Re-understanding the role of the market and the government in resource allocation: what is the relationship between them?

The first perspective views the government and the market as opposing forces. It claims that the larger the government's role, the more limited the market's function – adding that the government's economic role is to fix market failures: using the “visible hand” to support the “invisible hand,” thereby reducing excessive economic swings and enabling sustainable socio-economic development. This view is widely accepted by economists worldwide. They argue that no economy is purely market-based. To overcome the inherent limitations of market mechanisms, governments should adopt interventionist policies that enhance efficiency, promote fairness and ensure macroeconomic stability and sustainable growth. They also believe that no country in the world today has a completely free market economy without government guidance. Therefore, they suggest that as a market economy develops, the need for government intervention becomes even more important. This perspective is grounded in facts, theoretical analysis and real-world observations, lending it a certain level of scientific credibility. Under this influence, both the economics community and official policy documents in China often see the market and government as two separate categories, framing their relationship as mutually exclusive and inversely related. Some even argue that the government and the market are mutually exclusive, claiming that the more resources and authority the government controls, the less space the market has for regulation and function. This perspective is widely prevalent in China today. However, this approach, rooted in the Western academic tradition that sees government and market as mutually exclusive pairs, is flawed and hinders a clear and correct understanding. A closer examination reveals that it suffers from confused analytical categories and a mismatch between the subject and object of analysis, as the market is understood in various ways – as an initial transaction venue, a transaction platform or a mechanism. None of these directly corresponds to the government, which is an organizational entity. Historically, China's market was established under government leadership. The relationship between the market and the government is dialectical – an interdependent unity between subject and object. It is well known that the state, society and the market are abstract collective concepts. They consist of individuals and actors beyond the individual level (such as households, enterprises and governments) and are driven and operated by these actors (see Figure 1).

Therefore, in terms of analytical categories and levels, the government and the market do not have a corresponding relationship. Rather, the government corresponds to enterprises and households, while the market corresponds to society and the state. The market operates around transactional interests, aiming to facilitate the circulation of commodities. Society functions within an ethical and moral order, seeking to achieve internal harmony. The state operates within a legal order, realizing statutory law through organized actions backed by coercive power. Together, these form the basic patterns of human social evolution.

As clearly shown in Figure 1, the state is a product of human cooperative order, serving as a public hub and internal “core driving force” that connects and unites the four key economic actors: individuals, households, enterprises and the government. Without recognition of the state, the government, the superstructure of the state built solely on individuals, households and enterprises, would be like a tall building erected on sand, liable to collapse at the slightest external pressure.

The second perspective excludes the government from the market entirely, asserting that enterprises are the primary actors in the market, dominating all market activities and playing a decisive role in resource allocation. This viewpoint is most prominent in the Anglo-Saxon model (particularly the Chicago school of economics) and the Austrian School, as well as in classical and neoclassical liberal economic thought. Proponents of this view regard the market as a panacea for all economic problems. From a philosophical and socio-epistemological standpoint, their argument is grounded in the doctrine of human wickedness (i.e. the theory that humans are inherently self-serving). Relying on the “self-interested individual” and “homo economicus” (economic man) assumptions, they advocate for the theory of minimal government. Drawing on the labor theory of value and the utility theory of value, they argue that the government does not create value but rather consumes it. Thus, the government should act as a “night watchman” for the market economy, undertaking only the most basic responsibilities – such as national defense and public security – with the guiding principle that “the less the government governs, the better”. In The New Palgrave Dictionary of Economics, the market is defined as “a system where production and distribution are determined by the decisions of independent business enterprises (state-owned, private, and others)” (Eatwell et al., 1992, p. 868). This definition explicitly excludes the government from decisions regarding market production and distribution, which clearly does not align with reality.

Based on prevailing domestic and international perspectives and discourses, at least the following points merit further scrutiny and discussion. First, there is a misalignment and confusion in analytical categories and levels – specifically, the conflation of the subject and the object in discussions, resulting in role misalignment. Second, there is a tendency to conflate the state with government or even equate them. This confusion arises from the development of modern nation-states in the West. Historically, city-state governments emerged before the formation of nation-states. Consequently, Western economists generally equate state theory with government theory. The English term “state” is often used interchangeably to refer to both the government and the state itself. For instance, in Understanding the Market Economy (Isachsen et al., 1992), the authors note that any economic system must address two core issues: ensuring the efficient use of resources in both the short and long term and ensuring the fair distribution of income from production. To resolve these issues, the state must participate and play an essential role. This book concludes that there is no “pure” market economy where all economic decisions are made in the free market; all modern market economies are “mixed,” as the government plays a crucial role in any contemporary society (Hu and Zhou, 1992, pp. 1–2), which conflates the state with the government and treats them as interchangeable. Most scholars and analysts in the world tend to equate the state with the government when studying economics, which may be because, in modern times, the importance of the state has increasingly been replaced by that of the government and Foucault argued that the state must be understood through the general strategy of government that shapes its existence and limitations (Migdal, 2013, p. 19). However, the government is essentially one of the state's enforcement organs – it is only the key, largest administrative body that constitutes the state entity. Therefore, equating the state with the government risks causing both academic and ideological confusion.

