Dogs and Demons

decide how money is used and invested is what keeps Japan's bureaucrats firmly in control. That said, the oddest part of the equation is the amazing disdain the bureaucracy shows for money. The figures for debt, bad loans, failed stock markets, and so forth are staggering enough to keep the leaders of most other countries lying awake at night in terror. Yet Japan's government agencies seem curiously unconcerned. Like spoiled society girls who grew up on ample trust funds, Japan's officials have never really had to learn what money is. When they needed it, there was always more from Daddy.

Edo townspeople knew better than to distrust and disdain money. The novelist Saikaku warned:

Year after year the loss and senseless waste pile ever higher one atop the other: the blossoms of a merchant's flowering talents fall, his brocade robes are replaced by ones of paper, and finally, in the same way the seasons turn one to another, he is reduced to a faceless beggar. Consider all this and it should become apparent that for the merchant, in all his varied activities, there is simply no room for lack of heed.

Michael Phillips, an adviser to start-up companies in California, wrote a classic little volume in 1977 entitled The Seven Laws of Money. The Second Law was «Money has its own rules,» which meant that no amount of goodwill or cleverness gets you beyond the simple laws of supply and demand, income and outgo, profit and loss, compound interest, and so forth. He writes: «The rules of money are probably Ben Franklin-type rules, such as never squander, don't be a spendthrift, be very careful, you have to account for what you're doing, you must keep track of it, and you can never ignore what happens to money.» Yet for a while it became fashionable to believe in a mysterious new Japanese system that somehow transcended the Second Law. As Alan Blinder put it, «The amazing Japanese economy poses another challenge-one that has been barely noticed. I refer to Japan's challenge to received economic doctrine. Stated briefly and far too boldly, the Japanese have succeeded by doing everything wrong (according to standard economic theory). That should make economic theorists squirm.»

The question of whether there really are «laws of money» is one of the most hotly debated topics among economists today. Karel van Wolferen warns against taking this view too far. He says:

That [there are laws of money] is what neoclassical economists, in other words, the vast majority of contemporary mainstream economists, are telling themselves and want everyone to believe. Keynes never thought so. And it fits in with American ideology, which is rarely recognized as an ideology. What Alan Blinder is referring to is perfectly accurate: Japan is definitely a challenge to received economic doctrine. Blinder once pointed out to me that the reason why this doctrine has become one, and why it is now rarely challenged, is because it had been made to fit the Anglo-American experience amazingly well. The reason why money does not have its own rules, like physics, is because there is an important political dimension to it. This notion is anathema to mainstream economists, which is why you get so much certainty where none is warranted.

There is no doubt that countries can structure the means of production and the use of capital in many different ways depending on their political structures, with «Russian communism,» «Japanese capitalism,» and «Anglo-American capitalism» being only three of numerous varieties. In that sense, van Wolferen is correct in reminding us that economics does not have ironclad laws of cause and effect, like physics. By Western standards, Japan's banks are almost all bankrupt-yet they continue to function. Many other aspects of Japan's unique form of credit-ordering also baffle outside economists-and, most remarkably, despite the Bubble and all the pain it has engendered, the whole system is basically still intact, ready for the next period of economic expansion.

However, the meltdown in Russia and a decade of doldrums in Japan suggest that while cultural factors can make some difference, certain underlying rules of money do exist and will in time assert themselves. The interesting lesson to be learned from Japan is that the effects of an economy's defying «laws of economics» will not necessarily show themselves as classical theorists would predict. Instead, they go underground, re-emerging in surprising forms elsewhere. At a bank in Tokyo, you can make 10 plus 10 equal 30 if you like – but somewhere far away, at a pension fund in Osaka, for example, it may be that 10 plus 10 will now equal only 15. Or even farther away, implications of this equation may require that a stretch of seashore in Hokkaido must be cemented over.

The Ministry of Finance did not get away with ignoring all the classical rules, for the bankruptcy of pension funds, insurance companies, and banks, the stagnant stock market, six years of zero-to-negative growth, and millions of people in debt to loan sharks are cold, hard facts that cannot be ignored. The argument over whether there are laws of money has to do partly with what sacrifices you are willing to take to maintain an «unscientific» system. Japan is willing to drive its national debt to stratospheric levels, flatten its mountains and rivers, and bleed its savers dry in order to support its system. So the system endures.

Back in the seventeenth century, when Saikaku penned his racy stories of townspeople in the cities of Osaka and Kyoto, shopkeepers knew differently. In Saikaku s world, people had to repay debts, money earned interest, quick-thinking businessmen prospered, while their competitors went bankrupt. Even staid Confucianists understood these things. In 1813, the Confucian scholar Kaiho Seiryo wrote: «Everything under heaven and earth is a commodity. And it is a law of nature that commodities produce new commodities. From paddies is produced rice, and from gold is produced interest, and there is no difference between them. For the forests to produce timber, the sea to produce salt and fish, and for gold and rice to produce interest is a law of the universe.» Saikaku's sharp-witted shopkeepers and Confucian academicians alike would find today's so-called Japanese Model – where debts don't matter, money earns no interest, and no established company ever fails – absolutely incomprehensible.

