Economic Thought and the Role of the State in Late Development

by Ralf Kroessin

UNIVERSITY OF KENT AT CANTERBURY

Economic Thought and the Role of the State in ‘Late Development’:

Friedrich List and the Japanese ‘Miracle’

Ralf Kroessin

(MA by Research in International Relations), 1998 Preface:

Despite vanishing recognition for the economic importance of the nation-state – especially in the age of so-called globalisation - states can play and have played a vital part in economic development. The case of Friedrich List and the impact of his ideas on the Japanese economic development, which is often referred to as a ‘miracle’, prove the crucial importance of addressing other economic traditions.

The German 19th century economic thinker advocated state-led development through the fostering of ‘infant industries’ and; importantly, through the promotion of the ‘productive forces’ of the national economy as a whole. List’s idea of a national system of political economy was attacking Smith’s and Ricardo’s cosmopolitical economics. Based on the concept of historicism, List and the German Historical School essentially argued that universal economic laws were non-existent and, thus, states had the right to intervene into the economy. Particularly in the case of late-developing countries, the promotion of national economic development was regarded to be critical to their success in ‘catching-up’ with the industrialised and developed world.

List, however, was a liberal nationalist and his concept of economic nationalism - which was often but unjustifiably regarded as ‘neo-mercantilist’ - together with the ideas of the German Historical School, provided a tremendous intellectual stimulus for Meiji Japan. Consequently, Japan’s leadership systematically fostered economic growth and industrialisation, and turned Japan into a state, where national economic development is the prime objective.

In the Japanese capitalist-developmental state a unique collaboration across the public and private divide between the elite bureaucracy, industrial leaders and the long ruling political party, the LDP, has facilitated a ‘miraculous’ economic development. List, therefore can be regarded as the intellectual godfather of the capitalist-developmental state and the Japanese economic ‘miracle’, which in itself demonstrates that there is a variety of approaches to economic development that continue to drive forward history. C O N T E N T S

INTRODUCTION

CHAPTER 1 “COMPETING ECONOMIC DOCTRINES”

1.1 The Origin of the Classical School of Economics
1.1.1 The Founder of Economics: Adam Smith
1.1.2 Malthus, Ricardo, and Say’s Law
1.2 Marxist Analysis of Economics
1.3 The Keynesian Revolution
1.4 Hayek and the Market Mechanism
1.5 Conclusion

CHAPTER 2 “FRIEDRICH LIST”

2.1 Life and Times
2.2 Economic Organisations and the Unification of Germany
2.3 “Das Nationale System der Politischen Ökonomie”
2.4 Conclusion

CHAPTER 3 “ECONOMIC DEVELOPMENT: FREE TRADE OR STATE INTERVENTION”

3.1 Advantages of Late Development
3.2 The Development Debate
3.3 State Versus Market
3.4 The Developmental State
3.5 State Autonomy And Capacity
3.6 Conclusion: List Versus Smith

CHAPTER 4 “CASE STUDY: INTERPRETING THE JAPANESE SUCCESS”

4.1 How Political Economy Came To Japan
4.1.1 Feudal Tokugawa Japan and the Preparation for Industrialisation
4.1.2 The Meiji Restoration and the Foundation for Administrative Guidance
4.1.3 Western Learning: Laissez Faire Versus Protectionism
4.1.4 Following the German Example
4.2 Economic Bureaucrats and the Tradition of Administrative Guidance
4.3 Economic Reconstruction During The Occupation
4.4 Conclusion: Miracle Japan and the MITI - Interdependence or Free Markets?

CHAPTER 5 “CONCLUSION: LISTIAN STATE-LED DEVELOPMENT AND THE CONTINUATION OF HISTORY

6. BIBLIOGRAPHY INTRODUCTION

In recent years the politico-economic phenomenon of globalisation has been vividly discussed in the media and the scientific community. Within this global framework, political progress and economic development are normally thought to be facilitated through system of liberal democracy and market forces respectively, while the state is meant to play a subordinate role. However, the reality appears to be different: the nation state has increasingly become more influential in shaping ‘people’s’ ideas and perceptions about their collective destiny, or perhaps never even ceased to be important. For instance, the collapse and fragmentation of the Soviet Union or Yugoslavia are very powerful examples amidst a multitude of other cases where ‘national’ communities have decided to determine their own future. It is important, though, to point out that nationalism exists in all forms or shapes. Not only the irrational, aggressive type such as fascism, or the non-progressive conservative nationalism are prevalent, but benevolent and rational versions can be found.

But not just the present day suggests the often overlooked importance of the nation state in the field of global politics and economics, history itself can reveal certain insights to us. Thus it will be argued in this dissertation that the nation-state has been critical in the formation and achievement of political and economic goals and continues to do so, despite the growing myth of globalisation. In order to argue the case, it is essential to identify relevant examples of a continuously important role of the state in the modern world. Yet the objective of this research has to be more clearly defined to ensure the validity of the argument: therefore, the main focus of this dissertation will be provided by an analysis of the relationship between state and economic development.

Hence, this dissertation deals with the question of the role of the state in economic development and thereby suggests that the nation state, in spite of the growing interdependence of states and markets, or even perhaps due to this synergy, still can play a very important part in the formation and achievement of political and economic objectives. East Asia, and Japan in particular, has been selected to illustrate this argument as a case study. Thus, at the heart of this dissertation stands the rather pragmatic than theoretical framework of what is often referred to as economic nationalism. Consequently, it is vital to assess the relationship between economics , national economies and nationalism. As David Levi-Faur points out: “In an era of ‘cascading interdependence’ (read globalization), the neglect of nationalism - its interaction with the economy and its effects on policy making - impairs our ability to grasp the full significance of the notion of the nation-state and to analyse the current changes in its economic roles.”

Thus, without denying the existence of malignant aspects or types of nationalisms, or even idealising it, rational and enlightened nationalism has been existing and importantly can be associated with economic imperatives and policies. Particularly through an analysis of the economic role of the state in economic development, the future of economic nationalism in the age of globalisation can be evaluated. This brings us to the German economist Friedrich List, whose work is widely regarded as ground breaking in the field of the political economy of the nation state. Even though he writes in the 19th century, List’s analysis is still extremely relevant today. He was a political and economical practitioner rather than a pure theorist which invests him with the unique quality of being applicable to the assessment of the economic role of the nation state in the past and present day.

List was a liberal, enlightened nationalist and is often, but unjustifiably, associated with the practice of neo-mercantilism. He was one of the pioneers of the ‘infant industries’ conception, but more importantly attacked Adam Smith and the liberal principle of ‘laissez faire’ also on a theoretical level: not simply just exchangeable value but productive forces account for the wealth of a country. List then carries on to formulate a theory of economic development which, in contrast to Smith’s free enterprise system, was based on the promotion of productive powers through the state. (This obviously violates much that is nowadays taught in economics in the Anglo-American world, where the market mechanism is regarded as an ‘all-cure’). But it can be argued that late-developing countries have to be allowed to shape their own economic future especially as there are no universally valid economic laws as postulated by the liberal economists. This brings us to an exciting example of late development: East Asia and particularly Japan. Arguably Japan has since the Meiji Restoration of 1868 followed a path of developmental capitalism in which the state through the promotion of infant industries, the fostering of productive forces, and administrative guidance etc. has actively intervened into the economy in order to achieve the national objective of development and industrialisation. David Williams, therefore, regards Friedrich List as the ‘godfather of the Japanese Miracle’ .

Hence, one of the main objectives of this dissertation is demonstrate that dominant strands in mainstream economic thought have neglected or attacked any role for the state in promoting development. However, the case of List and the impact of his ideas on Japan, prove the vital importance of addressing other economic traditions. Thus, it will be shown that in the past and present the nation state can continue to be an essential actor in the economy. It has to be pointed out, however, that this assessment is focusing on the success of the East Asian economies, and here especially on Japan and its statist vision on economic management.

In chapter 1, the competing, mainly Anglo-American, economic theories are presented in order to illustrate the role these theories envisage the state to play, which is a restricted one and exercised only in special circumstances. After this the discussion leads over to a comparison with the teachings of Friedrich List in chapter 2. List underlines the main objective of this dissertation by elaborating both a practical and theoretical framework within which the state is essential to economic development, especially for late-developing countries. List, therefore, provides us with an alternative view of economic development and suggests statist guidance to achieve national economic objectives. Chapter 3, hypothetically, follows the well-trodden path of associating the main ideologies or IR-paradigms of realism, liberalism and structuralism with economic theories (economic nationalism or mercantilism, laissez faire and Marxism respectively), which are widely used to differentiate between various debates within the discipline of International Political Economy, only to conclude that this kind of analogy is often incorrect, misleading and unsustainable.

The development of Japan, which was certainly inspired by List’s teachings, clearly shows that state and market are interdependent and various economic tools have been utilised by the government to facilitate late-development. Japan is then identified as a plan-rational state, a concept elaborated by Chalmers Johnson to describe this process of state-led development. In sum, the synergy of state and market, which has been facilitated by government initiatives, policies and programmes has brought this tremendous economic success, industrialisation and high-speed growth to the East Asian developmental states.

Hence, chapter 4 illustrates the dissertation’s central argument about the essential role of the state in economic development as a case study. It will be demonstrated how western political economy came to Japan, and how it was adopted and effectively ‘Japanised’. The influence of List and the German Historical School are of particular importance as they had a more visible impact on the formation of government policy throughout the later stages of the Meiji period than other, especially Anglo-American, economic theories. The continuity of the state’s involvement in the economy, leading to a blurring of the public and private spheres of economics, will be shown. From the Meiji period, over to the inter-war years, and finally to the period of war and occupation, the state, through its bureaucratic apparatus, has increasingly succeeded in guiding and steering the economic activity of the nation. Hence, this has effectively led to the high-speed growth, and rapid and diversified industrialisation of Japan, which is often - but unjustifiably - referred to as a ‘miracle’.

Chapter 1 “Competing Economic Doctrines”

This chapter provides a history of economics via a comparison of the principal competing Anglo-American doctrines – ‘Anglo-American’ here denotes economic theories which are derived from the tradition of the framework of Adam Smith’s analysis of economics. In the context of this dissertation, this comparative economic history is essential to the investigation and assessment of the importance of the state in economic development. As these Anglo-American doctrines are widely regarded as the dominant strands in mainstream economic thought, the main objective of this chapter, therefore, is to identify the role these doctrines envisaged the state to play in economic development. Hence, it will be argued that the Anglo-American economic theories are essentially market-driven, and are ignoring or even attacking other economic traditions. It is important to point out that chapter 2, however, is an integral part of this discussion as the contradictions and convergence of the Anglo-American and Listian economic conceptions will play an essential role in the later evaluation of development strategies used in Japan. Important, here, is a critical comparative analysis of the common theoretical framework which is given through the paradigms of International Relations. This, hence, can be regarded as a useful tool for our understanding of IR, particularly with the reality of the economic pragmatism and practice, which has helped Japan and East Asia to develop so successfully, in mind. However, the simplifications of IR are still widely – but as later chapters will underline, quite unjustifiably - imposed on the study of political economy. But as this chapter is a discussion of economic doctrines, and not of the IR-paradigms, this inquiry should not go beyond the question about the role of states in economic development.

1.1 The Origins of the Classical School of Economics

Between the end of the Middle Ages and the publication of Adam Smith’s ‘An Enquiry into the Nature and Causes of the Wealth of Nations’ the conditions for the establishment of the classical system of political economy both in terms of theory and practice were generated. Various social, political and technological changes were significant in this the era as the medieval world was swept away. As Roll exemplifies:

“The growth of the national states, anxious to destroy both the particularism of feudal society and the universalism of the spiritual power of the Church, resulted in a greater concern for wealth and a quickening of economic activity. The loosening of the central doctrinal authority, caused by the Reformation, and the progress of the concept of natural law in jurisprudence and political thought prepared the ground for a rational and scientific approach to social problems; and the invention of printing created new possibilities of intellectual intercourse. Feudalism also became inadequate in its regulation of production.”

In Britain this can be seen in the enclosure movement which co-revolutionised the methods of farming, leading to quasi-market oriented agricultural production and subsequently to rural overpopulation. The new commercial tendency was accompanied by maritime discoveries, resulting in the expansion of domestic and foreign trade.

Not only the development of trade but the transformation of the organisation of production was significant: a primitive form of capitalist production, merchant or commercial capitalism evolved. This novel system meant the manufacturing of goods on the small scale where the merchant functioned as the supplier of raw materials and as the distributor of the end product to the market - small workshops and home manufacturing was the standard at the time, industrial production was still unknown. It is here important for this dissertation to emphasise the interconnected development of the state and merchant capitalism. “Monopoly was the outstanding way in which the rising nation-states sought to increase trade and to create sources of revenue for themselves.” The East India Company is one of the best examples for the new founded collaboration of state and merchants. Furthermore, the increasing expansion of the European powers and the colonisation of the Americas, Africa and Asia made trade easier, even more lucrative and the ‘exploration’ mechanism more efficient.

However, the growing link between the trading interest and the state brought the development of economic practices and commercial policies into existence, which were transcending the traditions embedded in the Canon Law of the Middle Ages and the negative world view on commerce and trade began to change. Yet, it can be differentiated between two different tendencies in economic practice: already in the Middle Ages bullionism, the treasuring of precious metals and proper mercantilism emerged,, before commercial capitalism began to appear in the 17th century.

“Yet mercantilism was neither a scientific school nor a scientific theory - there were no schools at all in our sense of the world - and we distort the picture if we seek already in this period what was in fact the consequence of a specialised discipline after it had properly constituted itself. Its importance for analysis in the field of social science fell short of its importance of a means for the creation of national economic units.”

Thus, the essence of mercantilist teachings was its emphasis on trade and the emerging states. Hence, at the heart of mercantilist policies lay merchant capitalism and its objective in foreign trade to sell as many goods as possible and to buy as little from other countries as absolutely necessary. This resulted in the accumulation of wealth in form of precious metals. Protective measure such as import duties, privileges, monopolies, etc. were used to fortify the national economy further against other economic units. Heckscher identified mercantilism with state-making as its economic policy was designed to secure political unification and economic power through state intervention. However, clearly not production but foreign trade was identified as the source of national wealth, and the gold and silver accumulated was often not reinvested productively. Hence, this tendency was generating the inherent structural weakness which later led to the collapse of mercantilist economies in favour for the emerging industrial capitalism. But the importance of mercantilism lay in its nation-building characteristic, as Roll argues: “The building-up of nation-states is put in the forefront, and monetary, protectionist, and other economic devices are regarded merely as instruments to this end. State intervention was an essential part of mercantilist doctrine. ... It must also be conceded that a great deal of mercantilist literature from Mun, the enlightened English merchant, to Hornick, the Austrian nationalist lawyer and privy councillor, claims to speak in the interests of nationalist advancement.”

In sum, while mercantilism played a vital role in the establishment of states as economic entities, it is very important to point out that only wealth in form of precious metals was regarded as true wealth. Productive forces as such, as Adam Smith was one of the first to emphasise, were largely ignored and foreign trade was regarded as the main source of national wealth. Thus it is unjustified to define economic policies focused mainly on state-building generally as mercantilist or neo-mercantilist (see chapter 2.4) without looking into the way and nature of the creation and accumulation of wealth.

Thus, the driving force of change and development for the social, political and economic foundations of the post-medieval world was the transformation of the mode of production from feudalism to commercial and finally industrial capitalism. This economic development was accompanied on the intellectual level by enlightened political thought, scientific rationality, individualism, the forerunners of liberalism, and particularly in France, by the Physiocratic School.

In the light of this argument it appears to be necessary before the actual discussion of the classical system to look briefly at three outstanding scientific ‘discoveries’. Firstly, Isaac Newton’s revolutionary concept of scientific methodology enabled scholars to analyse, explain and formulate theories about all different types of phenomena - including the increasingly complex world of economics. Secondly, in terms of political theory John Locke’s notion of natural law and the inherent importance of the individual’s right to their own person and property, protected through the social contract, is of extreme importance for the development of capitalism. Lastly, the Physiocrat Francois Quesnay

“discarded the mercantilist belief that wealth and its increase were due to exchange. They transferred to the sphere of production the power of creating wealth ... . Having discovered its (the surplus or produit net, the author) origin in a manner which was an advance on the English mercantilists, they went on to add, ..., an analysis of its circulation among the different classes of society.”

Hence, the Physiocrats came to the conclusion that there are two socio-economic classes, one which is productive, and one which is unproductive. They regarded surplus as a concrete material wealth of useful goods and in one particular branch of production, agriculture, the surplus as the difference between goods produced and consumed was the clearest. But the problem with the Physiocracts was that they insisted that only the agricultural classes produced true ‘wealth’ and that the manufacturing and commercial classes merely manipulating it in a sterile way. Nevertheless, Physiocracy was a pioneering application of scientific principles to the world of economics and Adam Smith, even though he criticised their emphasis on agriculture, was deeply impressed by Quesnay’s ideas. “The notion of circulation of wealth he gladly accepted and acknowledged, but the idea that industry was somehow sterile and barren struck him as a peculiar construction of the world. After all, had he not grow up in Kirkcaldy and Glasgow where one could see wealth being created at every hand in the workshops and factories of craftsmen?”

In fact the world had changed and revolutions had taken place: in technological terms spinning and weaving machines, and steam engines had been invented in the 18th century. A general wave of industrialisation began to sweep predominantly through Britain. Politically, with the American Declaration of Independence of 1776, mercantilism, which was fuelled by the colonial system of the British Empire, found its limits and proved to be inadequate. Adam Smith’s ‘An Inquiry into the Nature and the Causes of the Wealth of Nations’ was published in the same year and it signified a revolution in the social science, or more precisely, founded the scientific discipline which is nowadays regarded as economics. The remains of the Middle Ages were washed away by the French Revolution only a few years later. Hence the whole quality of economic and political thinking had changed which reflected the transformation of society from feudal to capitalist - even though Smith was still analysing and writing from a perspective of the pre-industrial capitalist era.

1.1.1 The Founder of Economics: Adam Smith

Adam Smith was born in 1723 in Kirkcaldy, Scotland and was educated at Oxford to become a professor of logic and moral philosophy at the University of Glasgow. Later he was offered a private appointment as a travel companion for the young Duke of Buccleuch which secured him a generous pension and enabled him to concentrate fully on his research and writing until he died in 1790.

Smith was the first academic economist. This claim is based on the much higher degree of complexity and systematic thinking he was capable of in comparison to his predecessors. Already as a student he followed the tradition of enlightenment which is shown in his ‘Essay on Astronomy’ (probably written before 1758). Natural Law, individualism and Newton’s world view were then forming Smith’s thinking and work. However, he was a philosophical economist and as his famous work ‘The Theory of Moral Sentiments’ (1759) shows, his interest in human behaviour will dominate his later writings. “It is useful to understand that Smith, together with his good friend David Hume, belonged to a coterie of philosophers called the Sentimentalists. These philosophers argued that the distinguishing mark of man was not reason, but feelings, or sentiments ... . Man is by nature a social being, argues Hume, and society has its origins in instinct and feelings and not in intelligent self-interest as was argued by the rationalists like Hobbes. For Hume, as for Smith, the social process starts with instinct, develops through feelings and emotions, and only finally comes under the direction of the intellect.”

In Smith’s behavioural analysis the pain-pleasure principle is the leading motive for human conduct. However, he argues in the ‘Theory of Moral Sentiments’ that human beings derive satisfaction not only from their own pleasures, but from a sympathy type of fellow feeling. Here lies the inherent problematique of Smith’s ideas as a whole: “... Smith has derived the self-seeking, materialistic behaviour which is needed to energize a progressive, laissez-faire economy from fellow feeling - a paradox which haunts all his thinking on economics.” This has been called the Adam Smith dilemma and as can be seen from his later work on economics, ‘The Wealth of Nations’, the conflict between the sympathy for others in the ‘Moral Sentiments‘ and “... Smith the economist [who] is popularly seen as a high priest of materialism,” has not been fully resolved.

However, almost twenty years elapsed before Smith wrote his major book on economics and even here the influence of various sources can be felt. David Hume and Smith’s teacher Hutcheson, a naturalist who believed in the superiority of natural over man-made law, have left their mark on his social philosophy, but especially the physiocratic school, even though Smith criticised them, influenced him with their emphasis on laissez faire. As Roll underlines: “... Smith’s treatment of the question of the question of value and of all the problems that flow from it, owes much to the whole body of economic thought which had already developed.” In particular, Petty, Steuart and Cantillon have to be mentioned in connection with Smith’s economic background.

Smith’s main work, ‘The Wealth of Nations‘, is divided into five books dealing with problems of production, distribution, exchange, capital, different economic policies, previous systems of political economy and public finance. In the centre of Smith’s practical philosophy stands his analysis of behaviour as developed in the ‘Moral Sentiments’. According to Smith, each man is his best judge of his own interest and should therefore be free to pursue it in his own way. If left on their own people would not only improve their own situation but also general welfare:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not their humanity but to their self-love, and never talk to them of our necessities, but of our advantages.”

Hence, as Smith believed in natural order and balance he stated that an ‘invisible hand’ promotes human welfare through self-interest. As a consequence of this assumed natural order any intervention into human affairs is harmful. Subsequently, the government should abstain from meddling with economy and society and only has the duty to defend the state from foreign aggression, to establish an administration of justice and to maintain public works and institutions which are not profitable enough for private enterprises. Interventionism was in Smith’s laissez faire opinion only legitimate in cases of national security. This has led to the coining of the term ‘night-watchman state’, as Smith claims that “government can rarely be more effective than when it is negative, ... he becomes a strong opponent of all forms of state interference with the ordinary business of industry and commerce.” Thus, concerning the economy the natural order will lead to a profit-driven society. Exchange takes place to facilitate the satisfaction of the different individual interests, argues Smith. “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy... . What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.” This is particularly important as Smith viewed the state just as the aggregate of individuals, and therefore a different conclusion, based for example on the nationalist understanding of the state as a special economic unit, made no sense to him. Moreover, from here we can deduce Smith’s free trade position easily, as trade and exchange of goods were generally regarded by him to be in the human nature.

According to Smith the division of labour is the engine of economic development, but it is limited by the extent of the market - both inter-regionally and internationally. As a consequence of trade the market is widened and increases the division of labour even further. This results in the assumption that commodities will be produced in countries where they can most efficiently, subsequently, each country will naturally have an absolute advantage in the production of particular commodities. Hence, trade allows countries to buy products they do not possess an absolute advantage in from abroad cheaper than at home. Therefore, international trade can take place on equal terms, a concept further developed in David Ricardo’s ‘Theory on International Trade and the Comparative Advantage’. However, this meant that the mercantile system of protection, monopolies, industrial regulations, privileges, etc. which still in part dominated commerce and industry could be politically and ideologically attacked and finally broken up, based on the newly emerged economic science.

The classical school of political economy was at first a revolutionary intellectual movement and in sum “Adam Smith has been viewed primarily as the source of laissez faire ideas. The benefits of economic freedom can be argued on the basis of three axioms: 1) Individuals desire to maximise their wealth. 2) Individuals know better than governments how to maximise their wealth. 3) National wealth is the sum of individual wealth. This is an effective argument for free trade and it never really requires an understanding of the microeconomics of demand and supply.” But in the light of arguments about the special role of the state in industrial development, which emerged in the mid 19th century in late-developing countries such as the USA and Germany, we have to ask ourselves about the universal validity of the axioms of classical economics. (See chapter 2 and 3). However, at the time Adam Smith’s work had a powerful impact on businessmen and politicians alike and thereby prepared the way for a full development of industrial capitalism. In this sense Smith represented the interests of the new capitalist class and economic liberalism facilitated the breakthrough of the Industrial Revolution, particularly in Britain.

But not just the practical application of Smith’s economic doctrine caused fundamental change, but provided an answer to the question about the source of wealth. “The great advance in economic thought which is due to Smith is the emancipation from mercantilist and physiocratic fetters ... The mercantilists had found it (the source of wealth, the author) in foreign trade. The physiocrats had gone further and had shifted the origin of wealth from the sphere of exchange to that of production ... With Smith labour as such becomes the source ... . The wealth of a nation, he said, will depend upon two conditions: first, the degree of productivity of labour to which it is due; and secondly, the amount of useful labour, that is to say, labour productive of wealth, which is employed.”

In his investigations about the source of wealth Smith realises that the increasing division of labour (his famous example of the pin factory) leads to an increase of productivity. He tries to transform this production into the social element of abstract exchange value, based on the presumption that human beings are led by their ‘instinct’ to trade and exchange. But as Roll argues, Smith generalised and deduced from the existing conditions of his time a perpetually operating economic law. “But Smith’s purpose was propagandist. He emphasised the influence of the market on productivity in order to demonstrate that trade had to be freed as a prerequisite to the development of productive power, and not merely to the full use of the existing powers of production.”

But the central problem discussed by Adam Smith is, after he defined value through labour, the question of exchange: money was invented after barter proved to be unacceptable for more complex financial transactions. Yet, he finds two different values. One he called value in use, which refers to the utility of the good. The other is the value in exchange, which signifies the power of a good to purchase other goods. Obviously, there are some problems inherent to Smith’s theorising about ‘value’ which led in the late 19th century to the marginal utility doctrine. “It seems established that the earliest theory which Adam Smith held regarded ‘labour’ as the whole source of value and the quantity of labour embodied in each commodity as the measure of that value.” Nevertheless, Smith’s analysis of the division of labour leads to the problem that that it is no longer the product of one’s own labour that determines wealth, but the amount of other people’s labour which this product can command. Therefore, due to the confusion about the nature of value it is left to later economists to clarify the problem. As O’Brien states there are already in the early stages of the classical doctrine different types of value theories: “firstly, the ‘cost of production’ theory of value which so far as classical economists are concerned, originated with Adam Smith; secondly, the Ricardian theory of value; and thirdly the subjective value theories associated especially with the work of J.B.Say.”

