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[This article is excerpted from Economic Thought Before Adam Smith. An MP3 audio file of this article, read by Jeff Riggenbach, is available for download.]

The three main schools of political thought: the Legalists, the Taoists, and the Confucians, were established from the sixth to the fourth centuries BC. Roughly, the Legalists, the latest of the three broad schools, simply believed in maximal power to the state, and advised rulers how to increase that power. The Taoists were the world's first libertarians, who believed in virtually no interference by the state in economy or society, and the Confucians were middle-of-the-roaders on this critical issue. The towering figure of Confucius (551–479 BC), whose name was actually Ch'iu Chung-ni, was an erudite man from an impoverished but aristocratic family of the fallen Yin dynasty, who became Grand Marshal of the state of Sung. In practice, though far more idealistic, Confucian thought differed little from the Legalists, since Confucianism was largely dedicated to installing an educated philosophically minded bureaucracy to rule in China.

By far the most interesting of the Chinese political philosophers were the Taoists, founded by the immensely important but shadowy figure of Lao Tzu. Little is known about Lao Tzu's life, but he was apparently a contemporary and personal acquaintance of Confucius. Like the latter he came originally from the state of Sung and was a descendant of lower aristocracy of the Yin dynasty. Both men lived in a time of turmoil, wars and statism, but each reacted very differently. For Lao Tzu worked out the view that the individual and his happiness was the key unit of society. If social institutions hampered the individual's flowering and his happiness, then those institutions should be reduced or abolished altogether. To the individualist Lao Tzu, government, with its "laws and regulations more numerous than the hairs of an ox," was a vicious oppressor of the individual, and "more to be feared than fierce tigers." Government, in sum, must be limited to the smallest possible minimum; "inaction" became the watchword for Lao Tzu, since only inaction of government can permit the individual to flourish and achieve happiness. Any intervention by government, he declared, would be counterproductive, and would lead to confusion and turmoil. The first political economist to discern the systemic effects of government intervention, Lao Tzu, after referring to the common experience of mankind, came to his penetrating conclusion: "The more artificial taboos and restrictions there are in the world, the more the people are impoverished — The more that laws and regulations are given prominence, the more thieves and robbers there will be."

The worst of government interventions, according to Lao Tzu, was heavy taxation and war. "The people hunger because theft superiors consume an excess in taxation" and, "where armies have been stationed, thorns and brambles grow. After a great war, harsh years of famine are sure to follow."

The wisest course is to keep the government simple and inactive, for then the world "stabilizes itself."

As Lao Tzu put it: "Therefore, the Sage says: I take no action yet the people transform themselves, I favor quiescence and the people right themselves, I take no action and the people enrich themselves—"

Deeply pessimistic, and seeing no hope for a mass movement to correct oppressive government, Lao Tzu counseled the now familiar Taoist path of withdrawal, retreat, and limitation of one's desires.

Two centuries later, Lao Tzu's great follower Chuang Tzu (369–c.286 BC) built on the master's ideas of laissez-faire to push them to their logical conclusion: individualist anarchism. The influential Chuang Tzu, a great stylist who wrote in allegorical parables, was therefore the first anarchist in the history of human thought. The highly learned Chuang Tzu was a native of the state of Meng (now probably in Honan province), and also descended from the old aristocracy. A minor official in his native state, Chuang Tzu's fame spread far and wide throughout China, so much so that King Wei of the Ch'u kingdom sent an emissary to Chuang Tzu bearing great gifts and urging him to become the king's chief minister of state. Chuang Tzu's scornful rejection of the king's offer is one of the great declarations in history on the evils underlying the trappings of state power and the contrasting virtues of the private life:

A thousand ounces of gold is indeed a great reward, and the office of chief minister is truly an elevated position. But have you, sir, not seen the sacrificial ox awaiting the sacrifices at the royal shrine of state? It is well cared for and fed for a few years, caparisoned with rich brocades, so that it will be ready to be led into the Great Temple. At that moment, even though it would gladly change places with any solitary pig, can it do so? So, quick and be off with you! Don't sully me. I would rather roam and idle about in a muddy ditch, at my awn amusement, than to be put under the restraints that the ruler would impose. I will never take any official service, and thereby I will [be free] to satisfy my own purposes.

Chuang Tzu reiterated and embellished Lao Tzu's devotion to laissez-faire and opposition to state rule: "There has been such a thing as letting mankind alone; there has never been such a thing as governing mankind [with success]." Chuang Tzu was also the first to work out the idea of "spontaneous order," independently discovered by Proudhon in the nineteenth century, and developed by F.A. von Hayek of the Austrian School in the twentieth. Thus, Chuang Tzu: "Good order results spontaneously when things are let alone."

But while people in their "natural freedom" can run their lives very well by themselves, government rules and edicts distort that nature into an artificial Procrustean bed. As Chuang Tzu wrote, "The common people have a constant nature; they spin and are clothed, till and are fed — it is what may be called their 'natural freedom.'" These people of natural freedom were born and died themselves, suffered from no restrictions or restraints, and were neither quarrelsome nor disorderly. If rulers were to establish rites and laws to govern the people, "it would indeed be no different from stretching the short legs of the duck and trimming off the long legs of the heron" or "haltering a horse." Such rules would not only be of no benefit, but would work great harm. In short, Chuang Tzu concluded, the world "does simply not need governing; in fact it should not be governed."

