Abstract The parallel between the economic reforms of Chinese Song Dynasty Chancellor Wang Anshi and those associated with Keynesianism has been rather neglected so far. However, understanding the original ideas of Wang Anshi’s economic thought and his reform policies, and comparing those with John Maynard Keynes’, we argue that Wang Anshi’s reforms well deserve the label of ‘proto-Keynesianism’. Both sides reach a consensus about the importance of government’s expenditure to support aggregate demand, increasing inducement to invest and state control of the economy in order to combat economic depression, especially as regards unemployment. 1. Introduction Keynesian economic policy as we know it emerged as a reaction to the Great Depression, proposing ‘little more than the positive relation between government expenditures and national income, or in more sophisticated versions something closer to Abba Lerner’s idea of “fiscal federalism” in which fine-tuning expenditure and tax policy can stabilize the level of aggregate demand at full employment’ (Kregel, 1995, p. 261). However, more than 800 years before John Maynard Keynes, in 1069 and 1074 AD, Wang Anshi (1021–1086), an eminent statesman and Chinese Imperial Chancellor under Chinese Northern Song Dynasty, developed and implemented an economic policy which shared the same goals and approaches in one of the most important economic reform endeavors in Chinese history. He did so by a completely different way of reasoning, but there is a parallel that is hard not to notice and that is most interesting from today’s perspective. Given the re-emergence of China, forays into classical Chinese economic and social thought and policy are more relevant than they have ever been within recent memory, seeing that in spite of their sophistication and complexity, they hardly form part of any canon within the global-Western discourse (see Drechsler, 2015B). The parallel itself is known, however; in 1944, for instance, Henry Wallace called Wang Anshi a ‘Chinese New Dealer who lived about 900 years ago’ (Li, 2014, p. 216). (Of course, Keynes’ thought, his policy recommendations, Keynesianism and the New Deal are not the same, but in this paper we are concerned with rather broad brushstrokes.) Yet, unlike the ones between Wang Anshi’s economic reforms and socialism or ‘state socialism’ in the German Historical School sense (e.g. Gowen, 1914; Franke, 1931), the parallels with Keynesianism have not attracted much academic attention. The current essay aims to fill that lacuna in an initial way. Specifically, what we will try to do is to understand Wang Anshi’s economic thought and his design of economic policy contained in the copious texts he wrote—including poetry—as well as in the policies he actually implemented in order to sketch out what his ideas really were, and to examine whether his was what we can call a version of the Keynesianism that emerged centuries later—proto-Keynesianism, then, to be more accurate. We will not argue for any influence of Wang on Keynes of any sort (there is no indication that Keynes was actually aware of the Chancellor’s work)—we are looking for parallels, not origins. This approach was taken already by one of us in an essay on Wang’s role in modern Public Management (Drechsler, 2015A), and the current theoretical approach is based, again, on Hans-Georg Gadamer’s hermeneutics (Gadamer, 2013; Drechsler, 2016). According to Gadamer, ‘a person who wants to understand must question what lies behind what is said. He must understand it as an answer to a question, if we go back behind what is said, then we inevitably ask questions beyond what is said. We understand the sense of the text only by acquiring the horizon of the question—a horizon that, as such, necessarily includes other possible answers’ (Gadamer, 2013, p. 378). Following this framework, the next section will reconstruct the questions Wang Anshi’s economic texts tried to answer, viz. the economic crisis he faced. In the third section, the essay will illustrate the Chancellor’s actual economic policies as implemented within his reforms. The Chancellor’s economic thought and the reasoning behind the policies will be discussed in the fourth section. And finally, on that basis, we will examine more closely to what extent all this can be called proto-Keynesianism. 2. Context Interwoven with complex problems regarding national defense, public service and state finance, an economic crisis haunted mid-eleventh-century China, ruled by the Northern Song dynasty (Smith, 2009, pp. 347–87). The Northern Song’s economy was largely rural: government statistics show that in 1034, 80% of the empire’s population comprised rural households (Li, 1986, p. 2780). But this system was not a closed natural economy. Because the Chinese state had already given up its ownership and distribution of land within villages and deregulated the market in the cities since the mid-eighth century, the eleventh-century urban and rural economy was to a great extent commercialized, dominated by private ownership of land, expanding urbanization and widespread use of money (see McDermott and Shiba, 2015, pp. 321–98; Golas, 1980, pp. 298–99). Actually, the global-first true paper money was invented in the Southwestern regions of the Northern Song (Golas, 2015, p. 210). Between the 750s and the 1050s, the Northern Song not only went through economic changes, but also through profound political and social ones, such as China’s loss of dominance in East Asia and the disappearance of the large oligarchical-literati clans that so far had dominated the government (see Bol, 2010A, pp. 7–42). All this seemed to make the previous mode of organizing the empire untenable, and so, encouraged by the early success of the