Trust: The Social Virtue and the Creation of Prosperity

According to Max Weber and the sociological tradition that he founded, the very essence of modern economic life is the rise and proliferation of rules and law. One of his most famous concepts was the tripartite division of authority into traditional, charismatic, and bureaucratic forms. In the first, authority was inherited from long-standing cultural sources like religion or patriarchal tradition. In the second, authority came from a “gift”; a leader was chosen by God or some other supernatural power.1 The rise of the modern world, however, was bound up with the rise of rationality, that is, the ordered structuring of ends to means, and for Weber the ultimate embodiment of rationality was modern bureaucracy.2 Modern bureaucracy was based on “the principle of fixed and official jurisdictional areas, which are generally ordered by rules, that is, by laws and administrative regulations.”3 The stability and rationality of modern bureaucratic authority arose from the fact that it was rule bound; the ability of superiors to have their way was limited in a transparent and clearly articulated manner, and the rights and duties of subordinates were spelled out in advance.4 Modern bureaucracies are the social embodiment of regular rules and govern virtually every aspect of modern life, from corporations, governments, and armies to labor unions, religious organizations, and educational establishments.5 The modern economic world was, for Weber, bound up as well with the rise of contract. Weber noted that contracts, particularly regarding marriage and inheritance, have existed for thousands of years. But he distinguished between “status” contracts and what he called “purposive” ones.6 In the former, one person agreed in a general and diffuse way to enter into a relationship with another (e.g., as a vassal or apprentice); duties and responsibilities were not clearly spelled out but based on tradition or the general characteristics of the particular status relationship. Purposive contracts, on the other hand, were entered into for the sake of some specific act of economic exchange. They did not affect broad social relationships but were limited to the particular transaction at hand. The proliferation of the latter kind of contract was characteristic of modernity: In contrast to the older law, the most

As with Japanese keiretsu, the member firms in a Korean chaebol own shares in each other and tend to collaborate with each other on what is often a nonprice basis. The Korean chaebol differs from the Japanese prewar zaibatsu or postwar keiretsu, however, in a number of significant ways. First and perhaps most important, Korean network organizations were not centered around a private bank or other financial institution in the way the Japanese keiretsu are.8 This is because Korean commercial banks were all state owned until their privatization in the early 1970s, while Korean industrial firms were prohibited by law from acquiring more than an eight percent equity stake in any bank. The large Japanese city banks that were at the core of the postwar keiretsu worked closely with the Finance Ministry, of course, through the process of overloaning (i.e., providing subsidized credit), but the Korean chaebol were controlled by the government in a much more direct way through the latter’s ownership of the banking system. Thus, the networks that emerged more or less spontaneously in Japan were created much more deliberately as the result of government policy in Korea. A second difference is that the Korean chaebol resemble the Japanese intermarket keiretsu more than the vertical ones (see p. 197). That is, each of the large chaebol groups has holdings in very different sectors, from heavy manufacturing and electronics to textiles, insurance, and retail. As Korean manufacturers grew and branched out into related businesses, they started to pull suppliers and subcontractors into their networks. But these relationships resembled simple vertical integration more than the relational contracting that links Japanese suppliers with assemblers. The elaborate multitiered supplier networks of a Japanese parent firm like Toyota do not have ready counterparts in Korea.9

Because culture is a matter of ethical habit, it changes very slowly—much more slowly than ideas. When the Berlin Wall was dismantled and communism crumbled in 1989-1990, the governing ideology in Eastern Europe and the Soviet Union changed overnight from Marxism-Leninism to markets and democracy. Similarly, in some Latin American countries, statist or nationalist economic ideologies like import substitution were wiped away in less than a decade by the accession to power of a new president or finance minister. What cannot change nearly as quickly is culture. The experience of many former communist societies is that communism created many habits—excessive dependence on the state, leading to an absence of entrepreneurial energy, an inability to compromise, and a disinclination to cooperate voluntarily in groups like companies or political parties—that have greatly slowed the consolidation of either democracy or a market economy. People in these societies may have given their intellectual assent to the replacement of communism with democracy and capitalism by voting for “democratic” reformers, but they do not have the social habits necessary to make either work.

