How private enterprise created modern Japan

Private entrepreneurs succeeded,
government officials failed

Silk spinning, a big industry in late 19th century Japan

In a single generation, during the late 19th century, Japan transformed itself from a backward rural nation to a dynamic economy. The Japanese achieved rapid, self-sustaining growth much faster than Western nations, and they used comparatively little outside capital. This was one of the most astonishing transformations in modern history.

Although the Japanese achievement has often been hailed as the result of a wise government industrial policy, there's little evidence to support such a claim. Beyond eliminating many barriers to enterprise, the government was actually a minor and rather inept player. It channelled funds into some high profile businesses, but almost every single one lost money. Prestigious heavy industries favored by the government never added as much value as humble light industries such as textiles which got little or no government favors.

Two centuries of stagnation. By the mid-19th century, the Tokugawa Shogun (military dictator) had virtually cut off Japan from the outside world for more than two centuries. Since 1636, the Shogun had enforced the death penalty for Japanese people caught trying to leave the country. Japanese merchants were permitted to see only the Dutch on Dejima, a small island off Nagasaki. This two-century period was known as the "Great Peace," and the Japanese enjoyed a modest prosperity as a consequence. There was a gradual increase in cultivated land. But without the stimulus of the outside world, the economy stagnated. Technology changed little in agriculture or industry. The Japanese were oblivious to the industrial revolution sweeping through Western Europe. Countless things which were commonplace in Western Europe had never been seen in Japan.

In addition, there were internal restrictions which discouraged people in one region from trading with people in other regions. The primary aim was to keep people apart and thereby prevent political alliances from forming against the Shogun. Moreover, people weren't free to choose their occupations. Sumptuary laws made it illegal for ordinary people to purchase luxuries like silk; by limiting the market, and such laws assured that Japanese producers would remain small, unable to accumulate capital for more ambitious operations. "This late feudalism represents one of the most conscious attempts in history to freeze society in a rigid hierarchical mold," noted historian E. Herbert Norman.

An unintended consequence of these restrictions was that the Japanese couldn't realize substantial benefits from their own domestic market. Limited to serving local markets, Japanese companies were smaller and less competitive than they would otherwise have been. The worst consequence was famine which occurred because restrictions made it difficult for farmers with crop surpluses to ship grain where people suffered from crop failures. Rebellions became more frequent. In 1837, armed farmers in Settsu submitted this petition to local officials: "With both the high price of rice and the prevalence of epidemics, there have been many who died. Since spring twenty out of over hundred have died of starvation and this fall, during the last ninety days, half of the people have died. We ask that just government be applied towards us." The Shogun's trade restrictions, intended to bolster the regime, undermined the nation.

Despite the Shogun's efforts to enforce autarky, Japanese were curious about the outside world. A few escaped the country aboard Dutch merchant ships or American whalers. Dutch books were smuggled into Japan. Many samurai sold their precious swords to get Dutch grammars, so they could read Dutch technical books. Relying only on book learning, curious Japanese produced pens, ink, chemicals and medicines. Curiousity intensified when the British shelled Kagoshima and Shimonoseki, following attacks on their merchant ships. Japanese people didn't need their government to promote knowledge of the outside world; they needed government to get out of the way, so they could learn without risking their lives.

The most powerful stimulus. During the mid-19th century, the United States turned toward the Pacific Basin. The Oregon and California territories became part of the Union. People talked about building a transcontinental railroad. The China trade was developing, and Japan seemed like a logical place for ships to replenish their coal and other provisions. But the Shogun refused to consider expanded contacts with the outside world.

In July 1853, the American Commodore Matthew Perry appeared in Edo (Tokyo) Bay with four well-armed ships, two of them steam-powered -- something few Japanese had ever seen. Perry's cannon could have levelled much of the city, and because most of the city's food came in by sea, he could have inflicted a painful blockade. The Shogun couldn't have done much about it. Perry presented officials with a letter from President Millard Fillmore, expressing a desire to begin peaceful relations. Then Perry left. He returned a year later with eight ships. Clearly, the American threat had to be dealt with.

The Shogun wasn't just powerless against Western weapons. His position was deteriorating at home. Choshu and Satsuma, feudal clans in western Japan, had a little first-hand experience with European naval power, and they were anxious for reforms which would protect Japan's independence. At the same time, Japanese scholars challenged the moral pretensions of the Shogun by arguing that the Emperor was the nation's spiritual inspiration. These scholars promoted a renewal of Shinto religious doctrines which involved Emperor worship. The Emperor, in turn, gave his blessing to the rebellious feudal chiefs who were arming themselves with imported rifles. The Shogun had neither popular support nor the means of financing an adequate army. His soldiers went into battle mainly with traditional two‑handed swords.

