The Ecological State

The central problem of economics is scarcity, or at least that is how the story is told. The basic argument is that we have infinite desires but limited resources, and because we cannot have everything we want, we must necessarily devise a system to distribute goods and resources.¹ Enter the efficient market economy, with its prices and wages set by the magical forces of supply and demand, the supposed gatekeepers of the warehouse of economic nirvana. There is a kernel of inadvertent truth behind this narrative. Natural limits certainly impose absolute scarcities that are impossible to overcome. There is only so much uranium in the solar system, for example. And even if we synthesize certain substances by using other substances, the total amount we can produce will still be limited by the availability of the raw materials going into the production process. We cannot beat energy conservation.

Although natural constraints on supply are important, most economic scarcities that rule our lives are actually social and artificial. Supply and demand are not natural forces drifting through the air; they are contrived realities established by an interactive social environment involving governments, corporations, institutions, and classes. Supply and demand cycles are social constructs designed to answer a basic question: Who gets what? Those with social and institutional power decide how they want to distribute money, labor, and resources, and those without must navigate the resulting constraints and roadblocks that have been thrown in front of them, or they can challenge the system and remove some, if not all, of the roadblocks. Especially under capitalism, artificial scarcity is an important social reality that torments the lives of billions around the world, but scarcity as a natural limiting factor in economic activity is not as fundamental as we might like to think. In that case, what is?

Let us begin answering this question by remembering that human economies are dynamical systems powered by energy flows, and their successful operation requires the presence of stability in the face of an uncertain environment. If ecological instabilities make it difficult for an economy to keep collecting energy, then that economy is susceptible to collapse even though plenty of energy remains available for consumption. The coronavirus pandemic has painfully revealed this fundamental truth once again. The global economy is experiencing the worst cataclysm since the Second World War not because we are running out of stuff, but because chaotic feedback loops between nature and society have the power to severely destabilize cycles of economic activity. As industrialized agriculture keeps expanding into pristine habitats, it is dramatically increasing the odds of viral transmission from wild animals to human beings.² As we pump more greenhouse gases into the atmosphere, the planet keeps getting warmer and nearly all living organisms are feeling the impact. There are unavoidable ecological consequences associated with every kind of economic activity, but the energy-intensive modes of capitalism have been uniquely harmful.

The central problem of economics is not scarcity, but stability in the flow of goods and resources, and especially the stability of the ecozones that act as an economy’s primary energy reservoir. The primary goal of any economic system should be to ensure stability and sustainability in the face of nature’s external perturbations, which have always played a dominant role in the development of human history. Before going further, we should have a concrete sense about what stability means on a theoretical and empirical level. We cannot pursue stability as a strategy unless we know what we are trying to stabilize, and why it is worth stabilizing in the first place. Stability will be understood as something like a dynamic equilibrium, an acceptable range of energy consumption for human civilization that allows it to function without transgressing critical planetary boundaries. People are complex, to say nothing of entire societies. No civilization would be able to maintain a constant rate of energy consumption at all times, which is why viewing stability as a constrained dynamic equilibrium offers civilization more balance and flexibility as it tries to coexist with the natural world.

Economies absorb energy from the natural world and then convert a portion of that energy consumption to power their cycles of production, distribution, and consumption. An ecological system needs to prioritize the stability of the energy flows that sustain these productive economic cycles. This means primarily stabilizing an economy’s aggregate rates of energy conversion and consumption. The fraction of total consumption (throughput) that a civilization converts to useful forms of energy is the aggregate energy efficiency. In a previous article for Monthly Review, I argued that aggregate efficiencies for economic systems across history generally change at very slow rates, given the constraints on technological development and the economic incentives of each system.³ Because aggregate efficiency does not change much as economies consume more energy, much of that extra energy consumption is lost as waste and dissipation to the environment. In the last two centuries of capitalist development, these energy losses have profoundly reorganized our planet’s entire ecosphere, to the point where intensifying ecological disturbances have become a major threat to the stability of the energy flows that power our economic systems.

Moving past capitalism will require lower rates of energy consumption from the advanced economies of the industrialized world, but also a tectonic shift in the way we understand the purpose of economic activity, from the current obsession on growth (measured currently in terms of gross domestic product) to a greater focus on energy stability. But how are we supposed to maintain stability with the current economic structures of capitalism? The simple answer is that we cannot. We need entirely new social and political systems that align with the energetic constraints of our stability program. The only realistic way of providing this kind of macroenergetic stability in the near future is through the substantial involvement of the state in the control and administration of economic resources. This is not necessarily an obvious claim, and is worth explaining to some extent.

The ecological crisis is largely a product of very wealthy people, countries, and corporations exploiting the planet’s resources for their economic gain.⁴ Capitalism depends on ecological degradation because it needs to rapidly extract vast quantities of natural resources, manufacture the corresponding products, and then commodify the resulting surplus in global exchange markets.⁵ Capitalists cannot quickly dial back their energy-intensive methods of production and distribution without threatening their profit rates. Because this nexus of corruption cannot be expected to clean its own filth, we must turn toward something that can. The state is the only social institution powerful enough to curb and constrain the energy-intensive economic modes of capitalism. But it is not immediately obvious how it should go about achieving this. Setting up the wrong framework could still produce additional ecological disasters. This is the central question addressed in this article: What should the role of the state be in an ecological society? We will begin with a short review and critique of the state’s economic role under the dominant liberal paradigm.

The State in Liberal Economic Theory: Review and Critique

Liberal economic theory regards state intervention in the economy as a harmful distortion of the market’s apparently inevitable path toward long-run general equilibrium, that magical place where the market satisfies all requests for the right price, the fantasyland where aggregate supply equals aggregate demand. The neoclassical synthesis established at the end of the twentieth century maintains that governments can occasionally intervene to fix temporary problems caused by market activity, but that markets will eventually get it right “in the long run”—a term of art that economists never specifically define. But even when adopting the myopic and idealized assumptions of neoclassical theory, results from the 1970s showed that “general equilibrium” is neither stable nor unique.⁶ An economy that reaches such a state would fall out of it, and the presence of multiple equilibria leaves open the problem of which one we should aim for. This objection still leaves out several methodological problems that make it virtually impossible to accurately measure aggregate supply and demand, so one can never really know if an economic system has actually reached general equilibrium, even after allowing for its existence.

But there is an even bigger problem with the liberal conception of the state as the impartial guardian of private property rights, the noble referee of the private sector’s mistakes. The state and the accumulation process under capitalism are profoundly intertwined. The state does not merely “protect” private property; it can also actively create it. In the 1930s, at the height of the Great Depression, the U.S. government banned companies from manipulating their stock prices, which then caused most corporations to stop buying their own stocks as a way of avoiding charges of manipulation.⁷ But in 1982, after the collapse of the New Deal coalition allowed Ronald Reagan to obtain power, the government kissed goodbye to the lessons of the past and eliminated or substantially revised the prior regulations. The predictable result was that companies started pouring vast sums of money into their stocks, sending valuations sharply higher with little regard for actual performance or economic fundamentals.⁸ In the 1990s, the Bill Clinton administration issued new tax rules about CEO salaries that wound up incentivizing companies to pay their executives through lucrative stock packages.⁹ Through these and other actions, the state encouraged massive wealth redistribution toward capitalists and away from workers. Once the apologists of capital took over the state, there was little doubt about who would benefit. Another well-known example of the state boosting capitalist power comes from volume 1 of Karl Marx’s Capital, in which he recognized the importance of expanding national debt to the process of wealth accumulation.¹⁰ In particular, the explosion of war debt in the eighteenth century helped unleash the financial floodgates in many European economies.

These examples demonstrate that the state provides critical top-down constraints on economic activity, and thus exerts enormous amounts of influence over the cycles of production and distribution. The concept of a “free market” is largely an abstraction because virtually all governments have a strong impact on the dynamics of market activity. Governments decide what counts and does not count as property and enforce property rights. Governments define the rules governing market operations. Governments can even create new global markets for domestic companies through warfare and other forms of strategic competition, like sanctions, embargoes, and blockades. Trade and commerce cannot be decoupled from state power. Likewise, the exercise of state power cannot be decoupled from the class dynamics that constrain the distribution of labor and wealth. The state does not act in a vacuum; its actions are shaped by various kinds of social and class struggles. The state is a thunderous battleground among competing economic classes and social groups. Economics, especially in the modern world, cannot be understood separately from the collective actions of the state.

The coronavirus pandemic has provided another powerful and historic example for understanding the state’s critical economic role. In 2020, the U.S. federal government pumped the economy with trillions of dollars in a desperate bid to save private capital from a systemic breakdown.¹¹ Meanwhile, capitalists did not hesitate to fire millions of workers as a way of salvaging their profits, all while eagerly accepting the trillions of dollars the government injected into corporate balance sheets. This is the second time in the last two decades that capitalists have relied on massive interventions from their governments in order to avoid total collapse. How are workers faring through this crisis? It depends on where they live.

In many European countries, governments took several ambitious steps to prevent economic catastrophe, such as deciding to finance most of the wages for their private-sector employees. Although European nations experienced small increases in unemployment as a result of the crisis, their figures paled in comparison to the jaw-dropping numbers that emerged from the United States last year.¹² The federalized system of the United States produced a patchwork of different responses to the pandemic; this incoherent and uncoordinated strategy is partly to blame for the pandemic’s rapid and intense proliferation throughout the country, even as some societies around the world have returned back to normal after sharp declines in the number of new cases. U.S. journalist George Packer infamously called his country a “failed state” for its botched response.¹³ On the financial front, the U.S. government provided money to finance limited unemployment benefits through two stimulus bills, but many workers have had a hard time accessing the benefits because of how certain states run the program.¹⁴ Millions have slipped into poverty as a result of this and other social failures. Throughout this crisis, the people of the United States have received a painful reminder that the distribution of economic resources, including jobs, is largely a product of social policy, not the preordained outcome of impersonal economic laws waltzing their way through history.

Nationalization and Efficiency

Capitalists run to the state when they need money and favors, but otherwise they merely ask of the state that it legitimate and, when necessary, reinforce their continued plundering of society. And there is nothing that terrifies the reigning neoliberal orthodoxy more than the specter of nationalization, the transfer of assets from private to public ownership. In the last few decades, many Western nations have sold a substantial portion of their public assets as part of a larger political power shift away from labor and toward private capital. These changes may have enriched a few corrupt plutocrats and worsened the lives of millions of people, but they have not altered the strategic and structural importance of the state, as Western capitalism seems to be on the verge of collapse about once a decade unless the state intervenes to save the system.

