A Changing Market Environment

After World War I, heavy industry, which hitherto had constituted a minuscule sector submerged by a sea of agricultural and light industrial enterprises, emerged as the driving force, the engine, of Japanese economic growth. As a result the era of balanced growth ended. And a new epoch characterized by wide and widening differentials in wages and labor productivity between the heavy industrial sector and the rest of the economy commenced.

The new market environment brought down once and for all the curtain on the system of Tokugawa entitlements. Why? Recall that Tokugawa entitlements had supplemented a set of market institutions that had automatically built in—through incentives—a considerable amount of health protection for employees. Indeed, in the case of the majority of workers in Tokugawa Japan the "employer" and the "employee" were really inseparable since the enterprise for which the latter worked was the family into which he or she was born. The entitlement system was therefore oriented to providing insurance for households that were also enterprises so that they could continue to stay in operation. Since most enterprises engaged in rice cultivation and rice was ultimately the basis for taxes and for stipends for the samurai, entitlements were focused around rice. Entitlements basically involved transfers of rice and were aimed at dealing with short-run fluctuations in supply and demand at the local level, with market price serving as a barometer for

this supply/demand balance or lack of balance. Most ikki protests, most conflicts between landlord and tenant, ultimately had their origins in local conflicts over the distribution of rice. Entitlements were balkanized and therefore conflicts over them were also local.

But the trends underlying and leading up to the new market environment made a mockery of the Tokugawa system of entitlements. First of all, with the growing breakdown within the labor market of the industrial sector of enhancement of population quality, the assumption that matters could be left to enterprises was no longer credible. And even more important was the decline in the proportion of the labor force working in agriculture, and within the farming sector itself the decline in farming income relative to total income. As long as domestic rice production expanded rapidly enough to satisfy a population that, increasingly, was engaged in pursuits other than producing rice, the government allowed the farmer to enjoy the benefits of a healthy expansion in demand in the form of favorable—favorable to farmers, that is—movements in terms of trade of agricultural products vis-à-vis manufactured products. But as best-practice Tokugawa agricultural techniques diffused throughout the countryside, growth in agricultural productivity began to falter. It became apparent to a government concentrating its focus on the building up of production of iron and steel, chemicals, and transportation equipment that relying on domestic sources for foodstuffs might hamper the speed with which the nation could turn toward nonagricultural pursuits. The Rice Riots of 1918 heralded the end of an agricultural policy aimed at solving the problem of food supply for urban industrial regions through technological progress in domestic agriculture. The government began to aggressively promote the importation of foodstuffs, especially rice, from its colonies, Korea and Taiwan. In short, the central government adopted a policy that inevitably depressed either the level or growth of domestic rice prices relative to manufacturing output price levels and growth rates.

The political tilt toward industrial districts created havoc with the traditional concept of entitlements for two very important reasons. It made clear that the government was now sufficiently satisfied with domestic conditions in farming—of the ability of agricultural villages to avert subsistence food crises—that it could turn the principal focus of its food policy away from promoting domestic productivity to guaranteeing to the growing legion of industrial workers that prices for basic food staples would remain fairly stable relative to nominal wages. In effect, the government was trying to solve the growing population quality

problem caused by the gradual breakdown in health-enhancing labor market institutions within industry with its rice import program. In weighing the needs of the industrial sector against those of the agricultural sector the central authorities came down on the side of industry, effectively transforming the rice price question from an agricultural into an industrial entitlement issue. Moreover, partial justification for this policy twist was the fact that agricultural crises occurred with diminishing frequency and ferocity. And a corollary of this was the fact that tenants benefited less and less from the entitlement insurance traditionally offered by landlords since the probability of harvest failure was steadily in decline. Thus the two mainstays of Tokugawa entitlement insurance, which had been falling into disuse even during the last decades of the balanced growth era, now ceased to exist altogether. The result was rural rebellion—limited perhaps, but rebellion nevertheless—as the rural sector, especially its poorer segments, began to aggressively voice its discontent with the attention shown to the industrial sector and the almost exclusive attention now being devoted to building up a new system of entitlements to cope with the social problems of manufacturing. The increasing policy of according wage premiums to male workers in heavy industry served to further fan the flames of rural discontent.

The wrenching changes experienced in the structure of labor markets can be seen in table 19. First consider wage differentials in panel C of that table. The premium enjoyed by male industrial workers both over male workers in agriculture and over female industrial employees sharply and decisively increases during the interwar period, especially during the 1930s. In response to the changes in relative wage ratios for males and females in industry and in agriculture, which in turn reflects the surge in demand for males in heavy industry, farm families began to change the sexual composition of their labor forces. This is apparent in panel A of the table: the number of male workers declines with some fluctuation until the mid-1930s and then precipitously drops thereafter as the number of female workers increases, most dramatically after the mid-1930s. Female workers, who constituted the backbone of the low-wage/low-skill light industrial labor force—and increasingly this was the case as a glance at the percentages of cotton spinning hours worked by females confirms—were in a sector of manufacturing that was declining in importance relative to high-wage/high-skill heavy industry, which was becoming the new growth engine. The expansion of heavy industry as represented by machinery production and the contraction in textile production is clearly seen in the bottom right-hand portion of

panel C. In short, a new labor market structure was emerging and an old labor market that had much in common with that of late feudal Japan was dying.

But drastic structural change was hardly limited to labor markets. It was also apparent in product and in capital and land markets. Consider the sharp fluctuations in the terms of trade between agriculture and manufacturing: during the late 1920s the rice price and the price level of a general bundle of foodstuffs sinks; and then it soars during the late 1930s. The uncertainty of getting an acceptable harvest had now been replaced by the uncertainty of the income one could secure from that harvest. Among the industrial products declining in price relative to agricultural prices is the output of the chemical fertilizer industry. Note from panel A of table 19 that the prices of nitrogen-based fertilizer fall relative to land prices while wages rise—with some fluctuation—relative to land. A rise in the cost to farming families of labor relative to land brought on by a vigorous expansion in demand for labor within industrial production should encourage households to substitute factors for labor that are becoming, in relative terms, comparatively cheap. And trends of this sort are evident from panel A: fertilizer and machinery inputs are increased (the changing terms of trade encourage this after the early 1930s) and labor input in terms of number of workers is decreased. Because of a secular trend toward improvement in population quality, adult workers are better able to work and hence workdays per worker increases somewhat, but labor productivity increases even faster, each hour of work garnering more real output because of the quality improvements in the labor input and because labor now works with more fertilizer and with more machinery. In short, interwar agriculture was by no means incapable of productivity growth.

But while it was not incapable of generating growth, the returns to investments in agriculture were now, in the new market environment, far less potentially remunerative than those that one might secure from industrial investments. The rapid expansion of the six big cities evident from. panel D is testimony to the feverish activity centered around new heavy industrial enterprises in the major metropolitan conurbations. This is one reason wealthy landlord families—the very households that pioneered the diffusion of best-practice techniques and the construction of social overhead capital in the countryside like roads and drainage ditches—now turned away from rural pursuits and began to invest funds and time and energy in the newly developing industrial sector. Hence in the new market environment landlords had little, if anything,

to offer since they were no longer spearheading the drive for improvements in the countryside; they were not even particularly interested in the problem of how to redress the growing imbalance in entitlements as they saw their fate now tied increasingly to investments in urban industrial enterprises, and moreover their entitlement insurance was hardly needed. Is it surprising, therefore, that their tenants now turned against them?