I. Coase on Property Rights
In his essay “The Problem of Social Cost”, Coase argues that what are exchanged on the market are not physical things as economists usually think, but rights to take certain actions and rights held by individuals as established by a legal system.
That is to say, property rights are rights to which people are entitled to as is clearly defined by law. Obviously, Coase’s notion of property rights is broader than that of asset ownership only, because according to him it includes, besides ownership, all other rights derived from it, such as use right, right of disposal, operation right and right to earn profits from it. According to Coase, clear demarcation of all these rights is a precondition for market economy.
Therefore, it is not correct to say that unless properties are owned privately would market economy be possible. In other words, private ownership is not a precondition for market economy. This is what the Coase Theorem implies, and it has stood the test of history.
Some scholars, especially some in China, however, have wrongly interpreted “clear definition of property rights” as the realization of private ownership, arguing that only privately-owned properties can be clearly defined in property rights. But this argument did not match historical facts, because exchange of commodities started between clans and tribes in primitive societies which were based on public ownership, not in societies with private ownership. This fact has been evidenced by the world’s historical records and archeological discoveries and by Karl Marx, Max Weber, Fernand Braudel and Ernest Mandel.
II. Guan Zhong’s Theory and Practice: Sharing in Rights and Profits
When considering how to develop a market economy so as to encourage people’s working enthusiasm and promote social productivity, Guan Zhong put forward a theory that, while confirming the ownership of means of production by the monarch as representative of the state, proposed to assign to individual common people the rights to use, handle and manage such means for gains and then split the profits between them and the state. He did not suggest privatizing the ownership right of state properties for the purpose of increasing their values, but advocated clearly defining the different rights, i.e., that of ownership vs. that of use etc., assigning them to different social entities and then split the gains between the owner and the user according to thus defined rights.
When Duke Huan asked Guan Zhong to issue orders for people to cut trees and smelt iron in the mountains for making farming and weaving tools, the latter replied:
“No. If we send prisoners into the mountains to work, they may escape; if we conscribe common people, they may complain and then, if there is a war on the border, they may not be willing to fight. In that case, the whole project will not benefit us but on the contrary become self-defeating at the very beginning. Therefore, the best way is to have individual common people run the whole business by themselves and, based on a proper calculation of the output and profit, let the producers take 70% of the gain, leaving 30% for the state. At the same time, if we manage to balance the supply and demand by regulating the prices, people will work hard at Your Highness’s disposal.” (《管子》轻重乙第八十一)
When Duke Huan asked Guan Zhong if there is a way for the state to have a stable income without taxing the people, the latter replied:
“By timely managing the state-owned natural resources,…[i.e., to summarize, either allowing people to exploit or prohibiting them from exploiting such resources according to the season and at the same time getting all the means of production ready in due time.] If some people cannot afford to buy such means, the state can rent out to them and take back after they finish work and then destroy the rental agreement. In other words, the people provide labor while the state material resources.” (《管子》山国轨第七十四)
That is to say, by outsourcing farm work or renting out the land to individual people and then sharing the gains with them, they will spare no efforts to work on the land without supervision from the state:
“The Way has it that, if we rent out the land evenly to individual households for them to manage by themselves and tell them to do the right work at the right time of the year, they will be aware of the comings and goings of the seasons, the pressing nature of time, and the threat of starvation if they slack, so that they will go to bed late and get up early; all of them, father and son, the elder and the younger, will toil on the land whole-heartedly and tirelessly, sparing no pains. Not to parcel out the land evenly to people would be a mistake – the land would not be made full use of, neither would man power be given full play.… When the gains are to be shared with the people, they know for sure how much they can keep after yielding a certain percentage to the state; and if this percentage is discretely standardized, people will do their best to work the land, everybody in each family joining efforts without supervision from above. ”(《管子》乘马第五)
And Guan Zhong went on to point out that, to make such a system possible, the ruler should not be greedy but willing to share with people:
“Why is a sage looked up to as a sage – it is because he knows how to share with people. If he could not share with people, then he would be no different from a commoner; if he were insatiable, how could he become a sage? Therefore, when the state is in trouble, he will ask the people for support, but while the state is in peace, he stores wealth among them.” (Ibid.)
