Revisiting the Revisionists

This article appeared on Cato.org on August 20, 1998.
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Like a torpedoed ship, Japan is sinking fast. A bad debt crisishas paralyzed its economy, and trillions of yen worth of"pump-priming" public works projects have failed to keep it afloat.From 1992 to 1997 economic growth averaged only around 1 percent ayear, compared with 2.9 percent in the United States.

Only 10 years ago, Americans worried that Japan had become theterror of the seas. Major U.S. industries -- automobiles, consumerelectronics, semiconductors and steel -- were giving way toJapanese competition. Trophy assets, from Rockefeller Center on onecoast to Pebble Beach Golf Course on the other, were falling intoJapanese hands. Many believed that a rising Japan and a decliningUnited States were "trading places."

Leading the chorus of doom was a group of commentators known as"revisionists." Three American figures stand out: politicalscientist Chalmers Johnson, whose 1982 book MITI and the JapaneseMiracle laid much of the intellectual groundwork for later writers;former Reagan administration trade negotiator Clyde Prestowitz, whoauthored Trading Places: How We Are Giving Our Future to Japan andHow to Reclaim It and later founded the Economic Strategy Instituteto advance the revisionist viewpoint; and former U.S. News &World Report editor James Fallows, who cast U.S.-Japan relations inCold War terms.

Revisionists correctly observed that Japan practiced a uniqueform of state-directed insider capitalism that differed fromAmerica's open-market system. The Japanese model, they declared,was beating the pants off free-market economies. As Johnson wasfond of saying, "The Cold War is over, and Japan won."

Revisionists thought that the heart of the Japanese economy'ssuperiority was its long-term focus. Japanese banks allocatedcapital according to government policy or long-standing corporaterelationships, and companies and banks owned each other throughcross-shareholding. That "patient capital" system allocated funds,not to achieve a high short-term return on investment, but to gainmarket share in strategic industries and thus, supposedly, tomaximize long-term returns.

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The revisionists' big mistake was to believe that a handful ofgovernment planners could outthink millions of privatedecisionmakers.

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Indeed, Johnson wrote that "Japan is dynamic because itsmanagers devote themselves to competing with other companies athome and abroad, without having to serve the parasitic interests ofshareholders or the passive interests of workers who have no stakein the viability of the company." Prestowitz agreed, saying, "Thesingle greatest weakness of U.S. industry in competing with Japanis lack not of management effort but rather of financial stayingpower. Our capital is both too expensive and too impatient."

America, revisionists said, should emulate Japan. "In order tomeet the competition of Japan," Johnson warned in 1995, "othercountries must copy or match Japan's 'keiretsu'-type companystructures, its mercantilist industrial and trade policies, itsability to make capital available on a preferred basis to strategicindustries, and its managerial incentives that impose long-termperspectives on company operations."

Today, the revisionists' assessment of the Japanese "threat" andtheir recommendations for U.S. policy look downright silly. Japanhasn't attained worldwide dominance; on the contrary, it hassuffered a "lost decade" of economic stagnation. The "Japan, Inc."model hasn't eclipsed Western-style capitalism; instead, there isan emerging consensus on both sides of the Pacific that theJapanese model has failed. Countries up and down the Pacific Rimare embracing market-oriented reforms in the wake of an economiccrisis blamed widely on Japanese-style "crony capitalism."Meanwhile, the United States, far from declining, is enjoyingrecord-setting prosperity, despite the fact that at most it onlytoyed with the policies that the revisionists were pushing.

While none of the revisionists has explicitly renounced hisviews, Japan's problems have caused some to change their tune.Prestowitz, for example, now says that the whole Asian model --once the supposed wave of the future -- must be scrapped, and thesooner the better. "With much of Asia now on life support," hewrites, "it is time to recognize that the Asian brand of capitalismis dangerous to the world economy's health and that it must beabandoned, particularly by Japan."

Better late than never, Prestowitz finally has it right. Torevive its fortunes, Japan must move to a system under whichcapital is allocated in response to clear and undistorted marketsignals. In sum, Japan needs to abandon the very elements of itssystem that the revisionists singled out as its greateststrengths.

The revisionists' big mistake was to believe that a handful ofgovernment planners could outthink millions of privatedecisionmakers -- could pick "strategic" industries, allocatecapital in defiance of market signals and prop up the stock marketand real estate values. Like so many others before them, theyprided themselves on being sophisticated realists, when in facttheir faith in bureaucratic miracles was hopelesslynaive.