By contrast, people who do not trust one another will end up cooperating only under a system of formal rules and regulations, which have to be negotiated, agreed to, litigated, and enforced, sometimes by coercive means. This legal apparatus, serving as a substitute for trust, entails what economists call “transaction costs.” Widespread distrust in a society, in other words, imposes a kind of tax on all forms of economic activity, a tax that high-trust societies do not have to pay.

Chinese family businesses instinctively thought of ways of hiding income from the tax collector. The situation is quite different in Japan, where the family is weaker and individuals are pulled in different directions by the various vertical authority structures standing above them. The entire Japanese nation, with the emperor at the top, is, in a sense, the ie of all ies, and calls forth a degree of moral obligation and emotional attachment that the Chinese emperor never enjoyed. Unlike the Japanese, the Chinese have had less of a we-against-them attitude toward outsiders and are much more likely to identify with family, lineage, or region as with nation. The dark side to the Japanese sense of nationalism and proclivity to trust one another is their lack of trust for people who are not Japanese. The problems faced by non-Japanese living in Japan, such as the sizable Korean community, have been widely noted. Distrust of non-Japanese is also evident in the practices of many Japanese multinationals operating in other countries. While aspects of the Japanese lean manufacturing system have been imported with great success into the United States, Japanese transplants have been much less successful integrating into local American supplier networks. Japanese auto companies building assembly plants in the United States, for example, have tended to bring over with them the suppliers in their network organizations from Japan. According to one study, some ninety percent of the parts for Japanese cars assembled in America come from Japan or from subsidiaries of Japanese companies in America.43 This is perhaps predictable given the cultural differences between the Japanese assembler and the American subcontractor but has understandably led to hard feelings between the two. To take another example, while Japanese multinationals have hired a great number of native executives to run their overseas businesses, these people are seldom treated like executives at the same level in Japan. An American working for a subdivision of a Japanese company in the United States might aspire to rise within that organization but is very unlikely to be asked to move to Tokyo or even to a higher post outside the United States.44 There are exceptions. Sony America, for example, with its largely American staff, is highly autonomous and often influences its parent in Japan. But by and large, the Japanese radius of trust can be fully extended only to other Japanese.

Family life, which constitutes the smallest and most basic form of association, has deteriorated markedly since the 1960s with a sharp increase in rates of divorce and single-parent families. Beyond the family, too, there has been a steady breakdown of older communities like neighborhoods, churches, and workplaces. At the same time, there has been a vast increase in the general level of distrust, as measured by the wariness that Americans have for their fellow citizens due to the rise of crime, or in the massive increases in litigation as a means of settling disputes. In recent years the state, often in the guise of the court system, has supported a rapidly expanding set of individual rights that have undermined the ability of larger communities to set standards for the behavior of their members. Thus, the United States today presents a contradictory picture of a society living off a great fund of previously accumulated social capital that gives it a rich and dynamic associational life, while at the same time manifesting extremes of distrust and asocial individualism that tend to isolate and atomize its members. This type of individualism always existed in a potential form, yet through most of America’s existence it had been kept in check by strong communal currents.6