In fact, modern states are composed of individuals, households, enterprises and actor entities established above them, including political parties, governments, legislative bodies and judicial institutions. Equating the state with the government can easily lead to state nihilism. The small group of people making government decisions has limitations in knowledge, time and energy. This group operates within fixed tenures and tackles only what is feasible within their terms. They often face complex governance trade-offs. Thus, government agents in both democratic and non-democratic societies are inevitably liable to make mistakes, some of which can seriously harm citizens' rights and interests. If the state and government are equated, the mistakes of government agents will be attributed to the state itself. This fosters the belief that a “state” that frequently makes serious mistakes is unworthy of being cherished or fought for, naturally giving rise to ideologies, public opinions and behaviors divorced from the realities of human development – such as state nihilism and anarchism. This is an issue that requires particular attention and guidance in China's transitional society.

The third perspective advocates advancing reform by envisioning an ideal market economy system as the blueprint. Since the launch of China's reform and opening up, some prominent scholars have proposed that China should reference this ideal market economy system to build a free, competitive market economy. This view gained prevalence from the 1990s, during which some summarized a policy slogan as “exchanging market share for technology”. A decade later, it became evident that while market share had been conceded, the desired technology had not been obtained. The Chinese then realized that it is hard to grasp advanced technology, akin to strictly guarded family secrets, through acquisition. Consequently, China reverted to a developmental trajectory that prioritizes autonomous innovation. In recent years, as China advances comprehensive and profound reform, certain economists have reiterated the assertion that “for China's subsequent phase of market-oriented reform, there must also be a benchmark or frame of reference”. They further contend: “Neglecting fundamental economic principles will inevitably result in reform failure. Contemporary economic theory posits an ideal economic environment as the benchmark and a free competitive market as the frame of reference. It explicitly delineates the prerequisites for markets to attain efficient resource allocation—and consequently function as sound market economies. These prerequisites, in turn, point to the long-term direction of reform, serving as forward-looking guidance to clarify the path and illuminate the direction. Through theoretical guidance for reform, transformation, and innovation, they facilitate the gradual progress of real economic operations toward the ideal state” (Tian, 2015). This theory may appear to be plausible, as it invokes the names of developed countries and presents Nobel Prize-winning economic theories as “authoritative,” thereby garnering significant traction in academic circles, the news media and institutions of higher education and research. However, it is a classic example of imported dogma in the “carving the boat to find the sword” vein (i.e. rigidly adhering to outdated ideas regardless of changing realities), and its understanding of market and market economics is clearly flawed. According to prevailing theories and policy proposals, China's state-owned monopoly industries – including railways, oil, telecommunications and finance – should undergo a process of privatization, resulting in the fragmentation of these entities into numerous small companies that operate in a free market. However, it would result in China's economy regressing to a primitive stage of market economy, characterized by the predominance of small family-run shops and township enterprises, hindering its ability to compete with developed nations. The analogy employed here is stark: it would be akin to a steamship engaging in combat with an aircraft carrier, a muzzleloader pitted against a laser gun, a modest local supermarket contending with Walmart or a primitive warrior confronting a steel robot. This perspective overlooks the historical evolution of the global market structure, which has progressed sequentially through monopolistic competition, oligopolistic monopoly, state monopoly and international monopoly since the 1930s. Instead, it employs utopian liberal market theories to devise a blueprint and roadmap for China. In the real world of economics, however, perfectly competitive markets are rare. Instead, the goal of competition among large enterprises often tends toward monopoly or oligopolistic collusion. Therefore, this argument is clearly divorced from reality and the basic common sense of historical evolution. The study overlooks China's historical and political context, instead insisting on the uncritical application of Western theories to China's economic reforms, even elevating them as the benchmark for reform. The text goes so far as to advocate a return to the laissez-faire market economy pioneered by Adam Smith, or the Anglo-Saxon model. Such claims are demonstrably driven by an ideological agenda that aims to pave the way for capital to expand its power.

The market theories of both classical and neoclassical liberal economists have consistently argued for the merits of Adam Smith's “invisible hand” and the “general equilibrium theory” it embodies. They have used this framework to design institutions and mechanisms, aiming to approximate its “ideal” state subjectively. However, this approach, rooted in abstraction rather than historical analysis or empirical reality, is precisely the “utopian market theory” advocated by proponents of economic laissez-faire, which has consumed the intellect and energy of generations of elite economists and has now almost become a religious manifesto, looming over the academic community in China today. It is therefore particularly necessary to engage in reflection, scrutiny and discernment to identify its beneficial and harmful components. What we observe in the real Western world is an apparent disconnect: the behaviors of Western governments differ from what the mainstream academic community and ideological discourse claim. One of the most notable examples of this is the divergence between the policies of Western governments since 2008 and the dominant economic theories and ideologies.

