April 05, 2005

German and Japanese Economics

Becker and Posner both have lengthy posts dealing with the alleged growth of China, perhaps even to eventually surpass the US. What I found interesting was Becker's mention of Germany and Japan as previously championed economies that were supposed to outdo the US. I'm old enough to remember the late 1980s and early 1990s when people started getting scared about Japan surpassing us. They were believed to be more disciplined, intelligent and harder-working, and their trade barriers were considered unfair (of course, they also accepted "voluntary" self-enforced export restrictions and quotas). We even had movies about it, like that bad one with Michael Keaton and George Wendt (Norm from Cheers) working at a car factory.

What's interesting is that both the German and Japanese model (and of course the USSR model) were touted as superior because they were different. Any country that eventually surpasses the US is probably going to need to beat us at our own game (i.e. substantively free markets and stockholder capitalism). Countries and people are fallible but the basic rules of efficiency, supply/demand and the rest aren't. You can outrun the inefficiencies caused by spurning basic economic laws or mask it with hard work, but eventually it catches up.

Both Germany and Japan had educated workforces, high-technology industrial capacity, experience with contemporary transportation, and a reputation for hard work. Unfortunately, they also both socialized their economies. You can tailor your resources for growth and you can tailor them for a welfare state, but you can't maximize both at once. That's basic opportunity cost. Maybe to some degree they support each other, but after a certain threshold the subsequent returns are less and less.

But what I find most interesting on this subject is anecdotes about the anti-market aspects of German and Japanese economics.

Japan Example 1: The Japanese are known as very hard workers. They have even been said to occasionally work right into their death. Of course, from a European perspective, this is true of Americans, as well. The problem is not just working hard, but doing work that's worthwhile. When some companies in Japan lose cash flow, they have the option of transferring some employees to partner companies until they restore the cash flow to take them back. Of course, the partner company doesn't usually need the employees or they would have hired their own, so as a result they're paying a bunch of people who are usually redundant. The partner company can't depend on the employees sticking around for longer than a year or a few years, so it doesn't get avoid making new staff decisions. The partner company, which may have been quite healthy, is now infected.

In Japan, cash flow problems really can be contagious.

So the original company has had, say, 18 months to set itself right. Unburdened by so many employees, it's now looking much healthier and brighter. It takes back some or all of the loaned-out employees. Of course, it obviously wasn't doing that bad without them, so how important could these employees be? Re-burdened just at a time of transition into success, the original company starts to slump again. Maybe it's had time to restructure and it can better utilize the re-acquired employees, but ultimately this was an exercise in shifting around dead weight.

Rather than firing these employees and allowing them to re-enter the economy in more productive places, this practice ties up human labor (educated, hard-working people) in jobs where they are of less value. The funds used to staff and salary these employees is now also stuck on employees that are contributing less value than the money might otherwise have bought. The only way out of it is to reorganize the company and find a place to utilize those employees. Fortunately, this practice as I understand it is not too widespread.

Japan Example 2: The Japanese economy for decades has been marked by mega-conglomerates called zaibatsu before the war and keiretsu after it. They group together companies in different industries and include a number of banks in each keiretsu. Whenever some companies in the keiretsu fall behind their group's bank writes them a loan. In this way the bad companies get protection from the good. The more-efficient businesses are backing the loans that go to the less-efficient companies. By not moving the resources of the less-efficient businesses into a new structure or into new management, they propagate inefficiency. By using the gains of the productive companies to cover the losses, they tend to cancel out many of the gains made in the economy.

Soviet Example 1: I couldn't resist a Soviet example. Of course the Soviets had the same problem as the Japanese in canceling productivity by protecting bad producers - only much worse - but the price fixing cries out to be mentioned. The Soviets, in an attempt to help the workers and confound the West, loved to price fix. They felt that the price of bread ought to fairly be a certain rate - which ended up being about the same as an equivalent amount of grain. After all the labor, ingredients, transportation and storage put into making a loaf of bread from grain, the Soviets wanted no profit from it. As a result livestock farmers could feed their animals bread instead of grain. There was no cost to them, because the fixed prices made it about the same. In effect, a lot of the effort that went into making, storing and shipping bread was useless, because the livestock would've eaten grain anyway. It's no wonder their economy couldn't sustain itself.

German Example 1: The Germans are also considered hard workers, though perhaps considered less so than the Japanese. But they have a highly specified system of licensing and guilds for the professional trades. So specified, in fact, that a roof-repairer is legally distinct from a roof-builder. Heaven help the man who crosses the gap between repairing a roof and building man. One German man, an experienced roof repairer with decades of experience, repaired so much of a roof that it counted as building one. He was fined.

Even though the man was competent and experienced, he was basically seen as poaching on the territory of the builders. Imagine how difficult allocating resources in an economy must be when the roofing professions are split at least in half and regular folks have to determine whether they need a large repair or a partial rebuilding. Of course, Germans often believe their economic resurgence in the last five or six decades is because of the licensing system, rather than in spit of it.

Whatever country it is that eventually surpasses the US economically (assuming it happens) will need the help of the market rules. Trying to build a whole new system, whether it's socialism or managed capitalism or cartel capitalism, just creates too many inefficiencies to be a great idea. It's possible that some economy might be so monstrous that its sheer girth will compensate for its mismanaged markets, but it would be much easier for another country to beat the US at our own game. It's not that the markets tend to work by US rules; it's that the US tends to follow market rules.

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