Friction-Free Economies Why is it necessary to turn to a cultural characteristic like spontaneous sociability to explain the existence of large-scale corporations in an economy, or prosperity more generally? Wasn’t the modern system of contract and commercial law invented precisely to get around the need for business associates to trust one another as family members do? Advanced industrialized societies have created comprehensive legal frameworks for economic organization and a wide variety of juridical forms, from individual proprietorships to large, publicly traded multinational enterprises. Most economists would add rational individual self-interest to this stew to explain how modern organizations arise. Don’t businesses based on strong family ties and unstated moral obligations degenerate into nepotism, cronyism, and generally bad business decision making? Indeed, isn’t the very essence of modern economic life the replacement of informal moral obligations with formal, transparent legal ones?1 The answer to these questions is that although property rights and other modern economic institutions were necessary for the creation of modern businesses, we are often unaware that the latter rest on a bedrock of social and cultural habits that are too often taken for granted. Modern institutions are a necessary but not a sufficient condition for modern prosperity and the social well-being that it undergirds; they have to be combined with certain traditional social and ethical habits if they are to work properly. Contracts allow strangers with no basis for trust to work with one another, but the process works far more efficiently when the trust exists. Legal forms like joint-stock companies may allow unrelated people to collaborate, but how easily they do so depends on their cooperativeness when dealing with nonkin.

In opting for large scale, Korean state planners got much of what they bargained for. Korean companies today compete globally with the Americans and Japanese in highly capital-intensive sectors like semiconductors, aerospace, consumer electronics, and automobiles, where they are far ahead of most Taiwanese or Hong Kong companies. Unlike Southeast Asia, the Koreans have moved into these sectors not primarily through joint ventures where the foreign partner has provided a turnkey assembly plant but through their own indigenous organizations. So successful have the Koreans been that many Japanese companies feel relentlessly dogged by Korean competitors in areas like semiconductors and steel. The chief advantage that large-scale chaebol organizations would appear to provide is the ability of the group to enter new industries and to ramp up to efficient production quickly through the exploitation of economies of scope.70 Does this mean, then, that cultural factors like social capital and spontaneous sociability are not, in the end, all that important, since a state can intervene to fill the gap left by culture? The answer is no, for several reasons. In the first place, not every state is culturally competent to run as effective an industrial policy as Korea is. The massive subsidies and benefits handed out to Korean corporations over the years could instead have led to enormous abuse, corruption, and misallocation of investment funds. Had President Park and his economic bureaucrats been subject to political pressures to do what was expedient rather than what they believed was economically beneficial, if they had not been as export oriented, or if they had simply been more consumption oriented and corrupt, Korea today would probably look much more like the Philippines. The Korean economic and political scene was in fact closer to that of the Philippines under Syngman Rhee in the 1950s. Park Chung Hee, for all his faults, led a disciplined and spartan personal lifestyle and had a clear vision of where he wanted the country to go economically. He played favorites and tolerated a considerable degree of corruption, but all within reasonable bounds by the standards of other developing countries. He did not waste money personally and kept the business elite from putting their resources into Swiss villas and long vacations on the Riviera.71 Park was a dictator who established a nasty authoritarian political system, but as an economic leader he did much better. The same power over the economy in different hands could have led to disaster. There are other economic drawbacks to state promotion of large-scale industry. The most common critique made by market-oriented economists is that because the investment was government rather than market driven, South Korea has acquired a series of white elephant industries such as shipbuilding, petrochemicals, and heavy manufacturing. In an age that rewards downsizing and nimbleness, the Koreans have created a series of centralized and inflexible corporations that will gradually lose their low-wage competitive edge. Some cite Taiwan’s somewhat higher overall rate of economic growth in the postwar period as evidence of the superior efficiency of a smaller, more competitive industrial structure.

I THE IDEA OF TRUST The Improbable Power of Culture in the Making of Economic Society

