The Depressing Effect of Agricultural Institutions on the Prewar Japanese Economy

"The Depressing Effect of Agricultural Institutions on the Prewar Japanese Economy" by Fumio Hayashi and Edward C. Prescott (Journal of Political Economy, 2008, vol. 116, no. 4).

This paper attempts to address the question of why the "Japanese miracle" did not occur before the war. It starts out with the premise that "for much of the prewar period of 1885-1940, Japan's real GNP per worker remained a third of that of the United States."

The idea here is that, essentially, since first sons of farmers were basically required to take up farming, the number of farmers stayed the same. This constancy in the number of farmers preserved inefficient, small scale farming techniques, and locked up too much of the labor force for the country to fully industrialize and urbanize.

Some interesting implications are: 1) If this is the case, then perhaps it was nothing more than the breaking of this agricultural tradition which allowed Japan's economy to flourish in the decades after the war; 2) Perhaps, had Japan "solved" this "problem" sooner, it would have had a greater industrial output before and during the war, possibly prolonging or even changing the outcome of the war.

My personal assessment is that, were Japan's industrial output to have been 25-50% higher from about 1935-1945, there would have been more American casualties, the war would have cost far more for the US in terms of money, and would have left Japan in possession of some of the easternmost of its Pacific acquisitions. It is not unrealistic to speculate that the West Coast of the US might have been attacked more heavily under such a scenario.

Specifically, using a two-factor neoclassical growth model and assuming that labor constraints were a major factor in constraining Japan's growth, the paper's model predicts that prewar output would have been 32% higher in Japan without the labor constraint.

A major problem with this article is that it presupposes the postwar output was somehow the "real" or equilibrium output and that prewar Japan was simply failing to achieve it. It is also very possible that Japan was overachieving during that post-war period, however, which would invalidate this entire analysis. They do address this issue, but somewhat inconclusively, in my opinion. Other ways of stating this problem are: "maybe the average productivity of labor in Japan was unusually high during the miracle" or "maybe the traditional one-third to capital, two-thirds to labor split" was strongly and exceptionally violated during the miracle.

Another major problem with this article is it is difficult to separate the confounding factor of technological change from the anthropological issue of first sons staying on farms. For example, the tractor was not introduced into japan until 1955. Perhaps the impact of the tractor in Japan was particularly large, and this accounts for some or all of the pre-to-post-War disparity.