(This essay was published in Hong Kong Economic Journal on 8 February 2017.)

 

News of the disappearance of Chinese billionaire Mr. Xiao Jianhua from Hong Kong was widely reported in the media locally and internationally. Unconfirmed reports said that according to people briefed on the incident, he was abducted and whisked across the border over his business dealings with powerful figures in China who might have been targeted in the graft crackdown.

 

Mr. Xiao’s disappearance has raised fresh fears about Beijing’s growing lack of respect for Hong Kong’s autonomy and independence in law enforcement. An opposition member of the territory’s Legislative Council lamented that the incident underlined the impotence of the Hong Kong government in the face of Beijing’s arbitrary power.

 

But for wealthy businessmen from the Mainland or Hong Kong, this is not their most immediate concern. The central message of the alleged abduction is to send a strong signal to them about the dangers of doing business involving questionable dealings with those in power.

 

Throughout human history and across all cultures, wealthy businessmen have always feared government and worried about how to conduct their business activities as a consequence. There are three areas of concern.

 

Regulations and Taxes

 

The first concern is about increased regulations and higher taxes, through which the state can curtail the flexibility of business. So when Donald Trump announced that he was going to cut regulations and lower taxes, the stock market immediately responded positively.

 

In general, small businesses suffer more from regulations, which impose fixed costs that are more burdensome to them, and big businesses are more hurt by taxes. This is why businessmen have a common interest in preferring a small limited government that does not get much in the way of doing business.

 

The worry about regulations and taxes is a relatively modern one. In most parts of the world, they have appeared only after effective state bureaucracies were created that could enforce regulations and collect taxes. Pre-industrial agrarian economies had to devise other mechanisms to implement state decisions.

 

In feudal Europe, the collection of the tax on agricultural produce had to be outsourced to local nobility because there was no state bureaucracy. The nobles as a consequence gained considerable autonomy and independence from the king.

 

China has the longest history of a functioning state bureaucracy. But because the state could not collect enough revenues in an agrarian economy to pay its officers, the challenge of corruption was never solved. Corruption was never permanently purged and periodically resurged under weak administrations.

 

In Islamic territories, the state often had to govern without a bureaucracy, so it secured revenues from time to time through conquest and confiscation. Tribes would stay loyal to the sultan as long as he had spoils to distribute to them from his successful conquests.

 

Arbitrary Expropriation

 

The second worry is about the arbitrariness of government decisions. Wealthy businessmen of the past had to worry that lords, sultans, and emperors would confiscate their property arbitrarily, sometimes on drummed up charges. That is why so many wealthy individuals tried to hide their wealth, but this was not easy when it was mostly landed property.

 

In Islamic territories, the wealthy endowed their immoveable private estates to Islamic trusts (called waqfs, also known as pious foundations) to support a designated social service in perpetuity: a mosque, a school, a lighthouse, an orphanage, a neighborhood’s water supply, among innumerable other possibilities. The beneficiaries did not have to be Muslims (Islamic trusts were inclusive).

 

Assets in the Islamic trust provided a permanent source of income for a wealthy person’s descendants and shielded his assets against arbitrary taxation and expropriation. The trust came to be viewed as sacred on the ground that it served charitable purposes. This protected property because rulers were constrained by the fear that they would develop a reputation for impiety.

 

Since Islamic trusts provided social services that would otherwise have been provided by the state, one could think of them as an implicit contract between rulers and their wealthy subjects. They allowed the wealthy to preserve some of their private wealth for their descendants by performing charitable acts. But economic growth probably suffered because resources were not channeled into their most productive use.

 

All pre-industrial societies — China, India, and Europe — developed various solutions to help the wealthy protect their property from the grabbing hands of an arbitrary state.

 

State Business Partnerships

 

The third worry is of entering into a business relationship with the ruler as partner. Partnering with the state is a two-edged sword. It is the fastest path to acquiring monopoly privilege and huge profits. But it is also vulnerable to the moods of the ruler. Even more worrying, it is the source of corruption and promotes rent-seeking for privilege that transforms businessmen into political lobbyists and cronies.

 

The earliest long distance trade arrangements were typically granted as monopoly rights by the king to favored businessmen. In 1670, the British crown granted Prince Rupert and his two French business partners a charter that established what eventually became known as Hudson’s Bay Company, with the sole trade and commerce rights in an area in northern Canada that turned out to be six times the size of France.