Liberal democracy and capitalism remain the essential, indeed the only, framework for the political and economic organization of modern societies. Rapid economic modernization is closing the gap between many former Third World countries and the industrialized North. With European integration and North American free trade, the web of economic ties within each region will thicken, and sharp cultural boundaries will become increasingly fuzzy. Implementation of the free trade regime of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) will further erode interregional boundaries. Increased global competition has forced companies across cultural boundaries to try to adopt “best-practice” techniques like lean manufacturing from whatever source they come from. The worldwide recession of the 1990s has put great pressure on Japanese and German companies to scale back their culturally distinctive and paternalistic labor policies in favor of a more purely liberal model. The modern communications revolution abets this convergence by facilitating economic globalization and by propagating the spread of ideas at enormous speed. But in our age, there can be substantial pressures for cultural differentiation even as the world homogenizes in other respects. Modern liberal political and economic institutions not only coexist with religion and other traditional elements of culture but many actually work better in conjunction with them. If many of the most important remaining social problems are essentially cultural in nature and if the chief differences among societies are not political, ideological, or even institutional but rather cultural, it stands to reason that societies will hang on to these areas of cultural distinctiveness and that the latter will become all the more salient and important in the years to come. Awareness of cultural difference will be abetted, paradoxically, by the same communications technology that has made the global village possible. There is a strong liberal faith that people around the world are basically similar under the surface and that greater communications will bring deeper understanding and cooperation. In many instances, unfortunately, that familiarity breeds contempt rather than sympathy. Something like this process has been going on between the United States and Asia in the past decade. Americans have come to realize that Japan is not simply a fellow capitalist democracy but has rather different ways of practicing both capitalism and democracy. One result, among others, is sthe emergence of the revisionist school among specialists on Japan, who are less sympathetic to Tokyo and argue for tougher trade policies. And Asians are made vividly aware through the media of crime, drugs, family breakdown, and other American social problems, and many have decided that the United States is not such an attractive model after all. Lee Kwan Yew, former prime minister of Singapore, has emerged as a spokesman for a kind of Asian revisionism on the United States, which argues that liberal democracy is not an appropriate political model for the Confucian societies.10 The very convergence of major institutions makes peoples all the more intent on preserving those elements of distinctiveness they continue to possess.

Most neoclassical economists would argue that state-owned firms will inevitably be less efficient than private ones because the state lacks the proper incentives to run enterprises efficiently. The state does not have to fear bankruptcy, since it can keep businesses going out of tax dollars or, at worst, by printing money. It also has strong incentives to use the firm for political ends like job creation and patronage. These deficiencies of public ownership have been the underlying justification for the global move toward privatization over the past decade. But state-owned enterprises can be run more or less efficiently, and any final judgment as to the efficiency price paid for nationalization has to be measured against the entrepreneurial capabilities of that society’s private sector. In France, nationalized companies have often been allowed considerable managerial discretion and operate not much differently from their private sector counterparts.36

Social capital is a capability that arises from the prevalence of trust in a society or in certain parts of it. It can be embodied in the smallest and most basic social group, the family, as well as the largest of all groups, the nation, and in all the other groups in between. Social capital differs from other forms of human capital insofar as it is usually created and transmitted through cultural mechanisms like religion, tradition, or historical habit. Economists typically argue that the formation of social groups can be explained as the result of voluntary contract between individuals who have made the rational calculation that cooperation is in their long-term self-interest. By this account, trust is not necessary for cooperation: enlightened self-interest, together with legal mechanisms like contracts, can compensate for an absence of trust and allow strangers jointly to create an organization that will work for a common purpose. Groups can be formed at any time based on self-interest, and group formation is not culture-dependent. But while contract and self-interest are important sources of association, the most effective organizations are based on communities of shared ethical values. These communities do not require extensive contract and legal regulation of their relations because prior moral consensus gives members of the group a basis for mutual trust. The social capital needed to create this kind of moral community cannot be acquired, as in the case of other forms of human capital, through a rational investment decision. That is, an individual can decide to “invest” in conventional human capital like a college education, or training to become a machinist or computer programmer, simply by going to the appropriate school. Acquisition of social capital, by contrast, requires habituation to the moral norms of a community and, in its context, the acquisition of virtues like loyalty, honesty, and dependability. The group, moreover, has to adopt common norms as a whole before trust can become generalized among its members. In other words, social capital cannot be acquired simply by individuals acting on their own. It is based on the prevalence of social, rather than individual virtues. The proclivity for sociability is much harder to acquire than other forms of human capital, but because it is based on ethical habit, it is also harder to modify or destroy. Another term that I will use widely throughout this book is spontaneous sociability, which constitutes a subset of social capital. In any modern society, organizations are being constantly created, destroyed, and modified. The most useful kind of social capital is often not the ability to work under the authority of a traditional community or group, but the capacity to form new associations and to cooperate within the terms of reference they establish. This type of group, spawned by industrial society’s complex division of labor and yet based on shared values rather than contract, falls under the general rubric of what Durkheim labeled “organic solidarity.”7 Spontaneous sociability, moreover, refers to that wide range of intermediate communities distinct from the family or those deliberately established by governments. Governments often have to step in to promote community when there is a deficit of spontaneous sociability. But state intervention poses distinct risks, since it can all too easily undermine the spontaneous communities established in civil society.

