More Like Them?

"I don't know whether the Japanese system is good or not. I just don't understand it." Bob Homer (an American baseball player who played in Japan)

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A generation ago, "made in Japan" conjured up images of shoddy but inexpensive goods. Today that phrase is synonymous with high-quality, and high-priced, automobiles and consumer electronics. This much is familiar. But Americans are less familiar with something else made in Japan: a new and unique type of economic system that, while certainly not socialist, is not quite capitalist either.

Economists have a well-developed theory of American-style capitalism but no comparable theory of the Japanese system, which has been called, among other things, "peoplism," "welfare corporatism," and "competitive communism." Developing a theory to explain the Japanese system, however, is a challenge of more than academic interest. It especially ought to be a challenge for those interested in economic equality. Everyone is aware of Japan's miraculous record of productivity growth, but it is less well known that Japan has managed to achieve that growth while simultaneously creating one of the most equal distributions of income on earth. Have the Japanese devised a way to defeat the vaunted tradeoff between equality and efficiency? Might they even have figured out how to make greater equality promote efficiency? Few questions are, or should be, more important to Americans interested in developing a liberal economic agenda.

Now that the competition between centrally planned socialism and market capitalism is over, interest in Japan's alternative way of organizing a market economy should be greater than ever before. While the Soviet system remained on the screen, differences among, say, the American, German, and Japanese systems looked puny. Now they loom much larger. It seems to me that nascent market economies in Eastern Europe and the former Soviet Union ought to be considering the Japanese model more seriously than they are. But first they -- and we -- need to know what it is.

Is the Japanese System Special?
The mere assertion that the Japanese system is something special is already controversial. According to one school of thought, Japan has a conventional, free-market capitalist system that simply does some things better than we do. For example, the Japanese work harder and save more than Americans, and Japan's educational system is a marvel at turning out legions of literate, disciplined industrial workers. That more and better inputs yield more and better outputs is hardly a mystery. On this view, Japanese businesses react to prices and utilize markets just as American businesses do; lifetime employment is a myth; the families of Japanese businesses known as keiretsu are little more than social clubs; government intervention is a mere detail, and probably harmful; and soon.

You hear this theme mainly from two groups. One is neoclassical economists, on both sides of the Pacific, who are eager to defend the universality of received doctrine. The other is Japanese government officials, who are at pains to deny that Japan is different for fear that all differences will be labelled trade barriers.

This view doubtless contains important elements of truth. But there is another, quite different, way of looking at the Japanese system. On this alternative view, Japan's economy differs fundamentally from capitalism as we practice it in the United States. In Japan, long-term, cooperative relationships between firms and their employees, among companies doing business with one another, and between industry and government partly augment and partly supplant markets. Parties to such agreements, which are rarely written, may well react less to price incentives than do their American counterparts. This alternative form of capitalism appears to do almost everything wrong when viewed through the lens of Adam-Smithian economics. Workers advance by seniority until well into their careers and are almost never fired for poor performance (although performance does affect their ultimate status and pay). When buying components, firms often do not seek the lowest price. The government not only tells businesses what they ought to do, but the companies frequently listen! Yet the system undeniably works.

This so-called revisionist view of the Japanese system is often associated with "Japan-bashing," but inappropriately so. Many thoughtful Japanese scholars and businessmen see their system as fundamentally different; and none of them is, to my knowledge, a Japan basher. Although I have, in the not-too-distant past, allied myself with this revisionist (but not Japan-bashing) view, I now think it may not go far enough. After immersing myself in studies of the Japanese economy and speaking with dozens of Japanese economists, businessmen, and government officials, I now believe there is good reason to question whether the Japanese system should be called "capitalist" at all.

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This may seem a startling notion. And, since it is mainly a semantic point, I should clarify what I mean. Certainly, the Japanese economy is based on markets and incentives and has little government ownership of capital. So, if "capitalism" just means private ownership of the means of production, there is no doubt that Japan's economy is thoroughly capitalistic. But capitalism ought to connote something more than the use of markets and the predominance of private property. It ought to connote primacy for the owners of capital, or their appointed agents, in guiding the allocation of resources. Such primacy is conspicuously absent in Japan.

