What We Owe to Chinese Classical Economics: Where Did Modern Economics Originate? History Shows That Concepts of Inflation, Regulation and the Free Market Can All Be Traced to Ancient China, Whose Ideas Were Later Refined by the Enlightenment Thinkers

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As China's economic power and importance continue to grow, the world watches to see how its economic and business culture will develop. Many are convinced that China is shedding all traces of its socialist past, already making the transition to free-market capitalism. Over the coming few decades, it is argued, globalisation will transform China, and the Chinese economy and businesses will come to be run very much on western lines.

So strong is this belief in some quarters that a dogma of 'West good, East bad' has arisen among consultants and policy-makers, in the United States in particular.

Whatever the respective merits of socialism and capitalism, those western observers may have fallen into a trap. Socialism is a western ideology grafted on to the Chinese system. Further blurring the East-West divide, one of Chinese socialism's most notable features, the state-run enterprises, colossal factories built around massive production lines and employing tens of thousands of workers, were inspired in part by western theories of scientific management.

What is more, the concept of the 'free market' we are so proud of in the West is very strongly influenced by classical Chinese philosophy. It was the impact of Chinese ideas, especially Daoism (Taoism), on the scholars of the European Enlightenment that enabled the Europeans to break down the old restrictive mercantilist system and come to a coherent vision of the free market.

The West has a long history of misunderstanding and misrepresenting Chinese views on economics and business (the reverse is also true, of course). A century ago, the sociologist Max Weber described Confucian thinking as a 'dead hand' that stifled innovation and entrepreneurship and left China economically moribund. As a Chinese observer remarked rather tartly a few years after, Weber cannot have read Confucius.

By the 6th Century BC, China already had a coherent doctrine of economic thought, long before any other state or culture. What is even more remarkable is how strongly this doctrine has persisted. Down through the centuries that followed, China's economy prospered.

Big businesses were created, such as the Tongrentang pharmacy based in Beijing but with branches all over the empire, or the …