Introduction

This chapter analyses the relationship between the input of capital and economic growth in Japan during the past century. Our presentation follows the broad framework set forth by Solow and Temin in the introductory chapter and is complementary to the next two chapters (by Taira and Yamamura), which deal with the inputs of labour and entrepreneurship.

The assigned task of exploring the role of investment in Japan necessarily imposes a certain sectoral as well as temporal emphasis. Only relatively little attention will have to be devoted to agriculture, since this sector never became an important recipient of either public or private capital. In Japan, at least, an understanding of the advances created by a rising level of investment deals largely with the growth of modern non–agricultural industry. This also means that (unlike Taira and Yamamura) we must concentrate especially on the history of the twentieth century, when factories, machines, and new social overhead implements reached sizeable dimensions for the first time. Of course, no attempt will be made to slight the crucial transitional years of the Meiji era or even the preceding years of Tokugawa rule, but one should always keep at the forefront the sharp distinction between the hesitant beginnings of economic modernization in the late nineteenth century and its full flowering during the past sixty–odd years.

Entrepreneur or Manager?

Regulation has been the substitute for entrepreneurship in Russia during the thousand years of its recorded economic history, and in the past five decades regulation has eliminated entrepreneurship altogether. The state cannot be considered to be the entrepreneur because this function can be exercised only by its citizens: Peter the Great established a framework of controls and incentives which induced the freemen among his subjects (and a very few foreigners) to act – and to continue to act – in new ways; Stalin's system, by contrast, prevented anyone from departing from the path which he or his officials defined as progressive. Since the First Five–year Plan, personal autonomy in the taking of economic decisions – a necessary feature of entrepreneurship – has not been permitted, but in the quarter-century before that deprivation every citizen had had the right to become an entrepreneur. In both earlier and subsequent times, however, the farm worker had much less liberty than the rest of the population. The serfs had been emancipated in 1861, but for another hundred years the country remained a predominantly rural society; townsmen, less than one-sixth of the total at the start of the century, came in 1961 exactly to equal the number of villagers, whose history had been one of uninterrupted restriction until the reform of 1906 and the Revolution of 1917. By determining the actions of those in their service, both Tsarist and Soviet governments have imposed the productive dynamism they desired.

Introduction

In the present state of our knowledge, any piece of economic history bearing the title ‘Capital Formation in Germany in the Nineteenth Century’ certainly deserves a sceptical reaction from its readers. Much basic research remains to be done before the quantitative information that title implies will be available. Recent specialized investigations into the question have stressed the difficulties in the way of obtaining a general picture, especially for the early part of the nineteenth century. German agricultural history, for example, has focused too strongly, according to one expert, on describing the experience in individual regions and branches.

The variations between individual groups of peasant farmers – differentiated according to tenure rights (and thus according to tax or debt burden), quality of the soil, size of enterprise, as well as other criteria – were so great that one may well assume that there were large variations in agricultural income and hence in the possibilities for capital formation. Individual investigations which are limited to a few farms or villages either can reflect and confirm the broad development trends that affected production techniques, marketing conditions, or consumption in all farms, or can reflect an exceptional situation.

In a more general survey, Knut Borchardt's scepticism seemed to go still further, when he labelled any attempt to estimate the national wealth as more or less ‘jesting’, since short-run price variations would tend to dominate the few observations one could hope to make.

Concepts and Scope

The definitions used in this Chapter have to meet two requirements. First, they must be applicable within the whole period under discussion. They must be flexible and broad enough to subsume the tremendous changes occurring within entrepreneurship and management from the late eighteenth century to the twentieth. However, they need not be so broad and abstract as to cover all types of entrepreneurs and managers in history. They should rather be framed with regard to characteristics of the German economy which remained constant through this whole period (without necessarily existing at other times and places) and which were, at the same time, of central importance for the development of entrepreneurship and management. Such a characteristic we find in the fact that this has been, and – for the larger part of Germany – still is, a period of industrialization structured according to capitalist principles. The general features of industrial capitalism which are most central for the study of entrepreneurship and management during the whole period are (a) a factory system which is characterized by power-generating and manufacturing machines, by large amounts of fixed capital, by maturing techniques on an increasingly scientific basis, by the separation between organizational and operative functions, and by contractual labour working under centralized managerial authority, not at home, according to elaborate patterns of labour division; and (b) largely independent and autonomous business enterprises on the basis of the private ownership and control of capital, which is used for the production of goods and services and their sale on the commercial market, according to the criteria of profitability; business enterprises relate to each other mainly through market mechanisms.