Besieged from within and without, the Shogun agreed that Townsend Harris could reside in Shimoda as the first American Counsel. Harris pursued trade negotiations which dragged on for several years until 1857. Then British and French forces succeeded in occupying some Chinese territory. Conceivably, some of these forces could be deployed against Japan. To prevent that from happening, the Shogun agreed to the treaty terms Harris demanded. Namely: (1) Americans could conduct trade not only in Nagasaki like the Dutch but also in Yokohama, Kobe, Niigata, Shimoda and Hakadote; (2) tariffs would be kept at a low 5% for the next 40 years; (3) Americans in Japan would be subject to American laws, and violations would be handled by the American embassy, not by Japanese courts. Soon the Shogun signed similar treaties with Britain, France and Russia.

These treaties unleashed a powerful xenophobic backlash within Japan. The Shogun lost face for permitting foreign goods free access to the Japanese market and for agreeing that foreigners would be above Japanese laws. He seemed to be sacrificing Japan for the interests of foreigners. Feudal chiefs from Western Japan mobilized forces and overthrew the regime in 1868. Because they couldn't agree on who would be the next Shogun, they decided the government structure must be changed. The Emperor, long a ceremonial figure, should be the nation's political leader. People rallied behind 16-year-old Emperor Meiji, hoping he could help Japan avoid becoming a Western colony like much of China. Hence, the new era became known as the Meiji Restoration. The Emperor moved his residence from Kyoto to Edo and renamed it Tokyo (eastern capital).

Although many Japanese hated foreigners, they couldn't deny the evidence of their eyes. They were shocked to discover how far they lagged behind the West in commerce, industry, education, military technology and much else. This revelation galvanized the Japanese into action.

Many went abroad for the knowledge needed to help maintain Japan's independence. Often travel dissolved their xenophobia. Travel moderated the views of government officials like Inoue Kaoru and Ito Hirobumi. They returned and fought xenophobia with books, lectures and even songs. The "Civilization Ball Song" asked children to count the bounces of a ball and call out ten Western things the Japanese should adopt -- gas lamps, steam engines, steam boats, lightning conductors, mail delivery, horse-drawn carriages, cameras, telegrams, newspapers and schools. Many entrepreneurs like Shibusawa Eiichi, Hara Rokuro and Okura Kihachiro owed much of their remarkable success to knowledge gained from travel abroad.

The educator Fukuzawa Yukichi was awed by the material wonders of America and Western Europe. In 1859, he visited San Francisco. "We were surprised by the carriages," he recalled. "On seeing a vehicle with horses attached to it, we should easily have guessed what it was. But really we did not identify our mode of conveyance until the door had been opened, we were seated inside, and the horses started off." His hotel was another revelation: "There we noticed, covering the interior, the valuable carpets which in Japan only the wealthy could buy from importers' shops at so much a square inch to make purses and tobacco pouches with. Here the carpet was laid over an entire room -- something quite astounding -- and upon this costly fabric walked our hosts wearing the shoes with which they had come in from the streets! Again: "Immediately bottles were brought in. Suddenly an explosion -- the popping of champagne. When the glasses were passed around, we noticed strange fragments floating in them -- hardly did we expect to find ice in the warm spring weather." Fukuzawa was struck that many things which were precious in Japan were discarded in America: "there seemed to be an enormous waste of iron everywhere. In garbage piles, on the seashores -- everywhere -- I found lying old oil tins, empty cans, and broken tools. This was remarkable for us, for in Yedo, after a fire, there would appear a swarm of people looking for nails in the ashes."

Fukuzawa observed how travel helped open the minds of others. In Paris, for example, food made friends: "there was such a spread of food, delicacies of both the 'woods and the sea', that even those who professed their dislike of 'foreign objects' could not maintain this aversion in the choice of food...we were treated to a continual hospitality until at times we returned exhausted to our lodgings." Fukuzawa went on to write Seiyo Jijo (Things Western), a book which did much to inform Japanese people about revolutionary economic changes going on.

A few Japanese embraced free trade ideas. In 1878, Ukichi Taguchi published Jiyu Koeki Nihon Kaiza Ron (A Free Trade Policy For Japan) which, inspired by Adam Smith, Richard Cobden and John Stuart Mill, argued that government protection of industry would undermine crucial incentives to adapt in a changing world. He was especially concerned that protection would encourage idle samurai to continue their backward ways. Ukichi's book went through many editions. Ukichi started the economic journal Keizai Zasshi, and in 1882, published the book Keizai Saku (Economic Policy), an attack on economic nationalism which was gaining popularity. He declined offers to join the government, maintaining that he was most effective as an independent citizen.