Northern Song’s regime, since the mid-eleventh century, literati from different schools of thought intensively debated how the state in a changed world should be structured (see ibid., pp. 7–8). Wang Anshi and his followers formed one of the four most influential camps in this debate (see Liu, 1959, pp. 22–30), and his reform can be regarded as a response to those changes (Bol, 2010A, pp. 72–77). According to Wang Anshi, the rural part of the economic system was at the root of this crisis: In recent decades, farmers have always lived very hard lives. Government only puts a burden on them but seldom relieves them. Take the capital’s suburbs as example: most of the irrigation projects like dykes and canals have not been maintained; deserted arable lands contiguously stretch for hundreds of square miles; family after family goes bankrupt and is forced to abandon its village and move elsewhere. This is what the situation looks like nearest to us, so we can imagine what it is like in the more remote regions. Once a disaster happens, corpses of victims of starvation are piled one upon the other, and the roads are filled with refugees. (Xu, 2014, p. 6050; all translations are our own) According to Wang, especially the deficient construction of irrigation projects was one of the main causes of the farmers’ economic misery (Wang, 1959, pp. 446, 664). It is often remarked that small farmers (the fourth and fifth ranks according to the government’s five-rank classification of the population) constituted 40–60% of total rural households in Northern Song China, but that they only possessed a bit more than 20% of the cultivated lands, with which they were unable to secure sufficient income for their families. Thus, they had to take out loans from the well-capitalized landowners (the upper three ranks in the classification), who owned almost 80% of the land, which often led to small farmers’ chronic indebtedness and subsequent loss of land and bankruptcy (see Golas, 1980, pp. 299–304). The interest rate for rural loans was very high: government set the ceiling at 100% p.a. (Li, 1986, p. 522), so we might imagine what it usually was. The beneficiaries of this high interest rate were ‘the wealthy landowners, many of them officials’ (Golas, 1980, p. 302). Song officials always sought to build their economic foundation through land acquisitions, and at that time ‘land was everyone’s first choice for security and respectability’ (ibid., 302). Wang Anshi and his followers, but even his opponents, named them 兼并之家, literally those who annex others’ wealth, translated as ‘plutocrats’ by Williamson (1935) and ‘engrossers’—‘magnates who preyed on the poor and usurped the fiscal prerogatives of the state’ by Smith (2009, p. 389). We use the term ‘exploiters’, as this seems to catch the original meaning best in contemporary English. Most, if not all, upper three-rank rural and propertied urban households were considered exploiters (see Xu, 2014, pp. 6045, 6050). For Wang Anshi, they were a major enemy of his reform. Some of them were the owners of large estates and rural usurers to whom small farmers appealed for help but who ‘always take advantage of farmers’ temporary shortage of money and lend to them usuriously at an interest rate of more than 100% p.a., so potential borrowers are often denied the funds they need’ (Xu, 2014, p. 6041). Some of them were large urban businessmen and speculators who were responsible for the instability in the urban commercial market. But all of them were well connected to bureaucrats and had representatives in government. As Wang Anshi told the Emperor: ‘The exploiters are influential and powerful. They are able to influence the attitude of literati and officials. … I am afraid Your Majesty cannot resist their malicious opposition to our reform’ (Li, 1986, p. 5433; see Wang, 1959, p. 773). The empire’s urban economy was suffering from an instability of the commercial market, partially for similar reasons and with the same culprits. Wang Anshi’s urban economic policy was mainly triggered by a report on the problems of the market of the capital city which stated: The commercial market in the capital is in chaos: prices are extremely unstable. The rise and fall of prices can be multiple times that of the equilibrium price in the absence of market manipulation. The well-capitalized urban exploiters take advantage of the chaos and usurp control of the market. When the merchants come to the capital in droves and there is a surplus of goods, the exploiters keep the price low and purchase large amounts of goods for storage. When merchants rarely come and the goods are short, the exploiters use their storage to push up the price. In this way, the exploiters acquire very high profits and monopolize a large amount of wealth, but the merchants can barely make a profit, so that they become unwilling to do business in the capital city. The residents suffer from this process and have hard lives. (Li, 1986, p. 5622) Wang Anshi thought that the main cause of this instability was that ‘the state no longer holds its control over the economy, so well-capitalized private actors take the chance and control the market by themselves to serve their own interest’ (Li, 1986, pp. 5622–23; see Weber, 1986, pp. 425–26). In his opinion, the lack of state control of the economy could not only explain the problems of the urban commercial market, but it also was the fundamental reason why the whole national economy faced crisis: ‘we are not administering finance and the economy with the correct method’ (Wang, 1959, p. 417). And ‘the government allows everything to go freely as it desires, nor has any adequate effort to determine outcomes ever been made’ (Wang, 1959, p. 446). In other words, there was too much laissez-faire and too little state control of the economy, which led to market failure with catastrophic effects. 