Economic ideas over the long-term
Taoism reflects a basic belief in non-interventionism and Taoists have been called ‘the world's first libertarians' (Rothbard, 1995, 23). In Chapter 3 of the Tao Te Ching, written by Lao Tzu (604—531 bc), governments are counselled to ‘do that which consists in taking no action, and order will prevail' (as translated by Lau, 1963, 7).
In Chapter 9, the ruler is advised ‘To be overbearing when one has wealth and position is to bring calamity upon oneself' (as translated by Lau, 1963, 13), and in Chapter 17, to be ‘but a shadowy presence to his subjects' (as translated by Lau, 1963, 21). Later, in Chapter 57, Lao Tzu provides this warning against what would become legalism: ‘The more taboos there are in the empire the poorer the people... The better known the laws and edicts the more the thieves and robbers there are. Hence the sage says, I take no actions and the people are transformed of themselves... I am not meddlesome and the people prosper of themselves' (as translated by Lau, 1963, 64).These sentiments are echoed by Chuang Tzu (369—286 bc): ‘Let things be what they are. Have no personal views. This is how everything under Heaven is ruled' (as translated by Palmer and Breuilly, 1996, 61). Yet little economics appears beyond these simple aphorisms. There is simply nothing there (which might be the best concise summary of Taoism). This does not mean Taoism had no influence. Instead, its influence was more to temper the importance of the state in the minds of the populace rather than having any real impact on policy.
In contrast, the Confucians had a definitive system of economic thought. Confucius (551— 479 bc), writing only a few decades after Lao Tzu, founded Confucianism and took a low- regulatory but mixed-state approach, as opposed to the pro-state legalism and asceticism of Taoism. Confucianism is concerned with the place of an individual within society rather than the atomistic conception of self found in modern economics.
Everyone within society has reciprocal obligations, including the emperor, which puts it at odds with legalism. Yet, this reciprocity is practical, as well as moral, as indicated when the Duke of Ai asks how to raise revenues for the state, to which the reply given is to set the tax rate at 10 per cent. The duke is indignant. His tax is currently set at 20 per cent, so wouldn't lowering it reduce revenues? The reply, from the Analects of Confucius 12:9 (Legge, 1893, 255) is pure supply-side economics: ‘If the people have plenty, their prince will not be left to want alone. If the people are in want, their prince cannot enjoy plenty alone.'It took a challenge, known as Mohism, to Confucian thought by Mo Tzu (490—403 bc) to get Chinese philosophy to go beyond axioms and platitudes and towards systematic analytical reasoning. Mohism was a utilitarian-based ethical system that dispensed with what was seen as wasteful expenses, such as the largesse that Chinese spent on the dead. It has now been largely incorporated into Taoism, but Mo Tzu is noteworthy as being the first to distinguish between use value and exchange value, using the same commodity/example used by Aristotle a century later, leading one to wonder if the Greek philosopher knew of Mo Tzu's argument: ‘A straw sandal used as a medium to buy something else is a straw sandal no more' (Hu, 1984, 10).
The Confucian scholar, Mencius (371—289 bc), discusses at great length the division of labour and why the exchange of goods is the only way society can get all that it needs: ‘Why does [the farmer] exchange things in such confusion with the various artisans [rather than] avoid all this trouble [by doing it himself]?... The activities of the various artisans inherently cannot be done along with farming' (as translated by van Norden, 2008, 70). He also counselled that a ‘benevolent government' was one that ‘lessens punishments [and] reduces taxes', while traditional commentator Zhu Xi stated ‘the people will be able to fully apply their strength in farming the fields' (as translated by van Norden, 2008, 6).
The rationale was two-fold: first, it increased prosperity and second, it ensured a loyal populace.Confucianism was not always amenable to the free market. Indeed, with one exception, it soon took a more centrist position. Scholars such as Xun Kuang (312—230 BC) pushed against limited government. In contrast to Mencius, who viewed man as inherently good, Xun Kuang believed ‘Human nature is evil [and] he is born with a love of profit' (as translated by Knoblock, 1994, 150—1), leading him to argue that government must create laws that will lead individuals to become good. His students, Han Fei and Li Si are considered two of the founders of legalism, which heavily influenced Confucian thought as it jockeyed for favour with the ruling elites. These two philosophies, though derived initially from the same principles, ended up being at odds with one another in a battle over China's soul. Nowhere was this more in contrast than on the advice to governments. Whereas Confucianism would stress having few laws and keeping the punishments light, legalism taught punishment should be heavy but equally applied to the powerful and the weak.
During these battles, legalism tempered Confucianism and it was left to the great historian, Ssa-Ma Chi'en, to reassert the original Confucian conception of a laissez-faire attitude towards the economy, even if it was only short-lived (Spengler, 1964). China would show a Confucian face over its legalist character for most of its history, a policy known as rubaio fali (Wang, 2011, 110).