The Japanese introduced a number of sweeping reforms which set the stage for economic growth. Feudal domains were abolished. All social classes -- former feudal lords, samurai, merchants and peasants -- were declared equal before the law. The government abolished barriers to domestic trade as the treaties abolished barriers to international trade. The Japanese abolished restrictions on freedom of movement. Guilds were abolished, enabling people to choose occupations freely. Property rights were expanded so that practically anyone could buy land. Farmers could plant whatever they wanted.

Free trade -- the freedom of Japanese consumers to do business with whom they wished -- had a dynamic impact on the economy. The availability of imports helped stimulate consumer tastes which weren't being satisfied by domestic producers. Competition from cheap Indian cotton textiles and Chinese lacquer goods forced inefficient Japanese crafts people out of business. Merchants, who had long enjoyed guild monopolies, were slow to adapt in changing markets, and many went broke. The failure of traditional businesses made people available for new businesses. This might seem like a euphemism for unemployment, but as University of California economic historian David S. Landes observed, "no status society has ever effected an industrial revolution, presumably because of the limitation imposed on the mobility of human and material resources, and because of the prevalence of social values and attitudes unfavorable to business enterprise."

Once Japan opened up, people were no longer forced to make do with limited resources available within their borders. They could benefit from foreign talent and capital. Japan's most serious scarcity was technical knowledge, and for a number of years this was alleviated by doctors, chemists, engineers, economists and other experts who came from abroad. Japanese entrepreneurs were better off because they were free to tap foreign investment capital. The British, for example, offered their services. They helped finance a railroad connecting Tokyo and Yokohama (1870).

Free trade stimulated Japan's port cities. Nagasaki was perhaps the first to expand, since the few Japanese who knew anything about international business were located there. Most of Japan's silk was exported from Yokohama, and Western technology such as railway equipment, textile machinery and lighting devices were typically shipped to Yokohama. Japan's only foreign exchange dealer -- Yokohama Specie Bank -- was in that city. It was the place to go for the latest technical information as well as the first Japanese lemonade and ice cream. There was a commercial revolution in Osaka, center of the cotton trade. Entrepreneurs from Tokyo, China and the West went there. They established a wide range of businesses, including cotton spinning mills, a paper mill, steel mill and a tannery. These immigrants made Osaka more important than it had been before. In 1885, an estimated 10%-12% of Japan's industrial capital was in Osaka; within a decade, this figure was approaching 30%.

Western goods and ideas appeared all over Tokyo. Emperor Meiji set an example for adopting Western ways. He was the first Emperor in a thousand years to mingle with commoners. After 1772, he dressed not in traditional Japanese robes but in a Western uniform or a swallowtail coat and silk top hat. He rode about in a Western-style coach rather than the traditional palanquin. Meiji ministers abandoned the traditional practice of shaving their eyebrows and blackening their teeth. It became fashionable among ordinary people to combine Western with traditional clothing; to wear a kimono over slacks, for example, or a frock coat with a sword. Fewer and fewer men continued the traditional hairstyle -- some hair shaved entirely off, the rest long and gathered into a top knot; by the 1880s, some 90% of men favored Western-style "random cropping". Japanese discarded traditional bamboo-and-paper umbrellas and started using imported umbrellas which were dubbed "bat shades". Gold watches became popular. Modern newspapers flourished in Tokyo. Schools began teaching knowledge of the West. Dry goods shops like Daimaru evolved into department stores. Restaurants opened to serve Western‑style beef. Trading on the Stock Exchange started in 1878. All this was heady stuff which attracted entrepreneurs looking for new opportunities.

Nazan University (Nagoya) economic historian Johannes Hirschmeier compiled a survey of 50 successful Meiji entrepreneurs, and it revealed that while place of birth and social background didn't correlate with success, early experience in a port city did. Hirschmeier reported: five of the 50 entrepreneurs were in Nagasaki before age 20; five were in Yokohama; six in Osaka; 27 in Tokyo. Only 13 of these entrepreneurs didn't have any experience in these cities.

