George Macartney (1737-1806) was perhaps the Westerner most famously rejected by the Chinese, but Hank Paulson and Ben Bernanke are making a good run for his record. Earl Macartney, the first British envoy to China (then, as now, one of the two biggest economies in the world) led a Paulson-sized delegation to the Qianlong Emperor in 1793. His man-of-war had 64 cannon, demonstrating the might of the First Industrial Revolution to a country that had in fact invented gunpowder. He refused to kowtow, just as Mr. Bernanke declined to admit the existence of the terrifying fiscal deficit, the near absence of savings in the United States, the waste of two trillion dollars in Iraq, the crumbling American infrastructure, the growing income inequality in the United States.

He demanded trade reform, like Ambassador Schwab just did (with her office nearly neglecting China for the previous six years). He demanded open markets, which in that year meant the export of high-value high-profit goods that would consume China's savings, just as Mr. Bernanke insisted that Chinese should lower their savings and buy more objects and services, especially from the West and especially including those that carried royalties for intellectual property.

The Qianlong Emperor (1711-1799) refused all Macartney's entreaties. He left a note on a chair saying that China had no need for the West's things. China today is not quite so undiplomatic, or unsophisticated about the advantages to be obtained from what is now the Third Indusrial Revolution going on in the West. It agreed to buy four Westinghouse nuclear reactors. Of course half the value of the contract will be performed in China, or in other words, perhaps as many as the equivalent of 50,000 new jobs will be created in China, or about ten times as many as in the United States. Moreover, China was said to have been "very demanding" as to the technology transfer: plainly, the Chinese intend in this area as in others to insist on "self-innovation" in all high-technology products.

But based on what has broken into the press so far, the Chinese granted the Paulson man-o-war nothing it sought. And what they thought of Mr. Bernanke's lecture, no one can yet know. But parsing that lecture gives a good sense of how weak is the American case, much weaker than Macartney's, and how wrong-headed is the current Administration's focus in terms of responding to China. The fault, folks, lies not in China, but in ourselves, as the text of Mr. Bernanke's speech reveals, without admitting.

The Fed Chair opens by acknowledging that on a currency-adjusted basis China has the second largest economy in the world. What this means is that the world has to kowtow, to some degree, to China as the source of taste, design direction, intellectual property, export power, lending power, and eventually geopolitical power. Not right now, but surely over the next 20 years Americans will not feel so insouciant about giving the kind of imperial lecture that Mr. Bernanke went on to provide the Chinese on December 15, 2006. I already am where we all will be: when I lectured, to a far smaller audience, at Beijing University last month, I discussed what America needed to do, as outlined in my "Shadow" book, in response to China, and not what China needed to do to make up for America's self-inflicted problems. But I'm not the Fed chair, who is now still the world's single most important governmental force, at least as to economic matters.

Mr. Bernanke then told the Chinese that the "single most important cause of the ongoing expansion in productivity" in China since 1978 was "a greater reliance on markets." In fact China has a huge state-owned sector and its single party interferes in markets more than any other large country's government in the world. The communications sector, for instance, is almost entirely majority-owned by the state. The vast, cheap, almost inexhaustible labor force is brought from rural China to the doorstep of commercial firms by a conveyor belt of state-sponsored and state-encouraged transportation, building, and financing that beggars the scale of the totality of historical immigration into the United States. However, Mr. Bernanke really meant what he delved into in the next sentences: the Chinese government doesn't set many prices. In fact, it sets lots of prices, especially for basic services, and so when he said 95% of retail prices are market-set he probably wasn't giving a weight-adjusted figure. There are lots of noodles that are market-priced without moving the total meter a great deal. In any case, there's little doubt that market pricing, while laudably different from stultifying Soviet-style government pricing (such as occurs in any state of the United States for telecommunications or energy), is an important yet minor contributor to China's productivity gains, compared to massive investing and extraordinarily vigorous competition in every conceivable market. You can have market pricing, but without new investment and competition it won't produce great gains in standard of living. (That was the reason for the Microsoft lawsuit.)

The Fed Chair then told his audience that "modern economies...are too complex to be managed...on a centralized basis." This might have come across as a little odd, since he is the number one centralized manager of the global economy, but again he only meant, apparently, to refer to that old bugaboo of government price regulation. Of course that has nothing to do with the issues of today, which are in fact managed centrally, especially including currency rates, fiscal imbalances, and trade barriers.

