What Was The Ancient China Economy System?

In ancient China, apart from the small peasant economy, the state had a strict monopoly on the production and operation of vital industries such as salt, iron, and tea, which had high profits and had a strong impact on people’s livelihoods. Moreover, the state manipulated the economic lifeline of the country by balancing prices and the supply-demand relationship. Such a monopoly prevented the emergence of private forces to subvert the state power economically and improved the state’s economic capability to achieve centralized unification. However, at the same time, it also hindered the development and prosperity of the commodity economy, ultimately leading to the absence of a spontaneous capitalist social form in China.

The monopoly system of the state-owned economy

In ancient China, the state economy was mainly based on the monopoly system (禁榷jin que), the “monopoly of the purchase and shipment” (均输jun shu), and the “balancing prices” (平准ping zhun) policy. The monopoly system was a system in which the ancient Chinese government, by virtue of its administrative power, obtained operating profits and monopoly income by taking over the production and operation of some important commodities. “Jin” meant “forbidden.” “Que” meant the single-plank bridge across the water, with the meaning of exclusivity, specialization, and monopoly, which could be derived from “monopoly” and “patent” in the economic aspect. The combination of the “jin” and “que” meant that other organizations were not allowed to operate, and only one organization was allowed to operate exclusively. In ancient times, for revenue reasons, the state would bring some types of commerce under state control, and the government would control the production or operation of these industries. The industries that were generally included in the monopoly system were salt, iron, wine, tea, and other important industries closely related to people’s livelihoods. These industries were characterized by high profits and simple processes. The state brought these industries into the scope of the monopoly, which required very little input to obtain a large monopoly profit.

It is generally believed that the monopoly system began in the Spring and Autumn Periods, first operating in fish and salt and later extending to salt and iron. The monopoly system, represented by the salt and iron monopoly, became the fundamental national policy to control the economic lifeline of successive Chinese dynasties and greatly affected the national economy and people’s livelihood for more than 2,000 years after the Spring and Autumn Periods.

During the Spring and Autumn Periods, Duke Huan of Qi wanted to expand taxation to strengthen the state. Kuan Chung, the Grand Chancellor, thought that increasing taxes and collecting property directly from the people was a tangible burden that would easily attract the people’s discontent. He further advanced that the best and most desirable way was to take it from the invisible so that the government would increase the tax income and reduce the compulsion and anger of the people. Therefore, he introduced commodity taxation, adding taxes to the price of goods. In this way, the people seemed to have not paid taxes but had actually done when they purchased the goods.

In the concrete operation, Kuan Chung further proposed that the state should monopoly the development and operation of mountain and sea resources to gain monopoly income (namely iron and salt). In the agricultural society, salt and iron were the two most important pillar industries of the whole society, which were vital to production and living. By controlling the resources of the mountains and the sea, it could monopolize the business of salt and iron and then reap the benefits from it, i.e., “salt and iron monopoly.”

For the salt industry, Kuan Chung implemented a monopoly policy. The state opened up the salt ponds for free production by private sectors and then monopoly on the purchase and marketing. The state could control the price by dominating production and sales. For the iron industry, the state had a strict monopoly on all mining resources. The government also controlled the pricing of iron and carried out the unified purchase and sale of ironware. Under these premises, Kuan Chung opened up the iron industry and allowed private sectors to operate independently. After the ironware was sold, the private sector received 70% of the value added, and the government received 30%, which was equivalent to a 30% income tax.

After Kuan Chung, the “salt and iron monopoly” was highly valued by all dynasties. Tung Chung-shu, a great Confucian of the Western Han Dynasty, criticized the Qin government for levying exorbitant taxes on the salt and iron industries, which were 20 times higher than before, showing the extravagant profits of its monopoly.

At the beginning of the Western Han Dynasty, Lao Tze’s thought was advocated. In the salt and iron business, the rulers took the policy of non-action. At that time, the businessmen who operated salt and iron were as rich as kings and vassals. Dongguo Xianyang and Kong Jin, who Emperor Wu initially appointed to charge of the official salt and iron business, were examples. Dongguo Xianyang was a major merchant in extracting salt in Qi, while Kong Jin was the head of a smeltery and foundry in Nanyang. Their industries had accumulated a huge sum of money. At that time, the military expenses were huge because the court needed to fight against the Xiongnu, leading to the gradual empty of the treasury. At the same time, many vassal powers controlled the local finance, which affected the central government’s income. Emperor Wu donated the emperor’s private property to the state and ordered the local rich and powerful to follow suit at the same time. The salt and iron merchants were the targets of donations. However, few of the salt and iron merchants responded after the order was issued. Emperor Wu was furious, thinking that since the merchants had taken advantage of the two profitable businesses, they must donate the money to the government when needed. So he began to impose heavy taxes on merchants of salt and iron while accepting the suggestions of Zhang Tang (? -116 BC) and Sang Hongyang (155? -80 BC) to take the salt and iron production right from the private sector to the court.