Chuang Tzu, moreover, was perhaps the first theorist to see the state as a brigand writ large: "A petty thief is put in jail. A great brigand becomes a ruler of a State." Thus, the only difference between state rulers and out-and-out robber chieftains is the size of their depredations. This theme of ruler-as-robber was to be repeated, as we have seen, by Cicero, and later by Christian thinkers in the Middle Ages, though of course these were arrived at independently.

Taoist thought flourished for several centuries, culminating in the most determinedly anarchistic thinker, Pao Ching-yen, who lived in the early fourth century AD, and about whose life nothing is known. Elaborating on Chuang-Tzu, Pao contrasted the idyllic ways of ancient times that had had no rulers and no government with the misery inflicted by the rulers of the current age. In the earliest days, wrote Pao, "there were no rulers and no officials. [People] dug wells and drank, tilled fields and ate. When the sun rose, they went to work; and when it set, they rested. Placidly going their ways with no encumbrances, they grandly achieved their own fulfillment." In the stateless age, there was no warfare and no disorder:

Where knights and hosts could not be assembled there was no warfare afield — Ideas of using power for advantage had not yet burgeoned. Disaster and disorder did not occur. Shields and spears were not used; city walls and moats were not built — People munched their food and disported themselves; they were carefree and contented.

Into this idyll of peace and contentment, wrote Pao Ching-yen, there came the violence and deceit instituted by the state. The history of government is the history of violence, of the strong plundering the weak. Wicked tyrants engage in orgies of violence; being rulers they "could give free rein to all desires." Furthermore, the government's institutionalization of violence meant that the petty disorders of daily life would be greatly intensified and expanded on a much larger scale. As Pao put it:

Disputes among the ordinary people are merely trivial matters, for what scope of consequences can a contest of strength between ordinary fellows generate? They have no spreading lands to arouse avarice — they wield no authority through which they can advance their struggle. Their power is not such that they can assemble mass followings, and they command no awe that might quell [such gatherings] by their opponents. How can they compare with a display of the royal anger, which can deploy armies and move battalions, making people who hold no enmities attack states that have done no wrong?

To the common charge that he has overlooked good and benevolent rulers, Pao replied that the government itself is a violent exploitation of the weak by the strong. The system itself is the problem, and the object of government is not to benefit the people, but to control and plunder them. There is no ruler who can compare in virtue with a condition of non-rule.

Pao Ching-yen also engaged in a masterful study in political psychology by pointing out that the very existence of institutionalized violence by the state generates imitative violence among the people. In a happy and stateless world, declared Pao, the people would naturally turn to thoughts of good order and not be interested in plundering their neighbors. But rulers oppress and loot the people and "make them toil without rest and wrest away things from them endlessly." In that way, theft and banditry are stimulated among the unhappy people, and arms and armor, intended to pacify the public, are stolen by bandits to intensify their plunder. "All these things are brought about because there are rulers." The common idea, concluded Pao, that strong government is needed to combat disorders among the people, commits the serious error of confusing cause and effect.

The only Chinese with notable views in the more strictly economic realm was the distinguished second century B.C. historian, Ssu-ma Ch'ien (145-c.90 BC). Ch'ien was an advocate of laissez-faire, and pointed out that minimal government made for abundance of food and clothing, as did the abstinence of government from competing with private enterprise. This was similar to the Taoist view, but Ch'ien, a worldly and sophisticated man, dismissed the idea that people could solve the economic problem by reducing desires to a minimum. People, Ch'ien maintained, preferred the best and most attainable goods and services, as well as ease and comfort. Men are therefore habitual seekers after wealth.

Since Ch'ien thought very little of the idea of limiting one's desires, he was impelled, far more than the Taoists, to investigate and analyze free market activities. He therefore saw that specialization and the division of labor on the market produced goods and services in an orderly fashion:

Each man has only to be left to utilize his own abilities and exert his strength to obtain what he wishes — When each person works away at his own occupation and delights in his own business, then like water flowing downward, goods will naturally flow ceaselessly day and night without being summoned, and the people will produce commodities without having been asked.

To Ch'ien, this was the natural outcome of the free market. "Does this not ally with reason? Is it not a natural result?" Furthermore, prices are regulated on the market, since excessively cheap or dear prices tend to correct themselves and reach a proper level.

But if the free market is self-regulating, asked Ch'ien perceptively, "what need is there for government directives, mobilizations of labor, or periodic assemblies?" What need indeed?

Ssu-ma Ch'ien also set forth the function of entrepreneurship on the market. The entrepreneur accumulates wealth and functions by anticipating conditions (i.e., forecasting) and acting accordingly. In short, he keeps "a sharp eye out for the opportunities of the times."

Finally, Ch'ien was one of the world's first monetary theorists. He pointed out that increased quantity and a debased quality of coinage by government depreciates the value of money and makes prices rise. And he saw too that government inherently tended to engage in this sort of inflation and debasement.