However, the labour theory of value in the ‘Wealth of Nations’ is the cornerstone for all later classical economists and leads to further discussions about capital and distribution, even though the confusion between price and value cannot be overcome by Smith. He argues: “Labour alone is the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared.” Hence labour becomes the real and money the nominal price of commodities. Smith then carries on with his theory of capital and distribution and discusses wages, profit and rent. Yet again, he encounters problems explaining the capitalist’s profit with the labour theory of value sufficiently and only later it was Marx’s argumentation of the surplus value which offered an apparent solution to the phenomenon.

In short, Smith’s theory of distribution is based on a mixture between labour and cost-of-production theories, where wages are determined by subsistence, profit related to interest rates and rent depends on the price of the agricultural products, i.e. is purely differential. Moreover, capital accumulation can take place through the employment of productive labour - here, Adam Smith differentiates between productive and unproductive labour. Roll underlines: “This distinction, which began with the physiocrats and was implied in mercantilist thought (it is inherent in any search for the ‘causes’ of wealth), remained one of the most important parts of classical thought.”

Hence, we can understand the merits of the classical revolution as it reflected the changed nature of society and economy. Capitalist production, in Smith’s eyes, is the foundation for welfare and wealth. A new system of social categories or classes, productive and unproductive labourers, was introduced. This gave the emerging capitalist society a powerful cutting edge, but detrimental social forces and conflicts between the new and the old classes were predetermined.

Adam Smith, though, was a philosophical economist who believed in the natural balance and had a generally optimistic outlook. “In a sense the whole wonderful world of Adam Smith is a testimony to the eighteenth-century belief in the inevitable triumph of rationality and order over arbitrariness and chaos. Don’t try to do good, says Smith. Let good emerge as the by-product of selfishness.”

1.1.2 Malthus, Ricardo and Say’s Law

The classical school of political economy was brought into existence by Adam Smith, who with his emphasis on production, value and distribution established the structure of economic science. David Ricardo (1772-1823) and Thomas Malthus (1766-1834) based their work on Smithian assumptions but developed new aspects of the classical doctrine. Particularly in France Jean Baptiste Say (1767-1832), who translated ‘Wealth of Nations’, was one of Smith’s most faithful disciples, propagating ‘laissez faire’. The most important part of his work was his strong belief in the market mechanism which supposedly made general gluts impossible to imagine. Accordingly, Say’s law is manifesting that production under free market competition will always generate an equivalent demand for goods produced: supply simply creates its own demand!

But Smith’s and Say’s optimism was criticised particularly by Thomas Malthus whose work reflected the increasing deterioration of social conditions for the labourers in the high days of the Industrial Revolution. However, the implications of the Malthusian doctrine was not social reform but an attack on the proto-welfare state with its Poor Laws. Malthus argued in his ‘Essay on the Principles of Population’ (1798) that the population finds its limits in the means of subsistence. However, increasing production of foods leads to an increase in population, but population tends to increase in geometrical progression (1,2,4,8,16,...), whereas food supply at best can only increase in arithmetical progression (1,2,3,4,5,6,...). This asymmetry results in a natural balance in Smithian fashion as subsistence checks the population growth and subsequently should not be interfered with through welfare legislation etc. Yet Malthus was partly proved wrong as he did not anticipate the Green Revolution with its fertilisers and new agricultural machinery. However, his importance lies in his analysis of the possibility of general gluts which somehow shed a more pessimistic and even realistic light on the almost naive belief in the ever-healing market mechanism of Smith and Say.

Possibly the most important of the classical economists was David Ricardo whose scientific methods - even though as a stockbroker he had only a practical background and was no academic - were highly abstract and theoretical. “The importance of Ricardo is that of every great scientific pioneer. He succeeded even more than Smith in isolating the chief categories of the economic system. He left to his successors many unsolved problems, but he also indicated ways in which they might be solved.”

Nevertheless, Ricardo starts his ‘Principles of Economy and Taxation’ (1821) with a further development of the Smithian labour theory of value, reflecting the changed nature of production from pre-capitalist to industrial capitalist. Hence, he recognises the complications caused by capital, which was later used by Marx to formulate his exploitation theory. Furthermore, Ricardo realises the difference between value in use and value in exchange and comes to the conclusion that as prices change, value is different from price. With his ‘Iron Law of Wages’ this observation finds further expression, as Ricardo states that the value of labour is variable as well, based on the supply and demand and the price of food. In essence this leads to a cost of production theory of value, contradicting Smith’s early pure labour theory.

Moreover, Ricardo as a representative of the new capitalist class puts forward a theory on rent which reflects in quasi-Malthusian fashion a problematic outlook for industrial capitalism. Accordingly, he formulated the ‘Law of Diminishing Returns’: in the times of further industrialisation the landowner benefits from an increasing demand for agricultural products from the growing workforce. Hence there is no absolute rent, but it is purely differential. As a consequence more infertile land has been ploughed up to meet growing demand. Therefore, the price is dictated by the highest cost of production, leading to higher rent on the more fertile lands. The Capitalist, however, as prices for subsistence are rising, has to pay higher wages. Thus, profits for the capitalists are diminishing, whereas the landowner’s rent is rising. Therefore, as Britain at the time was still a mainly agricultural country, Ricardo was painting a gloomy picture for the future, which could only be remedied by a stronger position of capitalism within the economy.

Most importantly for the purpose of this study, Ricardo’s work is of outstanding importance for the emerging free trade policies which brought Britain at the time to a quasi-domination of the economic world. His theory of international trade, centred around the concepts of the comparative advantage, was based on the assumption (expressed in the famous ‘cloth and wine’ example) that:

“the same rule which regulates the relative value of commodities in one country, does not regulate the relative value of commodities exchanged between two or more countries. … The quantity of wine which [Portugal] shall give in exchange for the cloth of England, is not determined by the respective quantities of labour devoted to the production of each, as it would be, if both commodities were manufactured in England, or both in Portugal...”

Hence, even if a country possessed an absolute advantage in the production of certain commodities it could be still more advantageous to import the respective product from abroad as long as it was relatively less efficient in the production of the commodity than of another. As O’Brien points out, Ricardo established “a theory of gain from trade which was clearly distinguished from that based upon absolute advantage.” In essence, Ricardo’s theory provided expanding British industry with an ideology in order to propagate free trade and to improve the production conditions for the rising capitalist class. Obviously, the main argument backed up by his theory of trade and the comparative advantage was the liberalisation of imports of British industrially manufactured goods into possibly countries on the verge of industrialisation (USA, France, Germany ...) for a reduction of agricultural protectionism on the British side. Even if there had been an absolute advantage for British grain, the comparative advantage was pointing at the manufacturing sector instead of occupying valuable productive resources in agriculture. In this sense Ricardo was vehemently criticising the Corn Laws, based on his theory of International Trade and the Law of Diminishing Returns, and was campaigning against the inherent protectionist policies laid down in parliament by the politically still dominant landowner class.

However, Ricardo was not only actively involved as a member of Parliament in the politics of his day but played an outstanding role as a pioneer of scientific economics.

“Several streams of thought have their origin in his work. One the one hand the Marxian theory, though in a distorted form, makes use of the imperfections of classical political economy as expressed by Ricardo. At the same time, the disintegration of the labour theory of value begins with Ricardo’s immediate followers. His emphasis on distribution raised the question of class relations and directed attention to social and historical factors in economic analysis.”

Yet another important development in economic thought shifted the emphasis away from the classical concepts of production, supply and cost. The marginal revolution of the 1870’s with the publications of Jevons, Menger and Walras gave economics a new perspective without denying the basic premises of the classical school. The modern neo-classical theory was now mainly concerned with consumption, demand and utility. The marginal utility concept was introduced to exemplify that in order to explain demand, it was not necessary to determine the average utility of goods, but the marginal utility which falls with the consumption of the respective good. This meant a clear break from the labour theory of value. Now, the neo-classical school, and here Alfred Marshall (1842-1924) in particular, began to develop the subjective theory of value since they had realised that the price of the good was determined by it’s subjective perception of utility. Subsequently, the microeconomic approach of classical and especially neo-classical doctrine continued to shape thought and policy making for well into the first half of the 20th century.

1.2 Marxist Analysis of Economics

In the heyday of the Industrial Revolution capitalism did not only find approval but also criticism from different quarters. Particularly the socialist critique based on the deteriorating social conditions for workers and the increasingly influential liberal philosophy, formulated a new ideology which was challenging the newly established status quo. Already in the early 19th century French Utopians of the likes of Saint Simon, Fourier, Sismondi and Proudhon were creating both the theoretical foundations for the new communist ideology and model villages to put their ideas to the test. In Britain, however, the socialist pioneers stood in the tradition of the classical school and based their analysis on the assumptions made by David Ricardo. Writers such as Bray, Gray, Thompson, Hodgskin and especially Robert Owen have to be mentioned as the forerunners of Marx, who all used the classical conclusions to point to a revolutionary morale.

Karl Marx, born 1818 in Trier, Germany, initially focused on philosophy and was a follower of Friedrich Hegel. Hence, based on a critical evaluation of the historical-dialectic concept of Hegelian philosophy, Marx later developed a new socio-economic theory. Yet Marx was not the revolutionary right from the start as he seemed to be destined for an academic career. However, his disillusionment with the reactionary academic establishment forced him to take refuge in journalism where he felt to be able to express his political and philosophical ideas. But Marx’s criticism of the worsening social conditions of the workers caused by the expanding industrial capitalism was suppressed by the Prussian government and after a only short editorship of the liberal ‘Rheinische Zeitung’ he was forced into exile. He lived for a short while in Paris and in Brussels where he became friends with Friedrich Engels (1820-95) and they jointly wrote the ‘Communist Manifesto’(1848). Then he had to emigrate to London and it was in the British Library where he started the systematic study of political economy. Subsequently, Hegelian philosophy started to become fused with Ricardian economics to a revolutionary political ideology and economic doctrine. “Utilitarianism and early English Socialism, French Socialist thought, and the beginnings of German radicalism were the inspirations of Marx’s youth.” Subsequently, Marx expressed these new ideas and published ‘The Critique of Political Economy’ in 1859 and ‘The Capital, Vol.1’ appeared in 1867 - volume 2 and 3 were published by Engels after Marx’s death in 1883. The basic assumptions of the Marx’s analysis of economics are, firstly that history is a process of constant change caused by inherent contradictions within the socio-economic system itself. This leads secondly to the conclusion that the economic system itself is constituted by social productive relationships. As a result Marx and Engels formulated a materialist concept of history. In this dialectical historical materialism modes of production or types of economic order are competing in the Hegelian sense of thesis and antithesis to form a synthesis.

“History progressed through a series of stages, each characterised by its mode of production or economic system, from slavery and feudalism to capitalism and, finally, communism. At each point, historical change resulted from the internal contradictions which characterised all class societies. This occurred when the class system itself, the ‘relations of production’ became a constraint upon the further development of production techniques and innovation, the ‘forces of production’, and was reflected in a social revolution through which a new mode of production emerged.” .

Subsequently, history and society can only be explained in terms of what Marx called the economic base which conditioned the legal and the political superstructure:

“The materialist conception of history starts with the principle that production, and with production the exchange of the products, is the basis of every social order; that in every society that has appeared in history the distribution of products, and with it the division of society into classes or estates, is determined by what is produced, and how the product is exchanged. According to this conception the ultimate cause of all social changes and political changes are to be sought not in the minds of men, but in changes of the mode of production and exchange; they are to be sought not in the philosophy, but in the economics of the epoch considered.”

Nevertheless, the economist Marx was a Ricardian and agreed with the premises of the labour theory of value. However, he criticised the Classical School for their approach to the distribution of power through the class system. Moreover, Marx encountered the logical problems of the labour theory of value as soon as he tried to explain the labourers wages and the capitalist’s profit with the tools of classical economics. Essentially, he raised certain objections about their validity as reality had shown that labour itself had become a commodity, or at least was treated like it.

Furthermore, Marx identified a number of far reaching problems inherent to the classical doctrine. Firstly he criticised the distribution of power in the capitalist system through a class society, which was secondly interconnected with an uneven distribution of wealth. He put forward the question why the exchange value of labour is less than that of its product. Like every other commodity, analysed Marx, labour is formed and measured by the amount of labour required for its production or in this case for the reproduction of the physical power of the labourer, i.e. it is determined and embodied in the labourers need for subsistence. However, when a capitalist employs a labourer, the phenomenon arises that human labour can be expended in a longer time which is required to reproduce it. Its here where the surplus value, the capitalist’s profit comes into existence. Therefore, the labourer is exploited as “the surplus labour of one man becomes the condition of existence of others.” Based on Ricardo’s ‘Law of Diminishing Returns’, despite increasing productivity, Marx expected the capitalist’s profits to fall as wages have to rise to keep up with increasing food prices. Thirdly, Marx had great insights about the development of the temporary economics which he called ‘Laws of Motion’ of a capitalist system. He realised that the only way in which the profit-driven capitalist economy under the pressure of competition and rising wages can maintain itself was through expansion. “But growth implies the second prediction of the Marxist model: the ceaseless quest for new techniques. It was no accident that industrial capitalism dates from the Industrial Revolution, for Marx made clear, technological progress is not merely an accompaniment of capitalism, but a vital ingredient.” Hence, the concentration of wealth in the forms of industrial monopolies and giant corporations was an inevitable tendency of capitalism, leading to an impoverishment of the masses, the creation of a class conscience and finally to revolution.

Fourthly, conflicts between production and consumption, and the falling tendency of the rate of profit are inherent to capitalism according to Marx’ analysis. “The purpose of capitalist production is the creation of surplus value and the transformation of parts of it to new capital. This process depends only on the size of the working population and on the rate of exploitation. ... The product which contains surplus value has to be sold.” Competition, underconsumption, overproduction etc. can therefore upset the system. Even though such a tendency can be counteracted by an increased degree of exploitation, reduction of wages below the value of labour, increase of the industrial reserve army (the unemployed), or different financial organisation of the capitalist business, at one stage only a crisis can be the solution to the inherent conflicts of capitalist economy. Equilibrium can therefore temporarily be re-established but in a business cycle the next crisis is already determined as capitalism means the continuing expansion of the productive powers of society.

“All that is common sense and substantially sound. We find practically all the elements that ever entered into any serious analysis of business cycles, and on the whole very little error. Moreover, it must not be forgotten that the mere perception of the existence of a cyclical movement was a great achievement at the time. … But he also used it in a different sense. Believing that capitalist evolution would someday disrupt the institutional framework of capitalist society, he thought that before the actual breakdown occurred capitalism would begin to work with increasing friction and display the symptoms of fatal illness. … And he displays a tendency to link those recurrent crises with this unique crisis of the capitalist order. He even suggests that the former may in a sense looked upon as previews of the ultimate breakdown.”

Yet, coincidentally in the year of Marx’s death an economist was born who was to revolutionise the way we used to think about business cycles and economics as a whole. Moreover, his importance lies in the achievement of ‘taming’ capitalism, and therefore - against all predictions of historical materialism – prolonging its life beyond the expectations of the late 19th century social revolutionaries.

1.3. The Keynesian Revolution

John Maynard Keynes was born in 1883 as the son of the Cambridge lecturer in logic and economics, John Neville Keynes. Gifted with many talents he went to Eton and studied at King’s College, Cambridge. In1908 he entered the Civil Service and was assigned to the India Office. Intellectually unchallenged and disappointed with his work he left for an academic career and began to lecture economics at King’s. In 1913 he published his first work on economics, the ‘Indian Currency and Finance’ which Schumpeter regards as “the best English work on the gold exchange standard.”

At the beginning of the First World War he was drafted into the Treasury, at first to a junior position, but he quickly rose through the ranks and made himself a name as an outstanding economic genius. His biographer, Roy Harrod, notes that Keynes was regarded to have contributed more to winning the war than any other person in civil life with his work to finance the British war effort. After the end of the war he took part in the Paris Peace Conference as Deputy for the Chancellor of the Exchequer on the Supreme Economic Council, and as representative of the Treasury. But without real influence on the outcome of the talks he resigned, realising that the Versailles Treaty was going to lay the foundation for a resurgence of economic nationalism and militarism – instead of concentrating on rebuilding and restabilising Europe:

“The Council of Four paid no attention to these issues, being preoccupied with others, - Clemenceau to crush the economic life his enemy, Lloyd George to do a deal and bring home something that would pass muster for a week, the President to do nothing that was not just and right. It is an extraordinary fact that the fundamental problems of a Europe starving and disintegrating before their eyes, was the one question in which it was impossible to arouse the interest of the Four. Reparation was their main excursion into the economic sphere, and they settled it as a problem of theology, of politics, of electoral chicane, from every point of view except that of the economic future of the states whose destiny they were handling.”

Keynes’ ‘Economic Consequences of the Peace’ was a best-seller and brought him internationally the reputation of being a brilliant but somewhat unorthodox thinker and economist. However, he continued to pursue many other interests: he debated in the Bloomsbury Circle, lectured at Cambridge, wrote a highly acclaimed book on mathematical probability , speculated very successfully in the foreign exchange and commodity markets, became chairman of a life insurance company, and married a Russian ballerina. In 1923 he published ‘A Tract on Monetary Reform’ in which he emphasised that Britain should not return to the pre-war gold standard, even though a big majority of public figures were campaigning for it. After its reintroduction he protested and prophesised in his Pamphlet ‘The Economic Consequences of Mr.Churchill’ an over-valuation of the Pound and heavy unemployment. “As so often he was right. He called for large-scale government expenditure and public works to cope with unemployment, even though this would mean a large Budget deficit, but he could not provide a theoretical justification of this ‘potentially unsound’ idea, and was largely ignored.” Throughout his subsequent work a clear interest in business cycles is present, especially during the years of depression and high unemployment, which was leading to an evaluation of the appropriate roles of individuals and governments in the quest for a high and stable level of economic activity. As Roll points out, this: “… led Keynes into an appraisal of the agenda of the state and a consequent modification of the doctrine of laissez-faire (not an abandonment as the title of his best-known pamphlet, ‘The End of Laissez-Faire’ (1926) might suggest.)”

However, in 1930 he wrote the ‘Treatise on Money’ which was almost like a prelude to his grand work, ‘The General Theory of Employment, Interest, and Money’ which appeared in 1936. Yet, even though struck by ill health he returned to the Treasury at the outbreak of World War II and helped to co-ordinate war finances and particularly the ‘Lend and Lease Treaty’. In ‘How to Pay for the War’ (1940) he made radical new proposals on the problem of internal war finance as he suggested a compulsory saving scheme through the automatic investment of a portion of every earner’s income in government bonds. Later he was the British Chief negotiator in the Bretton Woods Conference, leading to the establishment of the International Monetary Fund and Worldbank, perhaps not quite in the way as suggested by Keynes, but the international economic balance of power had clearly shifted towards the USA. In 1946, at the age of 62, John Maynard Keynes died of a second heart attack and the world lost a man, who was regarded by politicians and economists alike as a truly outstanding genius who was to revolutionise the economic thinking of the world in the years to come.

The Keynesian Revolution was certainly inspired by a closer investigation into business cycles, particularly by the analysis of the Great Depression of the late 20s and early 30s. Here Keynes’s contribution was to emphasise that modern economics were not really working according to the laws of the classical school.

“The implied assumption of the classical system (which becomes explicit in the law of the market developed by James Mill, Say, and, to some extent, Ricardo) is that the economic system spontaneously tends to produce full employment of given resources. Keynes’s theory is built upon a rejection of this assumption. The Classics … virtually ignored the problem of the crisis. They also failed to analyse specifically the possibility that there may be different levels of economic activity with the same amount of resources. … But when the classics develop their theory of value and distribution for what Keynes called a special case, that of full employment, they did so because they thought that their analysis of the mechanism of exchange and their theory of capital accumulation had already proved that the economic system invariably tended toward full employment. This tendency, which was implied in the inevitable correspondence between supply and demand is most dogmatically expressed in Say’s law.”

Keynes’s reassessment of Say’s law was based on the analysis of business cycles and on the recent contraction of the economy in the Great Depression, and importantly on the relationship between saving and investing. He argued that the structure of the economy had changed since the early days of industrial capitalism: in Ricardo’s time only wealthy landlords and capitalists were investing into their businesses. Saving simply implied accumulation of investments. With increasing industrialisation and a wider distribution of wealth, saving became open to all levels of society. This coincided with an enlargement of and depersonalisation of businesses, which were now looking for new capital not just from their owners but also from private savers. Therefore, saving and investing became separated, which Keynes regarded as a critical development.

“In short, said the classics, full employment is the normal state of affairs. Full employment exists provide that all the savings generated by a fully employed economy are invested, and the rate of interest is a mechanism which ensures that this will happen. … Unfortunately, said Keynes, it is ‘a nonsense theory’. The main reason why it is nonsense is that it fails to take account of the changes in income that result from any change in investment or saving; it fails to see that what people want to save, and what they actually do save, are in certain circumstances quite different things.”

Moreover, this meant the rejection of the general belief that the economy would undergo a see-saw like movement of contraction and expansion. There was no automatic recovery as the classical economists expected after the price of labour would fall at the bottom of the cycle, leading to a safety mechanism that made investments more lucrative again. Hence, the economy was exposed to the possibility of boom and bust, but could stagnate as well. Keynes explained in his ‘General Theory’ that the economic equilibrium could even manifest itself in a state of prolonged depression and increasing unemployment, lower productivity and a decreasing tendency to save would lead to a total contraction of national income. This theory was clearly backed up by a statistical analysis of private savings: in 1929 the Americans saved $3.7 billion, whereas in 1933 the savings had completely dried up.

“Keynes had explained how an economy in the trough of an depression could fail to generate its own automatic recovery. … But when you turned the Keynesian proposition around, it spelled troubled at the top of the business cycle as well. … It meant that every boom was constantly threatened with collapse. … Hence in the final analysis, the economy hung on the amount of investment which business carried out. When investment was low, the economy shrank in size; when investment was high it permitted the cycle of contraction to begin. Riches and poverty, boom and slump, all depended on the willingness of business to invest.”

However, Keynes regarded capitalism not as doomed as Marx did but started the debate about government intervention. Breaking with the tradition of classical economics he proclaimed that the government had to, in case private enterprise was not able to expand, play an active economic role as investor and employer. Government spending, or ‘priming the pump’, was an obvious break from the norm as far as the laissez-faire understanding of economics at the time was regarded, but according to Keynes a controlled market economy was the objective, not a planed one:

“If the treasury were to fill old bottles with bank notes, bury at suitable depth in coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again …, there need be no more unemployment and with the help of the repercussions, the real income of the community would probably become larger than it is. It would, indeed, be more sensible to build houses and the like; but if there are practical difficulties in the way of doing this, the above would be better than nothing.” This implied government action of a type and scale never thought of before. Only in the United States an economic program called the ‘New Deal’ had been brought into action by President Roosevelt already in the early 1930’s. In a way Keynes’s ‘General Theory’ was a defence and theoretical explanation of the need for government intervention. Public spending, even if it may lead to a budget deficit, was now made a legitimate policy tool to combat unemployment. Keynes’s key argument here was the multiplier effect which had first been developed by R.H.Kahn in 1931. Based on the marginal propensity to consume, Keynes argued, an increase in the income would lead to higher consumption and therefore to a stimulation of national economy as a whole. Accordingly, government spending would have a overall positive effect through the respective multiplier: private businesses in turn would start to invest, employ more workers, leading to an increased effective demand and the national income would subsequently rise again by even several times more than the original government investment.

In concluding, Keynes’s main achievements are firstly the partial rejection of classical economics which only covers a special case in the capitalist system, and secondly the taming of capitalism itself through anti-cyclic public spending, again in contrast to the prevailing laissez-faire ideas, and finally the prevention of financial crises and unemployment through government control of credit and currency. Moreover, it was Keynes’s scientific discovery, based on the observation that the factors determining the behaviour of the whole economy are not merely a multiplied version of the behaviour of individual economic actors, that coined the distinctive terminology of macro and micro economics. But we have to bear in mind that, “For while Keynes espoused a policy of managing capitalism, he was no opponent of private enterprise. … In review ‘The General Theory’ was not a radical solution; it was rather a explanation of why an inescapable remedy should work. If an economy in the doldrums could drift indefinitely, the price of government in action might be graver by far than the consequences of bold unorthodoxy.”

Finally, as the political reality particularly in Germany, Scandinavia and Britain has shown, Keynesianism had become a popular policy tool via social legislation and monetary control through the government from the 1950s onward. To fight unemployment, co-ordinate the market economy, establish a welfare state and create economic stability dramatic steps have to be taken, which were to revolutionise the way we are thinking about the economy and the state: “The central controls necessary to ensure full employment will, of course, involve a large extension of the traditional functions of government. … Furthermore, the modern classical theory has itself called attention to various conditions in which the free play of economic forces may need to be curbed or guided.”