It was not easy to nationalize the salt and iron industries because of their huge profits and correspondingly intertwined interests. In 117 BC, Emperor Wu of Han appointed Dongguo Xianyang and Kong Jin as the ministers of salt and iron to supervise the merchants, just like “hair of the dog that bit you.” Both of them knew very well the key and secret of profit-making in salt and iron operation. They set up salt and iron officials in the places where salt and iron were produced under strict management. In the case of salt, it was extracted by the recruited laborers, and the government priced, transported, and sold it. In the case of iron, the government had a monopoly over all aspects of iron mining, steel smelting, iron casting, and sales. In a few years, the government-run salt and iron business achieved notable results.

In 110 BC, Emperor Wu of Han appointed Sang Hongyang, who had been involved in the monopoly on salt and iron, as the commandant of grain management (治粟都尉zhi su du wei), and acted as the minister of finance (大农令da nong ling) in charge of the financial power. He appointed dozens of officials, reorganized the salt and iron officials of the vassals separately, and increased the number of areas where salt and iron officials were set up. According to statistics, after the efforts of Sang Hongyang, a total of 35 salt officials were appointed, distributed in 27 prefectures throughout the country. Before the salt and iron officials were set up, the private salt industries in these areas were very prosperous, and the state levied a salt tax on them. Iron officials were sent to at least 48 places, distributed in 40 prefectures, and all of them were under the control of the chief director of the iron industry of the Minister of Finance. In this way, the management system and business network of the salt and iron industries were initially complete. Due to the substantial capital and sufficient workforce, the production scale expanded rapidly after the full monopoly on salt and iron. The mass production of the government salt and iron industries had great advantages in terms of capital, equipment, personnel, cost reduction, standardized production, and technological improvements, resulting in considerable revenue.

Certainly, there were also some serious problems with the monopoly on the salt and iron industry, which led to controversy. In 81 BC, a public debate on the economic policy of the Han Empire took place in the imperial court. The volume of this debate was, “Should the salt and iron industries be operated with free competition or state monopoly?” One side of the debate was Sang Hongyang and his subordinates, and the other side was a group of Confucian scholars known as virtuous and literate men(贤良文学xian liang wen xue). This great debate, which would profoundly impact future generations, is recorded in The Salt and Iron Debates (盐铁论Yan Tie Lun).

The Confucian scholars enumerated the evils of the state monopoly system on salt and iron industries, such as high prices, trading coercion, violation of people’s interests, economic depression, and people’s misery. By state monopoly, a privileged group that plundered private profits in the name of the state was formed through the bribing and exploitation of influential officials.

What the Confucian scholars said was true. However, they failed to come up with an answer to the question raised by Sang Hongyang –how to maintain a unified empire and how to resist the risk of war and disaster if the government did not adopt a state monopoly on salt, iron, and wine (the monopoly system was later implemented on wine by Sang Hongyang)? This question is also known as “Sang Hongyang’s Grand Question.” It is based on the enlightenment of the Question that almost all the dynasties in the following 2,000 years have tried to monopolize the sources of finance and make the central treasury bigger.

Salt and iron monopoly brought the feudal state considerable revenue, especially in salt, which has been the most critical monopoly commodity firmly controlled by the feudal governments in successive generations. During the Song, Yuan, Ming, and Qing dynasties, salt tax revenue became the second largest source of imperial finance after land taxation.

The monopoly system prevented local powers from controlling important industries and businesses, thus making it impossible for them to develop financial resources that could compete with the central government and limit the aristocratic families’ influence on the country’s political and economic affairs. However, the monopoly system also affected the overall layout of commercial development. During the Ming and Qing dynasties, the capitalist economy began to emerge, and the power of private industry and commerce flourished. Nevertheless, these newly emerging things could not grow into new pillar industries that dominated the country’s livelihood and brought about much fewer changes and leaps in social form because they were suppressed by the monopoly system.

The monopoly of purchase and shipment and balancing prices policy

Another type of state economic system in ancient China was the purchase and shipment monopoly and balancing prices policy. In Chinese, shopping is often referred to as “买东西mai dong xi.” Dong means east, and xi refers to west in the Chinese language. It is said that there were two markets in Chang’an, the capital of the Tang Dynasty, the Eastern Market (东市dong shi)and the Western Market (西市xi shi). Specialties from all over the country could be found in the Eastern Market, and treasures worldwide could be bought in the Western Market. In other words, if you come to the Eastern Market and Western Market, you can buy anything you need. Therefore, people used to use “mai dong xi” to refer to going shopping. The logistics of a country, especially the capital city, was so smooth thanks to the monopoly of the purchase and shipment and balancing prices policy. They were originally policies to solve the problem of tribute transportation and price management, that is, to reserve materials for emergencies through the two policies so that the surplus and shortage could be coordinated and flowed. This policy can be traced back to the Spring and Autumn and the Warring States Periods and the era of Emperor Wu of Han. It was Sang Hongyang who carried it forward and made it a national economic policy.

