A History of Wealth and Poverty: Why a Few Nations are Rich and Many Poor, by John P. Powelson.


Japan: Institutions and Economic Growth


Over the centuries, the power-diffusion process changed Japan's economic development in three ways, to be discussed in the first three sections of this chapter. First, although the authorities (emperor, shogun, and daimyo) tried to mold the institutions of economic growth to their advantage, for the most part they failed. These institutions — markets and business, wage labor, money and finance, and commercial law — were fashioned mainly by the producers, traders, and financiers who used them. Second, the institutions supported phenomenal economic growth in the seventeenth through nineteenth centuries, closely rivaling that of the West. Western authors have not accorded the Japanese adequate credit for this. Third, the power-diffusion process created a basically liberal economy, or one founded on freedom of trade. Japan's current face toward the world, one of government-business liaison ("Japan Inc."), is not a reliable indicator of the degree to which the Japanese economy is culturally liberal. In the fourth section, we will discover that the much-touted "adoption of Western institutions" at the end of the nineteenth century consisted merely of marginal changes in the institutions the Japanese had already created.


The Institutions of Economic Growth

Corporate Business and Wage Labor

The history of business enterprise anywhere is a struggle between those who would participate in it — businesses, customers, suppliers, and creditors — and ruling groups who would set the terms and tax the benefits. In broad generalization, the participants mostly won this struggle in Japan and northwestern Europe, while the rulers mostly won it elsewhere. (By way of exception, in modern democracies, the government in power presumably regulates businesses to assure their compliance with the law and to fulfill public policy. Whether this regulation is self-serving, or answers to special interests, or meets a broad public interest is much debatable, but I do not join the debate here. The period under discussion is pre-democratic, in which the motives of the ruler were primarily self-serving; therefore the generalizations of this paragraph apply.)

As in many other places, in Japan businesses formed guilds at an early stage. Here and elsewhere guilds restricted production, raised prices, and foreclosed opportunities for outsiders. But in the fourteenth century, surrounded within Japan by still greater concentrations of power, guilds opened opportunity. They spawned wage labor where previously workers had been slaves, serfs, or confined to family enterprises, and they challenged the omnipotence of shogun and lords. Above all, they were groups of cooperators who trusted each other, compared with an outside Japanese environment in which war, mistrust, and coercion were the norms. Guilds introduced a biased, limited democracy, excluding many while admitting elements previously excluded. Although individuals had joined in corporate bodies before, guilds demonstrated how corporations could engage in economic ventures that individuals acting separately could not.

At the beginning of the sixteenth century, guilds monopolized almost every branch of trade, setting up barriers under license from the daimyo. Several times rulers — among them Hideyoshi, Nobunaga, and Tokugawa Ieyasu — tried to suppress the guilds but could not do so — another example of diffusion of power.

Guild memberships (kabu-shiki) were tradable. Trading shares in a monopoly might increase allocative efficiency because mergers or breakups would be facilitated, to approach an optimum size of firm. They might improve organizational efficiency [1] if more efficient managers bought the kabu-shiki of less efficient ones. Modern skills in trading might be traceable to Japanese experience in a market economy, not only in goods but also in rights and shares.

Just as pluralism in offices and shiki extended to all ranks in the sho-en except landless laborers and slaves, so also did guilds proliferate in many ways: in numbers and members; in names, such as za, onaka, kabu, nakama, kumiai, kabunakama, and tonya; and in titles and types of officials. [2] Sometimes and in some places membership was open and in others it was closed. Several times guilds were prohibited by the authorities, only to be reprieved.

Guilds were finally abolished in the Meiji Restoration of 1868. But it was not for whim of shogun or daimyo, who had both been dismissed, or emperor. Rather, guilds no longer served the interests of the groups that had negotiated their founding. These interests were to be better served by corporations (kaisha) and civil contracts with ways of business determined by parliamentary law and the courts. The same was happening in nineteenth-century northwestern Europe.


Money, Banking, and Credit

Monetary history everywhere is a struggle between those to whom money is a medium of exchange and facilitator of trade and those who seek to gain through manipulating its value. On balance, the former won in Japan and northwestern Europe, while the latter won in most of the rest of the world. (In modern democracies, a stable currency for the public welfare may be the goal of independent monetary authorities. In pre-democracies, stable currencies were the goal of rulers only if they served their own interests).

