Japan and the Economics
of the American Empire

excerpted from the book


The Costs and Consequences of American Empire

by Chalmers Johnson

Henry Holt, 2000


From approximately 1950 to 1975, the United States treated Japan a beloved ward, indulging its every economic need and proudly patronizing it as a star capitalist pupil. The United States sponsored Japan's entry into many international institutions, like the United Nations and the Organization for Economic Cooperation and Development, well before a post-World War 11 global consensus in favor of Japan had developed. It also transferred crucial technologies to the Japanese on virtually concessionary terms and opened its markets to Japanese products while tolerating Japan's protection of its own domestic market. It even supported the Japanese side in all claims by individual American firms that they had been damaged by Japanese competitors. In addition, the United States allowed Japan to retain an artificially undervalued currency in order to give its exports a price advantage for well over a decade longer than it did any of the rebuilt European economies.

We proclaimed Japan a democracy and a model of what free markets could achieve while simultaneously helping to rig both its economic and political systems. We used the CIA to finance the ruling party and engaged in all manner of dirty tricks to divide and discredit domestic socialists. In this process there was much self-deception. For far too long. America's leading officials insisted that Japan could never be an economic competitor of the United States'. President Eisenhower's secretary of state John Foster Dulles was, for example, convinced that while the Japanese might be able to sell shirts, pajamas, "and perhaps cocktail napkins" to the American market, little else was possible for them. Americans did not wake up to Japan's competitive challenge until their steel, consumer electronics, robotics, automotive, camera, and semiconductor industries were virtually extinct or fighting for their lives.

... the ideological challenge to the Soviet Union was the development and propagation of an American economic ideology that might counter the promise of Marxism-what today we call "neoclassical economics," which has gained an intellectual status in American economic activities and governmental affairs similar to that of Marxism-Leninism in the former USSR. Needless to say, Soviet citizens never understood Marxism-Leninism as an ideology until after it had collapsed, just as Americans like to think (or pretend) that their economics is a branch of science, not a fighting doctrine to defend and advance their interests against those of others. They may consider most economists to be untrustworthy witch doctors, but they regard the tenets of a laissez-faire economy-with its cutthroat competition, casino stock exchange, massive inequalities of wealth, and a minor, regulatory role for government-as self-evident truths.

Until the late 1950s, academic economics remained one of the social sciences, like anthropology, sociology, and political science-a non-experimental, often speculative investigation into the ways individuals, families, firms, markets, industries, and national economies behaved under different conditions and influences. It was concerned with full employment, price stability, growth, public finance, labor relations, and similar socioeconomic subjects. After it became the chief ideological counterweight to Marxism-Leninism during the Cold War, its practitioners tried to extract it from the social sciences and re-create it as a hard science.

Its propositions were now expressed less in words than in simultaneous equations, the old ideas of Adam Smith reappearing as fully mathematized axioms, increasingly divorced from empirical research. Its data were said to be "stylized facts," and economists set out to demonstrate through deductive reasoning expressed in mathematical formulas that resources could be allocated efficiently only through an unfettered market. By now all these terms ("resources," "efficiency," "markets") had been transformed into abstractions, not unlike the abstract formulations ("the proletariat," "the bourgeoisie," "class conflict") of its Soviet opponents. English-speaking economics became such a "hard science" that in 1969 _ the central bank of Sweden started giving Nobel Prizes to its adepts, virtually all of them American academicians. This ensured that virtually all aspiring economists would in the future try to do so-called theoretical economics-that is, the algebraic modeling of markets-rather than old-fashioned empirical and inductive research into real-world economies.

Economics split from the social sciences and took up a new position somewhere close to mathematics. Economists were now endlessly called upon by governmental bodies to testify that the American economy was unmatchable, even if it sometimes behaved badly because of overspending liberals, pork-barrel politics, or greedy monopolists. Alternatives to it were understood to be either converging with it or destined to fail. Economics no longer studied the economy; it spoke ex cathedra about what was orthodox and what was heresy. Meanwhile, empirical research on economic phenomena migrated to business schools, commercial think tanks, and the other social sciences.

