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A key public finance management principle during this time period limits expenditures in accordance with income. But where do income and expenditure come from, and what is the relative importance of their sources in the economy? In an attempt to addressing this question Guan Zhong first divided the population of the country into four categories according to profession: the gentry, the peasants, craftsmen, and merchants. Then he attributed different levels of importance to these classes. For example, the gentry are the protectors of the ruling classes, but the social productivity of the country went up with the increase in the ratio of craftsmen to merchants, according to Guan Zhong's theory of settlement. In this scheme the peasantry ranked lowest. Looking back one can now understand why in China the Marxist theory of social change put peasants at its center as opposed to industrial workers as Karl Marx himself intended in the Capital.
Fan Li and Ji Ran studied business cycles. They provided no explanation that looks even closely like what is in introductory economics textbooks. However, they predicted that the expansion phase of the business cycles would have six years of good harvest, followed by another six years of bad harvest, and by a major famine twelfth year. On the basis of such prediction it made some sense then to fix the prices of agricultural products at between 30 and 80 coins per Dan on average, and to maintain that level no matter the level of harvest, because any price lower than 20 coins per Dan would be disastrous to the farmer and any price higher than 90 coins per Dan would be bad for the merchant. An essential tautology was that `the price will fall when it rises to its highest, and it will rise when it falls to its lowest' (p. 127). The conclusion that scarcity determined the price levels of goods and services is consistent with modern economics. However, price control was a misguided policy.
Ancient Chinese economists also sketched out a monetary theory relying on `correspondence of the heavy and the light' metals in minting coins. A balance of heavy and light metal in coins was deemed necessary because money was for `measuring the value of commodities and ... buying foodstuff to relieve the people' (p.128), and gold was a good measure of value for that purpose. In a way the Chinese had a fractional gold standard, so that the real wealth of the people depended on land and labor. As the ancient Economist Shan Qi put it, `the land will not produce without the people, and the people will not get rich without labor. All the products in the world come from labour and labour from manual work' (p. 129). This assertion suggests that David Ricardo's and Karl Marx's labor theories of value may have a Chinese origin. It also demonstrates that Chinese economists understood the differences between the money and the real economies.
The emphasis on the materials composition of wealth went unchallenged only until Confucius and Mencius came along. From there on morality was important to wealth creation. In other words, wealth building came to depend more on the `righteousness' of the ruling class and less on its profit motives, where righteousness has basis in moral virtues and profit in materials such as land and labor. Hence, it was easy to conclude that "the gentleman is persuaded by righteousness, while a little-minded man by profits" (p.130). In this new understanding the rulers contributed more to wealth accumulation than any other class.
The Confucian-Mencian reflex created tremendous tension such that c. 390-315 BC, Xu Xing and Mohists (Mo Zi) sought to release that tension by modifying it. The modification stressed the role in wealth building of lower-classes. [They argued that?] "when a sage governs a nation, the wealth of that nation may be doubled. ... A sage-king never increases his expenditure that does not bring benefits to the people. ... The sage-rulers cultivate farmlands together with their people and govern them while eating what they themselves produce. ... The Prince of Teng is indeed a worthy prince. Nevertheless, he had not yet heard the true Way. ... Now the Prince of Teng has his granaries, treasuries and arsenals, which are nothing but oppressing the people to nourish himself. How can he be deemed worthy? ... [As] Shi Zi once said, `The Faery Farmer cultivated the farmland and had his daily meals in common with his people in order to persuade them to work in the farm" (pp. 132-133).
Xu Xing also thought that "there should be no two different prices in the market." He favored direct exchanges of goods and services produced by the different social divisions of labor. The following is his clarification of his thought: "Linen and silk of the same length would be the same price. So would it be with the prices of hemp and silk, these being the same in quantity; with the five kinds of grains, these being the same in amount; and with shoes that were of the same size." Obviously this pricing idea is totally ignorant of the factors that determined, which made it easy for Mencius at the time to charge that `that if the way of Xu Xing is to be followed, falsities will ensure one after another; then how could the nation be well governed?'"(p.134). There is no doubt that Xing's ideas were pro-peasant and challenged Mencius's notions that "those who labour with their brains govern others; those who labour with their brawn are governed by others. Those governed by others, feed them. Those who govern others, are fed by them." Xing clearly thought that Mencius's division of labour was a poor apology for "for the rationality and eternity of the feudal exploitation system" (p. 134). In all it is fascinating to see that Chinese ancient economists stumbled upon the "law of one price", they just had a different and incorrect interpretation of it.
Chapter 6 describes Chinese economist thoughts during the 190 - 8 AD (Han) period. Early during this period the thoughts of Jia Yi and Chao Cuo dominated and these sought to relax present-day class antagonisms prevalent up until then. However, the overemphasis of agriculture over commerce, especially Chao's notion that `in grain consist[s] the cardinal function of the sovereign and the essential concern of the policy,' signaled that the pendulum swung too far and helped to concentrate imperial power. According to the editors of An Intellectual History of China, Jia Yi and Chao Cuo also "advocated that dignitary ranks might be bought with grain and guilts ransomed with grain, [which] would contribute to absorbing the surplus money in circulation and diverting it from buying too much farmlands, while the guilty when exempted might keep their status of free citizen, leading to the amelioration of class contradictions. In short, it did promote social productivity and strengthen the unifying imperial power; but at the same time it also opened the way for foul practices such as buying and selling official posts and of protecting the feudal privileges." (p. 185). The new policies also urged saving and accumulation of surplus for provisions and wealth creation, because a well-fed nation is an `invincible', `invulnerable', and `triumphant' nation. To help accomplish all this there must be one central authority to create money and standardize money for it to function as legal tender. Again, we see the modern functions of money and the role of central banking may have originated in China.
Economist Sang Hong Yang attempted to re-emphasize the roles of craftsmen and commerce in the economy instead of `upholding agriculture and repressing commerce' as Guan Zi did. He argued that `when possessed with large fertile lands, the people are still poorly fed, it is because they are not furnished with proper instruments. When with the rich products from the land and the sea, the people are still poorly nourished, it is because they are not sufficiently provided with crafts and commerce. ... There are always more than one way to make a nation wealthy' (p. 186). And based on this understanding Yang recommended that the imperial government should prohibit private ownership, and promote government monopoly, of the production and distribution of certain commodities chief among them salt, iron, and brewery, so that `the profit that iron and salt have brought in is enough to meet all requirements of the government, to afford the military expenses and to provide the resources in times of need; they support the government in many ways. ... The monopoly of iron and salt is not only for the benefits of the government's income, but also for the consolidation of the root [...] and the restraint on the tip [...], the liquidization of political factions and the prevention of both the luxury and the annexation of lands ' (p. 186). Although the text does not provide any justification for government monopoly of brewery, it is clear was for raising tax revenue from it, given its low own price elasticity of demand. Clearly "sin taxes' are not a new policy.
Sang theorized that "the wealth of big cities ... was accumulated by the `managing ability' ... of `the wise' ... multiplied through the process of circulation of commodities. Hence, ... `wealth exists in the managing ability rather than in manual laborer'" (p. 186). This assertion recognizes the important roles of trade, commerce, and human capital in wealth...Read more›An Intellectual History of China Overview
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