This paper examines the economic role of the merchant coalition (kabu nakama) in Japan during the 18th and the first-half of the 19th century. During this period, public sector enforcement of contracts was imperfect. Kabu nakama substituted for the public sector, using a multilateral punishment strategy. When the government (Bakufu) prohibited kabu nakama in 1841, the growth rate of the real money supply contracted, efficiency of price arbitrage declined, and the inflation rate increased.
This paper examines the economic role of kabu nakama, a coalition of merchants or artisans, in Japanese economic development during the 18th and the first-half of the 19th centuries (hereafter, the Edo era). The analysis is related to three strands of the literature. The first is the methodological literature on institutions in economic history. North and Thomas, 1973, North, 1990 and North, 1991 have emphasized the role of institutions, especially public institutions for protecting property rights, as a prerequisite for modern economic development. More recently, Greif, 1989, Greif, 1993 and Greif, 1997; Aoki (2001), and Hayami and Aoki (1998) have shown self-enforcing private institutions might substitute for or complement public institutions.
The second strand is the literature on the Japanese economic development. This literature has made clear that Japan had a market economy during the Edo era (Crawcour, 1974, Crawcour and Yamamura, 1973, Duffy and Yamamura, 1971, Hanley, 1983, Ito, 1993, Miyamoto, 1989, Ohkura and Shinbo, 1978, Smith, 1973, Shinbo, 1978, Shinbo and Saito, 1989, Wakita, 1996, Yamamura, 1973 and Yasuba, 1987). According to Iwahashi (1988), numerous institutions supporting economic development existed during the Edo era, including a stable political regime, a land tax system providing peasants with production incentives, the unified weights and measures, among others. However, Iwahashi (1988) does not address the issue of public enforcement of contracts, which is an essential feature of the North’s framework. As discussed in Section 2, the public system for contract enforcement was seriously flawed during the Edo period.
Economic growth in Japan started around 1790, before the Meiji Restoration. At the same time, public enforcement of contracts was poorly implemented. In this sense, the pre-modern Japanese economic development provides an interesting counter-example to the view that a public system of such enforcement is a prerequisite for economic development.
Kabu nakama, a coalition of merchants or artisans, played the role of contract enforcement, substituting for the public authority. Many of the codes of kabu nakama included articles prescribing that all of the nakama members should suspend trade with a person who has cheated one of their own. It implies that kabu nakam a adopted a type of MPS, similar to that adopted by the coalition of Maghribis traders in medieval Mediterranean society. As Greif (1993) addressed, the MPS of Maghribis traders reduced the incentive for the trade counterpart to cheat, and through it enabled expansion of trade under the condition that third-party enforcement by the public authority was insufficient. Kabu nakama in Edo era Japan adopted the MPS not only for ordinary commercial transactions, but also for the putting-out system and employment, and thereby, it contributed to organizing production as well as to expanding commerce.