1.4 Hayek and the Market Mechanism

One of Keynes’s most vehement critics was Friedrich Hayek. He was born in 1899 in Vienna and had academic interests in a wide field from psychiatry and psychology, genetics, to philosophy, politics and economics. After serving in the First World War he work as a civil servant before taking up an academic career. After his PhD in political science he went to the USA as a research assistant which was to influence the way he was thinking about politics and economics considerably. On his return to Austria he started lecturing and became the first director of the Austrian Institute of Business-Cycle Research in 1927. He moved to Britain to lecture at the London School of Economics and acquired British citizenship in 1938 where he remained until 1950. After a short period at the University of Chicago he returned to Europe and took on a professorship at the University of Freiburg/Breisgau. In 1974 he was jointly awarded the Nobel Price in economics. Friedrich Hayek died in 1992.

The economist stood in the tradition of the Austrian school which was founded by Carl Menger (1840-1921), Friedrich von Wieser (1851-1926) and Eugen Böhm-Bawerk (1851-1914). Their work was contrasted sharply with both the classical school and the German Historical School (see chapter 2). The Austrian School claimed with Carl Menger’s publication of ‘The Principles in Economics’ (1871) that the classical labour-theory-of-value was incorrect and that value derives from utility.

“Although Carl Menger was among the acknowledged pioneers of marginalism, there is a distinction in his work which became the special mark of the Austrian School. … Menger emphasised the network of linkages between the production of different goods and the role of human action and market transactions in achieving a coherent structure within the network. … Every individual act involves a choice, and the combination of individual’s choices produces highly complex structures, knowledge of which is never complete nor certain. … Menger’s subjective theory of value and his aversion to the pretence of mathematical precision is in direct opposition to the formalism which was to become the primary feature of the alternative marginalism of neoclassical microeconomics.”

Moreover, Menger’s criticism focused on the German Historical School as well, as they rejected important assumption of the classical economists: Smith’s motive of self-interest and money making could not be as easily refuted as the Historical School claimed, since it was the most persistent and most clearly observable driving force in the capitalist system. The so-called ‘Methodenstreit’ raged between the scholars of the Historical School who argued that a deduction of economic laws solely from the self-interest motive was not justified, but an induction from historical facts should determine certain principles instead, and the classical and Austrian school. Furthermore, Menger carried on to emphasise the subjective nature of economic values and the wrongs of the belief in the mathematical correctness of social science.

In the tradition of the Austrian school especially Friedrich Hayek, together with Ludwig von Mises, continued to formulate a liberal philosophy which regarded all socio-economic data as subjective phenomena. Hence, only in the context of individual choices in the market place a general understanding of the functioning of economics is possible. As Steel points out: “Human action and reaction are in constant play, and the Austrian analysis founded upon dynamic market processes, where decisions are formulated in the presence of uncertainty and with the potential for error, and where entrepreneurship determines the flux of ever-changing relative prices which are indispensable as a guide to give coherent direction to economic activity.”

At the time of Hayek’s active work both neo-classical microeconomics and Keynesian macroeconomics were prevalent and Hayek regarded both as methods of static analysis which were incapable to evaluate the dynamic nature of society and economics. Therefore, the aim of Hayek’s approach to economics was to provide the basis for an understanding of the manner of coherent human interaction in society and economy.

In the growing intellectual shadow of Keynes he published ‘Money Theory and the Trade Cycle’ in 1933 which rejected the view that money and the availability of credit did not affect the structure of production, and shows how an injection of credit can cause changes in the relative price of goods which might lead to a dangerous over-investment. Therefore, Hayek stressed the importance of his concept of ‘neutral money’ since the natural reallocation of resources and prices would be dealt with by the dynamic market mechanism. Monetary disturbances through government control of finances in general then could lead to a distortion of price which are carrying important information about the future of the economy, which in turn might have a overall negative effect on the economic development if distorted. ‘The Pure Theory of Capital’ (1941) carries on to investigate business cycles, the role of capital and entrepreneurial activity. Hayek’s analysis stood again in opposition to Keynes’s ‘General Theory’ which he regards as misleading and even damaging as the Keynesian macroeconomic policy and the advocated government spending might lead to a disturbance of the market mechanism. In 1935 he published ‘Collectivist Economic Planning’, a condemnation of socialist planned economies on the grounds that the economic process of allocating resources is so highly complex a problem that it is insuperable – again highly and vehemently praising the free market as the only all-cure.

This line of investigation and subsequently the political belief is continued in his best-known work, ‘The Road to Serfdom’ (1944). Hayek argues that not necessarily dictatorship leads to planning, but rather planning to dictatorship, because dictatorship is the most effective way of enforcing the plan. Even in an initially democratic society the consensus over a planned economy can lead to a delegation of power. At the stage when the planning body becomes fully institutionalised as an instrument of key political power, a dependency is created which is “scarcely distinguishable from slavery.” However, Hayek’s ‘propaganda’ is not only focused on just the Soviet type of planning or on the actual development of totalitarianism in Nazi-Germany, but even Keynesian macroeconomic government intervention is regarded as potentially dangerous – yet a decline into economic dictatorship and totalitarianism is not inevitable. Subsequently Butler underlines the neo-liberal viewpoint:

“One of the most powerful themes of ‘The Road to Serfdom’ is that even modest economic planning has the effect of slowly but inexorably eroding the values and attitudes which are vital if freedom is to exist. When it is believed that jobs can be created by government and not by employers serving the customer; when we suppose that incomes can be made secure and unaffected by constant changes of the market; and when the government starts to protect the monopolies and special privileges of special groups for whatever reason, the erosion of liberty has begun. Long before, people see their future lying with governmental protection and direction, instead of the free and competitive economy.”

In 1960 ‘The Constitution of Liberty’ appeared and was a restatement of the principles and the practice of liberalism in modern terms, laying down the framework for a liberal society and neo-liberal economics. He argues that the working of society and economy is such a complex mechanism that it exceeds the capability of an individual to comprehend, therefore it is impossible to plan the economy successfully. Individual freedom should subsequently not be inhibited as thereby the social and economic system or order respectively is robbed of its unique ability to allocate resources efficiently through the market place and to overcome new problems.

Hence, Hayek’s key framework is the market mechanism and only it is capable to establish order and provide the necessary adjustments. “We are only beginning to understand on how subtle a communication system the functioning of the advanced industrial society is based – a communications system which we call the market and which turns out to be a more efficient mechanism for digesting and dispersing information than any that has been deliberately designed.” However, Friedrich Hayek remains the leading propagator of the neo-liberal school of thought for which the market is the key ideological concept. In sum, free trade, the spirit of free enterprise, government abstinence from monetary policies and large scale public spending, and an independent price mechanism through the market are the essential factors which are constituting the neo-liberal framework. Nevertheless, the inherent problem of Hayek’s economics lies in the ideological overvaluation of the market mechanism. The theoretical approach, generally, leads into a sensible direction as the market can basically provide a sound procedure to allocate resources in contrast to pure economic planning, but Hayek completely degrades and negates the role of the state in for example an underdeveloped economy or in times of recession, when perhaps sensible state intervention might be necessary.

Hayek’s writings and insights were all based on the concept of liberty, and in sharp contrast to the at the time prevailing Keynesianism he initiated a renaissance of liberalism. His neo-liberal economic doctrine, based on the omnipotent market mechanism found special expression in the Reagan and Thatcher governments which came closest to Hayek’s ideal of limiting government intervention to the fostering of conditions which encourage private enterprise. Consequently, the essence of the neo-liberal renaissance meant a revitalisation of macroeconomic policy modelled on the principles of free trade, laissez faire and the market mechanism, which was before almost exclusively dominated by Keynesian ideas and tools. Liberalism and classical economic thought, hence, through Hayek’s achievement were allowed again to participate in the great 20th century debates about de-colonisation, economic policies, globalisation and the future of capitalism.

1.5 Conclusion

The function of this chapter was to underline the differences and similarities of the principal dominant economic doctrines, especially in the context of the inter-paradigm debate of International Relations. The Anglo-American doctrines presented (Classical liberalism, Marxism, Keynesianism and neo-liberalism) are widely regarded to be the dominant strands in mainstream economic thought and are mainly - with Marxism as the exception - propagating the market mechanism by a greater or lesser extent for economic development. Robert Gilpin, for example, summarises accordingly that “[o]ver the past century and a half, the ideologies of liberalism, nationalism, and Marxism have divided humanity. … The conflict among these three moral and intellectual positions has revolved around the role and significance of the market in the organisation of society and economic affairs. Through the evaluation of the strengths and weaknesses of these three ideologies it is possible to illuminate the study of the field of international political economy.”

However, another aim of this chapter was to demonstrate that the clear-cut structure of IR with its emphasis on the three world views of realism, liberalism, and structuralism cannot be imposed on the study of International Political Economy, because of the actual close theoretical relationship between the different economic doctrines. Hence, the supposed difference between, for example, structuralism and liberalism is not necessarily reflected in economic theory. This dissertation has pointed out that the Marxist economic analysis is inherently using the classical presumptions of the labour-theory-of-value to lead to a different, revolutionary moral, but Marx himself stands out as a Ricardian economist. This clearly implies that, as Smith and Ricardo are the founding fathers of classical or liberal economic thought, that there must be a certain overlap in the essence between Marxist and liberal economic theory.

Furthermore, economic nationalism measured by the same standards is usually identified as part of the ‘realist’ paradigm, and accordingly connected with mercantilist or neo-mercantilist economic practices. However, as the discussion of economic history has shown that mercantilism sees wealth solely in terms of specie, accumulated through foreign trade, and therefore is not compatible with the concept of the labour theory of value (Adam Smith) or theories of productive forces (Friedrich List). Hence, the often produced argument that any type of economic nationalism does not need to rely on capitalist methods of production, distribution and exchange in general – because it is bending the well-established rules of the international economic system - , in order to set it equal to mercantilism, has to be regarded as unsubstantiated. But, as the discussion of List’s concept of economics in the following chapter will demonstrate, in order to reach nationalistic economic objectives effectively and quickly, a certain type of capitalism can be necessary. Capitalism itself, however, does not necessarily have to incorporate the principle of free trade as this ‘political’ concept itself was mainly motivated by global and domestic political and economical interests of Britain as the oldest and leading industrial nation in the 18th and 19th century.

However, this dissertation is not about IR theory, but rather intends to deal with an analysis and an improvement of our understanding of the type of economic development which has set in in the Japan of the late 19th century. This short and obviously very simplified discussion of the IR paradigms, therefore, only serves the purpose of highlighting the difference of the nature of Japanese developmental capitalism – and does not do IR justice, but this is certainly neither the function nor the intention of this dissertation to do so. However, even though the IR paradigms may altogether appear right and helpful for the study of International Relations, it has to be pointed out that, in the light of the analysis in the following chapters, a more flexible approach is important for the understanding of political economy, particularly since the economic pragmatism practised in East Asia has borrowed ideas across the ideological divide. Economic policies can, as chapter 3 and 4 will emphasise, subsequently, deviate from the clear cut structure of the inter-paradigm debate of IR, because economic theories themselves, as this chapter will demonstrate, have been developed in correspondence and interdependence to each and another. Therefore, it will be concluded that the often quoted paradigms of International Relations cannot be easily applied to the study of International Political Economy as this will only lead to a misinterpretation of economic realities.

Thus, the paradigmatic approach of, for example Robert Gilpin can only be regarded as doubtful. Not just the fact that the economic thinkers presented in this chapter are in an antagonistic relationship to the well-known inter-paradigm debate is of importance for the dissertation as a whole, but the evaluation of the economic thought of Friedrich List (see chapter.2.4 in particular) plays a essential role in the assessment of the phenomenal process of economic development in Japan (chapters 3 and 4). List himself, as the following chapter will explain, is certainly a propagator of economic nationalism but was a political liberal. Hence, the inter-paradigm debate does not seem to be applicable to this discussion about the role of the state in economic development, because the policies implemented are often coming from wide range of different economic doctrines as the Ricardian roots of Marxism and the liberal nature of List economic nationalism are illustrating.

In conclusion, this chapter has shown that it is of vital importance to address other economic traditions such as Friedrich List’s concept of a national system of political economy, as the mainstream, Anglo-American economic doctrines have neglected or even attacked any role for the state in promoting economic development.

Chapter 2 “Friedrich List”

“Between each Individual and entire Humanity stands the Nation.” (List, 1841)

Friedrich List, the civil servant, professor, politician, political prisoner, businessman and journalist made his mark as an agitator for protective tariffs, German unification, the Zollverein and the construction of railway systems. The aim of this chapter is therefore to elaborate the influences on List’s ideas, his intellectual development and the impact of his own thought on subsequent economic practices. As we will see, his ideas of economic nationalism were an inspiration to the political unification and the industrial development of Germany and Japan, arguably the first Newly Industrialising Countries (NIC) of their time.

Within the context of the whole dissertation, this chapter serves the purpose of presenting the alternative economic tradition chapter 1 postulated: as the dominant Anglo-American strands in mainstream economic thought have neglected and attacked any role for the state in promoting economic development, Friedrich List’s ideas, this dissertation argues, prove the vital importance of addressing other economic traditions. State-led economic development and industrialisation through the promotion of infant industries, protective measures, administrative guidance and industrial policy within a mainly market-based economy, opposed to ‘laissez faire’, market mechanism without state-intervention and free enterprise, are issues which are usually ignored by the mainstream economic thinkers. However, this chapter will present Friedrich List and his concept of a national system of political economy, which have been decisive to the economic rise of Germany and Japan, in order to point out that the state can play an essential part in economic development. However, it is important to view Friedrich List in the circumstances of his life and time. His work can only be fully evaluated in the light of Germany’s development from economic and political fragmentation to industrialisation and nation building. List himself underwent a long personal development process, from a follower of cosmopolitical economics to the co-founder of economic nationalism - although he was a liberal, enlightened nationalist. The changes and contradictions in List’s life, thus, require a detailed biographical analysis.

List’s main achievement can be seen in the popularisation of new economic strategies in contrast to the classical free trade doctrine, and his analysis of development and underdevelopment in a time when Britain’s capitalism dominated the world. But List was not a pure academic, but he rather was, as Keith Tribe has pointed out, a politico-economic journalist. However, he was neither the first nor the last German 19th century economist to criticise Adam Smith’s free trade doctrine, both romanticism and the German Historical School condemned laissez faire. In the early 19th century Germany was a semi-feudal agricultural country and industrial capitalism was not far advanced. But in fear of the social forces capitalism and liberalism were able to set free, or bluntly put, afraid of the socio-political repercussions of the French Revolution, some German writers and economists wanted to preserve the traditional society and the status quo in their home country. Derived from Johann Gottlieb Fichte’s concept of nationalism and Edmund Burke’s conservative criticism of liberalism a rather illogical school of ‘romantics’ evolved. Friedrich Gentz (1764-1832) and Adam Müller (1779-1829), for example, argued that the state is an organic and natural entity, not just the aggregate of the people living within the same territory, and therefore finds legitimate expression in the nation state. They idealised the Middle Ages and feudal society, and held it as unacceptable that self-interest in the Smithian sense could be the driving force of history and economics. The paternal state and the national community’s welfare are the real underlying reasons and subsequently they demanded a strong state and patriotism. Economic autarky, as envisaged by Fichte, had to be achieved. Free trade as such destroys national cohesion and the nation state as an economic unity, therefore, had to stop following ‘laissez faire’ policies. List was neither a romantic nor a typical classical economist as he did neither represent the landed interests of the conservatives, nor the vested interests of the newly emerged capitalist class, the bourgeoisie: he was an agitator for industrial capitalism, even though the economic backwardness of Germany made him “... the apostle of economic nationalism. List’s association with romanticism is attributable to the fact that the nationalism which he was forced to adopt brought him in opposition to Smith’s doctrines.”

The German Historical School, on the other hand, analysed economics from the mid 19th century onwards with their method of historical empiricism. Importantly, as we will see, Friedrich List uses especially this methodology in a basic form first, based on the concept of historicism. Hence, he and his methodology are regarded as precursors of the German Historical School, which had a tremendous influence on the development of both Germany and Japan.

2.1 Life and Times

Friedrich List was probably born on August 6th, 1789 as the son of a tanner and smallholder in Reutlingen, at the time an autonomous Imperial city, in the small state of Würtemberg. After leaving school he entered his father’s business, but he was an unsatisfactory apprentice and disliked the work, so he looked for a different career. In 1805 he secured himself the position of a junior clerk in the local government where he learnt the rudiments of public administration. Even though without university qualifications, he worked hard on his promotion and finally after different stages he was appointed Director of Finance (Rechnungsrat) in the Ministry of the Interior in 1816. List had already taken up journalism and had written several memoranda criticising the inefficient public administration when he co-founded the political journal Würtembergisches Archiv. His main political ambition at the time was the improvement of public administration and the reform of the constitution of Würtemberg. In the meantime List grew famous for his competence in matters of public economy and administration and progressive members of the government, especially von Wangenheim, the Minister of Education, when restructuring the Universitity of Tübingen in 1817, appointed him Professor of Public Administration to promote reforms.

But as a non-academic List was despised by the university establishment and as a critical propagator of reforms which the reactionary nobility and bureaucracy regarded as revolutionary he lost the support of his influential friends. Official inquiries were made into his lectures, but List - even though he worked apparently hard on his academic career - was still maybe more interested in his journalistic work and general political reform. Consequently he went to the Frankfurt Easter Fair after the winter semester 1818/19. There, as a well-known man, he was asked to draw up a petition to the Federal Diet on behalf of a deputation of merchants. From now on he played on essential role in establishing a Union of Merchants and Manufacturers and in promoting industrialisation. In the mean time his university career came to an end when he resigned over the dispute and criticism about his teachings in Tübingen and List never again held any public office in Germany. But “... he at last felt able to speak his mind freely... As the secretary of the Union of Merchants he broke out of the narrow confines of Würtemberg to play a political role on a larger stage .”

In List’s journalistic work his political ambitions had already been expressed but now he was in the position to influence the development of Germany from a cultural to a political unity by propagating a national parliament instead of a loose assembly, a constitutional and centralised government, a national army and a Federal Court of Appeal together with other federal institutions to foster the arts, science and education. At the time, though, Germany consisted of 39 sovereign entities united in the Deutscher Bund (German Confederation) with Austria and Prussia as the most powerful states competing for domination. But every single state exercised complete control over social and economic affairs, fiscal policy, legal matters, coinage, transport and tariffs. The members of the Union of Merchants and Manufacturers experienced difficulties resulting from those internal tariffs and felt that an economic revival after the Napoleonic Wars was only possible if an agreement between the German states could be reached to trade freely within the territory of the German Confederation and to protect domestic ‘infant’ industries from foreign competition. Even though List, as he stated in “The National System of Political Economy”, was in his younger years a follower of Adam Smith’s free trade doctrine , he grew convinced that here a real advance for his nationalist cause could be made. As Szporluk emphasised, List “... brought into nationalist thought and politics a new component or dimension - to wit the idea of ‘Germany’s’ economic unity. List’s program was novel and highly original, for it took as its premise the rise of industrialism following the Industrial Revolution in Britain and also accepted the political ideas and ideals of the French Revolution.” The new ideological connection between economics and the nation as opposed to Smith’s individual perspective was made. As Secretary of the Union of Merchants and editor of their weekly periodical Organ für den deutschen Handels-und Fabrikantenstand List, after the petition to the Federal Assembly had not brought the wanted success, tried to promote his economic aims by approaching the rulers of various German states directly. But only little success could be made again, yet

“its labours had not entirely been in vain. List’s vigorous propaganda had forced German statesmen to recognise that a multiplicity of internal tariffs posed a problem which could not be ignored. Between List’s retirement as secretary of the Union of Merchants and the founding of the Zollverein hardly a year passed without some negotiations taking place either for the formation of a regional union or for the inclusion of new territories in the Prussian Customs system.... When the Zollverein was founded in 1834 it was a very different organisation from the one envisaged by List. It was not established by the German Confederation as List had proposed. It was founded by Prussia its members accepted the Prussian tariff which List regarded as far too liberal to give German manufacturers adequate protection against foreign competition.”

In this period almost all of List’s time and devotion was spent on affairs of the Union of Merchants, but in July 1819 he returned to Würtemberg and was asked to stand as a candidate at the next general elections. However, had to wait until December 1820 to gain a seat in the lower house of the Würtemberg assembly. This was another opportunity for him to air his opinion on German commercial and political unity and reform. But only after a short while in parliament List was confronted by the police with one of his earlier pamphlets and charged with insulting the King, and other revolutionary ‘demagougeries’. List protested, but as his biographer Henderson states: “failed to appreciate that for years he had been a thorn in the flesh of many senior civil servants and some influential ministers of state.” Under pressure List was expelled from the assembly, found guilty and sentenced to 10 months fortress-imprisonment. There was an outcry on the side of the liberals about the miscarriage of justice and List escaped before he could be arrested. He moved to Strasbourg and stayed in several other German states and in Switzerland. Then he left for Paris where he met the hero of the American War of Independence, General Lafayette, and won his support. In 1824 List returned to Würtemberg and appealed to the king for a pardon, but he was jailed and had to serve 5 months in prison before - on the condition of his emigration - he was released.

In 1825 together with his wife and children Friedrich List travelled to America and joined Lafayette’s entourage who had invited him earlier to come with him. Here he had the opportunity and the privilege in Lafayette’s presence to study the development of the United States and to talk to many prominent politicians, scholars and businessmen. He started, unsuccessfully, some business adventures of his own, he published a number of articles and pamphlets supporting liberal rights and economic protectionism. It was here where List clearly developed most of the thoughts and knowledge he later voiced in “The National System“.

In the USA there already existed a ‘school of national economics’ and Alexander Hamilton (1757-1804) was their outstanding writer. He was the first US-Secretary of the Treasury and tried to re-establish America politically and economically after the War of Independence. “Hamilton advocated a nationally directed and controlled economy and... he believed that the economy should be invigorated and protected by bounties and tariffs, by canals and roads and other public improvements built by the federal government ... .”

Yet Hamilton stood in the centre of a debate against the agricultural south and the proponents of the physiocratic tradition, namely Jefferson and Madison who argued for the import of manufactured goods as they held agriculture for the real source of value. Even morally they were convinced that only in an agrarian society virtue could be preserved - and practically it was possible for the expanding population of the USA to occupy more land in the west. But Hamilton rejected the agrarian arguments of Jefferson and proposed in his ‘Report on the Subject of the Manufacturers’ (1791) the development of domestic industries. First, he simply used Smith to refute the physiocratic tendencies, based on the assumption that only through a flourishing manufacturing industry a nation can increase its wealth. As Tribe argues, the Report, “did involve the foundation of ‘protectionist’ as opposed to ‘free trade’ arguments, but this did not mean that principles established in the ‘Wealth of Nations’ were also rejected. The Report argues that the development of agriculture and manufacture must be joint, but with manufacture taking the leading position in stimulating their mutual development and thereby increasing domestic demand for raw produce.” However, he ends at a different conclusion than Smith, bearing the special circumstances of the USA as a late developing country in mind: only through the protection of infant industries in the USA from foreign manufacturing nations economic development was possible. “Hamilton’s ideal was a free economy - free, that is, insofar as curbs upon individual initiative were concerned, but not free in that sense that government abstained from interference of any kind. He insisted only that the interference of government be benevolent and in the interest of the national welfare.” Yet he realised that the cosmopolitical vision of a system of perfect liberty was desirable but at the time simply an illusion. Britain was firmly established as the leading industrialised nation and trade on equal terms was impossible. Hence, governmental guidance was necessary and Hamilton departed from the Smithian-Ricardian principle of absolute and comparative advantage as a trade policy. “The argument that Hamilton than went on to develop, and which became the basis of protectionist doctrine, suggested that the only means that a nation like the United States had available to secure the eventual benefits of joint development of agriculture and manufacture was a system of protective tariffs....”

In his personal intellectual development Hamilton was, obviously, still embedded in the mercantilist tradition as he aimed to unify the USA politically and economically. He shared the mercantilist policy of tariffs and bounties, but more importantly, “instead of measuring the wealth of a nation by the quantity of precious metals it contained, Hamilton took the yardstick of productive capacity.” Here, he clearly breaks free from mercantilism and acknowledges the principles of capitalist production laid down by Smith, yet he cannot share his free trade conclusions. In short, Hamilton became the theoretical and practical ‘founding father’ of the American system, for the first time combining Smithian assumptions about industrialisation with protectionist principles.

At the time of List’s arrival in the United States the debate between the protectionist, industrialising North and the free-trading, agrarian South was at full flow and after the end of the Napoleonic Wars commercial competition with Europe sharpened again. In 1827 he was invited to write about the American economy and we can be sure that he consulted Hamilton’s Report which was reprinted at the time. But very likely Daniel Raymond with his treatise ‘Elements of Political Economy’, which appeared in 1823 and was a renowned contemporary American economic text, had an influence on List as well. Raymond was arguing along the same lines as List as they were both “... concerned to refute a system of political economy which they identified with the ‘Wealth of Nations’.” Therefore, Alexander Hamilton’s together with Daniel Raymond’s and Matthew Carey’s arguments was reflected in List’s ‘Outlines of American Political Economy’ and greatly influenced his thinking and intellectual development as a whole. It underlined List’s final departure from his early liberal economic convictions, which he already had doubted while agitating for the Zollverein and administrative unification of Germany.

