Unlocking Potential

In a recent interview with the Financial Times, Premier Wen Jiabao expressed his admiration for Adam Smith’s Theory of Moral Sentiments, written in 1759, before his better-known treatise The Wealth of Nations (1776). What the premier took away from the book is the idea that a society in which wealth is concentrated in a few hands will be unstable and immoral. Such a society, however, is more likely to be illiberal than liberal.

There are two organizing principles of society: first, consent, the so-called voluntary principle, which relies on individual freedom and responsibility and, second, coercion, the use of force to command people and politicize economic life.

Of course, Smith favored consent over coercion but recognized, as did classical liberals, that some use of force is necessary to prevent injustice - that is, the violation of one’s legitimate (“natural”) rights to life, liberty and property.

For Smith, justice did not mean “doing good with other people’s money”; it meant, “doing no harm”. As such, justice is consistent with the Taoist principle of wu wei, or noninterference. According to Smith, if private property rights were protected by the “laws of justice”, free trade would lead to mutually beneficial gains. Individuals seeking their own gain would also increase the wealth of the nation.

Long before Smith explained his “invisible hand doctrine”, Lao-tzu taught that “people spontaneously increase their wealth” when they are left alone. Likewise, the great Han historian Sima Qian understood what Nobel laureate economist F. A. Hayek later called the “principle of spontaneous order”. According to Sima, “when all work willingly at their trade … things will appear unsought and people will produce them without being asked [commanded]”.

China lost the notion of spontaneous order during the chaos of the Great Leap Forward and the Cultural Revolution. Central planning destroyed, rather than created, wealth because it abolished private property and economic freedom. Today, as the result of more than 30 years of economic liberalization, the Chinese people are richer and freer.

China’s “peaceful development” has helped create a middle class and, more important, an entrepreneurial class willing to take risks in a global economy.

The process of “creative destruction”, which economist Joseph Schumpeter described, is evident in China’s development.

Faced with constant change and a global financial crisis, China’s leaders are not calling for protectionism, and Chinese entrepreneurs are searching for new opportunities.

When Mr Wen says “the society that we desire … is one in which people can achieve all-round development in a free and equal environment”, he should reflect on the following passage from the Theory of Moral Sentiments:

“In the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.”

Hong Kong’s adherence to “small government, big market” has served the people well. The mainland’s economy is not yet the freest in the world, but it could be - if “social harmony” were combined with the security of people and property, so that individuals could plan their own lives under a transparent and stable rule of law.

Mr Wen, in his interview, appears to recognize the need for institutional reform and further liberalization. The challenge is to recognize that the role of a just government is not to redistribute income and wealth, which violates private property rights, but to extend the range of individual choices by limiting the power of government and expanding the scope of markets.

Morality arises from consent, not coercion. Equality under just laws is the basis for freedom because government is limited in its powers; equality of income brought about by government intervention, however, destroys freedom and with it economic development - in the liberal sense.

China’s spectacular economic progress since 1978 is due to the expansion of mutually beneficial exchanges through opening to the outside world and internal reform, with greater protection of the non-state sector and private property rights. What its leaders need to remember is, as Smith put it, that “beneficence is always free, it cannot be extorted by force”.

Beijing can best “achieve all-round development in a free and equal environment” if private property rights are expanded and legal norms comply with the voluntary principle.

The danger is that the current financial crisis is expanding the size and scope of government both in China and the west. It is ironic that the crisis is being blamed on “the free market” when, in fact, the fundamental cause was market socialism, not market liberalism.

James A. Dorn is a China specialist at the Cato Institute.