Slow Variables: Government's Mission is to Establish Stable Expectations

Government is the most powerful force in the world. It can achieve many good things, but it can also lead to negative consequences through mechanisms such as rent-seeking, soft budget constraints, forced legibility, and unintended outcomes. In this lecture, let’s conduct a thought experiment: imagine the most ideal government. What would it look like?

A good government is not defined by “what it does,” but by “what it doesn’t do.”

Let’s start from the perspective of an ordinary person. Imagine you’ve opened an online store on an e-commerce platform. You’ve meticulously refined your products, trained your team, built up your reputation, and accumulated some wealth. You have a few competitors, but you’re not afraid. You believe that by developing the next generation of products, you can achieve an even more dominant position. To this end, you decide to recruit talent and expand production capacity.

However, just as you invest capital, the platform’s recommendation algorithm changes. Your online store loses all its traffic overnight! It turns out the platform owner discovered your category was highly profitable and decided to enter it personally, selling similar products. You don’t even have a channel to complain.

So, would you still proactively make long-term investments and research new products? What you should really be studying, instead, is the platform owner’s mood and strategy.

The same applies to a nation. Entrepreneurs, investors, scientists, ordinary workers, and students should direct their attention to the market, not fixate on the government. Whether doing business with other businesses (to B) or with consumers (to C), it should not evolve into everyone focusing on “to G” (to Government) relationships.

However, they cannot do without government, just as e-commerce cannot do without a platform. A government truly committed to serving the people can offer society its most precious gift, not direct subsidies, not one grand project after another, nor constantly shifting support policies, but an element so fundamental it’s often overlooked for its governance value—“stable expectations.”

The conceptual tool for this lecture is “slow variables.” The daily mission of government is precisely to maintain these slow variables.

Cornerstones of the Market Economy: Hard Constraints and Creative Destruction #

The reasons why market economies are superior to state-run economies have been extensively discussed by predecessors, so there’s no need to elaborate here. In short, its core lies in the following three concepts—

The first is “price signals,” proposed by Hayek: economic knowledge is dispersed among countless individuals on the ground, and no central planning system can replace this—only through the market can this localized knowledge be condensed into actionable signals of prices, profits, and losses.

The second is “creative destruction,” proposed by Schumpeter: the market allows newcomers to challenge old powers and new technologies to replace old structures—only through this can true growth be achieved.

The third is “soft budget constraints,” by Kornai, which we discussed earlier: the market operates under hard budget constraints; in a market economy, failure is real and irreversible—poor projects truly go bankrupt, inefficient enterprises exit the market, and resources are thus freed up.

In contrast, power instinctively seeks to control everything: it replaces price signals with administrative decrees, supplants survival of the fittest with protectionism, and even nurtures failing projects into long-term parasites through fiscal infusions.

Consequently, some liberal intellectuals, due to their reverence for the market, harbor antipathy towards government. Some even believe that markets emerge spontaneously and that less government intervention is better… However, this is not the case.

A case often cited by liberals is the “Champagne fairs” in France during the 12th and 13th centuries. At that time, long-distance trade flourished in Europe, and many merchants regularly traveled to the Champagne region of France for large-scale transactions. Here, there was no reliance on central planning or government price-setting… Economists have used this to argue that market order can spontaneously form through merchant law, private judges, and reputation mechanisms.

However, this is not the whole truth of history [1]. Consider this scenario: you trade with me today and return to another city tomorrow; if I am swindled, can I pursue redress all the way? Without property rights protection, contractual integrity, judicial fairness, stable currency, and reliable enforcement mechanisms, free trade would quickly degenerate into one-off black market transactions. The true historical context is that the prosperity of the Champagne fairs relied on safe passage, dispute resolution, contract enforcement, weights and measures management, and the protection provided by the Counts of Champagne.

A free market is not a wild grass that grows spontaneously, but a highly sophisticated public infrastructure.