In a truly capitalistic society, firms are controlled by either capitalists or executives hired to serve their interests. These managers hire labor, raw materials, and components, paying each a price set by the market. If there is something left over after paying all the bills, this surplus accrues to the capitalists. Maximization of this surplus -- profit -- is the firm's overarching goal. Employees are instruments to be used in pursuit of this goal, just like capital, raw materials, and components. This picture is a caricature, to be sure; it leaves out the company picnic and contributions to the community chest. But, to an important and perhaps increasing extent, it captures the essence of American capitalism.

When applied to Japan, however, this same stereotype becomes a gross distortion of reality. Indeed, a number of Japanese scholars have argued for what amounts to a diametrically opposed model in which the roles of labor and capital are neatly reversed. According to this alternative model, the managers of a large Japanese firm serve not as agents of the stockholders but as agents of the firm's core employees. (Japanese companies often have "temporary" or "part-time" workers who may work full time for many years but are still not considered permanent employees.) These managers hire the necessary capital, paying the price dictated by the market. Then, if there is anything left after paying standard wage rates, materials costs, and returns to capital, that surplus is used for the benefit of the permanent employees. That might mean plowing back the profits to promote growth, training workers extensively, providing generous fringe benefits like company housing, funding the pension plan, guaranteeing job security in bad times, or even just paying higher wages. All these are possible uses of the firm's surplus. Paying it out to shareholders is not among the leading options.

Whether this system deserves to be called capitalism is a semantic question, but it is certainly not the American way. A more interesting issue is how the Japanese system works. Two central ingredients in the Japanese stew stand out. The first is the emasculation of the shareholder and the concomitant deemphasis of (a) profit maximization as the goal of the firm and (b) the role of the stock market (some would argue all capital markets) in resource allocation. The second element is Japan's unique system of industrial relations, particularly the way it encourages and exploits employee involvement. These two features are intimately related. Together they not only raise the question of who is sovereign within the Japanese firm but provide a provocative answer: It is the core employees, not the shareholders.

There are, of course, other hallmarks of the Japanese system, such as extensive cross-holdings of shares among firms, lifetime (or, at least, very long-term) employment, company unions, the keiretsu system, activist industrial targeting, and protectionism of all kinds. A short article cannot linger long on these and other features of the Japanese economy. So, with due apologies for superficiality, I deal with them only in so far as they support Japan's "peoplistic" system.

he Emasculated Stockholder
There seems to be general agreement that arm's-length shareholders play essentially no role in decision making in the Japanese corporation. They are rentiers, not owners -- entitled to a fair return on their capital but not to a voice in how the company is run. At first this description seems to apply just as well to the American system. After all, what say does an individual shareholder of General Motors have in management decisions? But there is a vital distinction.

The top executives of a large American corporation see themselves as agents of the stockholders, guardians of their interests. Management's role, it is often said, is to "create shareholder value," that is, to maximize the value of the common stock. Lest they forget their mission, generous stock options provide a visible hand that makes the interests of managers and stockholders coincide. Should this powerful incentive, which may amount to millions of dollars, prove insufficient, threats of hostile takeovers and stockholder lawsuits lurk in the background. Sometimes, of course, the system runs amok, and managers feather then-own nests. But these are aberrations, individual cases of incompetence or dishonesty. According to conventional economic thinking, the American system has the right incentives in place to make corporate executives serve the interests of stockholders. Indeed, recent activity in the market for corporate control has probably strengthened these incentives. This, it is thought, is as it should be.