Coupled with the philosophical traditions, there was a lot of practical economic advice. According to Hu (1988, 17—18) ‘The Tribute System of Yu', a fifth century bc document, details the first exposition of the doctrine of equal sacrifice in public finance. Land quality was the dominant rationale for assessment of taxes, although it was modified by factors such as the distance from the central authority and the locality's relative level of wealth.
The Art of War by Sun Tzu (544—496 bc) is a military classic still studied around the world. Yet buried within its text is a clear understanding of key economic concepts. For example, the idea of diminishing marginal returns is found in this passage: ‘When you do battle, even if you are winning, if you continue for a long time it will dull your forces and blunt your edge' (Cleary, 1988, 57). This point was refined by Jia Lin, a Tang Dynasty (ad 618—906) commentator: ‘Even if you prevail over others in battle, if you go on too long there will be no profit' (Cleary, 1988, 57). A ninth-century commentator to the text Du Mu states ‘When provisions go for three hundred miles, the country is out a year's supplies; when provisions go for four hundred miles, the country is out two years' supplies' (Cleary, 1988, 61). Sun Tzu notes the military drives up prices in its vicinity, demonstrating an understanding of how demand affects prices. Karagiannis and Madjd-Sadjadi (2007, 183) argue passages such as these show ‘[a]lthough theoretically dealing with warfare, the book is really about maximising gain in all arenas'.
Huan Kuan in the Discourses on Salt and Iron documents the debates in the imperial court in 81 bc on whether to keep government monopolies on salt, iron and liquor. The debate on iron centred on the efficiency of government enterprises, with Confucian scholars (who were arguing for a return to laissez-faire) stating that the quality of state production was inferior since it was ‘produced to meet quotas rather than to provide for real needs' (Wagner, 2008, 187). Government officials pointed out that having the iron and salt monopolies in the hands of the government had greatly expanded production due to economies of scale, giving a case of natural monopoly some two millennia before Smith and Mill formalised the concept (Hu, 1988, 266—7). The court was convinced of the correctness of this line of reasoning for both iron and salt, but returned the liquor industry to private hands, though it imposed heavy taxes on its production to offset lost revenue.
Sophisticated price supports were proposed by Fan Li in the fifth century bc and implemented by Sang Hongyang in 110 bc (Hu, 1988, 270—1). By having grain trade within bands, so it was bought when it was ‘too low' and sold when it was ‘too high', the government could help assure domestic order. These bands were set so they would only be triggered in extraordinary cases, and normal trading did not cause government intervention nor lead to a sustainable black market.
The Book of Guan Zi, a legalist policy primer dating from the fourth century BC, provides one of the earliest formulations of the quantity theory of money in the ‘Shan Guo Gui'. After beginning with an example of how to increase prices tenfold by removing coinage from circulation, it advises ‘While cash is in short supply and valued and goods are plentiful and cheap, buy up goods, paying for them with cash. Money will then be in the hands of the people below, but goods will be in the hands of the government and increase in value tenfold' (Rickett, 1998, 392). There is no indication of rational expectations kicking in where the public realises that they are being duped by the government, which controls the monetary supply. To increase demand, the government is advised to engage in deficit spending during contractionary times and in saving during expansionary times, since an individual's income provides the basis for his consumption and if there is no income, there can be no consumption. It also states that individuals will find it difficult to do these things even as the state can.
By the ninth century, it was generally acknowledged that hoarding of money had reduced the level of transactions, but Shen Kuo (1031—95) was the first to detail the effect that foreign trade could have. He noted (Hu, 1988, 394) ‘the barbarian lands in every direction all rely on the copper coins of China', and he believed government monopolies on necessities would exacerbate the situation, since the higher monopoly prices would encourage imports and thus an exodus of Chinese coins.
The solution was to ban imports to decrease the outflow of foreign exchange rather than banning export of coins directly, as others advocated.We conclude this section with a discussion of the Chinese Malthus, Hung Liang-Chi (1746—1809). Writing five years before Malthus, in the Zhi Ping Pian (On Peaceful Governance), Hung noted China's population, which had reached 400 million people and was doubling every two generations, increased at a faster rate through geometric expansion than the land that could come under cultivation (which grew in a linear fashion). He believed unless arable land could be increased by land reclamation, or by altering the tax burden so as to discourage agriculture, the government would either have to intervene with policies designed to curb population growth in the country, or ‘natural checks' to population growth (disease, drought, murder, war) would occur as resources per person dwindled. The more pressing concern for Hung was not demand outstripping the food supply but rather rising joblessness (Silberman, 1960).