The first thing to note about Korean industrial structure is the sheer concentration of Korean industry. Like other Asian economies, there are two levels of organization: individual firms and larger network organizations that unite disparate corporate entities. The Korean network organization is known as the chaebol, represented by the same two Chinese characters as the Japanese zaibatsu and patterned deliberately on the Japanese model. The size of individual Korean companies is not large by international standards. As of the mid-1980s, the Hyundai Motor Company, Korea’s largest automobile manufacturer, was only a thirtieth the size of General Motors, and the Samsung Electric Company was only a tenth the size of Japan’s Hitachi.1 However, these statistics understate their true economic clout because these businesses are linked to one another in very large network organizations. Virtually the whole of the large-business sector in Korea is part of a chaebol network: in 1988, forty-three chaebol (defined as conglomerates with assets in excess of 400 billion won, or US$500 million) brought together some 672 companies.2 If we measure industrial concentration by chaebol rather than individual firm, the figures are staggering: in 1984, the three largest chaebol alone (Samsung, Hyundai, and Lucky-Goldstar) produced 36 percent of Korea’s gross domestic product.3 Korean industry is more concentrated than that of Japan, particularly in the manufacturing sector; the three-firm concentration ratio for Korea in 1980 was 62.0 percent of all manufactured goods, compared to 56.3 percent for Japan.4 The degree of concentration of Korean industry grew throughout the postwar period, moreover, as the rate of chaebol growth substantially exceeded the rate of growth for the economy as a whole. For example, the twenty largest chaebol produced 21.8 percent of Korean gross domestic product in 1973, 28.9 percent in 1975, and 33.2 percent in 1978.5 The Japanese influence on Korean business organization has been enormous. Korea was an almost wholly agricultural society at the beginning of Japan’s colonial occupation in 1910, and the latter was responsible for creating much of the country’s early industrial infrastructure.6 Nearly 700,000 Japanese lived in Korea in 1940, and a similarly large number of Koreans lived in Japan as forced laborers. Some of the early Korean businesses got their start as colonial enterprises in the period of Japanese occupation.7 A good part of the two countries’ émigré populations were repatriated after the war, leading to a considerable exchange of knowledge and experience of business practices. The highly state-centered development strategies of President Park Chung Hee and others like him were formed as a result of his observation of Japanese industrial policy in Korea in the prewar period.

The great concentration of wealth in the hands of the owners of chaebol has also had the consequence feared by the KMT in Taiwan: the entry into politics of a wealthy industrialist. This happened for the first time with the candidacy of Chung Ju Yung, founder of Hyundai, for president in the 1993 election. There is, of course, nothing wrong with a Ross Perot-style billionaire’s entering politics in a democracy, but the degree of concentrated wealth in the Korean business community has made other political actors on both the right and the left nervous. The result for Korea thus far has not been propitious; while losing the election to Kim Young Sam, the seventy-seven-year-old Chung was jailed in late 1993 on rather specious corruption charges—a warning to all would-be politicians among the business class that their participation in politics would not be welcome.74 Despite the apparent anomaly between its Chinese-style familistic culture and its large corporations, Korea continues to fit my overall hypothesis. That is, Korea, like China, is a familistic culture with a relatively low degree of trust outside kinship. In default of this cultural propensity, the Korean state has had to step in to create large organizations that would otherwise not be created by the private sector on its own. The large Korean chaebol may have been run more efficiently than the state-owned companies of France, Italy, and a number of countries in Latin America, but they were no less the product of subsidy, protection, regulation, and other acts of government intervention. While most countries would be quite happy to have had Korea’s growth record, it is not clear that they could achieve it using Korean methods.