During the time of Emperor Wu, the Han government set up the minister of the monopoly of the purchase and shipment who was subordinate to the Ministry of Finance and responsible for the unified collection, sale, and transportation of goods. Before the policy was implemented, all counties had to send their local products as a tribute to the capital Chang’an, which not only consumed a lot of labor and affected the normal production of the people but also quickly led to the putridness of the tribute due to long-distance transportation or waste due to the backlog of the products of poor quality. To overcome these disadvantages, the central government set up officials making a monopoly on the purchase and shipment of goods in each county. The government bought tools and recruited civilians to participate in transportation. The tributes of high quality due from the counties shall be shipped directly to the capital, except for the general ones. These ordinary tributes were either transported by local officials to the nearby high-priced areas for sale or converted into cash at local prices. With the money, the officials could then purchase the local abound and cheap specialties and transport them to high-priced areas, engaging in inter-regional trade. In this way, it reduced the losses caused by tribute delivery in the past, relieved the burden of the people, and increased the financial revenue at the same time. In 115 BC, Sang Hongyang became the Vice Minister of Finance and began to implement the purchase and shipment monopoly on a trial basis. Five years later, he was promoted to the position of the Minister of Finance and promulgated this law to the whole country.

Balancing prices is the economic policy of the state to coordinate prices. After the agency of balancing prices was established, most of the materials acquired in the vassal states were bought and sold in various places, but a large number of materials still had to be shipped to Chang’an for sale. To prevent wealthy merchants from manipulating the market and profiteering, the central government adopted the balancing prices policy and set up an agency for it in the capital, Chang’an. The tribute goods from all over the country, goods acquired by the officials of the monopoly of the purchase and shipment, goods and artifacts made by official handicrafts, and goods in possession of the financial authorities were stored in the agency and operated by the balancing prices officials. The officials decided to buy and sell according to the ongoing market prices, buying when things were cheap and selling when they were expensive.

The policy of monopoly of the purchase and shipment and balancing prices cracked down on merchants’ hoarding of goods and profiteering, ensured the regular and stable prices of goods, and greatly enriched the materials in Chang’an, which helped solve the financial problem of the Han government. However, this policy was detrimental to the big merchants’ interests, so it aroused their fierce opposition. In the “Salt and Iron Debates” in 81 BC, Confucian scholars objected to Sang Hongyang’s economic policies of the monopoly of the purchase and shipment and balancing prices and the government’s monopoly on salt, iron, and wine. They put forward many disadvantages brought by implementing these policies, such as officials throwing up a curveball at the sellers when accepting tribute products and cheating customers when selling goods. In response, Sang Hongyang strongly defended these policies to benefit the people and stabilize the prices of goods.

Sang Hongyang’s idea of the monopoly of purchase and shipment was advocated by later generations. Liu Yan, a government treasurer of the Tang Dynasty, used it to control food production, sale, and transit. And Wang Anshi (1021-1086), the Minister of the Northern Song Dynasty, directly absorbed Sang Hongyang’s idea of the monopoly of the purchase and shipment and implemented the Monopoly of the Purchase and Shipment Law (jun shu fa). Since the Southern Song Dynasty, due to the further development of commodity and monetary economy, the proportion of the tribute of material objects gradually decreased. Hence, the Monopoly of the Purchase and Shipment Law slowly terminated.

The idea of balancing prices also influenced later generations. Often the implementation of the monopoly of the purchase and shipment was accompanied by the balancing prices. In the Northern Song Dynasty, when Wang Anshi implemented the Monopoly of the Purchase and Shipment Law, he also introduced the Market Exchange Law (市易法shi yi fa). He set up market exchange offices in the capital, borders, and important cities to purchase goods that were stagnant in the market at fair prices and sell them when there was a shortage, which was conducive to stabilizing the national economic order and increasing government revenue.

In essence, the “monopoly of the purchase and shipment and balancing prices” policy is to balance the irrational fluctuations of commodity prices due to special reasons, smooth out the great differences of commodity prices in time and space, and maintain fairness and effectiveness of the market. Its purpose is to ensure stable national revenue and guarantee the sustainable reproduction of the people. It is the government’s vocation to carry out the policy of “monopoly of the purchase and shipment and balancing prices.” When a government has not established a standardized and effective market mechanism, this policy is particularly important because it involves market efficiency and fairness.

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