Perhaps for the first time List found appreciation and later took on the US-citizenship. Szporluk regards this point among others as an important insight of List’s concept of the ‘nation’. List was not a nationalist of the German Romantic School, but “[O]nly someone whose concept of the nation was closer to the enlightenment ... could accept as a bona fide nation an entity so recently formed.” Hence, he was not a narrow-minded German nationalist but he saw the nation - the nation-state - in accordance with the enlightened concept of self-determination - as the only legitimate form of socio-political organisation and justified form of government.

List became a popular economic authority in the United States and campaigned for the ‘American System’, proposing high tariffs and public works to stimulate industrial growth. In the mean time he closely observed the development of the railway system, invested money in a local railway enterprise and realised the importance of transport for economic progress. Later List’s political involvement as he supported Jackson election campaign earned him reward: he was appointed American consul to the Free City of Hamburg. However, he was not accepted there and was subsequently sent to Paris for the negotiation of a trade agreement in 1830. In the end he was able to secure himself a consular post in Saxony where the government cared less about his political past.

Back in Germany List spent most of his time on the propagation of political reform and on economic protection, while passionately advocating railway construction. Subsequently, he brought the Eisenbahn Journal und National Magazine into publication, promoting the construction of a national railroad system, which, learning from England and the USA, he considered a vital precondition for the economic unification and development of Germany. But financially again in a desperate situation as the diplomatic appointment was only badly paid, List’s enterprises were unsuccessful and he did not earn a lot of money as a railway advisor in Saxony, he moved to Paris. There he took part in an essay competition on free trade and protection offered by the French Academy of Moral and Political Sciences. However the jury did not award the price to anyone and List’s essay ‘The Natural System of Political Economy’ and another two entries were only termed ‘ouverages remarquables’. Yet again, List was interested in the domestic political affairs of his chosen home country, wrote for French periodicals, was the Paris correspondent for the Augburger Allgemeine Zeitung and regularly submitted memoranda to the French King. List’s French phase from 1837 to 1840 reveals his mental flexibility, after he had already campaigned for protectionism in the United States, he now promoted the construction of a national railway system and economic development of France. “This was not typical behaviour for a German nationalist in the 1830s and 1840s ... .”

The ‘Natural System’ was List’s second attempt, (after the ‘American Political Economy’), to formulate a treatise of his economic and political thoughts. However, he was deeply disappointed and began to write a new book ‘The National System of Political Economy’, which appeared in 1841. This is a comprehensive statement of his understanding of history, of his concept of society and state, of his interpretation of contemporary German politics, his theory of international relations and his vision of world order. The importance of the ‘Natural System’ and the ‘National System’ “lies not so much in the advocacy of the policy of protection as ... in the relatively new doctrines he put forward. While the classical economists had examined problems concerning population, exchange value, money, rent and the allocation of scarce resources, List discussed stages of economic growth, ‘productive powers’, and the industrialisation of backward regions.” In the centre of List’s work stands, what has come to be known in the 20th century as a theory of uneven development. Developing nations like the USA, France and Germany in particular need an economic policy of state intervention to survive international competition. In his view protective tariffs were only a means to an end: the equalisation of all nations leading to his vision of universal peace in a world society.

In 1840 List returned to Germany and devoted his time mainly to journalism, promotion of railways and economic growth. He was even offered the editor position of the Rheinische Zeitung, but declined for health reasons - it was later given to Karl Marx! He also declined an offer from the Russian Minister of Finance as he disliked arbitrary governments. However, he was in severe financial hardship for a man of his prominence as he was just not able to secure himself a position in the public administration, as an academic again or any other permanently salaried post. His energies were then mainly spent on propaganda for tariffs and he launched a new periodical, the Zollvereinsblatt in 1843. But between 1843 and 1846 his mental and physical powers were declining and he neglected his duties, financial and professional disappointments not rare. He suffered from severe depression and a persecution complex and while on a trip to the Tyrol to restore his health he committed suicide on November 30th, 1846. “With his death Germany had lost a great patriot who had combined practical achievements with visions of the future. ... He had seen that Germany would one day be a great manufacturing country and had tried to promote industrial growth by campaigning in favour of a customs union, a high tariff, and a network of railways.”

2.2 Economic Organisations and the Unification of Germany

Friedrich List’s main direct and active contribution to the German economic unification was the founding of the Union of Merchants and Manufacturers, and the promotion of protective duties along with the abolition of all internal trade barriers. At the time Germany consisted of 39 sovereign entities united in the German Confederation and there were enormous varieties in size and population between the states. Some provinces were isolated from the main part of the territory which they belonged to, and autonomy of tariffs, coinage, weights and measures, laws and transport regulations etc. made the political map of Germany rather look like a ‘patchwork carpet’.

There was a large gap between the trade policies of the different states of the Northern ports and independent cities such as Hamburg and Bremen were highly interested in free trade with foreign countries, opposed to the large inland fragmented territorial and industrialising states which started to become aware of the difficulties in internal trade. However, before List had voiced the opinion of the Union of Merchants there was no general and public awareness of the problems created by internal duties and international free trade. His main achievement, hence, lies in the creation of the concept of economic unity going along with the political union of Germany to foster development and national wealth. Yet from 1818 when the ‘Verein des deutschen Handels-und Fabrikantenstandes’ was founded to 1834 when the Deutscher Zollverein came into existence a long battle was fought for the domination of Germany. The competition between the two most powerful states in the German Bund, Austria and Prussia, overshadowed the whole process of nation building. Already in 1818 Prussia had established a tariff regime by abolishing internal duties in the tariff area and by prohibition of import duties on raw materials. It was in fact the most liberal tariff in the whole of Europe. However, even though the big landowners of the Eastern provinces of Prussia were content as timber and cereals could easily be exported for the import of manufactured products, the manufacturers of the Rheinland and Westphalia complained that the tariff did not protect them from cheap English competition. Hence, when the Union of Merchants was campaigning for the establishment of a German customs union there was naturally wide spread disagreement about its nature and aims.

As over the years more and more states joined the Prussian tariff, it became obvious that the time for a general customs union was near and the German Zollverein was established as the result of a fusion of the Prussian tariff area with other customs unions. But the rivalry between Prussia and Austria resulted in a separation of Austria from the rest of the German Bund. In spite of Austria’s endeavours to create a customs union of the whole of the German territory was, due to the now established Prussian hegemony and the orientation of the interests of Austria in the south-east, never realised.

Certainly, Friedrich List who always had promoted the establishment of a Zollverein was glad to see his vision come true, but “was now championing the cause of protection since he was convinced that only a radical reform of the tariff could promote industrialisation and economic prosperity of Germany. List believed that the state had a vitally important part in promoting economic growth. Only by levying high import duties could the state save ‘infant industries’ from being strangled at birth by competition from more advanced industrial countries.”

Moreover, the economic development of Germany was foreshadowed when the Prussian - Austrian dualism ceased in favour for Prussia after the military victory of Königrätz in 1866. Finally under the Prussian Prime Minister Otto von Bismarck’s leadership the German Reich came into existence after France was defeated in 1870/71. Subsequently, the German economic unification as a precondition for national wealth and prosperity led to a state and nation not quite like the one envisaged by List. He always had been in favour of a more universal solution, including the whole of the German cultural nation, but based on economic achievements and policies, rather than on military expansionism.

All the time List had advocated the importance of the role of the state in development, protectionism was simply a means for an end, and his influence as economic practitioner, not necessarily as a theorist is reflected by the drastic progress industrialisation made. By the construction of a national railway system we can clearly see List’s vision: when in 1835 the first railway line Between Nürnberg and Fürth was built, a massive industrial development set in. Already in 1840, 549 kilometres of railroads existed and over the 1850s it expanded from 6044 kilometres to 19694 kilometres in 1870.

2.3 “Das Nationale System der Politischen Ökonomie”

The ‘National System of Political Economy’ was first published in 1841 and was List’s third attempt to collect and formulate the ideas and theories that underlay his politico-economic believes and activities. It was his vision and as Keith Tribe points out:

“... in many respects a compendium - one hesitates to write systematisation- of themes broached in preceding years, seeking to provide an alternative treatise to those of ‘the School’ which from the mid-1820 represented for him virtually all that was wrong in economic thinking. The intellectual inspiration of this school lay in Smith’s ‘Wealth of Nations’ and its popularisation through Louis Say’s brother, Jean Baptiste. A series of errors in economic thinking were held to characterise this tendency, chief among which was an artificial divorce of politics from economics and it was alleged that the consequence of this separation was that political distinctions and national interest failed to find a place in a doctrinal system that supposed the world to ruled by general, universally valid economic laws. The school therefore practised a Cosmopolitical Economy, rather than a true Political Economy which recognised the exigencies of national interests and political forces.”

However, some doubts have been cast over the question how well List had studied the ‘Wealth of Nations’ and how original his own ideas and theories actually were. Nevertheless, the real importance of Friedrich List’s teachings are not necessarily his academic techniques as he was principally a politico-economic journalist and a practitioner, but the more general insights we can gain from his original interpretation of development and underdevelopment.

Decisive are in fact List’s views and interpretations of history, state and society, international relations and his vision of world order. This clearly reflected his book, as the first part concentrates on history, the second on theoretical differences between the ‘school’ and his own analysis, the third on an explanation of different economic systems, and the last part on his understanding of politico-economic reality and his vision. But the whole ‘National System’, even though it partly consists of repetitions and propaganda, can - due to its interpretative and prescriptive character - be taken as a manual for economic development as the necessary preconditions and methods are explained in a unique way. Importantly, in List’s view, history was based on continuous change and transformation, a perspective which, as discussed earlier, was further developed by the German Historical School, especially under Schmoller, in order to criticise the universalistic approach of liberal economics. History was not predetermined and if the necessary conditions were generated economic development was possible almost everywhere.

“In List’s conception of history, change and development were two dominant facts determining the relations amongst states, cities, empires, and nations, some of which were more advanced than others. To him, one nation’s dominant role in the affairs of the human race was the rule of history. In his time, England was the most advanced nation on earth. To this particular German nationalist, England - not Prussia, as is all too often imagined - came nearest in fulfilling the idea of a great society.”

List’s conception of history comes close to the understanding of the ‘great men of history’ approach as individual decisions and incidents can cause change and development. As he explains in his interpretation of the ‘History of the Netherlands’, his completely non-deterministic view of politics and history gives us reason to believe that particularly national economic development can be facilitated through political decisions. List argues: “Had Charles V cast away from him the crown of Spain ... how different would have been the destiny of the Dutch and the German peoples. As Ruler of the United Netherlands, as Emperor of Germany, and as Head of the Reformation, Charles possessed all the requisite means, both material and intellectual, for establishing the mightiest industrial and commercial empire... .” However, the right decisions were made in England, and a socio-political climate was created which made industrial development possible. The centrepiece of List’s analysis was his concept of the nation, which like an absolute axiom or natural law provided the structure for his economic thinking:

“Between each individual and entire humanity, however, stands THE NATION, with its special language and literature, with its peculiar origin and history,... ; a society which, united by a thousand ties of mind and of interest, combines itself into one independent whole ... and its still opposed to other societies of a similar kind in their national liberty, and consequently can only under the existing conditions of the world maintain self-existence and independence by its own power and resources.”

Therefore, only in the sovereign nation state could this socio-political natural law be realised, implying that independent nations have the right to decide about their future through specific economic policies etc. Hence, List subsequently demanded that the Germans form a nation state, “a community with cultural, as well as political and economic forms of collective existence.” In this sense List’s level of analysis is the state, as individuals and international relations are embedded in this concept. On these grounds he regards Adam Smith’s individualism and self-interest (i.e. every individual in pursuing their own interest promotes thereby also the interest of the community as a whole) as a misleading interpretation in a world of competing nations. Still, List points out that private and national economic interests can be completely different and due to a nations sense of history and future the nation state and subsequently its intervention is justified “... to impose certain regulations and restrictions on commerce ... for the best interest of the nation.”

In terms of international relations Friedrich List’s argumentation has similarities to the one presented in the ‘realist’ school of IR. In all the nations “exists the impulse of self-preservation, the striving for improvement which is implanted by nature. It is the task of politics to civilise ... to make small and weak ones great and strong, but above all, to secure to them existence and continuance. It is the task of national economy to accomplish the economical development of the nation, and to prepare it for admission into the universal society of the future.” The familiar theme of survival, maximisation of power and national interest, is but channelled into an almost idealist vision of co-operation and peace. Nevertheless, List’s world order at the time of his writings is still based on economic capabilities, equalling political power, and competition between states, but “through the greatest possible equalisation of the most important nations of the earth in civilisation, prosperity, industry, and power (i.e. through developmental policies of both promoting and protective nature, the author) by the conversion of the antipathies and conflicts which now exist between them into sympathy and harmony” a universal union can be created. In the theoretical part of the ‘National System’ List starts by emphasising the importance of the clarity of definitions in order to show how his elaboration can be located in the framework of economic thought. He differentiates between three components of political economy: individual, national and economy of the mankind. But as List highlights, the school of Adam Smith completely ignores the role of nations in economy by assuming a universal republic of mankind, based on the elitist concept of individualism. In spite of the title given by Smith, he only concentrates on the individual and the whole mankind, the ‘Wealth of Nations’ as a level of analysis is left aside. “Only the School has omitted to take into consideration the nature of nationalities and their special interests and conditions, and to bring these into accord with the idea of universal union and everlasting peace. The popular School has assumed as being actually in existence a state of things which yet has to come into existence.” Hence, List argues that the economic principles ruling individuals and the whole mankind are indeed qualitatively different from the specific national needs and interests. Individuals strive for individual well-being, so does the whole mankind just on a higher level, whereas national economy is not about wealth and exchange values but about national independence and power. As E.M. Earle has noted by pointing out that “the primary concern of List’s policies, both political and economic, was power, even though he linked power with welfare.” Therefore, List transcends the dichotomy between the economic and the political sphere. In sum, the school of Adam Smith is dealing with cosmopolitical economy, i.e. how the individual and the whole humanity may attain prosperity - whereas, according to List, the field of real importance is the national political economy as it reflects the socio-political reality of global economic relations. The nation is not simply the aggregate of people living within a territory, but in his view a cultural, political and economic unity which has to be considered separately. “This results in the development of an argument to the effect that economic forces operate upon a terrain divided into distinct national entities; the principles of cosmopolitical economy are not therefore wrong in themselves, rather it is wrong to suppose that they are unmodified by diverse national interests, by the forces of international politics.”

Furthermore, List criticises the classical school for their purely individualistic perspective regarding the creation of wealth, measured in exchange values. Almost like the physiocratic school which only recognised agriculture as the source of productivity, the School - according to List - additionally accepts the individual manufacturer as a direct creator of wealth. However, this again in the cosmopolitical outlook leads to only an economic result based on the aggregate of individual productivity. Subsequently, a division of labour within the manufacturing process leads to increased productivity, as in Smith’s famous example of the ‘pin factory’. Yet, argues List, this simplification is not correct as its not just the individual working and creating wealth, but the whole society of a nation. “[M]ost depends in all these respects on the conditions of society in which the individual has been brought up, and turns upon this, whether science and arts flourish, and the public institutions and law tend to promote religious character, morality and intelligence, security for person and property, freedom and justice ... .” By pointing this out, List opposes Smith’s ‘simple’ division of labour and develops the ‘Theory of Productive Forces’. Its not only individual labour that generates values, but any kind of activity contributing to the productive forces of a nation on the whole generates future power and wealth. Therefore, List theoretically steps back from the school’s stress on values of exchanges, but emphasises the long term effect of activities on the nation’s productivity which Smith had regarded as unproductive such as literature, teaching, arts, recreational work etc. “Adam Smith has on the whole recognised the nature of these powers so little, that he does not even assign a productive character to the mental labours of those who maintain law and order, and cultivate and promote instruction, religion, science and art. His investigations are limited to the human activity which creates material values.” Hence, for List the objective for nationalist economic thought cannot be the short term accumulation of values of exchange and capital in a Smithian sense, but the improvement of a nation’s productive forces, as only they are leading to political power and national welfare in the long run.

Moreover, to further strengthen the national productive forces, not just a division of labour within the production process is necessary, but actually a union of labour. This union stands for the division and variety of commercial operations within a nation’s agricultural and manufacturing industry, and a combination of productive forces. State intervention, here, can play an essential part to organise and improve this confederation of national productive forces. Again, List locates economy on the national level which can be influenced by policies, whereas he blames Smith for his purely individualistic perspective on economy leading to a result which is merely brought about by the natural cause of things and the classical ‘invisible hand’. But in List’s non-deterministic view, a nation is responsible for its own future, and “... the whole social state of a nation will be chiefly determined by the principle of variety and division of occupations and the co-operation of its productive powers... . The most important division of occupations in the nation is that between the mental and material ones.” List argues, understandably, that the mutual interdependence of mental and material productive forces will reciprocally result in increased productive powers and more independence and political power for the nation. Hence, mental productive forces such as morality, religion, enlightenment, education, civil liberties and political institutions etc. are promoting the material productive forces directly and indirectly. In this mutual process the future of a nation can be influenced. Economic policies are the leading political instrument to structure change and development. Every strong nation, according to List, has to take their responsibilities by joining, fostering and protecting their productive powers.

Thus, protectionism along with the promotion of domestic industries through education, technical schools, industrial exhibitions, infrastructural improvements and subsidies etc. are serving, according to List, a specific aim: to equalise the difference between the leading nations and to bring Britain quasi-monopoly of List’s time to an end in order to reach universal peace and welfare. But as long as Britain dominated the world with her manufacturing power protective measures are necessary: “Protective duties act as stimulants on all those branches of internal industry the produce of which foreign countries can provide better than the home country, but of the production of which the home country is capable.”

Hence, economic independence and self-sufficiency are legitimate objectives for a nation. List simply believes in the right of equality between nations, at least between proper nations with large territories, culture and a distinct sense of collectivity. Therefore, he sets out to prove that nothing is so injurious to that right than free trade and cosmopolitical economic doctrines, and argues that “the system of protection can be justified solely and only for the purpose of industrial development of a nation.” But when equality between the leading states is established, freedom of trade on equal terms can be utilised to facilitate further welfare and civilisation for the whole mankind. Nevertheless, List the visionary idealist knew that England’s free trade policy in reality was only strengthening their leading position. He argued that, after Britain had used protectionist measures like the internal promotion of industries and especially the famous Navigation Act to reach the top, Britain (i.e. the benefiting entrepreneurs and their liberal government) tried to secure their rule by wiping out the traces of success. As British manufacturers had already achieved a state of quasi-monopolistic domination, the former official protectionist policies could be abolished. The doctrines of Adam Smith and David Ricardo were simply used to cloud the public’s and politician’s judgement and memory, and were only furthering Britain’s hegemony. Smith was not only incorrectly used, argues List, to explain the term ‘national political economy’, but misleadingly advocated to secure the status quo. Thus, the doctrine of free trade and the theory of comparative advantage, developed by Ricardo which argues that every nation possesses special advantages in various branches of production and under free trade they will compensate each other, leads to a reality completely different from that both Smith and cosmopolitical philosophers have envisaged. But List convincingly puts forward that this “argument is only true in reference to agriculture, in which production depends for the most part on climate and on the fertility of the soil, but is not true in respect to manufacturing industry, for which all nations inhabiting temperate climates have equal capability provided that they possess the necessary material, mental, social, and political qualifications. England at the present day (in the 1840s, the author) offers the most striking proof of this.” Therefore, based on the implementation of economic policies change and development can be facilitated. For List this means, particularly in the case of Germany, economic and political unification, import duties on manufactured products and the promotion of the domestic industry to establish a balance between agriculture and manufacturing. Even Adam Smith, according to List, allows a protective system, but only in cases of retaliation, national security and means of equalisation (i.e. to neutralise the difference of taxation). List, however, fully agrees and due to his prevalent concept of the importance of the nation he extends Smith’s argument on the whole of economy: true national political economy needs to protect infant industries from unnaturally established dominance and competition. After all, “in order to allow freedom of trade to operate naturally, the less advanced nations must first be raised by artificial means to that stage of cultivation to which the English nation has been artificially elevated.”

Friedrich List’s, perhaps, most important achievement is a quasi modern assessment of economic progress and his theoretical insight into what is nowadays called ‘uneven development’. He clearly defines a framework for a comparative analysis of development on the international scale by putting forward a series of developmental stages which he regarded as the natural course of progress. The first stage is the rather simple evolution of productive forces in the agricultural sector by overcoming the ‘hunting and gathering’ era of primitive humans. The emergence of inter-regional or foreign trade in the agrarian state is the second stage and some simple manufacturing already develops. The third stage is marked by an equal progress of agricultural and manufacturing production, whereas the fourth stage already sees the import of raw materials and the export of manufactured products which then reciprocally promotes agriculture and vice versa. Finally, in the last stage perfection is reached and the previously required system of protection can be converted into free trade. Thus, bearing the stages of development (‘The National System’, Chapter 15) in mind, economic policies can be used to overcome ‘underdevelopment’ and to generate progress. Particularly to reach the higher level of industrial development, state intervention becomes necessary and, according to List, the system of free trade has to be suspended - whereas in the early stages the pastoral or agrarian state should make full use of free trade in order to import technology, machinery etc. which will ultimately lead to the first phase of manufacturing.

Even though List talks already about a ‘nation state’ in the early stages of economic development, he is not elaborating his views on the political concept as such, but does generally accept the underlying ideas of nationalism, expressed through the French Revolution and in the German romantic school. However, the decisive point in the building of a nation state for him is the introduction of manufacturing industries which clearly reflects his cause for economic growth in Germany in the 1830s and 40s. Yet again, he regards ‘development’ not simply as an economic process, but the socio-political surroundings are playing a major part. The ‘Political Productive Powers of the Nation’ (Chapter 17) are an important dimension of industrial growth. Hence, socio-politically the agrarian state, as its society is are clearly inhibited by the feudal despotism, and its population, subsequently, only takes uncreative and monotonous occupations, is inflexible and rather unproductive. Yet, manufacturing industries will automatically, according to List, and reciprocally promote civil liberties and enlightenment, based on the skills, spirit of invention and freedom that is required for industrial production. The ‘industrial town’ is an analogy he used to show that liberty is the result of urbanisation and industrialisation and vice versa. “The country derives energy, civilisation, liberty and good institutions from the town, but the towns ensure to themselves the possession of liberty and good institutions by raising the country people to be partakers of these acquisitions.” Although List had a fairly idealised picture of urbanisation that symbolised for him all the positive aspects of progress, especially when one bears in mind the problems caused by the early capitalism and urbanisation, he emphasised that a progressive country should be like an industrious town, enjoying and generating welfare and freedom.

“The creation of an industrial economy involved the transformation of rural craftsmen into urban factory workers and the establishment of large farms to feed the growing factory towns. List admitted that the transition from one type of economy to another might lead to temporary unemployment but eventually the workers would be better off in the new urban industrial society than they had been in the old rural society.”

Yet, in this respect List advocated in his nationalist economy social and political reforms, which were a prerequisite for development, together with protectionist measures. But, “he was not an advocate of protection in the early stages of a nation’s development, ..., and he thought that, even during a nation’s transition to an industrial society protection should have a specific purpose and a restricted application.” Therefore, List had laid down an early economic strategy to fight underdevelopment which at times comes close to the modern interventionist strategy of economic ‘selecting and targeting’ as he argued: “Neither is it at all necessary that all branches of industry should be protected in the same degree. Only the most important branches require special protection... .”

In the last part of the ‘National System’ List, the economic practitioner, has his say. This in particular emphasises his relevancy for present economic affairs, especially when we bear the one-sidedness of the List critique in respect to Smith in mind. As Szporluk explains: “Scholars generally agree that List’s criticism of Adam Smith are at best exaggerations, if not outright distortions, of the Scotsman’s real views. It is not necessary to expose this question in depth ... . It is enough to examine List’s comments about Smith and the School mainly for what they reveal about List, not about Smith.” Hence, List himself has enough original to say to further our insight into the developmental problematique and offers alternative remedies.

First of all List is establishing and formulating the fundamental predispositions for development (Chapter 25), which may not appear to be a sophisticated analysis today, but in the light of early industrial development they give us some insight into the phenomenon of ‘uneven development’ in general. He obviously, here, is in favour for something that resembles a ‘modernisation’ approach as we would name it today. Both technical factors, on the one hand, such as infrastructure, skills, experienced workforce, sound agriculture, compactness of territory and efficient political institutions etc., and mental prerequisites, on the other hand, like morality, education, spirit of industrial enterprise and justice, are necessarily found in advanced nations. In a way List talks here really about England which he regarded as the ideal type of a modern industrialised nation. If only these preconditions could be generated, economic development, assisted by protectionism was possible for Germany, France, the United States etc., as well. As Henderson points out:

“He still believed in world free trade as an ideal state of affairs which might be achieved at some time in the future. He advocated protection not as a fiscal system of universal application, but as a means of enabling recently established ‘infant industries’ to survive competition from advanced manufacturing countries. And he did not advocate protection for agriculture. Protection was for List not an end in itself. It was the means by which states could develop from poor rural agrarian societies to rich urban industrial societies whose citizens could enjoy a much fuller life than before.”

