Evolution of Economic Systems: The Case of Japan

In this paper we shall provide a theoretical overview of what we are the main sources of their evolution and what are the chief implications of focusing around institutions and economic systems. For the former, we identify innovation, adaptation for environmental changes, international interactions and coordination as main sources. For the latter, we distinguish two different mechanisms to enforce cooperation; trust-based and authority-based mechanisms. We shall then apply this theoretical framework to evolution of the Japanese economic system starting late nineteenth century. The Japanese economic system started rapid evolution through integrating Western institutions with traditional community-based institutions. Although this hybrid system endogenously evolved toward pure authority-based system in prewar period, this evolutionary path came to a turning point in 1940's. Investments made by employees, bank and firm, and inter-firm relationships during the WWII and not only been sunk but also decreased the value of outside options for the members who took part in these relationships. Those investments became a basis for the evolution of quasi community-based institutions in the postwar Japan.