This leads to “Institutional Economics” [2]. This theory posits that for two strangers to dare to engage in trade, institutional guarantees must be in place: markets operate effectively because there are forces maintaining ledgers, contracts, currency, and arbitration mechanisms.

We previously discussed the platform economy; in fact, the market itself is a platform that requires governance and maintenance.

If we imagine the market, or even a nation, as a platform, then the government is the operator of this platform.

Any platform operator must maintain the following four layers of rules—

The first is the identity layer: clarifying who can enter and who is eligible to be a participant.

The second is the transaction layer: defining how property rights, contracts, currency, taxation, and price signals operate.

The third is the arbitration layer: stipulating how conflicts are resolved, ensuring transparent procedures, and guaranteeing the possibility of appeal.

The fourth is the settlement layer: maintaining currency credibility, fiscal credibility, and enforcement credibility, ensuring that ultimate promises are fulfilled.

These rules are precisely the platform’s slow variables.

Fast Variables and Slow Variables: The Core of System Resilience #

According to Canadian ecologist C. S. “Buzz” Holling, every complex system has fast variables and slow variables [3]: fast variables change rapidly, are obvious, and are easily used as performance indicators; slow variables change slowly, are less conspicuous, yet determine the entire system’s “resilience.”

Taking a lake as an example, the amount of algae on the surface, the clarity of the water, and the size of fish populations are all fast variables; while the vegetation condition of the nearby watershed, the species structure of the lake, the phosphorus content in the bottom sediment, and the water body’s self-purification capacity are slow variables.

You can immediately pursue short-term results from fast variables, for example, by using drugs to inhibit algal growth, which can temporarily clear the lake surface. However, if the slow variables are not properly maintained, the lake will sooner or later become turbid again.

The same applies to a nation. Economic growth rate, fiscal revenue, employment rate, and the prosperity of specific industries are all fast variables; while property rights protection, sound rule of law, social credit, and social trust are slow variables.

By properly maintaining slow variables, fast variable indicators will automatically and gradually improve. However, arbitrarily manipulating the system in pursuit of fast variables can harm slow variables.

This is like farming: the fast variable is the crop yield, and the slow variable is the soil’s regenerative capacity. If you want to rapidly increase yield this season, the simplest way is to apply more chemical fertilizers—however, by doing so, you will damage the soil structure, groundwater quality, and soil organic matter. So, while this season’s yield may be high, in the long run, the land will become unsustainable.

By the same token, with clear property rights boundaries, talent and capital will trust that returns truly belong to them; with continuous and reliable rules, businesses dare to arrange contracts, production capacity, and supply chains for years ahead; with fair arbitration procedures, cooperation between strangers need not rely entirely on personal relationships and force; with credible currency and fiscal policy, the market dares to view today’s investments and tomorrow’s returns as entries on the same ledger.

Conversely, if the government, in pursuit of certain short-term indicators, directly intervenes in system operations—today supporting an industry, tomorrow suppressing a price, the day after changing a rule—fast variables might momentarily look good, but slow variables will suffer deep damage.

Some governments enjoy the dividends generated by slow variables, while others constantly deplete the principal of slow variables.

Lessons from History: Emperor Wu of Han’s Overdraft of Slow Variables #

A most typical case is the shift in the Western Han dynasty from the Reigns of Wen and Jing to the era of Emperor Wu.

After the chaos of the late Qin dynasty and the Chu-Han Contention, the foundational state policy in the early Western Han was “rest for the people”—through light taxation, reduced interference with the populace, stabilizing households, restoring agriculture, and re-accumulating national finances, allowing the people to believe that their lives in the coming years would largely follow established rules. The rule during the Reigns of Wen and Jing did not seek grand, dramatic achievements or grand narratives; the government displayed extreme restraint.

As a result, after several decades, fast variable indicators naturally improved: household registration increased, the tax base expanded, the national treasury was full, granaries were abundant, and commercial activity was vibrant.

What Emperor Wu inherited upon his ascension was precisely the rich inheritance accumulated over the two reigns of Wen and Jing.

However, once one holds immense power, a strong impulse to use it arises.

