The Review of Austrian Economics, 15:2/3, 175–197, 2002.
2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
The Postwar Japanese Political Economy
in an Exchange Perspective
SHIGETO NAKA firstname.lastname@example.org
Faculty of International Studies, Hiroshima City University, Hiroshima 731-3194, Japan
Abstract. Early postwar Japan represented a Coasian social contract between an unproductive majority and a
productive minority. The contract was possible and enforceable due to the American Occupation of Japan. It
was socially desirable because it induced economic growth. It was self-enforcing due to speciﬁc Japanese condi-
tions. However, the contract became socially undesirable as Japanese economy matured and the initial conditions
changed, contributing to an increase in rent seeking. It also became unenforceable because the distribution of sur-
pluses became more difﬁcult as economic growth declined. As contractual enforcement mechanisms weakened,
dynamic rent seeking activities further reduced Japanese economic growth rate (JLE# D72).
Key Words: American occupation of Japan, postwar Japanese political economy, Coasian contract, dynamic
I propose a hypothesis to explain the early growth and subsequent slowdown of postwar
Japan from a political exchange perspective. I argue that a Coasian social contract emerged
in the Japanese political market under the American Occupation. The contract persisted until
early 1970s due to the unequally apportioned, multi-member electoral district system for the
lower house of the Japanese legislature, the Diet. However, since the 1970s this governance
system has hampered Japan’s ability to implement much needed structural reforms to the
The Coase theorem asserts that parties to an externality may spontaneously reach a
socially desirable agreement, provided that the transaction costs are negligible. An analogy
applies to the postwar Japanese political setting: due to speciﬁc conditions, the majority
coalition and minority coalition reached an implicit social contract that was both socially
desirable and self-enforcing. Speciﬁcally, I argue that this contract was socially desirable
given Japan’s demographic and historical conditions at that time. Further, I maintain that it
was self-enforcing due to Japan’s unique electoral district system. Finally, I argue that the
contract became undesirable and unenforceable when the Japanese economy matured and
economic growth slowed.
Since 1955, Japan’s electoral system consistently elected conservative Liberal Democratic
Party (LDP) representatives from many rural and semi-rural districts to the lower house.
I am grateful for useful comments by anonymous referees. Gary Anderson, Tyler Cowen,Mark Crain, Bill Shugart,
and Mark Toma gave me useful tips for the paper. Bob Tollison and Ulrike Woehr encouraged me on this project.
I am indebted to Peter Boettke, Wayne Brough, and Trey Fleisher. Any error in the paper is my responsibility.