Guanzi (《管子》) -- Earliest Masterpiece on Political Economy in Human History (7): Non-Hegemonic Theory On Macro-Control -- Goods, Currency and Administrative Regulation

EDITOR’S NOTE: Dynamic balance between the Yin and Yang aspects in everything and every relationship is the Way (or Dao) of the world, the Way of every level of existence, i.e., any individual’s body and soul, any family, any business firm, any local community, any state or nation, the whole human society and planet earth, the whole universe and beyond till infinity. The only way for all mankind to achieve and maintain a peaceful and happy life is to conscientiously follow this general trend toward a comprehensive balance (near or relative balance, never absolute or static balance) on and between all levels of existence; it would be even better if people can help facilitate this trend like “pushing the boat along with the current”, but never to trigger or aggravate any imbalance willfully. Otherwise, Nature, or the working of Dao, would force them to obey Its will, so to speak, for a recovery of balance in the form of disasters, conflicts, social reforms or revolutions. Guan Zhong and Duke Huan of Qi of ancient China knew that very well and acted accordingly.

Guanzi(《管子》): Earliest Masterpiece on Political Economy in Human History (I)

Guanzi (《管子》) -- Earliest Masterpiece on Political Economy in Human History (2): Non-Hegemonic Theory On Market Economy

Guanzi (《管子》) -- Earliest Masterpiece on Political Economy in Human History (3-5): Non-Hegemonic Theory On Property Rights, Resources, and Currency

Guanzi (《管子》) -- Earliest Masterpiece on Political Economy in Human History (6): Non-Hegemonic Theory On Government

THE TEXT

I.  Two-Way Regulation of Market Prices through that of Grain and Currency

      According to Guan Zhong, the primary way to regulate the market should be through government control of the currency and grain.

        How were the two -- currency and grain -- related, then? Guan Zhong found that there was an inverse relationship between their prices:

        “When the grain goes higher in prices, the value of gold dropped, and vice versa, the two being always in an inverse relation, never fixed. Therefore, a capable sovereign should pay attention to grain prices.” (《管子》轻重甲第八十)

Guan Zhong and other statesmen before him knew very well that grain is of vital importance to people’s livelihood and at the same time that currency is used by people for exchange of goods. Therefore, he said:

        “Ancient kings were good at regulating currency to secure supply of grains for common people so that their manpower could be brought into full play.” (《管子》轻重乙第八十一)

In Guan Zhong’s view, once the state is in control of both grain and currency supplies and making two-way adjustments of the market, there would be peace under heaven. What, then, were the concrete measures used for such adjustments? They were the establishment of state storage of grains and that of a market regulation fund, or, as called by Guan Zhong, “the art of weighing and balancing” (轻重之术):

         “Therefore those good at running the state make a point of selling off stored commodities when they are in short supply and buying in those oversupplied on the market. When things are in abundance and, so, people are willing to sell cheap, the sovereign should buy them in at low prices; When things are lacking and, so, people are willing to pay higher prices, the sovereign should sell dear. By buying cheap and selling dear, not only could the sovereign make ten times of profits, but the prices of all goods can stay stable after such adjustments. The great benefit from weighing and balancing lies in purchasing at higher prices for goods too cheap on the market and storing them to be sold later at lower prices when they become too expensive, so that the supply of goods remain steady as prices would not change with that of seasons; if the balance is not well kept, prices would soar. Knowing this, the sovereign would try to maintain the balance with the above measures, to make sure that a city of ten thousand households have ten thousand Zhong [volume unit -- translator] of grain and ten million strings of cash in store; a city of one thousand households have one thousand Zhong of grain and one million strings of cash in store. They are used to support farming during Spring ploughing and Summer weeding seasons. All farm tools, plant seeds and grain supplies are provided by the sovereign. Hence, wealthy traders would not be able to exploit the common people.” (《管子》国蓄第七十三)

        That is to say, if the state is in control of the currency and has established a food price equalization-reserve fund and grain storage, it can buy in grain to be stored when its prices drop and, when the prices become too high, sell the stored grain to drive them down and keep them stable. In this way, currency and grain and other commodities would always be kept in balance between supply and demand and exchanged at equal values; thus inflation or deflation would be avoided, people’s enthusiasm for production protected, their livelihood needs met, merchants prevented from exploiting common people through price manipulations, and stability secured under heaven.