When liberal and conservative economists criticize nationalization, they are predominantly, though not exclusively, obsessing over the concept of so-called efficiency. This nebulous concept does not have a universally accepted definition, and different research studies focus on varying aspects of the term. For dominant economic groups, the main focus is on lowering production costs as one possible method of boosting profitability. In general, any result that boosts profits is treated as efficient. For many economists, efficiency has more to do with the “optimal” allocation of resources, such that no new allocation can occur without hurting someone else (so-called Pareto optimality), a criterion designed to favor the corrupt status quo, in effect constituting a right to inequality.

Antinationalization arguments based on the idea of market efficiency have an extensive history. In 1920, the Austrian economist Ludwig von Mises presented an argument against certain forms of socialism that became known as the “calculation problem.”¹⁵ Mises argued that prices act like signals that tell us about supply and demand for labor and resources. A central board of public planners could never know enough about the fine-grained details of the economy, like how many fish this restaurant needs or how many shingles are going on that roof, to send the right signals to various consumers and producers. Only decentralized networks in which prices are set between individuals and corporations through mutual consent can offer an ideal allocation of resources.

There are many possible refutations to the calculation problem, but the easiest is to point out examples of complex civilizations that efficiently allocated resources without using prices at all. Andean civilizations in South America, such as the Tiwanaku and Inca, developed complex states and empires without the corresponding rise of a large financial class. The state controlled the distribution of resources, handing out food and equipment as necessary, and people usually paid taxes to the government in the form of labor.¹⁶ Based on anthropological data, these systems thrived for centuries and they appear to have worked very efficiently, in the sense that they consistently avoided extreme resource shortages.

Leaving ancient history aside, markets under capitalism have routinely produced oligopolies and monopolies, creating many inefficiencies and externalities along the way. In other words, capitalism itself has a tendency to centralize economic planning in the hands of a few powerful corporations, which then control the distribution of resources for other individuals and corporations. Contemporary examples would include the likes of Amazon and Walmart, both of which establish prices through central planning for millions, or perhaps billions, of different commodities.¹⁷ Mises was wrong to view prices as innocent markers of supply and demand, as impartial signals about the physical state of the economy. Prices function more like symbolic quantifiers of social power, as mediated by class struggles, monopolies and oligopolies, and institutional rivalries.¹⁸ Capitalists price their commodities to beat out the profit rates of their competitors, to seize control over new markets against established rivals, and to extract profits from their hard-working labor force. Capitalists are not that interested in efficiency. They are interested in controlling the social distribution and utilization of economic resources. More specifically, they are interested in augmenting their power by trying to organize society on their own terms, and that process includes pressuring governments and workers to accept their demands through a wide array of threats and coercive actions.

On the empirical side of things, global studies on the relative efficiency of nationalization compared to privatization have yielded mixed results. A major study of the British privatization wave in the 1980s revealed no systematic evidence that private corporations were more efficient than the public companies they had replaced. The authors concluded that “it is difficult to sustain unequivocally the hypothesis that private ownership is preferable to nationalization on efficiency grounds.”¹⁹ Another major study about the privatization of Indian banks concluded that the public banks had higher productive efficiency than the private ones.²⁰ Other studies have offered more mixed results.²¹

Suppose we were to grant the questionable claim that the private sector is more “efficient” at allocating resources, primarily by keeping costs down, than the government. So what? How does this show that higher efficiency is something worth achieving more than other desirable aspects of economic activity, such as job security, poverty alleviation, and macroeconomic stability? It does not, at all. In other words, there are positive aspects associated with greater levels of nationalization that we as a society could decide are worth more than the negative aspects, such as a slight decline in relative “efficiency.” Here it should also be noted that greater efficiency in the production of such “goods” as luxury mansions and gas-guzzling SUVs may in fact be detrimental to human welfare as a whole. The “efficiency” argument against nationalization is thus a total waste of time, and especially so from the perspective of an ecological system, which needs the state to have some direct control over the levers of production and distribution as a way of modulating the economy’s energy flows.

The Past and Present of Nationalization

Before arguing about what governments should be owning or controlling, it is worth reviewing what many of them are already doing all over the world. In the United States, public control over vital social services still persists in unlikely places. Nebraska enforces direct public control over its electric utility companies, which are governed by “public power districts.” North Dakota has a state-owned bank with billions of dollars in assets. Worldwide, governments either control or operate numerous major businesses, including airlines, banks, and oil companies. Finland’s government owns Finnair, the country’s largest carrier. Norway’s government owns Equinor, one of the largest petroleum companies in the world. Governments are actually dominant players in the oil sector, as with Saudi Arabia’s Aramco, China’s Sinopec, and Russia’s Rosneft. Aramco has been recognized as the most profitable company in the world for many years over the last two decades.²² During the previous decade, the biggest commercial bank in the world has been the Industrial and Commercial Bank of China, which is also state owned.²³

The point of these examples is to emphasize that there is no obvious contradiction between government ownership and the shift toward sustainable human development as a mark of social success. It is certainly true that many state-owned companies in the past have been operated with great negligence and incompetence, but the same is true for many private companies as well. How many zombie corporations are kept around by venture capitalists on the fringe promise that they might deliver something in the future, even though they are currently in shambles? How many, like Enron and Theranos, temporarily thrived because of blatant fraud and deceitful behavior? Not only can state companies compete and succeed, they can also provide more stability and certainty to millions. State companies do not have to survive by obtaining profits because the government can keep financing them, including through taxation, borrowing, and various forms of monetization, such as printing money. They offer the kind of longevity and job security that private corporations simply cannot.

The analysis thus far has ignored something important: history and the geopolitical order. The successes and failures of nationalization programs cannot be understood separately from the power dynamics of the global economy. From Iran to Guatemala, many nations challenged the capitalist order in the twentieth century by trying to socialize and democratize the ownership of natural resources. But the core bloc of the global system would have none of it. Because U.S. and European companies were in danger of losing their hefty profits from these nationalization programs, Western powers almost always responded by trying to overthrow the local governments, either through coups and outright wars or by imposing sanctions intended to destabilize the defiant country. We simply do not know how scores of nationalization programs would have turned out because they were squashed before having a chance to even get off the ground.

The Iranian example is particularly instructive. Before the 1950s, the production and distribution of Iranian oil was controlled by the Anglo-Iranian Oil Company, in which the British government had a majority stake. Rising popular anger about the unfair distribution of profits prompted the Iranian government to nationalize the Anglo-Iranian Oil Company in 1951.²⁴ The move had many unintended consequences. Britain and other Western countries responded with severe sanctions that made it virtually impossible for Iran to export most of its oil. Iran also lost access to its financial reserves held in Western banks. With the economy reeling and internal political divisions intensifying, the government of Mohammad Mosaddegh was overthrown in 1953 through a violent coup orchestrated by the U.S. CIA and the British MI6. Nationalization failed in Iran not because of some inherent deficiency, but because Western powers decided to make it fail as a way of protecting their control over the global oil trade.

The precarity of nationalization was not confined to smaller economies like Iran. The Soviet Union also suffered from the Western-led economic order. Although it was never directly attacked through a coup or a violent conflict during the Cold War, it still experienced the harmful economic consequences of being cut off from multiple credit and technology markets dominated by Western currencies and firms around the world. Despite these restrictions, the Soviet Union still made an amazing amount of progress in various scientific and technological fields, such as launching the world’s first artificial satellite and building the first nuclear power plant that supplied electricity to a connected grid. In any case, nationalization is likely to be more successful if it manages to expand in the core of the global economic system, particularly in the United States. Regardless of where it takes hold, we need to model its impact on society through an ecological prism. We need to understand how the exercise of state power can be decoupled from the harmful legacy of capitalism and turned into a positive method for enhancing the ecological stability of society.

A New Model

The ecological state cannot be abstracted away from an ecological society. To analyze the dynamics of the state is to analyze the dynamics of society. In their seminal 1997 work, A History of World Agriculture, scientists Marcel Mazoyer and Laurence Roudart coined the term ecological valence to describe the ability of a species to maximize its population density in different environments.²⁵ Certain organisms, like bacteria, are capable of living in both normal and unforgiving ecosystems, which is a way of saying that they have a high level of ecovalence. Other organisms require much more restricted environments; you would not find any polar bears roaming the equator, a sure sign that polar bears have low ecovalence. We will borrow this useful term and modify it slightly for our purposes, redefining ecovalence as the ability of organisms to sustain or increase biophysical flows in response to external disruptions in their surrounding ecozones. In the context of wild animals, ecovalence could be a measure of their adaptability when interacting with human civilization.

For civilization itself, ecovalence represents the central goal: the protection of our way of life in the face of chaotic natural instabilities. I introduce the term valerism to capture this new ecological perspective. Valerism is a combination of valence and regeneration. Valence stands for the collection of stable group modes that maintain sustainable economic activities. Regeneration is the idea that social activities should nurture and regenerate the natural world, not exploit it for short-term objectives. Valerism is compatible with certain forms of socialism and other democratic movements focused on establishing a reciprocal relationship between human civilization and the natural world.

The central objective of the valerist state is the pursuit of macroenergetic stability, making the valerist system very different from capitalism, which is heavily invested in the deceptive prospect of infinite growth. In this context, stability means that production and consumption are changing and fluctuating around some predefined energy equilibrium. The equilibrium itself could be defined by local conditions, reflecting the confluence of social and political factors that dominate in a particular economy. Although growth can certainly occur in a valerist system, growth itself would never be the organizing principle of the economy. To overcome the ecological crisis, and to prevent another one from ever happening again on account of human activity, a valerist economy needs to impose limits on aggregate energy use and consumption (throughput). These limits could also be paired with constraints on the consumption of materials and the production of commodities. Furthermore, society also needs to place limits and constraints on the accumulation of financial wealth, as vast sums of money are often a gateway to accessing more energy for the very rich. Nevertheless, my primary focus here is on the energetic constraints.