3. Economic policy What made solving the economic crisis more urgent for Wang Anshi was that the Shenzong Emperor (1048–1085, r. from 1067), who had just ascended to the throne, was determined to recover China’s lost territory and eliminate the ‘barbarians’ threat to national security by conquering them, but his ambition was severely limited by the empire’s depressed economy (Smith, 2009, pp. 351–53). In the face of all the problems the Northern Song faced, Wang Anshi’s administration therefore prioritized curing the economic crisis, since as he said to the Emperor: ‘The reason why we couldn’t undertake notable military initiatives on the frontier now is because of insufficient economic resources, so I put the proper management of the economy as the top priority… And in managing the economy, agriculture is the most urgent; in agriculture, the most urgent is relieving and stimulating farmers and restricting exploitation’ (Li, 1986, p. 5351). To deal with insufficient investment and high interest rates in the rural economy, Wang Anshi transformed the Court of Agriculture (司农寺) from a relatively ceremonial and decorative central government agency into a development bank providing low-interest loans for social relief and agricultural development and a public works administration, as well as a rural reform agency which was in charge of three main reform policies for the rural economy: the ‘Green Sprout Loan Act’ (青苗法), the ‘Corvée Exemption Act’ (免役法), and the ‘Agriculture Promotion Ordinances’ (农田利害条约) (Xu, 2014, pp. 3687–89). a) The ‘Green Sprout Loan Act’ was a social-welfare and development-finance project. The money it used came from the government’s granaries which Wang Anshi believed did not fully pull their weight because of stagnant management (Xu, 2014, p. 6041). According to the Act (see Xu, 2014, pp. 6041–55), when farmers faced a temporary financial crisis, they were allowed to borrow the granary deposits, the coins and grains, as a loan—hence called a ‘Green Sprout Loan’. At least five borrowing farmer households should form a mutual-guarantee unit, and that unit should mortgage all its lands to sign a contract with government. The loan was then issued to the unit and distributed between its members. The interest rate for the loan should be set by the district government based on the lowest price of grain in the past ten years in that district, and the ceiling was 20% p.a. As long as tenant households received a guarantee from their landlords, they were also allowed to take out a loan. After demands of rural households were satisfied, the project could also cover propertied urban households. In order to prevent the loan system from becoming just a source of profit for the government, it was regulated that borrowing should be voluntary and that the deposits of loans and their interest should be under the jurisdiction of the Court of Agriculture, i.e. outside of the usual public finance system, making it ‘legally impossible to embezzle the loan and its interest to finance the government’s ordinary fiscal expenditure, so that the project will only serve to relieve the farmers’ (Xu, 2014, p. 6049). Wang Anshi believed that the farmers could thus overcome temporary financial crises and focus on tillage; exploiters could not take advantage of the farmers’ difficulty; and especially, farmers could be motivated to reclaim more lands and construct more infrastructure, so that agricultural production would be improved (see Xu, 2014, p. 6041). The Chancellor expected that lowering the interest rate would increase the inducement to invest in the agricultural sector. As he wrote in the act: This is not just about disaster relief. When farmers receive the loan, they will not suffer from the shortage of means of living between one harvest and the next, so that they can focus on tillage. That way, the farmers could be motivated by the government to reclaim more lands and construct irrigation projects to improve their productivity. As the result, agriculture will be promoted automatically. (ibid.) Later, in retrospect, he regarded himself proven correct on this point (Wang, 1959, p. 774). b) The ‘Corvée Exemption Act’ was an institutional adjustment. At that time, farmers were required to fulfill extensive compulsory labor service, like police services, tax-collecting or tax transport, for local government, which was a heavy burden on them (see Golas, 2015, pp. 167–70). According to the Act, all households could pay a fee to avoid this compulsory service, which government could use to hire the service it needed (Wang, 1959, p. 440; Li, 1986, pp. 5521–24). Here, Wang’s parallel with the West about monetization of corvée should be noted, which even started at the same time—in Northwestern Europe, during and after the eleventh and twelfth centuries, farmers could provide rents in kind or money in lieu of their corvée duty (Ganshof and Verhulst, 1966, pp. 314–16). However, this was to benefit the lords, whereas, e.g., the suggestion for such a switch by J. H. G. Justi, the towering figure of Cameralism, in the eighteenth century was focused on relieving the farmers (Klein, 1961, p. 175); likewise for Wang Anshi. c) The ‘Agriculture Promotion Ordinances’ were a set of detailed arrangements to promote land reclamation and irrigation projects, and they are at the core of Wang Anshi’s rural policy measures. According to the ordinances (see Xu, 2014, pp. 5958–59), every county government should report to its superior district government regarding land conditions, hydrological conditions and the conditions of the irrigation facilities in their county. Meanwhile, they should draft and