Schumpeter (2001, pp. 44–45) argued that modern economic theory (analysis) hangs too much in the air and does not take sufficient account of the fact that no sensible application to practical questions or even to the analysis of given situations of an economy can be made of its results without reference to the historic political framework within which they are to hold. This observation is particularly pertinent when applied to Western ideologies that are prevalent in contemporary discourse. As Mao (1999, pp. 23–49) stated in On the Ten Major Relationships: “Our policy is to learn from the strong points of all peoples and all countries that are genuinely good in the political, economic, scientific and technological fields, as well as in literature and art. But we must learn with an analytical and critical eye, not blindly, and we should not copy everything indiscriminately or transplant it mechanically. We must not adopt their shortcomings and weaknesses. […] Some of our people were once unclear on this matter and even imitated others' flaws. They swelled with pride over what they had adopted, only to find it had already been discarded in those very countries, resulting in a stumble, much like the Monkey Sun Wu-kung somersaulting”. This analogy is particularly apt when describing the current prevalence of dogmatic adherence to foreign, particularly American, ideologies in certain discourses.

Therefore, it is essential to undertake a rational analysis of prevailing beliefs and perspectives that divorce economic theory from its historical and political context. It is necessary to distinguish erroneous interpretations from sound principles, to expose the fallacies embedded in widespread assumptions and to promote correct theories and principles. This effort is particularly crucial for building a healthy and harmonious society.

The initial forms of human society and organization are widely regarded as families and clans, which placed a strong emphasis on ethical values and social harmony. The primary method of maintaining internal order within these early societies was through moral and familial relationships. Consequently, coercive institutions such as armies, judicial systems, police forces and taxation mechanisms were established at levels beyond the family unit to safeguard the lives, security, freedoms and properties of the community. This process led to the emergence of the state. The market's original function was as a forum for the exchange of products that were deemed mutually beneficial among family units, within states, and between states.

According to Yi Jing: Xi Ci II (Book of Changes: Great Treatise II) (Yang, 2016, p. 367), Shennong's contributions to agriculture included the invention of si (spade). Besides, he “caused markets to be held at midday, thus bringing together all the people, and assembling in one place all their wares. They made their exchanges and then left, each having gotten what he wanted. The idea of this was taken, probably, from Shi He (the twenty-first hexagram)”. This passage suggests that the ancient market was established by the legendary leader Shennong, with its primary function being to facilitate the exchange of products.

Shangshu: Hong Fan (Book of Documents: The Great Norms) identifies food as the foremost of the eight policies governing the state, with goods as the second. Han Shu: Shi Huo Zhi (Book of Han: Treatise on Food and Goods) further asserts that national prosperity and people's wealth are contingent on sufficient food and free trade. “In the eight policies of the Great Norms, food is prioritized, followed by goods. The term “food” is used to denote cultivated grains and edible produce, while “goods” refers to items such as cloth for clothing, as well as ancient Chinese currencies (including gold, knife-shaped coins, turtle shells, and cowrie shells). These goods play a crucial role in the distribution of wealth, the propagation of benefits, and the facilitation of exchange. These elements are the foundation of people's livelihood, believed to have originated from the era of Shennong. At that time, people hewed wood to craft spades, bent wood to form lei (handles), and disseminated the benefits of these tools across the land, ensuring ample food supplies. They established midday markets to attract people from all regions, gather goods from every corner, and facilitate exchanges where traders departed satisfied with their bargains. With sufficient food supplies and smooth circulation of goods, the state became prosperous and the people affluent, thereby enabling education and moral instruction to flourish”. (Ban, 2007, p. 157). This historical account demonstrates that, since the time of Shennong in ancient China, significant emphasis has been placed on both production and the circulation of goods. These activities were regarded as the foundation of classical political economy, fostering national prosperity and societal well-being. In this context, the term “circulation of goods” refers to market transactions or the broader concept of a market economy.

Guanzi: Cheng Ma states: “The market serves as the ‘Zhun’ for goods ^[1]”. This means that the market is a space where commodities attain their proper value through exchange. Over two millennia ago, ancient sages further observed, “The market reveals governance (order or chaos) and indicates abundance or scarcity, but it does not generate abundance or scarcity itself”. In other words, market conditions reflect a state's political stability and the level of societal wealth, yet markets themselves cannot create wealth (Li, 2009, pp. 42–43).

