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China's Benign Neglect Pays Off

Mises Daily: Wednesday, November 30, 2005 by

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The Chinese have great respect for their history. For more than 3000 years, every monarch who ruled the Middle Kingdom had a court historian who faithfully recorded the affairs of the state — politics, state finance, natural disasters, palace intrigues and most importantly, warfare. The great Chinese historian Sima Qian wrote extensively in Shiji (Record of the Scribe) of the reign of the Emperor Han Wudi, who ruled China from 141 to 87 BC. This period, by all accounts, is one of the greatest and longest reigns in the history of imperial China.

The Han dynasty was established in 202 BC by a peasant rebel leader named Liu Bang following the collapse of the Qin dynasty. To appease the peasantry and to secure political support of the merchant class, Liu Bang quickly abolished the harsh penal laws of the Qin, eased state taxation and adopted a Taoist philosophy in government - a policy of "Wu Wei Er Zhi" which loosely translates to "Live and Let Live".

When Han Wudi ascended the throne at age 16 in 141 BC, the Chinese populace had enjoyed some six decades of laissez-faire government under the early Han rulers. The economy was growing rapidly, generating peace and prosperity among the common folk, and at the same time enriching state coffers. But to the north, there existed an ominous threat.

Barbarians from the North

Living off the Mongolian Steppes were the Xiongnu tribes, united under a confederation in 3rd century BC and ruled by Da Chanyu (Great Khan) following several hundred years of intertribal warfare. These roving hunters and warring nomads were constantly on the move, did not own much in terms of factors of production and never produced much by way of farming. But they did develop superior skills and know-how in weapon fabrication and excelled in breeding fine horses. To supplement their meager nomadic livelihood, they would resort to frequent pillaging and plundering of the towns and villages along the northern borders of the Han Empire, as well as those of the smaller kingdoms on the eastern fringes of the Gobi desert. The Han Chinese called them the Barbarians of the North.

To keep the barbarians at bay, early Han emperors had to adopt a marriage-for-peace policy — Han princesses were regularly married off to the Xiongnu nobility, along with tributes in silk, ivory, gold and precious stones. For the first few years of his reign Han Wudi kept up this costly practice but soon realized such policies of appeasement could not be sustained, as the northern barbarians grew envious of the riches and opulence in the Han court. Their border raids became more frequent and on several occasions, came close to besieging the Han capital city Chang-An (present-day Xian).

Han Wudi, tired of incessant Xiongnu intrusions and emboldened by the bulging state coffers, soon abandoned the long held marriage-for-peace policy and decided to switch to a strategy of military offensives against the barbarians. Thus began half a century of bloody warfare between the northern neighbors.

Blood-sweating Warhorses

The first military campaigns into the northern grasslands were difficult battles for the Han army. Foot soldiers and chariots in large formations were no match for the swift and elusive cavalry of the battle-honed nomads. Tactics developed in the Central Plains could not be deployed in the hostile terrains and under unpredictable weather conditions of the Steppes. Nevertheless, due to the superiority in numbers, the Han army managed to drive the Xiongnu out of the fertile Yellow River region and back into the Mongolian Steppes. Peace was temporarily restored.

But Han Wudi knew it would not be long before the barbarians returned with their border incursions. In 138 BC, having learned of the existence of city-states to the far west of the Han Empire from bearded silk traders, the emperor sent an expedition of 100 emissaries to seek diplomatic ties and to establish military alliances with these faraway sovereign states. Although the first expedition did not return for 13 years, stories of exotic produce (grapes and wines), fantastic beasts (lions) and advanced metallurgical know-how (steel) fascinated the Han Emperor. Reports of "blood sweating" warhorses particularly excited Han Wudi who began to harbor thoughts of a hundred-thousand-strong cavalry in his army.

(Scholars believe these "blood-sweating" horses to be early ancestors of the modern Akhal-Teke breed from present-day Turkmenistan. See "The Art of the Horse in Chinese History" published by Kentucky House Park, 2000, ISBN 1-56469-071-7).

