EC104: World Economy- History and Theory

Lecture 2.1: Reading Quick Links

16) Allen 17b) Broadberry

17c) B-berry & Gupta 21) Pommeranz
Topic 2: The Great Divergence

Lecture 2.1: When was the Great Divergence?

RECOMMENDED READING
16) *Allen, R., et al (2010). Wages, prices and living standards in China,
1738-1925: in comparison with Europe, Japan and India, Economic History
Review 64: 8-38.
17b) Broadberry, S. (2013) Accounting for the great divergence. Economic
History Working Papers, 184/13. London School of Economics and Political
Science.
17c) *Broadberry, S. & Gupta, B. (2006). The Early Modern Great
Divergence: Wages, Prices and Economic Development in Europe and Asia,
1500-1800, Economic History Review 59: 2-31.
21) Pomeranz, K. (2000). The Great Divergence: Europe, China, and the Making of the Modern World Economy, Princeton:
Princeton University Press. Chapter 1

Introduction to the Great Divergence

By 1850, Europe, especially the United Kingdom and the Netherlands, were clearly richer and more technologically sophisticated
than any country in Asia. It is clear that this has not always been the case. In many historical periods, Asian countries have been
relatively prosperous compared with their European counterparts, notably China during the Song Dynasty (960-1278 CE). This
emerging gap in incomes and technology between East and West, as well as North and South, is known as the Great
Divergence.

Needhams Puzzle

Joseph Needham, in the book series Science and Civilization in China (1954-onwards) demonstrated that, at least by 1400 CE,
China was technologically sophisticated and innovative, and perhaps ahead of Europe in many areas. He then posed the famous
Needham Puzzle: Why was China so advanced, and if it was, why did it not then experience an industrial revolution?

In order to assess why China fell behind, and why Northwestern Europe surged ahead, we need to know when this happened,
and to what extent. Different schools of thought have proposed different timings, which then change their preferred causal
explanations. Unfortunately, data on incomes and wages become increasingly difficult to reconstruct as we go further back in
history. Attempts to measure the when of the Great Divergence thus hinge on using better and more comparable data.

The California School

While there have always been economists commenting on the relative development of China and Europe going back at least to
Adam Smith, the modern debate over the timing of the China-Europe gap began with Ken Pommeranzs The Great Divergence
(2000). Pommeranz, and later other members of the California School including Bin Wong, Jack Goldstone, and Andre Gunder
Frank. Their thesis is generally that Europe and China had comparative levels of technological and economic development until
the late Qing dynasty, circa 1800. This late divergence thesis implies that we should be searching for causal stories about
divergence among factors present during the late 18
th
and 19
th
centuries: the industrial revolution and the first globalization,
rather than in long-run features of Chinese culture or institutions.

Revising the Revisionists

The claims of the California School, however, are backed up mostly by anecdotal evidence about technology and development,
because until recently, information about real incomes and wages for earlier periods was scarce for Europe, and entirely
unavailable for Asia. (Angus Maddisons guesstimates were helpful for provoking debate, but rested on poor to non-existent
empirical evidence.) Recent work by scholars such as Allen, Broadberry, Gupta, van Zanden, Ma, and others have tried to
EC104: World Economy- History and Theory

provide more concrete estimates of wages, incomes, and living standards, in order to settle debates about the timing and extent
of divergence. They have largely come down on the side of falsifying the California School interpretation, and showing that some
regions of Europe were clearly ahead of China even as early as 1400, and that Europeans had higher wages, more and better
access to manufactured goods, had higher levels of urbanization, long before the late Qing dynasty and the industrial revolution.

Wages (in grams of silver per day)

The first and easiest way to measure the gap in welfare is to examine wages converted into a common commodity, such as
silver, which was traded internationally. These show that Chinese (Beijing) wages in the 18
th
century were well below those of
London and Amsterdam, although they were comparable to poorer parts of Europe such as Milan or Leipzig until the 1840s.


Source: Allen et al., (2011), Wages, prices, and living standards in China, 17381925: in comparison with Europe, Japan, and
India, Economic History Review, Vol. 64, 8-38.

Real Wages and Welfare Ratios

Silver wages only tell half the story. To evaluate standards of living, we need real wages: nominal wages deflated by the price of
the goods purchased. To obtain this, Allen et al. (2011) calculate the price of nutritionally-equivalent subsistence baskets of
goods for the various cities, in local prices. They then divide the silver wage by the cost of the basket, which yields a welfare
ratio, expressing how many times a worker could buy the subsistence basket for themselves and their families with the wages
they could earn. (Note: In many Asian countries, this ratio is often less than one!)

EC104: World Economy- History and Theory


Source: Allen et al., (2011)







Silver Wages vs. Grain Wages

The units we use to measure relative wages
matter a great deal to our evaluation of
standards of living, especially when prices
diverge between regions. By asking how much
grain a worker can purchase with their wages,
we get a better result of nutritional standards
of living. However, as workers move further
from subsistence, they purchase fewer
nutritional goods, and more manufactures and services (this is known as Engels Law). Broadberry and Gupta (2006) measure
both grain and silver wages for China and Europe, and find that, while grain wages are fairly close, indicating roughly equivalent
standards of living in terms of nutrition, silver wages are not. European workers are paid far more in terms of silver, which
indicates a higher standard of living in terms of manufactured goods and access to services. This indicates an earlier divergence
than the California School suggests.