Not so in Japan. A wise and experienced Japanese banker told me that "shareholders are almost nonexistent in the mind of the president of any large Japanese company." In the American context, that would be a fantastic statement, but it is not even controversial in Japan. When I asked the head of a large Japanese conglomerate whether stock-market movements would ever affect his business decisions, he answered in a single word: "Never!" Sony's Akio Morita calls the Japanese corporation "a social welfare organization" responsible for taking care of its employees. A top insurance executive said that "the incentive for Japanese businessmen is not money" but rather climbing the hierarchical ladder and acquiring a good reputation. Douglas Kenrick, a New Zealander who has run a business in Japan for forty years, writes that it is taken for granted that "the corporation exists for the employees and to give a service to its customers, not the shareholders." And so it goes. You hear such sentiments everywhere.

To the Japanese, employee sovereignty seems a more natural principle of corporate governance than stockholder sovereignty. After all, because of the lifetime employment system, it is the core employees who have a long-run stake in the company and make extensive, immobile investments in it. Open-market shareholders can and do come and go at will. Why should top corporate executives, who see themselves as guardians of a dynasty, place the interests of transitory shareholders ahead of those of permanent employees?

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Two conspicuous features of the Japanese system contribute to the emasculation of the shareholder. The first is the extensive system of cross shareholdings through which companies own pieces of one another. This arrangement is most prominent within the so-called financial keiretsu, where one Mitsubishi company, for example, owns shares in many others. But it is not limited to this sphere. Toyota and Nissan own shares in, and are in turn partly owned by, their suppliers, their banks, their insurance companies, and so on. Indeed, purchasing a block of shares is a standard way to cement a business relationship in Japan.

Because of the extensive web of interlocking cross-ownership, some 75 percent of the stock of a large Japanese corporation is typically "locked up" by firms that have ongoing business relationships with the company. Since these shares rarely trade, only about 25 percent of the outstanding shares are left for arm's-length investors who care only for dividends and capital gains. Nothing remotely resembling this characterizes the U.S. stock market, where individual investors and return-oriented institutions, such as pension funds, own most of the shares. A 1988 survey of 300 large manufacturing firms in the U.S. and 300 in Japan, conducted by Japan's Ministry of International Trade and Industry (MTI), found that 79 percent of the Japanese shares were held by relationship-oriented investors, especially other companies with business relations with the firm. In the U.S., the corresponding figure was only 34 percent.

The roots of the Japanese system of cross shareholding may lie more in historical accident than purposeful design. In 1949 individual investors owned about 70 percent of the shares of Japanese corporations -- comparable to the percentage in the United States today. Then two things happened. First, the American occupation forces dissolved the prewar zaibatsu and prohibited holding companies. One way for Japan's emerging industrial giants to put the pieces back together was to link companies by cross-holdings. Then, when the Japanese capital market was opened up to the world in 1964, there was widespread fear that huge Western companies, particularly American ones, would gobble up smaller Japanese firms. ("Black ships" again!) Cross-holdings amounted to an effective nationalistic takeover defense.

They still play this role, even though Japanese corporations are now more frequently the gobblers than the gobblees. And the defense works against domestic as well as foreign takeovers. Hostile takeovers are virtually unknown in Japan, and cross-holdings are one obvious reason. It is simply impossible to use the stock market to gain control of a company 75 percent of whose shares are immobilized by cross-ownership.

Extensive cross-holdings have one other fascinating effect: Because of them, large Japanese firms are essentially unowned. The logic is simple. Suppose there are five firms -- called A, B, C, D, E -- and each owns 20 percent of the other, leaving only 20 percent in the hands of individual investors. Who, then, owns the remaining 80 percent of Firm A? The straightforward answer seems to be: Firms B, C, D, and E. But, of course, Firm A owns 20 percent of each of them, and thus indirectly owns 16 percent (20 percent of 80 percent) of itself. That, apparently, leaves 64 percent in the hands of the other four firms. But Firm A owns 20 percent of that, for another 12.8 percent of itself. It is easy to see where this argument leads: Apart from the 20 percent held by individual investors, Firm A essentially has no owners -- and similarly for the other firms. Thus, to an amazing extent, the Japanese corporation has no owners!