Japan's money system was created by individual initiative. In the eleventh century, many kinds of coins were traded in exchange houses. [3] Moneylenders and financial agents were found in trade fairs in the thirteenth century. [4] The terms discount and exchange charge are found in fifteenth-century documents. Reflecting the economic expansion of the fourteenth and early fifteenth centuries, both lords and traders minted new coins, which mingled with coins received in trade with Korea and China. Gold and silver coins appeared for the first time in the fifteenth century.

After an attempt to issue paper money failed because of lack of trust, [5] fourteenth-century shoguns found it easier to gain their wealth by taxing moneylenders. In 1346, they passed special laws, ostensibly to protect lenders from theft, but with the real intent of protecting their own extortions.

The authorities threatened the private monetary system in two ways during the Tokugawa period (1603-1868). First, the shoguns sponsored gold coinage from their territories in the east, whereas silver was more in favor in Osaka and farther west. Several times they attempted to issue new coinage based on gold, or to control the exchange rate in ways that favored gold. But their power depended on the acceptance of gold. Every attempt introduced trading uncertainties from the changing value of money. Second, over and over the daimyo and their samurai tried to milk the merchants. No longer needed as warriors during the Tokugawa peace, the samurai had become civil administrators on the fiefs. As such, they held certain prerogatives over the civilian population, including the merchants. Being of less value to the daimyo than in more warlike times, the samurai had not been awarded salary increases to keep up with the cost of living. Both daimyo and samurai would therefore demand loans from the merchants, now seen as a new source of wealth.

Constraints upon this system operated with vague borders. On one side, the daimyo and samurai could not destroy the goose of the golden eggs by demanding everything the merchants had. From the other side, the merchants could not ignore the daimyo and samurai except at their peril. These officials could swing favors toward obliging merchants and mete out punishments to the others.

Ieyasu, who began the Tokugawa family's 265-year reign, prohibited private coinage, established his own mints for gold, silver, and copper coins, each with a unified value based on a standard Oban with a monopoly of legal tender. Was this a grab for power, or an attempt to facilitate trade and finance for buyers, sellers, lenders, and borrowers? Had power played no role, Ieyasu might have allowed his coins to compete with others for favor. In fact, private coins continued to circulate, tacitly permitted. Accepting what was fact, in 1616 the second Tokugawa shogun, Hidetada, decreed no discrimination against any coinage. Any who discriminated would have their faces branded by burning iron, and all inhabitants of their towns would be fined. It is not clear to what extent this edict was enforced.

In the early years, Tokugawa shoguns were proud of their currency, refusing the opportunity for debasement. But the fourth shogun, Ietsuna, debased after considerable discussion. In response to an empty treasury, his successor, Tsunayoshi, debased further in 1695. Bad money drove out good, and trading circles were confounded by the uncertain value of any coin. The battle between money manipulation as a tax on merchant assets and money as a means of circulation began in earnest.

Sometime in the first half of the seventeenth century, rice merchants began speculating in futures, issuing bills against rice not yet grown. In 1653, the shogun outlawed this practice for the city representatives of the daimyo but not for ordinary merchants. The prohibition failed, and futures contracts and bills of exchange became well established. By the 1680s more than thirteen hundred rice brokers and over fifty money changers were at work. [6]

Early in the seventeenth century an Osaka merchant named Kambei contracted to deliver rice from the fiefs to the city. Clan officials issued him tickets as claims against their rice, and he developed a market for the tickets. They came to be used as money in the rice trade, and loans were made on the basis of them. A prohibition by the shogun in 1627 was disregarded, but when Kambei failed because of a bad harvest he was punished for selling short. The practice ceased, although whether because of the prohibition or for lack of trust is not clear. Takekoshi reports not only the case of Kambei, but also a number of similar attempts at new instruments of credit, which were widely popular but of doubtful legality. [7]

Settlement by bill of exchange also dates to the seventeenth century. Mitsui Hachiroemon, whose house is still a leading Japanese firm, contracted to deliver gold and silver taxes from the fiefs to the shogun's headquarters in Edo (modern Tokyo) within sixty days. He offered bills as receipts for the gold and silver. He then produced finished textiles, shipped them to Edo at less cost than metals, sold them for gold and silver, and redeemed his bills. He gained from both interest and sales. [8]

Two merchants in Osaka — Kikoyo Goroemon and Kinokuniya Tozaemon — printed paper money redeemable in silver in the early 1600s. [9] About 1640, another merchant, Tennojiya Gohei, issued deposit receipts in small amounts. These circulated widely and were copied by other merchants. Convertible paper money soon was issued by daimyo. Money changers acted as regular banks by the 1630s, and parent-bank relationships were established for interbank transfers.10 Thus, the principal institutions of money and credit known to the West in the seventeenth century functioned in Japan at the same time. Associations of traders were mostly responsible for initiating them. Indeed, "the degree of trust between merchants was widely noted by contemporary writers." [11]

