SUN ZI'S ART OF WAR:
DEADLY ORIENTAL STRATEGIES for SUCCESS, CAREER & BUSINESS

from GUI *WORLD OF CULTURE*

HOMEPAGE:
GUI WORLD OF CULTURE
AMAZING SCIENTIFIC
WORLD OF FENG SHUI
CULTURE SYMBOLISM
ORIENTAL STRATEGY
SUN TZU ART OF WAR
ARTICLES in Strategy
SUN TZU ART OF WAR COURSES
YI JING
CONFUCIUS

Wang An-Shih's
PRACTICAL CONFUCIAN MANAGEMENT APPROACH
TO FINANCIAL MANAGEMENT

Prof. Dr. Ong Hean-Tatt 5th October 2000 wanas00a

Confucianism: World's Most Enduring Management Philosophy


top

Introduction

The recent Asian economic crisis woke up Asians to the existence of various serious flaws in the financial management in several of the Asian economies. In looking for useful guidelines to rectify the recent economic problems we could take a leaf from the long history of China about how the Chinese rulers dealt with similar national economic problems.

During the reign of Emperor Jen Tsung (1023-1063) the financial situation of the Sung dynasty reached a critical stage, characterised by a similar feature with the recent Asian economic crisis, that of revenues being far outstripped by expenditures. More unpleasant, there were widespread corruption and mediocrity in several areas of management, leading to profound wastages of both public and private funds.

When the famous reformer Sung prime minister Wang An Shih was promoted to vice-Grand Councillor, he first dealt with the problem of national finance. The experience of Wang An Shih offers valuable lessons about financial management at the national level, but which also could be adopted by corporations for their organisational financial management.


Prelude

Until a problem is first recognised, the problem would naturally remain unresolved. Know your problem, even as Sun Tzu would advise:

  • If you know your enemy and know yourself; in a hundred battles you will never fear the result. Sun Tzu 3:18

Before Wang An Shih arrived at the scene, Ssu Ma Kuang had already listed out to Emperor Jen Tsung various reasons why the annual income was inadequate to meet expenditure: extravagance, gifts were too lavish, too many supernumeraries, personnel of royal household too many, standing army too large

Extravagance was a serious root of the financial mess of the Sung dynasty. There had been too many wasteful ventures. Sun Tzu would have warned about extravagant ventures:

  • Operations of war shall require... a thousand pieces of gold a day... Where the campaign is prolonged the resources of the State will not be enough to last the strain... your strength exhausted and treasury spent.. Then no man, however wise, will be able to avert the inevitable consequence. Sun Tzu 2:1, 3-4.

While agreeing with the above list and that extravagance was a major financial evil, Wang An Shih went on to list other reasons why the national financial state was deplorable. Two reasons avoided by Ssu Ma Kuang and hence continually hindering efforts to rehabilitate the national economy, were the sensitive controversial issues of corruption and the role of the wealthy in siphoning off the resources of the nation.


Wrong Financial Remedies

Some leaders could react to the serious financial situation by adopting the wrong measures. Sun Tzu gave some remarkable insights into the nature of these kind of wrong measures:

  • The proximity of the army causes things to be extremely expensive. High prices cause people's to drain away. When their wealth is drained away, they would be afflicted with taxes. Together with loss of wealth and weakness, homes of people will be bare and seven tenths of wealth gone. Sun Tzu 2:11-14.

It is the attempt to raise taxes to obtain additional money which was severely criticised by Sun Tzu. This wrong kind of 'remedy' was also the basis of the IMF packages to 'help' beleaguered Asian nations. Wang An Shih was also to heavily criticise this flimsy measure of trying to raise taxes to squeeze out more money from the already beleaguered people.

These taxes caused severe hardship to the general population, especially the lower classes of people. The moral of the case is that much of the financial mess was caused by oversights in and measures dictated by the top ruling and wealthy classes. Now that there are severe economic losses the top ruling and wealthy classes were unwilling to bear the losses but tried to recoup by taxing the lower classes of people or finding equivalent ways to make the lower classes of people pay for their leaders' losses.