GRAIN WAGES (kg/day) vs. SILVER WAGES (g/day), SOUTHERN ENGLAND
AND YANGZI
Year China
Silver
China
Grain
England
Silver
England
Grain
China/Britain
Silver
China/Britain
Grain
1550-1649 1.5 4.5 3.8 5.2 39% 87%
1750-1849 1.7 3 11.5 7.8 15% 38%
Source: Broadberry and Gupta (2006)
GDP PER CAPITA (1990 GK$)
Year Holland/NL England/GB Italy Japan India China
730

483

900

534

980

1247
1020

1518
1050

1458
1090

754

603

1204
1120

560

1063
1150

1270

759

EC104: World Economy- History and Theory

Income per Capita

A more thorough (but more difficult) way to
measure standards of living is by calculating real
GDP/capita. Broadberry (2013) has assembled
the most recent comparable estimates for
incomes for various countries in Europe and
Asia. The results are not only suggestive of the
timing of the Great Divergence, but also that
there have been various reversals of fortune
and little divergences, where countries within
regions rose and fell in relative incomes prior to
the industrial revolution.


The Great Divergence and the Little Divergences

Broadberrys results suggest that the Great Divergence likely dates back to 1400-1500, when British and Chinese incomes were
relatively similar, and then diverge sharply after 1650. However, there are also several other notable features of this new
evidence. First, China was, during the Song dynasty, a wealthy region of the world, with incomes about as high as Britain in the
late 1600s. Second, Britain (1000-1650) was not rich, compared with Renaissance Italy or the Netherlands during the Golden
Age, and only became the global income leader in the mid-19
th
century, following the industrial revolution. China, meanwhile,
became poorer over time, losing over a third of its GDP/capita during the Qing Dynasty. Within Asia, China falls behind Japan,
which surges ahead during the Tokugawa period.

1300

755 1482

1400 1245 1090 1601

960
1450 1432 1055 1668 554

983
1500 1483 1114 1403

1127
1570 1783 1143 1337

968
1600 2372 1123 1244 791 682 997
1650 2171 1110 1271 838 638

1700 1403 1563 1350 879 662 841
1750 2440 1710 1403 818 573 685
1800 1752 2080 1244 876 569 597
1850 2397 2997 1350 993 556 594
Sources: Broadberry (2013), Broadberry et al. (2014)
EC104: World Economy- History and Theory

Lecture 2.2: Reading Quick Links

17a)Brandt et al 19) Hobson
Topic 2: The Great Divergence

Lecture 2.2: Why did China Fall Behind?

RECOMMENDED READING
17a) Brandt, Loren, Debin Ma, and Thomas G. Rawski. (2014). "From
Divergence to Convergence: Reevaluating the History behind China's Economic
Boom." Journal of Economic Literature, 52(1): 45-123.
19) Hobson, J. (2004). The Eastern Origins of Western Civilisation, Cambridge:
Cambridge University Press. Chapter 1

Explaining the Great Divergence

There are many possible explanations for why China might have fallen behind Europe in economic growth. The topic tends to be
a mirror in which scholars see their preferred explanation for economic growth more generally as being the cause of the Great
Divergence. Nevertheless, we can see the outlines of several factors that almost certainly played some role in causing the
divergence, even if there is disagreement as to the importance of each factor.

Classical Explanations: Smith and Malthus

Both Adam Smith and Robert Malthus examined the question of why China was poorer than Britain, each within the framework
of their own theories. Neither Smith nor Malthus believed in economic growth in the modern sense, wherein each generation
would be wealthier than the last. Both believed in the emergence of an equilibrium steady-state for the economy. For Smith,
differences in the wealth of nations could be explained by laws and institutions. Good laws and easy taxes would lead countries
to make the best use of their productive potential through the expansion of markets. Smith recognized that China had been
wealthy in the past, but had stagnated.

China seems to have been long stationary, and had probably long ago acquired that full complement of riches which is
consistent with the nature of its laws and institutions. But this complement may be much inferior to what, with other
laws and institutions, the nature of its soil, climate, and situation might admit of. Adam Smith, Wealth of Nations,
Book 1, Ch. 9

Malthus also made an argument about the causes of Chinese living standards. As seen in earlier lectures, Malthus believed that
population growth would erode any economic gains, and that preventative checks induced by moral restraint were the only
way of keeping wealth permanently above the level of subsistence. China was, for Malthus, the ultimate case of positive checks,
where death rather than restraint kept the population at its fixed level of poverty. About China, he wrote that it was

Where a country is so populous in proportion to the means of subsistence that the average produce of it is but barely
sufficient to support the lives of the inhabitants, any deficiency from the badness of seasons must be fatal. (Ch. 7), and
China [is] more populous, in proportion to its means of subsistence, than perhaps any other country in the world. (Ch.
12) T. R. Malthus, An Essay on the Principle of Population

China and Malthus

To test whether Malthus was correct about China, we need to understand how the population of China changed over time.