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The second salient feature that reduces stockholders to insignificance can be phrased this way: Japan is the first true Berle-Means economy. In their 1932 classic work, The Modern Corporation and Private Property, Adolph A. Berle and Gardiner C. Means wrote -- disapprovingly, by the way -- of the separation of corporate ownership from corporate control. Ownership is so dispersed, they argued, that no shareholder can exercise effective control over management. Therefore management is free to pursue its own goals -- growth, self-aggrandizement, or whatever. As I have already indicated, few economists apply the Berle-Means thesis to the contemporary American system, except around the edges. (Is the corporate jet really in the stockholders' interest?) Stock options, takeover bids, and stockholder lawsuits all bend management (often willingly) to the will of the stockholders.

But no such control mechanisms operate in Japan, where stock options, hostile takeovers, and stockholder suits are virtually unknown. Boards of directors are not merely captives of management, as in the U.S.; they actually are management since Japanese companies have few outside directors. The top executives of a large Japanese corporation are basically a self-perpetuating oligarchy that names its own successors. When the system malfunctions, there are ultimate checks from the capital market, especially from the main bank. But, under normal circumstances, management has a free hand.

Thus arm's-length shareholders in Japan are essentially coupon-clippers who receive meager dividends, are not particularly welcome at stockholders' meetings, and are supposed to be placated (and for years have been) by hefty capital gains. They are welcome to use "exit" (by selling shares) but not "voice." All in all, they are unimportant players on the Japanese business scene.

In the American system, most stockholders also have little voice; but their exit can be a stern disciplinary device. A company that, for example, consistently invests in projects earning less than the cost of capital will see its share price fall. The drop in share values will, in turn, (a) cost the managers money directly and (b) anger the shareholders who might (c) tender their shares to a raider. In Japan, neither (a) nor (c) can happen. So where is the discipline from the stock market? The apparent answer is: Nowhere.

According to conventional economic thought, this should be a weakness of the Japanese system. The stock market is supposed to capitalize long-run expected profits into current share prices. So, in theory, maximizing the immediate share price should be tantamount to maximizing appropriately discounted long-run profits -- which is the right thing to do. But, in reality, the insulation from the stock market that characterizes the Japanese system may be a strength. Japanese executives are effectively liberated from the nexus of stock market analysts, traders, and fund managers that, according to many observers, so distract American executives. This may contribute to the legendarily long-time horizons of Japanese management.

To what conclusion does this analysis lead? John Kenneth Galbraith anticipated the answer a quarter-century ago. If management

maximizes profits, it maximizes them...for the owners. If it maximizes growth, it maximizes opportunity for ... advancement, promotion and pecuniary return for itself. That people should so pursue their own interest is not implausible.3

My claim is that institutional features of the Japanese system, and perhaps also certain cultural attributes, lead large Japanese firms to pursue goals other than profit maximization. In particular, an understanding of the Japanese labor market gives good reason to believe that large Japanese companies maximize the long-run well-being of their core employees.

The Demise of "Us Versus Them"
The replacement of profit maximization by employee benefit maximization as the primary goal of the Japanese company already takes us some way toward understanding why labor-management relations are so congenial, cooperative, and productive in Japan. In an important sense, Japanese managers are agents of the workers; so there is only "us" and no "them." Thus Morita speaks of the Japanese corporation as "a family system" in which ordinary workers and executives share the same fate. According to many Japanese observers, this is the secret to their extraordinary industrial dynamism.

Doubtless, Japan's strong work ethic, ethnic homogeneity, and conformist tendencies all contribute to its remarkably consensual labor relations. But it would be a mistake to attribute everything to culture, for it was not always this way. Prewar and immediate postwar Japanese labor relations were often tumultuous. Workers could be fired at will. Labor strife was rampant in the early 1950s, as Japanese unions flexed their muscles and were beaten down (sometimes literally) by management.