Mr. Bernanke explained to the Chinese that in their country as in the United States, small and medium sized enterprises are "an engine of job creation." In fact, about a third of American employees work at firms that number less than one tenth of the total number of American firms - about 5,000 out of 6 million hire the key third who are high-paid and intensively productive members of the American work force. And the reason China's firms compete vigorously against American firms is not because of the 11 million (or so) out of 12 million Chinese firms that sell noodles and such, but because every major American employer has or will have in short order a few or (soon) many competitors out of China. It is firm-to-firm match-ups, as in the case of the NFL, that determine who wins or loses in global competition, and the undiscussed advantages of China in this competition have little to do with currency valuation and much to do with low wages, foreign investment, and vigorous domestic competition as opposed to an increasingly rigid, change-adverse American economy. See my book.

Mr. Bernanke was correct to mention, even en passant, the importance of "entrepreneurship." Overall, by the way, his speech felt written by a committee, which may well have included alleged China hands in this China-weak Administration. If so, Mr. Bernanke should in the future insist on doing his own work exclusively. I don't know how the work got done. But it's not that I worry about the independence of the Fed: that's sort of a polite fiction; it's the quality of the work that I am sure Mr. Bernanke can protect only by doing it all himself.

The Fed Chair noted that "globally-engaged firms...helped..foster productivity growth" in China. Well, yeah, given that the vast majority of China's export boom into the United States comes from foreign investment into China. That's the same corporate profit pool that isn't getting tipped into the American economy, and the reason is not the risk-return ratio as much as this Administration's silent erasure of market-opening antitrust laws or any other policies to promote open markets and new entry and new investment into American domestic markets. Obviously firms want to earn American money; the proof lies in the continued bidding on American treasuries. But they don't want so much to invest in new opportunities to earn money from entrepreneurship in America. That's a huge problem and the most salient illustration is in energy, where new investment is sadly lacking. That is what Secretary Paulson and Mr. Bernanke are probably saying to each other back home in Washington, and I don't blame them for not telling the Chinese -- but still...

Mr. Bernanke lectured the Chinese about misallocating their capital. This is a persistent habit of economists in every country, any why economists have a difficult time giving governments or firms strategic advice, since strategy often requires short-term losses and the creation of public goods, which appear as inefficient allocations in many models. The Chinese may make mistakes in the aggregate in allocating capital but it's hard to argue with their success of the last 30 years, in which the government has repeatedly boosted investment in non-market and seemingly inefficient ways. An example is the creation of the world's largest fixed line and wireless phone companies, measured by customers, by using, among other tactics, the army to build infrastructure.

In building up to his (deleted) assertion that the RMB's undervaluation is an "effective subsidy" -- an invitation to lawsuits, which one would have thought this Administration did not favor -- Mr. Bernanke suggested the Chinese should give "greater autonomy to the central bank" in order to insulate it from "short-term political concerns." It's hard to imagine a big country where politics is less short-term than in China, and of course the one-party state and imperial tradition combine to produce that attitude. Chou En-lai said it was "too early" to tell if the French Revolution was a success, for goodness's sake! Moreover, the fusion of the Chinese central banking decisions with the export and fiscal policies of the state seems to work out rather well for the Chinese; the lack of political authority for the Fed is no advantage, by contrast.

One of the particularly odd portions of Mr. Bernanke's speech was his suggestion that Chinese should save less and that they saved too much because of the "thin 'social safety net'" -- meaning little health insurance, pension plans, and education subsidies by government. So China, in other words, reflects the fully privatized vision of a truly uncompassionate government, just like Mr. Greenspan (that crafty libertarian) and Mr. Bush (that Goldwater Republican) want for America. But Bernanke says that China needs, he almost said, an FDR New Deal. There's no accounting for taste.

At the very ending paragraph, at last our emissary from the Fed said the United States needs to increase "its own rate of national saving" and to avoid "protectionism." Of course the United States needs to stop selling government debt by the shipload to China. It needs to stop burning billions in the deserts of the Middle East. It needs to open its own markets to competition from domestic start-ups as well as foreigners. It needs to provide high quality and low cost post-secondary education, health care to all, wage insurance, individualized elementary school testing and education of each according to their needs and up to their ability. It needs to do all these things in order to have free trade work out well for all Americans and not just for the favored few who, frankly, really don't need to do still better than everyone else. Our saving rate and tariffs are just two of a long list of necessary reforms.

The Chinese know what America needs. Most Americans know what America needs. Our emissaries on this enormous, strange, and possibly failed (it's too early to say) mission probably also know that what really needs doing ought to be done right here, within the Beltway, to make America vigorously competitive for decades to come. Because if we take the right domestic actions, China can grow boundlessly without threatening the American Dream; and if we do not take those steps, China's growth will shrink American hopes forever. It's up to us, not them, to choose our future.