The fundamental problem is not simply that in the Cold War era Japan attained a $5 trillion economy—although that alone was an unexpected competitive challenge to American economic preeminence—but how it did so. It had found a third way between the socialist displacement of the market advocated by Soviet theorists and an uncritical reliance on the market advocated by American theorists. The Japanese had invented a different kind of capitalism —something no defender of the American empire could accept. It was therefore assumed either that the Japanese were cheating (and all that we needed to compete successfully against them was a “level playing field”) or that they must be headed for a collapse similar to the one that had overtaken the USSR.
In turning neo-classical economic theory into a fighting ideology, American ideologues encountered one element of capitalist thought that they could not express in abstract, seemingly “scientific” mathematical terms. This was the set of institutions through which competitive market relationships actually produce their benefits. Institutions are the concrete, more-or-less enduring relationships through which people work, save, invest, and earn a living—such things as stock exchanges, banks, labor unions, corporations, safety nets, families, inheritance rules, and tax systems. This is the realm of the legal, political, and social order, where many considerations that govern the economy other than efficiency contend for primacy. For economic theorists institutions are “black boxes,” entities that receive and transmit economic stimuli but are themselves unaffected by economic theory.
In attempting to forge a fully numerical, scientific-looking model of the capitalist economy for purposes of the Cold War, Western ideologues simply assumed that the institutions of modern capitalism must be those that existed in the United States in the late Eisenhower era. This meant that savings were typically moved from the saver to industry through a capital market (such as the New York Stock Exchange) rather than, for example, through the banking system. They assumed that industrial-labor conflicts were settled by interminable strikes, and not by, for example, offering some workers career job security; and they assumed that the whole purpose of an economy was to serve the short-term interests of consumers, instead of some overarching goal such as the wealth and power of the nation as a whole.
These American assumptions were almost identical to the Soviet assumption that the institutions of “socialism” must be those that existed in the USSR during, say, the Khrushchev era. Neither side ever produced an ideological model to sell to others that could be divorced from their own country. Because of this inability to express the institutions of either socialism or capitalism in some culturally neutral—or at least more varied—way, it is understandable that many observers simply reduced the claims of Marxist-Leninist ideology to the USSR and those of free-market capitalism to the United States.
In finding a third way, Japan’s postwar economic “miracle” reinvented not economic theory but the institutions of modern capitalism so that they would produce utterly different outcomes from those imagined in the American model. Given Japan’s history of catch-up industrialization, its overarching need to avoid the victimization and colonialism to which every other area of East Asia had succumbed, its virtual dearth of raw materials, its dependence on manufacturing and international trade to sustain its large population, and its overwhelming defeat in World War II, it could not ever have become a clone of the United States. Its postwar planners and technocrats instead organized a capitalist economy intended to serve the interests of producers over consumers. They forced Japan’s citizens to save by providing little in the way of a safety net; they encouraged labor harmony regardless of what it did to individual rights; and they built industries based on the highest possible human input rather than simply on some naturally given comparative advantage, such as cheap labor or proximity to a large market like China’s. Their goal was to enrich Japan, if not necessarily the Japanese themselves. They viewed all economic transactions as strategic: theirs was to be an economy organized for war but now directed toward ostensibly peaceful competition with other countries.
Since the 1950s, the United States had seen the entire world in Cold War terms. This meant that Japan was far more important as an anti-Communist ally than as a potential economic competitor. In order to keep U.S. troops and bases in Japan, the Americans provided open access to their market and the government pressured private American firms to relinquish ownership rights to technologies being transferred to Japan. As Japanese trade and industrial bureaucrats took advantage of this deal, trade disputes became inevitable. From the “dollar blouses” that flooded into the United States during the Eisenhower era to the textile disputes of the Kennedy and Nixon administrations, complaints about the costs of “alliance” with Japan became a permanent feature of Washington politics. They also produced a lucrative new field for former government officials turned lobbyists, whom the Japanese hired in increasing numbers to ameliorate or paper over the disputes. Even though Washington remained more or less ignorant of how the government in Tokyo actually worked, the government in Tokyo took a life-or- death interest in Washington’s role in regulating the American economy. Japanese officials also did everything in their power to maintain the artificial separation between trade and defense that the U.S. government had invented and to see that the Pentagon was happy with its facilities.
This artificial separation between trade and defense has been a peculiar characteristic of the half-century-long American hegemony over Japan. Official guardians of the Japanese-American Security Treaty and their academic supporters have maintained an impenetrable firewall between what they call, using the Japanese euphemism, “trade friction” and the basing of one hundred thousand American troops in Japan and South Korea. There was no reason why these two aspects of the Japanese-American relationship should been dealt with as if they were separate matters except that, had they not been, the actual nature of the relationship would have been far easier to grasp.
Until the 1980s, the United States officially ignored all evidence that this compartmentalization of its massive military establishment and its growing trade deficits with Japan was going to be very costly. From about 1968 on, trade deficits began to rise just as the hollowing out of certain industries that the Japanese government had targeted became more visible. U.S. officials then consulted with their Japanese counterparts about these problems and accepted fig-leaf agreements that offered the pretense of remedies to distressed American businesses and communities. With the exception of President Nixon’s 1971 decision to force an ending to Japan’s artificially undervalued exchange, nothing else of significance was done.
During the 1980s, however, pressures for action of some sort markedly increased. The Japanese economy, now a major competitor, was starting to erode the industrial foundations of the United States. Moreover, the Cold War was settling into its final Reaganesque rituals. Despite inflated CIA estimates of Soviet strength, it became increasingly clear to many, even before the rise to power of Mikhail Gorbachev, that the two sides were starting to accommodate each other and that the threat of a superpower war was declining. In this context, a new way of thinking developed about Japan itself and about the nature of America’s relationships with newly rich Asia.
No less than a fundamental rethinking of Japan is now under way at the highest levels of the U.S. government, business, and academia. The standard rules of the free market, according to the new school, simply won’t work in Japan. . . . Some people call the new thinking “revisionism,” departing as it does from the orthodox view that Japan will eventually become a U.S.-style consumer-driven society.4
The Japanese, who had been very proud of their “developmental state” and its guided economy and who readily wrote about it for domestic consumption, suddenly became concerned when American revisionists, myself included, began saying that “leveling the playing field” was not the issue, since the two economies were different in such fundamental ways. It was one thing for Japan and its lobbyists to parry complaints about their country’s closed markets and the numerous barriers it raised against foreign products ranging from automobiles and semiconductors to grapefruit and rice. It was quite another for Americans to claim that they were playing by entirely different rules. Accusations that the “revisionists” were Japan bashers or racists rose quickly to the surface.
Meanwhile, a number of Japanese politicians and industrialists added insult to injury by claiming that the trade