The death of the Empress Dowager, Han Wudi's mother in 126 BC brought an irresistible opportunity for the Xiongnu who launched fresh raids at the Han borders. As the Chinese custom of "filial-piety" at the time strictly prohibited military activities during times of imperial mourning, these attacks deeply angered the emperor. On the first day of the lifting of the ban on military actions, he commanded his generals to launch a massive retaliatory attack on the northern barbarians. This battle resulted in the Da Chanyu (Great Khan) and his shattered army being driven out of the Mongolian Steppes and deep into the Gobi desert.

State Intervention and Monopolies

Not satisfied with the Xiongnu threat being considerably reduced and fully intent on eliminating permanently the menace of border incursions, Han Wudi announced to his ministers his plan for a large scale offensive against the Xiongnu. One of the horrified ministers asked of the emperor: "How are we to carry out such an ambitious military campaign across the vast Gobi desert?" Without any hesitation, the emperor shot back: "Money!"

On the advice of his interventionist Finance Minister, Sang Yanghong, the Han Emperor first standardized all currency units in the country and then monopolized the minting of all copper coins. He next consolidated the production of salt, iron, and liquor and placed the trading of these essential goods under state control. When he saw that merchants and traders were prospering from the state's early investments in the network of roads and waterways (built to facilitate the movement of goods, particularly silk, produced in the south), he imposed a capital gains tax and a vehicle levy on them.

Also realizing the importance of international trade to the domestic economy Han Wudi sent a second expedition to the west in 122 BC with a mission to establish trade links with Central Asia, as well as to exchange the highly sought-after Chinese silk for the legendary "blood-sweating" warhorse for his cavalries. Such pioneering expeditions eventually led to the opening of the famous Silk Road — the name given to the routes taken by caravan traders who used Chinese silk as the de facto international currency right up to the Tang dynasty (6th to 9th century AD).

Showdown in the Desert

The Han monarch's interventionist economic policies were so effective that in a few short years Han Wudi's coffers and granaries were completely filled. The Emperor could now afford to forge weapons from steel, buy warhorses from Xiongnu smugglers and cross-breed them with "blood-sweating" stallions from the west, and even reserve the best grains for his soldiers. At the height of his reign, Han Wudi commanded the largest and most awesome war machine then known in Chinese history.

In 119 BC an immense Han army, consisting of 500,000 foot soldiers fitted with the finest armor and weaponry, a hundred-thousand-strong cavalry mounted on some of the swiftest warhorses acquired from Central Asia, supported by a supply train of 40,000 coaches, along with a huge contingent of military engineers, horse doctors, water scouts, and a herd of 5000 cattle, crossed the Gobi desert.

This historic battle lasted over three months with both the Han army and the Xiongnu forces suffering massive casualties. The warring nomads were decisively crushed and their loosely-held confederation disintegrated in the desert. Remnants of the warriors of Da Chanyu (Great Khan) eventually fled west into Eastern Europe (present day Hungary) and the Xiongnu tribes disappeared from the Mongolian Steppes from around 51 BC.

The Han state's coffers were depleted and the economy sharply declined towards the end of Han Wudi's reign.

Lessons

The story of Han Wudi presents useful insights on the political thinking of the modern Chinese state which has time and again befuddled policymakers in the West, particularly those in the Bush Administration.

Energy, for example, is the present day equivalent of the legendary "blood-sweating" warhorse which the Chinese government needs to power its modern economic engine. As the US government persists in running down the capital stock of the nation (at the rate of some US$7 billion a month and with the loss of many precious young lives) in the war on Iraq, a policy of "benign neglect" is maintained by the Chinese.

It is serendipitously positioned to capitalize on the current geopolitical situation in the Middle-East, to befriend the oil-rich nations of Central Asia and other resource-rich nations who are antagonistic to the US government, and to secure valuable energy sources through diplomatic ties or to purchase their outright ownerships. The Chinese seems to understand the simple math of ERORI (energy return on energy input) better than the professional economists working for the Bush government.