Therefore, only the interaction between socio-political and economic forces or policies was facilitating change and development. List’s practical advice for the leaders of developing countries was the implementation of import duties on manufactured goods of 40 to 60 percent in the initial phase, and 20 to 30 percent to maintain growth. Beyond these figures a nation was just not ready for independence and simply free trade should be adopted. List was outspokenly against the protection of agricultural products, as this sector would automatically benefit from the increased demand stimulated by the manufacturing industry. Obviously, raw materials were to be excluded as well in order to promote the supply for the domestic manufacturers. Central to List’s anti-free trade position is the practical weighing up of arguments and the use of descriptive analogies: “... we may easily be convinced that in competition with... (the industrially far advanced, the author) ... it is simply foolish to rest our hopes on the operation of ‘the natural course of things’ under free competition, where in our case, workmen and technical men have in the first place yet to be trained, where the manufacture of machinery and proper means of transport are merely in course of erection, where the home market is not secured to the manufacturer - not to mention any important export market, ... .” List felt strongly about the future of Germany, and hence, with the analogy of the child who could not defeat a strong man, the German ‘infant industries’ needed appropriate protection to survive. Obviously due to his fear and his patriotic sentiments he blindly propagated against the School of Adam Smith, even though he shared their vision of industrialisation.

Particularly, the case and the history of Britain was for List the ideal of economic growth and industrial development as England had reached supremacy as never witnessed before (chapter 33). Politically the right decisions were made by the rulers - after the wool industry had stimulated all other industries - when the famous Navigation Act secured the development of a national navy. But this act was protectionist in nature as such and, as List argues, the system of protection together with visionary leadership and state intervention promote economic growth are the prevalent themes in the English history. Yet, constitutionalism, the weakening of the aristocracy in favour for the bourgeoisie, a system of justice (especially the right of trial by jury) and civil and economic liberties played a vital part in her success. The teachings of history are, therefore, the “... the powers of production and consequently the wealth of individuals [is] growing in proportion to the liberties enjoyed, to the degree of perfection of political and social institutions, while these, on the other hand, derive material and stimulus for further improvement from the increase of material wealth and of the productive powers of individuals.” Hence, the importance of List’s critique of the cosmopolitical economic doctrine lies in his analytic and prescriptive pragmatism, which firstly made him realise the phenomenon of uneven development on the international scale. Szporluk underlines here: “To see List only in terms of railway development or of an economic nationalism based on arguments about ‘infant industries’ is to overlook his perspective of international economic development as a civilising process.”

Friedrich List was a man of strong visionary powers. He foresaw the emergence of the USA as the leading economic power and even predicted a bipolar world with Russia and America as opposing political systems. After his experience with the Napoleonic continental system, which united large territories under the same laws and commercial regulations, he advocated again a confederation of the European countries, which some scholars regard as an early expression of the common market idea . However, some regarded him close to the Nazi expansion ideology as he saw Germany in the centre of a united Europe, but it can be argued that he made clear that this could only be reached on the basis of a voluntary confederation (Chapt. 35): “If any nation whatever is qualified for the establishment of a national manufacturing power, it is Germany... .”

2.4 Conclusion

This chapter has explored Friedrich List’s concept of a national system of political economy and presented his ideas on state-led economic development, in order to oppose the mainstream Anglo-American economic doctrines, which have neglected or attacked any role for the state in development. His pragmatic approach to economic development had an important intellectual impact to the industrial success and economic growth of Germany and Japan, which were the first NICs of their time. As Williams points out: “...List was the nineteenth century’s finest thinker about the foundations of what we now call ‘industrial policy’, a set of ideas and practices that have been decisive to the economic rise of modern Germany and Japan.”

However, List is still important and continues to be relevant in our time for a number of reasons. Firstly, his rejection of Smith’s cosmopolitical economy in favour for a national political economy is an important cornerstone in the improvement of our understanding of the workings of the economy of countries. Secondly, not simply the accumulation of wealth through a division of labour in Smith’s sense, but List’s theory of productive forces has to be seen as the key to economic development. Hence, the cutting edge for this dissertation lies in the role List gives the state to promote economic development through industrial policies, protectionism, ‘infant industries’, education (mental productive forces), infrastructure (material productive forces) etc. As Levi-Faur rightly emphasises:

“On the basis of the concept of productive powers, List was able to offer an analysis that connected government educational policies and the notion of human capital with the desired outcome of economic development. List was able to distinguish between the characterizations or outcomes of development and the causes of development. ... It is mental capital that ... thus should be considered the most important cause of development, and it is the government that is responsible for the education of its citizens and therefore for the augmentation of human capital. It is the extent and amount of human capital that distinguishes between developed and underdeveloped economies.”

In essence, the different vision of economy between the Anglo-American and List thinkers is manifested in the following preferences: ‘Automatic’ growth vs. deliberate development, consumers vs. producers, individuals vs. the nation, and morality vs. power. Moreover, List’s concept of historicism and idea of national political economy - standing in the tradition of the economic nationalists such as Hamilton and Carey - had a great impact on subsequent economic doctrines and practices. Most importantly, List and his methodology are building the foundation for the German Historical School, which had a tremendous influence on the development of both Germany and Japan.

The actual founder of the German Historical School, Wilhelm Roscher (1817-94) stood himself in the anti-individualist tradition of romanticism and developed a new academic perspective into economic inquiry: the study of economic history was the key analytical conception. More elaborate criticism of the classical school came from Bruno Hildebrand (1812-78) who rejected the existence of natural economic laws. Karl Knies (1821-98) pointed out that historical studies are the only legitimate form of economics, and policy and solutions for economic problems can only be achieved from a historical point of view. However, it was the younger historical school founded by Gustav Schmoller (1838-1917) which really seriously began with historical economic research. Thus, they concluded that there were no absolute and perpetually operating economic laws as Smith and Ricardo had claimed, but as economic conditions were constantly changing, they must be considered as essentially relative and variable with time and place. Therefore, deductive reasoning based on the classical motive of self-interest was to be abandoned from economic science and replaced by induction from an empirical analysis of history. Yet the German Historical School was not anti-capitalist, but gave rise to the intellectual social reform movement, the so-called ‘Kathedersozialismus’, the socialism of the professorial chair. However, the Younger Historical School was clearly anti-socialist and regarded only social reforms and state intervention as a legitimate means in the process of taming capitalism and unifying all classes behind the strengthened nation-state.

Subsequently, in 1872 the followers of the Younger Historical School were founding the ‘Verein für Sozialpolitik’ (Association for Social Policy), an association of social scientists who were advocating government intervention into the economy in order to ease the increasing class conflicts through social welfare legislation. The fundamental aim of the ‘Verein für Sozialpolitik’ was the preservation and, subsequently, the economic strengthening of the German nation against the threat of social revolution. Schmoller regarded economics not as a neutral, positivist science, but as a means to achieve a healthy and harmonious society. The so-called ‘Kathedersozialisten’, therefore, were quite different from the utopian and Marxist socialists as the reforms and social legislation they proposed were aimed not to overthrow but to preserve the existing economic and political system by taming the ‘dangerous’ social forces of labour organisations, and to unite all classes under the common aim of national welfare and power. (See chapter 4.1.3)

In conclusion, List is the outstanding proponent of a long tradition of economic nationalism and his ideas had an essential intellectual impact on the economic development of both Germany and Japan. Thus Williams argues: “There is a direct intellectual link between the American critique of the English Navigation Acts and Alexander Hamilton’s advocacy of national protection and encouragement of ‘infant industries’; and it stretches from Hamilton to the economist Friedrich List and the German historical school, and from List to the inventors of Japanese industrial policy.” However, List, as this dissertation is arguing, is not simply about protective tariffs but he emphasises the importance of the state’s role in promoting productive forces for economic development, opposed to the Anglo-American doctrines which believe in ‘automatic’, merely market-based growth. Hence, this chapter has served the objective of demonstrating, as the dominant strands in mainstream economic thought have neglected any role for the state in economic development, that List’s concept of national political economy can provide an alternative vision. Subsequently, his concept of economic nationalism, based on government-led industrialisation, is still relevant in the present day as for example the case of the Japanese ‘miracle’ demonstrates (see case study in chapter 4). The causes of this so-called ‘miracle’ have been heatedly debated by the followers of the statist and marketist schools, which can also be represented by the discourse between the economic conceptions of Friedrich List and Adam Smith.

The following chapter, hence, takes up the discourse between List and Smith in the context of the development debate and illustrates the importance of Listian economic thought in explaining the differences of the East Asian capitalist system, and in providing the intellectual foundations for the capitalist developmental state.

Chapter 3 “Economic Development: Free Trade or State Intervention”

For the purpose of this dissertation, the discussion of the economic doctrines of List and the Anglo-American thinkers now has to be taken a step further in order to show that List’s ideas have had an important intellectual impact on economic practices which were used in late-developing countries such as Germany and Japan. There is a growing body of literature which addresses the question of the role of state and market in economic development and the work of Friedrich List is increasingly rediscovered. His analysis of development provides an important insight for our understanding of the economic strategies which were implemented in East Asia and cannot otherwise be explained sufficiently. In relation to the dissertation as a whole, the ongoing discussion between protagonists of free trade and state intervention respectively, is an integral part of our inquiry into the role of the state in economic development. Of particular interest here is the fact that the East Asian developmental capitalism deviated from the path of development the mainstream Anglo-American economic doctrines usually prescribes. List was a protagonist of the promotion of industrialisation and economic development for very specific reasons. Economic nationalism was not a self-perpetuating motive but a means to an end: ‘underdeveloped’ countries should simply be allowed to catch-up with the dominant industrial countries. Thus, List provided them the analysis and strategy required for late-developers to achieve an equal status. Importantly, this was the basis for the creation of the so-called ‘capitalist developmental state’ whose objective it was to reach this target.

3.1 Advantages of Late Development

“The industrially more developed country presents to the less developed country a picture of the latter’s future.” (Karl Marx, Capital, Preface)

Before discussing different development strategies it seems to be advisable, in order to shed light upon the phenomenon of development itself, to view the world as divided between advanced and follower economies. Logically, late developing countries want to achieve the benefits of an industrial society, but obviously faster and less costly. “The advanced countries became not only models of economical and political techniques up for adoption, they also provided examples of mistakes made, warnings of problems which the first industrializers had encountered and which follower societies should seek to avoid or mitigate.”

The concept of followership, therefore, constitutes certain advantages and opportunities which were inherent to the nature of late development. Firstly, as the quotation from Marx in the beginning of the chapter exemplifies, established industrial countries were providing the late developers with an outlook on their own future or some sort of teleological insight by projecting domestic conditions onto the advanced country. Secondly, as Veblen has argued, development could be reached faster as whole stages could be skipped by borrowing from the achievements of the advanced nations. “Imperial Germany had become more efficient industrially than her predecessor, England, because of the merits of borrowing. England was paying the penalty for having been thrown into the lead and so having shown the way.” Finally, mistakes and problems which the advanced countries had encountered in the process of industrialisation could be mitigated or even perhaps totally be avoided.

3.2 The Development Debate

The following sections will examine the respective role of state and market in development by means of a comparison between the different well-known paradigms of International Relations/International Political Economy. However, as argued earlier, this dissertation seeks to expand the understanding of the East Asian ‘economic miracle’ beyond the inter-paradigm debate, which is not really helpful for our investigation. By highlighting the difference of the East Asian ‘developmental state’ the thesis that the state has played an essential role in engineering the economic growth and development will be central to this chapter, leading to the assumption that a synergy between state and market has been created in order to facilitate this development. Thus, the theoretical foundation for the discussion of the phenomenon of industrialisation and rapid economic growth in Japan and East Asia will be laid here, which then will be documented in the case study in the following chapter. Generally, economic development means the significant increase of productive capacities within a country and is often associated with major changes in both the technical and socio-economic conditions of production. The actual quality of change is important in order to differentiate between simple growth and development. As Dowd elaborates: “Growth is a quantitative process, involving principally the extension of an already existing structure of production, while development suggests qualitative change, the creation of new economic and non-economic structures.” In this sense, for instance, the Industrial Revolution in Britain was a process of complete change in terms of social and economic structure, as well as in terms of quantitative scope and scale. Yet additionally, the term ‘economic development’ which is viable to our question is based on the concept of modern economic growth and development in the sense as defined by Kuznets : the application of modern science and technology to industry; a sustained and rapid rise in real product per capita, usually associated with a high rate of population growth; a rapid decline in the relative importance of agricultural output; and the existence of international contacts.

Hence, in a broad way of understanding, the generalisation made by Marx and quoted in the beginning of the chapter is sensible, but obviously we have to be careful when dealing with simplifications. As Gerschenkron argues: “... the development in a backward country may, by the very virtue of its backwardness, tend to differ fundamentally from that of an advanced country.” Therefore, the example of the Industrial Revolution in Britain should not be turned into a normative statement on econ0omic development as a whole, and in general terms it should be avoided to be preoccupied with purely ‘Western’ development models or to regard the British case as a universal blueprint. But its essential to concentrate on the core of the analytical concept of the various developmental theories in order to evaluate their validity for this dissertation since the developmental states of East Asia have ‘followed’ a certain path.

However, the modern world’s history has provided us with different broad concepts of overarching significance on the question of how desired economic change or development is to be achieved: capitalism, socialism and nationalism are usually called upon in order to supply an ideological framework for economic development. These paradigms are generally used to contrast different world views and approaches to economic phenomena, but as the comparison of economic doctrines in chapter 1 and 2 has shown such a simplification and sheer imposition of IR paradigms is unjustified. In reality, due to the nature of late development and its inherent advantages, we often find a large overlap of various economic doctrines: particularly in East Asia a wide range of flexible, partly protectionist, partly free market trade policies have been implemented to facilitate economic development. Since the early stages of de-colonisation an ideological battle between the respective development theories has been fought and essentially centred around the roles which the state and the market were supposed to play. In a basic form a comparison between the dominant viewpoints in necessary in order to emphasise the dogmatism that has evolved in literature and politics in the last decades. However, as this only reflects the different schools of thought, it has to be pointed out that successful developmental strategies have often utilised a variety of overlapping policy instruments.

Firstly, liberal modernisation theory is based on the basic assumptions of capitalist production and is in a way ‘simply’ an act of projection or derivation from Western history, suggesting economic development modelled on the Industrial Revolution. Usually the normative statement is made that development and change can only be facilitated through the modernisation of the economic, political and social structures of a country which is still ‘traditional’, ‘backward’ and ‘underdeveloped’. However, this has produced a variety of criticism as it merely can be seen as a process of uncritical ‘Westernisation’.

Principally, modernisation theory prescribes a market-led development, based on the Smithian assumption that the market provides a unique mechanism through which individuals, in pursuing their own interests, thereby create wealth from which in general society benefits. Subsequently, the system of free enterprise, laissez faire, free trade and the establishment of a capitalist market economy are necessary prerequisites for economic development. Accordingly, W.W.Rostow identified the history of Western Europe and the USA in the last 200 years with theoretical stages of development and proposed internal economic, social and political changes for the underdeveloped countries - which practically led to an emulation of Anglo-American of economic liberalism and democracy. Hence, the simple formula of de-colonisation combined with the premises of the classical economic school would lead to a ‘take-off’ stage and subsequently to sustainable development. It was pointed out in the classical tradition that the market mechanism alone, after the backward structures had been removed, would be sufficient to propel development - the state was only needed to provide ‘law and order’.

Yet liberal scholars like Rosenstein-Rodan , sceptical of the simplicity of the formula, emphasised the need for a “... prescription for ‘balanced growth’ - a co-ordinated plan of investments by the government in strategic sectors of the economy. This view firmly established the intellectual rationale for planning in the development literature - the so-called dirigisme syndrome.” However, after this ‘big push’ by the government or through foreign aid the ‘natural’ process of economic development, meaning capitalist industrialisation was supposed to set in automatically. Moreover, later the importance of free trade was underlined and the underdeveloped countries were advised to follow a strategy of export oriented industrialisation (EOI) by participation in international trade.

But the various modernisation models were strongly criticised especially after the recently de-colonised ‘Third World’ proved unable to catch up with the industrialised Northern hemisphere. Derived from a Marxist analysis and Lenin’s theory of imperialism a new understanding of the phenomenon of underdevelopment emerged in the late 1960s and 1970s, called dependency theory. Due to the head start of the industrialised countries, argued Raul Prebisch , the underdeveloped Third World was not able to compete on the world market, which led to the ‘development of underdevelopment’. As these countries mainly relied on the export of raw materials, resources for development were drained from the periphery to the core (A.G.Frank , S.Amin ) through exploitative international trade (‘unequal exchange’). The dependencia theorist, however, sought a solution for the exploitation problem in the isolation from the world market (‘revolution or underdevelopment’) through a policy of Import Substitution Industrialisation (ISI). Again, as history has shown, this development strategy where put to the test has not really succeeded and subsequently the dependency theory has been criticised for its almost too simplistic approach to a complex problem. Particularly, the example of rapid economic growth and development in East Asia’s Newly Industrialised Countries (NIC) is given as evidence against the ISI strategy as often fundamentally different developmental policies have been applied in the region. Generally, dependency theory fails to explain this phenomenon convincingly, even though the term ‘dependent development’ was formulated to keep up the structuralist argumentation, but in many aspects the region has developed a momentum of its own. Especially this phenomenal achievement make Japan and the East Asian NIC’s such as South Korea, Taiwan, Singapore, Malaysia etc. a very important case for the contemporary analysis of the development problematique.

From a different political prospective, economic nationalism, based on the concept that humanity is naturally divided into different nations and that the only legitimate type of government is national self-government in the nation-state, claims the right of self-determination through economic independence and the implementation of economic policies. As discussed before, there is a long history of various nationalist practices in economics, beginning with the post-medieval mercantilism, through the doctrines of Hamilton and List, and to modern neo-mercantilist instruments of import quotas, industrial standards, currency devaluation (‘beggar-your-neighbour-policy’) etc. However, there is a wide variety of nationalist ideas and they often overlap with other economic concepts, yet the principle of the leading role of the state in terms of defining aims, policies and agendas prevails. As far as the economic thought of Friedrich List is concerned who is usually identified as a neo-mercantilist, it has to clarified again that List shared Adam Smith’s vision of industrial capitalism, did not generally deny the value of the market mechanism and based his assessment of national wealth and power on mental and material productive forces, unlike the mercantilists who are defining wealth only in terms of accumulation of precious metals. List, therefore, stands out as an economic nationalist without qualifying for the neo-mercantilist undertone. His life itself demonstrates the fact that he is not simply an irrational, aggressive, conservative or non-progressive nationalist, but a liberal who recognised the non-cosmopolitical nature of international politics and economics. Therefore, List, by no means, can be regarded as a neo-mercantilist who only has the interest of his own country in mind, but his economic analysis and strategy are generally available to late-developing countries.

However, Susan Strange, in best IR tradition, summarises the development debate in the form of three competing theories of trade: “In the study of international relations the three are known as the realist, the pluralist and the structuralist... . In international economics, they go under somewhat different labels - mercantilist (or neo-mercantilist), neo-classic or liberal, and Marxist (or neo-Marxist), or in Latin America and other Third World countries dependencia theories. Reduced to the simplest essentials the difference between the three schools lies in the value that ought to be given priority... .” Respectively, economic liberalism treasures economic efficiency and wealth, dependencia is about justice, argues Strange, and economic nationalism about survival. Moreover, as a general outline the opposing ideologies have completely different understandings of the respective roles of state and market in the economic sphere: liberalism is built on the market mechanism and defies state interventions, dependency theory condemns the market as exploitative and relies on state planning, whereas economic nationalism demands a strong state to interfere with the market in order to maximise national interest. Problematic with this approach of imposing the inter-paradigm debate onto the analysis of the East Asian development is that it can lead to a distortion of the specific issues involved in the concept of the developmental state, as it is inherently a capitalist economic system, but makes use of special socio-political and institutional features (see discussion in 3.3 and 3.4). The success of Japan and the East Asian NICs is often based on a mixture of policy instruments from various economic schools, underlined by particularly the intentional use of both ISI to protect ‘infant industries’ and EOI in other sectors (see case study in chapter 4).

Nevertheless, the 1980s have seen a revival of the classical economic doctrines and an often blind exchange of ideological statements has dominated the political and academic world. Accordingly Srinivasan emphasises: “In the dominant stream of development literature, the assigned role of the state extends beyond maintaining law and order and enforcing contracts ... More often then not these interventions either proved to be ineffective or worse than the disease of market failure they were meant to cure.” But very doubtfully, Srinivasan and the neo-liberals ignore new trends in the body of academic literature and research which point to a re-valuation of the role of the state in economic development. In recent years, hence, the development debate after long ideological battles between the ideologically motivated neo-liberal school and the dogmatic state-interventionists has taken off into a different direction. The neo-statist claim of governed markets as an explanation for the ‘miracle’ economies in East Asia, therefore, builds the core of this inquiry and will be discussed in the following sections.

Yet, as Datta-Chaudhuri points out: “This debate inevitably remains inconclusive. The analytical results on ‘market failure’ do not disappear in the face of the evidence that most governments (or for that matter most economies of less developed countries, with or without state intervention) have performed rather badly.” However, the cutting edge of the development debate between the competing importance of state intervention and market mechanism lies in the phenomenal economic performance of the countries on the pacific rim of East Asia. Thus, it is not essential to simply conduct a quantitative study on the failures and success stories of government intervention, but to look into the quality and reasons of successful economic development and the causes of the tremendous economic growth. Here are the so-called dragon and tiger economies of East Asia of outstanding importance, and Japan, of course, needs special consideration as it was the first Asian follower country which succeeded in its quest for industrialisation.

3.3 State versus Market

Inspired by the example of Japan and the East Asian NICs a new body of literature has emerged, transcending the dichotomy between state and market. Japan was the first non-western country to achieve the status of an advanced industrial society and despite various important differences it is undoubtedly ‘capitalist’ in character. Berger uses here a fascinating metaphor: “... skyscrapers festooned with neon lights blinking messages in Japanese characters; old ladies in Kimonos emerging from high-speed electric trains; the centuries-old calm of Buddhist monastery gardens enclaved within the vast urban landscapes of Tokyo or Seoul or Taipei. These are images of juxtaposition, modernity or even hyper-modernity superimposed upon a civilisation that continues to be emphatically different from that of the West.” Despite Berger’s emphasis on Western-style modernity, it is important to underline the difference of the nature of the economic system in East Asia: in Japan together with the so-called ‘Four Dragons’ South Korea, Taiwan, Hong Kong and Singapore a new type of capitalism, the East Asian capitalism, has evolved. Its new in the sense that both the still dominant neo-classical economic doctrine with its emphasis on the minimal state and the market mechanism, and economic theories based on pure state interventionism such as neo-mercantilism and dependency theory cannot explain the phenomenon of the East Asian ‘miracle’ economies sufficiently and satisfactorily with their respective policy instruments. This suggest that the prevalent ideological division in the development literature can perhaps be overcome in favour for a ‘synergy of state and market’ argument as ‘new’ empirical evidence since the 1980s has shown. Particularly the work of Chalmers Johnson, Alice Amsden, Robert Wade and Frederic Deyo have set out to

“refute the neoliberal vision of East Asian growth in terms of economic benefits of trade liberalisation, private enterprise, and a restricted role of the state. The central thesis associated with the newly emerging countercritique, which we might classify as broadly ‘institutionalist’, is that the phenomenon of ‘late development’ should be understood as a process in which states have played a strategic role in taming domestic and international market forces and harnessing them to national ends. Fundamental to the East Asian development has been the focus on industrialisation as opposed to considerations involving maximising profitability on the basis of current comparative advantage. Key to rapid industrialisation is a strong state, providing directional thrust to the operation of the market mechanism. The market is guided by a conception of long-term national rationality of investment formulated by government officials. It is the ‘synergy’ between the state and the market which provides the basis for outstanding developmental experience.”

Essentially, the hypothesis this dissertation is centred around is that the phenomenal economic growth in Japan and other East Asian countries, often referred to as an economic ‘miracle’, has been generated through governmental guidance - this is particularly based on Johnson’s concept of the developmental state. It is argued that a state leadership role is especially important for late industrialising countries at an early stage of development to foster economic growth, as it was emphasised by Friedrich List and Alexander Hamilton in their argumentation for the protection of ‘infant industries’. But in order to gain understanding we first have to differentiate between types of state market relations and then look into the conditions necessary for the successful implementation of developmental policies. “Rather than arguing about more or less state action and more or less market freedom, developmental analysis must inquire into the conditions under which state action and market functioning combine to advance growth and development.”

It appears to be helpful in order to locate the role of the state and market in the development process to look at the work of Ralf Dahrendorf, who drew a distinction between two types of economic rationality: market rationality was based on the assumption that a smoothly functioning market is in fact to the greatest advantage of the greatest number; and it required a politically passive ‘hands-off’ attitude in matters of legislation and decision-making. Plan rationality, in contrast, has its dominant feature precisely in the setting of substantive social norms. Planners determine in advance who does what and who gets what. Subsequently, Dahrendorf regarded Western capitalist political economies as market rational and identified state socialism with plan rationality. Chalmers Johnson , however, building on these distinctions, suggested that the concept of plan rationality was a better description for the understanding of Japan and the East Asian NICs, rather than for the Soviet type of economy, which can be more appropriately be defined as plan ideological. Henderson and Appelbaum proposed subsequently to complete “... the logical schema with a fourth distinction that addresses the Reaganite-Thatcherite ‘new right’ economic policies currently in vogue in many parts of the world, including former state socialist societies such as Poland: market ideological political economies, according to which public policy is oriented above all toward assuring free market operations. Like plan ideological political economies, market ideological regimes arise from ideological dogma ... .” Accordingly it is argued that market rationality stands for a state with a regulatory function to provide a secure framework for the working of the national market economy. Thus plan rationality means state regulation, supplemented by state direction of the economy as a whole - still the economy remains largely in private hands under market competition and the state can intervene to achieve necessary national economic objectives. Obviously, the four concepts should be regarded as ideal types, but they are helpful to locate the East Asian economies in a comparative international framework. Therefore, we can define Japan, South Korea, Taiwan and Singapore as plan rational, opposed to the market ideological ‘Reaganomics’ and Thatcherite dogmatism. In the light of these theoretical constructs we can assume that the type of capitalism practised in the East Asian developmental states is substantially different from the Anglo-American model. In this strategic capitalism the role of the state is crucial to development and economic performance, and the state interventions have positively contributed to the rapid economic growth and success in the area.