By the eighteenth century, the exchange market operated in the open with regular hours. Bid and ask prices were posted, and check clearing took place through banks. [12] A chain of endorsements was still required, and if any was missing the bill would not be honored. Although merchants did not issue bearer notes, banks did. Whoever received a bill drawn on a bank could present it and receive, instead of a deposit, a "deposit note." This would circulate, but the holder ran the risk of bank insolvency. "Integrity and reliability were the characteristics of the typical Osaka house. Credit was so solid that bills and notes passed freely from hand to hand, and after a long circulation came back to the drawer or maker." [13] Although currency and deposits were not government guaranteed, nevertheless by the late Tokugawa era, the law in Osaka and Edo gave priority to their protection. [14] One can only suppose that this legal protection reflected the high value placed by urban merchants on the integrity of the credit system.

These descriptions of money, banking, and credit demonstrate the power-diffusion process: that before the twentieth century, the financial and monetary system in Japan was fashioned by its common users more than by the authorities. The power of the users to influence finance was greater than that of the government.



As in a monetary system, the evolution of law [15] everywhere is a struggle between those with sovereign power to make it and those who, concerned for their personal, business, and contractual relationships, work out agreements that take on the character of law. In Japan, as in northwestern Europe but not in much of the rest of the world, the latter group mainly won the struggle. (Independent law with a power of its own is characteristic only of modern democracies).

Central law in early Japan was promulgated by the emperor, perhaps at the behest of the families that controlled him. A constitution of 604 proclaimed the supremacy of the emperor. The statutes of Taika (645-52) defined political units and land rights, taxation, and salaries of officials. In 702, the penal and administrative codes (ritsu and ryo respectively) were set forth. Two comprehensive codes (Taiho in 710 and Yoro in 718) followed.

These codes illustrate laws handed down by authorities in order to control and extort from their subjects. [16] They contrasted with the customary law of the sho-en. As the emperor lost control during military upheavals that culminated in the Gempei War, law enforcement became privatized at the local level. Still, shoguns and daimyo made laws. Only as they ran into countervailing power were they forced to compromise with each other, with ikki, and with peasants. A perusal of Grossberg, who studied the laws of the Muromachi shogunate (1338-1573), yields the following observations, all of which reflect a shift downward in the fulcrum of power: [17]

  • First, the shogun succeeded in transferring jurisdiction over many cases from the emperor's court to his own.
  • Second, many shogunal laws appear as moralistic pleas rather than decrees. The shogun would deplore wrongdoing such as seizure of land or failure to repay debt, admonishing his subjects to behave better. The Kemmu shikimoku of 1336, sometimes referred to as a legal code, was more properly a set of questions posed by the shogun to his advisors, and their opinions.
  • Third, the repetition of many laws, such as on land ownership and debt cancellation, indicates that earlier laws had not been enforced.
  • Fourth, classes not accustomed to power, such as commoners, priests, and merchants, participated in shogunal justice without being paternalized.
  • Fifth, disorder ranging from petty violence to open rebellion obstructed law enforcement by the shogun for over two hundred years.

In addition to laws at the shogunal level, each daimyo maintained his own courts. Increasingly, the daimyo claimed new powers of administration. [18] Here on the fief, sho-en customs continued to be a significant source of law, and village affairs continued to be settled locally.

The legal protection of the peasant is probably the most significant contribution of the Muromachi era to power distribution in Japan at that time. Laws refer to returning land to commoners. Grossberg cites Ishii as calling this era "the zenith of commoners' legal rights." [19]

Why did the Muromachi shoguns cede so much power to the daimyo? Why did they defer to the customary laws of the sho-en just as the sho-en were disappearing? Why did they make the peasant's right to land secure? Why did the village remain a significant political unit? Why have some writers referred to this period as "enlightened?" [20]

The probable answer to all these questions is that the shogunate was becoming progressively weaker militarily, while Japan was disintegrating into a loose confederation of separate states, in which daimyo, villagers, shogun, and all their retainers jockeyed for power and made concessions to each other in exchange for support. In this dissolution the seeds of legal pluralism sprouted.