 

In Adam Smith’s time, the dominant economic philosophy was mercantilism. Trade and commerce were undertaken for the purpose of making the state rich and businessmen were profit-sharing agents of the state. Business activities were undertaken in the form of a state-granted monopoly. In the Wealth of Nations, Adam Smith criticized monopolies and advocated market competition as the preferred way of doing business.

 

Today we are taught in economics courses that market competition promotes innovation, productivity, and better use of resources to the benefit of the consumer. Smith’s revolutionary idea was to associate the wealth of nations with the prosperity of the consumer and not that of the ruler.

 

Putting Smith’s idea of market competition to work means requires (at a minimum) putting in place the rule of law, ensuring a level playing field for all, and requiring the sovereign to be prepared, indeed feel compelled, to limit its own propensity for self-aggrandizement by respecting the property rights of others without discrimination. These institutional arrangements provide the necessary conditions for Smith’s economic system to operate, but they are not sufficient for it to be embraced as an ethical system.

 

Throughout history, all civilizations have looked upon the pursuit of profit and wealth as vulgar and even vilified it. Merchants have always been regarded as the lowest form of human existence. Mercantilism made the pursuit of profit and wealth acceptable only because it was done on behalf of the state. So for Smith’s idea of market competition to gain traction, it was necessary to see the self-interested pursuit of profit through trade and commerce to be regarded as a virtue and not a vice, as something that can be good and not evil.

 

The idea that being bourgeois was a virtue and not a vice is truly a revolutionary one. The accidents of Reformation and Revolution in northwestern Europe 1517–1789 bred a new liberty and dignity for common people, which led in turn to an explosion of trade and commerce. This took us from living on $3 a day to the opulence and dignity we have today. Professor Deidre McCloskey described the seven virtues of being a bourgeois:

 

“It is the prudence to buy low and sell high, to trade rather than to invade, to calculate the consequences before acting, to pursue the good with competence.

 

“It is the temperance to save and accumulate, to educate oneself in business and in life, to listen to the customer, to resist the temptations to cheat, and to ask quietly whether there might be a better compromise.

 

“It is the justice to insist on private property honestly acquired, the justice to pay willingly for good work, to honor labor, to break down privilege, to value people for what they can do rather than for who they are, to view success without envy, making innovation work.

 

“It is the courage to venture on new ways of business, to overcome the fear of change, to bear defeat unto bankruptcy, to be courteous to new ideas, to wake up next morning and face fresh work with cheer, resisting the despairing pessimism of many who proclaim the end of capitalism.

 

“It is the love to take care of one’s own, to care for employees and partners and colleagues and customers and fellow citizens, wishing well of humankind.

 

“It is the faith to honor one’s own community of business, to build monuments to the glorious past, to sustain traditions of commerce, of learning, of religion, finding identity in our past.

 

“It is the hope to imagine a better task, to infuse the day’s work with a purpose, seeing one’s labor as a glorious calling.”

 

Will Bourgeois Virtues Thrive Here?

 

As bourgeois virtues blossomed, so did the opportunities to build a better material and spiritual world. The big economic story of our times is not the Great Recession. It is how China and India began to embrace the economic ideas of Smith and of Hong Kong’s experience, and attributed a sense of dignity and liberty to the bourgeoisie they had denied for so long. The result has been an explosion in economic growth.

 

To be sure, the challenges of such a momentous transformation are plenty, especially in a nation that invented bureaucracy more than two thousand years ago. The task of reconstructing proper relations between the state and the market in China cannot avoid a long and tortuous path despite everyone’s best hope.

 

Hong Kong will continue to thrive if it remains a place where businessmen do not have to worry because they embrace bourgeois virtues. And if they are free to do so, then they need not be worried about the disappearance of Mr. Xiao Jianhua, whose rise to fortune appears largely to be a by-product of the on-going restructuring of state-market relations on the Mainland.

 

As long as the government maintains a light-handed regulatory environment and low taxes, businessmen will have no fear of the first type worry. And if the government does not arbitrarily expropriate the wealth of business, then the second type of worry will not be there either.

 

But the third type of worry is always present; the type of business activity that most worried Adam Smith in his times. It is the worry of doing business in partnership with the state where the rule of law will not be the only factor that matters. It is the kind of business that could from time to time cause people to disappear.

 

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