report detailed proposals for reclaiming lands and for constructing, renovating or improving irrigation facilities. After being verified and deemed worthy by the district and provincial governments, these projects should then be carried out by beneficiary households. If the cost was beyond their capacity, they should be issued Green Sprout Loans. If these were not sufficient, very wealthy households should be motivated to provide loans, for which government promised to help collecting the debt. For the urban commercial market, Wang Anshi’s countermeasure to instability was to set up a nationwide buffer stock system to regulate price and demand. There were two main reforming policies: the ‘Equitable Tribute Act’ and the ‘State Trade Act’. According to the former (see Xu, 2014, pp. 3121–22), the empire’s rigid tribute system, which collected pre-set types of goods from specific locations and transported them to the capital (see Golas, 2015, p. 165), was turned into a flexible buffer-stock project. The Commissioner of Supply, who was in charge of collecting and transporting the tributes from the most prosperous six Southeastern provinces of China, was granted a sum of government money. When collecting tribute, he would sell the collected tribute goods in markets where there was a shortage and use the income to buy goods in markets where there was a surplus. The ‘State Trade Act’ was a further step in establishing the buffer-stock scheme as well as an urban financial agency, implemented by State Trade Agencies in large commercial cities and State Trade Commissions in every province (see Li, 1986, pp. 5623–24). The State Trade Agency or Commission used government money as principal and recruited merchants as their compradors. The compradors were usually the well-capitalized urban exploiters who benefited from market instability. The Agency recruited them to control them. The Agency was supposed to purchase unsalable goods, of which the price should be set based on the equilibrium price in the absence of market manipulation and the negotiation between compradors and sellers, then store them and sell them when there was a shortage. In this process, the Agency should not seek excessive profit. Merchants on the market who needed financial assistance could apply to borrow goods or money from the Agency, but they should mortgage their property for equivalent-value loans. The annual interest of this loan would again be 20%. 4. Economic thought But Wang Anshi’s economic policies were not mere reactions to the vagaries of the times and the problems of the Northern Song—in fact, they were genuine practice in the sense of applied theory (Kant, 1923). We would argue that his economic thought came from and is part of Confucian economics. Since what Confucianism is and what it is not was and is even today heavily contested (see only Tu, 1991), partially because it directly addresses Chinese identity, this may be a controversial statement, but Wang identified as a devout Confucian scholar and statesman. Contemporary rivals and later detractors, until today, would say that he is not, but—apart from the fact that ‘Confucianism’ in his context is a highly rhetorical label denoting alignment with and restoration of tradition—his policies and oeuvre, including economics, are a significant and, we would argue, rather faithful and even constituent forms of Neo-Confucianism, which is by no means monolithic (Drechsler, 2015A). As the Shenzong Emperor said to Wang Anshi when he accepted Wang’s submission of New Interpretations of Three Classics (三经新义), ‘Today, everyone has a different interpretation of the Confucian classics. Then how to unify the principles of behaviour? By publishing the interpretations you wrote as the orthodoxy to unify scholars’ (Chen, 1977, p. 374). Wang thought the best way out of the crisis in his time was to carry out the Confucian principles manifested in the policies of ‘ancient great Confucian rulers’ (see Wang, 1959, p. 410). The eminent New Confucian economist Huan-Chang Chen (1911, pp. 76–77, 168–75; on the difference between Neo- and New Confucianism, see Drechsler, 2018) defined Confucian economics as meaning that the state should promote the people’s economic life, proactively enter the economy, control consumption, production and distribution in order to equitably diffuse wealth to all, as Confucians hold—Chen argued—that wealth is the cause of happiness, and in order to make people equally happy, the state should enable them to enjoy wealth equally as well. Wang Anshi believed that Zhouli was the blueprint for good government in his time (Wang, 1959, p. 878). Since the Tang Dynasty (618–907), Zhouli has been recognized as one of the most fundamental Confucian classics which defined what Confucianism is (Yao, 2011, pp. 56–57). Wang’s interpretation of Zhouli differed from some previous orthodoxy, although it became an orthodox text for the Northern Song itself from 1075 (Chen, 1977, pp. 374–80). It advocated a centralized fiscal-activism role of the state in the economy (see Bol, 2010B; Song, 2010; Wang, 1959, p. 773) in a way that the Berlin sinologist Otto Franke later called ‘perfectly bureaucratized State Socialism’ (Franke, 1931, p. 1; meaning, basically, the Bismarckian-Prussian system, not the Soviet Union, see Drechsler, 1997). The basis of Wang Anshi’s own economics, in his own words, is the assumption that ‘the wealth of individual households depends on protection from the state; the state’s wealth depends on taxes and tributes from the people; the people’s wealth depends on extracting wealth from nature’ (Wang, 1959, p. 795). Or, to put it in another way: what is needed is ‘to prompt all resources in the country to generate wealth for the whole country and to