Veblen's theory of institutional change: an explanation of the deregulation of Japanese financial markets

American Journal of Economics and Sociology, The,  July, 1995  by J. Patrick Raines,  Charles G. Leathers

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The process of internal institutional development and the process of adjustment to new conditions within the existing institutional 'paradigm' operate as extensions, elaborations, and modifications in the prevailing scheme, but do not themselves result in radical changes in the institutional base or in institutional revolutions (Rutherford 1984, 344).

The dominance of the pecuniary logic of business institutions requires that production and distribution in a market system be guided by the profit motive. Veblen's analysis of the development of business enterprise, from a system of competitive proprietary firms to one dominated by corporate giants, focused on both technological advances and evolving financial institutions (in modern terms, financial innovations) which enabled the large businessmen and bankers to increase their control over industry.

Veblen's essay on Japan added another important insight into the institutional nature of the business enterprise system, namely, that the dynamics of the system are such that it becomes international in scope. Quasi-feudalistic nations, such as Imperial Germany and Imperial Japan, can acquire certain industrial efficiency advantages by "borrowing" modern industrial technology free of the burden of funded capital. But to fully exploit the economic advantages of industrial technology, those economies would have to enter the world market on equal footing with the western economies. Feudalistic institutions and attitudes, as well as traditional policies of isolationism, would have to give way to western business institutions and governmental policies favorable to the pursuit of pecuniary profits by large businesses and financial interests.

Veblen's analysis of Japan explicitly contradicted the still popular thesis that Japan is somehow culturally unique in an exceptional fashion (see, for example, Angresano 1988). Instead, Veblen argued that the "Spirit of Old Japan," commonly portrayed as reflecting an innate and irreducible character unique to the Japanese, was merely an institutionalized matter of acquired thought, tradition, and training (1915b, 255). In the long run, life under conditions imposed by the modern industrial system and modern business practices and values is incompatible with archaic values and attitudes. As Japan progressively assimilated borrowed industrial technology, the Japanese people would increasingly fall under the influence of the "peculiar habits of thought of the occidental culture," and the "Spirit of Old Japan" would be effectively dissipated (Veblen 1915b, 255-66). Break downs in the Japanese system of life-time employment as well as the end of social and political consensus are evidence of such changes.

IV

Commercialization, Internalization and Financial Markets

Of particular relevance was Veblen's prediction that Japan would rather quickly become highly commercialized on a global scale. He noted that Japan could only exploit the great productive capacity of its borrowed industrial technology "by the help or through the mediation of a business organization of the modern kind" (1915b, 262). Thus, the Japanese would come increasingly under the influence of the business enterprise system, which extends well beyond the immediate market place.