Partly in reaction to this turmoil, Japanese business and government founded the Japan Productivity Center (JPC) in 1955. As part of its productivity enhancement campaign, the JPC enunciated three "guiding principles" designed to enlist the support of organized labor. The JPC's three principles -- job security, fair sharing of the gains from productivity growth, and joint consultation between labor and management -- have become the norm in Japanese industrial relations.

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The principle of job security -- more specifically, the idea that the adoption of new technology should not cost anyone his job -- is exemplified by the famous lifetime employment system. That phrase really means (almost) total job security for the firm's core employees until age sixty or so, followed by "retirement" into another (often inferior) job. Japanese workers have no reason to fear technological progress. On the contrary, since they make their careers within a single firm, they have every reason to want the firm to prosper and grow. After all, the faster the firm grows, the more workers can be promoted into higher and better positions.

Because core employees rarely quit and are almost never fired, both the worker and his (it is rarely her) firm have incentives to make long-term investments in the employment relation. Although good data are lacking, Japanese firms are widely believed to spend a much larger fraction of payroll on worker training than do American firms. As an executive of a giant manufacturing firm told me, "We manufacture the person before we manufacture the product."

Such investments are not limited to formal training programs. Extensive personal relationships -- networking of all sorts -- characterize the Japanese firm. To be sure, an enormous amount of time and energy (not to mention consumption of alcoholic beverages) goes into cementing these relationships; and some of this effort is no doubt excessive. But the result is a degree of cohesion that can be found in few American corporations. American workers often think of labor as "us" and management as "them." When Japanese workers think "us versus them," "them" is more likely to be competitors than management.

Regular job rotation is a typical part of the lifetime employment system. With a few exceptions, such as scientists, Japanese white-collar and, to a lesser extent, blue-collar workers are generalists rather than specialists. Yoshio is more likely to identify himself as a "Sumitomo man" than as a "personnel officer" or "purchasing agent." This system has both pros and cons. On the plus side, it gives workers a comprehensive rather than parochial view of the firm and a natural immunity to tunnel vision. On the negative side, a constant parade of amateurs trots through most executive positions.

But one other important benefit flows from job rotation -- one that both supports and is supported by lifetime employment. Because Japanese workers are trained to perform a variety of tasks, the Japanese firm enjoys a work force that is amazingly flexible. Workers can be moved easily from one job to another as market conditions dictate. The rigid job titles that often hamstring American blue-collar (and, to a lesser extent, white-collar) employment are mostly absent in Japan. No one calls an electrician to change a light bulb. It is obvious that this kind of flexibility makes it easier for a firm to promise job security. And long job tenure, in turn, allows the firm to recoup the costs of its investments in cross-training.

Do these long-term investments in people with almost total job security pay off? The Japanese certainly think so.

Feelings of solidarity between workers and executives are bolstered by compensation structures that are starkly egalitarian by American standards. Under the Japanese seniority-wage system, wage differentials by age or length of service (which normally correspond) are far larger than in the United States or Europe. But wage differentials for other reasons -- like skill or rank -- are far smaller. In particular, Japanese executives earn a fraction of what American executives are paid; and the financial incentives that produce multi-million-dollar compensation packages in the U.S. are unheard of in Japan. With no prompting from me, several Japanese business leaders branded the compensation of some American executives "obscene." They believe such wage disparities undermine morale and hurt productivity.

I do not wish to be misconstrued as claiming that all returns are shared equally in the Japanese corporation, which is therefore a worker's paradise. Certainly not. First, "temporary" or "part-time" workers (both are euphemisms) enjoy fewer benefits and less job security than core employees. Second, large Japanese businesses are most certainly hierarchical, with higher salaries, more prestige, more generous fringe benefits, and deeper bows accruing to those at higher ranks. But, bowing aside, these differentials appear to be smaller, both quantitatively and qualitatively, than in American corporations. True, Japanese executives enjoy expensive Tokyo apartments at company expense; but ordinary workers also get rent-free (or nearly so) accommodations in company dormitories and apartments. And it is hard to imagine Japanese executives giving themselves big raises while simultaneously cutting the wages of ordinary workers or laying them off.