The increases in productivity brought about by Ford’s innovation were startling and revolutionized not just the automobile industry but virtually every industry serving a mass market. Introduction of “Fordist” mass production techniques became something of a fad outside America: German industry went through a period of “rationalization” in the mid-1920s as manufacturers sought to import the most “advanced” American organizational techniques.12 It was the Soviet Union’s misfortune that Lenin and Stalin came of age in this period, because these Bolshevik leaders associated industrial modernity with large-scale mass production tout court. Their view that bigger necessarily meant better ultimately left the Soviet Union, at the end of the communist period, with a horrendously overconcentrated and inefficient industrial infrastructure—a Fordism on steroids in a period when the Fordist model had ceased to be relevant. The new form of mass production associated with Henry Ford also had its own ideologist: Frederick W. Taylor, whose book The Principles of Scientific Management came to be regarded as the bible for the new industrial age.13 Taylor, an industrial engineer, was one of the first proponents of time-and-motion studies that sought to maximize labor efficiency on the factory floor. He tried to codify the “laws” of mass production by recommending a very high degree of specialization that deliberately avoided the need for individual assembly line workers to demonstrate initiative, judgment, or even skill. Maintenance of the assembly line and its fine-tuning was given to a separate maintenance department, and the controlling intelligence behind the design of the line itself was the province of white-collar engineering and planning departments. Worker efficiency was based on a strict carrot-and-stick approach: productive workers were paid a higher piece rate than less productive ones. In typical American fashion, Taylor hid

The low-trust, family-oriented societies with weak intermediate organizations we have observed have all been characterized by a similar saddle-shaped distribution of enterprises. Taiwan, Hong Kong, Italy, and France have a host of smaller private firms that constitute the entrepreneurial core of their economies and a small number of very large, state-owned firms at the other end of the scale. In such societies, the state plays an important role in promoting large-scale enterprises that might not be spontaneously created by the private sector, albeit at some cost in efficiency. We might postulate then that as a general rule, any society with weak intermediate institutions and low trust outside the family will tend to have a similar distribution of firms in its economy. The Republic of Korea, however, presents an apparent anomaly that needs to be explained in order to preserve the validity of the larger argument. Korea is similar to Japan, Germany, and the United States insofar as it has very large corporations and a highly concentrated industrial structure. On the other hand, Korea is much closer to China than to Japan in terms of family structure. Families occupy a similarly important place in Korea as in China, and there are no Japanese-style mechanisms in Korean culture for bringing outsiders into family groups. Following the Chinese pattern, this should lead to small family businesses and difficulties in institutionalizing the corporate form of organization. The answer to this apparent paradox is the role of the Korean state, which deliberately promoted gigantic conglomerates as a development strategy in the 1960s and 1970s and overcame what would otherwise have been a cultural proclivity for the small- and medium-size enterprises typical of Taiwan. While the Koreans succeeded in creating large companies and zaibatsu in the manner of Japan, they have nonetheless encountered many Chinese-style difficulties in the nature of corporate governance, from management succession to relations on the shop floor. The Korean case shows, however, how a resolute and competent state can shape industrial structure and