EC104: World Economy- History and Theory

Population of China (millions)


The evidence suggests that in general, population growth in China was not subject to positive checks, since this is incompatible
with a rapid and sustained increase in population. There are sudden drops in population, mostly associated with dynastic
change, as during the Manchu (Qing) conquest of China in 1644. Nevertheless, the stagnation and even slow decrease of income
per person as seen in the last lecture suggests that population growth was indeed keeping Chinese standards of living down to
levels approaching subsistence, as Malthus envisioned. Nevertheless, even if population growth supressed incomes, it does not
necessarily resolve the question as to why China was unable to escape the Malthusian trap, when Europe was successful.

China and Institutions

In order to understand why China was not able to achieve sustained economic growth, despite having been relatively rich during
the Song dynasty, we need to understand the evolution of Chinese economic institutions. Between the Song and Qing dynasties,
China underwent substantial transformations in the ways in which the central government administered the economy, collected
taxes, organized trade, and managed agriculture. To assess whether Adam Smith was correct about an institutional origin for
low Chinese incomes, we need an account of these changes over time.

China and the Fiscal State

One of the key institutional structures in any economy is the way the government obtains its resources, and how it uses them.
The Chinese state had two overriding needs: Food, and defence. Population pressures and the need to protect the state from
domestic insurrection explain the urgency of securing adequate food production. The constant presence of hostile groups,
notably the steppe nomads in the north (Jurchens, Mongols, Khitans) meant that the state needed to raise armies and build
fortifications, or pay tributes to ensure security. Both of these functions required substantial tax revenues. The system of
taxation used to raise these funds, goods, and labour for the provision of these resources shaped the economic institutions of
the country.

Before the Tang dynasty (618907), the state delegated agricultural production to local aristocrats in exchange for forced labour
service, which was used for construction and defence. By the Song dynasty (960-1279), Chinas fiscal state had evolved into a
sophisticated system of paper money, state monopolies, land and trade taxes, which were used to pay the enormous tributes
required to keep the Imperial state secure without a large standing army. The conquest of the Song by the Mongols under Kublai
Khan, leading to the Yuan dynasty, led to the slow abandonment of this system. Militarily, the position of the Chinese state
improved, with few external threats. Faced with an ever-increasing population, the Imperial state allowed tax revenues fell to
ever lower levels, supported by the Confucian doctrine of qingyao bofu, roughly translating to low taxes. By the 1800s, the
Chinese state faced serious difficulties providing the public goods (defence, infrastructure, contract enforcement) that were
prerequisites for modern economic growth. Although they had overseen an enormous population increase, incomes per person
fell slowly but persistently from the Song peak until the end of the Qing dynasty.

China and Agriculture

EC104: World Economy- History and Theory

Sustaining the population increase between the late Tang (about 80 million) and the late Qing (about 400 million) required
tremendous innovation in agricultural methods. Some of the increase was due to the expansion into new agricultural land. The
switch from dry farming in the north of China to wet rice farming in the lower Yangzi, made possible in part by the renovation of
the Grand Canal under the Yongle emperor, and partly by the change in the global climate known as the little ice age, which also
allowed for the multiple cropping of rice. Where possible, the state supported other measures to increase yields and available
land, including irrigation and the reclamation of marginal land. The introduction of new world crops, notably corn and sweet
potatoes, allowed previously unusable lands to be brought into production, and provided food security by diversifying the crop
base. Overall, yields increased by 75% during the Ming and Qing dynasties, suggesting substantial innovation and
experimentation in order to keep food production at high levels.

China and Trade

Chinese trade during the Song dynasty was substantial, with an export base of tea, silks, and porcelain, and a considerable naval
presence. The height of Chinese naval expansion occurred under the Yongle Emperor, whose right-hand man Zheng He was sent
on extensive voyages of exploration (1405 to 1433) to display Chinese imperial power and to extend the network of states
paying tribute to the Emperor. At this time, Chinas naval power was likely a match for that of European powers, and Zheng Hes
fleet sailed as far as Ethiopia. However, rather than establishing a lasting trade or tributary relationship with the region and
potentially beginning an era of Chinese colonialism, the Chinese state abruptly ended all treasure fleets with the rise of the
Hongxi Emperor. Having been supported by the Confucian bureaucracy in a power struggle against Zheng He and the eunuchs,
and seeking to reform the Chinese fiscal system, the Hongxi Emperor not only ended all exploration, but cancelled much of
Chinas foreign trade. The state destroyed both the ships and the existing archives of writings about the expeditions in order to
prevent future treasure fleets, leading to a decisive retreat from foreign trade and naval power that was never reversed.

Conclusions

We can see merit in both the explanations of Smith and Malthus in explaining why China fell behind. However, these
explanations must be understood within the context of Chinese history. The institutions that governed the Chinese economy
reflected the pressures the state was under at different historical periods, and also shaped the future growth (or stagnation) of
the economy.