Institutional and Technological Change in Japan's Economy

Past and Present

Janet Hunter, Cornelia Storz, Janet Hunter, Cornelia Storz

• Publisher: Routledge
• Year: 2006
• ISBN:
  9781134206810
• Edition: 1
• Topic: Economics
• Subtopic: Economic Conditions
• Index: Economics

Institutional and technological change is a highly topical subject. At the theoretical level, there is much debate in the field of institutional economics about the role of technological change in endogenous growth theory. At a practical policy level, arguments rage about how Japan and the Japanese economy should plan for the future.

In this book, leading economists and economic historians of Japan examine a range of key issues concerning institutional and technological change in Japan, rigorously using discipline-based tools of analysis, and drawing important conclusions as to how the process of change in these areas actually works.

In applying these ideas to Japan, the writers in this volume are focusing on an issue which is currently being much debated in the country itself, and are helping our understanding of the world's second-largest economy.

1 Introduction

Economic and institutional change in Japan

Janet Hunter and Cornelia Storz

The malaise that has afflicted the Japanese economy since the start of the 1990s has been attributed by many commentators to problems with institutions and organizational technologies in Japan, limiting an effective response to changed economic and social imperatives, and undermining the ability of different groups to take the necessary action to regain the economic and technological competitiveness that characterized the country up to the late 1980s. Recent Japanese governments, particularly that of Prime Minister Koizumi, have argued that some of the answers to this perceived stasis can be found in changing the role of the state, but it is clear that such moves have encountered considerable opposition from both within and without the government's political supporters. The possibility and viability of substantial change in Japan, in institutions, organizations and technologies, therefore, remains high on the agenda.

Our understanding of the process of change over time has been considerably enhanced by recent developments in institutional economics, in the economics of organizations and in the study of technology, and in the application of some of these ideas to historical evidence and to more contemporary empirical concerns. While the papers contained in this volume are mainly empirical in approach, many are also informed by our recent greater understanding of how to analyse the processes of change in institutions and organizations, and in the utilization of both practical and organizational technologies.

Some of the key developments in institutional economics that have influenced our analysis of the actual process of change are mentioned by Ilona Koester in her paper, but it is appropriate to make a number of points here, and to mention one or two of the scholars who have been particularly influential in work in this area. Probably most influential for both economists and economic historians has, of course, been the work of Douglass C. North.¹ North's definition of institutions as ‘the rules of the game’ offered historians as well as economists a tool for conceptualizing and theorizing about things that they had always known to be important, but which they had, from a social scientific perspective, found very hard to pin down. The distinction that North drew between ‘formal’ and ‘informal’ institutions, differentiating between formal laws and regulations and the often unspoken rules that govern everyday life, acknowledged that, particularly when it came to the latter, there were limits on the ability of economic rationality and profit maximization to explain completely the actions and decisions of groups and individuals. It also seemed to offer a way of avoiding the dangerous term ‘culture’, a term which historians had long used to try and explain the observable differences between behaviour in different countries and regions, but which was for many social science historians unsatisfactory, or even irrelevant. The distinction between institutions and organizations as the manifestation of those institutions also proved valuable. North's focus on property rights and on transactions costs (drawing on Coase)² was quickly taken up by economists and economic historians and applied to a range of empirical studies.

North's work has, of course, been considerably extended by other economists seeking to illuminate historical processes. The work of Avner Greif³ is just one example of how the institutional approach has been utilized to shed light on historical economic activity that at first glance appears either irrational or nonprofit-maximizing, or both. Work on ‘embeddedness’ has illuminated further the social or ideological context within which economic decisions are made.⁴ However, since many economists and economic historians have tended to regard more detailed analysis of societal factors as beyond their expertise, lying more in the province of anthropologists or social historians, there remains the danger that institutions are left as something of a black box, used as a catch-all explanation for those things that cannot be explained by economic rationality or individual maximization, equivalent to the residual or error term in an equation. What is now almost universally accepted, though, is that it is not possible to understand the nature of economic change without considering the institutions within which it is embedded, and in this Japan is no exception.