Law expanded and diversified during the Tokugawa era, responding to the growth of guilds, merchants, production, and moneylending, and to changes in agricultural technology and land tenure. Most of the changes took place in villages or on the fief, or through market regulations or guild rules. Thus, they were undertaken mainly in a free market for institutions, albeit with merchants and landowners more powerful than consumers and workers.

The shogun's laws related primarily to preserving the power balance and keeping the peace, resolving conflicts among the estates, suppressing contact with foreigners, meting out punishment, and minting coins. These laws directed a hierarchical society with rigid class distinctions, and with peasants to be kept uneducated "in their place." Nevertheless, the rights of ordinary people were increasingly protected. [21]

Wigmore's (1969) ten-volume study of Tokugawa law leads to the inescapable conclusion that commercial law was developed primarily in the cities and markets, by local agencies including guilds. Citing differences from place to place, he nevertheless finds overall consistency. Primarily, commercial law both formalized customary law and introduced new principles concerning contracts (what constitutes acceptance; how the interests of all parties are protected; when a contract is valid; how its fulfillment is determined; how disputes are settled; damages, discounts, cancellation, and so forth); concerning agency (who is and who is not an agent; how an agent can bind the principle, what an agent can do on his or her own account, and so on); concerning debts (how they are incurred; how they are settled); concerning rules for selling and buying (how earnest money is determined; what constitutes delivery; notices; quality of goods), as well as other elements of modern commercial law.

By the time of the Meiji Restoration in 1868, Japanese law ranked alongside that of advanced nations in comprehensiveness, diversity, and balancing of conflicting interests. If Western law was "copied" by Japan, the changes were marginal.



The foregoing examples of corporate business, wage labor, money and finance, and law have in common that these institutions were fashioned predominantly by negotiation and compromise among the business groups and other individuals who used them. Attempts by sovereign powers (daimyo, shogun, or emperor) to influence or control them were often frustrated by the humble participants.

Economic Growth

That Japan's economic growth rate since 1868 has been greater than that of the West or of underdeveloped areas is much documented and widely agreed upon. [22] Though the growth of industry and cities in the Tokugawa period has been recognized, however, until recently historians have maintained that most Japanese of that era had a very low standard of living.

Admitting that their evidence was fragmentary, and making highly qualified observations, Ohkawa and Rosovsky [23] subscribed to the backwardness of Japan during the Tokugawa era (1603-1886). They also asserted that "modern economic growth in Japan began . . . some time after the middle of the 1880s." [24]

Some Western writers have been extremely paternalistic toward pre-Meiji Japanese. In a prime example of insulting nonsense, Hirschmeier [25] wrote as late as 1964 that "men who had been brought up with the abacus could not be expected to . . . exercise entrepreneurial initiative." In a generality that is anti-historic, he also tells us: [26] "The Osaka bourgeoisie — and we may take this group as representative of the Tokugawa city merchants in general — lacked most clearly the required set of attitudes, the mentality, for launching modern business."

By assembling widely fragmented data and analyzing them in detective-like fashion, however, Hanley and Yamamura [27] challenge such traditional findings. They conclude that the Japanese economy grew, but at different rates, throughout the entire Tokugawa period; that commerce and manufacturing expanded more than did agriculture; that productivity and real wages increased in commerce and manufacturing; and that because labor moved from agricultural to nonagricultural pursuits the increase in real wages fed back into agriculture.

Hanley further supports these results. "Information on housing and food, urban water quality and waste disposal, and life styles is examined along with representative family budgets and two sets of real-wage estimates. The evidence . . . suggests that the standard of living in mid-nineteenth century Japan was not only higher than in the 1700s, but relatively high in comparison to most of the industrializing West." [28]

Yasuba agrees, asserting that in the nineteenth century, "the Japanese standard of living may not have been much below the English standard of living before industrialization, and both of them may have been considerably higher than the Indian standard of living." [29] Totman writes of "phenomenal" growth in Japan during the Tokugawa period. [30] E. L. Jones describes in some detail the economic growth and cultural changes in Tokugawa Japan. [31] Going beyond the claims of these authors, however, I am suggesting here that the roots of this growth were planted through the power-diffusion process, in the four or five centuries before the Tokugawa family came to power.



Agricultural advances have been reported as early as the thirteenth century. Artisans found employment on private estates, local markets grew, and new strains of rice and other crops such as tea were introduced from China. [32] New irrigation works in the fourteenth century led to new crops and crop products. [33]

Fresh fields and farms were opened up in the Tenwa era (1681-83), and new villages were formed. [34] Writing of seventeenth-century feudal lords, Takekoshi uses language reminiscent of the innovating landlords of England of that same century: "[F]arm districts [were] opened up in many places by feudal lords and other public-spirited men." [35] Rich farmers, and later merchants, undertook public improvements with their own funds.