The main problem facing immigrant communities was to change the sort of sociability they practiced from an ascriptive to a voluntary form. That is, the traditional social structures they brought with them were based on family, ethnicity, geographic origin, or some other characteristic with which they were born. For the first generation that landed in the United States, they created the trust necessary for revolving credit associations, family restaurants, laundries, and grocery stores. But in subsequent generations they could become a constraint, narrowing the range of business opportunities and keeping descendants in ethnic ghettoes. For the most successful ethnic groups, the sons and daughters of first-generation immigrants had to learn a broader kind of sociability that would get them jobs in the mainstream business world or in the professions. The speed with which immigrants could make the transition from a member of an ethnic enclave to assimilated mainstream American explains how the United States could be both ethnically diverse and strongly disposed to community at the same time. In many other societies, the descendants of immigrants were never permitted to leave their ethnic ghetto. Although solidarity within the ethnic enclave remained high, the society as a whole was balkanized and conflicted. Diversity can have clear benefits for a society, but is better taken in small sips than in large gulps. It is easily possible to have too diverse a society, in which people not only fail to share higher values and aspirations but even fail to speak the same language. The possibilities for spontaneous sociability then begin to flow only within the cleavage lines established by race, ethnicity, language, and the like. Assimilation through language policy and education must balance ethnicity if broader community is to be possible. The United States presents a mixed and changing picture. If we take into account factors like America’s religious culture and ethnicity, there are ample grounds for categorizing it simultaneously as both an individualistic and a group-oriented society. Those who see only the individualism are ignoring a critical part of American social history. “Yet the balance has been shifting toward individualism rapidly in the last couple of decades, so it is perhaps no accident that Asians and others see it as the epitome of an individualistic society. This shift has created numerous problems for the United States, many of which will play themselves out in the economic sphere.

There are other problems more closely related to the question of culture. The poor fit between large scale and Korea’s familistic tendencies has probably been a net drag on efficiency. The culture has slowed the introduction of professional managers in situations where, in contrast to small-scale Chinese businesses, they are desperately needed. Further, the relatively low-trust character of Korean culture does not allow Korean chaebol to exploit the same economies of scale and scope in their network organization as do the Japanese keiretsu. That is, the chaebol resembles a traditional American conglomerate more than a keiretsu network: it is burdened with a headquarters staff and a centralized decision-making apparatus for the chaebol as a whole. In the early days of Korean industrialization, there may have been some economic rationale to horizontal expansion of the chaebol into unfamiliar lines of business, since this was a means of bringing modern management techniques to a traditional economy. But as the economy matured, the logic behind linking companies in unrelated businesses with no obvious synergies became increasingly questionable. The chaebol’s scale may have given them certain advantages in raising capital and in cross-subsidizing businesses, but one would have to ask whether this represented a net advantage to the Korean economy once the agency and other costs of a centralized organization were deducted from the balance. (In any event, the bulk of chaebol financing has come from the government at administered interest rates.) Chaebol linkages may actually serve to hold back the more competitive member companies by embroiling them in the affairs of slow-growing partners. For example, of all the varied members of the Samsung conglomerate, only Samsung Electronics is a truly powerful global player. Yet that company has been caught up for several years in the group-wide management reorganization that began with the passing of the conglomerate’s leadership from Samsung’s founder to his son in the late 1980s.72 A different class of problems lies in the political and social realms. Wealth is considerably more concentrated in Korea than in Taiwan, and the tensions caused by disparities in wealth are evident in the uneasy history of Korean labor relations. While aggregate growth in the two countries has been similar over the past four decades, the average Taiwanese worker has a higher standard of living than his Korean counterpart. Government officials were not oblivious to the Taiwanese example, and beginning in about 1981 they began to reverse somewhat their previous emphasis on large-scale companies by reducing their subsidies and redirecting them to small- and medium-sized businesses. By this time, however, large corporations had become so entrenched in their market sectors that they became very difficult to dislodge. The culture itself, which might have preferred small family businesses if left to its own devices, had begun to change in subtle ways; as in Japan, a glamour now attached to working in the large business sector, guaranteed it a continuing inflow of Korea’s best and brightest young people.73