        In the field of inter-state trade, Guan Zhong proposed that the state needed to set price standards for commodities based on their assessed values as a directive for the market so as to ensure that their prices corresponded more or less to their values in terms of the currency while also roughly in line with those of other states. Thus, neither would commodities flow to other states at too low prices, causing losses to the state, nor would other states be motivated to dump their goods at too high prices, reaping huge profits and also causing losses to the state.

        All the above, suggested and implemented by Guan Zhong, made it possible to realize supply-demand balance and price equalization in the state of Qi in ancient China. Such classical expositions are the earliest systematic ones the world knows about so far on the issue of market and price balance management through two-way macro-adjustments of supply and demand of commodities and currency. And such profound thoughts are still valid today, being more comprehensively contemplated and more practicable than Freedman’s monetarist theory, which relies on one-way control of the currency.

        In a word, Guan Zhong successfully proved to us that regulation of the market was an important means to balance supply and demand, to stabilize prices and, thus, to prevent powerful merchants from manipulating the market and plundering common people, to maintain social order and run the state effectively.

        As grain was a necessity for survival, i.e., the most important and basic commodity, its price could serve to represent the trend of prices of all goods in general. To know how to regulate grain and currency, one has to understand the relation between the supply of gold (as currency) and that of goods. This is because:

        “Gold is used to measure prices and expenses. To know how gold works is to understand the difference between wastefulness and frugality, which means moderation in spending. Too little spending would impede any endeavor whereas overspending lead to scarcity of goods. When spent too little, gold prices would drop, which would make any endeavor difficult; but when spent too much, gold prices would rise, which would make goods cheap and discourage production. If underproduction is not observed till goods are sold out, it shows lack of proper estimation; if overproduction is not noticed till the last minute, it shows lack of moderation. Neither should be allowed, and there is a way to avoid both.” (《管子》乘马第五)

        Obviously, Guan Zhong was well aware that government spending and public consumption had an important bearing on the supply of currency and commodities and moderate spending was a must to avoid over- or underproduction. This involved proper handling of two pairs of relationships between demand and supply: one of goods and one of currency. Only moderate spending would not upset the balance between commodity supply and demand; only the right amount of currency supplied would stay in balance with the market’s demand for it.

        Guan Zhong’s approach to the realization of the above is for the state to implement policies and issue edicts according to the order of importance and urgency, with a view to keeping control of the currency and maintaining a proper balance in goods’ supply and demand and prices, as he said:

     “Wise administration is like measuring gold on a balance: if the measuring weight is too heavy, the gold will be thrown off balance. Hence, the kind of administration that can weigh the different factors and follow the Great Way in keeping them in balance will make the state powerful and invincible. Now that grain price is higher in our state than in other vassal states, they will be drained of their grain like water rushing out to some low-lying area. So, goods come and go with their prices up and down. If something has been accumulating here attracted by a higher price and we take action when it is beginning to fall in price but not starting to disperse yet, then the whole accumulation will be ours. When goods are hoarded, their prices go up; when put on sale in large quantities, the prices come down; and when distributed, people will have plenty. When money is inflated in value, people will try every means to earn it; when its value drops, they will not spend. Therefore, the prices of things should be regulated till they are proper. Grains are the guarantee of people’s lives; money is the medium for exchange of goods; and state edicts are issued for adjusting priorities. ” (《管子》揆度第七十八)

        To persuade Duke Huan to accept his suggestion for regulating money supply, Guan Zhong cited King Wen and King Wu of Zhou as precedents from the past:

