Ruling a great country is like cooking a small fresh fish (On the institutional economics of government)

Author: Sheng Hong
Publisher:
Publish Date: 2003-05-01
Features: Originally reading Laozi's Dao De Jing, the most difficult part to understand is the meaning of "wu wei" (non-action) and "wu wei er wu bu wei" (non-action achieves all). How can doing nothing achieve everything? The key lies in understanding the word "wu wei." "Wu wei" does not mean doing nothing at all, but rather not doing things that hinder others' "you wei" (effective action). For the government, it means not hindering the initiative of the people. In a society where all members are motivated and proactive, what can't be achieved? Therefore, in a later article, I summarized it as, "‘Wu wei’ is to hinder the hindering and 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 shows 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 the government system. "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 the "reverence for nature" style in Chinese culture. Later, after visiting some new "scenic spots" in the suburbs of Beijing, I discovered how terrible it is to have a completely ignorant and unwise so-called "nature." Those culturally uninspired imitation ancient buildings are worlds apart from the imperial palaces in Beijing and Chengde, or the Jiangnan gardens in Suzhou and Hangzhou. Behind the architectural styles that blend seamlessly with natural landscapes lies deliberate and meticulous planning. To appear "natural" is not to be natural. Laozi said, "Humans follow the earth, the earth follows the sky, the sky follows the Dao, and the Dao follows nature." The key is the word "fa" (follow), meaning to imitate or emulate. And imitation can vary in quality. There is exquisite imitation, there is the "Halan Xue Bu" (imitating the steps of the Hanalan), and there is the "Dong Shi Xue Yin" (Xi Shi imitating Dong 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 large country 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 and turned too much, it will be broken; therefore, governing a large country should not be constantly (tossed about). This interpretation is close to the original meaning but misses the essence. Those who know cooking 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 large country is to skillfully and cautiously control the heat. So, how is the heat controlled, and how can a large country be compared to a small fish? This is a complex question, but it can be generalized. Simply put, governing a country requires first considering the nature of the people. From an economic perspective, the nature of the people is to pursue benefits and avoid harm. If the government can provide and maintain a basic system, under which any individual acting in their own interest also benefits society, and acting against society's interest harms themselves, then all members of society can thrive 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 course, what is harmful or beneficial to society is not always clear-cut. Often, the same action, if done insufficiently or excessively, will be detrimental to society. For example, money supply. Too much leads to inflation, and too little, as we now know, leads to deflation. Inflation means that when all members of society are mobilized for economic activity, if demand is still 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 precious metal 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 non-redeemable 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 monetary policy is generally the adjustment of the central bank's rediscount rate. The adjustment of the rediscount rate affects commercial banks' lending rates. In a mature market economy, even a slight adjustment in interest rates can affect people's cost-benefit calculations, thereby influencing their behavior. When interest rates are raised, some people may find that their planned economic activities are no longer worthwhile, leading them to suspend their investments. Conversely, the opposite is true. In this way, the government engages in the governance of society, benefiting everyone through small adjustments.
Talking about heat, talking about money supply, we naturally think of Alan Greenspan, the 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 rediscount 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 global economy, to the extent that one of his speeches could either cause stock market turbulence or instill confidence. Since he took 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 a 0.25% adjustment, if he makes a mistake in direction, it could lead to inflation or deflation. Therefore, a deep understanding of the monetary system, financial institutions, and the real economy is required, along with 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 of 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 illustration of "governing a large country is like cooking a small fish"? Reaching such a realm is not the credit 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 an ancient and magical institution—it brings people welfare but can also lead to disaster. This book discusses the origin and nature of the government, the fundamental rewards and punishments paradox of the government, the government's speeches, the government's position in the institutional structure, and the government in international politics, adhering to the "small government" advocacy of economic liberalism. The author explores how the government can be "small" and takes "governing a large country is like cooking a small fish" as the ideal.