III. Earliest “Contract Farming System” in Human History
With all the land owned by the monarch as representative of the state, the above-said practice of evenly renting out the land to individual households, or contracting out farm work to individual commoners, amounted to entrusting state-owned assets to common people with their use and management for reaping benefits, or to contracting out to peasants the rights to use and take (partial) profits from state-owned assets. In view of this, the system implemented by Guan Zhong was probably the earliest contract farming system in human history, because it unequivocally differentiated the different rights to property, i.e., public ownership side by side with private use and management, and unambiguously defined the relations between the two.
That is to say, under that system, such natural resources as the land, forests, mines, lakes and marshes and such means of production as various types of equipment and tools were publicly owned by the state while labor privately owned by individual households; then the two sides co-operated in production and split the gains. This property ownership system and policy embodied Guan Zhong’s conviction that “the security of one’s high position lies in sharing benefits with the people” (安高在乎同利).
Guan Zhong’s property rights theory did not only clearly defined and protected private ownership but so did it with state ownership as well. This is where lies the difference between Guan Zhong and some of today’s economists, who tailored Coase’s property rights theory to suit their one-sided interpretation of “clear definition of property rights” as wholesale privatization. When there was urgent need to make state-owned properties more productive, Guan Zhong did not choose to privatize them all but to split the different rights to property (right to use, to manage, to dispose and to gain from) among different parties variously related to the production process and adopt the pattern of “private management under state-ownership with profits split between the two” – he did so because he was well aware that only when the state maintained the most fundamental right, that of ownership, to the bulk of existing assets could it prevent big private capital from plundering the common people and thus guarantee the safety of the state and the stability and prosperity of the society.
The state of Qi’s thriving market economy proves that, so long as property rights are clearly defined and properly protected, commodity exchanges and market economy will come about in any society, be it founded on public or private ownership. Either type of ownership system can accommodate the practice of leasing out or contracting out to somebody else the right to use and profiting from the properties one owns. With agreements made to specify the rights and responsibilities of both the property owner and the property user (a leaseholder, or a contractor, etc.), the commodities produced by the latter are all exchangeable and, moreover, a leasehold tenure or contract title itself may become objects for exchange.
(4) On Resources
I. Material Guarantee for Social Stability
Guan Zhong regarded natural resources as the most important and most fundamental prerequisite for economic development and material guarantee for stability under heaven. Should the state lose its ownership rights and effective control over such resources, economy would not be able to develop healthily nor to guarantee people’s livelihood. Especially, when business tycoons were able to grab a larger part of wealth from the common people, as if “the state were ruled by two chiefs”, the state chief would no longer be able to govern effectively for loss of control of the resources. When Duke Huan asked what was meant by “the state being ruled by two chiefs”, Guan Zhong replied:
“Right now, to pay the taxes that Your Highness collects, the common people often have to sell their products at half the prices, and the other half actually falls into some merchants’ hands – this is the same as if the state is ruled by two chiefs. Those merchants are taking advantage of the loopholes in our policies and capitalizing on people’s financial difficulties at specific times of the year, so that the poor are losing wealth and becoming doubly poor and the peasants are losing their harvests and becoming doubly deficient in food. Therefore, any state chief who cannot control and make good use of the mountain forests, marshes, meadowlands etc. cannot become a successful king under heaven.” (《管子》轻重甲第八十)
II. State Control of Natural Resources
Since natural resources are the material guarantee for stability under heaven, Guan Zhong insisted that the state must be in control of resources and wealth so as to maintain stability all over the state and bring about prosperity for all the people. When Duke Huan asked why a successful state chief had to control natural resources, Guan Zhong replied:
“Forests, marshes and meadowlands are where people gather firewood from and where people can raise livestock to be used as sacrifice. Therefore, we should let people make use of them, let them go pasturing their cattle and sheep or fishing there and give them assistance when needed… so that the state and the people can help and benefit from each other… A capable administrator is good at balancing different factors and interests and always maintaining an ample stock of cash and goods. Hence, everything will still be in control even when something unexpected should happen. Only thus can one become a successful state chief.” (Ibid.)