Traditional forms of cooperation led to new crops and marketing improvements during the eighteenth century. [36] Land reclamation from 1600 to 1862 caused the area under cultivation to increase by 64 percent. Productivity was increased by new draft animals, more fertilizer, more iron in plows and hoes, and the spread of double cropping. [37] Deeper plowing, greater use of fertilizer, and production of cash crops are indirect evidence for increased yields. [38]


Manufacturing, Trade, and Entrepreneurship

Evidence also exists for growth in manufacturing and trade in pre-1868 Japan. Despite the closing of the country to the outside world from 1635 onward, much smuggling occurred, especially in the ports of the western (tozama) daimyo. Furthermore, the Tokugawa period saw a great increase in internal trade.

Priests and temples traded with China and Korea during the fourteenth century. [39] In a manner reminiscent of Italian city states of the same era, Buddhist priests invested gold and silver in trade and themselves traveled on the tribute ships. Japanese ships were also engaged in piracy off the Chinese coast. Imports increased. [40] In 1369, the shogun assumed jurisdiction over moneylenders and sake brewers, previously controlled by temples, and subjected them to taxation. [41] Trade must have been gaining in importance for the shogun to have taken this action.

Evidence of entrepreneurship in manufacturing is abundant from the sixteenth century on. Japanese shipbuilders immediately copied the big ships of the Portuguese after they arrived in 1543. Takekoshi calls the Genroku age (1688-1703) "epoch-making in industrial development" [42] and goes on to cite entrepreneurs, some by name, who were active in timber, rice brokering, transport, transmission of price quotations, iron manufacture and export, dry goods, monetary movements and banking, and introduction of commercial crops. Daimyo tried to attract new industries into their fiefs, just as medieval lords in Europe did for new towns. The big cities grew, especially Osaka, Kyoto, and Edo, but also Nagasaki, with new roads for overland transport, and new shipping lines, to connect them.

These historical writings make incredible the picture of underdevelopment and poverty portrayed, without quantitative evidence, in so many Western writings about nineteenth-century Japan. Scarcely more credible are the frequent assertions that the major era of economic growth began only when Japan had been "opened" by the West. The rise of guilds, money and banking, corporations, and law in the Tokugawa era could not have occurred had it not been for strong economic growth.


The Growth of Liberalism

Several times before 1868, Japanese central authorities tried to command free trade when they deemed it to their advantage. Always they failed. Nevertheless, Japan made great progress toward free trade through centuries of negotiation among producers, merchants, peasants, and local authorities, each wanting monopoly in its own province but each willing to settle on limited free trade as the compromise. This section sketches that course of history, up to the Meiji Restoration of 1868.

In contrast to China, "the freedom of the market and the formation of independent corporate life were distinctive features of [Japanese] feudal economic life." [43] We have seen the free market in land shiki. In contrast to the slavery of virtually all the rest of the contemporary and earlier world, lands were reclaimed and irrigated in eighth-century Japan with paid labor by freemen.44 But Jacobs exaggerates the idyllic situation for merchants. Although free trade existed in many places, for the most part emperors, shoguns, and daimyo tried to restrict it to their advantage. [45]

While every group wanted a monopoly for its own products, freedom of trade grew out of merchant alliances with leverage and flight from restrictions. When merchants fled the emperor's taxing power before the twelfth century, Buddhist temples offered them sanctuary, provided that they would accept free trade so that none would dominate the others. [46]

The growth of trade offered irresistible temptation to political authorities at all levels to profit from it. Until the mid-fourteenth century the landed proprietors (honjo) would erect toll barriers with permission of the imperial court at Kyoto. About 1346, the shogunate passed a law prohibiting these: "Since they create an unpardonable hindrance to travelers going to and from the capital, both new and formerly established barriers must be dismantled immediately." [47]

The shogunate was striking at an important source of revenue of its rival, the emperor. But in 1368, the imperial court relinquished the right of approval to the shogunate (I do not know the circumstances but would presume a show of power by the shogun). The shogunate suddenly favored toll barriers after all. [48] The growth of liberalism was see-saw. Daimyo established barriers at their boundaries, [49] but within their fiefs they abolished monopolies and declared trade to be free and exempt from taxes, in order to attract merchants. [50]

