The Role of the Merchant Coalition in Premodern Japanese Economic Development: An Historical Institutional Analysis

This paper analyzes the role of the merchant coalition (kabu nakama) in Japan in the eighteenth and the first half of the nineteenth century, from the standpoint of Historical Institutional Analysis (Greif[1997]). The quantitative economic history literature has made clear that sustainable economic growth based on a market economy started in Japan at the end of the eighteenth century. On the other hand, from time to time the central government (Bakufu) legislated ordinances prescribing that suits on pecuniary matters would not be accepted (Aitai Sumeshi Rei). The implication is that the public system for third-party contract enforcement was not working well. The activities of merchant coalitions substituted for public third-party enforcement in premodern Japan. Many of the merchant coalitions' codes prescribed that all of each coalition's members should suspend transaction with those who cheated any one of the members of the coalition. This was the multiple punishment strategy (MPS), as formulated by Greif[1993]. The MPS of the merchant coalition reduced incentives for the players in the market to cheat, which in turn promoted development of a market economy. It is remarkable that the Japanese merchant coalition applied the MPS not only to ordinary commodity trade, but also to the putting-out system and employment. We empirically tested the above hypothesis about the function of the coalition. In 1841, the Bakufu prohibited the coalition, intending to eliminate any monopoly. This event can be regarded as a natural experiment, suitable for an investigation into the role of the coalition. The above hypothesis implies that prohibition of the coalition lowered the performance of the market economy. This implication was examined using data on the money supply and commodity prices. As predicted by the hypothesis, we found that the growth rate of the real money supply contracted and that the efficiency of price arbitrage declined.