When US Secretary of Defense Donald Rumsfeld proudly announced to the American public that he was employing strategies from The Art of War in Iraq, Emperor Han Wudi could have been there to offer council with a famous Chinese saying: "Qi Hu Nan Xia" (You mount the tiger, you can't get off!") He would have been speaking, no doubt, from his experience with the vicious Xiongnu encounters in the Mongolian Steppes. Unfortunately for Mr. Rumsfeld, that saying is not found in Sun Tzu's war manual.

Similarly, on the issue of unification with Taiwan, the mainland Chinese will keep up the political pressure on the renegade province, to goad Taiwanese President Chen Shui Bian to continue his massive defense spending (buying costly American military hardware). At the same time, it will further loosen its FDI (foreign direct investment) policies to drive the migration of Taiwanese industries and its economic bases over to the mainland. The long-term objective is to deplete the capital stock of its political foe.

For US Treasury Secretary John Snow, the Chinese government will continue to pay lip service to his endless babble on the need for currency reforms and bank sector deregulations which could allow foreign exchange speculators to manipulate the Chinese currency and wreck havoc on the "clunky" and problematic Chinese financial markets. It had witnessed the horrific economic turmoil caused to its neighbors during the 1997/1998 Asian Financial Crisis, and the disastrous political and social consequences that followed.

From the perspective of the modern Chinese state, currency speculators are no different from the northern barbarians who took on Emperor Han Wudi — these predatory opportunists have no interests in the long-term ownership of factors of production and they produce little by way of goods of utility. The only way to deal with such scoundrels: Keep Them Out!

Furthermore, the presence of the ever-belligerent IMF, with its severe market reform conditionalities (in exchange for national bailouts) inspires little confidence in the Chinese for the much-touted regime of flexible exchange rates, which is perceived as monetary imperialism wrapped in "free-market" rhetoric.

For incoming Fed Chairman Ben Bernanke, his deflation phobia is just what the Chinese doctor would have ordered. The Fed can blissfully continue to keep the good times rolling with the printing press, and the Chinese will be just as happy to oblige with more and more cheap goods. Mr. Bernanke can call it "cash hoarding," a "propensity to save," or anything else he chooses to accuse the frugal Chinese of, but the Chinese worker is not about to give up his centuries-old thrifty habits anytime soon.

But, in his overzealousness to demonstrate his grasp of voodoo economics (creating money out of thin air) in his new job, Mr. Bernanke is going to end up serving the economic interests of the wrong political master.

Conclusions

It is said, often on the eve of major battles, Han Wudi would remind his generals:

"State warfare inevitably burdens the common folks and bring much suffering, but as the Son of Heaven, it is my duty to eliminate the threat of the Xiongnu permanently so that future rulers of the great Han Empire will not have to exhaust the citizenry; and risk the fate of the Qin dynasty that came before us."


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Emperor Han Wudi understood the long-term consequences of incessant state expropriations on the peasantry and the merchant class for the purposes of waging bloody wars. Clearly the Han monarch, who ruled the Middle Kingdom for 54 years, had a time preference much longer than most modern day prime ministers and presidents elected via a democratic process.

Similarly, not subject to the whims and fancy of an electorate, the present Beijing government holds a long-term perspective on the political goals and economic interests of the authoritarian state.

Like the great Han Emperor who ruled more than 2,000 years before him, the Red Capitalist has now patiently amassed a huge economic war chest, to the tune of US$700 billion in foreign exchange reserves, which is growing at a rate of some US$200 billion a year! This time around, it will not be for the purpose of obliterating uncivilized warring nomads from the north, but instead to face down the monetary barbarians from the West. And when the next major financial crisis strikes, guess who is going to be the new international "lender of last resort."


K.Y. Leong is in business in Singapore. Read his articles. Send him mail. Comment on the blog.