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The last part of the Japanese employment package is the joint consultation system. Originally, the idea was that management should consult labor on issues raised by the introduction of new technology, which in 1955 appeared likely to be highly disruptive. Nowadays, joint consultation spills over these bounds. Regular meetings between managers and representatives of labor discuss organization of the shop floor, production and sales plans, and even major management policies. Management routinely shares information with labor that would be considered proprietary in American companies.

This system gives workers a way to let off steam and is therefore good for morale. But it is much more than that. In conjunction with related institutions like team work and quality circles, joint consultation provides a powerful conduit of information from the factory floor to the executive suite. It enables Japanese firms to exploit the unique, detailed knowledge of the production process that only front-line workers can have. And information does flow -- in abundance. The JPC estimates that 85 percent of all workers in major Japanese manufacturing firms take part in a quality circle and that the average number of suggestions per worker per year is twenty-two! With that many ideas, at least a few must be good ones. Many Japanese economists believe that the highly participatory Japanese workplace, with its extensive involvement of workers encouraged to use their brains, is what enables Japanese manufacturers to practice kaizen, or continuous improvement of their production processes.

Labor unions contribute to the participatory system. Japanese unions are generally organized along company lines and are often viewed as docile. In some respects they are; for example, many would never call a strike. But most observers note that unions vigorously defend workers' rights, clamor for higher wages and fringe benefits, and so on. A key difference seems to be that the union views itself as part of the company -- once again, it is not "us versus them." In fact, union officers may be managers serving a regular job rotation in the union. And most executives of large Japanese companies began their careers as union members. A Japanese union seeks not to weaken or destroy the company but to help it grow.

Not everything is rosy in the Japanese employment system, however. For example:

  • A company unwilling to fire even gross incompetents is likely to get stuck with a few. In Japan, such people are given "window-side jobs," that is, positions with nice offices but no responsibility. The idea, apparently, is for them to stare out the window and not impair the smooth functioning of the rest of the organization. Carrying such people on the payroll is costly, of course. But it does cement the loyalty of the others.
  • Just as some companies get stuck with incompetents, others find themselves blessed with more top-quality people than they can promote. This may be no problem for the company, but it is a problem for the society. If Mitsui, say, has more promising young bank executives than it can promote, the Japanese system keeps them bottled up. It does not permit them to move to where their talents might be useful.
  • A lifetime employment system can work only if labor immobility is reciprocal. A firm cannot afford extensive investments in employees who frequently quit to take their training elsewhere. And, indeed, mid-career moves from one major Japanese corporation to another are rare. I was told, for example, that no Mitsubishi company would ever hire a Sumitomo man -- an anecdote indicative of the Japanese gentlemen's agreement not to raid other firms for talent. This means, of course, that individuals get trapped in the company that first hires them; if they are unhappy, they simply have to endure.
  • This system is beginning to fray around the edges under two types of pressure. Young Japanese find it repressive and want more freedom to change jobs. And foreign firms have brought the nefarious practice of "head hunting" to Japan. But these are minor exceptions to the Japanese adage that one businessman translated for me as "serving two lords is not good."
  • Many people believe that the Japanese system works much better with blue-collar workers in factories than with white-collar workers in offices. This is consistent with Japan's vastly superior relative productivity performance in manufacturing versus services. If true, it does not bode well for the future, when the share of manufacturing in Japan's economy will surely be smaller than at present.
  • The incredible devotion to company that characterizes Japanese society undermines the Japanese family. The story of the "salaryman" who works from 9 a.m. to 9 p.m., goes out drinking with his fellow workers, and then commutes home for two hours, arriving just in time to collapse into bed for a few hours sleep before boarding the next morning's train back to Tokyo, is not a myth. And it does little good for Japanese family life.
  • And, of course, women are excluded from the system to an extent that most Americans would find both amazing and appalling.