3.4 The Developmental State

Even though we have identified the guidance of the market through the state as in a plan rational political economy as the most important factor for development, the question arises why East Asia in particular, and not Latin America or Africa, has succeeded? Hence, a closer look at the concept of the ‘developmental state’, first coined by Chalmers Johnson, is a necessary prerequisite for an evaluation of the East Asian capitalism. Manuel Castells argues that: “A state is developmental when it establishes as its principle of legitimacy its ability to promote and sustain development... .” The legitimacy principle may be exercised on behalf of society in a democracy or on behalf of a societal project. This leads Castells to the hypothesis that where the state substitutes itself for society in the definition of goals, two types of states are the result: a revolutionary state deals with the transformation of the social order, whereas a developmental state is concerned with a change of the economic order. “Thus ultimately for the developmental state, economic development is not a goal but a means.”

This brings us back to the earlier discussion of the ‘state versus market’ debate, and subsequently we have to refine the central thesis: not any, but a strong state is vital for economic development and industrial transformation. Moreover, as we are concerned with late industrialisation, both the neo-classical liberal premise of minimal government and free market, and the structuralist statist economic management appear to be outdated and the concept of state-market symbiosis more appropriate:

“... economy is much more complexly embedded in the political. The simpler reciprocity of state-economy relations that once gave Europe a developmental edge, whereby states provided legal and commercial infrastructure in exchange for taxes, is far too rudimentary for modern economic development. In the past two centuries, development has required a more complex form of state involvement, and out of this has evolved a very different kind of state strength. It is in the East Asian setting that we find its most distinctive manifestation. The debate as to whether states or markets have causal primacy, and which is better at promoting national competitiveness, seems altogether outdated in the light of the East Asian development, which is characterised above all by the synergy of state and market, ‘guided markets’.”

Thus the result was the transcending of the dichotomy between states and markets and the rejection of both the neo-classical/neo-liberal marketist and the structuralist statist extremes, leading to the neo-statist approach. The capitalist developmental state (CDS) is a phenomenon beyond what the ‘orthodox’ developmental theories are capable to explain. The CDS has been “evolutionary“ and is defined “around the concepts of fusing of ‘public’ and ‘private’; the role of state ideology; use of developmental legitimacy; plan rationality; and the existence of a relatively autonomous economic technocracy.”

3.5 State Autonomy and Capacity

In the debate about the developmental state questions naturally arise about the socio-political nature of the decision-making process and powers in the state itself. A certain type of standard criticism is shed on the meaning of the term ‘statism’: it is argued that the state has ceased to be an ‘independent’ actor with the general demolition of authoritarian states. Mitchell , for instance, argues that it is now thoroughly permeated and interpenetrated by society, and therefore has magnitude of different orientations and functions. However, these kinds of boundary or coherence problems are not peculiar to states – almost any social institution comes up with similar results when investigated. Thus, the critique does not categorically undermine the existence of the autonomous state, as much as does not deny the relevance of inquiries into other socio-political phenomena which suffer from similar boundary problems.

Moreover, it was essentially argued by the neo-statists that not all states are uniformly capable of effective economic governance and that the quality of the state involvement and intervention was decisive for the promotion of industry and trade. The empirical evidence gathered by Johnson, Amsden and Wade in the example of the East Asian economic ‘miracles’ appears to be overwhelming and a new line of analysis of state strength in respect to economic development emerged.

Furthermore, Weiss and Hobson have observed that the East Asian developmental state has a particular capacity to mobilise collaboration between different social groups in pursuit of developmental goals. “Strategic industrial policy is not widely practised outside the East Asian region, in part because the prevailing institutional underpinnings do not favour, a point rarely observed by Western enthusiasts of industrial policy.” This results in the acquisition of state autonomy, essential to strategic industrial policy for successful development. Empirical evidence for this argument Can be found in Amsden, Johnson’s, Wade’s work. In general four important points can be made to exemplify the special character of the East Asian developmental state:

1) Japan, South Korea and Taiwan have all experienced land reforms leading to a sociological change as the traditional landowner class lost power and the state succeeded in penetrating and controlling the agricultural class - unlike many Latin American countries. 2) It can be argued that after the Japanese occupation Korea and Taiwan were in a disorganised state and the newly emerging government was able to influence commercial and industrial interest as Japanese businesses had been almost exclusively dominant before. Additionally with a history of nationalised banks and state sponsored industries in Japan - and subsequently in Korea and Taiwan - a certain weakness of the civil society in economic matters can be witnessed. The suppression of labour organisation can only underline this argument for newly acquired autonomy. 3) The state bureaucratic elite has an important significance in the question of acquisition of state autonomy. In Japan, Taiwan and South Korea bureaucrats are rigorously recruited from the elite universities and promotion is based only on merits, which leads to a high stability of the bureaucratic career, enabling them to a “long term view on industrial adjustment (essential for strategic policy-making), and to pursue national rather than personal interests.” As the bureaucracy is based on meritocratic principles and usually political appointments are not taking place, their elitist educational background leads to „unusually committed, cohesive, and competent officialdom with a strong sense of identity and capacity for collective action. These attributes in themselves do not guarantee an autonomous bureaucracy isolated from pluralistic pressures, but they do lay the foundation for that strong sense of national ‘mission’ that so clearly differentiates the elite bureaucrats in East Asia from its Latin American counterpart. 4) The role of the Japanese colonisation of Taiwan and Korea hints again at the implementation of the earlier in Japan experienced ‘administrative guidance’, but there is no conclusive evidence for this argument. Other external factors such as the US-presence in the region and the favouring geopolitical situation, opening the US-markets up and providing aid is often overrated. But Bruce Cummings has pointed out that, for example, due to the special requirements of the cold war the US aid was channelled directly through the state apparatus which put the government into a perfect position to implement strategic developmental policies.

Hence, bearing the factors for state autonomy in mind it is important to analyse the circumstances which transformed autonomy into state capacity in East Asia. Two points are here of outstanding importance: “The strategic capacity of Japan and the NICs has depended politically on the formation of coalitions with domestic industry... . Organisationally, however, state intervention has increasingly on the formation of dense institutional linkages between politically state bureaucracies and organised business... . The central proposition is that the general effectiveness of these states, in economies of increasing complexity, has been enhanced by deliberate fostering of ties across the public-private divide, pulling into the state’s orbit those economic bodies - banks, general trading companies, industry associations - pivotal to the state’s developmental project.” In sum, based on the concept of power through society, in form of the described collaboration instead of despotism, can be held as the key to success of the East Asian states as autonomy was converted into capacity to implement strategic industrial policies. In Japan particularly in the 1960s and in the East Asian NICs business was systematically integrated within the political decision-making process, leading to an ‘embedded autonomy’. The state forms policy networks, mobilises economic actors for production and implements its policy decisions which in turn results in the capacity of the state to pursue developmental objectives effectively and successfully.

The case study in chapter 4 will serve here to exemplify the claim of the special institutional capacity described in form of an analysis of the Japanese economic development since Meiji Restoration in 1868. It is important to underline that the capitalist developmental state is evolutionary and historical and intellectual influences have to be given consideration.

3.6 Conclusion: List versus Smith

Going back to the initial hypothesis about the vital role of the state in economic development (the argument already put forward by List in the late 19th century - facing the problems of late industrialisation in Germany, the USA etc.) it has to be pointed out that the neo-statist theory on the autonomy and capacity of states appears to provide interesting insights with the concepts of ‘guided markets’ or ‘governed interdependence’. Thus as the neo-statist theory illustrates by analysing the East Asian success there is no unified Western approach to capitalism. The neo-liberal premise of free markets, laissez faire and minimal government is clearly not sufficient in the explanation of the phenomenon and the model of market governance in a plan/market rational political economy has to be taken into account.

Moreover, the initial debate between free marketists and statists, or perhaps shortened to Smith versus List, is probably too simplified to deal with the complex nature of modern economic development, even though, pointing into the right direction, it opens up the discussion of the respective roles and relationships of states and markets. Subsequently, the economic historian Eric Jones has suggested that the debate of Marx versus Smith is superseded by the debate List versus Smith. This implies that the importance is now placed on the analysis of states or markets rather than plan versus market. Hence as elaborated earlier a synergy of state and market may more likely be the formula to explain the economic development of Japan.

Nevertheless, even though List is widely regarded as a proponent of neo-mercantilsm, he is – as this dissertation argued in chapter 1 and 2 - wrongly associated with this category of economic thought and practice. In List’s opinion the protection of infant industries in order to promote industrialisation in a backward country is justified, even if a capitalist system is generally adhered to, but after a ‘take-off’ stage free market economics are again the desirable path of development. Mercantilism is, in order to increase the material wealth of a nation, usually emphasising state-intervention as a long policy instrument, regardless if economic ends have been achieved. Especially in Japan List’s conception of economic nationalism was therefore only a means for the late developers and inspired developmental strategies from the Meiji Restoration onwards. Importantly Johnson underlines here:

“Japan’s political economy can be located precisely in the line of descent from the German Historical School - sometimes labelled ‘economic nationalism’, ‘Handelspolitik’, or neomercantilism, but this school is not exactly in the mainstream of economic thought in the English-speaking countries. ... The issue is not one of state intervention in the economy. All states intervene in their economies for various reasons, among which are protecting national security (the ‘military-industrial complex’), insuring industrial safety, providing consumer protection, aiding the weak, promoting fairness in market transaction, preventing monopolization and private control in free enterprise systems, securing the public’s interest in natural monopolies, achieving economies of scale, preventing excessive competition, protecting and rearing industries, distributing vital resources, protecting the environment, guaranteeing employment, and so forth. The question is how the government intervenes and for what purposes. This is one of the critical issues in twentieth-century politics, and one that has become more acute as the century has progressed.”

Bearing in mind that particular the Japanese industrial development already started in the last century we have to look closer at the roots of the phenomenon by means of the case study in the next chapter. Friedrich List, however, is regarded by David Williams as

“the intellectual godfather of the Japanese miracle... . Whatever his limitations, and there are many, List’s clarity about the limitations of the nineteenth century theory of political economy sets him apart from the positivist tradition which has sought to monopolize the teaching of economics for the past two centuries. On this point alone, List’s scepticism may be seen as liberating. For any Westerner who seeks to understand Japanese economic policy-making in Japanese terms, The National System of Political Economy is an indispensable text.”

Even though the initial debate is centred around the role of the state, it is not justified to associate the concept of the developmental state with purely mercantilist or neo-mercantilist thinking. In List’s concept state intervention is not used as a self-fulfilling purpose, but as an instrument to achieve the objective of late-development. Particularly as Friedrich List’s approach regarded not the accumulation of material wealth in the mercantilist sense but the development of the national productive forces as the aim of state intervention. “... the existing definition for neo-mercantilism inadequately accounts for the experiences and practices of Japan or the East Asian NIEs: the aspects of development that fit the neo-mercantilist view are consequences, rather than aims, of the developmental state.” Therefore, combined with the ‘infant industries’ argument a mixed strategy of ISI and EOI has emerged in East Asia that underlines the value of the neo-statist conclusion that a synergy of state and market, with the state playing an essential role, was the key to the economic development and success of Japan, Taiwan, South Korea and Singapore.

In conclusion, Listian economics had a clear impact in the late 19th and subsequently 20th century in the rationale of the Japanese developmental state, but as Hobson and Weiss have pointed out, “in the twenty-first century, the battle will not be defined by ‘Smith versus List’ or ‘market versus state’ but as laissez faire versus governed interdependence.” Thus, the purpose of this chapter was to demonstrate that the state in form of the by Listian economics inspired East Asian ‘capitalist developmental state’ can be essential to economic growth and development, despite the fact that mainstream Anglo-American economic doctrines generally have neglected or attacked any role for the state in the promotion of development. The following chapter, subsequently, will illustrate that it is vital to address other economic traditions such as Friedrich List, whose economic thought and practical strategies have used to facilitate the ‘late’-development and economic growth of Japan.

Chapter 4 “Case Study: Interpreting the Japanese Success”

This chapter deals with the ‘state versus market’ debate from a slightly different perspective: via an analysis of the Japanese economic and political history, light will be shed on the Japanese economic ‘miracle’ (particularly in the earlier sections of this chapter the emphasis will be on the first phase of modern development initiated in the Meiji Period, and in the later sections on the second era of high-speed industrialisation from the 1950s onwards which is usually referred to as the Japanese ‘miracle’.) It will be argued that it was not a miracle but simply the successful and almost unique co-operation between the private and public economic spheres in order to achieve the national goal of development.

In the context of this dissertation’s objective, the case study on the Japanese economic ‘miracle’ is vitally important to illustrate that in Japan the Listian economic thought was preferred to the mainstream Anglo-American economic doctrines: only government-led industrialisation was regarded to facilitate Japan with the economic power that was required to fight back the Western expansion.

Hence, this chapter will first of all establish how western political economy came to Japan (and was subsequently absorbed and ‘Japanised’). Secondly, based on the German Historical School‘s and particularly Friedrich List’s (who is, as explained in chapter 2, laying some important theoretical foundations for the German Historical School) concepts of productive forces and infant industries, how the Japanese government successfully intervened in the economy through the administrative guidance of their economic bureaucrats. And thirdly, how an interdependence of state and market in Japan as a developmental state has led to high speed growth and what is widely described as a ‘miracle’ economy. This case study, subsequently, incorporates the discussion of the competing economic doctrines from chapter 1 and 2, and the strategies of economic development from chapter 3, and applies them to the example of Japan, which perhaps together with Germany was the first NIC of its time and therefore is vitally important to this dissertation. Particularly, the influence of List’s ideas in the formation of the Japanese developmental state during the Meiji era will be evaluated and the establishment of economic administration to implement objectives between, during and after the World Wars will be assessed. However, as there is simply not enough room in this dissertation for an additional comprehensive discussion of the phase of high-speed economic growth from 1956-1972 and the phase of deceleration from the 1970s onwards, a clean cut will be made with the year 1955. The year 1955 is vitally important to Japanese history and the post-war political and economical system is often called the ‘1955-system’ as it signifies the new era of LDP rule of strategic co-operation with bureaucratic and business elites.

Thus, with the end of the occupation era (1946-1952) a reconstruction had set in, which clearly illustrates the special case Japanese capitalism represents and proves convincingly the point this dissertation has set out to make: Listian economic ideas were essential for the tremendous success the Japanese economy has had since the Meiji Restoration. But it is important to this dissertation to underline the continuity in the Japanese development starting with the reforms of the Meiji period, which to a significant extent found inspiration in List’s ideas, to the post-war era of high speed growth and subsequently Dower points out: “In the twentieth-century case, as in the nineteenth, the linkages and influences are apparent almost everywhere one looks: in continuities in personnel and institutions, in technological and economic legacies, in bureaucratic and technocratic activities, and in the permutations and transformations of consciousness and ideology at both elite and popular levels.”

4.1 How Political Economy came to Japan

“In 1868 the political fate of Japan still seemed to reside in the hands of excitable two-sworded samurai, rushing about and hacking opponents to pieces with impunity. By the last decade of the 19th century Japan was endowed with a constitution, a parliament, a limited franchise and other modern paraphernalia. In every respect, therefore, this period is one of substantial and perceptible change.”

A variety of foreign philosophical, political and economic thoughts was imported into the Japanese intellectual environment and began to blend in with the domestic traditions in the 19th century. Particularly during the Meiji period, Western ideas provided the inspiration for important political developments. This chapter, therefore, will elaborate and underline the how and to what extent these ideas gained foothold in Japan, how they have been assimilated into Japanese intellectual traditions and, importantly, which policy decisions - regarding the economic development of Japan - they have facilitated. In particular, a focus will put on the postulated tradition of governmental involvement in the economic sector, which arguably pre-dated the Meiji era’s Listian style economic development and played in form of administrative guidance an important part in the Japanese economic miracles of the 20th century.

4.1.1 Feudal Tokugawa Japan and the Preparation for Industrialisation

As laid down in chapter 3.1, this dissertation deals with the phenomenon of modern economic growth and development. In Japan the period following the Meiji Restoration of 1868 has been identified as crucial to the formation of a modern industrial society, whereas the preceding Tokogawa period (1600-1867) has often been recognised as the feudal stage of development and, therefore, as the antithesis of modern economic growth. However, it can only be imagined with difficulty that the Meiji Restoration represented a sharp break from the past and that earlier times had no influence whatsoever on the political, economical and social reforms of 1868. At least we have to identify a transition period which manifested itself in an overlap of the late Tokugawa era and especially in part of the first two decades of the Meiji era, as it obviously had to take time for the reforms of the new government to be implemented. Additionally, the work of E.H Norman, D.C.Sheldon and T.C.Smith has quite convincingly established that significant change was already taking place in Tokugawa Japan. Particularly the last fifty years before the Meiji Restoration were laying an important foundation for later developments: wage labour was increasing, subsistence agriculture was replaced by commercial farming, rural industries were expanding and even some Western-style industries were established. Rosovsky, however, argues that it is not justified to impose the western stages of development from feudalism to British Industrial Revolution on a society like Japan which is entirely different and had not invented modern techniques of production. He concludes therefore that only the transition period beginning with the Restoration of 1868 and ending with the Matsukata deflation in 1885 should be taken into account for an analysis of modern economic development in Japan.

But, agreeing with Crawcour, this dissertation will argue that the late Tokugawa period has had an obvious impact on the Meiji reforms and constitutes therefore an integral part of our assessment of the intellectual foundations of the so-called Japanese economic ‘miracle’. Foremost the Confucian heritage played an important role in the economic, political and social thought of pre-Meiji Japan. It has to be noted that the Confucian philosophy with its emphasis on social order and harmony is always linked to practical as well as theoretical aspects of politics and economics.

“The Confucian influence is particularly evident in the concept of economics itself. The term keizai - which in modern Japanese means ‘economy’ – already existed in Tokugawa Japan, but its meaning bore overtones far removed from twentieth-century notions of economics as the science of efficiently allocating scarce resources amongst alternative uses. Keizai was an abbreviation of the phrase keikoku saimin (or keisei saimin), which may be roughly translated as ‘administering the nation and relieving the sufferings of the people’.”

However, Japan was essentially a pre-modern society as it was a revenue economy in which the non-productive ruling samurai class based their living on the extraction of a rice tax from the peasant population. Social status and tradition, therefore, were determining the production of goods and services, and economic calculations. As reflected in Kumuzawa Baizan’s (1619-91) thinking, agriculture was the basis of economy, whereas merchants were regarded as parasites, which obviously bears resemblance to the physiocratic thought of 18th century Europe.

Feudal Japan was de facto ruled by the hereditary shogun, who was formally the tenno’s military deputy, but had effectively degraded the emperor to the role of the chief-priest. Yet much of the shogunate’s power, particularly in the late Tokugawa period was based on the premise of national defence against the barbarians, i.e. the West. This was reflected in the political slogan ‘joi’, ‘expel the barbarians’ – as the European economic expansion in the common form of merchants and Christian missionaries increasingly gained foothold in Asia. In 1639, Japanese xenophobia peaked and all Western contacts – except a small Dutch trading post in the bay of Nagasaki – were banned by the ‘sakoku’ isolationist policy of the shogunate.

But on the domestic economic level certain changes started to manifest themselves: a money economy increasingly replaced rice as currency and a transition towards a commercialisation became visible. On the philosophical level this was reflected by the writings of Ishida Baigan (1685-1744) who praised the merchants’ economic pragmatism and claimed that due to the market mechanism in the long run only honesty on the side of the merchants would pay out. He therefore justified and dignified the role of the merchants in the Japanese society and, since they promoted general welfare through their postulated honest business practice he contributed to the creation of an ethical system, which the historian Robert Bellah regarded as essential intellectual stimulation for modernisation and rationalisation, comparable to Kant’s Protestant work ethos. Interestingly, in Baigan’s argumentation certain parallels with classical notions of enlightened self-interest can be drawn.

Kaiho Seiryo (1755-1817), moreover, was respecting the new found virtues of the merchants but realised that their increasing wealth meant a relative impoverishment of the Samurai class. Therefore, he proposed the warrior’s active participation in commerce through a promotion of the production of rural goods typical of their domain and a subsequent trading with other regions. However, in accordance with a loose interpretation of Confucian values he concluded that all social relationships are essentially market transactions. Hence, exchange creates order and harmony in society, the high aim of Confucian philosophy. Accordingly, profit and commerce can be seen as a natural process, stabilising and promoting the welfare of society. “Thus, in Seiryo’s writings, the language and imaginery of Confucian thought is transformed into the rationality of market exchange, and the virtues of Confucian ethics undergo a metamorphosis to emerge as the values of a nascent capitalist economy.”

As Seiryo had already expressed, political authorities should participate in production and commerce through the market place, but particularly Sato Nobuhiro (1769-1850) extended this notion into a clearly different direction. Based on the traditional concept of ‘keizai’ he prescribed a state controlled economy: “Keizai (economy) means managing the nation, developing its products, enriching the country and rescuing all its people from suffering. … If this administration of ‘keizai’ is neglected, the country will inevitably become weakened, and both rulers and people will lack the necessities of life.” Hence, Nobuhiro’s ideal government does not simply follow traditional virtues but it actively ‘develops the nations products’ which clearly suggests, in connection with his other writings, that prosperity can be promoted through government intervention in the form of the introduction of new production techniques and general economic guidance. This is in a way the first notion of a development-oriented nation, which can arguably be regarded as at least the early ideological foundations for the ‘developmental state’ of the modern post-1868 era.

As - despite of the sakoku isolation – contacts to the outside world through the Dutch trading post remained open scholars like Nobuhiro found certain inspiration for their work from this source, which was generally called 'Dutch Learning’. Thus evidence about the European economic development and success, based on industrial production and trade, strengthened the opinion that economic expansion was desirable and legitimate. On the other hand, news about the defeat of mighty China in the first Opium War of 1840-42 was reported and together with increasing sightings of foreign ships off the Japanese coast fear and hysteria on one side, and waves of nationalism based on the belief in Japanese superiority, on the other side, swept through the country.

Nobuhiro's work already emphasised state control and especially nationalism, but with Yokoi Shonan (1809-69) another scholar of both nationalist and Dutch Learning traditions took the earlier established pragmatic philosophy a step further. With the arrival of Commodore Matthew Perry in 1853 and his quasi ultimatum to open Japan for foreign contacts, the shogunate was seriously pressured and could not ignore the foreign challenge any longer. But this had disastrous effects for the Tokugawa system of order and stability itself, which was in the late stages reciprocally linked and justified with the policy of expulsion of barbarians (joi). Hence, the school of nationalist learning - the Mito school for example - was affected as well, as the whole Confucian social matrix seemed to be threatened and failed to offer a practical solution for the problem posed by the foreign challenge. However, Shonan proposed in opposition to the xenophobic nationalist school to open Japan to foreign contact as he deeply believed in the moral superiority of Japan. He claimed that under the given circumstances only 'keikoku', the opening of the country, could lead to a strengthening of Japan and to the subsequent expulsion of the barbarians out of a position of power. Direct confrontation, as the defeat of China had shown, made no sense and therefore other pragmatic measures had to be taken. In 'Three Principles of National Policy (Kokuze Seiron)' written in 1860 he proposed a plan of national defence, based on a strategy of national prosperity (fukoku ron), strong army (kyohei ron), and the way of the warrior (bushido). Subsequently, the concept of 'prosperous country and strong army '(fukoku kyohei) became one of the formative slogans of the Meiji Restoration.

Moreover, Shonan regarded foreign trade as a means of prosperity, but he clearly perceived that at the time unlimited foreign trade would lead to the ruin of Japan. Thus he prescribed a total reconstruction of the political, social and economical system of Japan.

“In the economic sphere Shonan called for the complete dismantling of the feudal restrictions on occupational mobility and inter-domain trade. He did not, however, espouse a doctrine of laissez-faire, but instead saw the state as playing a central role in promoting economic development. In this respect, his views are reminiscent of the ideas of Sato Nobuhiro. Shonan's proposals for government intervention, however, are much more modest than Nobuhiro's sweeping vision of a controlled economy. The government, states Shonan (and he is still thinking in terms of domain rather then national government), should promote new forms of agricultural production by offering loans to farmers. It should also test new agricultural technology and equipment, and train farmers in the best methods of production. These proposals are not confined to the farm sector. In relation to crafts and commerce the same applies.”

Hence, the concept of ‘prosperous country and strong army’ would constitute the cornerstone of the new Japanese nation's economic and foreign policy, as the Meiji Restoration facilitated an opportunity to put traditional Japanese thought and pragmatism, combined with the increasing influence of Dutch or Western Learning respectively, to the test.