collect and use that wealth to cover all expense in the country’ (Wang, 1959, p. 417). Three main components are part of this basic insight: a) Wang Anshi saw the full exertion of productive capacity as the source of wealth of the country. In his system, all human and natural resources should be fully prompted to extract wealth, so that the people could be as wealthy as possible. For this purpose, he especially valued public investment in infrastructure, which made the full unfolding of productive capacity possible. The monsoon climate, the river networks and the intensive cultivation in traditional Chinese agriculture made building irrigation facilities as indispensable to agriculture as coal-mining and iron-making during the Industrial Revolution (Needham, 1980, pp. 413–22). Wang Anshi believed that the duty of the Office of Winter, one of the six ministries in Zhouli which was in charge of state-owned factories and public works, was ‘to make the country wealthy, to cultivate and nourish the people’ (Wang, 1985, p. 10). b) Wang Anshi emphasized that public finance should be actively used to expand the economy. He criticized his colleagues’ austerity policy, focusing on extorting from the people in order to maintain a short-term fiscal balance, as ‘parents trying to earn money from their children’ (Wang, 1959, p. 795). He suggested that instead, ‘parents should teach their children how to earn money’ (Wang, 1959, p. 795), viz. government should pro-actively spend to stimulate the economy and to focus on long-term budget balance, based on an expanded economy to ‘enrich the state without raising taxes’ (Chen, 1977, p. 326). Contrary to his opponents’ opinion that ‘all wealth in the country is either kept by the state or preserved by the people’ (ibid.), Wang Anshi believed that the economy could expand and that fiscal policy was not a zero-sum game between people and state. As e.g. Erik Reinert has argued, this worldview, a mental source of the economic development of the Western world, was a key feature of Mercantilism, an economic policy Keynes likewise referenced (see Reinert and Daastøl, 2004; Reinert and Reinert, 2005). Interpreted from Zhouli, Wang’s fiscal theory assumes that on the one hand, the state should invest its resources as much as possible to promote the economy to ‘attract’ more wealth to come to the treasury, and on the other hand, to ‘collect’ as little as possible to avoid extorting wealth from the people (see Wang, 1985, p. 17). As he said in one of his poems, ‘The Fourth Out of Nine Fables’, the Ancient Great Rulers’ fiscal policies included the following aspects: Who can’t afford wedding and funeral Will be granted loan for relief. Who faced loss in bad harvest Will be lent credit to continue undertakings. Surplus goods will be purchased; And sold out when it became shortage. (Wang, 1959, p. 160) I.e., fiscal policy should be focused on positive expenditure to relieve the people, support the investment and stabilize demand. That is why Wang Anshi urged his colleagues to wisely utilize the ‘collection and distribution, purchase and sale’ (‘散敛开阖’) of government finance to optimize the economy (Wang, 1959, p. 512). c) Wang Anshi specifically emphasized ‘restricting exploitation’; he did not want to abolish wealthy landownership per se for egalitarian reasons. In fact, he was opposed to some of his colleagues’ proposals for nationalization of land. He saw them as neither applicable nor beneficial, because he saw the irreplaceable function of the wealthy in filling in the gaps the state left in the economy, including the granting of loans (see Li, 1986, p. 5181), as long as this was done decently. His problem with the exploiters was that they usurped the control of economic power from the state and abused them for their own interest, to manipulate prices, interest rates, investments and market exchange, which, for him, violated the principle of the Ancient Great Rulers. In general, Wang Anshi’s ‘restricting exploitation’ was primarily focused on retrieving control of the economy from the private sphere: It is the wealth that unites the people … If the wealth cannot be administered properly, the lowliest men living in small villages and narrow alleys in towns can take advantage of the situation to usurp the control of economy, monopolize it and compete with the state for control over the people in order to serve their unlimited greed. They don’t have to be very noble and politically powerful to do so. In these circumstance, if the Emperor claims that he doesn’t lose control of the people, it’s just words. And even if the Emperor focused on enriching the people and worked hard, it would barely be meaningful (Wang, 1959, p. 860–61). His poem entitled ‘On Exploitation’ (Wang, 1959, p. 114) states: The Ancient Great Rulers treated the people as their own sons; Controlled all wealth, public and private. The states controlled all economic powers, As the pole star centers the orbit of all stars. The state controlled all wealth-granting and -collecting; Exploitation was regarded as a crime. Nonetheless, this did have an egalitarian component as well, as their principles, Wang Anshi explained, were ‘to make the have-nots have, to make the harmful gone, to take from the rich to aid the poor’ (see Xu, 2014, p. 3122). 