As commercial centers prospered, they stimulated agriculture which was where perhaps 80% of Japanese worked during the early Meiji period. The closer farmers were to a commercial center, the more they specialized in producing cash crops like cotton, silkworms, tea, oil, sugar. Moreover, commerce stimulated "putting out" industries like cotton textiles, raw silk, paper and tatami. Though the technology was primitive, these rural industries helped break the yoke of peasant customs, and they prepared large numbers of people for modern industry. Some of the most successful Meiji era entrepreneurs were the sons of "putting out" masters.

The silk industry was the biggest winner in newly-opened markets. Disease substantially wiped out European silkworms in 1860, creating a sudden demand for Japanese silkworms. But within a few years, the European silkworm business was reestablished, and Japanese silkworm exports declined. Since Japanese entrepreneurs weren't subsidized or protected, they had to adapt. They expanded exports of raw silk. But, produced by hand, this was uneven in quality. It was inferior to European silk. Markets forced Japanese entrepreneurs to adapt again. They began importing silk reeling machinery which improved quality.

Industrial policy backfires. Japanese officials became impatient with the private sector. The most influential Meiji minister was Okubo Toshimichi who believed that progress could be accelerated by government industrial promotion, known as shokusan kogyo: be bold and spend a lot of money on new technology.

Accordingly, the government started capital-intensive industries. In 1871, the government established a postal service between Tokyo and Osaka. It started building a telegraph system and a rail network. It pursued shipbuilding, brick production and silk manufacturing. By the mid-1870s, according to an official report, the government owned three shipbuilding yards, 51 merchant ships, 52 civilian factories, two munitions factories and 75 miles of railways.

Yet almost all these projects were a bust. The government's Fukugawa cement factory lost money. Its Shinagawa glass factory reported losses. The government never made money with Tokyo Gas Company. Government railroads cost twice as much per mile to build as private railroads. By 1892, private companies had built 1,320 miles of railroads, double the mileage of government railroads. The government tried to modernize iron mines in Kamaishi. They bought modern machinery, but they couldn't handle technical problems. The government spent 2.5 million yen and produced only 175,126 yen worth of iron before they closed down the operation. Although government officials believed shipyards were essential for protecting national security, they couldn't get the Nagasaki shipyards to do more than minor repair work.

The government couldn't even turn a profit in a traditional business like silk reeling. The most conspicuous failure was the grandiose Tomioka Filiature. It became a make-work scheme for hundreds of samurai daughters. Managers closed the factory to visitors, so they couldn't see how inefficient the place was.

As has happened so many times before and since, government officials didn't have a clue how to create value. They thought that money and technology were enough. They missed the crucial importance of detailed knowledge which was beyond their grasp, because it was dispersed among large numbers of local people, and it was continuously changing. Twentieth century governments with super computers haven't been able to master such details as problems with a proposed business location, how to avoid over-paying for various assets, how to recruit the most effective people, how best to motivate employees, how to get a reliable power supply, how to assure adequate product quality, what to do about product pricing, how to negotiate with distributors, how to handle marketing, how to manage inventory, how to cut capital costs -- these and myriad other details, which make or break a business, have always been beyond the grasp of centralized officialdom. Meiji government enterprises lost money because they botched details.

Many historians have suggested Meiji government enterprises were valuable "models" for technology, but they failed at that, because they didn't show entrepreneurs how to use technology profitably. Far from adding value, government enterprises consumed scarce resources. Losses meant that fewer resources were available for more promising agricultural as well as industrial ventures. Government enterprises were a drag on the economy.

Even if government enterprises had been successful, they were too small to warrant the generous attention they've received in historical accounts of the Meiji period. The government was never a significant employer. Government spending was estimated to be 12% to 14% of the economy -- comparable to Britain until World War I. Only about one-seventh of the population worked in manufacturing, the bulk of those in the labor-intensive textile industry which received little government support. During the Tokugawa period, long before the Meiji Restoration, there was a well-established trend for people to migrate out of agriculture and into manufacturing.

The government tried "targeting" private firms for subsidies, on the theory this would help spur economic development, but here again success required knowledge which was beyond the capacity of a few officials to master, regardless how smart they were. The government helped three merchant houses -- Shimoda, Ono and Mitsui -- but when special privileges were later withdrawn, only Mitsui survived. The government helped many samurai start businesses with subsidies. During the Japanese deflation of 1881-85, most of the subsidized samurai businesses failed.