Today, when Emperor Wu’s great achievements are mentioned, they invariably include defeating the Xiongnu in the north, performing the Fengshan sacrifice at Wolf Juxu Mountain, establishing the Four Commanderies of Hexi, and Zhang Qian’s missions to the Western Regions… While these achievements were certainly remarkable, they came at an enormous financial cost. Moreover, once government spending begins, it becomes difficult to curb, even leading to unnecessary waste. Normal fiscal extraction methods were far from sufficient to support Emperor Wu’s grand ambitions; consequently, the government reached its hand into resources, prices, circulation, and private wealth—

In monetary policy, the state sometimes introduced deer-skin currency, and at other times issued white-metal coins; currency credibility was repeatedly impacted, and the public’s value expectations for their currency wavered repeatedly.

In taxation policy, suanmin (a property tax levied on merchants) and gaomin (informing on others’ wealth to receive half of it) directly targeted private wealth, completely shattering merchants’ property rights expectations.

In industrial policy, state monopolies on salt and iron, and exclusive liquor sales, nationalized industries that could have been privately run, with the government directly entering the market as the largest operator.

In price policy, junshu (equal transportation) and pingzhun (price equalization) involved the state buying and selling goods, nominally to regulate prices, but in reality, prices were no longer merely supply-and-demand signals; they also had to serve the needs of national finance and warfare.

In labor and military service, a large amount of labor was withdrawn from production, and households’ continuous operational plans constantly faced disruption.

In the judicial and property rights spheres, harsh official rule and the informant system made people worry not just about market failures, but even more about failures stemming from policy changes, broken interpersonal relationships, or even incorrect political alignment…

These were all, in essence, overdrawing national credit. In the short term, the national treasury might have been full; but in the long run, slow variables and stable expectations were completely depleted. The inevitable result was that even superficial wealth could not be sustained.

The Book of Han’s Treatise on Food and Money records that in the early years of Emperor Wu, the common people were “self-sufficient and prosperous,” and the imperial treasury was full; however, in the later period, it evolved into “expenditure became increasingly excessive, the empire was exhausted, and people again devoured each other.” The Annals of Emperor Zhao in the Book of Han even more explicitly states that the situation Emperor Wu left for Emperor Zhao was: “the land within the seas was depleted, and the population halved.”

Perhaps some would say that for the foundation of the empire, any sacrifice made by the populace was worthwhile. However, was the cost of halving the population truly worth it? Although the Xiongnu continuously harassed the borders during the Reigns of Wen and Jing, they did not pose an absolute security threat to the empire. To quote Han Anguo, the Grandee Secretary: “Fighting a thousand li away, the army gains no advantage. Now the Xiongnu possess swift warhorses and the hearts of beasts; they move like birds, difficult to capture and control. Acquiring their land does not suffice to expand our territory, possessing their people does not suffice to strengthen us… Attacking them is inconvenient; it is better to seek a marriage alliance.” Of course, this is not to argue that the ‘heqin’ (marriage alliance) policy was the best option, but the Han empire could have entirely adopted a proactive defensive strategy, instead of launching vast expeditions into the northern deserts, expending enormous military resources.

Furthermore, were these measures truly for the foundation of the empire? According to records in the Records of the Grand Historian’s Treatise on Fengshan and Treatise on Price Equalization, and the Book of Han’s Biography of Gong Yu, the money Emperor Wu spent outside of war, and even directly on personal enjoyment—including palaces, imperial tours, Fengshan sacrifices, seeking immortality, mausoleums, and imperial workshops—was by no means scattered waste, but constituted another long-term drain on imperial finances. The Grand Master Jí Àn once openly criticized Emperor Wu as “inwardly full of desires, outwardly feigning benevolence and righteousness,” which can be considered an accurate assessment.

Today, whenever Qin Shihuang and Han Wudi are mentioned, they have become a source of pride for many in China—yet, their contemporaries, from direct descendants to the bureaucratic elite and common people, generally held them in low regard.

