward, proprietary technology to subsidize other domestic and overseas operations.

There's a more serious problem with Fallows's selective vision, as well. He sees the semiconductor industry as a model for the general success of a Japanese mercantilist development strategy which aims at domination. But the international record of Japanese industry more broadly—even in areas considered "high technology"—is extremely uneven. In fields such as chemicals, pharmaceuticals, and biotechnology, Japanese industry has remained weak despite years of protected markets, R&D effort, and procurement subsidy.

If we throw in the domestic sector and examine the trend in Japan's GDP over the past 30 years, the claim that Japan has found some sort of economic magic wand becomes still less plausible. Viewed as a five-year moving average, which smooths out year-to-year variations and brings out longer-term trends more clearly, Japan's annual GDP growth fluctuated around the 10 percent level through the 1960s, dropped to a 4 percent trend line around the time of the first oil shock in 1973, and remained there through the end of the 1980s. With the collapse of the late '80s "bubble economy" and the onset of the current recession, GDP growth has crashed to near zero. While it is anybody's guess when and how strongly Japanese growth will rebound, the trend of the past 30 years begs explanation. Whether because he mistrusts neoclassical theory or because he feels he is on to something bigger, however, Fallows pays hardly any attention to economic statistics.

The same cannot be said of Bill Emmott. As Japan bureau chief, business-affairs editor, and now editor-in-chief of The Economist, he has been arguing for years that however "different" the Japanese may appear or believe themselves to be, in the end they are subject to the same market forces as anyone else. In his 1989 book The Sun Also Sets, Emmott analyzed the Japanese economy, concluding that Japan's trade surpluses, capital exports, and savings rate are destined to subside as demographic, cultural, and economic forces follow their natural course. Japanophobia briefly updates that argument in light of the past four years, while focusing more narrowly on a particular phenomenon: the global expansion of Japanese multinational companies.

Japanophobia sketches out six reasons why Japanese firms have rushed to invest overseas: perceived opportunities to arbitrage superior management against lower wage rates; the need to evade trade barriers; the cheapness of foreign assets paid for in inflated yen borrowed at low interest rates; the need to be represented locally to be successful in certain highly competitive markets; the opportunity to take advantage of local technology; and the pursuit of Japanese customers overseas.

Emmott reviews the experience of Japanese multinationals overseas in four industries—cars, entertainment, tires, and finance—and makes a plausible case that their successes and failures can be accounted for in decidedly mundane terms. And failures there have been indeed. The takeover of Firestone by the Japanese firm Bridgestone has been as pathetic a comedy of errors as any all-American corporate foul-up. The major Japanese securities firms and banks prospered only so long as their Japanese customers overseas had pots of money, while their efforts to build genuinely domestic businesses were non-starters. Sony and Matsushita paid grossly inflated prices for Hollywood studios in a quest for a supposed synergy between entertainment software and hardware. The investments are now finally showing some signs of life, but the long-term success of those ventures is still an open question.

By contrast, the Japanese automakers have, on the whole, been much more successful, and Emmott describes some of the ways in which skilled management has overcome the problems of overseas investment. He dissects the fuss over "local content," and argues that the logic of "lean production" dictates that manufacturers locate more and more aspects of the business near their target markets if "transplant factories" are to be successful over the long haul.

Emmott's case studies are useful in puncturing the illusion of Japanese invincibility. His broader macroeconomic arguments, which are presented in greater detail in The Sun Also Sets and which I have not laid out here, are clear and convincing as far as they go. His skepticism toward revisionist industrial-policy nostrums is on the mark. But in the end he really doesn't meet the challenge raised by Looking at the Sun, however flawed its conclusions may be.

That's because Emmott makes no attempt to justify grand ideas. He simply assumes that neoclassical economic theory holds within a certain domain of validity. His books relentlessly pile up concrete details to build his case that the phenomena he describes are indeed understandable on his terms. But recall Fallows's gripe that neoclassical economics fails to explain differential growth adequately. By confining himself to a neoclassical framework, Emmott fails to address satisfyingly the underlying fears which give the revisionist approach its appeal.

These fears are perhaps more about ourselves than about Japan. Suppose, for example, that in all of the dimensions that matter, Japan is indeed converging on the West and is destined to settle into a respectably sluggish economic middle age typical of other G7 countries. Even if Japan were to negotiate the transition to slower growth without serious social mishap, we would still face a far greater challenge to our thinking about economy and society than any posed by Japan in miracle-growth mode. On present trends, we would be left with a situation in which developed nations settle into an indefinite period of slow growth, while rapid development is limited to nations playing catch-up.

Libertarian ideals are closely linked in the American psyche with ideas of steady progress and unlimited frontiers. Their survival depends on the identification and wide cultivation of those extra-economic virtues and habits which make continued growth possible. In that sense, at least, Fallows's alarm is a timely one. We still have our work cut out for us.

Oren Grad is a consultant in international health and economic development at Abt Associates in Cambridge, Massachusetts. He recently spent nine months as a visiting scientist at Tokyo University.