Competition in Japan
The preceding discussion raises three key questions. First, if Japanese firms are really run by and for their employees, how have they managed to avoid the problem of "decapitalization" that ruined worker management in places like Yugoslavia? Second, if employees really control their firms, what motivates Japanese workers to work so hard, so long, and so well? Third, if the stock market does not discipline Japanese executives, what does?

Decapitalization.
In a labor-managed firm, short-sighted employees have an incentive to run down or even expropriate the firm's capital for their personal use rather than leave it to their successors. The worry is that they will adopt clever "end game" strategies, like failing to maintain equipment and borrowing to pay higher wages, that eat away at the firm's capital. Such problems are conspicuously absent in Japan. Why?

Part of the reason may be cultural. The Japanese are widely thought to be more future-oriented and "naturally" loyal to their companies than are other national groups. Just as preserving the family name (rather than the blood line) has been important throughout Japanese history, preserving the company name is important to contemporary Japanese workers and managers. They are plainly disinclined to play end games.

But significant economic incentives also deter decapitalization. One is that not only firms, but also workers, make heavy investments in firm-specific human capital -- that is, knowledge and other intangible assets tied up with their particular company. If the firm falters, much of this capital will be lost. A second factor is the company pension, which will be a major source of post-retirement income to core employees. Firms with brighter futures offer more secure and generous pensions. Finally, almost all employees of major corporations retire from their companies well before they retire from the labor force. Since they will eventually rely on their companies to help place them in a post-retirement job, they want the company to prosper and grow.

Work Incentives.
Why do workers with complete job security, seniority-based wages, and meager opportunities to change jobs work so hard? A small part of the answer is that the Japanese are naturally industrious; to some extent, work is its own reward. Another small part is the intense peer-group pressure that permeates a conformist, workaholic society. But, once again, there are also important economic incentives.

Masahiko Aoki, perhaps the premier theorist of the Japanese system, points out that large Japanese organizations -- whether in business or government -- foster intense long-run competition among employees of the same age. Those who enter a hierarchy in the same "class" advance in lock step for some years (say, eight to fifteen), but then career paths diverge. The most able, or politically astute, move up more rapidly than the rest. Since everyone knows that career opportunities on the outside are thin, internal competition is fierce.

Managerial Discipline.
With shareholders silenced, what keeps Japanese executives in line? I noted earlier that the main bank may step in if things spin out of control. But what disciplinary devices exist short of that extreme exigency? The answer lies in the forces of competition.

First, there is competition in the labor market. This may sound strange in a country whose leading companies refuse to raid one another for talent. But the competition for entry-level labor -- coming straight out of high school and, especially, college -- is intense in Japan's labor-shortage economy. I was in Tokyo in August 1991, when the official recruiting season for April 1992 college graduates began. By the time the opening bell sounded, most of the best seniors already had jobs. This keen competition for entry-level talent forces Japanese managers to offer attractive compensation packages, good treatment, and inviting career paths -- that is, to serve the interests of employees. If they do not, they will be starved for labor just as conventional capitalist firms that offer below-market returns are starved for capital.

Second, there is competition in product markets. In this regard, America's image of Japan's internal market -- allegedly full of cartels administered by MTI -- is badly out of date. Yes, there are cartels, but many fewer than a decade or two ago. (The Japanese Fair Trade Commission's list shows 261 cartels in 1989 compared to 491 in 1979 and 886 in 1969.) And, yes, competition is often waged on dimensions other than price, such as quality, variety, and introduction of new products. And, yes, competition is kept within bounds. As one government official concerned with competition confided in me, the firms "know when to stop." And, yes, an unseemly amount of subtle protectionism remains.