In short, Emperor Wu’s grand achievements not only drew from the accumulations of the Reigns of Wen and Jing but also squandered that entire family fortune. If Emperors Wen and Jing had spirits in heaven, they would surely regard Emperor Wu as a prodigal son.

Slow Variables in a Global Context: From Rome to Modern Britain #

The West also has similar lessons—

In 301 AD, Roman Emperor Diocletian, in an attempt to curb inflation and quell social discontent, issued the Edict on Maximum Prices, forcefully setting price caps on thousands of goods and wages. This resulted in goods diverting to the black market, a sharp decrease in supply, and the edict quickly becoming a dead letter.

Between 1557 and 1596, King Philip II of Spain, to support the Habsburg Empire’s perennial wars, repeatedly declared debt suspensions and restructured national debt. This repeatedly dealt heavy blows to royal credit, leading European financiers to re-evaluate Spain’s credit risk.

In 1971, US President Nixon, to curb inflation and stabilize short-term public opinion, implemented wage and price freeze policies. Although superficial inflation was temporarily suppressed, price signals were distorted, followed by market shortages and a sharp rebound in inflation.

In 2022, the UK Truss government, in an attempt to quickly stimulate growth, introduced a “mini-budget” and large-scale tax cuts that lacked credible fiscal backing. This resulted in violent fluctuations in the pound’s exchange rate and the UK government bond market, the pension system nearly collapsing, and the Bank of England being forced to intervene to stabilize the market…

However, later Chinese rulers generally regarded Emperor Wu of Han as a negative example, drawing lessons from him.

For instance, Wang Anshi’s reforms, aimed at helping the government extract resources, were immediately recognized as dangerous by his contemporaries. Sima Guang, Han Qi, and others condemned Wang Anshi for “seeking profit” (征利) and “promoting profit” (兴利). Wang Anshi, knowing their implications, quickly retorted: if it were like Sang Hongyang (who managed finances for Emperor Wu of Han), “monopolizing all the wealth of the realm to serve the ruler’s private desires,” that would be called promoting profit; but I aim to curb annexation and aid the poor and weak, so how can I be called a promoter of profit?

However, once the label “Sang Hongyang” was attached, Wang Anshi found it difficult to shake off its influence. He himself thus became a symbol of sorts. Later, when Zhang Juzheng amassed wealth for the Great Ming, some accused him of being like Wang Anshi.

The Qing dynasty, summarizing the lessons of dynastic rises and falls, directly adopted a silver standard for its monetary policy, and even avoided complex fiscal tools, striving to maintain the posture of a “small government.” The Kangxi Emperor’s reign even directly declared, “In prosperous times, as the population grows, no additional taxes will ever be levied”… Thereafter, even when facing the Taiping Rebellion, and even needing to pay enormous indemnities, the Qing dynasty merely raised funds through salt taxes, customs duties, likin, loans, and even selling official posts and titles—yet it consistently dared not exceed the fixed quotas for land and poll taxes.

Because if you deeply understand history, you will profoundly grasp the temptation of fast variables and the importance of slow variables.

The Boundaries of Government: Builder, Not Destroyer #

How many responsibilities should the government undertake? Scholars have differing views on this.

Some scholars argue [4] that the government should merely maintain slow variables and provide a low-entropy operating environment. More scholars might believe that the government should also undertake tasks that the market itself struggles to accomplish effectively—such as education, healthcare, basic scientific research, public health, infrastructure, environmental protection, standard setting, etc.—the common characteristic of these tasks is their significant positive externalities, but due to a lack of good short-term profit prospects, the market often lacks sufficient internal drive.

For instance, the Italian-born economist Mariana Mazzucato, currently teaching in the UK, argues that government can also “shape and create markets” [5]. Technologies like the internet, GPS, touchscreens, and voice recognition were not entirely developed by private capital taking sole risks in their early stages; rather, the state, through research funding, military projects, university systems, public procurement, and long-term patient capital, first paved the way.