As various authorities erected barriers to tax itinerant merchants, these in turn fought back through guilds. "Under the patronage of a prestigious religious institution, the Kyoto court, or a local feudal authority, to which they paid fees, the guilds succeeded in establishing protection from extortion by other authorities and some degree of local monopoly under which their trade and profession could flourish." [51]

This exercise in leverage brought with it liberalization at one level (freedom from extortion) but restriction at another (guild monopoly). The net result was probably a step toward freedom of markets. Here, then, is a hint that free markets may come about not by atomizing the economy but by balancing monopolies against each other. Sometimes, guilds would buy the toll barriers from local lords so that they might operate them for the benefit of their members. [52]

Among the groups opposing toll barriers were peasants, who were directly affected by higher prices of goods they bought, and landowners, who paid the costs of tolls on other estates. In calling off a stalemated war in 1485, two provincial warlords withdrew their armies and demanded that estates be returned by the governors to their owners and that toll barriers be prohibited. At this point, the local ikki formed a government for a section of the province that they controlled, with a "constitution" that prohibited tolls. When the new provincial governor, who represented the ikki, established tolls to meet a need for funds, a massive peasant rising ensued. [53]

In international trade, bargaining for liberal policies was sometimes rough. When Japanese traders were thwarted by the restrictive policies of Korea and China, they often took what they wanted by force. The distinction between pirates (Wako) and traders was ambiguous. [54] In 1443, the Koreans liberalized their restrictions against the Japanese to lessen the piracy. But tribute ships paid a duty — 10 percent in the fourteenth century — upon their return from China. [55] By the sixteenth century, merchant ships traded without government interference. [56]

With the breakdown of the sho-en during the Muromachi era (1338-1568), towns developed and merchants enjoyed increased freedom, just as occurred in the breakdown of feudalism in Europe. Sho-en had attempted to be self-sufficient; towns could not be. "The increased freedom gained by the nonagricultural sector of the Japanese economy had two important repercussions during the Muromachi period: the growth of towns and the attendant urban commercial society and the freeing of merchants and artisans from certain social constraints." [57] As these cities grew, they formed a further interest favoring free trade. [58]

When Nobunaga unified Japan in 1568, he declared trade should be free throughout the islands. All barriers and tolls were forbidden. Perhaps he was just recognizing an already existing situation. Guilds, which had favored tolls, had broken down during the preceding wars. Peasants, merchants, and city dwellers all opposed the tolls and avoided them where they could. Another possibility is that Nobunaga foresaw the rise of trade and industry over the next century and wished to prepare for this by promulgating policies that anticipated Adam Smith, as yet unborn in a country of which Nobunaga probably had never heard. Both these answers possess some credibility. Towns and cities, trade, crafts, and guilds. were growing. Public opinion was swinging toward free trade on a broad front, not only domestically but in foreign commerce as well. No duties were exacted at Nagasaki and Hirado, and taxes on government imports were negligible. [59]

Yet another reason is also probable. The daimyo already had established free trade within the fief; Nobunaga looked upon all Japan as his fief, and therefore free trade represented the shift of power from daimyo to himself. He also abolished guilds, probably for the same reason.

Nobunaga's policies did not last, even though his successor, Hideyoshi, confirmed them by abolishing all road checkpoints to promote transportation. But the daimyo reestablished customs tolls on their fiefs, which were not abolished until 1869. [60] Instead of withering before Nobunaga's command, guilds became the new forces that both promoted and monopolized trade. Nobunaga's commands were one more example of top-down reform not in equilibrium with the power balance below.

In the Tokugawa era (1603-1868), that power balance shifted in favor of merchants. Guild monopolies proved more weighty than toll barriers. Jealous of guild power, the shogun tried once again to legislate liberalism, issuing an edict of 1622: "Commercial transactions must be free, and no one shall act in the contrary or combine to raise prices." [61]

The shogun's law could not be enforced. Peasants were frequently required by law of the domain to sell to monopoly merchants. [62] As new facets of trade and exchange opened, each was entrusted to some monopoly or semi-monopoly group: transport, principally between Osaka and Edo; foreign trade in port cities; exchange houses; and buying and selling of rice. For the most part, these monopoly groups were registered and controlled by the city or the fief, although the shogun attempted from time to time to impose his own regulations.

When the Tokugawa capital was moved to Edo (modern Tokyo), Osaka was released from harassment by the samurai and therefore grew as a commercial center. [63] It outstripped Edo in business talent, wealth, and commercial organization. In another attempt to legislate liberalism, Minister Tadakuni Mizuno (in the Tempo reforms, 1841-43) abolished guilds and all middlemen, ordering that sales should be transacted directly between producers and urban retailers. [64] All exclusive systems were destroyed for twelve years and freedom of the sea was decreed. But middlemen were a necessary link. Not conforming to the reality of the market, the reforms failed and were withdrawn after a period of chaos.

