Feb 22, 2017 04:13 PM

Debate Over Government’s Role in Economy Actually Began in Ancient China

No book has had more influence on the idea of the free market and international trade than the Scottish moral philosopher Adam Smith’s book The Wealth of Nations, first published in 1776, the same year as the founding of the United States of America.

In an age of mercantilism, where the idea that nations can grow by huge intervention in the market for national self-interest (including beggar-thy-neighbor policies), Smith’s ideas were revolutionary. Smith succeeded because the free-market ideology gave a high moral standing and scientific rationalization to the British imperial philosophy that by minimizing interference (taxation, subsidies and trade restrictions), the market will automatically generate wealth, jobs and prosperity for all. Free trade is good morally and scientifically for the hegemon and the colonies.

The American economist Paul Samuelson called Adam Smith the founder of modern economics because Smith’s insights into the benefits of specialized division of labor and economies of scale in production created the scientific rationale for globalization. Smith stood for free trade, minimal government, competition, and investing in infrastructure, education and national defense.

Adam Smith’s book actually marked a watershed between the rise of the Industrial Revolution in the West, even as the Chinese economy peaked and began its century-long decline. In comparing and contrasting Chinese and Western thinking on economics, I find it useful to look at a Chinese classic that came out 1,857 years earlier than Smith’s, in 81 B.C. — the Han Dynasty text called Salt and Iron Discourse.

Many Western economists commenting on the modern Chinese economy would not have heard of this remarkable book without realizing that nearly two millennia earlier, China had already debated between free markets (or minimal governments) versus heavy centralized government, state taxes and monopolies.

Money is of course a matter of the state, since without money, the state cannot function. Adam Smith argued that free trade with minimal customs duties would improve national production, trade and wealth, thus enabling the government to do its best to support free trade and wealth creation. On the other hand, those who prefer centralized power argue for the state to engage in trade and home industries through state-owned enterprises (SOEs) or restrict competition (and maximize taxation) through state monopolies. The debate over the role of SOEs is still raging today in China.

The background to the 81 B.C. conference was imposition of heavy state taxes and a monopoly on salt, iron, liquor and coin production during the reign of Han Wudi (141-87 B.C.), the great conqueror, who used the proceeds to finance his army to crush the northern barbarians and expand Chinese territory. In his late age, Han Wudi began to become aware of the heavy costs on the people, influencing his successor to review his policy.

His successor, Han Emperor Zhao (94-74 B.C.), allowed an open debate in order to review whether the larger policy of outward military expansion, financed by state monopolies, should be extended. The debate over fiscal policy was a controlled struggle over major policy and philosophical differences between state power and market power, between the official class and the literati who represented the private merchants and cultural values of family and stability.

Reading the text, one sensed that it was a debate over the whole philosophical ideas of ancient China — how a hundred schools of thought contended for policy acceptance. Under Han Wudi, the grand philosopher Dong Zhongshu had integrated the different schools under the umbrella of Confucianism, but in reality, it was a struggle between realists (under the now-discredited Legalist faction) and idealist/moralists (under Confucian, Taoist and Yingyang) that reared its head. The Confucians wanted a return to the earlier “wu wei,” or minimal interference, fiscal policies that allowed the private sector to produce salt and iron with very low taxation.

On one side was the established policymakers, led by Grand Secretary Sang Hongyang, the businessman-turned-finance-minister who initiated the salt and iron monopolies under Han Wudi. On the other were the Confucian literati, drawn from those who studied the Wenxue (culture) groups and the Xianliang (virtuous) class of qualified people who were ready to be selected for higher positions. The fact that the literati were able to defend their ideas openly and criticize the existing policies without fear of retaliation was the behind-the-scenes support given by Emperor Zhao and his military chancellor, Huo Guang, half-brother of the military general Huo Qubin.

The outcome was effectively a draw, with only the liquor monopoly being demolished, and some provinces were allowed to experiment with a gradual withdrawal of the salt and iron monopolies. The power struggle ended the next year, when Chancellor Sang was executed as part of a failed coup attempt, and Chancellor Huo began a measured reversal of the interventionist policies.

What the Yantie Lun revealed was that even 2,098 years later, policy debates universally are always between the established institutional powers (such as the Barack Obama liberal order) and the challengers (such as those led by Donald Trump) who represent different world views, ideology and interests.

The difference between Adam Smith and the Chinese “wu wei” policy was one of geographical conditions. China was a continental power, always paying the price of huge security expenditure to defend against foreign invasions or internal rebellions. Britain was a maritime empire, with an outward interest, whose navy was more interested in conquering colonies and opening up trade than in domestic coups d’état. Any economic and financial policies needed to consider the inherent problem of institutional interests. Having too large an army in China was neither fiscally sustainable nor strategically acceptable since the guns could be pointed inward rather than outward.

Money and finance therefore cannot be separated from politics, including at the geo-political rivalry level. At the heart of the problem is this: If we use one national currency as the global currency, who benefits? The reality is that the Industrial Revolution initially used gold, then sterling, and today it is dominated by the U.S. dollar. As China regains its economic power back to 1776 levels, the yuan is no longer a local currency, but has geopolitical ramifications. This is not about “currency wars,” but a geopolitical struggle for global balance.

Andrew Sheng is a Distinguished Fellow of the Asia Global Institute at the University of Hong Kong and a former chairman of the Hong Kong Securities and Futures Commission.

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Andrew Sheng

A distinguished fellow of the Asia Global Institute at the University of Hong Kong and a former chairman of the Hong Kong Securities and Futures Commission.