ccording to the conventional wisdom, economic systems in the contemporary world can be classified into the following models: 1) The American economy, which emphasizes resource allocation in the private sector; 2) China, which is moving toward a market economy under a virtually one-party dictatorial regime; 3) the European model, which contains some variants of industrialized capitalism, including indicative planning (France) and the social market economy (Germany); 4) the so-called Swedish model; and 5) the Asian model which, again, consists of several variants depending on the stages of economic development.
Such typology certainly helps us understand the basic differences, especially subtle differences, existing among economic systems in non-socialist countries. However, discussions focusing only on these differences tend to overlook the possible “functional disorder” in modern industrial societies, which are, as political regimes, constituted by the principles of liberal democracy. Attention to this “functional disorder” is far more important than attention to “differences.”
So, as an economist, let me confine my speech to the following three aspects of this “functional disorder.” One is the possible influence of global competition on our time-horizon and attitudes toward risk in economic activities. It may be called the “long-run cost” caused by short-sighted thinking. The second aspect concerns the common problems existing in both democracy and market economy with respect to private interests and the public good. The third aspect is connected to the role of the leadership in modern democracy.
The Problem of Short-sighted Thinking
Consider the analogy of growing a forest. While perhaps a bit extreme compared to other businesses, the lumber industry offers a good example of the relationship between time and productivity of capital. It takes time. The deployment of capital does not yield overnight return and one should not have such expectations. Up to fifty years of labor and time are devoted to forest cultivation until it finally assumes a form enabling income to be realized from it. If its operator’s time horizon becomes shorter, the long-term benefits of the forestry business will be jeopardized. Hence the industry becomes disorganized and ends up in disarray. The problem faced by the forestry industry closely resembles a host of other problems confronting Japan and the world’s market economies and democracies. Let me take up three examples.
First, the ways in which we develop or evaluate human resources are among the most important factors that vitalize our societies or organizations. Companies that do not face competition and do not have productive employees, or organizations which do not develop capable human resources and do not practice fair evaluations of these human resources, will in the long-run almost certainly decline. After all, organizations work to secure outstanding human resources and try to develop them.
However, regardless of the importance placed on competition and meritocracy, things are never that simple. This is because no one has complete information on a person’s capabilities and future potential. This is why all organizations seek to develop effective methods of developing and measuring the abilities, aptitudes, and performance of their workforce.
But in recent years, it appears that new methods of managing human resources are being adopted. They are short-term (usually one year) “performance-based” salary systems falling short of long-term perspectives. The annual wage contract system is directly linked to each year’s performance, which is fundamentally based on evaluations only for a year. This may be a very effective system for professional soccer players or sumo wrestlers, but it is not appropriate for workers in large establishments who spend time acquiring skills and knowledge by serving for a long term.
Second, a change is occurring in R&D, where a short-term view is also becoming prevalent. In Japan’s case, one cause of this may be the economic recession, but another is intensifying competition, which has strengthened the emphasis on short-term successes. Many companies have reduced their R&D budgets and begun to purchase new technology from outside, while restructuring their own research institutes. Even in the U.S., which has been enjoying favorable business conditions for the past several years, the ratio of R&D to Gross Domestic Product reached a peak in 1987 and has since undergone a significant decline. Japan’s expenditures reached a peak in 1990 and have been declining. Although this trend has reversed since 1995, it has merely returned to the 1990 level.
What does this distinctive trend tell us? It tells us that major corporations are abandoning long-term advanced research on their own that entails risks.
A third example is the volatile and capricious movement of short-term capital which was actually one of the main causes of the Asian financial crisis starting in 1997. Some business corporations became more interested in investing in international short-term capital markets rather than in foreign direct investment, which requires a longer time-horizon in transferring technology, training the workforce, and obtaining final returns from investment.
Here I would like to touch upon how this short-term perspective is causing problems in Japan. From the long-term standpoint, it reflects the diminished importance that we place on developing human resources, R&D, and capital accumulation.
Another side effect of this short-sighted thinking can be observed in the policy formation process. In Japan, there is a strong tendency toward down-playing the views of specialists in the process of formulating policies. Without specialized knowledge and analyses, the growing complexity of contemporary political and economic problems makes it impossible to foster a climate for effective debate. The leader of a country cannot have sufficient knowledge in every specialized field of public matters. Hence the need to co-opt specialists and experts into policy formation. Let me quote Walter Lippmann on this point:
I argue that representative government, either in what is ordinarily called politics, or in industry, cannot be worked successfully, no matter what the basis of election, unless there is an independent, expert organization for making the unseen facts intelligible to those who have to make the decisions. I attempt, therefore, to argue that the serious acceptance of the principle that personal representation must be supplemented by representation of the unseen facts would alone permit a satisfactory decentralization, and allow us to escape from the intolerable and unworkable fiction that each of us must acquire a competent opinion about all public affairs (Walter Lippmann, Public Opinion [New York: MacMillan, 1922], 31).