In the discussion that follows, I cite energy consumption figures on a daily per capita basis. With this standard in mind, the current global average rate of consumption is roughly 50,000 kilocalories. This number disguises widespread variability among the world’s economies. The United States, for example, has an average consumption rate of around 200,000 kilocalories.²⁶ Ecological scientists have shown that, if the entire planet consumed energy at this rate, human civilization would quickly face catastrophe.²⁷ Many other Western economies are generally below the U.S. figure, hovering around 150,000 kilocalories. By contrast, a country like India, the world’s second largest in terms of population, had a consumption rate of about 20,000 kilocalories in 2019.²⁸ For some historical perspective on these numbers, consider that hunters and gatherers after the invention of fire had a consumption rate of about 4,000 kilocalories.²⁹ The Roman Empire at its height might have reached an average rate of about 10,000 kilocalories.³⁰

Different countries are facing different realities. In past work, I have emphasized that efficiency gains and technological innovations are not the best ways of tackling our ecological crisis. Reducing carbon emissions and increasing fuel efficiency are vital, but global warming is not our only ecological problem. Addressing the ecological crisis holistically means that we should focus on controlling energy use and consumption, all while meeting essential needs. However, the controls and constraints that we should adopt may vary depending on the country and wider historical context that brought it to the current moment. Some countries need to reduce consumption drastically; others can still continue consuming at higher rates for a few more years. But in every society, it is a good idea to establish an upper limit of 70,000 kilocalories for the average energy consumption rate. This limit would be actively enforced through various constitutional and legal decrees; it should only change in the event of an extreme social emergency. Why should societies choose this particular number? There are many reasons, including that it is in line with the recommendations of ecologists and other scientists; it is a reasonable and realistic maximum value that would help reduce humanity’s ecological footprint; and it would still allow us to conserve the most important achievements of the modern world, such as higher life expectancies and improved levels of education.³¹

Societies can also choose to set a lower limit, but here the guidelines can be more flexible. If we wish to protect some of the trappings of modern civilization, such as taking a drive or getting on a flight every once in a while, then a rough lower bound could be something like 30,000 kilocalories. The point of establishing a range, instead of a fixed number, is to recognize that societies are complicated and need some measure of flexibility as they interact with the world and respond to its challenges. Some people may be worried that this range would trap us in a cycle of poverty, destitution, and death. Nothing could be further from the truth. Plenty of well-functioning societies are already in this range, or very near to it. For example, Italy has an average consumption rate of about 70,000 kilocalories.³² Spain is at around 80,000. The life expectancy of a Spanish citizen is 83 years and the vast majority of them are not starving in the streets. It is certainly possible to have healthy societies with far lower rates of energy consumption than those that currently prevail in much of the West. This is because the total amount of energy that we use is not the only important indicator of social progress. It also matters how society is organized, how people are educated, how wealth is distributed, and how we protect our natural environments, among many other factors.

In any case, the only realistic way to impose these energetic constraints is to have strong public and collective control over the dominant sectors of the economy. It is important to qualify this claim and remove some possible misconceptions. A valerist system would still permit the existence of private exchange markets. You can still go to the local market and eat at your favorite restaurant; the government will not take those things away from you. But to prevent large corporations from accumulating too much wealth and power, and to prevent them from becoming energy guzzlers that threaten the planet’s ecological stability, the state should be involved in their ownership and administration, which in many cases will involve some type of nationalization. In so doing, the valerist state would also put the brakes on the ruthless tendencies of modern capitalism to plunder natural resources and commodify them for large profits in global markets.

In summary, the fundamental features of valerism as an economic system are the following: an average energy consumption rate between 30,000 and 70,000 kilocalories, the organization of economic life around the principle of stability instead of growth, collective and democratic control over the extraction and distribution of natural resources, and a tightly regulated exchange market in which private individuals can try to obtain profits by buying and selling certain goods and services through mutual consent. This program would allow us to move toward a more egalitarian society. Just as importantly, it would also facilitate the survival and stability of industrial civilization.

Notes

1. For a typical version of this argument, see William A. McEachern, Macroeconomics: A Contemporary Introduction (Boston: Cengage Learning, 2008), 2–3. One of the many false assumptions here is the idea that all people have unlimited desires. It is a purely ideological construct that has no support in historical and anthropological studies. Capitalism needs people to keep consuming without end, and thus capitalists want people to believe that every level of consumption is a barrier that must be surpassed. Needless to say, this is not how most people throughout history understood their world.
2. Erald Kolasi, “The Physics of Capitalism,” Monthly Review 70, no. 1 (2018): 29–43.
3. In the 1970s, the economists Hugo Sonnenschein, Rolf Mantel, and Gérard Debreu published a series of papers concerning the uniqueness and stability of general equilibrium in neoclassical economics. Their work came in the context of earlier results from Debreu and the U.S. economist Kenneth Arrow showing that general equilibrium could exist, but only under highly idealized assumptions that apply absolutely nowhere in the real world. The results of Sonnennschein, Mantel, and Debreu collectively became known as the “SMD theorem,” after their last names. The SMD theorem is a highly negative and deflationary result for neoclassical theory because it shows that even if you know the equilibrium prices that prevail in general equilibrium, that information cannot tell you anything about the underlying economy that actually produced those prices. In effect, there are many “microscopic configurations” that can produce the same state of general equilibrium. Later results from Alan Kirman, Donald Saari, Ivar Ekeland, Donald Brown, and Chris Shannon have only strengthened and expanded the original conclusion. For an excellent overview of the SMD theorem and subsequent debates, see S. Abu Turab Rizvi, “The Sonnenschein-Mantel-Debreu Results after Thirty Years,” History of Political Economy 38 (2006): 228–45. Another excellent review of the failures of the general equilibrium program can be found in Frank Ackerman, “Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory,” Journal of Economic Methodology 9, no. 2 (2002): 119–39.
4. For an excellent introduction to stock buybacks, see Emily Stewart, “Stock Buybacks, Explained,” Vox, August 5, 2018.
5. See Lenore Palladino, Stock Buybacks: Driving a High-Profit, Low-Wage Economy (New York: Roosevelt Institute, 2018). She finds that, in the twenty-first century, U.S. corporations have used an astonishing 94 percent of their profits for stock buybacks and dividend payments to shareholders.
6. Sarah Anderson, “The Failure of Bill Clinton’s CEO Pay Reform,” Politico, August 31, 2016.
7. Karl Marx, Capital, vol. 1 (London: Penguin Classics, 1976), 919.
8. See Heather Long, “The Federal Reserve Has Pumped $2.3 Trillion into the U.S. Economy. It’s Just Getting Started,” Washington Post, April 29, 2020.
9. Michael Birnbaum, “Coronavirus Hits European Economies but Governments Help Shield Workers,” Washington Post, April 30, 2020.
10. George Packer, “We Are Living in a Failed State,” Atlantic (June 2020).
11. Coral Murphy, “Part-Time Workers Finding Coronavirus Unemployment Benefits Hard to Come By,” USA Today, April 17, 2020.
12. See Ludwig von Mises, Economic Calculation in the Socialist Commonwealth (Auburn: Ludwig von Mises Institute, 2014).
13. For a concise description of the Inca imperial economy, see Gordon Francis McEwan, The Incas: New Perspectives (New York: W. W. Norton, 2008), 87–88.
14. See Leigh Phillips, The People’s Republic of Walmart (New York: Verso, 2019).
15. See Jonathan Nitzan and Shimshon Bichler, Capital as Power (Abingdon: Routledge, 2009).
16. Stephen Martin and David Parker, “Privatization and Economic Performance throughout the UK Business Cycle,” Managerial and Decision Economics 16 (1995): 225–37.
17. Arunava Bhattacharyya, C. A. K. Lovell, and Pankaj Sahay, “The Impact of Liberalization on the Productive Efficiency of Indian Commercial Banks,” European Journal of Operational Research 98 (1997): 332–45.
18. For example, see Sergei Guriev, Anton Kolotilin, and Konstantin Sonin, “Determinants of Nationalization in the Oil Sector: A Theory and Evidence from Panel Data,” Journal of Law, Economics, and Organization 27, no. 2 (2011): 301–23.
19. Stanley Reed, “Saudi Aramco Is World’s Most Profitable Company, Beating Apply by Far,” New York Times, April 1, 2019.
20. Cheng Leng and Engen Tham, “China’s ICBC, World’s Largest Bank, Sees Best Third-Quarter Profit Rise in Five Years,” Reuters, October 25, 2019.
21. Edward Henniker-Major, “Nationalization: The Anglo-Iranian Oil Company,” Moral Cents: The Journal of Ethics in Finance 2, no. 2 (2013).
22. British Petroleum, BP Statistical Review of World Energy (London: British Petroleum, 2020), 8. Note that British Petroleum presents its figures in terms of exajoules. To get from exajoules to kilocalories, you need to know that an exajoule is equal to 1,018 joules and a kilocalorie is equal to about 4,180 joules. Once you get the total annual number of kilocalories for the country, you need to divide by 365 (the number of days in a year) and the population of the country. This will give you the daily per capita consumption rate in kilocalories.
23. George P. Nassos and Nikos Avlonas, Practical Sustainability Strategies (Hoboken: Wiley, 2020), 9–10.
24. British Petroleum, BP Statistical Review of World Energy, 8.
25. Earl Cook, “The Flow of Energy in an Industrial Society,” Scientific American 225, no. 3 (1971): 134–47.
26. Paolo Malanima, “Energy Consumption and Energy Crisis in the Roman World,” Environmental History Conference (2011): 4.
27. See Mathis Wackernagel and William Rees, Our Ecological Footprint: Reducing Human Impact on the Earth (Gabriola: New Society, 1996). Also see Johan Rockström et al., “A Safe Operating Space for Humanity,” Nature 461 (2009): 472–75.
28. British Petroleum, BP Statistical Review of World Energy, 8.

Why was There No Capitalism in Early Modern China?

In this paper, we ask the following question: why couldn’t Early Modern China make the leap to capitalism, as we have come to know it in the West? We suggest that, even if China compared well with the West in key economic features – commercialization and commodification of goods, land, labor – up to the 18th century, it did not traverse the path to Capitalism because of the “fact of empire”. Lacking the scale of fiscal difficulties encountered in Early Modern Europe, Late Imperial China did not have to heavily tax merchants and notables; therefore, it did not have to negotiate rights and duties with the mercantile class. More innovatively, we also propose that the relative lack of fiscal difficulties meant that China failed to develop a “virtuous symbiosis” between taxing, monetization of the economy and public debt. This is because, essentially, it was the mobilization of society’s resources – primarily by way of public debt or taxes – towards the support of a military force that created the first real opportunities for merchants and bankers to amass immense and unprecedented wealth.