There is another weakness indicated by the Asian recent economic crisis. It should be noted that the Asian economies, like those elsewhere in the modern era, are highly modernised and regulated. But the battery of rules and regulations have proved unable to prevent the Asian crisis, just as they have failed to prevent similar crises elsewhere. It is doubtful that there could be long term solutions with more regulations, which could mask an underlying frantic lack of understanding of what are really happening. Rather, there may be a need to tackle the spirit and will than the technical ability of the people involved.

Inapt financial management coupled with increasing hardship for the people signaled a dangerous situation for the whole stability of the nation. It was to lead to the eventual demise of the Sung dynasty. Trying to ward off the approaching disaster, Wang An Shih went out to seek implementation of remedies to resolve the financial crisis.


Step 1: Set Your House in Order

Certainly, such a serious financial situation would call for wholehearted efforts from all strata of the whole nation. But the leadership had to set the first leading example. When people see their leaders trying to economise they too will follow suit. Otherwise, the people will only see their leaders as hypocrites and trying to live well while they, the general populace, suffer.

It is a military strategic maxim that when the army lacks food the general would descend to squat and eat with the soldiers the same coarse food.

So, Wang An Shih urged the leadership to first set the example to enable the economy to recover, "The good ruler maintains an economical standard in public life, extravagance being recognised as a great evil. If extravagance is not controlled it soon reaches an irremediable stage, when the people, in order to satisfy their lust for power and prestige are ready to exhaust all their resources."

As a result of investigation into the annual budget, every item was closely re-scrutinised. In this way a saving of about 40 percent was achieved. This illustrates the principle also seen in modern management that often costs could be reduced by 40%, a figure also achieved by Iaccoca in his famous turnabout of the ailing car giant Chrysler company. Much of this was due to control of the Court expenses. This reflected well on the character of Emperor Jen Tsung, who thus showed his willingness to help in the rectification of the national economy.

In contrast, the Manchu Empress Dowager Tzu Hsi squandered away scare revenues of the empire in building the Jehol Garden for her own personal entertainment. The unwillingness of the Manchu rulership to economise and divert revenue to productive activities was a major basis of the eventual fall of the Manchu dynasty.

The first necessary step towards is the willingness of the top leadership to act, especially in the way Emperor Jen Tsung supported Wang An Shih. The sovereign ruler needs to work with responsible officers to institute effective measures:

  • In war, a general first receives commands from the sovereign, then assembles and concentrates the troops. Sun Tzu 8:1

Step 2: Reduction of Taxation, Interest Rates and Related Matters

We have already seen earlier that Wang An Shih criticised the high rates of interests which hurt the people. At the time of Wang An Shih, a group of people had emerged to gain control of the financial situation of the nation. Wang An Shih called them "Usurers and Trade Monopolists". The majority of the high class was involved in money lending at high interest rates as it was the chief source of income.

Wang An Shih's actions was thus "directed against the activities of the wealthy Usurers and Trade Monopolists, who, instead of using their wealth for the initiation of industrial enterprises which might have benefited the poor, were evidently content to live lives of luxurious idleness upon their ill-gotten gains. These gains came from the exorbitant rates of interests which they charged on loans made to the poor, whose insignificant resources were eaten up in annual or monthly payments to their rich creditors."

Asians have to be careful with financial remedies invoking high interest rates like the IMF packages. Well meaning as these packages are, they have unrealised undesirable consequences.

The crux of the situation is that the rich got richer not from meaningful activities. Instead they got money easily owing to their political ties with the leadership and hence could dictate financial measures like high interest rates. As we shall see, there were other ways they manipulated the financial situation to enrich themselves.

The people had to work very hard, only to be deprived of much of their earnings. The rising discontent and grumbling among the people were ignored, which was to eventually lead to the demise of the Sung dynasty. As Sun Tzu would say, people must have a fair chance to enjoy the profits from their efforts:

  • In plundering the countryside and having captured new lands, let the spoil be divided among the men. Sun Tzu 7:20

Wang An Shih was particularly active in devising various schemes for making state loans to the people at lower rates of interest than those demanded by the wealthy moneylenders.