The government awarded contracts, subsidies and monopoly privileges to companies which evolved into the giant zaibatsu conglomerates. For instance, because Minomura Rizaemon, chief executive of the Mitsui money-changing firm, had backed the Restoration government early on, Mitsui was awarded lucrative contracts to provision the army; Mitsui handled about two thirds of this business. Since the Restoration government considered shipbuilding a national security issue, it conferred monopoly privileges on Iwasaki Yataro who established the Mitsubishi zaibatsu and became perhaps the wealthiest Meiji entrepreneur. Hirose Saihei transformed Sumitomo from a stagnant copper monopoly -- apparently no innovations in 150 years -- into a streamlined producer. Sumitomo became a successful trading company which handled copper, coal, tea and silk.

Impressive as the zaibatsu became, there isn't much evidence that favoring these companies at the expense of others was a net gain for the economy. Monopoly privileges simply meant that consumers and taxpayers had to pay more to the zaibatsu than would have been the case in an open market. Subsidies encouraged lobbying and bribes, which is why companies receiving these favors were known as saisho -- or "political merchants", a derogatory phrase.

In any case, the zaibatsu didn't dominate the economy. At the end of the Meiji period, 1912, about 60% of Japanese still worked in agriculture. Japan's biggest exporters in the 1930s were unsubsidized silk and cotton producers. Indeed, during the postwar period, the first Japanese exports which the US government restricted were cotton textiles, not cars, consumer electronics or other glamor goods. American companies feared Japanese competitors because of their access to cheap labor, not because they were highly sophisticated.

William Lockwood, an economic historian at Princeton University, underscored the point: "The founding of large-scale industry in Japan, because of its political support, its strategic implications, and the striking contrast it offered with traditional Japan, attracted a good deal of attention from the outside world. But it was the expansion of Japan's basic economy -- agriculture and small-scale industry built on traditional foundations -- which accounted for most of the growth of national productivity and income during this [Meiji] period."

How effective was the government's spending on infrastructure? Railroads were costly and didn't directly affect many people. Hence, University of London economic historian G.C. Allen maintained that at least during the early Meiji period, "construction of 'dirt' roads, and the replacement of pack-horses and human porters by rickshaws and carts pulled by horses, oxen, dogs and men probably exerted a more powerful influence on the development of the new economy than railways."

The cost of all these industrial promotion schemes was borne on the backs of peasants. The land tax, enacted in 1873, provided as much as three-quarters of government revenue. It took almost 30% of what peasants produced. Tenant farmers paid taxes equivalent to about 60% of what they produced. As University of Hawaii economist Harry Oshima reported, such tax burdens "can only mean that for the vast majority of the farming population saving and investment were almost out of the question. Though savings and investment data are lacking, the frequency of disputes, uprisings and riots, the rise in unpaid taxes and land confiscated in lieu of tax payments, the increase in debts and mortgage foreclosures, and the rapid rise in the amount of tenanted land (from around 30 percent of the total cultivated land to 45 percent by the end of the Meiji period) were clear signs of the difficulties experienced by the majority of agriculturists in the period."

Moreover, industrial promotion schemes added to inflationary pressures, already serious because of pensions for idle samurai warriers and the cost of suppressing the 1877 Satsuma revolt of disgruntled samurai. Government debt soared from 55 million yen in 1876 to 254 million yen by June 1778. Rice prices doubled between 1877 and 1880. Government bonds plunged. Yen, expressed in terms of silver, fluctuated as much as 10% per day. Inflation fueled wild land speculation.

Retrenchment & privatization. A turnaround began with the appointment of Count Matsukata Masayoshi as Minister of Finance, October 1881. After surveying the financial mess, he concluded that bureaucrats had no place in trade or industry, because they couldn't compare "in shrewdness, foresight, and enterprise men who are acuated by immediate motives of self-interest."

Matsukata ended industrial subsidies, and in 1882 he began selling just about all enterprises except munitions factories. Determined to get these money-losers off the government's books, he was willing to accept whatever they might fetch, which often wasn't much. For example, in 1885 the entrepreneur Furukawa Ichibei paid 338,000 yen for the Ani Copper Mines on which the government had spent 1.7 million yen. The government had spent 350,000 yen developing the Shinagawa glass factory, but it sold for only 79,950 yen. The government had poured 2.4 million yen into the Mamaishi iron mine, but the results were so bad that it was shut down; in 1887 the entrepreneur Tanaka Chobei bought the remnants for 12,600 yen.

Matsukata used the proceeds from privatization to pay down the national debt. It declined from 245 million yen in 1880 to just 5 million yen in 1890. Government interest costs dropped accordingly. National budgets were covered entirely by taxes and fees.