INTRODUCTION

“In the West, capitalism triggered revolutions in science, technology and economic growth with the industrial revolution. From there, it became the dominant mode of production in Europe and in most of the rest of the world. Capitalism enabled favored classes and countries to amass capital, power and knowledge at an unprecedented rate. In China, something rather different occurred” (^{Gates, 1996}, p. 40).

However we may define capitalism – whether we understand it as a “free private enterprise exchange economy” or we grasp it as a mode of production based on exploitative property relations and the accumulation of capital through the extraction of surplus value from wage-earning workers – there is but little disagreement about the fact that Europe embarked, beginning in the late 1700s with England, on a road of sustained per-capita income growth that quickly made it look very different from the rest of the world, still mired in what Kenneth (^{Pomeranzs 2000}, p. 207) dubbed as a “proto-industrial cul-de-sac”. But what really makes the European breakthrough – “the capital-intensive, energy-intensive, land-gobbling European Miracle”¹ – unique is the fact that, as recent research has thoroughly demonstrated², far from being unique, in the late 1700s “the most developed parts of western Europe seem to have shared crucial economic features – commercialization, commodification of goods, land, and labor, market-driven growth… – with other densely populated core areas in Eurasia” (^{Pomeranz, 2000}, p. 107). The author is thus arguing that there is no reason to think that this pattern of market-development would necessarily have led to any kind of industrial breakthrough.

There has been extensive research on what prevented China from breaking through to an industrial revolution³. If one equates capitalism with the “perfect functioning of markets”, one is boggled by the fact that it has not been convincingly proven that Early Modern Europe was closer to Smithian ideas of freedom and efficiency than China. In the seminal book “The Pattern of the Chinese Past”, (^{Elvin 1973}) puts forth the thesis that in the 18^th century China had reached a “high-level equilibrium path”: in Gunder Frank’s interpretation of this thesis (¹⁹⁹⁸, p. 301-2), China had gone about “as far as you can go with the agricultural, transport and manufacturing techniques developed in the preceding centuries on the basis of abundant human labor combined with scarce land and other resources”. Elvin and others thus challenge cultural and institutions-based theories that purport to find Europe’s advantage against China in some kind of European civilizational traits that can be traced back centuries before the industrial revolution⁴. Andre Gunder Frank is particularly critical of what he dubs the “Eurocentric Vision, received from Weber, Marx and their disciples, that the Asiatic Mode of Production was stagnant and literarily useless, while European institutions were progressive” (¹⁹⁹⁸, p. 205). Actually, he thinks the whole “Asiatic Mode of Production” construct is laden with unproductive prejudices, and thus needs to be discarded in favor of more unbiased analyses of Asia’s pre-industrial economy, what he convincingly did in his ReOrient.

In this article, we offer a political economic contribution to an explanation of why China was not the birth place of capitalism, understood as a system of endless growth of the capital stock (commodities, machines, money) and unfettered search for profit. As Wallerstein puts it (¹⁹⁹⁹, p. 27), this definition has the double advantage of being consonant with most or all explanations of the processes of the “capitalist/modern world” and of being a good fit with historical reality. Our argument will bear on the line of scholarly work first advanced by Braudel, who argued for a distinction between capitalism and the market economy, thus suggesting that the political economy of Early Modern Europe may have mattered more than social class relations in explaining the “Rise of Europe”. Especially, we will advance the arguments of José Luis Fiori, a Brazilian scholar who – to our mind – develops and improves upon the Braudelian tradition.

Like Frank, Elvin and Pomeranz, we deem the birth of capitalism to have been something accidental, not the result of dialectical contradictions inherent in the feudal mode of production. While these authors focus on environmental and resource availability factors – silver and other resources extracted from the Americas allowed Europe to buy its way into Asian markets and then dominate world markets (Frank); China’s unfavorable man-to-land ratio thwarted innovation in labor-saving technologies, in comparison to Europe (Elvin); South-American and Caribbean colonies and Europe’s (chiefly British) coal reserves were indispensable for providing the necessary resources for capital and energy-intensive growth (Pomeranz)⁵ – we focus on the effects of state-making and war-making on “state rulers to economic elites (chiefly merchants)” relationships. Particularly, we stress Fiori’s powerful argument that capitalism was a sub-product of the power struggle within the Early Modern European Interstate system.

This paper is organized as follows. In the first section we present our main theoretical underpinnings, respectively, (i) the Arrighian/Braudelian rejection to liberal theories of the transition to capitalism and (ii) Fiori’s Global Power theory, which actually downplays the very role of economics in explaining the transition. In the second section (before the conclusion), we outline why state-elite relations in Imperial China did not lead to capitalism, whereas the alliance between cash-hungry European rulers and merchants facilitated the leap to a new mode of production.

THE DISTINCTION BETWEEN THE MARKET ECONOMY AND CAPITALISM AND FIORI’S GLOBAL POWER THEORY

A series of scholars have tackled the problem of why China did not embark on a capital-intensive accumulation process – despite having reasonably well functioning markets, secure property rights to land, generalized wage-labor⁶ (etc.) – by escaping the conundrum one comes across when linking capitalism directly to the development of markets. These scholars argue that, while capitalism is obviously compatible and to a large extent dependent on the wide-spread development of property rights and competitive markets, the ideal conditions for continuous capital accumulation – and not only for its origin, for its debut – include (or perhaps demand) arrangements that make it possible for some people to circumvent competitive markets, to profit from securing monopoly rights and other state-sponsored privileges that make profit rates soar to the point where investment in capital goods becomes attractive. Were it not for these perpetually-reproduced arrangements, they say, the drive for capital accumulation would soon wither away as competition would plummet profit rates back to the levels of “traditional-market” societies. Hence the famous distinction that Fernand (^{Braudel 1977}, p. 62) makes between the market economy and capitalism: “there are two types of exchange, one is down-to-earth, it is based on competition, and is almost transparent; the other, a higher form, is sophisticated and domineering. Neither the same mechanisms or agents govern these two types of activities, and the capitalist sphere is located in the higher form”. Whether state-sponsored or not, Braudel considers long-distance trade and financial intermediation examples of the second type. For him, it was the sheer amount of capital involved in these enterprises that, in turn, “enabled capitalists to preserve their privileged position and to reserve to themselves the big international transactions of the day” (¹⁹⁷⁷, p. 58). But we should remember that, for Braudel, “capitalism (ultimately) only triumphs when it is the state”⁷, that is, when rich merchants enjoy from the state both the security and favour necessary for “capitalist dynasties” to build their fortunes over generations.

Following Braudel, (^{Arrighi 1994}, p. 10 ss.) also believes that the transition marking the rise of capitalism in Europe above the existing market structures little had to do with the proliferation of commercial activities (these have purportedly always existed), but with the fusion of capital with government, the mix that propelled European States towards the territorial conquest of the world (p. 11). In other words, it was the military and colonial endeavors of warring European states that created the economic loci that allowed capital to be accumulated – via public debt, tax-farming, trade monopolies, etc. – at unprecedented rates. More specifically, if it weren’t for the European inter-state competition for capital, blocks of governmental and business organizations would not have been formed. And for Arrighi, were it not for this fusion, the vast “elements of capitalism” – located everywhere in the world for the past few millennia – could never have amassed such power as to revolutionize the material world. So, for the Italian scholar what needs to be explained is not the domestic aspects of capital accumulation per se but how exactly the geopolitical competition between European States impelled them to furnish an ever-increasing concentration of capitalist power in the European (then World) system at large, a concentration that directly served the interests of sequential leading capitalist powers.

Now it is time we presented an innovative line of research not well known in the English-speaking world because most of it has yet to be published in English⁸. Like Braudel, for José Luis Fiori the specifically European collusion of profit and power is central to explaining the rise of capitalism. However, Fiori thinks that Braudel’s Wheels of Commerce (1982) focus excessively on the development of individual trade and markets and conveys the idea of a gradual transition – within the “games of exchange” – to the “high gear” world of capital and capitalism (^{Fiori, 2010}, p. 126). To put it differently, there seems to be a missing link between Braudel’s “games of exchange” and his theory of capitalist “large profits” and “large predators”.

Fiori’s main argument in his Preface to Global Power (²⁰¹⁰) is that there is no intrinsic factor related to exchanges and markets that explain the decision to accumulate and the universalization of market themselves, and thus, that the leap from market to capitalism must be mediated by the worlds of power and war. Put differently, the expansive force that accelerated that growth of markets came not from the “games of exchange” nor from capital-labour relations (class struggle), but from the “games of conquest”.

Somewhat counter intuitively, Fiori goes on to say that taxes were the first price of labor: only after its imposition was the population forced to produce a surplus. “The value of taxes became the elementary unit of value of the first pricing system within the payments community, unified by the sovereign’s taxes and currency” (²⁰¹⁰: 130). And as the payments of taxes in cash fostered the exchange of surpluses in markets where “taxpayers” could accumulate the necessary credit (money) required for the payments of their debts in sovereign currency⁹, “a virtuous circle of sovereign power accumulation and increased surplus, trade and markets” (p. 130) ensued.

For reasons not entirely known, it was only in late medieval Europe that a sufficient number of competing sovereigns monetized their tributes so as to turn Europe in what Maurício (^{Metri 2007}) – another scholar from the Federal University of Rio that participates in the “Global Power” research group – calls a “monetary mosaic”. In other words, for historical reasons there emerged in Europe endless currencies, each valid within their “taxation area”. But by “monetary mosaic” Metri means that the originality of Europe lay in the fact that those tributary territories were not isolated and in conjunction formed an “international community of payments” in which operations for the cancellation of sovereigns’ debts and credits and arbitrage in foreign exchange became the first real opportunities for money to beget more money. In Fiori’s words: “the first European banks were born out of these transactions and began to internationalize their operations and multiply their financial wealth in the shadow of Power” (²⁰¹⁰:131).

The interlocking between power and wealth first appeared decisively in the Northern Italian maritime republics, where rulers and merchants often found themselves being the same person, but the Italian Republics of the late middle ages were too small in scope to constitute what Fiori calls, in The Global Power Formation (²⁰⁰⁴, p. 14), “revolutionary forces of accumulation of power and wealth, with global expansion strategies”: the national economies, born half state, half empire.