According to Zhou Li (The Rites of Zhou), records of economic development during the Zhou Dynasty demonstrate that China had already established a highly structured, government-regulated market economy. The text specifies that markets were systematically established within city walls by the government. In the First Section, Tianguan Zongzai (Heavenly Minister and Prime Minister), the following is stated: “When the king establishes a state, he determines directions and positions, organizes the urban and rural layout, appoints officials to defined roles, thereby setting standards for the people”. Here, “organizing the state” refers to the capital's grid-like structure, formed by nine north-south and nine east-west roads. The ancestral temple was positioned to the east, and the Altar of Soil and Grain (Sheji) was situated to the west. Government offices were situated in the front, while the market was located in the rear. This indicates that by the Zhou Dynasty, markets were integral components of the capital's design. Further, the text notes: “Upon founding a state, assist the queen in establishing the market, set its order, arrange its layout, regulate its stalls, display its goods, standardize measures, weights, and currency, and conduct sacrifices through yin rites”. This passage clarifies that after the capital's construction, the Inner Minister was tasked with aiding the queen to establish markets, setting up administrative offices for market officials and designating administrative zones at market entrances. Market stalls were systematically organized, with merchants' goods (e.g. gold, jade, textiles) displayed openly. Transactions adhered to standardized measures, weights and currency units. The Second Section of Zhou Li, Siguan Ditu (Minister of the Earth) describes the emergence of specialized officials, Sishi (market superintendents) – who oversaw market affairs with a staff of 164 subordinates. Many modern institutions, such as the Price Bureau, Tax Bureau, Quality Supervision Bureau and Commerce Bureau, have historical precedents in the Zhou system, which featured clearly defined divisions of labor.

Specifically, Zhiren (Price Regulator) evaluated the prices of goods (e.g. slaves, livestock, weapons, utensils and exotic foods), regulated market prices and supervised trade contracts. Changren (Tax Collector) levied taxes on market stalls, goods, quality inspections, fines and housing and turned over revenues to Quanfu, i.e. the Treasury Office. Xushi (Quality Inspector) conducted quality inspections for industrial and commercial goods. Gushi (Merchandise Classifier) classified and graded goods, determined prices and initiated market transactions. Sibao and Siji enforced market order. Quanfu utilized tax revenues to purchase unsold goods, balance supply and demand dynamics and set benchmark interest rates for market loans. Simen collected taxes on goods at the capital gates. Siguan (Customs Inspector) verified import/export tax documentation and penalized smuggling activities, while Sizhang (Market Supervisor) taxed commodities and supervised goods and prices. Even by the Qing Dynasty, it was widely acknowledged that “establishing markets at the city center to facilitate commerce, benefit artisans, and implement policies to stabilize distant regions constituted exemplary laws for all generations” (Wang et al., 2015, p. 758).

It is generally acknowledged that most international trade in modern nations is promoted and regulated by the government. Historically, this government-led approach to domestic markets was also prevalent in the 18th century. For instance, in 1759 (the 24th year of Emperor Qianlong's reign), following the stabilization of the western frontier, the Qing government established official markets in key locations such as Pishan, Kucha, Aksu, Uqturpan (also known as Wushi), Khotan, Yarkand, and Kashgar. Goods transported from the interior included silk, satin, brown felt, dyed fabrics and tea bricks, which were exchanged for commodities from Altishahr region, such as donkeys, horses, cattle, sheep, jade feathers, furs, leather, gold, silver, copper, handicrafts and agricultural products like wheat, buckwheat and forage, which were critical supplies for border defense. These goods were either officially supervised or managed by military and civilian traders, with all transactions priced in strict alignment with interior market rates (Wang et al., 2015, p. 764). This historical record underscores the state's proactive role in establishing markets to meet military logistical demands.

From the establishment of Soviet style governments during the revolutionary era to the Border Region Government (e.g. the Shaanxi–Gansu–Ningxia Border Region Government) and later the Northwest People's Government, Northeast People's Government and North China People's Government during the Chinese Civil War, these governments consistently institutionalized market mechanisms. They proactively established markets, engaged in foreign trade, conducted commercial activities and regulated market dynamics through fiscal, monetary, material and pricing policies.

Since China's reform and opening-up, the government has driven market development through multiple initiatives, including the establishment of special economic zones, open coastal cities and high-tech industrial parks. These measures not only fostered market growth but also ensured orderly market conditions.

Therefore, the market is a human-constructed trading platform and venue, as well as a system for disclosing and screening buying-and-selling information, which is the concept known as the “market-as-platform perspective”. In the context of China's historical economic development, the market emerges as a result of human agency in trading activities, with its ultimate manifestation being the circulation of goods through exchange. The government has consistently served as the primary institutional actor in market development. It can even be asserted that the market itself does not autonomously allocate resources, exchange products or distribute other human-made creations; instead, resource allocation and exchange occur through interactions among economic actors operating behind the market mechanism, such as government officials, entrepreneurs and capitalists, who especially occupy central roles in resource allocation in contemporary society. From this perspective, the market, as an integrated synthetic construct, is neither an intentional agent of human action nor capable of fulfilling the functions typically associated with autonomous subjects.