The purpose of this volume is to advance our understanding of industrial development by describing the progress of what economists call the ‘factors of production’, i.e. the inputs out of which food, clothing, and shelter are made. It is by no means clear, however, that the increase in our ability to produce food, clothing, and shelter that we call ‘the industrial revolution’ was a direct result of an increase in the factors of production. In fact, the relation between the traditional factors of production – land, labour, and capital – and the ability of an economy to produce is far more complex than the use of the words ‘inputs’ and ‘outputs’ might suggest. We therefore introduce the discussion of the factors of production by an attempt to set forward the relations between these factors and industrial development that is the subject of this book.

It is a great abstraction to talk of the economy as a whole and of only a few factors of production. The uses of such an abstraction are obvious: it enables us to make generalizations, to compare countries with each other, and to direct our research into areas of potential usefulness. But there are also limitations to this usefulness, limitations that are directly related to the ability of this abstraction to tell us something interesting about a complex world. The relationship between the factors of production and the process of industrialization to be described shortly holds good only under a variety of restrictive assumptions.

The General Argument

Until quite recently, studies of capital formation in France were few in number and relatively cursory. This lacuna was of little importance: it seemed that the findings to be expected of such research were already well known. It was thought that the level of economic growth and of investment had remained below the level which technical advance made it possible to reach – or so it seemed from a comparison with the relevant figures for other countries or even with those for France during the earlier part of the nineteenth century. For of all the countries that underwent industrialization France was one of the few to experience an early and lasting break in development. François Perroux was the first to identify the problem. ‘About 1860’, he writes, ‘there appeared the first signs of a slowing-down of the economy; from 1880, this became a pronounced trend.’ The rate of growth fell, and this falling-off had long-lasting effects on the economy, for during its early stages – the period 1892–1914 – the second phase of industrialization was ‘much less vigorous than the first’. Various arguments have been put forward to explain this deceleration. Two of them, related to the state of the economy, have gained general acceptance in the past.

Underinvestment, runs the argument, was connected, in the first place, to the shortness of the periods during which long-term planning was possible. At the very beginning of the nineteenth century, France already laboured under this disadvantage: the stagnation of agricultural productivity and the decline in international trade had paralysed industry throughout the thirty years of insecurity and of war which lasted until 1820.

Introduction

Since the Second World War the effort to understand the process of economic growth has been a major preoccupation of the social scientist. During this quarter-century those economic historians investigating this complex phenomenon have tended to follow the lead of the late T. S. Ashton by according a critical significance to the entrepreneur; and with their growing disenchantment with the strategic roles of natural resources and capital in economic development, economists too are increasingly promoting entrepreneurship and the supply of managerial ability to a position of greater and greater importance. More and more attention is being given to the economic and social circumstances favourable to increasing the supply of entrepreneurs, and the investigation of these circumstances is becoming ever more sophisticated. Economic historians and sociologists have identified a number of beliefs, attitudes, value systems, climates of opinion, and propensities which they have found to exert a favorable influence on the generation of enterprise and of developmental initiative. They have also stressed the role of minorities and of deviant behavior in the formation of entrepreneurial groups. [And] joining in the search,… psychologists have recently undertaken to establish the dependence of development and of entrepreneurial activity on the presence of achievement motivation.

These interrelated explorations leave the student of the phenomenon of entrepreneurship both stimulated and not a little bewildered. The arguments advanced by both sociologists and psychologists are often fascinating, but the majority of them are as yet imprecise, chronologically ill-fitting, and empirically insubstantial.

THE THEORY: EARLY PROPOSALS FOR SELF-STRENGTHENING

The suppression of the rebellions during the T'ung-chih period enabled the Ch'ing dynasty to survive for another half century, even thought China's international position on the whole worsened after the treaty settlement of 1860. The humiliation of the Anglo-French occupation of Peking could not easily be forgotten by the statesmen who lived through the event. However, not until the mid-1870s did the rise of Japan and European encroachment again make a foreign war likely. The intervening years of peace gave the Ch'ing government an opportunity to build its military and financial strength in preparation for future confrontation with the powers. Such strength was of course also valuable for the maintenance of internal order.

Beginning in 1861, the phrase ‘self-strengthening’ (tzu-ch'iang) appeared frequently in memorials, edicts and the writings of the literati-officials. It expressed the realization that a new policy was needed to meet the unprecedented change in China's position in the world. A considerable range of activities was proposed toward this end, but not all the proposals were put into effect, and among them, not all were carried out successfully. In time, ‘self-strengthening’ became less a rallying cry for genuine efforts at innovation than a shibboleth that served to justify expenditures and vested bureaucratic interests. Domestic order was in general maintained: numerous local outbreaks were easily suppressed. But China's defeat in the Sino-Japanese War of 1894—5 revealed the failure of a policy proclaimed to be for defence against foreign powers.