War could not have played more important a role in the shaping of these nascent National Economies. In the north of Europe, the Hundred Years War (1337-1453) was decisive in shaping the national identities of France and England, and responsible for providing a “power concentration impetus” that outlasted the war and led to the relatively “centralized” governments of Louis XI and Henry VII. In the Iberian Peninsula, the centralizing impulse that resulted in the union of the crowns of Castile and Aragon led to the completion of the Reconquista (1492) and ultimately to the Great Navigations and the exploration of the American colonies. And it was the Spanish Habsburg Empire and its long wars against France in Italy (1494-1559), England (1588) and the United Provinces (1560-1648), that borne out their correspondingly National States. Lastly, the Thirty Years War (1618-1648) in Germany, the first “European International War”, was the war that finally integrated and established the frontiers (in 1648) of these incipient National States. The Great Northern War (1700-21) brought Russia into the system and by the second decade of the 18^th century one could already speak of a European International System (soon to become a world system by action of the expansionist rationale of the European Nations-cum-Empires), integrated by virtue of war, the fundamental engine of this system¹⁰.

Of course, war, currency and trade have always existed. What was original in Europe, as of the Late Middle Ages, was the way the “need for conquering” induced, and was later associated to, the “need for profit”. This is why the historical origin of European capital and the capitalist system “derives from the conquering and accumulation of power and the authoritarian encouragement to the growth of surpluses, exchanges, and large financial gains¹¹ built in the shadow of winning powers” (^{Fiori, 2010}: 132).

Therefore, the success of England in becoming the first mature capitalist country cannot be understood without bearing in mind that England was, undoubtedly, the most successful mercantilist country. Mercantilism, defined as a set of policies designed to increase the state’s power and wealth in a non-friendly environment, was necessary to create the locus in which capital could be accumulated: in Fiori’s words (²⁰⁰⁴, p. 32), “mercantilism was the knife territorial states wielded to carve “national markets” out of the vast and disorganized “European World Economy” of the 16^th century” (and later, it was the weapon states employed to protect their new creature – the national markets – from foreign competition). To use another Braudelian metaphor, mercantilism – and all the national policies so related – was necessary to carve extraordinary profit opportunities out of the “ordinary and ever existing market economy”. Why mercantilism, financial revolutions¹², and capitalists having political clout did not take place in China is what we turn now to answer.

BY WAY OF COMPARISON: CHINA VERSUS EUROPE

Scholars have argued that, in pre-modern times, a virtuous symbiosis between the Chinese government and mercantile/financial activities was non-existent; that the Chinese government was hostile to “higher forms of exchange”¹³; that the Chinese highly developed and precociously meritocratic civil service drew the elite’s attention away from commercial activities and into building specific human capital to pass civil service examinations, whose basic readings were the Confucian classics, that supposedly taught “rational adjustment to the world”, not mastery over it¹⁴; that the late Imperial China – framed broadly as the Song through Qing dynasties, ca. 960-1911 CE – official discourse lauded farming and weaving activities as the material foundation upon which a proper social order should be built, a social order that “rested on wholly non-capitalist understandings of materialism, efficiency and instrumentality”¹⁵; that the self-engrossment of the Celestial Empire, particularly after its withdrawal from the avenues of long-distance trade and conflict, in the 15^th century, deprived China of the inventiveness and flexibility that warring European states were forced to develop if they wished to remain sovereign¹⁶; that the impact of the Chinese empire upon the economy was negative, in the sense that the “empire supported a traditional status system which was a surer access to money than was commerce”¹⁷.

All of the arguments above stress that the fact of empire, present in Ming (1368-1644) and Manchu (1644-1912) China (and much before), militated against the full impact of capitalism. The authors underline that, whenever “buds of capitalism” sprang, they were sooner or later nipped by political institutions that (1) either diverted potential merchants/industrialists away from pursuing a “capitalist career”, or (2) made sure they would not receive the necessary support from the state – according to the Braudelian/Arrighian tradition, vital for the development of capitalist dynasties – because the geopolitical situation of non-competition (of empire) dispensed with the politically risky prospect of supporting merchant/financial capital. None of the authors quoted above would deny that China’s pre-modern achievements in science and technology were remarkable¹⁸, that China had probably the most advanced economy in the medieval world¹⁹, that market exchanges did increasingly characterize Chinese imperial society until its demise, etc. Nonetheless, they all believe that the fact of empire – 1371 to 1911 represented the longest period of (practically) uninterrupted imperial rule in history – removed alternative bases of power, that is, removed internal and external threats to the almighty Chinese bureaucracy, which consistently stifled the development of capitalism.

Notwithstanding our endorsement of the view that the “fact of empire” precluded capitalism, we need to assess some of the arguments outlined above. First of all, it is not clear why – in the social structure given by the fact of empire – Chinese merchants and entrepreneurs would be more inclined to invest their accumulated wealth in land and offices than their European counterparts. The Marxist scholars (^{Brenner 1976}, ¹⁹⁷⁷) and (^{Teschke 2003}) argue that, in pre-capitalist Europe, where agrarian relations were essentially feudal (even during most of the Early Modern period, in continental Europe) – most of the surplus that the ruling elites extracted from the peasantry was invested either in land or in the purchase of offices. Calling Absolutist France a tax/office state, the authors claim that a good deal of the surplus in the French economy was channeled into the state by way of the selling of future revenue streams (tax-farming) or through public debt per se. The French State resorted to these expedients because, like any other Pre-Modern state, it did not possess big enough a bureaucracy to directly administer taxation, and thus was forced to do so via local notables. For all the talk of the power of the Chinese empire, its government was even more ill-equipped: in the early sixteenth century there were probably not many more than 20,000 Mandarins (civil servants) for a population of probably no less than 150,000,000²⁰, whereas in early seventeenth-century France the Crown could count on almost 40,000 royal servants, or one for every 400 inhabitants²¹. This means we should not think that the Chinese bureaucracy had strong blocking powers over the development of trade. For example, despite a series of edicts (between 1371 and 1567) that officially banned foreign trade, private “pirate” trade continued to exist²². In the rest of this paper we will outline how it was precisely the fact that Chinese capitalists were seldom the instrument used by Ming or Qing authorities to draw revenue from, build Merchant Empires²³ or help wage wars – and not the purported blocking powers of the bureaucracy – that stifled their development.

Scholars often view Ming-Qing economic history in the light of the Song Era (960-1279). The Song – and to a lesser degree, its predecessor, the Tang (618-907) – period brings the formation of institutions and structures that evolved in the foundations of what we think of Traditional/Imperial China: a land-based tax system; the regularization of a merit-based civil service; and the use of written examinations, rooted in Confucian ideology, to select candidates. The political changes were accompanied by long-lasting transformations in the economy: a shift from large landholdings to an agriculture regime based on small-holder ownership and the growing importance of markets for goods and factors of production along with the extensive development of private mercantile activity (^{Brandt et. al., 2013}: 6). In other words, building on the considerable expansion of markets and commerce under the Song – some of which declined during the short Mongol (Yuan) interregnum (1279-1368) – the Ming-Qing era witnessed renewed expansion of commerce and growing commercialization of agriculture. (^{Wong 1999}: 215-217) goes on to assert that between 1500 and 1800 some of the same kinds of commercial expansion that took place in Europe also happened in China. Commercialization penetrated to the village level and engaged peasants in cash cropping activities. Long-distance domestic trade was rampant, grain being the most important commodity traded (40% of the total in the eighteenth century). Even international trade was also significant – most was intra-Asian, with China shipping manufactures and tea in exchange mainly for timber, spices, bullion and horses -, though for obvious reasons the bulk of demand and sales was domestic and trade could never make up much more than 1% of pre-modern China’s GDP²⁴.

However, despite sharing structural economic similarities, circa 1500 there came a large set of changes in the scales and dynamics of European maritime commerce that did not take place in Chinese long-distance trade. In the late 15^th century onwards different European governments started to directly support merchants and adventurers:

“The Spanish extracted New World silver, while the Portuguese and then the Dutch sought to control the lucrative trade in spices. The Dutch formed the Dutch East India Company to organize their maritime aspirations; the English did likewise creating the English East India Company. Between 1500 and 1800, Europeans in Asia and the New World shifted from spices to drugs and stimulants – coffee, tea, and sugar. For sugar Europeans went beyond merely organizing lucrative trading arrangements, creating what Sidney Mintz has called “agro-industrial enterprises’’ in the Caribbean and Brazil” (^{Wong, 1999}, p. 216).

The Chinese imperial government did not offer as much support to merchants because, in Wong’s words (¹⁹⁹⁹, p. 221), it “did not depend either economically or politically on the support of many rich merchants for its fiscal security or its political power and legitimacy”. Hence, Chinese officials would not risk making concessions to the nascent capitalist-class, concessions that granted European economic elites an unprecedented voice in government.

This is not to say that commercial capitalism did not exist in Traditional China. For example, two major merchant groups came to occupy dominant positions across the empire (^{Wong, 1999}, p. 217). In the north the Shanxi merchants, who expanded their wealth in the fifteenth century by supplying government troops in the northwest in return for monopoly rights in salt distribution to the interior²⁵. In central and southern China the Huizhou²⁶ merchants established themselves in many marketing centers. The economic undertakings of these merchants were broadly similar to those practiced by, say, merchants of northern Italy or of the Low Countries. Each competed with others for profits to be made through long-distance trade. In particular, when the above mentioned grain-salt exchange system broke up in the end of the fifteenth-century, merchants from the region of Shanxi and merchants from Huizhou of southern Anhui met in the newly-formed Liang-huai salt-administration area. With the salt-trade thrown open, new opportunities were afforded to these two groups of merchants who, “because of the niggardliness of their native soils, had long been trading throughout the empire and gained notoriety for their hard-working and frugal habits” (^{Ho, 1954}: 143). For centuries, they reaped great profit from the salt trade. The Liang-huai salt merchants even contributed financially to the Qianlong Emperor’s (1735-1796) campaigns to suppress the Jinchuan rebels in the western province of Sichuan. But, yet, no “European-like virtuous synergy” between the need for profit and the need for conquering ensued. It is, then, in the general exam of Imperial China’s fiscal system and needs that we might find the answer to why this was so.