But the liberalism that could not be mandated grew by itself, not by control of monopolies but by their weakening through proliferation, not by enforcement of law but by its evasion, not by central control but by fragmentation of authority. Liberalism was hindered primarily by guild restrictions: price controls and "proper" procedures. But these might be offset by outside traders or simply by the large numbers in some guilds, whose actions were more overlooked than overseen. [65]

In the same era, landholding became increasingly fragmented, with decision-powers becoming dispersed among farmers through compromises among main and branch families. As families were split and parcels divided, paternalist obligations between senior and junior branches gave way to arms-length contracts. Rent was paid in cash instead of services. Parcels were bought, sold, and mortgaged; and a free market in land emerged. [66]

Free markets were also strengthened when attempts to control the rice trade failed. From the late 1680s peasants were selling rice directly to merchants on the fief. [67] This rice would be handled by approved but competitive brokers in each locality. [68] Without actually seeing the rice, successful bidders would sell competitively to distributors, arranging delivery.

However, Tokugawa merchants never were completely free of control by daimyo and/or shogun. [69] The daimyo would organize a monopoly for each product of the fief and sell through special agents in Osaka. Specified "house" merchants were patronized by shogun or daimyo. These merchants acted as agents of the authorities in enforcing rules to their mutual advantage. Perhaps these vertical alliances were precursors to the government-business cooperation of the late twentieth century, sometimes dubbed "Japan, Inc."

Still, the unification of the national economy, the proliferation of merchants, and the array of financial instruments increasingly presented the kinds of choices associated with liberal economies. Trade and industry flourished despite harassment by shogun or daimyo. Merchants almost always found ways around obstacles. [70] Eighteenth-century traders without any guild connections usurped guild privileges in the import trade in Osaka. [71] The balance of power, increasingly favorable to merchants, and the gains from competition and evasion of rules were critical forces in the evolution of a free market.

By the Meiji Restoration in 1868, the basis for a liberal economy had been laid. Workers were free and mobile, many producers chafed at guild restrictions, and consumers were more concerned for choice. When the guild system crumbled, [72] no one cared to defend it. Only forty-five years after the chaos of the Tempo reforms, similar reforms had occurred, by agreement, with hardly a murmur. Power had shifted downward.


The Presumed Adoption of Western Institutions

The conventional view in the West is that Japan adopted Western institutions of law, money, banking and financial markets, private farming, a constitution, corporations, and parliamentary democracy at the end of the nineteenth century. The Japanese, however, saw European and American institutions as only marginal changes, if any at all, from the ones they themselves had created. Their most economical course was to upgrade their own institutions by selecting from among the Western.

The selection took place through traditional compromises. Daimyo willingly gave up their fiefs in exchange for provincial governorships. Samurai were pensioned or given new administrative positions. Even the defeated shogun was treated with honor. Peasants were given titles to land. In these ways no one lost. By the end of the nineteenth century, when economic and political life required the consensus of many large groups instead of a few small ones, central-government institutions formalized what had been custom and became brokers for personal and commercial law. It was then that parliamentary democracy began.

Some difficult questions remained. Who would rule the new Japan? The emperor, in whose name the change had been made? The western daimyo, who had masterminded the restoration? Or a parliament? To resolve these questions, the Japanese called on their age-old facility for compromise. "[T]he Japanese tendency toward ambiguity, consensus, and compromise permitted an evolutionary development that moved with remarkable speed along the parliamentary paths blazed long before in England." [73] Power over the purse, conferred by the constitution upon the Diet (Parliament), provided it with leverage in its struggle with the military to achieve democracy. Only if the military had been willing — which they were not — to overthrow the constitution could this leverage have been suppressed.

Some were more ready to compromise than others, and a showdown between the "democrats" and the military seemed likely. Because the power-diffusion process had been mainly run, however, the story of the twentieth century is not part of this book: how Hara Kei led in forging a parliamentary system by repeated compromises with the military elite; [74] social legislation of the 1910s and 1920s; the crisis that led to Taisho democracy in the mid-1910s; realization that the people were sovereign even over the emperor, when the Diet rejected the emperor's command to reverse a vote of no confidence in 1913; [75] the heyday of party government and the advance of labor unions in the 1920s; and how the Japanese government handled the depression of the 1930s. In a tragedy that engulfed the world, the military, whose role had been ambiguous since the restoration and which had never been clearly subject to civilian authority, used its power to edge out democracy in the 1930s, taking extraparliamentary action to start a war in Manchuria. Perhaps — let us hope — World War II was the "last hurrah" of the samurai.

