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Top>Research>Has the "Variety of Capitalism" Theory Lost?


Yoichiro Nakagaw

Yoichiro Nakagawa [Profile]

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Has the Variety of Capitalism Theory Lost?

Yoichiro Nakagawa
Professor of Monetary and Banking History of Contemporary France, Faculty of Economics, Chuo University

"It (the variety of capitalism theory) seems to have lost." (Professor Ronald Dore)

This year (2009), the Chuo University Faculty of Commerce greets its 100th anniversary (Faculty of Commerce 100th Anniversary HomepageNew window). As part of events to commemorate this milestone, a lecture was held on November 7th by Professor Ronald Dore (Professor Emeritus at the University of London), a world-renowned authority in Japanese social and economic research.

During the lecture, which was entitled The Modernization of Japan: From Post-War Democracy to Structural Reform, Professor Dore discussed the various forms of capitalism, stating that Anglo-Saxon capitalism is market oriented. Conversely, he stated that rather than being market oriented, Japanese capitalism "can be generalized as organization oriented." There is a marathon history perspective which espouses that the expansion of the global economy is similar to a marathon race in which all runners follow the same course. In this perspective, the world is dominated by Anglo-Saxon capitalism, which is the lead runner in the marathon. Eventually, capitalism throughout the world converges into Anglo-Saxon capitalism. Through his past work, Professor Dore has boldly challenged this marathon history perspective by clarifying the characteristics of Japanese capitalism and by emphasizing its individualities.

However, the environment surrounding Japanese corporation changed dramatically after the burst of the economic bubble in the 1990s. "To whom does a company belong?"-the answer to this question changed from to the employees to to the shareholders. Under the banner of a merit-based system, the ratio of income distribution to executives became high, while the ratio of distribution to ordinary employees became low. As a result of pressure from the stock markets, or the pressure of enhancing performance, emphasis shifted from the customs of earnings retention and allocation of R&D funds to an emphasis on the payment of dividends. To summarize, from Professor Dore's perspective, Japanese capitalism has experienced a great change in direction during the past 20 years, shifting from the prior "organization orientated" style to Anglo-Saxon capitalism and its blatant quest for profit.

The variety of capitalism theory, which states that a variety of capitalism exists in the world, will be greatly weakened if it is true that Japanese capitalism has sided with Anglo-Saxon capitalism. Professor Dore closed his lecture with an impressive remark: "I have spent my whole life defying the marathon history perspective, but it seems that I have lost."

The Lehman shock revealed market flaws. However, at this point in time, there is no organization which can substitute for free markets.

How solid is the marathon history perspective which states that capitalism throughout the world will eventually converge into Anglo-Saxon capitalism?

Since the crash of subprime loans in the U.S. in September of 2008, there has been a slump in stock value and land value throughout the world, and there has been a decrease in growth rates. The global economy has gone into recession, and the flaws of global capitalism and market economics have been uncoverd. A large amount of capital has coursed throughout the world, has been spent in speculative markets, and has been invested in unproductive fields. This has resulted in enormous profit for a certain group of people, but has also created a large amount of low-income earners. Confidence in the market has been lost.

What about a socialist economic system as an alternative? Tragic memories regarding such systems are still fresh in people's minds. Lenin seized power in Russia in 1917. Since then, the history of a single-party communist dictatorship has left a brutal scar on the history of mankind.

The Berlin Wall fell in 1989, only 20 years ago. Since then, socialist systems were abolished by one eastern European country after another. Then, in 1991, there was the collapse of the Soviet Union itself, and socialist systems were almost extinct in Europe.

In the future, there will undoubtedly be voices, both public and private, calling for the resurrection of socialism under slogans such as "Don't become infatuated with capitalism!" and "Oppose the tyranny of market economics!" However, at the very least, there is no possibility of resurrecting a controlled economy that has the image of a single-party dictatorship. The global economy requires some kind of new rules, and, eventually, rules will probably be established which enforce regulations. Still, at the present time it is impossible to imagine an organization or system that is managed exclusively by a small number of elite and that serves as an alternative to markets.

Even though the market has been weakened to this extent after the Lehman shock, absolutely no voices (at least not explicitly) which call for the abolishment of market economics and a return to socialism. Rather than create an exclusive and controlled economy, it is most likely that minor adjustments will be enacted by enforcing regulations and preventing excess while maintaining the fundamental system of free markets.

The globalization of competition will continue.

In such a situation, the severity of competition will further increase in the foreseeable future. Competition exists not only domestically, but is carried out on a global scale. Due to this globalization of competition, competitors include both domestic and international corporations. Even corporations who have targeted only domestic markets in the past are now suddenly faced with overseas competition.

The desire to determine sales price at one's own initiative is only inherent for manufacturers and other producers. When left to the manufacturer's own initiative, sales price is determined by adding an appropriate amount of profit to total costs such as materials/components cost, labor cost, and general operating costs. However, when viewed from a global scale, there is currently an excess of supply. Due to a constant increase in the severity of competition, there is trend of price reduction. Recently, producers continue to operate under the fear of deflation.

This shift from a peaceful world of noncompetition to a world in which competition is supreme has created a frightening situation for manufactures. Manufactures are no longer able to decide a product's sales price, in other words, they cannot decide on an appropriate price (and an appropriate profit). Producers (manufacturers) will become unable to add profit to cost in order to determine a sales price at one's own initiative. Instead, prices will be determined by the market. The actual price at which a product is sold in the market becomes the appropriate price.