Peer (^{Vries’s 2012}) thorough survey of the Chinese system of public finance in the period stretching from the consolidation of Qing rule in 1683 to the outbreak of the First Opium War (1839) reveals, pace Pomeranzs and the revisionists, a state that was in almost all relevant financial aspects completely different from Early Modern European states. In China we see no upward trend in the collection of taxes, no development of constitutional constraints on the executive, no consolidation of public debt, no discernible system wherein revenue was traded off for property (and monopoly) rights; no consolidation of state-sponsored charted companies, etc. Indeed, notwithstanding the long tradition of describing China in terms of “oriental despotism” and of claiming that there taxes were oppressively high²⁷, official tax income for Chinese Central government was very low during the Qing. According to (^{Vries 2012}, p. 18 ss.), these are the estimates of the average annual official central income for the government: 35 million taels during the reign of the Kangxi emperor (1662-1722); 40 million in the reign of the Yongzheng emperor (1722-1735); and some 43 to 48 million during the reign of Qianlong (1735-1796) (and it continued to be at that level for the next half century). Of course, these figures refer only to the official taxes on land, salt and customs²⁸. Adding all types of surcharges, the Imperial Household income – that although not government income per se, was often used to pay for public expenses – and sources like the sale of offices, land, titles and tax-farming, Vries’s very high guess – according to him, higher than any guess ever found in the literature – is that total income for the Qing government may have amounted, before the Opium war, to a maximum of 300 million taels, in peak years. What is surprising about this figure, says (^{Vries 2012}, p. 20), is that it is extremely low (per-capita wise) compared to the central government income for Europe’s most successful fiscal-military state, Britain (even without taking into account that only a minor part of these 300 million taels ever reached Beijing). Three-hundred million taels were roughly equivalent to 11 billion grams of silver (using the official conversion rate of 37 grams a tael). In England, taxes were clearly on the increase during the so-called Second Hundred Years War (1688-1815) against France. The average annual taxes jumped from 3.6 million pounds during the Nine Years War (1688-1697) to 6.4 million, during the War for the Spanish Succession (1701-1714). They would double again to 12 million in the American War of Independence (1775-83)²⁹and reach a whopping 28 million pounds³⁰, at the end of the Napoleonic Wars (1815), what amounted to around 18% of National GDP³¹! 28 million pounds are worth slightly more than 3 billion grams of silver, using Vries’s exchange rate of 110 grams a pound sterling. In other words, in the beginning of the 19^th century the British state drew almost a third as much tax revenue as the Chinese state from a population 20 to 25 times smaller³²!

Of course, 1815 was a peak year and the purchasing power of silver was 2 to 3 times higher in China than in Britain. In any case, the comparison between tax revenues leaves out Britain’s most lethal weapon: the public debt. Tax receipts scarcely funded a third of the immediate costs of military mobilization of most 18^th century wars³³. The Revolutionary Wars of 1793-97 cost the British crown 100 million pounds, 90 million of which came from loans. The percentage of immediate military costs covered by loans came down to 50%, during the Napoleonic Wars (1798-1815), if only because of Pitt’s new income tax. But one must not forget that this last war cost the British state an astronomically high figure of 772 million pounds (^{MacDonald, 2003}: 339). By 1815, public debt reached 830 million pounds, or more than 250% of GDP (^{O’Brien, 2006}).

(^{Vries 2012}, p. 15 ss.) contends that the British public debt at the end of the Napoleonic Wars, being the equivalent of 88 billion grams of silver, was equal to more than half of the Chinese GDP (following the 1833 estimate of 4 billion taels, or 150 billion grams of silver). To put it differently, this estimate of the Chinese GDP in 1833 boils down to about 10 taels or 370 grams of silver per person. And, thence, the British national debt of about 6300 grams of silver per capita would mean that the British State commanded a per capita sum 17 times bigger than the average annual earnings of a Chinese. Even taking into account different silver purchasing powers, “per capita in real terms, Britain’s government always spent far more than its Chinese counterpart – in my estimates at least, excluding Ireland, seven times as much at the height of the Napoleonic Wars -, accumulated an enormous debt, and got away with it” (^{Vries, 2012}, p. 16). While other European states did not appropriate- in the long 18^th century – as big a share of the national product in the form of taxes and debt, they still were in many regards closer to Britain than to China. The Dutch State appropriated roughly the same per-capita taxes as Britain in the second half of the 18^th century (around 160 grams); France came a not too close second with 70 grams; Spain came with 50 and most other European states hovered around 30-40 grams of silver of average annual per-capita taxes in the second half of the 18^th century³⁴. China found itself, then, at the lower end of the scale³⁵. The biggest difference, though, would accrue from public debt, which China did not manifest whatsoever. For lack of space, we should only refer to the fact that it was partly a financial crisis that triggered the French Revolution: public debt stood at 60% of French GDP in the 1780s (^{Bonney, 2004}: 195).

This is not to mean that China did not wage wars. Not very unlike Europe, some 50 to 70 percent of the official budget of the central government went to the army. Compared to Europe, less was relatively spent in years of war and more in years of peace, in the form of regular military expenditure on the frontiers. Peter Perdue estimates that the major Qing campaigns between 1747 and 1805 cost an average of 5 million taels per year. The seven-year campaign of the Yongzheng emperor (1723-1735) against the Zunghars had cost even more, close to 18 million taels per year³⁶. Of course, those were emergency expenditures that have to be added to the annual regular military expenditures – during roughly the period from 1740s to the turn of the 19^th century – of 32 million taels. To conclude our numerical comparisons, following (^{Vries 2012}) the 37 (32 regular plus 5 extraordinary) million taels per year in military expenditures during the Qianlong reign would amount to double the expenditures on the British military in the same period³⁷. Per-capita wise, then, Britain spent 10 times as much on its army and navy as China.

This overall comparison between the Chinese and British fiscal systems shows us that the average Chinese subject had a much smaller stake in the government. Parallely, the Chinese state did not penetrate as much into society. In his brilliant analysis of taxation during the Ming (1368-1644) – we should stress that the Qing retained most of the Ming tax rates – (^{Huang 1974}) describes how there was widespread evasion by influential landowners³⁸ and how, therefore, the Ming could not increase tax rates without disproportionally hurting the poor; how government finance under the Ming represented an attempt to impose an extremely ambitious centralized system on an enormous empire without the necessary technology or administrative capacity (and without the necessary numbers of officials); how public finance was always in disorder not because of excessive absolute expenditure, but because the system had very limited flexibility and handling capacity; how, ultimately, the low official tax burden – owing to the Empire fiscal system’s “ideological preconceptions, rigid sense of responsibility, compartment spheres of action, unrealistically low salaries, insufficient office personnel, lack of information, deficiency in logistical capacity at the intermediate level, and reluctance to invest (all connected in one way or another with initial under-taxation)” (^{Huang, 1974}: 315-316) – led to rampant corruption at the local level (as the officials complemented their income with illegal extortions) and to under mobilization of the empire’s financial resources.

In the end, the financial establishment of the Chinese Empire was passive – as a rule expenditures were normally simply adapted to income and in case of problems one resorted to ad-hoc solutions – and the low-level of taxation only made possible because of the Ming and Qing dynasties’ “policy” of peace abroad and austerity at home. Clearly, this was only natural as long as the system could depend on “continuing cultural and political dominance over a large and self-sufficient economy which was able to disregard commercial pressures and competition from above” (^{Huang, 1974}, p. 323). In other words, China did not consider itself surrounded by enemies or competitors, especially after the defeat of the Zunghars in the 1760s. As a matter of fact, the celebrated “Ten Great Campaigns” fought during the reign of the Qianlong Emperor (they took place in various moments between 1755 and 1792) helped enlarge the area of Qing control in Central Asia, but most of these campaigns were not exactly “wars” – definitely not European-like wars between powerful states -, but actually policy-like actions on frontiers. The fiscal stress seems to have been even lower in previous Qing governments, as the Kangxi and Yongzheng emperors had the habit of providing loans to merchants.

It seems no coincidence, then, that the more peaceful rule of the Ming and Qing, as compared to the previous dynasties of Yuan and Song, was accompanied by decreased per-capita taxation and financial sophistication (Guanglin ^{Liu, 2005}). Even though the Northern Song supposedly rule all of China from 960 to 1127, the constant threat posed by the militant nomadic Jurchen – who actually conquered the capital – encouraged the Chinese to step up military expenditures. This period also coincided with the great socioeconomic reforms led by Chinese economist and chancellor Wang Anshi (1021-1086). Anshi thought the State should take the management of commerce, agriculture and industry into its own hands. He also successfully advised the government to convert the obligations of the populace into monetary obligations and to step up the production of copper coins, so as to foster trade. The fact of disunity was even clearer during the Southern Song (1127-1279), after the Jurchen Dynasty conquest of Kaifeng, in 1127. It encouraged the Song to “build a navy in order to man all waterways that stood between them and their northern competitors” (^{Hall, 1985}, p. 46).

Yet once China was reunited under the native Ming dynasty, it proved possible again to downplay military innovations and the use of gunpowder. Financial techniques widely employed under the Song and Yuan – land taxes assessed in copper coins produced en masse by the state, wide use of paper currency³⁹, integration of fiscal accounts, professionalism in fiscal administration – seem to have been lost under the Ming (^{Huang, 1974}, p. 316) and not particularly recuperated under the Qing. The absence of inter-state competition forced onto China a tendency to a condition of stagnation, or even historical reversion (^{Fiori, 2004}). Its absence meant that the great concern of the Ming and Qing emperors would be to sustain a centralized fiscal authority with extensive, rather than European-like intensive coverage.

This non-intensive tapping of subject’s wealth and skills towards the goals of the state translated, in the geopolitical area, into the so-called tribute system, “an institutional arrangement through which the moral authority of the Chinese empire could be translated into normative pacification in Chinese International relations” (^{Zhang, 2001}, p. 47). Thence, In the Sino-centric world, China was by definition the world, its empire was by definition universal. Of course, China’s hegemony was never as fully political as it was cultural⁴⁰. But precisely because it was more cultural, and as long as the non-Chinese ruling elites accepted the “assumptions underlining the prevailing belief in the moral purpose of the state” (^{Zhang, 2001}: 58), i.e., as long as they accepted the Confucian conception of the world as civilizational, in the sense that the “organizing principle of sovereignty is concentrically hierarchical, with China sitting at the core” (p. 56-57) and others participating in this order and assigned a place according to how “civilized” they were, no alternative institutional/geopolitical design seemed to be able to challenge the Pax Sinica⁴¹. And, more importantly, under the Pax Sinica, Imperial China’s military prowess did not matter that much precisely because it was not a necessary condition for the maintenance of this world-order.