Internationally, the market is typically conceptualized as a mechanism. Paul Samuelson defined the market as an actual place where buyers and sellers can engage in face-to-face bargaining, and it is a mechanism through which buyers and sellers interact to determine prices and exchange goods, services and assets. The key feature of a market is that it brings buyers and sellers together to jointly determine prices and quantities of the goods. In short, the market is a mechanism through which buyers and sellers interact to determine the prices and quantities of goods (Samuelson and Nordhaus, 1992, pp. 14, 36–37). This concept closely parallels the understanding of the market found in Guanzi. Friedrich Hayek, a representative of the Austrian School, described the market as a communications system that turns out to be a more efficient mechanism for processing dispersed information than any that man has deliberately designed (Hayek, 1981, pp. 80–81). While the “information mechanism” view serves as a powerful economic metaphor highlighting a key characteristic of market-based economic interactions, it does not address the deeper question of what a market is. Karl Polanyi critiques the conventional economic narrative that explains the emergence of the market economy by assuming a natural human propensity for barter and exchange. Based on this assumption, economists often depict a linear, evolutionary progression from small-scale historical markets to today's large-scale modern markets. However, Polanyi argues that this is not an accurate account of historical development. He notes that in early societies, only two types of small-scale markets existed: local markets and external (long-distance) trade. Both were highly regulated and lacked the structural flexibility necessary to generate transformative economic change. The rise of the modern market economy, Polanyi contends, was not an organic outgrowth of expanding trade, but rather the result of two pivotal developments in European history: the creation of state-driven mercantilist internal markets and the British dismantling of market regulations in the mid-19th century. Polanyi further observes that while human communities have never entirely abandoned external trade, such trade did not necessarily involve markets. External trade originated more in adventure, exploration, hunting, piracy, and war than in barter. It rarely implied peace or reciprocity in a bilateral sense, and even when it did, it was typically organized on the principle of reciprocity rather than exchange. In Polanyi's view, national markets did not emerge gradually from regional or long-distance trade; rather, they were the product of deliberate state policies under mercantilism (Polanyi, 1989, pp. 133, 150).

It is evident that the development of markets in the East and West followed distinct trajectories and was interpreted in different ways.

In ancient times, there was a saying: “to trade with a sword in hand”. In modern times, a similar expression holds: “A merchant's reach extends as far as the range of a cannon”. These adages illustrate that commercial activity has always depended on the order and protection ensured by state coercive power. From the standpoint of market governance, this highlights the interdependence between enterprises and the government, as well as the government's indispensable role in maintaining market stability.

In reality, since the emergence of the state, governments have been the most visible and dominant actors in markets. They do not merely enact market regulations, enforce rules and uphold order – they also establish markets, create fundamental instruments of exchange (such as currency) and drive market development. In essence, the government is the largest agent of resource allocation in any market economy, a fact widely recognized throughout human history.

Under normal conditions, the primary actors in the market or the key agents in economic resource allocation, typically include governments, firms, households and individuals. The Austrian School and the Anglo-Saxon liberal tradition often regard enterprises as the most important, if not the only, legitimate market actors. They exclude the government from active participation in the market economy, advocating laissez-faire economics and Adam Smith's notion of the “night-watchman state” – a minimal government limited to protecting life, liberty and property. Proponents of this view claim that: “the market can solve all our problems,” “market forces themselves can correct market failure,” and “market failure alone does not justify government intervention”. This represents an idealized and subjectively constructed economic belief system.

Objectively speaking, in agrarian societies prior to the 18th century, households and family-run enterprises were the predominant and most numerous economic actors in the market. With the onset of the Industrial and Commercial Revolutions in the 18th century, publicly owned and joint-stock enterprises began to emerge and gradually increase in number. Following the mid-19th century, particularly after the enactment of corporate laws such as the UK's Companies Act and similar legislation in the USA, modern limited liability companies emerged as significant market participants. In today's market economies, enterprises of various ownership types coexist, including public companies with limited liability, family-owned and privately held firms, collectively owned enterprises and state-owned enterprises. While private and family-run businesses still constitute the majority in terms of sheer numbers, they are not necessarily the most significant players in the market. The foundational institutional frameworks, core transactional instruments, physical and regulatory infrastructure, and control over key factors of production – the very conditions that enable markets to exist and function – are primarily established, maintained and controlled by the government, which stands as the most central actor in the market system. Key examples include land, currency, legal order and organized trading venues. On one hand, the government acts simultaneously as a supplier and demander, an investor and regulator, a builder of market institutions and a guardian of market order. On the other hand, when institutions or policies are poorly designed or implemented, the government can also become the primary source of market instability and systemic disorder. Therefore, in any modern market economy, the government is, in fact, the most pivotal actor.

Therefore, one must ask: where exactly should scholars draw the boundary between government and market? On what basis can they claim that the government ought not to intervene in core market functions such as price formation, supply and demand or competition?