5. Proto-Keynesianism 5.1. The questions Wang and Keynes answered In light of these considerations of the context, policies and theory of Wang Anshi’s economic reforms, let us now look at those of Keynes, to see how well the two do tally, and whether Wang Anshi did create a kind of proto-Keynesianism a millennium ago. We will do that by looking primarily at Keynes’ major works and considering, using with Gadamer’s approach, what questions the texts try to answer. That the problems they faced were similar was already mentioned by Vice President Wallace in the speech referred to supra: It was ten years ago that I learned for the first time about … Wang Anshi. Under very great difficulties he was faced in the year of 1068 with problems which, allowing for the difference between historical periods, were almost identical with the problems met by Franklin D. Roosevelt in 1933. The methods which he employed were strikingly similar. (Li, 2014, pp. 216–17) If we proceed with this, we find that Lord Keynes’ ultimate concern is the realization of full employment, viz. the maximum quantity of employment which is compatible with a given real wage (Keynes, 1936, p. 12). Regarding the theoretical aspect, in the General Theory, Keynes tried to discover the determinants on which the amount of employment in an economic system depends at any time, so that a given authority can control those determinants to realize full employment (Keynes, 1936, p. 247). And those determinants were the propensity to consume and the inducement to invest, determined by the relation between marginal efficiency of capital and the interest rate. In practice, the extreme case representing the questions facing Keynes was the Great Slump, the economic depression with its closing of plants and massive unemployment (Keynes, 1962, pp. 74–80). According to his analysis, the fundamental cause of that massive unemployment was the wide gulf ‘between the ideas of lenders and the ideas of borrowers for the purpose of genuine new capital investment with the result that the savings of the lenders are being used up in financing business losses and distress borrowers, instead of financing new capital works’ (Keynes, 1962, p. 79). The lenders universally asked for higher terms for loans than new enterprises could afford, and so the borrowers were reluctant to borrow because the fall in prices made those who postponed new enterprises gain by this delay (Keynes, 1962, pp. 78–79). Keynes was very aware that massive unemployment caused by the lack of inducement to invest was not a phenomenon of his own time: There has been a chronic tendency throughout human history for the propensity to save to be stronger than the inducement to invest. The weakness of the inducement to invest has been at all times the key to the economic problem. Today the explanation of the weakness of this inducement may chiefly lie in the extent of existing accumulations, whereas formerly risks and hazards of all kinds may have played a larger part. But the result is the same. The desire of the individual to augment his personal wealth by abstaining from consumption has usually been stronger than the inducement to the entrepreneur to augment the national wealth by employing labor on the construction of durable assets. (Keynes, 1936, pp. 347–48) In the Northern Song context, we see another but in the end very similar form of unemployment: not so much that of employees, but rather that of independent smallholding farmers. As we saw, the interest rate for loans provided by the exploiters’ households was very high and beyond the small farmers’ capability; they were therefore always ‘denied the funds they needed’ and became unemployed and bankrupt; whereas the investment in ‘new enterprises’ was stagnant: many lands became deserted, and the irrigation projects were not sufficiently maintained all across the country (Xu, 2014, pp. 6120, 6124). This unemployment and bankruptcy of independent small farmers is relevant for our discussion about proto-Keynesianism. Small farmers’ unemployment was not seasonal nor due to diminishing returns of land set. Unemployed farmers were not the surplus population spilled out from the fully exploited agriculture, where marginal output of labor on marginal land equals its subsistence. They deserted arable land and irrigation facilities because lack of capital and high interest rates eroded their output. Northern Song agricultural households bankrupted and left their labourers unemployed for the exactly same reason as Keynes’ industrial factories in the Great Slump: lenders asked for more interest than the enterprises could afford. In addition, in the framework of the General Theory, involuntary unemployment could be caused by a low marginal propensity to consume and a lack of capital resources in a non-capitalistic, non-industrialized economy dominated by self-employment (see Dasgupta, 2003). Besides, even in an industrialized modern economy, Keynesian involuntary unemployment in self-employed farmer households also exists. The Grapes of Wrath, Steinbeck’s novel about Dust Bowl farmers during the Great Depression, is a story about involuntary unemployment in modern times (see De Vroey, 2004, pp. 202–3). For Keynes, this American farmers’ misery was caused by the excessively low price of their products (see Keynes, 1981, p. 584) and was only part of the general price slump at that time. But in Wang’s case, agriculture was the major problem he had. 5.2 Unemployment relief But how to address this problem? In the General Theory, Keynes proposed that at a given propensity to consume, the level of employment depends on the amount of current investment, which is determined by the relation between the marginal efficiency of capital and the interest rate of the loan (Keynes, 1936, pp. 27–28). Therefore, the causes of unemployment lie in the weak propensity to consume and a too-high interest rate (Keynes, 1936, p. 31). Based on this reasoning, Keynes’ general policy proposals to solve unemployment included government spending to support aggregate demand and lowering the interest rate (see Kregel, 1995). Of course, as Keynes pointed out, this was not a new insight. He referred to earlier writings that praised luxury