The European “world-order” could not be more different. Though the Latin Christian Church could have been seen as an Empire, as “an heir to Rome” – not of course, in the military sense, but in the spiritual, ideological, cultural and legal arena – the very role the papacy played in making a secular empire impossible⁴² – in the West, the “church evolved its own system of authority as well as its own imperial claims and sought to deny divine legitimacy to all other rulers” (^{Brady, 1991}, p. 127) – transformed the Church into another of the various political and legal entities fighting for power and recognition in Europe. It was this power struggle that would create fiscal-military states and capitalism as the dominant mode of production that would later conquer the world.

Under the Pax Sinica, on the other hand, cheap government made sense. It entailed a kind of “agrarian paternalism”⁴³ where agriculture was seen as the main pillar of society and where rulers interpreted the “state’s mandate as one of managing and stabilizing wealth rather than controlling and extracting it” (^{Vries, 2012}: 33). Likewise, the concept of concentrically hierarchical sovereignty translated into “control from afar” and lean government⁴⁴. Policy-wise then, the agendas of Ming and Qing rulers resembled much more laissez-faire than mercantilist doctrines. That’s why, even though rich Chinese merchants sometimes contributed to their emperors’ campaigns and tours⁴⁵ – and vice-versa, as tax remissions were common among Chinese emperors -, they had no support from their rulers in the form of public investment in merchant infrastructure⁴⁶; they were never encouraged to go abroad or form chartered companies (no Merchant Empire was built); they were (almost) never given monopoly rights; i.e., taxes were not channeled from the general populace towards “bourgeois” needs: no bourgeois revolution ensued. Ultimately, no leap from the market economy to capitalism took place because no significant group of capitalists were taken into the state’s bosom and shielded from competition in world-wide markets.

Competition, after all, is the mother of capitalism. But it should be more than clear by now that we do not endorse the well-known argument that geopolitical competition within Europe made for an overall freer economic environment where, following institutional economics, progressive adoption and enforcement of rent-seeking thwarting institutions diminished transaction costs and paved way for the coming and utter generalization of free profit maximizing enterprises. From the beginning we have – specially following (^{Braudel 1982}) and (^{Fiori 2004}, ²⁰¹⁰) – assumed that the life-force of the capitalist are uncompetitive rents, that in both the history of capital accumulation and the history of interstate power struggle, the winners have been historically those who featured greater capacity or proclivity to break the rules and circumvent the institutions that have been created either to protect market competition or state sovereignty. In trying to circumvent these institutions, Early Modern European states were, in fact, heeding their “imperial calling” (^{Fiori, 2004}). In this sense, all states are imperial – as Tilly puts it: “at the very moment empires were falling apart in Europe, the main European states were building empires outside Europe…” (¹⁹⁹⁶: 244) – and the very difference between the Chinese Imperial Order and Europe’s is that China actually managed to secure a cultural and political monopoly. Had that happened in Europe, military and economic power would also have ceased to matter as much because the very competition that fuels them would have ended.

Lastly, we should note that, in pursuing their imperial strategies abroad and at home – the very creation of national states in Europe meant the subjugation of less powerful local powers – European states happened to favor a particular form of property (merchant property) and created fiscal-military apparatuses with intensive, not extensive, coverage. European fiscal states – mostly through representative institutions that were predominantly of aristocratic origins, where nonetheless these aristocrats became increasingly aligned with moneyed interests and where taxation was becoming increasingly more regressive⁴⁷ – transferred large amounts of wealth from the populace to military entrepreneurs, merchant/pirate adventurers and capitalist land-owners: capitalism was born a rent-seeking society.

CONCLUDING REMARKS

In this paper we eschewed the notion that capitalism – as an unfettered search for growth of the capital stock – can be directly derived from the development of markets. We argued that such capitalist rationally has to be explained – not assumed -, because it is not consistent with society’s (in principle) much more rational praise for social stability. We pointed out how both Late Imperial China and Early Modern Europe were highly commercialized societies, but only the latter made the leap to capitalism. We then sought answers to this theoretical problem (of the transition) in what we called the “Braudelian/Arrighian school of Political Economy,” which draws a distinction between capitalism and the market economy, capitalism being the anti-market, where the possessor of money meets the possessor of political power and where large profits are reaped. Bearing on this literature, we concluded that the reason why Imperial China did not embark on a capitalist accumulation trajectory, whereas Early Modern Europe did, must have had something to do with different “state rulers to economic elites” relationships.

Following the clue laid out by José Luis Fiori – a Brazilian scholar who developed a theory of the origins of the capitalist interstate system as deriving from the way the “need for conquering” induced, and was later associated to, the “need for profit” – we proceeded to demonstrate how the Pax Sinica entailed relatively low military spending on the part of Chinese rulers and low taxes on the populace. We also stressed how the relatively peaceful Chinese world-order translated into a kind of agrarian paternalism with extensive coverage and lean government. This meant that Chinese officials did not have to heavily tax merchants and notables. Therefore, they did not have to negotiate rights and duties with the mercantile class, i.e., concessions that granted European economic elites an unprecedented voice in government, with which they enacted reforms that all societies had previously thought unnatural.

But more importantly, we concluded that Europe made the leap to capitalism only because it created (exclusive) fiscal-military states that imposed themselves in Europe and abroad and routinely used military power to wage trade wars and stifle competition. To those European rulers and capitalists, power and plenty were inseparably connected. We thus hope that this paper will instigate fellow scholars to do further research on how power and plenty are still inextricably connected in Modern Capitalism, on how Braudel’s contre-marchés are still the lair of the big shots who thrive above the economics textbooks’ markets based on so-called representative agents.

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⁴⁸Jel Classification: N; H2; F5.

¹Ibid. p. 207.

²See, for example, Gunder (^{Frank 1998}), (^{Bray 1999}), (^{Wong 1999}), (^{Wong and Rosenthal 2011}), (^{Pomeranz 2000}) and (^{Goldstone 2008}).

³See last footnote, but also (^{Elvin 1973}) and Yifu (^{Lin 1995}).

⁴See, for example, (^{Macfarlane 1978}), (^{North and Thomas 1973}), (^{Mokyr 1990}) and (^{Bryant 2006}).

⁵We could also add (^{Wong and Rosenthal’s 2011}) argument, who say that Europeans were developing and deploying machine more intensely than the Chinese at least since 1600 because of Europe’s higher urbanization rate: geopolitical factors (war) had propelled European proto-industry to shelter itself from the common ravaging of the countryside by looking for protection inside the cities, while in China proto-industry had always been much more of a rural development. And because capital relative to labor has always tended to be cheaper in cities than in rural settlements, investing in labor-saving machines was from earlier times more economically optimal in Europe than in China.

⁶We should note by now that in this paper we do not intend to revise all the extensive empirical research (some of it already referred to in the introduction) that aims to disprove the traditional theses that Early Modern Europe displayed unique institutions (protection of property rights, financial intermediation, entrepreneurship, rational spirit, etc.) that launched it on an economic road unavailable to other, more backward societies. While there are several articles that aim to disproof the revisionists’ thesis that China was on par with Europe – see, for example, (^{Brenner and Isett 2002}), (^{Broadberry e Gupta 2006}), (^{Huang 2002}) and Robert (^{Allen 2009}) –, they are still somewhat inconclusive and even if the revisionists have made empirical errors in overestimating China’s past economic prowess, they opened up way for new paradigm challenging theories.

⁷(continue quote) “In its first great phase, that of the Italian city-states of Venice, Genoa, and Florence, power lay in the hands of the moneyed elite. In seventeenth century Holland the aristocracy of the Regents governed for the benefit and even according to the directives of the businessmen, merchants, and moneylenders. Likewise, in England the Glorious Revolution of 1688 marked the accession of business similar to that in Holland” (1977, p. 54).

⁸The research group called “Poder Global e a Geopolítica do Capitalismo” (Global Power and the geopolitics of capitalism) – http://www.poderglobal.net – is based at the Federal University of Rio de Janeiro. Its main proponent is José Luis Fiori, and in the following paragraphs we will bear directly on two of his book chapters. One of them has been published in English (^{Fiori, 2010}) and the other has been translated (but not published) and can be found under the heading “Global Power Formation” (2004), in the following link: http://www.poderglobal.net/category/2_capitulos-de-livros/.

⁹The reader might note the use of the Knappian concept of “State Money” and the similarity with Modern Monetary Theory’s treatment of money.

¹⁰This brief historical account was taken from (^{Fiori 2004}, p. 16-17).

¹¹Public debt – often along with tax-farming – enriched the bankers of Sienna when they financed Edward II’s conquest of Wales; the Medici and the Strozzi when they administered the Vatican’s debts; or several dynasties of Genoese and German bankers (namely, the Fuggers of Augsburg) when they financed the creation of the First (Spanish) World Empire.

¹²According to (^{Fiori 2004}, p. 28), in the 17^th and 18^th centuries in England alone took place the financial revolution that allowed the English State to transform its political space into an “economic, coherent and unified space”, the first capitalist national economy.

¹³(^{Braudel 1977}, p. 68) believes that the China of the Mings (1368-1644) and of the Manchus (1644-1912) displayed a political hierarchy that crushed all other kinds of hierarchies. In other words, the all-powerful bureaucracy would not let merchant/financial capitalists develop, for fear they might challenge bureaucratic power and society’s status quo.

¹⁴Justin Yifu (^{Lin 1995}) is especially interested in understanding why an Industrial Revolution did not ensue in China. He thinks that the incentive structure created by the specific form of civil service examinations and officialdom diverted the intelligentsia away from scientific endeavors. See also Pint-ti Ho’s classic “Salt Merchants of Yang-chou” (now Romanized as Yangzhou), who claims that as soon as salt merchant families became well-to-do, “its youthful members were encouraged to embark upon an scholarly, and ultimately an official, career, with the result that the merchant element in the family became less and less predominant” (1954, p. 165).

¹⁵See Francesca (^{Bray 1999}, p. 168).

¹⁶(^{Jones 1987}, p. 203) particularly stresses the “sudden” withdrawal from long-distance voyages (like those of the famous admiral Cheng Ho, who sailed as far as Kamchatka and Zanzibar between 1405 and 1430) in the mid-15^th century. As reasons for the “inexplicable withdrawal” Jones suggests the impact of financial and military difficulties in the North of China, which drew its attention away from distant voyaging, which had anyway always been for China a rather unprofitable activity (these maritime enterprises were more of a symbolic than commercial nature, with the aim of bringing distant lands under China’s cultural sway).

