Was Confucius the first economist?

inSight

13 Sep 2007

Was Confucius the first economist?

The great Sage may have been ahead of his time.

On a recent visit to Beijing I had the chance to see a frame of superb Chinese calligraphy of, I think, the "lì" (隸) style, quoting the "Daxue" (大學) or "Great Learning" of Confucius. As I looked at the calligraphy, I thought about the lessons that we could learn from "the Model Teacher" (萬世師表).

Chinese classics are never easy to translate into any other language, or even to interpret in modern Chinese. But I did afterwards find a translation by James Legge, in his Chinese Classics, vol. 1: "There is a great course also for the production of wealth. Let the producers be many and the consumers few. Let there be activity in the production, and economy in the expenditure. Then the wealth will always be sufficient" (生財有大道。生之者眾,食之者寡,為之者疾,用之者舒,則財恒足矣。).

I have never been good at Chinese classics, but I do have a keen interest in economics. What could Confucius have meant by "wealth", if he so readily linked it to production and consumption, promoting the former and discouraging the latter? The difference, of course, is savings, for whatever is produced and not consumed is saved. And with the use of money as a store of wealth, a medium of transaction and a unit of accounting, savings are equivalent to investment, or, in national accounting terms, gross domestic fixed capital formation, which increases productive capacity and therefore the growth potential of the economy. If this was what he was thinking of, in about 500 B.C. (2,500 years ago!) when the level of monetisation in the economy must still have been quite low and the financial system almost non-existent, to call him a Sage is an understatement. Adam Smith pales in significance in the field of economics when one considers that it was not until almost 2,300 years later that he wrote, in his Wealth of Nations, in the chapter on "Accumulation of Capital", that "capitals are increased by parsimony, and diminished by prodigality and misconduct".

But then, of course, you can overdo it; save and invest too much, resulting in the productive capacity of the economy being far higher than the aggregate demand for goods and services, and therefore high unemployment and possibly deflation or recession. How about the question of choice, to the extent that economic policies can influence such things, between sustainable economic expansion and painful boom-and-bust economic cycles? I wonder whether that featured in Confucius' thinking. I doubt it, because much of the "Great Learning" is about the cultivation of the person, about the ruler first taking pains about his own virtue, thus giving him the people, the territory and wealth (是故君子先慎乎德。有德此有人,有人此有土,有土此有財,有財此有用。). It is obviously too much to look for a clear distinction between stock and flow, and an understanding of the economic dynamics between them in 500 B.C.

When looking at the calligraphy, I recalled the high savings rate of the Mainland, well over 40%, and the current concerns about over-investment and whether the rapid pace of economic expansion can be sustained. I hope the Mainland authorities have not been following too closely the quote from Confucius displayed so prominently in the conference room. I say let the producers be many and the consumers many as well. Let there be activity in the production, and activity in the expenditure. But perhaps not so much as to emulate a particular developed economy with a savings rate at around zero, even though one cannot fairly describe the situation there as involving prodigality or misconduct.

We have always been talking about making the capital markets on the Mainland and Hong Kong inter-active, and the advantages of greater mobility of capital between the two economies, I wondered whether Confucius would approve of the production of wealth, and Adam Smith of the accumulation of capital, through the investment of savings in stock markets. "The virtuous ruler, by means of his wealth, makes himself more distinguished. The vicious ruler accumulates wealth, at the expense of his life." (仁者以財發身,不仁者以身發財。). What was in Confucius' mind?

 

Joseph Yam
13 September 2007

 

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