What is cardinally wrong was not high taxes or interest rates per sec. It was the attitude of the ruling leadership in obtaining their money. As the powerful sought wealth in a lazy way, there was no serious considerations of meaningful productive efforts to obtain honest wealth. National and organisational efficiency must necessarily suffer from ill planned poorly executed projects and the organisation inevitably inviting disaster.

The lesson is simple. Control of the national economy should be placed in the hands of those genuinely capable of generating productive wealth. Thus, in the wake of the Asian economic crisis, there have been justified cries that technocrats should be placed in charge. Financial institutions are essentially support services to the productive sectors. The size of the financial sector should be determined by the surpluses and profits from the productive sector. For the financial sector to outstrip the productive sector is like overblowing the balloon which must necessarily burst. So long as capable officers generate productive wealth supported by the service sector, the national economy will be in healthy balance.


Step 3: Curbing Compulsive Spending

Excessive spending is a malaise of the financial situation just before the Asian economic crisis hit. Until the crisis hit, people did not wake up to that several types of expenditures were unnecessary, wasteful and counter productive.

One of the major reasons for the excessive spending was the easy access to money. However, this factor could not cause harm unless it is linked to another feature of excessive spending the spending leans towards luxury goods which have little productive values. The result is that the revenues from productive efforts are not enough to sustain the spending on the luxury goods. Excessive spending means unwise spending, as simple a principle as that, yet so difficult to adopt.

Wang An Shih revealed a keen insight into this problem of luxury goods: "The capital city is the place where the fashions are set, the center towards which the faces of the people are turned, and the standards of which they are inclined to imitate. It is difficult to get the official clan, with their wealth and abundance of possessions to adopt an economical way of life. They readily fall into extravagance. On occasions of ceremony their raiments and equipages are marvellous. They make constant changes in their utensils and other appurtenances. The influence of all this rapidly spreads throughout the land. The consequence is that the artisan class devote themselves to the production of useless articles, and the commercial world concentrates on the securing of rare goods which by their very nature are difficult to obtain."

It is the desire for so much useless luxury which leads to corruption, as Wang An Shih went on to lament: "The rich strive to outstrip their fellows, and the poor are ashamed of their poverty. The latter say, 'I too am a man. I suffer lack while he (the rich) gets honours and possessions in such abundance.' So they turn to ways of envy and emulation, devoting their whole energies to the attempt to outstrip their fellows. The result is that among the lower strata of society there are those who exhaust the resources of a lifetime in one mad moment of extravagance... When modest and simple customs are set aside, covetous and corrupt practices become the norm. This in its turn leads to the exhaustation of the resources of both high and low. The people generally become depraved and the officials lose their reputation for honesty. Cruelty and oppression come to be regarded as the proper course while those who are of a dutiful and self-respecting character are considered base and uncultured."

Wang An Shih's advice and remedy was direct. Useless goods must be prevented from being sold. He recommended that the government set up a body to scrutinise goods for sale. All restrictions are to be imposed on useless luxury goods.

Corporations have been known to spend huge sums of money on luxury and other unnecessary items which added significantly to their debts when the Asian economic crisis hit. Firms which wisely used the money for productive purposes escape the brunt of the crisis. Sun Tzu would advise prudent non-wasteful planning:

  • Unhappy is the one, who to win battles and make conquests fails to cultivate enterprise and the result would be "wasteful stagnation". Hence, the saying the enlightened ruler plans well ahead and good generals cultivate the resources... Thus the enlightened ruler is prudent... Sun Tzu 12:15-16, 22.