4.1.2 The Meiji Restoration and the Foundation for Administrative Guidance

As discussed before, the main features of the transition period in Japan can be identified as follows: a) The adoption of modern economic growth as a national objective b) Institutional change c) Creation of infrastructure d) Growth of traditional economy

The adoption of modern economic growth as a national objective in the Meiji period, on one hand, can be clearly seen as a reaction to the Western challenge, but on the other hand it has been perceived that also financial problems were already on the agenda in pre-Meiji Japan. The reforms of the late Tempo period (1841-43) are an example of how the shogunate and the daimyo were trying to find new revenues by allowing and promoting an affluent society in order to increase and diversify productivity. Yet, the Tokugawa government was still unable, as it lacked a broad bases of political power, to implement wide ranging reforms. However, since the Western countries were granted the rights to trade in the ports of Yokohama, Nagasaki and Hakodate in 1859, private foreign trade made some commercial development practically inevitable – but as this often involved monopolies and privileges on the side of certain merchants, the frustration of the impoverished lower samurai and rural businessmen started to grow. (It was particularly these groups who supported the restoration later, often as we can see for personal reasons).

Institutional change was clearly implemented between 1868 and 1875 as Japan was administratively unified and restrictions on residence and occupation were removed. Furthermore, the daimyo lost the powers and the military privileges of the samurai were abolished, and instead the new central government introduced provinces with appointed governors and a conscript army.

In terms of general infrastructure, the Meiji government had inherited a whole range of experiences. Obviously, transport, communications and public utilities had to be improved but on the education sector the Tokugawa era left Japan with a literacy rate surpassed only by two or three countries at a time. The administration of the Tokugawa government, interestingly, was already actively playing a part in economic life and had built up special relationships to selective merchants (the founding fathers of Mitsubishi and Mitsui, for example were already involved in the big business of the time). “The role of the government was not confined to direct investment. More important throughout the Meiji period – and probably since – was its role in influencing private investment decisions by guarantees, subsidies, preferential access to bank funds, and but what is now called ‘administrative guidance’.” This can be seen in the formation of the Shohoshi (Commercial Administration) in June 1868, which was brought into existence in order to unify the commercial activities and the trading in the daimyo by issuing paper currency and raising tax revenue for the government on one side, and more importantly, implementing policies of nation wide finance and commercial development as inspired by Sato Nobuhiro’s proposals from the mid nineteenth century. Moreover, the banking and insurance system in the pre-Meiji era was already fairly well developed and hence was quickly able to cope with the demands of a developing country – the railway system, for instance, was financed without foreign capital.

Since the 1870s the traditional economy sector began to grow in order to keep in step with the drive for industrialisation and vice versa. However, as the industrial sector itself was relatively small at the time, the rapid growth of production in the early Meiji era must have actually been due to an expansion of the traditional industries. Yet Ohkawa suggested an increase in the real gross value of factory and domestic manufacture of about 2 ½ times between 1878 and 1885. Nevertheless, the actual modern economic growth has to be attributed to industries developed in the following period, but it is important to point out that “the ability of industrialising countries to achieve independence without sacrificing growth unduly has always depended on the success in mobilizing their initially meagre domestic resources, material and human.”

4.1.3 Western Learning: Laissez Faire versus Protectionism

During the isolation period the only source of information from the outside or western world, respectively, was the so-called Dutch Learning. After the opening of the ports, however, this changed dramatically and we can identify a diversification of intellectual influences. Ultimately, this was necessary to live up to the national motto 'fukoku kyohei' - the reformers and later the Meiji government of Japan had opted to become a unitary and centralised state. In order to achieve this objective new industries, infrastructure, administration, banking and financial systems etc. had to be introduced, economised or updated. This, in turn, demanded modern knowledge and the West had already proved its superiority in the fields of military equipment, technology, industry, transport, and science. Thus, Western Learning became one of the outstanding vehicles for the Japanese to reach their objective. Basically, three sources of information became increasingly utilised by the intellectual and administrative elite. Firstly, whereas before the opening of Japan in 1859 generally only Dutch sources were available, books in other languages were now read by scholars and subsequently translated into Japanese. Obviously, our point of interest lies in economic literature and it has to pointed out that still especially in the first decade after the end of the sakoku era Dutch economic writers like Professor Vissering of Leiden University were the Japanese window to the outside world of economics. Vissering was an expert on contemporary French and English economics and a proponent of laissez faire. Other standard economic texts of the time, even in their Dutch translation, became incorporated into the body of literature through translation into Japanese. But from 1870 onwards an increasing number of Japanese scholars had acquired the knowledge of other languages (in particular English and to a lesser extent French): Malthus’ “Essays on the Principles of Population” was translated in 1876, Jevons’ “Money and Mechanism of Exchange” in 1882, Smith’s “Wealth of Nations” in 1884 and J.S.Mill’s “Principles of Political Economy” in 1886. Furthermore, other languages, particularly German, became popular and German economic thought started to become more influential in Japan, signified by the translation of Friedrich List’s “National System” in 1889. Secondly, students scholars were sent abroad to study at European and American universities, and missions were sent out to collect ideas and innovations in the West - already one year after the opening of Japan the first official mission was dispatched to the USA, and in 1872-3 nearly all the members of the new Japanese government under Foreign Minister Iwakura travelled throughout the Western countries. On their return, scholars would usually take up a lecturing position at the newly founded colleges and universities and thereby spread the acquired knowledge. Thirdly, foreign scholars themselves were employed to teach at the institutions of Western learning which began to grow in numbers. Already in 1858 the 'Institute for the Study of Barbarian Writings' was founded, but especially the 1870s and 80s saw a rising number of Western style academic institute and the renowned Tokyo University came into existence in 1877.

However, as the main concepts of the teachings were based on Western economic thought and their translations into Japanese, certain problems were arising. As Morris-Suzuki emphasises:

“When we speak of the translation of Western economic writings, it is important to remember that this meant much more than the simple rendering of words and phrases from one language to another. The translators of Smith, Mill and Malthus were introducing into Japanese thought a complex and often unfamiliar body of ideas. ... Western economic theories, moreover, could not be understood in isolation. They were deeply embedded in the interconnected system of scientific, social, and ethical ideas that had emerged form the European enlightenment and developed through the subsequent processes of industrialization, political revolution, and imperial expansion.”

As a consequence, certain misinterpretations and slightly misleading analyses of economics were caused by some of the novel Western concepts. But practically, Western learning had a high standing amongst Japanese scholars, and particularly in the initial phase of the Meiji Restoration British economic thought was dominating.. Already in1858 the most prominent proponent of ‘Westernism’, Fukuzawa Yukuchi (1835-1901), had set up his private college (Keio Gijuku) for the study of Western languages and teachings, and propagated enlightened civilisation. He had travelled to Europe and America even before the Meiji Restoration and his college was at the time the only educational institution to teach Western economics. Fukuzawa’s perception of economic liberalism was, however, still indebted to the Confucian tradition and therefore a blurring of theoretical concepts took place. He was, as Chuhei Sugiyama and Hiroshi Mizuta point out, a nationalist and considered individuals not as individuals as such, but saw them as members of a nation - thereby giving preference to the Confucian concept of welfare for the society as a whole over the individualistic approach of liberalism. In terms of economics and foreign trade, after studying the different systems he concludes that: “ 'both free trade and protection are, after all, in the interest of their own country' and that protectionism in America had only been possible because it was backed by American military power, so that a country in Asia would not be allowed, even if it wanted to, to levy 'extraordinary custom duties' . Fukuzawa’s conception of trade, i.e. free trade for advanced countries and protection for underdeveloped countries, seems too clear to leave any room for doubt.”

Yet it can be argued that the theoretical knowledge of scholars in the late Tokugawa or early Meiji era was fragmented, as only a fraction of the contemporary Western literature was actually available, and Japan lagged behind in time regarding the publishing dates of the books - therefore the Japanese intellectuals were hardly able to follow the complexity and the full discourse of the great academic debates of the time.

Fukuzawa was a Japanese liberal who argued dogmatically, contradicting his own analysis of the international economic system, that the government should abstain from intervening into the economy and should not be an agent of economic activities itself, as he believed in the validity of the market mechanism and private enterprise. However, another important liberal thinker, Tsuda Mamichi (1829-1903) had again a some what muddled perception of economic science and the premises of economic liberalism. Especially the claim of the universal validity of economic law was causing some confusion: he, for example, argued in defence of laissez faire that imports and exports must always balance each other in the long run. He thought of the principle of trade as simply as the principle of the winds and tides - now advancing, now receding

Moreover, the economic reality of the 1850s and 1860s with its increasing Western dominance in East Asia had committed Japan to maintain a single non-discriminatory tariff of 5% on all imports, practically a policy of laissez faire had been imposed in the trade treaties by the Western powers. Kanda Takahira (1830-98) realised that this caused an import surplus, which in turn affected the depletion of gold and silver from Japan. Yet free trade was still perceived as beneficial to Japan as it was thought that only thereby knowledge of foreign cultures and Western technology could be increased. Kanda, however, was aware of the dangers of unmitigated laissez-faire and proposed government incentives for the promotion of domestic industries, even though he was an advocate of economic liberalism. But perhaps at the time in Japan there was a not necessarily as strong an ideological divide between free-traders and protectionists as in the America and Europe of the late 19th century. Here Morris-Suzuki sums up the argument quite clearly:

“The economic circumstances of early Meiji Japan were, after all, very different form those in Victorian England. There was no extensive industrial capitalist class, whose members might desire to carry on their business unhindered by government interference. On the contrary, the small number of new industrialists were well aware of their fragile position in the world economy and generally welcomed the guidance and assistance of the state. Most of them, too, were closely integrated into a small but powerful network of personal relationships which linked the political and economic leaders of the day, and for that reason were all the less likely to view the state action with fear or suspicion.”

An important turning point for the way the Japanese elite were thinking about political economy is reflected by the Meiji “14th year incident” in 1881. Bureaucrats and officials who were promoting liberal free-trade ideas were sacked and replaced by administrators who were favouring a nationalist-statist view of the economic role of government. The reason for this was a reassessment of the performance of the Japanese economy as Kyoko Sheridan explains:

“Before the 'coup' the industrial policy was oriented, at least officially, towards mighty efforts to import modern knowledge, technology, skills and training into the Japanese economy, in order to facilitate their rapid and efficient diffusion into every corner of society. The whole exercise was promoted for the purpose of building the 'super-infrastructure' for speedy industrialisation; although much of the actual effort took the form of building a traditional infrastructure, by establishing transport and communication networks, building schools and training facilities, and improving forestry and agricultural land. ... However, in the case of machinery and other heavy industrial products, the disadvantages of domestic manufacturers were obvious, particularly while Japan could not protect her domestic market with tariff walls... .”

As a consequence, the orientation in the education of the administrative elite underwent a 180 degree turn towards economic nationalism - particularly popular here were the theories of Friedrich List, Henry Charles Carey and the German Historical School. This change is illustrated in the restructuring of the Tokyo Imperial University, which was the leading institution to educate the Meiji bureaucratic elite: political economy which had been taught along British lines in the Faculty of Arts was transferred to the Faculty of Law and the curriculum remodelled following the German ideal. Lecturers invited to teach at the Tokyo University underwent the same change, the new trend was towards Germans or natives with German Historical School background and the English, French and American lecturers were replaced.

More and more scholars started to absorb the principles of economic nationalism and already in 1870 Wakayama Norikazu published ‘Hogo Zeisetsu’ (Theory of Protective Tariffs), which attacked the theory of free trade and advocated the concept of protectionism on merely practical rather than theoretical reasons. Even though his work was strongly indebted to Carey, he was still reminiscent of pre-Meiji arguments against foreign trade as introducing unnecessary foreign luxuries and decadence, draining domestic specie supplies, undermining Japan's independence and weakening the domestic industries, which were unable to compete with the West, even further. Moreover, Sugi Kochi published an article in 1874 which opposed Tsuda Mamichi’s view of free trade on the basis of the well-known ‘infant industry’ argument. But the obvious milestone in the development of Japanese protectionist thought was the translation of Friedrich List’s ‘National System’ in 1889.

“List’s ideas, developed in the environment of German Society during its earliest stages of industrialisation, had a certain appeal to those concerned with the economic state of Meiji Japan, and were a source of inspiration to many economic scholars around the turn of the century... . While the British classical economists had looked for economic laws that were universal as the laws of the physical science, the historical economists began by accepting that the principles of the social and economic science were specific to a given time and place.”

4.1.4 Following the German Example

‘Fukoku Kyohei’ became the driving force behind the modernisation movement of the Meiji Restoration and Western learning was regarded as an essential step towards that goal. For the political leaders visits abroad were a crucial source of information. The Iwakura Mission is of particular importance as almost the entire Meiji government took part in study trips to the USA and throughout Europe in 1872-3. The objective of the study visits was clearly the improvement of the understanding of the economical, technological and industrial processes and their subsequent implementation in Japan in order to catch up with the headstart of the West. At first, only two models, the American and the British example, appeared to be suitable for emulation. Some members of the delegation, who had been partly educated in England , seemed to favour the path of the British Industrial Revolution, but the short time they spent in Germany, and there especially in the highly industrialised areas of Western Prussia, left a lasting and deep impression the delegation. As Bernd Martin points out:

“In France, the Japanese, with their authoritarian concepts of order, were somewhat disconcerted by the republican ideal of freedom, and in the two Anglo-Saxon Countries, the United States and Great Britain, they were taken aback by the capitalist profit-orientated system. However, conditions in Germany clearly made the Japanese guests feel more at home. From the outset the powerful German state based on military victories, the patriotic feeling of national unity that seemed to characterise the relationship between the people and their leaders, and, last but not least, the powerful influence of the state bureaucracy in all fields, including economic issues, held a strong fascination for the Japanese elite who were trying to stabilise their own social position by means of a programme resting on ideological restoration and, at the same time, technological modernisation.”

In this context, it is important to emphasise that the drive for modernisation and industrialisation was the Meiji regime’s justification for power - just as much as the Tokugawa shogunate, perhaps, was based on the expulsion of barbarians and the isolation of Japan. Most of the Meiji leaders were from the lower samurai class and they were simply trying to consolidate their own power through economic success and independence form the West. The principle of followership, introduced in chapter 3.1, plays an essential role in this process. As it was crucial to the survival of the Meiji Restoration to achieve these objectives, the three main advantages of followership which must have been particularly appealing to the new leadership were a) the possibility to have an outlook on their own possible future, b) that the whole stages of development could be skipped and developmental objectives reached faster and less costly, and c) mistakes or problems the advanced countries had encountered, could either be totally avoided or at least mitigated. Kenneth Pyle provides us here with some insight by underlining Japanese examples of an awareness about the advantages of followership, it should be noted, though, that this only reflects an academic analysis after the actual turning point in history: the Japanese economist Kawakami Hajime, for example, expresses the concept with clarity in an early essay written in 1905 by pointing out that “the history of the failures of the advanced countries (zenshikoku) is the best textbook for the follower countries (koshinkoku).”

As mentioned before, the German example of political unification based on power politics and the military victory over Austria and France, and the rapid industrialisation based state intervention, therefore, was particular appealing to the leaders of the Meiji Restoration. Political contacts were knitted to the intellectual heads of the German unification, Rudolf von Gneist and Lorenz von Stein, and to the Reichs-Chancellor himself, Otto von Bismarck. On the constitutional and organisational level Prussian Germany offered several advantages over the Anglo-American or French alternatives; a strong national government with parliamentary control and a new national identity or ideology respectively seemed to be an absolute prerequisite for a strong economy. The Prussian militarism was then simply another ingredient for the ‘fukoku kyohei’ recipe, which grew well on the samurai class with their bushido warrior code.

However, “during the first stages of inner reconstruction, ... , the Japanese restricted themselves to cautious admiring and closely watching events in Germany, while at home in Japan the urgently needed experts were British and American.” For the time being the technological and economical predominance of the Anglo-American world and their reinforced position in East Asia made it impossible for Japan to actively follow the German path for now. Yet, in the long run the German influence started to grow proportionally with the success of Japanese industrialisation. Prosperity and military strength, moreover, was not simply based on an imitation of Western achievements, but an adaptation process to the new environment - literally a Japanisation of all kinds of knowledge and practices which seemed suitable for the objective of economic development - took place.

As Hazel Jones points out, during 1868 and 1900 almost 2500 foreign experts were employed in Japan and the German were, after the English, French and the Americans, only the fourth biggest party . As the Japanese were still deeply suspicious of anything Western, the preference was given to education under Western guidance at home, and there is only a relatively small number of Japanese students who stayed at universities abroad. Yet 86 percent of those postgraduates who were chosen for an academic education in the West, studied at German universities. This lead to a silent increase of the influence of German political and economical thought in Japan, as additionally this academic elite took over important positions in education and administration itself, resulting in - at least from the mid 1880s onwards - a Germanophile elite.

Before, as Martin underlines, Japan was lacking “an ideologically consistent reform programme. The eclectic system of borrowing from scattered sources and adopting various models at the time ... had resulted in a distortion of Japanese identity and considerably disconcerted the public ... the army brought about a decisive turn in Japanese domestic politics by its attempt at coordinating the reforms and, at the same time, raising public esteem for the imperial family.”

Hence, the military system was reformed and reorganised according to German ideals and a close link between the two new nation states was established. Proof for this argument can be found too in the emulation of the German constitutional structure, as the Japanese Constitution of 1889, building up an authoritarian state with a parliamentary facade, was clearly inspired by the Prussian model and German legal experts such as Hermann Roessler gave essential guidance. Effectively, the Japanese government had by then (1880) approached the German Reich for advice and assistance: Foreign Minister Inoue and Vice-President of the Privy Council Iwakura, on behalf of the whole Cabinet, professed this intention to seek close ties with German Reich and to beg His Majesty the Emporer Wilhelm’s government for their special friendship and their support of Japan in her present difficult period of development.

Following the German example of a young and aspiring empire, the cornerstones of success of the Meiji Restoration were the newly found patriotism, the Japanese loyalty towards the tenno and, importantly, social stability. Industrialisation had already in Europe and America caused massive social problems and the Japanese elite was obviously quite anxious that the from Britain etc. reported ‘class conflicts’, and that the socialist movement could pose a threat to the aspired economic stability and development.

However, the German Reichs-Chancellor von Bismarck approached the problem of social conflicts caused by the increasing industrialisation differently. The teachings of the Younger German Historical School had a crucial impact on the policy decisions of the German government. Particularly, the ‘Verein Fuer Sozialpolitik’ (Association for Social Policy) propagated state-intervention into the economy in order to mitigate class conflict through social legislation. Prominent German economists such as Gustav Schmoller, Lujo Brentano, and Adolf Wagner had founded the Verein in 1872 and their political aims focused on the unification of society behind the nation in order to defuse revolutionary tendencies in the socialist movement, and to increase thereby the economic power of Germany on the international scale. Hence, Bismarck’s policy of both anti-socialist and social legislation was firstly implemented in 1878 when an Anti-socialist law was passed which declared all socialist and social democratic associations for illegal. Yet, to cushion the impact of industrialisation social legislation was passed from 1883 onwards, which introduced health and accident insurance, invalidity and pension-schemes for all workers. The aim of both anti-socialist laws and social legislation, however, could not be reached in the long run and the followership of the labour movement grew until in 1890 when it was legalised again - in the elections to the Reichstag of 1890 the Socialdemocratic Party reached then already almost 20 percent of the votes. .

In Japan, too, the social policy school had a major influence on the political and intellectual elite. As discussed before, from the mid-1880s German thinking mainly served as a transmitter of Western science and an increasing number of academics became interested in Germany. The ‘Society for the Promotion of German Science’ was founded subsequently in 1882 by a group of academics who had formerly studied in Germany and aimed to promote German science, literature and research by opening schools and circulating publications. Even the Imperial Prince Kitashirakawa presided over the society after he returned from studying military science in Berlin but “[m]ost important was the fact that all of the government had joined the society as honorary members.”

Moreover, the professorial socialism of the Younger German Historical School became more popular through the teaching and support of Herman Roessler and the lectures of Karl Rathgen at Todai University. Subsequently, the Japanese Association for Social Policy was founded in 1896 by students of Rathgen’s. Here, Kanai Noburu (1865-1933) is of outstanding importance as he had studied in Tokyo under Rathgen and in Halle, Heidelberg, and Berlin under Schmoller to become professor of law at Todai University. Noburu was a pronounced opponent of economic liberalism and argued that the state should intervene into economics in order to solve social problems and to challenge socialist tendencies. Hence, he was in favour of a so-called ‘third way’ between laissez-faire capitalism and revolutionary socialism, which was exactly what the German social policy school was preaching. But in a way it reflected the Confucian tradition of ‘keikoku saimin’ as well, as they regarded economics as interwoven with moral and political issues – essentially they tried to achieve social harmony. The Association for the Study of Social Policy’s initial manifesto of 1890, therefore, declared:

“Our country’s industry has been making great progress and the national wealth is greatly increasing. Also we welcome this industrial progress, we also realize that it is widening the gap between rich and poor and weakening social harmony. … We oppose laissez faire because it creates extreme profit consciousness and unbridled competition, and aggravates the differences between rich and poor. We also oppose socialism because it would destroy the present economic organisation, obliterate capitalists, and therefore impede national progress. We support the principles of the present private enterprise system. Within this framework we seek to prevent friction between classes through the power of government … and thereby preserve social harmony.”

At the heart of the social policy school, therefore, lay state intervention through social legislation which was clearly paving the way for a more profound economic nationalism. However, the social policy school was not a unified academic and political movement for long and different splinter groups began to form. Especially the Japanese intellectual Fukuda Tokuzo (1874-1930), who was a follower of the Historical school, introduced to Japan early British socialist thought and started a critical discourse of Marxist theory, which ultimately lead to a splitting up of the Association for Social Policy. In short, various economic doctrines became popular in Japan and, importantly, underwent a total ‘Japanisation’ which, at the time, boiled down to nationalist sentiments centred around economic expansion.

In concluding, between around the Meiji Restoration and the First World War the Japanese economy developed rapidly and transformed the country and society from a largely agrarian to one with a successful textile industry and with growing heavy industries, capable of withstanding the pressure and competition of the world economy and international trade. Obviously, this coincided with an astonishing transformation on the intellectual level as well. Subsequently, Morris-Suzuki highlights:

“A wide range of foreign economic, political, and philosophical ideas – including the liberal traditions of the British classical economists, the nationalist view of the German historical school, the theories of social policy, Marxian socialism, and the new marginalist views of neo-classical economics – were imported to Japan, and began to be assimilated to Japanese intellectual traditions and economic circumstances. Although it would be wrong to over-emphasize the direct impact that such ideas had on Japanese economic policy, imported theories did at least provide an intellectual justification for significant political innovations including the new land tax, the financial reforms of the Matsuka era, the use of tariff protection from the 1890s onwards, and the introduction of factory legislation in the early twentieth century. Moreover, the Western ideas imported during the Meiji period created the foundations for the emergence of new and increasingly original Japanese developments in economic thought in the decades that followed.”

4.2 Economic Bureaucrats and the Tradition of Administrative Guidance

By the turn of the century Japan had established the foundations for heavy industrialisation: a transformation from traditional village-based industries to modern production by (a) importing techniques and thereby modernising traditional industries and (b) government-led industrialisation in consumer goods sector (sugar, cloth, ...), through finance, communications and transportation, to the building-up of heavy industries such as coal and iron production.

In essence, after the Meiji Restoration Japan has followed a path of developmental capitalism and therefore has been a plan-rational state whose economic orientation was based on industrial policy. However, as demonstrated in chapter 3, a successful developmental state has to gain autonomy and the capacity to implement economic policies - and therefore bureaucrats in a range of government agencies may play a role of outstanding importance. Subsequently, the ‘fukoku kyohei’ government policy was promoting economic growth and industrial development through the improvement of technological, economical, managerial and general knowledge. The high ranking importance of education can be underlined by the creation of the Monbushu (Ministry of Education) in 1871 before any other government department was brought into existence: general education and training was of obvious importance, even the training of entrepreneurs was helpful, but certain emphasis was on the education and training of public servants, in order to manage the promotion of development. This continued after the end of the Meiji era (1868-1912), the Taisho period (1912-1926), and the predominantly military rule until the end of World War II. The trend even continued until now as a vast majority of the Japanese bureaucrats are educated at the University of Tokyo - together with the future business and political elite of the country - and therefore share certain values and visions. (Additionally, the importance of education in Japan demonstrates the influence of Friedrich List’s concept of ‘productive forces’ in the form of human resources.)

Japanese capitalism, as we have seen from chapter 3, has taken a different path to achieve the objective of development and industrialisation, and by doing so has contradicted the explanations given for these economic phenomena by the orthodox Anglo-American doctrines. Hence, Friedrich List’s alternative economic thought has proved to be crucial to the state-led development of Japan which can be seen in the swing from liberal to nationalist economic practice after the ‘14th-year-incident’, the promotion of ‘infant industries’ in form of the establishment of state enterprises, the emphasis on education etc. It is important for the key debate (state or market?) of this dissertation to illustrate (a) why and (b) in what way Japan differs in the respective role state and market are playing. Therefore, firstly the special domestic economic structure will be elaborated, and secondly with the example of administrative guidance through economic bureaucrats the synergy of states and markets underlined.