The ideas contained in institutional economics have focused mainly on two questions, namely the impact of, and changes in, institutions. Institutions and their stability are in general considered helpful, since they offer relief to actors, enabling them to search for more profound solutions. The theory of transaction costs mentioned earlier, and the theory of property rights, are important approaches for analysing the impact of institutions, but even more important in the context of this volume is the concept of path dependence, the idea that even relatively small historical events can influence subsequent developments. Contributions in evolutionary economics also refer to this process using the terms ‘routines’ or ‘trajectories’. A focal problem in institutional economics is the fact that demand for new institutions and certain incentive structures does not necessarily lead to institutional change. Uncertainty, vested interests, changing costs, complementarities and mental models often lead to unexpected rigidities, often defined as path dependence or, in the case of more technological or organizational issues, trajectories and routines, as mentioned.⁵

Uncertainty is always an element of institutional change. This means that actors do not know which, and which kinds of, alternatives exist, so they may prefer to maintain the established institution. One argument put forward in political science, but increasingly acknowledged in political economy studies, relates to the existence of different interests. Here again, every change in institutions may induce a shift in power, which may in turn lead to opposition by those actors who were hitherto in favour of change. Transaction theory has shed light on the fact that change does not come free of cost. It is associated with a range of costs, such as the costs of learning and unlearning, as well as search and other types of costs; this again leads to undesired rigidities. A central additional factor is the presence of complementarities. This concept stems from the economics of standardization, and refers to the fact that the operation of an institution will depend upon the way in which it functions in conjunction with other institutions and rules (including, in the case of standards, technical rules), and its own embeddedness in these rules. Every change in one rule, or in one institution, therefore necessitates a change in another rule or institution, making the whole process of change extremely complex. A further factor that evolutionary economics has introduced into the concept of path dependence is the role of cognitive models, that is, basic individual and collective patterns of how the world is perceived and constructed. Since these patterns are so fundamental, it is almost impossible to change them directly. One example of this might be how entrepreneurial failure is understood in a society. Depending on the prevailing (unconscious) concept of market operation, policy makers may either try to support failed entrepreneurs, through providing some kind of social safety net, for example, or try to encourage them to search for solutions by themselves, for example by offering them incentives to build up more efficient capital markets. The editors of this volume stress, as do the authors in their individual contributions, that the incrementality of change and the rationality behind it should be taken seriously, but they also stress that, depending on the area of focus, there may be sufficient and often overlooked options which can be used to escape from undesirable aspects of path dependence. We may summarise, therefore, by stating that the traditional focus of economics led to a playing down, and even a disregard, of institutions and the role of history; instead, ‘pure markets’ were the object of analysis.⁶

Another element previously considered as a ‘black box’ is technology, and some of the chapters in this volume deal with both scientific and organizational technologies. Traditional neo-classical economics saw technology as exogenous; knowledge (whether organizational or technological knowledge) was not seen as an important factor in production. From an institutional perspective, however, it is not sufficient merely to react to prices; there is a constant need for innovation. Moreover, concepts of innovation systems have stressed that the adaptation and development of existing (radical) innovations is a central part of the innovation process.⁷ This is an issue of special importance for Japan, which has been criticized as unable to give birth to ‘real’ (i.e. ‘radical’) innovations. It may be suggested here, however, that some of the more evolutionary contributions in innovation economics have also tended to overstress the danger of lock-in caused by established routines. In this volume it will hopefully become obvious that there also exist methods for achieving change, such as the creation of new modularities, or changing cognitive frameworks on the part of entrepreneurs. From a longer-term perspective, the works of historians such as Joel Mokyr and Daniel Headrick have also had a significant influence on the way in which economic historians approach the issue of technological change in history. Headrick's work has been particularly focused on specific historical case studies,⁸ but both authors have extended their consideration from practical technologies to organizational and information technologies. Following part of a tradition dating back to Josef Schumpeter, Mokyr has spelt out the conditions conducive for innovation and invention in history, along with a distinction between macro- and micro-inventions.⁹ Given that critics of Japan, and Japanese themselves, have often argued in recent times that Japan has been good at the micro-inventions, but not the macro ones, this distinction raises fundamental questions about Japanese technology, past and present. Indeed, Japan lost markets in leading-edge technologies to the United States in the 1990s, such as those in biotechnology or information and communication technology. In the leading international rankings of the last few years Japan is placed low, compared with other OECD members. One report, which was especially sobering for Japan, was the Global Information Technology Report of the World Economic Forum of 2004, which placed Japan in twentieth place, far behind the leading OECD members.¹⁰ Obviously, current estimation of the Japanese innovation system and its technological capabilities is not too high, and Kerstin Cuhls’ analysis in the final chapter of this volume of the technologies of information flow at the start of the twenty-first century has to be considered in this context. We need to remember, however, that the evaluation of Japan's technological creativity as recently as twenty years ago was somewhat different, as some of the chapters in this volume can also testify.