INTRODUCTION: THE OLD ORDER

In the course of 2,000 years the Chinese historical record accumulated so voluminously that bibliography early became a specialty. Historians of China, both Chinese and foreign, have constantly produced bibliographies in the effort to avoid drowning in the flood of historical literature. For the English-reading public the quickest starting point is in the bibliographies attached to survey texts written for the obviously intelligent but unfortunately ignorant beginner. Most recently available are the reading lists in Immanuel C. Y. Hsu, The rise of modern China, and Paul H. Clyde and Burton F. Beers, The Far East, a history of Western impacts and Eastern responses, 1830-1973. In one survey there is even a fifty-page essay on 650 books on China, mainly modern; see John K. Fairbank, The United States and China. For the present introductory chapter, the most recent background study, with selected bibliography, is Charles O. Hucker, China's imperial past: an introduction to Chinese history and culture.

In July 1864, when the Taiping capital of Nanking was finally reduced by Tseng Kuo-fan's forces, many among China's scholar-official ruling class were already congratulating themselves on having witnessed a rare phenomenon in history - a dynasty that had reigned more than two hundred years, had seen glorious days and then declined, yet was able to defeat widespread and formidable rebellion. This was described in traditional historiography as restoration (chung-bsing, lit. ‘again rising’ or ‘rising at mid-course’), and it had occurred in but few instances since ancient times. The parallel often cited in the 1860s was the T'ang restoration in the reign of Su-tsung (756–72), when the great An Lu-shan Rebellion was suppressed.

In historical perspective, the Ch'ing restoration was perhaps even more remarkable than that of the T'ang. The imperial commanders of the eighth century were not far removed from the military-aristocratic culture of the Northern and Southern dynasties (317–589), but the scholar-officials of the late Ch'ing vanquished the Taipings in spite of more than a millennium of increasingly stultifying literary culture. Moreover, while the T'ang restoration saw the rise of virtually independent satrapies, Ch'ing imperial authority survived the rebellion largely intact: provincial governors-general and governors gained greater leeway in administration but nevertheless continued to depend on the throne's favour for their tenure of office. Just as T'ang Su-tsung had received aid from the Uighurs of central Asia, so the Ch'ing of the early T'ung-chih period profited by the direct and indirect assistance of the Western ‘barbarians’. But while the T'ang could count on the superior culture of the Middle Kingdom to overawe and even to assimilate their alien helpers, China in the nineteenth century was confronted by foreign peoples from overseas who not only were unassimilable but who also possessed a material culture superior to China's own.

HISTORY AND CHINA'S REVOLUTION

The history of modern China – what is now thought to have happened there – is full of controversy. Major events are known but their significance is disputed. Meanwhile many minor events remain unknown or disregarded.

The first cause of controversy is widespread historical ignorance due to the lack of a generally accepted body of research and writing in this under-developed field. I say ‘historical ignorance’ because the task of history is to understand the circumstances, motives and actions of all parties concerned, and an unbalanced knowledge, of one side only, may leave us still quite ignorant of the other side in a conflict, and therefore less able to comprehend it.

For example, British documents on the Opium War of 1840-2 were published extensively at the time, but Chinese documents not until ninety years later, in 1932. Moreover, the documents of both sides give primarily official points of view; the wartime experience of ordinary Chinese people was less well recorded and has been less studied. Even this seemingly well known event is still imperfectly understood. For instance, how far were Chinese local people merely passive spectators of Anglo-Ch'ing hostilities? How far were they moved to patriotic resistance? Opinions and instances differ.

A second cause of controversy is the broad cultural gap that separated the major historical protagonists – not only the cultural differences in language, thought, and values between the foreign invaders of China and the resistant Chinese ruling class in the nineteenth century, but also the similar differences between that ruling class and the great mass of the Chinese people, once they became revolutionary in the twentieth century.

ORIGINS AND DEVELOPMENT

The Taiping Rebellion (1851–64) was in many respects the hinge between China's pre-modern and modern histories. Its gigantic human catastrophes in the interior formed a backdrop for early Sino-Western treaty relations along the coast, and, along with the treaty system itself, gave notice of the imminent collapse of China's traditional order. Some themes of the rebellion had deep historical roots, while others grew from problems peculiar to the Ch'ing period. The enormities of social injustice, the decline of imperial and local administration, and the loss of bureaucratic morale are themes common to dynastic crises. Soaring population growth and massive internal migration were Ch'ing problems whose effects had been felt in social disorder and inter-ethnic conflict since the eighteenth century. Yet foreign contact itself had provided a new historical catalyst: an alien religion that generated a furious assault on China's existing social structure and values. The way this assault was met by the ruling elite conditioned the political and social environment of China's modern history.