Consider this: In today's markets, especially in financial markets, where transaction volumes are largest, who determines the key instruments that shape resource allocation and price outcomes? Is not the government that sets monetary policy, interest rates, exchange rates and tax rates? Does not the government also define technical standards, health and safety regulations, environmental requirements and implicit or explicit price ceilings and floors for goods and services? In the current phase of global capitalism, increasingly characterized by state-monopoly capitalism, is it not the case that pricing power over strategic commodities and core technologies is concentrated in the hands of corporate oligopolies or state-backed industrial alliances? Far from standing outside the market, the government is deeply embedded within it – and indeed, functions as the most consequential actor in the entire system. Nevertheless, immense intellectual energy has been devoted to the futile task of drawing rigid boundaries between “market” and “government” – two categories that are not only intertwined in practice but often analytically misaligned. This preoccupation has consumed countless hours of academic debate and filled volumes of journal space, while a far more pressing question remains largely neglected: How can we effectively incentivize, regulate, constrain and supervise the economic power wielded by government officials, entrepreneurs and capitalists? This is one of the central problems of modern political economy. Yet, in Chinese academic discourse, it has either been overlooked or insufficiently prioritized and is absent from the core research agenda.

Guan Zhong's “Qingzhong Theory” (Theory of Light and Heavy): Guan Zhong (719–645 BCE) was a preeminent statesman, economist, and military strategist in ancient China. His ideas were later compiled into the classical text Guanzi, which preserves his influential “Theory of Light and Heavy,” a foundational concept in early Chinese economic thought on price regulation. The theory interprets price fluctuations as monetary phenomena, rooted in the relative quantity (ratio) between money and goods, a perspective that anticipates the core idea of the quantity theory of money. According to Guan Zhong, the government can actively regulate prices by adjusting the supply and demand of key goods, particularly grain, through strategic control of money and grain stocks. When grain prices fall too low, the government should purchase surplus grain to raise prices; when prices rise too high, it should release grain from reserves to bring them back to a stable level. This intervention aims to ensure price stability, protect livelihoods and maintain social order. The “Theory of Light and Heavy” thus represents one of the earliest systematic recognitions of the law of supply and demand in economic history. More importantly, it laid the conceptual groundwork for government-led price stabilization policies, including the establishment of a national grain reserve system, the implementation of a flexible tax system and regulations to curb price manipulation. Additionally, Guan Zhong analyzed grain pricing from a strategic perspective of international trade. He emphasized the interdependence of domestic and foreign grain markets: if grain is cheap domestically while prices are high abroad, it will flow outward, leading to domestic shortages and weakening national resilience. In such cases, the population may become economically and politically dependent on foreign powers. Therefore, Guan treated grain as a strategic economic weapon. He advocated the government's strict controls to prevent the outflow of grain, thereby ensuring sufficient national reserves and guaranteeing food security. In practice, he implemented this strategy during Qi's rivalry with the states of Lü and Liang. According to Tongdian (Comprehensive Statutes): “The borders were closed, and no diplomatic envoys were sent to Lü or Liang”. “The people of Lü and Liang had to pay hundreds of coins for a measure of grain, while Qi sold it for just ten”. “Six out of ten people from Lü and Liang migrated to Qi”. (Wang et al., 2015, pp. 139–147, 353–355, 489–498).

Fan Li's “Agricultural Cycle Theory” and “Ping Tiao Theory” (Theory of Balanced Grain Marketing): Fan Li (536–448 BCE) was a renowned statesman, economist and entrepreneur of the late Spring and Autumn period. Drawing on the economic teachings of his mentor Ji Ran, Fan developed two influential theories: the “Agricultural Cycle Theory” and the “Pingtiao Theory” (or “Theory of Balanced Grain Marketing”). As recorded in the Huo Zhi Lie Zhuan (“Biographies of Wealthy Merchants”) in Shiji (Records of the Grand Historian): “All things unfold in cycles—nothing exceeds three years before change occurs. […] Every six years brings a bumper harvest, every six years a moderate one, and every twelve years a famine”. The Agricultural Cycle Theory posits that agricultural abundance and scarcity are linked to the movement of Jupiter (referred to as Taiyin in ancient Chinese astronomy). By observing the climatic patterns associated with Jupiter's 12-year orbital cycle, Fan Li identified recurring rhythms in agricultural output and formulated a cyclical framework: a three-year minor cycle, a six-year intermediate cycle and a 12-year major cycle. This insight gave rise to a macroeconomic mode of thinking – one that treats the economy as an integrated whole, with interdependent sectors and predictable rhythms. More significantly, Fan applied this cyclical understanding to policymaking. To ensure macroeconomic stability that supports agricultural production, commercial circulation, and urban livelihoods, he proposed that agricultural prices should be allowed to fluctuate freely within a reasonable range. Crucially, he argued that the state should actively regulate supply and demand in response to price movements – purchasing grain when prices were low and releasing it when prices rose – thereby keeping prices within a stable and fair band. This approach formed the basis of the “Pingtiao Theory”, a systematic policy for price stabilization. The Pingtiao Theory offers an early explanation of price fluctuations under the law of value, emphasizing market mechanisms tempered by strategic state intervention. It represents a significant extension and refinement of Guan Zhong's earlier “Theory of Light and Heavy”.