While some power concentration continues even today, nevertheless the concept of accountability is so far advanced that a government could fall in the corruption scandals of the 1990s — something that would have been unheard-of only half a century earlier.


  1. Sometimes known as x-efficiency, a term invented by Liebenstein 1978.
  2. All these are detailed in Takekoshi's massive economic history of Japan, 1930, in three volumes.
  3. Takekoshi 1930:3:18.
  4. Grossberg 1981:4.
  5. Takekoshi 1930:1:204.
  6. Takekoshi 1930:2:247.
  7. Takekoshi 1930:2:249ff.
  8. Takekoshi 2:278; Wigmore 1969:121.
  9. Takekoshi 1930:2:280.
  10. Crawcour 1961:351ff.
  11. Crawcour 1961:344.
  12. Wigmore 1969:119ff.
  13. Wigmore 1969:99.
  14. Wigmore 1969:127.
  15. Elizabeth Herr helped me with the research for this section.
  16. I have written more extensively about them in Powelson 1988:175ff.
  17. The detailed occurrences that underlie these observations are found in Grossberg 1981.
  18. Hall 1970:131.
  19. Grossberg 1981:9.
  20. Grossberg 1981:13.
  21. Wigmore 1969:xxii.
  22. For example, Ohkawa and Rosovsky 1973; Patrick and Rosovsky 1976.
  23. Ohkawa and Rosovsky 1978:137.
  24. Ohkawa and Rosovsky 1978:143
  25. Hirschmeier 1964:37.
  26. Hirschmeier 1964:43.
  27. Hanley and Yamamura 1977.
  28. The information is presented in detail in Hanley 1983:183ff.
  29. Yasuba 1986:224
  30. Totman 1981:219, quoted by E.L. Jones 1988:155.
  31. Jones, E.L. 1988: chapter 9.
  32. Grossberg 1981:5.
  33. Hall 1970:121.
  34. Takekoshi 1930:2:199.
  35. Takekoshi 1930:3:412.
  36. Hayami and Ruttan 1971:35; Braudel 1981:157.
  37. Hall 1970:201.
  38. Yasuba 1986:217.
  39. Takekoshi 1930:1:211ff.
  40. Hall 1970:122.
  41. Grossberg 1981:10.
  42. Takekoshi 1930:2:238.
  43. Jacobs 1958:30.
  44. Asakawa 1929:193.
  45. Tsuchiya 1937:84.
  46. Jacobs 1958:32. "So that none would dominate the others" is my supposition, not found in Jacobs.
  47. Law quoted in Grossberg 1981:35.
  48. Wintersteen 1974:204.
  49. Tsuchiya 1937:135.
  50. Duus 1969:79.
  51. Fairbank, Reischauer and Craig 1978:382.
  52. Takekoshi 1930:1:241.
  53. Davis 1974:236.
  54. Fairbank, Reischauer and Craig 1978:383.
  55. Takekoshi 1930:1:219.
  56. Takekoshi 1930:2:404.
  57. Hall and Takeshi 1977:126.
  58. Takekoshi 1930:1:267.
  59. Takekoshi 1930:2:282.
  60. Fairbank, Reischauer and Craig 1978:505; Ohkawa and Rosovsky 1974:143.
  61. Takekoshi 1930:2:489.
  62. T.C.Smith 1970:160.
  63. Takekoshi 1930:3:42.
  64. Takekoshi 1930:2:546.
  65. Takekoshi 1930:3:253.
  66. Mitsuru 1982:150ff; Powelson 1988: chapter 15.
  67. Bix 1986: 10.
  68. Takekoshi 1930:3:92; Wigmore 1969:119.
  69. Hall 1970:208.
  70. Takekoshi 1930:2:471.
  71. Takekoshi 1930:2:517.
  72. Takekoshi 1930:3:273.
  73. Fairbank, Reischauer and Craig 1978:547.
  74. Najita 1967; Fairbank, Reischauer and Craig 1978:685ff.
  75. Najita 1967:151-53.

Copyright © 1994 by the University of Michigan. First published in the USA by the University of Michigan Press, 1994.

Published on the World Wide Web by The Quaker Economist with permission from the University of Michigan Press, 2005.

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