Matsukata encouraged private banking to tap private sector savings. After several failed attempts, solvent banks developed. Yokohama Specie Bank, started in 1880, specialized in foreign exchange transactions. It provided financing for the growing export trade. Hypothec Bank (1896) handled agricultural lending. Hokkaido Development Bank (1899) financed enterprises on Japan's northern island. The Industrial Bank of Japan (1900) raised foreign as well as domestic capital for newly-privatized industries.

Entrepreneurs invariably outperformed government officials. For example, in 1870 the government had established Nippon Postal Steamship Company. But it did a miserable job compared to Iwasaki Yataro's new Mitsubishi Company. "While the Postal Steamship Company makes use of government protection and is boastful and overbearing," he declared, "we of the Mitsubishi strengthen our internal controls and go out of the way to please the people." Soon afterwards, Mitsubishi started competing with foreign companies, and it came to dominate Japanese shipping.

Bummei kaika. Initially, many entrepreneurs were eager to make money any way they could. They were brash, bold, ruthless and didn't mind cutting corners. But it soon became apparent that achieving big success required repeat business and therefore continuous cooperation with many people who were free to do business anywhere. The need for repeat business created strong, persistent incentives for moral behavior.

Joint stock companies promoted honesty by enabling entrepreneurs to raise capital without lobbying the government or paying bribes. These companies could tap the savings of a dispersed multitude. In 1884, there were a reported 1,298 joint stock companies with at least 1,000 yen of capital; a decade later, the number had jumped to 4,133.

Some formidable individuals wanted to make business an honorable profession, and the personal example they set had an enormous influence. They promoted the ethics of bummei kaika -- "civilization and enlightenment". Fukuzawa Yukichi was a prolific pamphleteer who argued that self-reliance, rational behavior, free trade and entrepreneurial profits were keys to Japan's progress. He relentlessly hammered at the Confucian hostility to commerce. His best-known work was Exhortations for Learning which went through 17 editions and sold over 3 million copies during the 1870s. A typical saying of his: "only if each individual becomes independent can the nation become independent." He introduced the ideas of Benjamin Franklin and other Westerners to Japan. Fukuzawa started Keio Gjuku, a school which encouraged Japanese to become entrepreneurs rather than bureaucrats; later Keio Gijuku became Keio University, one of the most respected universities in Japan. Fukuzawa started Maruzen, a trading company which, among other things, was -- and still is -- Japan's biggest book importer. He was the most important single influence for private sector modernization.

Western books about the moral dimension of markets enjoyed startling popularity. Samuel Smiles' Self-Help, translated as Saikoku-Risshi-Hen (1871), sold over a million copies. This book was followed by Smiles' Character (Seiyo Hinko Ron) in 1878 and Thrift (Seiyo Setsuyo Ron) in 1886. Benjamin Franklin's The Way to Wealth was published as Kanetame no Hiden (1879), and it did well. Among other popular Western books on the morality of markets were Daniel Defoe's The Complete English Tradesman, William Chamber's Moral Class‑book and F. Wayland's The Elements of Moral Science.

A private economic miracle. Many historians have talked about wise Japanese government officials doing this and that to plot the future of their nation. Yet few historians, obsessed with politics, seem to have recognized that Japan's extraordinary transformation was overwhelmingly the achievement of private individuals. Land was in private hands. Almost all enterprises were in private hands. Entrepreneurs and farmers created all the wealth in Japan, and the government spent much of it on samurai pensions, money-losing enterprises and a military build-up.

Competition forced entrepreneurs to introduce continuous improvements such as more productive seeds, rodent-proof warehouses, better accounting systems, electric lamps and gas engines for fishing boats. It's hard to name an important economic problem which wasn't resolved by determined and resourceful entrepreneurs, once they were set free.

Shibusawa Eiichi single-handedly did more than anyone else to promote sound banking practices and nurture entrepreneurial companies. The son of a farmer‑merchant, he joined the Finance Ministry which gave him an opportunity to visit Western Europe. He was astonished at the dynamic private sector which he believed was the key to prosperity. He quit the government and became a private banker. He served as mentor to perhaps a third of Japan's more than 200 private banks who sent him their people for training. He taught techniques which were familiar in the West but little-known in Japan: spread lending risks by placing a part of large loans with other banks; understand collateral and get enough of it; be prepared to help finance trustworthy, competent entrepreneurs even when the chips are down.

Shibusawa insisted that financiers had a moral imperative to encourage new business ventures. He started Japan's first paper company. Her started a cotton spinning company. He started three shipping companies. He had a hand in 45 railroad companies. Altogether, as investor, advisor, director or president, he was involved with more than 500 business ventures.