and criticized thrift as means to attain full employment, such as Bernard (see Keynes, 1936, pp. 358–62). And just as he was aware that unemployment caused by the lack of propensity to consume and inducement to invest was an old phenomenon, Keynes was also aware that older solutions to the problem existed. He believed that Mercantilism was one of these solutions which tried to increase inducement to invest in the country through increasing the trade surplus to absorb more precious metal to the country to reach a lower interest rate (Keynes, 1936, p. 336). The doctrine and policy of anti-usury in history provides the same case. According to it, ‘the rate of interest is not self-adjusting at a level best suited to the social advantage but constantly tends to rise too high, so that a wise government is concerned to curb it by statute and custom and even by invoking the sanctions of the moral law’ (Keynes, 1936, p. 351). Keynes agreed with this, as: Certain of the risks and hazards of economic life diminish the marginal efficiency of capital whilst others serve to increase the preference for liquidity. In a world, therefore, which no one reckoned to be safe, it was almost inevitable that the rate of interest, unless it was curbed by every instrument at the disposal of society, would rise too high to permit of an adequate inducement to invest. (Keynes, 1936, p. 351) Of course, e.g. usury laws are neither specific for Wang Anshi nor for Keynes, but altogether, quite a similar line of thought emerges. It may not be too far-fetched to think that if Keynes had happened to know Wang Anshi’s reasoning, he would not have felt any surprise but would have classified the Chancellor as his predecessor in realizing that the state should increase the inducement to invest through increasing the volume of capital and lowering the interest rate of loans and actively spend to support the propensity to consume. As we saw supra, Wang Anshi learned from Ancient Great Rulers that he had to keep the interest rate low to support the investment in people’s enterprise, which at his time was land reclamation and irrigation, and to stabilize the commercial market. However, in his time, just like during the time of Mercantilism (Keynes, 1936, p. 336), the Chancellor did not have direct control of the domestic interest rate to increase the inducement to invest. Thus, Wang Anshi had to use state money to set up a development bank to provide loans with a much lower interest rate than the market one; he had to use government money to directly invest in people’s enterprises and lever private investment; he had to make the state become a trader in the commercial market to provide stabilization when the private sector could, or better would, not. In this way, his endeavor was as appropriate from a Keynesian perspective as Mercantilism, anti-usury laws and the Fable of the Bees in realizing that the inducement to invest and the propensity to consume should be increased to promote economic prosperity. 5.3 State control The destinations to which Keynes’ employment theory leads include the ‘euthanasia of the rentier’ (Keynes, 1936, p. 376) and the ‘socialization’ of investment (Keynes, 1936, p. 378). At the given marginal efficiency of capital, to maintain full employment, the volume of capital should be increased and the interest rate lowered to increase the inducement to invest. In this way, the rentiers and their power based on the scarcity of capital would inevitably be restricted and die out (Keynes, 1936, pp. 375–76). In Keynes’ eyes, full employment is not a natural result which comes automatically through the economic system itself, but it is the result of centralized control and a plan, so the control of saving, investment, consumption and other economic factors should be returned back to the state from the private realm (Keynes, 1936, pp. 377–78; 1962, p. 173). To eliminate the scarcity of capital, of which the inevitable result is the ‘euthanasia’ of rentiers and their economic power, and to retrieve the control of economy by the state are also ideas that are part of Wang Anshi’s approach to ‘restrict exploitation’, as we saw supra 4. b) and c). However, while the latter is ‘vintage Wang’, the former is not—for him, the point was not to extinguish the wealthy landlord class, but just to make them less exploitative, both for economic and social reasons. (Strictly speaking, they were not rentiers anyway; they were more similar to the landed gentry of the Britain of Keynes’ time.) One of the key purposes of his reforms was to relieve the farmers of the exploiters’ oppression, and his solution was to use state fiscal resources. And he tried to make the state retrieve the control of ‘granting and collecting’ and ‘sale and purchase’ of wealth, namely those forces controlling the circulation of wealth, like price, interest rate, market exchange and investment, from them as well. However, as stated supra, he saw no need to nationalize the land but regarded the rich as having an indispensable function in the economy (Li, 1986, p. 5181). But Keynes would have agreed with Wang that as long as the state could control those important economic forces, it was not necessary to nationalize the instruments of production, as the initiative of individuals should be respected (Keynes, 1936, pp. 377–78). 