Unquestionably, after the first two decades of the Cold War, in purely dichotomous choice between an economy based on Marxism-Leninism and one based on free-market capitalism-as exemplified by the economies of the Soviet Union and the United States-most people around the world would have chosen the free market. But in East Asia, at the height of the Sino-Soviet dispute and the American war in Vietnam, neither ideology was working out according to either superpower's script. The Chinese were discrediting forever whatever attractiveness might have remained in the forced-draft economic achievements of the Soviet model. Through bungling, megalomania, and deep ideological confusion about what Marxism and the Soviet experience taught, the Chinese Communist Party managed to kill thirty million of its own citizens and then, in a paroxysm of mutual blame, came close to destroying its unmatchable cultural legacy in the so-called Cultural Revolution. Today this period is recognized-even in China-as a monumental disaster, but at the time many Americans, from idealistic leftist students to presidents and other political leaders, failing to understand what was happening, retained a sentimental attraction to Mao Zedong and Zhou Enlai, the mismanagers of the Chinese revolution.

The truly surprising development in East Asia, however, was that America's "non-Communist" satellites, protectorates, and dependencies were starting to get rich and to compete with their superpower benefactor. All of this was camouflaged by the Cold War itself, so that the enrichment of East Asia occurred almost surreptitiously. The year-in, year-out record-breaking growth rates of such previously poor places as Japan, South Korea, and Taiwan were not precisely what American elites had expected, but they were explained away as nothing more than confirmations-even overconfirmations-of officially espoused free-market ideology and so were greeted with parental pride.

If the capitalist economies of East Asia were starting to perform better than the United States itself, this anomaly was usually attributed to mysterious Japanese or Asian cultural or even spiritual factors or to complacency on the part of American managers and workers. By the time the Western world awoke to what had actually happened, economic growth in East Asia was self-sustaining and unstoppable by external actions (although many Asians thought this was exactly what the United States was attempting when its policies toward the area led to the meltdown of 1997). The enrichment of East Asia under the cover of the Cold War was surely the most important, least analyzed development in world politics during the second half of the twentieth century. It remains to this day intellectually indigestible in the United States.

The fundamental problem is not simply that in the Cold War e~ 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 modem 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 modem 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 11, 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.

... most Americans failed to grasp how crucially Japan's industrial policy depended on its political and military relationship with the United States and on access to its vast market. Nor did they understand that the Japanese were investing the huge trade profits in American Treasury securities that were, in turn, helping to finance America's huge debts and making the American financial system critically dependent on Japanese savings. This growing dependency made American officials reluctant to criticize the Japanese in any way. Even when they did so, the Japanese rationalized such criticism as meant only for U.S. domestic consumption.

What Americans, including the revisionists, failed to see was that the Japanese economy, still devoted to exporting a vast array of ever more sophisticated and technologically advanced manufactured goods primarily to the American market, was generating an industrial overcapacity that would eventually threaten the health of the world economy. Moreover, as much of Asia began to emulate the Japanese form of capitalism or become offshore manufacturing platforms for Japanese corporations, this overcapacity threatened to reach crisis proportions. The crisis came to a head in 1997 and has been a continuing feature of the international economy I ever since.

As the Cold War receded into history, the United States, rather than dissolving its Cold War arrangements, insisted on strengthening them as part of a renewed commitment to global hegemony. Japan was supposed to remain a satellite of the United States, whether anyone dared use that term or not. Meanwhile, annual American trade deficits with Japan soared. American manufacturing continued to be hollowed out, while a vast manufacturing overcapacity was generated in Japan and its Southeast Asian subsidiaries. Capital transfers from Japan to the United States generated huge gains for financiers and produced an illusion of prosperity in the United States, but in 1997, it all started to unravel. The most severe economic crisis since the Great Depression hit the East Asian economies and began to spread around the world.

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