But there is competition nonetheless and, in Japan's most successful industries, it is fierce. In his recent book, The Competitive Advantage of Nations, Michael Porter emphasizes the strong correlation between the degree of domestic competition in a Japanese industry and that industry's export success. Japan has nine automobile companies, thirty-four manufacturers of semiconductors, ten makers of VCRs, and so on. The level of service in a Japanese department store, not to mention an automobile dealership, is almost unimaginable to an American consumer. The variety of electronics for sale in Tokyo's Akihabara district makes it a major sightseeing stop. Product-market competition from Sony, Toshiba, and Hitachi disciplines Matsushita. Competition from Nissan, Honda, and Mistubishi disciplines Toyota. And so on.

The buzzword, then, is competition. Competition among firms selling similar products, competition among companies recruiting entry-level employees, and competition among fellow workers vying for promotion. No one should think that Japan's firms and workers live complacently off the fat of the land.

On Natural Selection
Without stretching the metaphor too far, economic systems can be viewed as involved in a Darwinian struggle in which the fittest and most adaptable survive. As Japan continues to open up to the rest of the world, will its unique economic system survive? Already, stresses are apparent.

As mentioned earlier, young Japanese are squirming in the corset of lifetime employment; and foreign employers are undermining the system by bidding away talented Japanese workers. Head-hunting may seem a trivial phenomenon, hardly enough to topple an entire system; and it probably is. But if employee sovereignty is central to the Japanese way of doing things, and reciprocal labor immobility is a linchpin of employee sovereignty, head-hunting may be more corrosive than you think. So far, the scale of this activity is trivial, but the Japanese clearly view it with alarm.

Financial liberalization and marketization pose a similar problem. If the provision of capital to firms becomes more market-driven and less relationship-driven, the voice of arm's-length shareholders may grow louder, making employee sovereignty harder to sustain and perhaps even driving Japanese firms to profit maximization. Here again, Japan has reason to fear "foreign influence."

Mercantilist trade policies are hurting Japan in an unconventional, and probably unexpected, way. The Japanese bureaucracy's skillful deployment of non-tariff barriers has driven Japan's trading partners, especially the United States, to demand structural reforms. The Structural Impediments Initiative, in particular, seeks to some extent to remake the Japanese economy in America's image by, for example, weakening the keiretsu and other institutions of "relational capitalism." To the extent that these initiatives succeed -- and I retain some skepticism -- the system that has served Japan so well will thereby be weakened.

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But foreign influence is a two-way street; and that is my final -- and hopeful -- message. There is much to admire in the Japanese system of industrial relations: high job security, extensive training, high employee involvement, flexible work forces, relatively egalitarian workplaces. We cannot, of course, simply import the Japanese system to the United States. Too many of our laws and institutions, not to mention our cultural traditions, are vastly different. But the success of Japanese transplant operations in the U.S. shows that you do not need Japanese workers to run a "peoplistic" firm. And the successful blending of equality and efficiency in the Japanese economy suggests that their system may have good survival characteristics.

I do not wish to exaggerate the ease with which an entire economic system can be overhauled. Under current U.S. laws and financial traditions, a firm wishing to elevate its employees to primacy over its shareholders would encounter a host of formidable barriers, including but not limited to takeover bids and stockholder lawsuits. It is far from easy to run a lifetime employment system when other firms in the system keep raiding you for talent. And American labor unions will not be anxious to transform themselves into company unions; some are even suspicious of the notion of labor-management cooperation.

But other parts of Japan's "peoplistic" system -- like quality circles, team work, relatively egalitarian pay structures, and extensive employee involvement -- can be put in place in America right now, with no need for institutional change, if management so desires. The employment practices of Japanese transplants in the United States, not to mention those of leading domestic companies like Hewlett-Packard and Corning, are adequate proof of that. In the American context, the introduction of profit sharing and greater labor-management cooperation are probably the logical first steps.

My fundamental point, however, is that thinking about institutional change is a necessary precondition to doing any. Perhaps Americans should spend less time cajoling the Japanese to be more like us and more time considering whether we might do better by being more like them.

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