There were other important reasons for the growth of American individualism at the expense of community in the second half of the twentieth century besides the nature of capitalism. The first arose as an unintended consequence of a number of liberal reforms of the 1960s and 1970s. Slum clearance uprooted and destroyed many of the social networks that existed in poor neighborhoods, replacing them with an anonymous and increasingly dangerous existence in high-rise public housing units. “Good government” drives eliminated the political machines that at one time governed most large American cities. The old, ethnically based machines were often highly corrupt, but they served as a source of local empowerment and community for their clients. In subsequent years, the most important political action would take place not in the local community but at higher and higher levels of state and federal government. A second factor had to do with the expansion of the welfare state from the New Deal on, which tended to make federal, state, and local governments responsible for many social welfare functions that had previously been under the purview of civil society. The original argument for the expansion of state responsibilities to include social security, welfare, unemployment insurance, training, and the like was that the organic communities of preindustrial society that had previously provided these services were no longer capable of doing so as a result of industrialization, urbanization, decline of extended families, and related phenomena. But it proved to be the case that the growth of the welfare state accelerated the decline of those very communal institutions that it was designed to supplement. Welfare dependency in the United States is only the most prominent example: Aid to Familles with Dependent Children, the depression-era legislation that was designed to help widows and single mothers over the transition as they reestablished their lives and families, became the mechanism that permitted entire inner-city populations to raise children without the benefit of fathers. The rise of the welfare state cannot be more than a partial explanation for the decline of community, however. Many European societies have much more extensive welfare states than the United States; while nuclear families have broken down there as well, there is a much lower level of extreme social pathology. A more serious threat to community has come, it would seem, from the vast expansion in the number and scope of rights to which Americans believe they are entitled, and the “rights culture” this produces. Rights-based individualism is deeply embedded in American political theory and constitutional law. One might argue, in fact, that the fundamental tendency of American institutions is to promote an ever-increasing degree of individualism. We have seen repeatedly that communities tend to be intolerant of outsiders in proportion to their internal cohesiveness, because the very strength of the principles that bind members together exclude those that do not share them. Many of the strong communal structures in the United States at midcentury discriminated in a variety of ways: country clubs that served as networking sites for business executives did not allow Jews, blacks, or women to join; church-run schools that taught strong moral values did not permit children of other denominations to enroll; charitable organizations provided services for only certain groups of people and tried to impose intrusive rules of behavior on their clients. The exclusiveness of these communities conflicted with the principle of equal rights, and the state increasingly took the side of those excluded against these communal organizations.

When we step back from contemporary American debates over family values, we find that the family paradoxically does not always play a positive role in promoting economic growth. The earlier social theorists who saw the strong family as an obstacle to economic development were not entirely wrong. In some cultures, such as in those of China and certain regions of Italy, the family looms much larger than other forms of association. This fact has a striking impact on industrial life. As the extraordinarily rapid development of many Chinese economies and of Italy in recent years indicates, familism in itself is a barrier to neither industrialization nor rapid growth if other cultural values are right. But familism does affect the character of that growth—the types of economic organizations that are possible, as well as the sectors of the global economy in which that society will operate. Familistic societies have greater difficulties creating large economic institutions, and this constraint on size limits the sectors of the global economy in which such businesses can operate.

while Koreans also are relatively group-oriented, they also have a strong individualistic streak like most Westerners. Koreans frequently joke that an individual Korean can beat an individual Japanese, but that a group of Koreans are certain to be beaten by a group of Japanese.”36 The rate of employee turnover, raiding of other companies’ skilled labor, and the like are all higher in Korea than in Japan.37 Anecdotally, there would seem to be a lower level of informal work-oriented socializing in Korea than in Japan, with employees heading home to their families at the end of the day rather than staying on to drink in the evenings with their workmates.38