Market System, Planned System and Social System

Economic systems are usually classified into public sector versus private sector, or planned system versus market system.

A conventional mixed economy means a mixture of the private sector (B in Chart 21) and the public sector (A in Chart 21) or a mixture of the market system and the planned system.

The welfare state is a well-known example of a mixed economy of the private free market system and the democratic planned system. Governments intervene in the economy to mitigate market failures and other weak points of the market system. Keynesian economic policy was introduced to overcome the economic depression and unemployment and to maintain stable economic growth and full employment. Social security and social services have developed to redress or mitigate the inequality of income distribution and to improve the well-being of people.

However, when the government sector expands too much, political failure (note6) becomes more apparent than market failure. Reconsideration of the welfare state is then required.

The mixed economy of Japan is, however, somewhat different from the European one in that social and informal systems play a more important role in providing services and integrating economic agencies (Rose & Shiratori eds., 1986). It may be called a plural economy of three systems, namely, (A) planned system (government sector), (B) market system (economic sector) and (C) social system (informal sector). As the Japanese model of welfare state attaches importance to the market and informal sectors as providers of welfare, it should be called "welfare society." The main features of each system and its governing function are shown in Chart 21. (Maruo, 1984). Of course, every country has components of these three systems. The difference is the relative size of each system or sector. The social and informal system plays a more important role in Japan and some Asian countries than in other industrialized countries. The informal system plays a larger role than in industrialized European countries in providing, for example, social welfare services and education (Rose and Shiratori, 1986).

For example, government interventions in industry are sometimes informal. Some companies accept retired government officials into top management at the informal request of related government departments. This practice is called "amakudari."

Within the market sector and companies, too, the role of social and informal system in Japan is important.

So-called implicit contracts between employees and management (relation i in Chart 22) in Japanese companies are a well-known practice.

Implicit contracts among them are informal contracts based on mutual understanding and trust. The lifetime employment system is an example of an implicit contract between employees and management. According to the Japanese Labour-Management Relations Law, a formal contract on employment tenure of more than one year is not valid. Still both employees and management implicitly accept lifetime employment as a conventional practice. The seniority wage profile is also based on implicit contract.

The practice of conducting business on a long-term basis between affiliated companies in the same business group and mutual share holding (cross-share holding) is usually based on implicit contract. Chart 21 illustrates the mutual relations between a large Japanese company and related banks and firms based on informal contracts and practices.

Economists have tried to explain these social relations by economic analyses in terms of the transaction costs theory or the repeated game theory. To some extent, economic explanation of social factors is possible. Still, there remain some fields where the microeconomic foundation based on the assumption of self-interest is problematic and limiting. Social factors, such as trust and reciprocity, are assumed to play important roles. (For example, see Fukuyama, 1995). In the field of social welfare, not only in Japan but also in European countries, "the notion of welfare mix" has become a catchword (Evers & Svetlik, eds.). Professors Richard Rose and Rei Shiratori are pioneers in creating and spreading this notion (Rose, 1984; Rose and Shiratori, 1986).

At first glance, the state of welfare in Japan looks like a model of welfare mix or welfare pluralism. However, the welfare mix is not a mere mixture of political, economic and social systems. It is an optimum mixture of the three systems at certain budget restrictions to achieve the most important welfare needs. The optimum means the best mixture where marginal social utility per expenditure in each system is equal. As each system has inherent merits*(see Table 5), it will be possible to improve the well-being of people by combining those merits. Though microeconomic foundation of the optimum welfare mix is not so difficult, the actual optimum mix will differ from nation to nation and according to economic development. Therefore, it is difficult to define the optimum composition of the three systems in numerical terms. Still, it is usually assumed that in Japan resource allocation for personal social services for the elderly and disabled, and for government support of working mothers is far from being optimum. If more resources are allocated to those measures, the well-being of the elderly and care-givers at home will improve markedly. Opinion surveys in Japan support this assumption (note7).

On the other hand, Japanese and other Asian people wonder why in Scandinavian welfare state the roles of private firms and the informal sector are so limited. The new model of the welfare society will pursue the optimum mix of three systems in Table 5.

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