Other scholars argue that latecomer countries attempting to industrialize solely through the market might face significant difficulties, as they often lack sufficient capital and a mature enterprise base—in such cases, the government should intervene directly, invest, and even establish factories as a “cold start” model [6]… You can enter the field as a player, but only if the playing field itself doesn’t yet exist.

I believe all these paths are viable. But the core key is that, regardless of the approach taken, the government must first be a builder of slow variables, not a destroyer.

A highly counter-intuitive principle is this: if a government respects slow variables and refrains from arbitrary levies, its war-making capacity will not weaken; in fact, it may even strengthen [7].

For example, after the Glorious Revolution of 1688, Britain, through a series of institutional arrangements, limited the monarchy’s ability to arbitrarily levy taxes, confiscate property, and violate contracts; the king’s power was caged, but the state’s power was not weakened because of it! Instead, the British government was able to borrow more funds at lower interest rates, opening up public credit as another major artery alongside taxation [8].

In reality, there is always immense surplus wealth hidden among the populace; the key lies in how to channel these funds for government use. If your method is forced requisition or excessive currency issuance, you harm slow variables, people will cease investment and production activities, and the economy will be severely damaged; however, if you choose to borrow, wealth-creating activities will continue, and after the war, society can still function normally, and people can live and work in peace and contentment.

The difference between the two lies in whether creditors believe this government will uphold property and debt contracts and fulfill its promises.

A government that is constrained and cannot arbitrarily default is, paradoxically, a more powerful government.

Governing by Non-Action (Wu Wei): The Ultimate Wisdom of Government #

Perhaps it was the Chinese who first put forth the idea that government should protect “slow variables.”

Doesn’t Laozi’s Tao Te Ching state, “I do nothing, and the people transform themselves,” explaining that the government, as a platform, should maintain slow variables and leave the vitality of fast variables to the people?

Doesn’t the saying, “It is because it does not contend that no one in the world can contend with it,” admonish that a platform operator should not compete for profit with its participants?

Doesn’t the discussion, “Is it not because it is selfless that it can fulfill its self?” imply that a constrained government can, paradoxically, wield greater power?

The original meaning of “governing by non-action” (wu wei er zhi) does not mean that the government does nothing; rather, it means that the government should adhere to its own level: not competing for profit with the people, not competing for business with merchants, not personally entering the market as an arbiter and operator, not abusing power to rewrite price signals, and not appropriating society’s space for trial-and-error and self-evolution.

The government should not be the protagonist on the stage.

It should be the maintainer of lighting, fire safety, order, acoustics, and emergency exits in the theater.

Without it, the play cannot proceed smoothly. But the audience doesn’t pay attention to it every day.

Notes

[1] Jeremy Edwards & Sheilagh Ogilvie, “What lessons for economic development can we draw from the Champagne fairs?” Explorations in Economic History, 2012.

[2] North, Douglass C. “Institutions.” Journal of Economic Perspectives 5, no. 1 (1991): 97–112.

[3] Walker, Brian, C. S. Holling, Stephen R. Carpenter, and Ann Kinzig. “Resilience, Adaptability and Transformability in Social–Ecological Systems.” Ecology and Society 9, no. 2 (2004): art. 5.

[4] 比如说，George Gilder, Knowledge and Power: The Information Theory of Capitalism and How It Is Revolutionizing Our World (Regnery Gateway, 2013). 另见《精英日课》第五季，《后资本主义生活》5：低熵的舞台

[5] Mazzucato, Mariana. The Entrepreneurial State: Debunking Public vs. Private Sector Myths. London: Anthem Press, 2013.

[6] Gerschenkron, Alexander. Economic Backwardness in Historical Perspective: A Book of Essays. Cambridge, MA: Belknap Press of Harvard University Press, 1962.

[7] 徐瑾，《货币简史：从贝壳金银到数字货币》（2024）。另见《精英日课》第六季：货币是信用的游戏

[8] North, Douglass C., and Barry R. Weingast. “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England.” Journal of Economic History 49, no. 4 (1989): 803–832.