¹⁷See (^{Hall 1985}, p. 48). To strengthen his argument, Hall (, p. 48) Shiba (, 1970, p. 2): “Many merchants and industrialists also sought to buy official status, and it was inevitable that, as the conflict between growing urban economic power and intensifying official control become more pronounced, the upper classes in the cities would attempt to safeguard their wealth by assuming a politically parasitical character”.

¹⁸“Needham was able to demonstrate that China had preceded Europe in a number of important discoveries and inventions, including documenting three Chinese inventions that Francis Bacon associated with the birth of the modern world: printing, the magnetic compass, and gunpowder” (in ^{Bray, 1999}, p. 162).

¹⁹Specially during Song times (960-1279). However, it is important to remember, as stressed by (^{Hall 1985}, p. 46), that the great commercial expansion under the Song took place during a period of actual political disunity: between 1127-1279 the Song lost control of Northern China to the Jin Dynasty, and it is known that the Southern Song considerably bolstered its naval strength to defend its waters and land borders and to conduct maritime missions aboard.

²⁰See (Huang 1981, chapter 2, Hall, 1985, p. 41).

²¹See (^{Brewer 1989}, p. 12). Of course, not all of those 40,000 were directly paid by the crown (like modern public servants would be), but the sheer difference between each country’s civil servants to population ratio shows how the Chinese empire penetrated society less starkly than the common sense image of “great empires” would suggest.

²²See (^{Hall 1985}, p. 49-50) and Wang’s article in (1990), who writes of the Hokkien Merchant Pirates from South Fujian, the most successful overseas traders between the thirteenth and eighteenth centuries.

²³For a comprehensive account of how European States nurtured merchant capital development, see the (¹⁹⁹⁰) and (¹⁹⁹¹), both edited by James D. Tracy.

²⁴This is a backward projection based on statistics from the 19^th century. See Ta-chung Liu and Kung-chia Yeh, 1965 (^{Brand et. al., 2013}, p. 12).

²⁵These merchants were also engaged in many businesses including the provision of commercial credit.

²⁶The Hui Merchants began to thrive during the Southern Song period (1127-1279), but rose to commercial prominence from the middle of the Ming. “Although the bulk of the trading activities of the Hui merchants were along the Yangzi River, especially the Lower Yangzi region, their reach extended nationwide and even overseas to Japan” (see ^{Gupta and Ma, 2010}).

²⁷Too see why this position is not tenable anymore, see (^{Blue 1999}) and (^{Vries 2013}, p. 58-61).

²⁸Analyzing official documents of central tax incomes, (^{Lai 2012}, p. 6) finds that in 1753 land taxes brought in 29,611,201taels, salt 5,560,540 taels, and customs 4,324,005 taels. In 1812, land taxes brought in 29,324,005 taels, salt taxes 5,797,645, and customs 4,810,349 taels.

²⁹These figures are from ^{Brewer, 1989}, p. 74.

³⁰In (^{O’Brien 1988}, p. 3).

³¹Yeh-chien (^{Wang 1973}, pp. 80, 128, 133) (^{Brand et. al. 2013}, p. 37) finds that in China total government revenue from all sources amounted to roughly 2.4 percent of net national product in 1908, suggesting that tax revenues remained well below five percent of total output throughout the Qing period.

³²In 1800, for example, there were 10 million people in the UK and at least 260 million in China.

³³They funded only 26% of the expenditures on the War of Spanish Succession and only 19% of the American War expenses, for example (^{O’Brien, 1988}, p. 4).

³⁴These figures are from ^{Karaman e Pamuk, 2011}, p. 6.

³⁵Using the very generous estimate of a maximum of 300 million taels for government income (roughly the same number as the Chinese population in the beginning of the 19^th century), we would boil down to one tael of taxes per person, or roughly 37 grams of silver.

³⁶See Beatrice Bartlett’s Monarchs and Minister, 1991: 121-22, (^{Vries 2012}: 27).

³⁷In terms of domestic purchasing power, 37 million taels are about the same as 37 million pounds sterling. British military expenditure averaged slightly less than 20 million in the mentioned period.

³⁸In 1632, tax arrears of 50 per cent or more were reported in 340 counties, that is, more than a quarter of the fiscal districts of the entire empire (^{Huang, 1974}, p. 308).

³⁹It is said that the great Mongol Kublai Khan, who ruled China in the 13^th century, confiscated all gold and silver, issued a lot of paper currency and established its credibility by decreeing that his paper money must be accepted by traders on pain of death. The efficiency of the system is said to have impressed Marco Polo in his visit to China (see ^{Yang, 1953}).

⁴⁰It is interesting that, “when the Mongols and Manchus conquered China, they had already to a considerable extent adopted the culture of the Chinese. They dominated the Chinese politically, but the Chinese dominated them culturally. They therefore did not create a marked break or change in the continuity and unity of Chinese culture and civilization” (Fung Yu-Lan, A short history of Chinese philosophy, 1953, apud ^{Zhang, 2001}, p.55-56).

⁴¹The term normally applies to a long period of peace in East Asia, under Chinese Hegemony, and stretches from the beginning of the Ming to the 19th century. Here, we use it metaphorically to mean the Chinese world-order and the Chinese Empire tribute system.

⁴²Because “the church refused to serve as a second fiddle in an empire equivalent to those of China and Byzantium, and thus did not create a Caesaropapist doctrine in which a single emperor was elevated to semi-divine status” (^{Hall, 1985}. p. 134-135).

⁴³Not being forced by revenue shortages to bestow “capitalists” with a louder voice in government, Chinese officials stressed the need for balance between farming, commerce and crafts (see ^{Wong, 1999}, and Fray, 1999).

⁴⁴“The Kangxi emperor, to just give an example, is supposed to have remitted 100 million during the first forty-nine years of his reign and decreed an empire-wide amnesty that excused each province in turn from remitting its annual land tax once in a three-year cycle. Famous and very consequential is his promise in 1713 that the head and poll taxes would be permanently based on the quotas of 1712.” (^{Vries, 2012}: 31)

⁴⁵In the Qianlong period, salt merchants’ contribution to military supplies, water control projects, and the emperor’s southern tours amounted to 30 million taels (^{Lai, 2012}, p.7). Sometimes the contributions would lead to capital shortages, which would then lead to salt merchants needing to borrow from the state, what was not entirely uncommon as well.

⁴⁶Late imperial government did intervene in the economy, but it surely did not follow a capitalist rationality: “All through the two millennia of the empire the state would undertake to open up new lands for cultivation; to loan tools, seed, and animals to settlers on the lands; to develop irrigation projects; and to disseminate improved methods or equipment and encourage the cultivation of new crops” (Fray, 1999, p. 173).

⁴⁷Notwithstanding the impression created – by academics of institutional persuasion like (^{North and Weingast 1989}), (^{Stasavage 2003}) and (^{Hoffman and Norberg 1994}) – that the trading off of revenue for political rights was a process wherein those who paid the bulk of taxes and those who were represented were identical.

Received: September 22, 2015; Accepted: December 23, 2015

Source

Value at Risk of Momentum Investment Strategy: Indonesia’s Liquid Stocks Portfolio | Jurnal Manajemen Indonesia

The capability of momentum investment strategy was explore through portfolio risk reduction by value at risk method at liquid shares in Indonesia stock exchange period 2008-2016. The purpose of this study are to analyse the value of momentum investment strategy risk reduction with the Value at Risk approach to historical-volatility approach and examine differences in risk reduction performance by winner and loser portfolios formed from a collection of liquid shares in the Indonesia stock exchange for the period 2008-2016. The stocks selection method in forming winners and losers portfolio done by Jegadesh and Titman procedure (1993) followed by calculation of risk reduction with the VaR-HisVol approach. The result show for quarterly and semester period winner portfolio has superior capacity of portfolio risk reduce than loser.

 

Source: Value at Risk of Momentum Investment Strategy: Indonesia’s Liquid Stocks Portfolio | Jurnal Manajemen Indonesia

Re-Posting Jurnal Efficient Frontier

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PENENTUAN HARGA WAJAR SAHAM DENGAN DIVIDEND DISCOUNT MODEL: Studi Kasus PT. INDOFOOD SUKSEK MAKMUR, Tbk

Intellectual Finance Club

Corporate Finance Working Papers No.002

Kevin Juido

 

Fair value adalah konsep yang digunakan dalam ekonomi dan keuangan serta akuntansi, fair value merupakan estimasi rasional dan tidak bias atas harga pasar pontensial dari barang, jasa atau aset dengan mempertimbangkan faktor-faktor seperti kelangkaan, karakteristik risiko, replacement cost, serta biaya produksi dan distribusi, termasuk cost of capital. Fair value dapat dilakukan dengan berbagai metode valuasi salah satunya metode valuasi Dividend Discount Model. Penelitian ini bertujuan untuk mengetahui berapa wajar saham PT. Indofood Sumber Makmur, Tbk dengan menggunakan metode Dividend Discount Models dan bagaimana keputusan investasi yang harus diambil oleh investor. Metode penelitian yang digunakan adalah analisis kuantitatif dengan menghitung estimasi pertumbuhan, cost of equity dan value of equity. Harga wajar saham PT. Indofood Sumber Makmur, Tbk dengan pendekatan Dividend Discount Models menunjukan sebesar Rp 3.450 dan keputusan investasi yang sebaiknya dilakukan adalah tidak membeli (buy) saham tersebut dan menjual (sale) untuk investor yang telah memiliki saham tersebut. Keputusan yang diambil tersebut berdasarkan harga pasar saham lebih tinggi dari harga wajar saham PT. Indofood Sumber Makmur, Tbk atau bersifat overvalued.

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HUBUNGAN VALUTA ASING DAN PASAR SAHAM: Pendekatan Kausalitas dan Kointegrasi

Intellectual Finance Club

 

Corporate Finance Working Papers No.001

Rowland B.F.P

 

Relationship between stock market and four currency return is discussed in light of linearity, causality, and cointegration model. It is argued that the negative sentiment in stock market making the participant move to finance market. The objective of this study is to analyze the pattern of between market return and four currency return using ordinary least square, cointegration, and causality approach. The final samples are member of LQ-45 public companies. By using cointegration test and error correction model, the results show that the return of four currencies significantly affect the Indonesian Stock Exchange market return both short term and long term.

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