American Great Depression and the Japanese Heisei-Era Depression Compared - From an Institutional Approach, The

Seoul Journal of Economics, Spring 2004 by Shibata, Tokutaro

This paper investigates the institutional causes of the Japanese Depression in the 1990s in comparison to those of the America Great Depression in the 1930s. The Japanese Depression has two similarities to the American Depression. (1) Both depressions followed the bubble economy. (2) The decades of the 1930s and 1990s were historical transition periods. The institutional causes of the bubble economy in Japan were following: (1) instability of the international monetary system. (2) transformation of the financial system from "regulation and relief to "deregulation and relief," (3) transformation of the industrial relations, (4) the Japanese domestic institutions such as the cross-shareholding system, the tax system, "the land standard," and the underdeveloped welfare system. These institutional factors are currently obstructing economic recovery.

Keywords: Japanese depression, Great Depression, Bubble economy, Deregulation, Cross-shareholding system, The land standard

JEL Classification: G15, G21, G32, N22

I. Introduction

The Japanese economic situation, which has experienced a long depression from the early 1990s to the present, can be compared to the American Great Depression. The current Japanese depression has two similarities to the American Depression, though Japan has never suffered from such a great contraction in this depression as the American people experienced between 1929 and 1933. First, both depressions occurred after the breakdown of a bubble economy. secondly, the decades of the 1930s and 1990s were historical transition periods. As the US economic system could not survive the 1930s without drastic transformation, the Japanese economic system is facing strong pressure to change from abroad.

The purpose of this paper is to compare two depressions in order to discover the answer to the difficult question "How should we reform our economic system?" I will make this comparison from an institutional approach, which I will explain in this first section.

A. Institutional Approach

An institutional approach assumes that stable institutional structures are required for favorable capital accumulation.1 Because of several unstable factors in the market economy, we need institutions that stabilize a capitalist economy. The first unstable factor is the peculiarity of the labor force market. Capital cannot produce labor forces, though it can make most of the commodities. Therefore, an abundant supply of labor force is indispensable for continuous capital accumulation. In addition, capitalists have to draw and control workers will to work because labor force has its own volition. Accordingly, the institutions that keep labor supply and control workers volition are required for stable capital, accumulation. For example, factory acts were created to keep good conditions for workers and they enhanced productivity in England in the middle of 19th century.

A second unstable factor is the instability of money. There are many currencies in the world, and then exchange rates are not always stable. This instability makes capital accumulation fragile. A stable international monetary system is required for favorable world economic development. The International Gold Standard and the pound sterling system stabilized world economies in the 19th century. A third unstable factor is the instability of finance. On one hand, credit systems and financial markets were developed to inspire capital accumulation. On the other hand, however, the financial system is one of the main causes of economic crises. For example, in order to protect the credit system from financial instability, a central banking system was developed as the Lender of Last Resort in England in the 19th century.

As mentioned above, when stable institutions support capital accumulation, favorable economic development is accomplished. However, old institutions cannot continue to support capital accumulation forever. Innovations transform economic structures and development of firm organizations also change market structures. New economic structures need new institutions, but institutions cannot change easily. Therefore, new economic structures contradict old institutions during historical transition periods. Both the American Great Depression and the Japanese Heisei-era Depression occurred during this transition time.

In the second section. I will analyze the causes of the American Great Depression from this institutional approach and evolution of the institutional structures after the Great Depression in the United States. In the third section, I will investigate the evolution of the institutional structures in postwar Japan and the institutional causes of the Japanese Heisei-era Depression.

II. Great Depression and Modern Capitalism (Shibata 1997)

A. Institutional Causes of the Great Depression

There were several institutional causes of the American Great Depression. First, the superiority of the management over labor unions caused the unequal distribution of income, which was a fundamental cause of the Great Depression. On one hand, the increase in profit margins stimulated the stock market boom. On the other hand, the unequal distribution of income depressed the demand for consumer durable goods and terminated the bubble economy.