There might be economists who refute the idea that "the appropriate price of a product is the price at which that product is sold." However, this idea will undoubtedly be approved by elite Japanese management that has long experience in competition. "Product price is not determined by the manufacture. It is determined by the customer."-This statement was made more than 30 years ago by OHNO Taiichi (founder of the Toyota production system). The Toyota production system has refined such philosophy through actual onsite experience. In other words, Japanese manufacturers have already made early preparation for the current globalization of competition.

Japan's trade structure: From consumer durable goods to production goods/capital goods.

The globalization of competition is most clearly evident in the consumer durable goods industries such as home electronics and automobiles. Before the oil shock, consumer durable goods were a representative category in the export of Japan, and the country was even criticized for its "torrential exports." Since consumer durable goods are sold to the masses, it is inevitable that they stand out within the importing country.

The production of consumer durable goods normally requires a large amount of human labor during the final assembly process. It is for this very reason that low-wage countries are competitive in the industry. Due to the high-wage and high-cost attributes of Japan, it is extremely difficult for Japanese corporations to engage in a simple price-war strategy. Low-wage countries are entering the global market in rapid succession. As a result, in the production of sundry items and daily goods, Japan is unable to be cost-competitive with China and other low-wage countries. In order to survive, Japanese manufacturers must sell products that possess a high level of quality, capability and functionality that can only be achieved in Japan (in other words, Japan Brand). Such products contain high levels of technology and know-how, and are therefore production/capital goods (components, materials, equipments, machines, etc.) that can only be produced by corporations with high standards.

During the two oil shocks which occurred in 1973 and 1979, Japanese manufacturers were the first to realize the need for the high-level products described above. Instead of the general-purpose products that were produced in the past, Japanese manufacturers focused on research and development in order to create products that are exclusive to Japan.

Export Value in Japan (By Special Classification)

Value of Exports by Special Classification of Commodity (1977--2004)New window
(Source)18 - 1 - c Export Value - By Special Classification (1965 to 2004) Created by the author based on the data shown above ( window).

This shift in products category was a great challenge to both the corporations involved and the production industry itself. I would like to advance briefly two reasons why the shift was made successfully. The first reason was the low barrier that existed between hierarchies within the company. Since there is little friction between personnel positions that are given classifications such as engineer, technician, and worker, it was possible to exert a company-wide effort and to succeed in the difficult task of shifting the products produced. The second reason was the sincere support of subcontracting manufacturers. Japanese industry featured a diverse supporting industry composed of small and medium-sized companies. Furthermore, the shift in products category was considered as my own concern by subcontracting manufacturers that supplied components and materials, and such manufacturers made the utmost effort to share knowledge and to make final products well sold in the market.

In the end, both within corporations and between corporations, a group of non-core members that would be alienated in Europe and America held a sense of ownership in Japan and worked to resolve each issue as if they were my own concern. This was the foremost reason that Japanese corporations were able to make the clear-cut shift from consumer durable goods to production/capital goods.

Today, it is true that the market continues to expand, deepen and globalize. The severity of competition is also increasing due to participation by developing countries. Perhaps this situation should be called "the impending completion of world dominance by Anglo-Saxon capitalism." However, it seems that Japanese corporations are still attempting to respond to globalization through the underlying strength of Japanese society.

Professor Dore, don't you agree if I say that the "variety of capitalism" theory has not yet lost?

Cultural program that Professor Nakagawa supervised Chi no Kairo(The Corridor of Wisdom)-Motivation of site that supports auto sector of Japan- is hereNew window

Yoichiro Nakagawa
Professor of Monetary and Banking History of Contemporary France, Faculty of Economics, Chuo University
Born in Tokyo in 1950. In 1974, graduated from the French Language Department at the School of Foreign Languages, Tokyo University of Foreign Studies. In 1976, completed studies of the Master's Program in International Relations at the Graduate School of Social Studies, University of Tokyo.
In 1981, received his Doctrat de 3e cycle (Ph.D. in Economic History) from the Graduate School of Social and Economic History at the University of Paris (I). In 1983, completed studies of the Doctoral Program in International Relations at the Graduate School of Social Studies, University of Tokyo.
After serving as Research Assistant and Associate Professor at the Chuo University Faculty of Economics, assumed his current position in 1994. Served as the Director for Center for Admission from November 2005 to March 2009. Has served as Vice-President of the university since December 2008.
Professor Nakagawa's main areas of research are economic history of comtemporary France, history of automobile industry in Japan and France, and communist totalitarianism. His current research themes are (1) the influence that Japanese systems have exerted on European and American industrial systems (otherwise known as "Japanization"), and (2) the role of France in the origin, expansion and fall of communist totalitarianism. Also, he sympathizes deeply with the call for the spirit of a Japanese-language clan in Taiwan, namely, Taiwanese born and educated in the Japanese era. They began to open their mouth claiming revision of history after Lee Teng-Hui assumed the position of President in Taiwan. His secondary research theme therefore is Taiwan: The Mirror of Japan.
His major written works include Study on French Economic History (Chuo University Press, 1993) and The Conquest of the World by European (Universal) Civilization -Guns and Cross- (Gakubunsha, 2003).