4.2.1 The Japanese War Economy: the Rule of the Bureaucrats

The period before and between the World Wars was of extraordinary importance for the formation of modern heavy industries and general development in Japan. Therefore, it is essential to this dissertation to come to an evaluation of the impact of the economic bureaucracy in this phase and perhaps assess the possible continuity of their influence during and after this period. However, particularly the expansionism and the Pacific War was only really possible due to the systematic organisation and the leading role the bureaucratic administration has played - and as far as our debate is concerned it can only be focused on the role of the bureaucracy in order follow the initial assumption of the influence of Listian economics - other interesting aspects such as the Japanese imperialism and the similarities of the German and Japanese fascism have to be neglected. Between 1900 and 1939 the Japanese population increased from 44 million to over 71 million, and the real national income grew by the factor 2.8. Industrialisation progressed at same time as between 15-23% of the national income was invested annually. At first the development took place in the light industrial sector and the economy was moving - due to domestic consumer demand and expanding export trade - toward specialisation in textiles. However, after World War I the government moved their emphasis to the heavy industrial sector such as steel and shipbuilding. “By the end of the 1920s, Japan was an industrialised nation in the sense that mining and manufacture accounted for a larger share of the national income than agriculture.”

But the high investment and fast growth in the 1920s and 1930s did little to improve the social situation of the general population, at least not to the extent as it had done it in some of the Western countries, because a considerable share of advantages of industrialisation was used to finance the military expansion into East Asia. Additionally, the world depression intensified nationalist and expansionist tendencies in Japan which had already been destabilising the Taisho democracy. There was a growing sentiment within Japan for the extension of the Japanese sphere of influence into China and Southeast Asia and in 1931 the ‘Manchurian incident’ - the invasion of Manchuria by the Japanese army – “marked a new stage in the manipulation of the government by the military.”

On the intellectual level various influences have to account for the growth of ultra-nationalism in Japan. Despite the fact that ultra-nationalism obviously is of a strong anti-intellectual nature certain ideologies and theories still had to build the foundation for this movement. Thus, the far right and the military were borrowing ideas about Japanese ethnic and moral superiority from the schools of national learning of the Tokugawa period. Additionally, even though Western academic ideas were particularly suspicious, some Western political and economic theories were still appealing and like the concept of the organic nation state, re-formulated by the German Historical School, were modified to serve Japanese ideological needs. Especially Takahashi Kamekichi (1891-1977) and Kita Ikki (1883-1937) were the predominant economists who were idealising the Japanese expansionism, echoing some of the German National Socialist’s slogans for ‘Lebensraum’ and applying it to the Japanese economic situation. Hence, the intellectual vacuum that was created under the totalitarianism was easily filled by economic theories centred around the state, which already in the Meiji era had seemed to be more appealing to the Japanese. Hijikata Narumi, who was introducing the writings of European fascism to Japan, had concluded that the Japanese spirit was incompatible with capitalism, and therefore postulated a controlled economy in which the state was planning the economic order. Morris-Suzuki elaborates that he envisaged “economic general headquarters which would play an active role in influencing the levels of supply and prices. This general headquarters would be staffed by economic experts, but would also take advice from a council of elected delegate representing the various economic interest groups.” His ideas, subsequently, achieved partial realisation with the creation of the Cabinet Planning Board in 1937, in which economic bureaucrats had substantial power to control the wartime economy. However, the Pacific War had not only finally changed Japan from a country which was in a transition state to one with a fully developed and highly efficient heavy industry, but had also established the rule of the bureaucrats as economic planners and organisers of the Japanese industrial growth and economic development firmly. Also important was the industrial structure in Japan, which was organised around the large enterprises, the zaibatsu, which were protected through government policies and controlled by the economic bureaucrats, in order to ensure maximum productivity without being exposed to domestic or international competition. “By 1937, Japan was involved in a full-scale war in China, but the wartime constraints that were imposed on finance, industry, and labour served to strengthen rather than weaken the power of the zaibatsu ... .”

Japan had also established a trade block, involving Manchuria and several northern Chinese provinces to counter trade restrictions enforced by Britain, who had imposed a tariff to protect her Asian colonies from Japanese imports. Subsequently, the Japanese government promoted the building of a railway system in her Chinese colonies and Japanese zaibatsu were helped to gain control over the colonial economy. In 1937 the Manchuria Heavy Industry Company was formed by combining the Nissan zaibatsu with various Japanese-affiliated companies and government assistance was given in return for resource for the Japanese heavy industry. A further step to guarantee supplies for the war effort was the creation of the Government Policy Company with the help of capital from the Mitsubishi and Mitsui zaibatsu in 1938. To control and organise the domestic production the National General Mobilisation Law had been passed and following the advice of the German Historical School public control of resources was introduced and business cartels were sponsored by the government to increase productivity of selected industries. The law gave full control to economic bureaucrats and “provided the government with the overall legal authority for deploying both manpower and material resources for the highest and most efficient development of the total power of the state in time of war. Public planning replaced the market mechanism in determining the allocation of national economic resources. Public decision-making replaced private decision-making wherever the government thought necessary ... .”

As a result, the composition of the manufacturing industry had been changed completely, heavy industry was expanding to replace textiles and food-processing. Particularly large scale companies were promoted, using modern technology and facilitating mass production. A final step in the war effort was taken with the Munitions Company Law of 1943 which allowed the government effectively to control the whole of the economy: top managers of selected businesses could be conscripted and transformed into public servants in order to supervise industrial activities along the lines required by the government. The newly formed Ministry of Munitions then took over the functions of Planning Board and the Ministry of Commerce and Industry (MCI), which until then had direct responsibility for the economic side of the war effort. The remaining civilian functions were merged with the Ministry of Agriculture to form the Ministry of Agriculture and Industry - the predecessor of the post-war Ministry for International Trade and Industrialisation (MITI). Thus, not the efficiency of the single firm was regarded to be important, but the effectiveness of the national economy as whole, and it was the task of the economic bureaucracy to organise and achieve the national aim through both an industrial rationalisation and an industrial control policy. The economic bureaucrats, even though obviously coming at first from different backgrounds at the time, were sharing at least the same belief in the need to reinforce government control over the economy. This was mainly based on the strong influence anti-laissez faire thought had in pre-war Japan: the German Historical and Social Policy School (and inherently List) and particularly the Showa Research Association, which concentrated on the possibilities of strategic government policies to achieve objectives of national importance.

Hence, the Pacific War had completely dominated politics, society and economy, and is regarded as a ‘total war’. All strength was concentrated on the war effort and military activities. The military budget was tremendously increased from the 1930’s onwards and the government “strengthened its control over the economy, the labour movement and civilian life, while further developing strategic industries, especially heavy industry. The industrial sector of the economy was distorted to accommodate a swollen military production sector.”

Even though economic rationality was certainly lacking during these times, the analysis of the wartime economy is very important, as it can be regarded as a continuation of the Japanese government’s ‘management’ of the national economy, and had, especially with the influence of the economic bureaucrats and economic guidance, a great impact on the structure of the post-war economy. Chalmers Johnson argues accordingly:

“From about 1941 to 1961 the Japanese economy remained on war footing. The goal changed from military to economic victory, but the Japanese people could have not worked harder, saved more or innovated more ruthlessly if they had been engaged in a war for national survival, as in fact they were. And just as a nation mobilised for war needs a general staff, so a nation mobilised for economic development needs an economic general staff.”

Hence it can be argued that the course of the Japanese economic history suggests a continuity in terms of government-led development through the economic bureaucracy, based on the insights Friedrich List had provided about the importance of an active role of the government in the creation of productive forces, the protection and fostering of ‘infant industries’, and the promotion of selected industries.

“These were days of extraordinary intervention ... on part of the Japanese state, and the practice and ideology of technocratic control which emerges so vividly here is certainly among the most conspicuous and controversial of the wartime legacies to contemporary Japan. War strengthened the bureaucracy, and the nearly seven-year Occupation that followed strengthened it further. ... Immediate tasks changed drastically, of course, from ‘war’ to ‘peace’. What remained was a deep dissatisfaction with the status quo and an abiding commitment to top-down, long-range planning to create a strong state in a new world order.”

4.3 Economic Reconstruction during the Occupation

In August 1945 the Second World War had finally ended for Japan and the Allied Forces began with the occupation of a country that lay in ruins and effectively was bankrupt. The occupation lasted 6 years and ended in with the signing of the San Francisco Peace Treaty in 1951. This decade can be regarded as a

“period of ‘postwar reconstruction’, during which the economy made a new start and progressed from its devastated condition in1945 to the beginning of the so-called ‘miracle’ which took it through the high-speed growth of the 1960s to the point in the 1980s when Japan succeeded in surpassing the West in industrial and living standards. Economic growth continued steadily through the immediate postwar years to the high-speed growth of the 1960s, as if to suggest that the economy followed a smooth continuous upward trend.”

In support, the Japanese economist Nakamura, for example, has made the suggestion that the economy had already taken off on its high-speed era as early as 1955. But whenever the starting point was, it is important to point out that a tremendous recovery process had set in in the post-war decades. However, it is clear after the analysis and discussion of the economic history of Japan in the preceding sections that the state with its economic bureaucracy has played a vital role in the economic development of pre-war Japan and the organisation of the war effort, suggesting that again the technocrats will be essential in the reconstruction process. In order to illustrate this argument an illumination and explanation of the occupation era is necessary.

The US- and Allied policy in the era of occupation was certainly formulated with the intention to democratise and demilitarise Japan. General MacArthur implemented measures to reform the Japanese society, economy and politics - bearing in mind that it was firstly intended to weakened Japan to such an extent that it would be impossible for them to start a war of aggression again. The Supreme Command of Allied Powers (SCAP) had identified the industrial-military complex as one of the major problems leading to the Japanese imperialism. As measures of economic decentralisation the zaibatsu, the then family-owned industrial conglomerates, were broken up and put under financial control and funding of banks (mainly the Mitsubishi Bank). An anti-monopoly law along the lines of the US Anti-Trust Act was introduced to promote competition in 1947. However, in the early post-war years Japan faced mass-starvation, epidemics and malnutrition.

“These basic survival problems were exacerbated by the growing dollar gap that made multilateral trade and payments impossible, and aid vital. Japan’s trade had collapsed by the war’s end. Of the little trade that remained about 66 percent of Japan’s export went to Asian nations and colonies, while about 90 percent of its imports came from the United States. Few Japanese products found a ready market in Western countries with the result that Japan received soft non-convertible currencies for its exports but need to pay hard dollars for its vital imports.”

The SCAP realised here that an industrial reconstruction of the Japanese economy was essential for her survival. Under the impression of the emerging Cold War, the outbreak of the Korean War in 1950, and the insight that permanent aid to Asia (and Europe) was to a certain extent detrimental to the US-economy which needed new markets for the conversion of her war industries, hence the Foreign policy had to be changed. Under the Marshall Plan aid for reconstruction and development was granted. After the US-government under Truman realised that China as a potential partner was lost to communism, the containment policy as propagated by George F. Kennan was underlining the need for a stable and prosperous Japan. MacArthur implemented land reforms and with the assistance of US-capital and management the big companies were made more efficient, and thus a real or effective decentralisation and drastic measures against the big business as such never really took place. The American ‘reverse course’ as a pragmatic solution for the needs of hot and cold war helped Japan on her way to accelerated economic development and reconstruction. Not only because of a change in their economic assistance from food aid to structural aid, but especially because of the fact that political reforms - due to a lack of understanding of the administrative Japanese system and because a functioning state was simply needed - were not effectively implemented, the economic administration and bureaucratic system stayed almost unchanged. A power shift had additionally taken place: whereas before the war zaibatsu, military and bureaucrats were competing for influence, the military had vanished in post-war Japan and the power of the zaibatsu broken up by the reforms - resulting in increase of influence for the economic bureaucrats. “Undemocratic or not, the occupation allowed the Japanese bureaucracy to assume powers that it had not been able to exercise during earlier periods. During the 1950s, the bureaucracy used these powers to guide the economy towards its heavy industrialisation and unprecedented growth.”

4.4 Conclusion: Miracle Japan and the MITI - Interdependence or Free Markets?

As we have seen from the discussion about the influences of Western economics on the development of a Japanese economic ‘ideology’, education of the general public and of the bureaucratic elite has been vital for the formulation of a unified economic framework, leading to the fulfilment of the national economic aim: development and industrialisation in order to stay independent.

Essential to the success of the Japanese developmental state was a co-ordinated approach for economic growth, consisting - as Sheridan suggests - of (a) the formulation of a national aim (i.e. national independence), (b) an economic objective (for example, fukoku kyohei - building a strong economic foundation for industrial development and independence), © an economic instrument (direct government control through firstly direct participation and later through administrative guidance), and (d) economic measures (pilot plants, finance for selected industries, ...).

Sometimes direct government action in form of model plants and direct investment is regarded as the lone basis for government led-industrialisation in Japan. “But this view ignores the other dimensions of government leadership - the setting of national aims and economic objectives. ... Examination of the role of government only in terms of its activities in selecting economic instruments and measure has led to an imperfect appreciation of the extent and nature of the role of government in Japan, and has obscured from sight one main foundation of the Japanese economic system.”

Hence, an analysis of the Japanese development with Anglo-American economic theories (see chapter 1, 2 and 3) has caused a misunderstanding of the real nature of the economic system in Japan. As it has been argued earlier, the divides between planned and free market economies are only really clearly defined in an ideological sense, and in reality we find that in a lot of cases a mixed economic system prevails, i.e. public and private sectors of the economy are interacting in one way or another. For the explanation of the Japanese capitalism the term ‘plan rational’ economy was introduced, which is going even further than the concept of a ‘mixed economy’. If we then regard a state not just as the sum of individuals but as a community with unique needs, interests, culture etc. the government plays subsequently a role which is beyond the confines of provision of public goods and mediating market failure. Therefore, the state in order to guarantee the survival of the national community has to act independently of market considerations and has to identify national aims, co-ordinate and unify the communal effort to achieve these goals effectively.

Thus in the Japanese industrialisation and development, however, the government did not only use economic instruments or measures to intervene in the economy, but was formulating a national aim, convinced its citizens and co-ordinated co-operation between public and private economic sectors in order to achieve the objective of development and hence independence. This unique co-operation between the public and the private sector in the Japanese economy in form of administrative guidance through economic bureaucrats giving preferential credits, selective targeting of industries with various protective measures, even drawing legislation etc. (details will be discussed later) has lead to a blurring of the public-private divide in the sense that it is usually understood. Hence, Adam Smith’s division of economic spheres of the public and the private with self-interest as the driving force is not fully applicable to Japan. The Japanese government, hence, does not only provide public goods and mediates market failures, which would constitute a classical example of state intervention, but also - and more importantly - co-ordinated and organised a national effort to promote industrialisation, development and economic growth. Thereby, the dichotomy between the simplistic concepts of states and markets is transcended. Only a special type of state, the developmental state, can fulfil these requirements successfully as public and private sectors are fused, a state ideology (e.g. pre-war, fukoku kyohei) has legitimised development, and the economic bureaucracy in the plan rational economy has autonomously organised industrial growth. Hence, competent public authorities and their technocrats were of outstanding importance in the formulation of national strategies which protect and promote general economic activity. As Sheridan concludes:

“Public guidance of public and private investment involves long-term economic thinking and planning. It requires competent public authorities to discriminate between members of the community on the basis of subtle and complex judgements of the community’s collective needs, now and in the future. A designated target approach is employed in Japan so as to nurture and develop those economic activities selected as important by competent public authorities. It is fashionable for Western economists to insist that ‘government cannot pick winners’. Japanese governments have been picking winners for 100 years now, in two senses: deciding which industries to develop, and often also predicting which entrepreneurs and corporations would prove to be skilled enough to be worth supporting.”

Moreover, in the institutional centre of the Japanese success stands the Ministry of International Trade and Industry (MITI). Hence, industrial strategies have been exercised mostly through the MITI and was identified by Chalmers Johnson as the main government agency responsible for the rapid industrial growth in Japan, which in the body of literature sometimes is referred to as a ‘miracle’ . Since its establishment in 1949, following the footsteps of the war time Ministry of Agriculture and Industry and the Ministry of Commerce and Industry (MCI), MITI has been the driving force behind the evolving reconstruction of the industrial structures and the development of production and trade. Its strategy has been implemented by formal and informal methods, usually referred to as administrative guidance, including selective export credits, a radical scrap-and-build policy, selective targeting through subsidies and tax incentives and the sponsorship of selected companies. “ In Japan the developmental, strategic quality of economic policy is reflected within the government in the high positions of the so-called economic bureaucrats, ... , the elite bureaucracy of Japan makes most major decisions, drafts virtually all legislation, controls the national budget, and is the source of all major policy innovations in the system.”

This technocracy forges together all social, political and economic institutions and thereby industrial growth has been successfully promoted and nurtured in the past decades, and therefore was essential to the success of the Japanese developmental state. This co-operation, can be clearly argued, is based on shared values between the leading groups in Japanese society, politics and economics: the long term national aim of economic growth, blurring the divide between public and private interests. A so-called ‘iron triangle’ - the co-operation of bureaucrats, political parties (essentially the LDP which dominated Japanese politics from 1955 until the 1990s), and the big business leaders - is governing Japan. This system, accordingly, is called the 1955-system, and essentially was providing Japan with all the politico-economic features vital to the ‘miracle’. Hence, this dissertation has chosen 1955 as the end point, as with this year all institutional and political foundations for the high speed growth and economic development are laid.

The amazing continuity of collaboration can be seen in various points: for example, (a) the complex company structure and the oligopolistic organisation of the industries, the keiretsu, which are interpenetrated by banks and other companies, and therefore not subject of short-term shareholder profit interest, allowing long-term economic management by the bureaucracy. The concept of ‘amakudari’(b), which means ‘descent from heaven’, provides another element of stability and control, as senior bureaucrats usually retire into senior management positions of private enterprises or even become politicians - this virtually guarantees co-ordinated industrial activities. Additionally, © the merger of the Liberal Party and the Democrats to form the LDP in 1955, which has been inspired by the fears of socialism by particularly the business leaders and their need for a unified and stable government, provided Japan with political stability.

In short, the Japanese economic ‘miracle’ was the result of a capable developmental state, basing its economic success mainly on a homogeneous and highly motivated economic bureaucracy, and their ability to co-ordinate the input of various social groups and manage the national industrial activities in the most beneficial way for state and nation. The Japanese state has succeeded in governing the market and in controlling their national economy in a plan-rational fashion, without making the mistake of ignoring market forces altogether. Concluding with Chalmers Johnson: “The Japanese built on known strength, their bureaucracy, their zaibatsu, their banking system, their homogeneous society, and the markets available to them. Such post-war reforms as the elimination of the military from political life, rationalisation of the zaibatsu, the strengthening of the Diet and the equalisation of the social classes were all important, but the institutions of the Japanese developmental state are products of Japanese innovation and experience.”

In conclusion, the Japanese state has followed a path of development opposing the mainstream Anglo-American economic thought. Friedrich List’s concept of a national system of political economy was hence vital to the Japanese ‘miracle’, proving this dissertation’s main argument that the state can promote economic development. Thus the fostering of ‘infant industries’, administrative guidance, industrial policy, co-operation the public and private economic sphere to achieve a national goal etc. were the key concepts to the success of the Japanese developmental state.

5. Conclusion: Listian State-led Development and the Continuation of History

In an era of so-called ‘globalisation’, the media and a growing part of the scientific community are arguing that the nation state and national economic objectives are increasingly devoid of meaning, and are generally pointing towards Anglo-American style market economies for ideal types. However, economic development does not necessarily have to be facilitated only through market forces, and there has been a growing tendency to overlook the statist perspective on development. Nevertheless, economic history illustrates that development has been brought about by various means: markets and states have often equally contributed to the economic success or failure of countries. But as this dissertation has shown, the Japanese economic ‘miracle’ is an extremely powerful illustration that the state is not completely out of the equation for economic development. Nevertheless, the notion of a ‘miracle’ alone usually would imply that there is more to it than simply just a continuous process of industrial development. The term ‘miracle’ has been coined by Anglo-American economists to ‘explain’ the inexplicable. But as we have seen, only in terms of classical or neo-classical theory the high-speed growth of the government-led industrialisation and development in Japan cannot be fully explained since the state is disregarded as an economic actor and only market forces are accounted for. The Japanese model, the developmental capitalism described, is still a controversial topic but there is a growing body of literature which points to this relatively new insight into national economic development. Chalmers Johnson, one of the outstanding scholars of Japan, has written, “that Japan has invented and put together the institutions of capitalism in new ways, ways that neither Adam Smith nor Karl Marx would recognise or understand.”

Thus, the state has taken a truely active role in Japan by shaping the direction the market takes through the co-ordination of an industry-wide consensus on development objectives, industrial policy and administrative guidance for selected targets. Consequently, this has lead to a reconsideration of development models in the western world, even though in East Asia a fundamental understanding of this is already common place and was used to build up the tiger or dragon economies in the Newly Industrialising Countries (NICs) of the region. An important part of this re-thinking process is the re-emergence of Friedrich List, who inspired and gave direction to the Japanese economic development from the Meiji period onwards.

List, importantly, is not only about ‘infant industries’ but his theoretical attack of the presumably universal laws of liberal economics such as laissez faire, has led him to analyse and formulate a new theory of development. This is usually ignored when List and his followers are branded as neo-mercantilists, as protectionism was only one of many means to an end: the promotion of productive forces, both material and mental, through government guidance and education respectively, was central to List’s model of economic development.

Essentially, this strategy has been implemented to foster economic development in Japan. Particularly in the later Meiji period a clear deviation from the Anglo-American path of development doctrines is visible and during the Pacific War this tendency was even exacerbated through an increase of decision-making power for the economic bureaucrats. The post-war ‘miracle’ then could be merely regarded as a product of the Meiji tradition of administrative guidance and successful state intervention. This interference, however, is not comparable to the total role the state plays in a planned command economy. In the Japanese developmental capitalist system. state and markets are interacting due to the influence of the government in a unique fashion and we can talk about a plan-rational economy. Japan’s state-induced high-speed growth and industrialisation has throughout the 1950’s and 60’s continued to bring prosperity to the region, but the 1970’s and 80’s have seen a period of deceleration. However, the scope of this dissertation does not allow us to investigate this phenomenon, even though, particularly in the light of the recent economic crisis in East Asia, it would be extremely useful for our understanding of the working of economics to carry out further analyses and extend this research into this era.

In conclusion, it is simply unjustified, despite the recent economic crisis in Asia, to declare the state’s role as invalid and unimportant. In theoretical terms, the common Anglo-American depiction of state versus market is too simplified to account for the economic reality, especially in East Asia. Not the choice between Stalinist state controlled (plan ideological) and free market (market ideological) economy has led to the success of Japan’s economic system, but the demonstrated synergy between state and markets was essential.

Another interesting conclusion which can be drawn from our discussion, is the contribution to an exciting debate which flamed up after the end of the Cold War. However, as this is only of indirect significance to this dissertation, it is only dealt with here in little detail, but it could be interesting to expand this at another place and time: Francis Fukuyama’s heatedly debated and applauded claim of ‘The End of History?’ has, in the light of the body of literature and the arguments this dissertation has presented, to be doubted. “The triumph of the West, of the Western idea,” Fukuyama argues, “is evident ... in the total exhaustion of viable systemic alternatives to Western liberalism.” The US-victory in the Cold War, which was according to Fukuyama in economic terms a battle between Marx/Lenin and Smith, or between state-led command economy and ‘laissez- faire’ free market economy, has therefore left liberalism/capitalism as the only political and economic system in Hegelian dialectic fashion. Fukuyama, subsequently, claims that Japan essentially adopted Western liberalism after the occupation and adapted it to their tradition and culture. Hence Japan is, supposedly, through and through a liberal/capitalist country. (But as David Williams’ “Japan: Beyond the End of History” suggests, this is not quite the case!)

Nevertheless Japan, which is formally a liberal democracy, shows that the type of capitalism practised deviates from the Anglo-American ‘norm’. Developmental capitalism as applied in Japan and East Asia is not the laissez-faire capitalism liberals and neo-liberals are regarding as true capitalism, but simply a totally different type. Hence, it can be argued that ‘history continues’.

Government-led industrialisation and development were essential to the success of the late-developing Japan, but market forces were not completely ignored. Friedrich List and Adam Smith, are sharing - to a certain extent - various fundamental aspects in their respective economic doctrines, but disagree about the universal validity of economic laws which Smith has claimed in his ‘Wealth of Nations’. Thus, Friedrich List, who has an identical vision of capitalist production as Smith, postulates in ‘The National System’ that the socio-political circumstances are changing with time and place, a concept which later was further developed by the German Historical School. Therefore late-developing nations have to apply different economic instruments than the already established countries, in order to catch-up without being dominated. This has proved List to be of extreme significance and importance to our understanding of the economics of late development, because his analysis of the economy of the nation state is of a rather pragmatic nature and still provides us with a timeless conclusion: the state - despite the liberal nation of ‘laissez faire - can facilitate economic development and industrialisation through the promotion of productive forces .

Even in the era of so-called globalisation, nation states should not be ignored as economic actors. As the continuous implementation of Listian economic practices in Japan has clearly proved, the government can successfully promote development through mobilisation of national resources in the market place. Hence, the Japanese ‘miracle’ has to be regarded as a process of government-led industrialisation and development and - with the help of Friedrich List – can be unravelled. In the light of the ongoing research about the phenomenon of development and the interdependence of state and market, it is more than justified to conclude this dissertation with David Williams who regards List as the godfather of the Japanese economic ‘miracle’.

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