When the Duke asked about how to manage the assets in specific geographical conditions, Guan Zhong, citing examples from earlier state leaders, replied:
“In the tenth year after the Yellow Emperor issued an injunction against opening up mines, when metallic substance was exposed in the Geluo Mountains because of a flood, Chiyou (蚩尤) usurped control of the mines and made swords, armors, spears and halberds from the mineral products, and that year he waged wars against nine tribes. Later, when the same thing happened again in Yonghu mountains, Chiyou again controlled and exploited the mines, made the famous halberds and dagger-axes, and waged wars against twelve tribes. All other tribal chiefs fought back in rage and the wilds were full of dead human bodies. Obviously, the state’s loss of control over mineral resources precipitated wars.” (《管子》地数七十七)
In view of the above, Guan Zhong insisted that the state should keep centralized control of all resources, which were the state’s economic lifelines:
“A capable state administrator has control of state assets, regulates the prices to promote economy and sets priorities in policies to adjust supply and demand – this is the constant principle for coping with shifting situations. He does not extort anything from his people but always has inexhaustible resources for use as if taken from rivers and seas flowing endlessly. This is called managing all-under-heaven by safeguarding resources.” (《管子》轻重丁第八十三)
In a word, it is impossible to make people prosperous and keep the state in order without the state controlling resources and, therefore, the state must keep control of such resources as economic lifelines – this was how Guan Zhong saw through all history, and his wise and far-sighted understanding of things still has real significance even today.
(5) On Currency
I. Universal Equivalent as Medium for Commodity Exchange
Guan Zhong also had very profound ideas about currency. First of all, he knew that currency, being a universal equivalent, is the indispensable medium for commodity exchanges:
“Gold and copper coins are the medium used by people for exchange of goods.” (《《管子》轻重乙第八十一)
II. The Measure of Commodity Values
Guan Zhong, being fully aware of the various functions of currency, pointed out that the primary function of Gold was its use as the measure of commodity values:
“Gold is the measure of all financial assets.” (《管子》乘马第五)
III. Vital Means for Market Management and Protection of People’s Livelihood
In Guan Zhong’s eyes, currency functioned, more importantly, as a means for managing the market so as to protect common people’s interests and bringing about a stable order under heaven, as he said:
“Grains are the guarantee of people’s lives; Gold and copper coins are the medium used by people for exchange of goods. 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)
“Jade is produced in Yushi, gold by the Ru and Han rivers, and pearls in Chiye. They are all seventy-eight hundred li distant and cut off from Zhou’s capital by mountains and rivers not open to vehicles or vessels. Knowing that they came from afar and were not easy to obtain and hence counting on their preciousness, ancient kings designated jade and pearls as upper-grade currency and gold as medium-grade while copper coins as lower-grade currency. All these three currencies… were used by ancient kings to safeguard all material wealth as guarantee for people’s livelihood and to bring about peace under heaven.” (Ibid.)
Guan Zhong’s view of currency, besides its basic functions, as an important means for securing the livelihood of all people under heaven is so profound and advanced that it has not occurred to any leading economists of the world today, i.e., more than two thousand years after his time.
IV. Earliest Formula for Calculation of Total Demand for Money
Since currency, as the medium for commodity exchanges, is the current money, it is necessary to know how much money would be needed for a market. When Duke Huan asked about management of state finance, Guan Zhong replied:
“There need be statistics of land, population, demand, expenses and money, statistics of a township, a county, and of the whole state. Without knowing all this, it is impossible to govern the state well. [When the Duke asked how to do the statistics, Guan Zhong replied:] How much land is there in a township? How much are the usual expenses in the area? What is their grains yield total? Then, what is the population of a county? How much is its land total? How much money would be needed for circulation within the county? What should be the proper prices for grains that would match the total amount of money in circulation?” (《管子》山国轨第七十四)
This shows that Guan Zhong regarded it a must for the state to know well about its basic conditions, such as population, total size of farm land, prices of goods, and quantities of grains and cloth needed, before figuring out how much money is required for circulation on the market and what are the proper prices for goods that matches the total amount of money. In other words, Guan Zhong already had a formula for calculating the amount of money needed for circulation, which, according to him, was as follows:
Total demand for money = Total quantity of commodities x Prices for the commodities
As the circulation of goods and currency was comparatively slow under the conditions of ancient times and the impact of this slowness on economy was not obvious yet, the issue of the pace of monetary flow was not Guan Zhong’s concern. His formula about the total amount of money demand, however, was the first one of its kind in human history.