The social background

The anarchy that gripped Kwangsi province by the 1840s stemmed partly from the disruptive effects of foreign contact, and partly from the region's unique social complexity. From 1795 to 1809 the south and south-eastern coasts had been scourged by bands of pirates, some sponsored by impecunious rulers of Annam (Vietnam). In Kwangsi these corsairs forged onshore links with Triad chapters (see chapter 3, p. 134), and a complex pattern of outlawry began to emerge. It was not long thereafter that the south China underworld entered the more lucrative field of opium distribution, as the drug traffic began to flourish in the 1820s and 1830s.

PERSPECTIVES ON THE TREATY SYSTEM

The unequal treaty system was set up in China at a time when the Chinese common people did not participate in a national political life. In the middle decades of the nineteenth century they were still schooled in the traditional ways of Confucian culturalism: government was an affair of the emperor and his officials, supported by the local élite. A modern type of nationalism received little expression under this old order. Instead, the Ch'ing regime was primarily concerned to retain the loyalty of the Chinese landlord-scholar ruling class and with its help to suppress any disorder or anti-dynastic rebellion that might arise among the rural populace. In this context the pacification of British rebels on the seacoast was at first a marginal, relatively minor problem. The Ch'ing aim in the late 1830s had been simply to stop an evil, the Anglo-Indo-Chinese opium trade.

This trade, constantly supplied by the British government opium manufacture in India, was to have a life of more than a century, until given up in 1917. The most long-continued and systematic international crime of modern times, it provided the life-blood of the early British invasion of China. For the first war the leading opium traders not only helped Palmerston work out the aims and the strategy, they also supplied some of the wherewithal: opium vessels leased to the fleet, captains lent as pilots and other staff as translators, hospitality always available as well as advice and the latest intelligence, and silver from opium sales exchanged for bills on London to meet the army and navy expenditures.

Traders came to China in the nineteenth century to extract profits. Diplomats and soldiers came to extract privileges and concessions. Alone among foreigners, Christian missionaries came not to take but to give, not to further their own interests but, at least ostensibly, to serve the interests of the Chinese. Why, then, of all those who ventured to China in the last century, was it the missionary who inspired the greatest fear and hatred?

If there is any one answer to this question, it is that the missionary was deeply – and unavoidably – committed to the proposition that the true interests of the Chinese people could be served only by means of a fundamental re-ordering of Chinese culture. Catholics and Protestants, liberals and conservatives – all shared in this commitment. Where they differed was less in ultimate goals than in the tactics to be used in pursuing these goals. China's conversion was their common object, and in the end they would be content with nothing less.

The vast majority of missionaries, Protestant and Catholic, were intolerant of Chinese culture and unwilling or unable to make meaningful adjustments to it. They devoted themselves tirelessly to religious proselytizing and tended to relegate secular change to a position of secondary importance. Although narrowly conservative in personal and religious outlook, their impact on the Chinese scene was the very opposite of conservative. For these were the missionaries whose demands on the native culture were the most unyielding – and hence, from a Chinese standpoint, the most overtly iconoclastic.

FAILED EFFORTS TO EXPAND COMMERCE

As the only European power active in Inner Asia, Russia held a special status in the Manchus' firmament. The Treaty of Nerchinsk in 1689 had loosely defined a border and had established the principle of equality between the Ch'ing and Muscovite empires. Three preliminary agreements and the Treaty of Kiakhta in 1727 had extended the boundary line farther west and appointed two places for Russian trade: Kiakhta on the northern frontier of Mongolia, and Tsurukhaitu (Curhaitu) on the Manchurian frontier near Nerchinsk. At both these places Ch'ing and Russian merchants could carry on duty-free trade, but Tsurukhaitu failed to develop as a commercial centre, so that virtually all the legal private commerce came to take place at Kiakhta. In short from the 1720s Russia possessed a market for Sino-Russian private trade in which both sides communicated on terms of equality. It would take Britain and the other Western powers until the 1840s to obtain such conditions on the China coast.

In addition to the Kiakhta trade, Russia could send a caravan to Peking every three years, on the understanding that the caravan leader would perform the Chinese tributary ceremonies, and Russia was allowed to maintain an ecclesiastical mission in Peking. Apart from these concessions, the Ch'ing excluded all Russians from the Middle Kingdom.

Russia's official caravans were not profitable enough. Smuggled furs glutted the market in Peking. Russian exports secretly bypassed Kiakhta and found their way to Urga in Mongolia and to Naun in Manchuria, while Chinese goods bypassed Kiakhta on their way to Irkutsk.