        “The ancient kings designated jade and pearls as upper-grade, gold as medium-grade and copper coins as lower-grade currency according to their different degrees of scarcity and preciousness. When state monetary policy was tight, gold price went up; when the policy became lax, it came down. Among the ancient kings, it was King Wen and King Wu who weighed and adapted their policies to raise or depress gold prices while controlling the upper- and lower-grade currencies.” (《管子》地数第七十七)

        Guan Zhong carried on the ancient kings’ idea and practice of currency regulation; he did not stop at that, however, but creatively control the supplies of both the currency and grain to regulate the market through a two-way channel and bring about peace under heaven.

        Guan Zhong’s policy of macroeconomic regulation of commodity prices and supply-demand relations on the market by using material reserve and money control was quite advanced. In contrast, modern Western monetarist policies only make use of money control and the results are never satisfactory. Many governments have come to realize it and rejected this one-way approach. For instances, China is using reserves for grain, cotton and petroleum for regulatory purposes. The U.S. and a few other developed countries are using strategic petroleum storage to control its price. Basically this is the same approach adopted by Guan Zhong, though currently being applied to a few goods only.  It can be predicted that Guan Zhong’s two-way approach to balance the market through regulation of both the currency and strategic goods will be accepted by more and more countries.

III. Special Open Market Operations for Special Conditions of the State

        How, then, should the state handle the supply of currency to balance the market? Guan Zhong proposed that different measures should be taken for states of different sizes and with different conditions:

         “States with one hundred chariots can issue bonds while taking other balancing measures to ease price fluctuations with the change of seasons and then all necessities can be provided. States with one thousand chariots should monopolize the exploitation of natural resources for making tools, weapons and all kinds of material goods and raise or lower the salaries for their officials and troops according to the good or bad harvest of the year, and then all needs will be met. And states with ten thousand chariots should issue proper edicts according to the crop situation of the year and the priorities of people’s needs to maintain a balanced market, and then there would be plenty for all.” (《管子·国蓄第七十三》)

IV.  Regulation of Money Supply with Luxury Goods

        Modern nations often adjust the circulation of currency by purchasing or selling government bonds through open market operations. In China’s Spring and Autumn period, government bond was not common, though it had appeared. One other thing Guan Zhong made use of to tighten or loosen money supply was luxurious treasure collectibles, as he said to Duke Huan:

        “If speculative manipulation of the market happens, Your Highness’s policies will lose their efficacy and the common people their means for survival. Therefore, a capable administrator should control something else besides the two major items susceptible to speculation [i.e., grain and money] … A state with ten thousand chariots should have in store treasures worth ten thousand jin of gold; that with one thousand chariots treasures worth one thousand jin of gold; and that with one hundred chariots treasures worth one hundred jin of gold. The use of such treasures together with policy edicts constitutes timely intervention in the market.” (《管子》山权数七十五)

        In Guan Zhong’s view, treasures could be used to absorb speculative capital, which was to be put back into circulation at a later proper time, as a way to regulate money supply and the market. The treasure he used was tribute tortoise shells. At the time when Duke Huan adopted this method, the most precious tortoise shell equaled the value of seven thousand jin of gold, the second best four thousand and the least valuable one thousand jin of gold. When the state was in urgent need of money during times of crises, he used them as collaterals to get loans, thus taking out excess money from circulation, and, when the crisis was over, recovered the treasures, thus putting back the money into the market. The total amount the state of Qi could obtain by mortgaging its tribute tortoise shells could reach twice the value of all her land.

        Obviously, Such treasures played the same role as that of jewelries and other luxury goods today in absorbing excess money from the market, or that of stocks and bonds, common in contemporary world, in regulating money supply and demand. In that ancient time when government bond was not in vogue yet, Guan Zhong’s use of treasures for this purpose was indeed a uniquely intelligent way of operation on the open market.