This brings us to one of the most profound implications of the Bubble and Japan's financial troubles as the nation enters the twenty-first century: the source of these troubles does not lie in the economy or even in financial weakness per se. I'm definitely not predicting the collapse of Japan industrially – or even financially (although the strain is terrific). Neoclassical Western economists are very wrong if they believe that Japan is about to crumble. The entire system can continue for two reasons: strong resources, and what one could call «the sacrifice.»

As for resources, Japan has piled up tremendous industrial capacity as well as savings in the bank-and these can support the status quo for years or possibly decades to come. «The sacrifice» refers to the fact that a nonclassical economic system can indeed be sustained, but, when the system strays very far from reality, at an ever- increasing sacrifice. The question is: What is a nation willing to sacrifice? In Japan's case, the answer is: everything.

The process of propping up the system that created Japan's Bubble wreaks untold havoc on society. These days the trend among the more penetrating writers, both Japanese and foreign, is to analyze Japan's financial problems in political terms. I, on the other hand, see them as part of a «cultural trauma.» We are probably all talking about the same thing. Japan's financial system has fallen far, but it has a long way to go before real value asserts itself. In the meantime, the distortions of the financial markets will continue to manifest themselves as distortions in society and as depredations on the environment.

«There is a solid bottom everywhere,» Thoreau writes. «We read that the traveler asked the boy if the swamp before him had a hard bottom. The boy replied that it had. But presently the traveler's horse sank in up to the girths, and he observed to the boy, 'I thought you said that this bog had a hard bottom.' 'So it has,' answered the latter, 'but you have not got half way to it yet.»

12. Education

Following the Rules

In governing the people the sage empties their minds but fills their bellies, weakens their wills but strengthens their bones. He always keeps them innocent of knowledge and free from desire, and ensures that the clever never dare to act.

– Lao-tzu, Tao-te Ching

The inability to slow down or turn back from disastrous policies has been Japan s core problem in the twentieth century, so it is natural to wonder why This brings us to education, which shapes the way people ask questions of themselves and their environment. Neither Japan's system nor the lengths to which it goes once it is set on autopilot are conceivable in a society in which people ask many questions. Plutarch tells us, «King Theopompus, when one said that Sparta held up so long because their kings could command so well, replied, 'Nay, rather because the people know so well how to obey' »

The fear of speaking one's mind in Japan dates to feudal days. Closed to the outside world and ruled by a military class for 350 years, Japan developed far-reaching techniques of social control. Sumptuary laws prescribed which woods the four classes of society could use in their houses, the shapes of their gates and doorways, and the materials of the clothes they wore. Temples and shrines had to join sects registered with the shogunate, and nonorthodox faiths were outlawed. The feudal virtues of loyalty and self-sacrifice became popular and abiding themes in Kabuki and puppet theater: parents killed their own children to protect those of the lord; joint suicide was a favorite ending of love stories.

No country in the world could have been more fertile ground for totalitarianism. But control of the human mind is more difficult than it appears. The provinces boasted dialects and character of their own, to the extent that outlying fiefs were almost independent states. (The government did not succeed in bringing Shikoku's Iya Valley under control until 1920, when workers carved the first road through its canyons by hand.) In the cities, class divisions created the stuff of variety: pompous samurai, meditative monks, soft-mannered craftsmen, and unruly, sensuous townspeople. Nothing could be more colorful and chaotic than the «floating world» of old Edo.

With the opening of Japan in 1868, Wakon Yosai (Japanese spirit, Western technology) became the rallying cry of the Meiji Restoration, and in the case of education Wakon Yosai involved a marriage between the old feudal desire for total control (Wakon) and compulsory education, introduced from the West (Yosai). Standardized textbooks, uniforms, school rules, marching in lockstep around the school grounds, bowing in unison – these regimens were able to achieve what 350 years of isolation could not: a triumph over regionalism and individuality. It was probably Japan's single most serious modern maladaptation.

Yet the opening up of Japan initially sparked a great outpouring of creative energy, culminating in the so-called Taisho Renaissance. Taisho, strictly speaking, refers to Emperor Taisho's reign (1912-1926), but as a cultural term people use it to describe the years from about 1910 until 1930. This was the era when Okakura Kakuzo was writing The Book of Tea; when Kabuki, traditional dance, and martial arts were taking the shape we see now; and when rich industrialists built the art collections that today form the core of Japan's museums. Great writers such as Akutagawa Ryunosuke and Izumi Kyoka wrote some of the most fascinating and