Sima Qian's Theory of Market Prices: Sima's biographical work Shiji (Records of the Grand Historian) was a comprehensive compendium of its time, an early Chinese encyclopedia of history, society and economy. In the article “Huo Zhi Lie Zhuan” (“Biographies of Wealthy Merchants”), Sima offers a profound discussion on economic division of labor, market dynamics and price formation. He writes: “Silk, bamboo, wood, stone—indeed, all things under heaven—are desired by the people. These are the goods and services that sustain everyday life—from customs and clothing to food, the care of the living, and the rites for the dead. Thus, we rely on farmers to provide food, on foresters to extract resources, on artisans to craft goods, and on merchants to circulate them. Is this achieved through government decrees or bureaucratic summons? No. Each person applies their ability and exerts their strength to obtain what they desire. Hence, when goods are cheap, demand rises; when dear, it falls. Everyone diligently pursues their occupation and finds joy in their work—like water flowing downhill, ceaselessly night and day, coming without being called, contributing without being compelled. Is this not in harmony with the Dao, a manifestation of natural order?” (Sima, 2008, pp. 2528–2553). This passage elucidates two foundational economic insights: First, the division of labor among agriculture, resource extraction, craftsmanship and commerce is the optimal framework for economic development, making all desired goods available to the people and enabling the economy to function smoothly. Second, Sima articulates a sophisticated understanding of market mechanisms – particularly the dynamics of supply, demand and price fluctuation. His observation that “when goods are cheap, demand rises; when dear, it falls” captures the essence of price signals in a self-regulating market. He portrays the market as a spontaneous order: individuals, pursuing their own interests, collectively generate economic coordination “like water flowing downhill” – naturally, continuously, and without central direction. Thus, Sima Qian concludes that price fluctuations arising from free exchange are not arbitrary but reflect a moral and natural rationality. In his view, the market is not merely an ideal economic mechanism, but a manifestation of the Dao – a self-organizing system aligned with the natural order.

A widely accepted view today holds that in a market economy, enterprises are the primary agents of price formation, and competition provides the essential conditions for this process. Accordingly, the primary determinants of prices are market supply and demand, while the basic mechanism is enterprise pricing. The so-called “price mechanism” refers to the combined operation of supply and demand dynamics, as well as competitive forces. Re-examining this understanding, which originally emerged during the early stage of socialism, is essential for a more objective understanding of how a market economy functions.

Observations of price formation across historical and cross-cultural market economies reveal that the factors determining prices are structured in layers, at least comprising three distinct levels:

First, the foundational prices determined by the government or quasi-governmental institutions that underpin all other prices in the economy. Key examples include the money supply, benchmark interest rates, exchange rates, tax rates and benchmark land rents. As the agent of the national economic order administration, the government uses these instruments to manage the economy in accordance with broader policy objectives. This role is especially critical in today's monetary and financial economy, where modern business cycles are largely driven by credit. In this context, money and interest rates occupy a central position in economic coordination. Although taxes are typically levied after economic transactions occur, they are far from passive. Taxation functions as a core regulatory mechanism embedded within the market. Therefore, tax rates constitute a foundational parameter in price formation. In most countries, land is owned by the state. Individuals and enterprises hold only statutory rights, including rights of use, disposal, transfer and income, all of which are subject to state regulations in terms of time and space. Consequently, land prices and rents are constrained by the state's temporal and spatial control over land tenure.

Second, enterprises' production costs, which are naturally determined by enterprises based on their technological capabilities, managerial efficiency, wage levels, labor productivity and marketing control. This level can be further divided into two distinct types: A small number of large enterprises and monopolistic organizations that possess significant pricing authority and market dominance, and the vast majority of small and medium-sized enterprises (SMEs) that lack such power and are largely price-takers. As Galbraith observes, the former operate like a planned system, while the latter function within a market-based system (Galbraith, 2006, Preface by the translator, p. 4) ^[2]. According to classical and neoclassical liberal economics, competition ensures the efficient allocation of scarce resources, and the pursuit of maximum individual self-interest ultimately leads to the maximization of social welfare. The market determines prices and demand, and enterprises accept them passively. In this view, the only way to maximize social welfare is to maintain competitive markets, thereby supporting the development of SMEs. According to Galbraith and Chandler, an examination of major economies, such as China and the USA, reveals that a relatively small number of large corporations – around one thousand – control and set benchmark prices for most goods and services. These large corporations wield the power to manipulate prices and influence the behavior of consumers, society and even governments. Thus, the owners and managers of these large enterprises constitute a de facto ruling class in modern society.

Third, the retail price of goods. This price is, of course, based on the first two levels and is further influenced by circulation costs and sales-related expenses. Circulation costs include those associated with the speed and duration of distribution, as well as losses or depreciation of goods and resources during transit. Sales-related costs encompass rent, labor, advertising, warehousing, spoilage, shrinkage and other operational expenditures. This retail price is what consumers directly encounter in the marketplace. While consumers have the right to choose among products and, in some contexts, to negotiate prices, they cannot set the prices.

In modern markets, which operate under state supervision and government regulation, resources such as land, labor, capital and technology are still subject to restrictions on their free exchange, mobility, migration, competition and selection across borders.