The chapters in this volume, and the ideas noted earlier, all relate to change or rigidity towards change. In that sense they are all concerned with a dynamic process, whether over a lengthy period, as tends to be the case with historians, or with a shorter period focusing around the present, as is the case with economists. We are familiar with the complaints that there has been a lack of change in contemporary Japan in response to crisis, but we need to note, in line with seeing change as process rather than event, that most change tends to be incremental rather than dramatic. Path dependence influences the shape and pace of change, but does not completely impede it. It may be suggested, moreover, that the contributions of approaches to the analysis of institutional change are often limited in three respects. First, they tend to lack a reference point. Second, they are inclined to underestimate the rationality behind incremental change, and overall neglect the fact that incremental changes may lead to radical changes as well. Third, they too often neglect the role of entrepreneurship and the options to leave or re-interpret given paths. According to Hall these changes can be differentiated according to whether they relate only to the setting of instruments, to the instruments themselves or to cases where even the hierarchy of aims has been changed.¹¹ Only if the instruments themselves and the hierarchy of aims are changed can institutional change be termed ‘paradigmatic’ or ‘radical’, something that because of path dependence is a rare event, but which does nevertheless exist. The changes in the corporate governance of Japanese firms outlined by Andreas Moerke in this volume can be seen as an example of radical change generated through entrepreneurship. The changes in corporate governance have embodied not only a change of instruments and their settings, but also change in the hierarchy of aims relating to which enterprise should be invested in, and the role of stability in interfirm relations.

Thus, the history of the modern Japanese economy suggests an ongoing presence of a dynamic of change, and a consistent willingness to countenance and encourage change. In that context, the present perceived ‘stagnation’ becomes particularly prominent. However, the reality of change is that it is often time-consuming, and accompanied by mistakes, but that these mistakes tend to get overlooked and forgotten if the longer-term outcome is seen as delivering ‘success’ or ‘progress’.¹² The chapters in this volume do not underestimate the difficulties of delivering change in the present, but they do point to the fact that change has been taking place, for better or for worse. Japan may well be no more static or sclerotic at the start of the twenty-first century than it has been at other times in the past.

Collectively the chapters here, which deal both with macro-level and specific institutional or technological issues, raise a number of points. One is the significance of human agents and their ideas and their cognitive models in the process of change. Patricia Sippel's chapter (Chapter 2) on the nineteenth-century development of the copper mining industry highlights this. Not only did a succession of individual mining engineers, both Western and Japanese, play key roles in the overall process of technology change, but there was also, Sippel argues, an overwhelming belief and confidence in the need for, and advantages of, such technological changes. A precondition for change is therefore not just the existence of ‘fit’ or ‘suitable’ complementary institutions, but a conviction that change is feasible and desirable, inducing a readiness to learn, to bear the costs, and to develop new concepts. Katalin Ferber's chapter (Chapter 3) focuses very specifically on one human agent in the process of institutional change, the economist Tajiri Inajiro, credited with being a major influence both in forming monetary policy in the Meiji period, and also in educating the next generation of experts. Individuals and groups of individuals play a key role in many of the other accounts in this volume, from the charismatic Carlos Ghosn of Nissan–Renault described in Sigrun Caspary's chapter (Chapter 9), to the members of the ever-present Japanese bureaucracy that has figured so prominently in recent criticisms. The ‘institution’ clearly frames the ways in which individuals and groups act, but that makes it no less important to consider the human agency that can in turn influence the development of those same institutions. Institutional and technological change can only be carried out by groups and individuals, someth...