I believe that Japan has fallen behind in this awareness.
Conflicts of Public and Private Interests
In addition to the need for an independent expert organization to help those who have to make decisions, the main problem of democracy is how to recreate a sense of public morality on the basis of equality and individualism. Individual interest is not always compatible with the public good. Here we can see a certain parallel between democracy and a market economy. The fundamental paradox of democracy is that equality of conditions is compatible both with tyranny and with freedom, just as market freedom can go with monopoly and with fierce competition.
In any democratic regime, there is a great need to prevent government from growing more powerful on the one hand, and individuals from appearing more helpless or self-centered on the other. Tocqueville presents several democratic expedients which are expected to transform private interests to the benefit of the public good (Alexis de Tocqueville, Democracy in America, Vol. I, ed. Francis Bowen, trans. Henry Reeve, [Cambridge: Sever and Francis, 1862], 202–8, 363–4, 243–4):
1. Local self-government forms many concealed breakwaters in order that citizens are trained in the use of freedom. The free local institution (e.g. the county or township) is expected to train and transform essentially selfish individuals into citizens whose first consideration is the public good.
2. The jury system is another device which is equally important to protect freedom and alleviate the individualistic tendencies of democracy. It enriches citizens with a consciousness of the needs of others. In this respect, legal training is indispensable since it gives citizens certain tastes for law and order. Their understanding will be broadened and deepened through contact with judges and their sympathy for fellow citizens will grow through jury service.
3. Freedom of association is probably the most important of democratic expedients. Through the operation of associations, individuals learn the art of adapting themselves to a common purpose. Their minds will be broadened by participating in associations. Through the operation of these democratic expedients, men are to be transformed into morally conscious citizens.
Considering these important roles of voluntary associations as democratic expedients, we should positively evaluate such intermediate organizations as non-governmental organizations and non-profit organizations, even though they occasionally act as pressure groups, as at the WTO meeting in Seattle and the UNCTAD meeting in Bangkok recently.
Democracy and Leadership
Democratic decision-making is an effective system in ensuring the authority of the majority view. But it is an ineffective system when it comes to closely examining the implications of that view. Democracy is probably the most desirable form of government, but it has yet to be decided whether democracy is in fact the best option that is theoretically possible.
The presumption of democracy, be it in government or business, is that leadership is a somewhat self-contradictory notion to begin with. Speculation abounds that democracy and leadership may, in fact, be incompatible. Democratic organizations almost by definition need no commander-in-chief. If that method is best which gives the majority view its due, so the argument goes, there is no real need for leadership. So long as goals are clearly defined, this line of reasoning is not flawed.
Expecting too much from leadership in a democratic system of government is tantamount to tacitly yearning for oligarchic rule and, if coupled with a system which elects a leader by popular vote, is likely to produce a dictator. Both in terms of aptitude and predisposition, people often rather like to be led than to lead. In the complex society of today, democratic decision-making processes, like elections and referenda, impose upon the people tremendous costs in terms of both time and money. In this respect, dictatorship—the extreme form of leadership—may be regarded as a highly mobile decision-making system, at least for those choices which must be made without delay.
In the 20th century, however, the world has learned at considerable costs what dictators bring with them. There is no need to belabor the point that dictators poison the popular mind with distrust and suspicion and engineer astronomical human sacrifices. In the economic sphere, their record is dismal. The collapse of the old Soviet and East European regimes bears witness to the inability of centralized command economies to respond viably to changing economic conditions.
Our daily life is surrounded by constantly changing factors. Even listing all the possible changes in the economic environment is hard to do. Foreign trade, international finance, technology—these things and many others are all changing, such that the course of human events itself is geared to the task of “responding to change.” And the very notion of “planning” at the central government level has by now been exposed for what it really is: an attempt to do the impossible. The fundamental flaw of socialist dictatorship was in its attempt to design and manage human societies by rationally calculating the “future” through a central planning agency.
How then can we reconcile the two conflicting decision-making mechanisms—leadership and democracy? Just as a market economy does not mean unbridled laissez-faire but requires a “government” to function as rule-maker, supervisor, and arbitrator, so a democracy, as a decision-making system reflecting the simple sum of individual desires, requires a certain degree of leadership, lest it become a drifting “ship of fools.” Here again arises the importance of communities and associations that exist between the state and individuals, or between public and private.