Representative decision-making bodies – such as the government and parliament (National People's Congress) – act as agents responsible for managing the national economic order in accordance with the state's will. Their formulation of basic price systems and policies, including those related to monetary supply, benchmark interest rates, exchange rates, tax rates and land base rents, exerts a decisive influence on the market economy. This influence can be both positive and negative, either fostering economic prosperity or leading to economic decline. Therefore, constraining the government, which is one of the most critical actors in a modern market economy, is essential for building a robust market system. Given the systemic and comprehensive impact of government institutions and policies on society and the market, they can either promote economic growth or cause economic downturns. Thus, effective constraints on governmental power are crucial for ensuring the proper functioning of a nation's political and economic systems, as well as the healthy operation of the market. Flawed government systems and policies may lead to market chaos, disorder, inefficiency and even systemic exploitation, thereby triggering social instability and imbalance. For example, the arbitrary issuance of currency or the unilateral alteration of legally defined property rights can result in systemic violations of the rights of individuals, families and businesses. Such actions can easily lead to social and national disorder, ultimately resulting in stagnation or regression in societal development. Therefore, it is necessary for the highest state authority, elected by the people, to enhance top-level institutional design to prevent arbitrary government actions through institutional mechanisms. This includes legally regulating, restricting and constraining governmental power.

Due to the short-termism, opportunism and self-interested behaviors of organizations and individuals in the market, the overall economy can become disordered and suffer from systemic consequences. Additionally, large enterprises exert significant influence over markets, society and the state, potentially leading to systemic exploitation and oppression of individuals and families. Therefore, to curb systemic economic disorder caused by short-termism and self-interest, China's highest state authority and executive agencies must strengthen top-level institutional design. This includes establishing robust mechanisms to regulate and constrain market actors, especially large corporations, from engaging in monopolies, price fixing, fraud and the exploitation of workers. In reality, a market economy is built upon a series of institutional and moral constraints. Without these constraints, the market could degenerate into a place where the strong exploit the weak through deceit and fraud.

In summary, building a sound market economy requires two complementary foundations: the state must establish explicit laws and regulations to standardize, regulate, and constrain all key market actors, including the government, enterprises, households and individuals, thereby ensuring an orderly economic system through institutional enforcement. Meanwhile, society must strengthen its moral and ethical framework to provide a broader and deeper foundation for sustainable economic development. Together, these two pillars form the essential supports for an ideal national order – one of social harmony, people-centered governance and shared prosperity for both the people and the nation – and an ideal market order in which everyone contributes their talents, land is fully utilized, resources are used efficiently and goods flow freely, like the two wheels of a cart or the two wings of a

Today, as many people still hold an almost superstitious faith in the market, it is essential to reassess the respective roles of market and government in resource allocation.

In fact, the so-called “invisible hand” can function as neoclassical theory assumes only under highly idealized conditions – conditions that are rarely, if ever, met in the real world. As Stiglitz (2004, p. 6) observed: “[…] the reason that the invisible hand may be invisible is that it is simply not there—or at least that if it is there, it is palsied”. Because information is inherently imperfect and markets are inherently incomplete, they rarely achieve constrained Pareto efficiency. Consequently, market-driven resource allocation is not necessarily an efficient approach. Meanwhile, the government, which is the most influential actor in any market economy, plays an increasingly central role in shaping economic outcomes. In a broader historical sense, human development has been a story of increasing organizational complexity. Since its emergence, the government has acted as a representative of collective interests, guiding the dispersed and unorganized “invisible hand” with an organized and coercive “visible hand”. Through legislation, administration and judicial authority, the government defines the utility, productivity, profitability and survival of various economic organizations. Laws and regulations establish the boundaries for economic contracts, and various government activities influence both the types of agreements and the scope of contractual activities. Property rights themselves exist as constructs of the state. The government plays a foundational role in creating the conditions for markets to function and in providing a stable, long-term environment for enterprises. Indeed, the emergence and continued operation of a market economy hinges on an effective government.

As Lindblom (2002, pp. 7–8) argues, the market system is far from the laissez-faire ideal of Adam Smith, and it does not rely on a minimal state. Rather, today's market economy is inherently regulatory – or, in the dismissive terms of classical free-marketers, “interfered with”. Within it, the government acts not only as the largest purchaser of major goods and services such as defense, infrastructure, and public services, but also as a strategic supplier, promoting national brands overseas to support domestic firms' global expansion. Its control over vast financial resources and its administration of social welfare programs enable it to shape income distribution. Moreover, through monetary and fiscal policy, the government actively manages credit and money supply. These interventions are essential to the functioning and stability of the modern market system. Whatever one's view of government, there seems to be no doubt that government intervention is essential for the market system to function. The government's role is even more extensive in China.

In sum, through fiscal, financial, trade, investment, pricing, industrial, technological, educational, employment and environmental and health policies, the government sets the rules of the game, including market entry conditions, operational procedures, permissible activities and minimum standards for profit distribution. Therefore, the regulation and governance of government have always been central to the development of a market economy.