Kashima Manpei, a Tokyo cotton merchant, built Japan's first private cotton spinning mill. He did it to help drive down calico prices. Unlike government operations, Kashima never had losses.

The most successful Meiji silk reeler was an entrepreneur named Katakura Kentaro who started a small business on his farm. He developed the business gradually, as he acquired machinery and improved his management techniques. He sent his son to the United States so he could study the latest reeling methods first-hand. Katakura might not have attracted as much attention as the grandiose Tomioka Filiature, but by 1894 he was producing more silk.

While government officials flopped as silk exporters, entrepreneurs Sato Momtaro and Rioichiori Arai prospered. Sato, a business student, absorbed tremendous practical knowledge from American, English, French and Dutch aquaintances. When he was 13, his parents sent him to America. He arrived in 1867. He attended business school, then worked in a general store. After he gained some first-hand experience with business methods, he subleased part of the store to sell green tea, lacquer wares and other Japanese goods. He won a scholarship and moved East so he could attend Boston Technical School -- later this became the Massachusetts Institute of Technology. Ever alert to opportunity, he explored New York and there established a little store offering Japanese goods. He did well, but he realized that to dramatically improve his prospects, he'd need better sources of goods. He decided to form his own export business.

In 1875, he returned to Japan and began seeking business associates. Fukuzawa Yukichi cheered him on, saying it was his patriotic duty to develop export business. Sato didn't have much capital, but his family pledged their assets as collateral to buy 26,000 yen worth of merchandise for his New York business.

Fukuzawa helped Sato meet many entrepreneurs including Hoshino Chotaro who owned a silk mill. Hoshino encouraged his younger brother Riochiro Arai to contact Sato. Riochiro bought a second-hand suit for about two yen -- then worth about $4. Hoshino paid 260 yen to buy his brother a steerage ticket so he could help develop an export business. After three weeks of enduring buckwheat and pork fat, he arrived in San Francisco, March 26, 1876. Four more young men joined Sato's American venture: Date Chushichi, knowledgeable about ceramics; Matsuda Rinzo, for tea; Morimura Yutaka, general merchandise; and Suzuki Toichi, pharmaceuticals.

Carrying his sachel of silk samples, Riochiro called on prospective New York buyers. Some didn't want to deal with Orientals. Others had been cheated by disreputable Japanese merchants. It became clear to Riochiro that he would prosper only if he achieved a first-class reputation. He began by introducing quality controls, to make sure that the raw silk he imported didn't have extraneous materials added to increase weight. In May 1878, he booked a 400-pound order for delivery by September. A recurrence of European silkworm disease sent prices soaring. Riochiro honored his much lower contract price and lost over $2,000, but in the process helped establish a reputation as a honorable man.

Riochiro, Hoshino, Sato and their associates addressed all the practical details involved with building the business. They arranged for secure means of remitting funds to Japan. Riochiro and Hosino formed Jomo Kairyo Kaisha, a company to help develop thinner, more consistent quality silk thread and keep Japanese silk producers informed about American requirements, so that customers would be satisfied with their shipments. As these merchants prospered, they had ships built with special holds to provide more protection for their silk.

Rioichiro looked for opportunities to send American goods back in the ships. As Shibusawa Eiichi and other Japanese entrepreneurs were rapidly expanding their mechanized cotton mills, raw cotton seemed like a natural. Thus, Rioichiro began exporting American raw cotton to Japan. By 1910, about 25% of Japan's raw cotton imports came from America.

Such private initiative, not government industrial promotion, turned Japan into a prosperous commercial nation. Between 1874 and 1916, imports soared 824%. Exports soared 1,121%. Trade as a percentage of gross national product grew rapidly, reaching 23% by 1916.

The most important single factor in the Meiji boom was opening up. Free trade, wrote G.C. Allen, "by exposing the economy to pressures from outside, helped to bring about quickly a more efficient allocation of resources. Hence there was created the great export trade in raw silk. In the absence of foreign exchange earned by this trade, Japan would have found great difficulty in financing the imports of raw materials and capital equipment needed for her industrialization..."

Ironically, although free trade was crucial, forcing it on Japan backfired. The threat of force showed that Westerners would push around other people when they could get away with it. This humiliation ignited the flames of nationalism. The Japanese resolved to become a military power foreigners must take seriously. A popular saying of the Meiji era was Fukoku kyohei: "Rich country, strong army." Conscription was introduced in 1870. A military build-up proceeded apace. Japan displayed its new military power in successful wars with China (1894) and Russia (1905). Three decades later, militarism had completely displaced commercial considerations from Japanese government policy, and the result, of course, was catastrophe.

