What Has Become Apparent from the Disputes over UFJ's Planned Merger with MTFG

Fellow, RIETI


(1) Human activities are governed by two ethical systems, namely, a "commercial moral code" and a "guardian moral code."
(2) Attempting to govern a market economy based on the guardian moral code leads to the misguided notion of constructivism.
(3) In determining and implementing economic policies, it is necessary to distinguish the two ethical systems in terms of function, and employ them appropriately according to need. The power of culture is what determines the degree of skill in switching between the two ethical systems.

During the past one month or so, a dispute over the United Financial Japan (UFJ) Group's planned integration with the Mitsubishi Tokyo Group (MTFG) has caused considerable controversy in the Japanese financial community. The decision by financial regulators not to intervene in the dispute is unprecedented and resulted in the three concerned parties, UFJ, MTFG, and Sumitomo Trust & Banking Co. (together with Sumitomo Mitsui Banking Corp.), seeking a court judgment. This three-way row points to the beginning of a major change in Japanese society's perspective on economic policy and commercial disputes.

Market capitalism versus constructivism

With regard to the implementation of economic policy and resolving economic disputes, there are two differing approaches. One approach holds that the administrative authorities and politicians should remain silent observers, leaving disputes to be settled by concerned parties based on the principle of individual responsibility. The other calls for active intervention and restrictions by the authorities.

The first approach is called "market capitalism," while some economists (with implied criticism) call the second approach "constructivism." This term was coined by economist and political thinker Friedrich A. Hayek and refers to broadly-defined government interventionism, including socialism and welfare statism.

Market capitalism is premised on the idea that liberty is essential to economic activity, and the realization that a government cannot know the detailed circumstances of each party in the private sector. Intervention by a government that lacks detailed knowledge of each specific transaction deprives parties of their freedom of action and makes the problem worse, and, therefore, a solution can be found more quickly by leaving the matter to the parties themselves. The decision by regulatory authorities not to mediate or intervene in the UFJ problem is thus implicitly based on principles of market capitalism.

Constructivism, by contrast, is based on the idea that someone, namely the government, should be responsible for the distribution of economic resources. That is to say, it is wrong to let the market, which is an impersonal aggregate, decide how to allocate people's resources and income, and therefore the government should make a fair judgment on the distribution of resources in a way acceptable to everyone.

Had they stood on this latter idea, the government and judicial authorities should have taken the initiative to solve the UFJ problem.

Two moral systems that coexist

Conflicts between market capitalism and constructivism have been a persistent part of human history, seen most conspicuously in the Cold War, a confrontation between capitalism and communism. Beneath the surface of the East-West conflict are these two contradictory ethical systems.

Jane Jacobs, a renowned thinker, said that human beings, unlike the other animals, exhibit two distinctive types of moral behavior corresponding to two types of human activity. The first type of activity is to seize resources and distribute shares to one's comrades, a behavior that is also observed among other animals. The other type of activity, which is unique to human beings, is to trade in markets.

Group-oriented activities whose aim is the seizure and distribution of resources constitute a prototype for various types of organizations that exist in human society. All sorts of organizations - corporations, government agencies, armed forces, kin groups, and so forth - derive from this prototype. Therefore, the behavior of people belonging to these various organizations can be governed by a common set of ethics.

Thus, according to the moral code of corporate governance, loyalty serves as the core virtue, thereby reinforcing absolute obedience to superiors and concern for one's comrades. Jacobs points out that members of certain organizations are "morally" obliged to not meddle in trade (for money) and to deceive - if necessary - for the sake of protecting larger group interests.

In contrast to activities governed by such a guardian moral code, the exchange of goods in markets is a completely different type of activity that requires a different set of ethics. Here, integrity toward one's counterpart in a transaction is the core virtue, and thus, people are required to respect contracts, to be honest, and to compete through trade. sJacobs calls this set of ethics the "commercial moral code."

When thus compared, the commercial moral code and the guardian moral code appear in conflict. But in real life, people rarely have any trouble applying the appropriate code to the appropriate occasion. People unconsciously distinguish between the two types of activity (managing an organization and engaging in market exchange) and switch between the two different moral codes as necessary.

In discussing politics and economic policies, , however, these two moral codes are easily confused. That is, some people apply the guardian moral code in discussing market activity while others discuss the problem of organizational management by applying the commercial moral code.

Using the commercial moral code for purposes of organizational management is criticized as "market fundamentalism," an attempt to apply the commercial moral code to areas where it does not belong.

On the other hand, applying the guardian moral code to problems concerning market activity can be described as "constructivism." The idea that a superior should be responsible for income distribution is an ethical code that can work only within a specific organization. If such a code is applied to the entire economy, the government, as the responsible entity, must decide how to distribute all economic resources.

The figures below show the relationships between the two types of activities and the two moral systems.

Figure: Two types of activities and two types of moral systems & Image of constructivism

The roles of "culture"

In determining economic policies or resolving economic disputes, it is necessary, as in real life, to switch between different moral codes or philosophies depending on the situation and goal.

Efforts to solve organizational problems by applying measures based on market fundamentalism is doomed to fail, as are schemes based on the guardian moral code when applied to market problems. In the 1990s, the Japanese government tried to solve the problem of nonperforming loans through an organizational, step-by-step approach and ended up making things worse. This is a typical example of a policy failure resulting from a misapplied ethical code.

The future performance of economy will be greatly affected by how effectively such switchovers between ethical systems can be made.

In determining economic polices, for instance, a government can apply the commercial moral code under ordinary conditions and then switch over to the guardian moral code in times of emergency.

For example, in 1998, when Long-Term Capital Management was on the verge of collapse, the U.S. government stepped in to rescue the highly-leveraged hedge fund by putting heavy pressure on private-sector financial institutions to provide credit. This was nothing but a "convoy system" that can be justified only under the guardian moral code. Adoption of such a scheme by the U.S. government - which is a strong proponent of economic policies based on market principles - would be unthinkable under ordinary circumstances.

At that time, however, it was feared that the failure of LTCM, which appeared inevitable, might lead to the collapse of the entire financial system of the United States. In the face of an imminent crisis, the U.S. showed flexibility in adopting the guardian moral code when the situation required it.

In order to flexibly perform such switchovers, there must be a sound standard for decision-making. Culture, which differs from one country to another, may provide such a standard, or what is called "soft power."

The fact that the Tokyo District Court and the Tokyo High Court handed down contradictory rulings on the UFJ case indicates that Japan has no agreed-upon culture to draw upon in determining when ethical switchovers should be made.

Japan's financial authorities have departed from the traditional convoy system, setting a course toward a new regime where policies are governed in ordinary times by the commercial moral code rather than the guardian moral code. This, however, must be accompanied by flexible switchovers between the two moral systems as conditions warrant.

The UFJ problem may be the first step Japan takes in developing a culture that provides grounds for switchover decisions.

>> Original text in Japanese

* The original Japanese text was carried on Asahi Shimbun, Aug. 22, 2004. Reprinting of this article without the consent of the author and the Asahi Shimbun is prohibited.

August 22, 2004 Asahi Shimbun

September 14, 2004

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