Step 4: Stimulating Productive Sectors

The financial mess of a nation or an organisation cannot be totally resolved by just savings. In the end productive activities need to be stimulated to produce new additional revenues. Hence, the efforts of Wang An Shih to derive savings had an aim to find surplus funds for stimulating productive activities: "I realise that it is necessary to enrich the empire before it can be brought to proper order. But at the present time the revenues of the Court are insufficient, while the financial condition of my people remains grievously straitened." Wang An Shih had sought to produce surplus funds at both the Court level by cutting down unnecessary Court expenses and at the people's level by reducing interest rates.

As agriculture was the major mainstay of the economy efforts were made to stimulate agricultural production. Wang An Shih particularly made available agricultural loans with reasonable interest rates to be obtained by farmers to rejuvenate farming practices.

It was also found that often there would be surplus produce in one district which could have been used by another district. The lack of transportation caused the surplus produce to go to waste, not to mention the lowered prices obtained by farmers. Hence, Wang An Shih endeavoured for the State to buy up the surpluses and got them transported to other districts. The economic benefits were obvious. At one end the local farmers got more equitable prices for their goods. On the other end the government derived some revenues from selling the surpluses in other districts.

Another novel measure arose from the traditional way the military was supplied with horses. There were a few major horse breeding and rearing centers. Horses were often transported over far distant to locations where they were needed. Wang An Shih decentralised these horse rearing centers. There were substantial savings. More, outlying areas received boosts in their economy from the new horse rearing business.

The capable officers should thus endeavour to generate new sources of productive wealth:

  • The general who advances without coveting fame and withdraws without fearing disgrace but only intent to protect the people and do good service for his ruler is the jewel of the State. Sun Tzu 10:24.

Conclusion: Appeal for Sanity in the Market

The Sung history showed that "Wang An Shih shows himself in sympathy with the idea of Ssu Ma Kuang, namely that an example of economy and simple living needed to be set by the official and wealthy class, particularly those resident at the court and in the capital. But he goes further than Ssu Ma Kuang in his endeavour to deal radically with the problem." The growing national financial problem was the result of a long process in which many entrenched officers were involved in. Fresh blood to replace those with old habits and new ideas to replace old paradigms, albeit radical, were needed. Wang An Shih was to find it necessary to bypass many entrenched bodies to push through his financial reforms.

Wang An Shih's measures involve a great deal of emphasis on the social behaviour of both the top leadership and the people. It should be pointed out again that the many regulations in the Asian countries had not been able to prevent the Asian economic crisis. The long term remedies have to go beyond regulations. While some short term regulations may be useful, the remedies must originate with changes in the spirit and will of the leadership.

The State's intervention in the national economy was particularly aimed at curbing manipulation. "Then, again, the Court often asks for goods which are not procurable in a particular district or that are out of season. This gives the wealthy traders and big merchants their opportunity. Taking advantage of the government's demands and the people's extremity they are able to get control of the market and prices." Traders should get profits but not at exploitative prices forced on the people. Well did Sun Tzu forewarn, as already quoted earlier:

  • The proximity of the army causes things to be extremely expensive. High prices cause people's to drain away. When their wealth is drained away, they would be afflicted with taxes. Together with loss of wealth and weakness, homes of people will be bare and seven tenths of wealth gone. (Sun Tzu 2:11-14).

Unfortunately for Wang An Shih, Emperor Jen Tsung died in 1063, about five years after Wang An Shih started his financial reforms. The mother of Emperor Jen Tsung took over as regent. She was partial to those who opposed Wang An Shih. She had Wang An Shih removed as prime minister and revoked his financial reforms. The revered Chu Hsi did not support Wang An Shih. Chu Hsi was later to admit that he realised Wang An Shih's bold proposals were necessary for the nation. The new emperor tried to reinstate Wang An Shih's farsighted policies. But it was too late. The damages to the country proved irreversible and the weaken Sung empire fell to the Mongols.

Let us learn the lessons and avoid similar financial disasters for our organisations. Resolution of a serious financial situation requires wholehearted sincere efforts and cooperation from all levels of the organisation. Chief of all, the top leadership has to set the necessary example, and this includes recruiting the right capable sincere persons to affect the necessary changes required to restore the financial economy.

top



File created: 3rd February 1999 modified: 7th February 2001