Ruling a large country is like cooking a small fresh fish - Institutional Economics of Government

Author: Sheng Hong
Publisher:
Publish Date: 2003-05-01
Features: Originally reading the Tao Te Ching of Laozi, the most difficult part to understand is the meaning of "wu wei and wu bu wei" (non-action and non-doing yet accomplishing everything). How can doing nothing achieve the effect of doing everything? The key lies in understanding the two characters "wu wei." "Wu wei" does not mean doing nothing at all, but rather not doing anything that hinders others' "you wei" (effective action). For the government, it means not doing anything that hinders the initiative of the people. In a society where all members are motivated and proactive, what cannot be achieved? Therefore, in a later article, I summarized it as, "'Wu wei' is to hinder the hindering and to limit the limiting." This aligns quite well with the ideal of a small government emphasized by economic liberalism. However, simply interpreting "wu wei" or the ideal of a small government as the government doing as little as possible is problematic. It should be said that the government is a great creation of human society. Up to now, many beautiful concepts, such as freedom, equality, and justice, have been approximately realized under the condition of having a government. This indicates that in some aspects, the government is irreplaceable. Therefore, the "wu wei" of the government should be to act where it should act and to refrain where it should refrain. This requires a deep understanding of this institution. "Wu wei" is not ignorance, and "nature" is not the absence of human consciousness and wisdom. I once greatly admired traditional Chinese garden art, considering it an embodiment of China's cultural style of "revering nature." Later, after visiting some new "scenic spots" in the suburbs of Beijing, I realized how terrible it is to have a completely ignorant and unappreciative so-called "nature." Those culturally barren imitations of ancient architecture are worlds apart from the imperial palaces of Beijing and Chengde or the Jiangnan gardens of Suzhou and Hangzhou. Behind those buildings that blend seamlessly with natural landscapes lies deep, deliberate planning. To appear as "natural" is not to be natural. Laozi said, "Humans follow the earth, the earth follows the sky, the sky follows the Tao, and the Tao follows nature." The key is the character "fa," meaning to imitate or emulate. And imitation, in turn, varies in quality. There is exquisite imitation, there is the awkward imitation of "learning to walk like a dog," and there is the even more clumsy imitation of Xi Shi. To imitate, one must first understand and fully grasp nature. Therefore, behind "wu wei" lies the profound art of understanding and imitating nature. Such a realm is also captured by Laozi's other saying, "Governing a great nation is like cooking a small fish." In the past, there have been various interpretations of what this means. One interpretation is that a small fish is very tender, and if it is flipped over and over, it will be broken; thus, governing a great nation should not be constantly disrupted. While this interpretation is close to the essence, it misses the subtlety. Those who know how to cook know that the core of culinary skill (or art) lies in mastering the heat. And among all cooking ingredients, a small fish is the most delicate and requires careful handling. Therefore, the highest realm of governing a great nation is to skillfully and cautiously control the heat. So, how is the heat controlled, and how can a great nation be compared to a small fish? This is a complex question, but it can be broadly understood. Simply put, governing a nation requires first considering the nature of the people. From an economic perspective, the nature of the people is to seek profit and avoid harm. If the government can provide and maintain a basic set of institutions, under which any individual's actions that benefit themselves also benefit society, and actions that harm society harm themselves, it can enable all members of society to prosper while pursuing their own interests. Generally, this system includes the functions of protecting property rights, maintaining order, and mediating disputes. Once such a framework is in place, people clearly know what their costs and benefits are, and they act automatically based on their calculations of these factors. Of course, what is harmful or beneficial to society is not always clear-cut. Often, doing something insufficiently or excessively can be detrimental to society. For example, money supply. Too much leads to inflation, while too little is now recognized as deflation. Inflation means that when all members of society are mobilized for economic activities, if demand still needs to be increased, it can only lead to rising prices without new supply; deflation means that some members of society are still unemployed but lack the financial support for their economic activities. For a long time in human history, people used precious metals as money, and the money supply was determined by the production of precious metals. The alignment of money supply and money demand only occurred occasionally. Later, people invented the gold standard system, issuing redeemable securities backed by precious metals, partially freeing themselves from the constraints of precious metals. Until today, most countries in the world use inconvertible paper money as currency, completely breaking free from the limitations of precious metals, and the money supply can be entirely determined by government monetary policy. What is called monetary policy is generally the central bank's adjustment of the refinance rate. Adjustments to the refinance rate affect commercial banks' lending rates. In a mature market economy, even slight adjustments to interest rates can influence people's cost-benefit comparisons and thus affect their behavior. When interest rates are raised, some may find their originally planned economic activities unprofitable and thus suspend their intended investments; conversely, the opposite is true. In this way, the government engages in the governance of the entire society through small adjustments, benefiting everyone.
Talking about heat and money supply, we naturally think of Alan Greenspan, the former chairman of the U.S. Federal Reserve (the U.S. central bank). His task is to ensure adequate money supply while avoiding inflation. His entire job seems to be adjusting the U.S. dollar's refinance rate by tiny increments of 0.25% or even 0.125%. Despite the small adjustment, it has a significant impact on the U.S. economy and even the world economy, to the extent that one of his speeches could either cause stock market turbulence or instill confidence. Since taking over the U.S. Fed, the U.S. economy has gradually moved out of stagflation, showing a trend of low inflation and high growth. Of course, Greenspan's work is not easy. Even with just 0.25% adjustments, if one missteps, it can lead to inflation or deflation. Therefore, it requires a deep understanding of the monetary system, financial institutions, and the real economy, as well as sufficient "feel" for the realities of the U.S. economy. This is closely related to his economic background and his long-term experience in the financial industry. Behind the micro-adjustments and mastering the heat lies an understanding of the economic system, an accurate judgment of the current economic situation, and a deliberate choice and arrangement of monetary policy and policy tools. Isn't this a vivid picture of "governing a great nation is like cooking a small fish"? Reaching such a realm is not the achievement of just one person. Only when the monetary system and financial markets are fully developed can monetary policy be so sensitive. And the formation of this economic system depends on the efforts and accumulation of generations. Within this system, the government operates effectively and irreplaceably, yet with minimal cost and maximum impact. Precisely because the government acts wisely at the right moments, it avoids intervening in other aspects of the economy, leaving vast space for all members of society to be "proactive." The government is both ancient and magical—a system that brings people welfare but can also lead to disaster. This book discusses the origin and nature of the government, the fundamental rewards and punishments of the government, the paradox of rewarding and punishing the people, the government's speeches, the government's position in the institutional structure, and the government in international politics. It upholds the "small government" of economic liberalism, exploring how the government can be "small" and taking "Governing a great nation is like cooking a small fish" as the ideal.