5.4. Functional finance Wang Anshi’s view of state finance reached consensus with Keynesian principles, viz. ‘Functional Finance’ as conceived by Abba Lerner, who ‘was probably the first economist outside of Keynes’s inner circle to grasp the nature and importance of the General Theory’ and ‘provided the logical framework (functional finance) for Keynes’s policy recommendations’ (see Scitovsky, 1984). Functional Finance means that fiscal policy should be undertaken with an eye on the influence of policy on the economy rather than only focusing on the budget, and that, during a depression, the government should apply more buying and lending and give more money to the people to support adequate spending within the economy to realize full employment, whereas during inflation, more selling, borrowing and taking more money from the people should be applied to control spending (Lerner, 1943, pp. 39–41; 1951, p. 127). This approach—probably what most people today identify with ‘Keynesianism’—is almost identical with Wang Anshi’s own policies based on Zhouli (see supra 4. b)–c)). Lerner’s ‘buying-selling’, ‘lending-borrowing’ and Wang Anshi’s ‘collection and distribution, purchase and sale’ express the same treatment towards public finance. The difference only lies in Lerner using different tools in different circumstances, but Wang only broadly suggesting the tools to improve the economy. 5.5. Specific policy proposals Regarding specific policy proposals, there is also consensus between Keynes and Wang Anshi. According to Kregel (1993), Keynes’ proposals could be classified into ‘offensive policy’ and ‘defensive policy’, i.e. policies drawing the economy back from depression and policies preventing depression from happening (again). Wang’s policies in rural economy were similar to Keynes’ ‘defensive policy’, whereas his improved tax system and the ‘State Trade Initiative’ were more like Keynes’ ‘offensive policy’ in the commercial market. In order to support the full employment situation attained during World War II in Great Britain, Keynes proposed his ‘defensive policy’. According to Kregel (1985, p. 38; 1995, p. 266), it included, among others, the following features: full employment in the long term required government control of investment; the state budget should be divided into current account and capital account, the latter to offset exogenous cyclical changes in investment spending; investment spending should be countercyclical relative to private investment; services provided by government should be ‘technically social’, i.e. those that the private sector was either unwilling or unable to provide. These features were similar to Wang Anshi’s reform policies in agriculture: Wang Anshi established a ‘capital budget’ in government—the Court of Agriculture, independent from the normal fiscal ministries; the task of the Court was to retrieve control of investment and the interest rate from rural exploiters and to countervail the lack of inducement to invest in the private sector; the investment projects of the Court were ‘technically social’: it provided the ‘Green Sprout Loan’ with a very much lower interest rate than private loans and invested in land reclamation and irrigation projects through these loans. Keynes’s ‘offensive policy’ was the emergency measure to pull the economy out of the depression and restore normality, for which the theoretical base is believed to be the ‘short period equation’ Keynes proposed in A Treatise on Money how to halt the fall in prices in commercial markets. According to the ‘short period equation’ (Keynes, 1978, pp. 125–27), the fall in prices in a market with excessive stocks could be halted by reducing their carry costs, increasing their consumption or reducing annual production (Kregel, 1995, pp. 263–65). The policy proposal based on this equation was the creation of international buffer stock schemes after World War II (see Keynes, 1980, pp. 112–22), which should set the basic price for the commodities, buy the commodities at a lower price, hold, store and sell them at a higher price, in order to stabilize the price of commodities and cure the trade cycle. This is, again, ‘vintage Wang’, as we have seen: purchasing surplus goods on the market and selling them during shortage was for him an effective solution to stabilize the market and prevent trade cycles. And one could see in Wang’s Equitable Tribute and State Trade Acts that the essence of these measures was also to create a buffer stock for market stabilization (Li, 1986, p. 5623). 6. Conclusion In order to end massive unemployment and economic instability, guided by Confucian economics, Wang Anshi forged or restored the Chinese state into a countervailing power to the private sector in controlling investment, interest rate and consumption by increasing government spending on investment and consumption and by supporting the inducement to invest and the propensity to consume in the country in order to realize full employment. All these endeavors and the thoughts behind them are directly in line with Keynes’ economic policy and the ‘conventional Keynesianism’ based on that doctrine. This resonance highlights that the factors influencing employment talked about by Keynes were at least partially psychological, the psychological propensity to consume, the psychological attitude towards liquidity and psychological expectations of future yield from capital-assets (Keynes, 1936, pp. 246–47), which have no direct relationship with the technology, specific institutions or even economic systems. Unemployment caused by the people’s will to save and hoard rather than undertaking the risk to invest and to consume, and therefore high interest rates for lending to those who dare to make those endeavors can, did and does happen in the richest countries of the twentieth and twenty-first century, just as much as in an eleventh-century agrarian—if sophisticated and monetized—society, and therefore, there can be essentially similar solutions to unemployment. 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Cambridge Journal of Economics – Oxford University Press
Published: Sep 1, 2018
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