Postwar Japan redeemed itself from barbarism not by diplomacy and military might, but by peaceful commerce which had brought Japan into the modern world during the Meiji era.

See:

G.C. Allen, A Short Economic History of Modern Japan (London: Macmillan Press, 1981).

J. Hirschmeier and T. Yui, The Development of Japanese Business (London: George Allen, 1975).

Junjiro Amakawa, "The Spirit of Capitalism in Meiji Japan," Kwansei Gakuin University Annual Studies, XVII (November 1968).

William W. Lockwood, The Economic Development of Japan, Growth and Structural Change 1868-1938 (Princeton: Princeton University Press, 1954)

Edwin O. Reischauer and Albert M. Craig, Japan, Tradition and Transformation (London: George Allen, 1979).

Haru Matsukata Reischauer, Samurai and Silk, A Japanese and American Heritage (Cambridge: Harvard University Press, 1986).

Yukuchi Fukuzawa, Autobiography (New York: Columbia University Press, 1960).

Additional articles:

Wall Street Journal calls The Triumph of Liberty -
"a literary achievement"

Voices for liberty in the ancient world
The first yearnings to be free were expressed in Greek epics, tragedies and comedies

The man who helped finance the American Revolution
During desperate years, merchant Robert Morris came through with money and munitions so that George Washington could win

Ancient Roman contributions to private property rights
The Romans replaced tribal property with private property and worked out the details about how ownership should be proven and transferred.

How toleration developed in modern Europe and America
Courageous individuals defied the terrors of the Inquisition and denounced religious wars.

The story of Magna Carta
King John's wars and taxes stirred England's barons to protect their interests by rebelling against him, and they set an enormously important precedent for liberty which benefited everyone.

The best of H.L. Mencken, witty American defender of liberty
This prolific newspaperman and literary critic still entertains and enlightens us today.

How private enterprise created modern Japan
The government's railroads, shipping, silk-reeling and other ventures all lost money. Private entrepreneurs achieved wonders.

Runaway slaves!
Far from being contented and docile, American slaves dreamed of liberty, and thousands rebelled or ran away. Inspiring resistance to oppression.

The strange battle for the U.S. Bill of Rights
Those who initially wanted it ended up voting against it, and those who never wanted it made it happen

Why has liberty thrived in the West?
This is where enough people stuck out their necks for liberty.

"Honor is a harder master than the law"
At 58 and in ailing health, Sam Clemens (Mark Twain) was plunged $94,000 in debt by business failures. True to his word, he repaid everybody.

Liberty as a woman
Throughout history, liberty has been depicted as a woman on coins, in engravings, paintings, statues and more. Here are illustrations from ancient Rome, France and America.

Private initiative spurred vital discoveries throughout history
Language, geography, science and other essentials of civilization were diffused around the globe by private initiative.Political liberty impossible without economic liberty
The life and times of F.A. Hayek. The New Yorker called the twentieth century "the Hayek century."

Political liberty impossible without economic liberty
The life and times of F.A. Hayek. The New Yorker called the twentieth century "the Hayek century."

Thomas Jefferson in perspective
How can friends of liberty still defend him after the relentless attacks of historians and biographers during the last quarter century?

How markets nurtured our civilization
Many people seem to imagine that markets and commerce are only about money, yet they made civilization possible. They brought people into contact with new ideas and things. Civilization has flourished where commerce has flourished.

Most dramatic orator in the American antislavery movement
Although Wendell Phillips isn't as well known today as William Lloyd Garrison, the pioneering journalist for abolishing slavery, or Frederick Douglass who provided the most compelling testimony, Phillips was more effective than anyone else stirring crowds against slavery.

Socialism's greatest enemy
How this great Austrian economist recognized the fatal flaws of a government-run economy 7 decades before the collapse of the Soviet Union made it obvious to all that he was right.

They created the first modern agenda for liberty
Dubbed the "Levellers" by their adversaries, these mid-17th century English rebels championed private property, religious toleration, freedom of speech, freedom of the press, free trade, a rule of law, a separation of powers, a written constitution, and they opposed military conscription.

William S. Gilbert's wicked wit for liberty
Most quotable lines by the dramatist whose comic operas, created with composer Arthur Sullivan, are still going strong after more than a century (reportedly performed more than the work of any other songwriting team except the Beatles). Mark Twain and H.L. Mencken enjoyed Gilbert's barbs at bureaucrats and politicians.

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