Wenkai He's complex and impressive study takes on a classic subject with a novel approach. It traces the emergence of the modern fiscal state, an important institutional innovation that enabled governments to centralize tax collection and use revenues to borrow from capital markets on a long-term, ongoing basis. Compared to the traditional fiscal state, the modern fiscal state collected taxes efficiently and effectively. More importantly, sizeable and stable revenues increased state capacity to manage economies and stimulated the development of long-term credit instruments. The modern fiscal state thus served as “a crucial stage in the evolution toward the credit-based modern economy” (p. 22). Yet it did not emerge everywhere and faced many obstacles militating against its development, since maintaining decentralized tax collection was simply cheaper and more convenient in the short-run.
How, then, did this important institution emerge? To answer this question, He employs an “eventful approach to historical causation [that] integrates agency, structure, and contingency into one coherent causal story to explain the creation of new institutions through an uncertain and interactive historical process” for three historical cases—England between 1642 and 1752, Japan between 1868 and 1895, and China between 1851 and 1911 (p. 180). He's comparative analysis seeks to avoid teleology by highlighting how uncertainty created multiple options for state actors while showing how socioeconomic structure informed those options and ultimately constrained the trajectory of institutional development. Moreover, it challenges prior research in history, economics, political science, and sociology that have postulated other factors—such as warfare, industrialization, elite conflict, or representative government—as being crucial to the rise of the modern fiscal state.
Divided into six chapters with an introduction and conclusion, He's study begins by laying out the “sequential features of institutional development” that make the three cases suitable for comparison. First, all had a commercial economy with integrated financial networks to facilitate the extraction and transmission of tax revenues—the fundamental infrastructure for a modern fiscal state. Second, all experienced decades of fiscal problems—the 1600s to the 1630s for England, the 1820s to the 1860s for Japan, and the 1820s to the 1840s for China—that existent institutions could not adequately resolve. Furthermore, major disruptive events capped off these periods of difficulties—the English Civil Wars in 1642, the Meiji Restoration in 1868, and the Taiping Rebellion in 1851. Third, as these events exacerbated fiscal pressures, they also forced state actors to experiment with new approaches to public finance.
During their respective episodes of institutional development, all three possessed the appropriate socioeconomic conditions. Yet while a modern fiscal state emerged in England and Japan, it did not in China. Why? According to He, an important causal mechanism present in the first two cases but not the third was a credit crisis: an “unintended consequence” stemming from “the excessive issue of fiduciary credit instruments such as bills of borrowing unfunded by tax revenue or non-convertible paper notes” (pp. 45–46). The credit crisis served as the carrot and stick inducing reform. First, because the central government issued the credit instruments, it was on the hook for the debt. Bearing all the financial risks for their redemption, the center could not shift the debt onto local governments and thus had an incentive to centralize tax collection. Second, because the severity of the credit crisis was so serious, it limited the set of policy choices available to state actors, including writing off the obligation and thereby defaulting.
Subsequent chapters look at the individual paths of fiscal reform. In England, the massive debts Parliament incurred to fund wars during the late seventeenth and early eighteenth centuries were the credit crisis that made centralized tax collection an imperative (chapter 2). In Japan, the unsecured paper notes the Meiji government issued to fund the Restoration served a similar impetus, pushing leaders to centralize tax collection (chapters 3–4). In China, however, no similar credit crisis occurred after the Taiping Rebellion, since unsecured paper notes issued were limited in circulation and quickly withdrawn (chapter 5). The Qing government, according to He, had the capacity to create a modern fiscal state during the late nineteenth century, as demonstrated by its successful repayment of the Sino-Japanese War indemnity. It did not, however, have the incentive or the urgency to centralize tax collection and continued to rely on interprovincial silver transfers to match revenues and spending in different regions (chapter 6).
He's sweeping synthesis will leave readers with lingering questions. Some will wonder to what degree He's tight comparative framework—which fit the cases of England, Japan, and China well—can accommodate other cases. Indeed, how did the modern fiscal state emerge in other contexts? Others will note that He's deep description leaves the analysis of individual cases rather self-contained. Another intriguing question is whether He's comparative methodology can trace the emergence of other institutions. Finally, economists might prefer a more quantitative approach that tests the efficacy of various causal mechanisms.
But this study will elicit such reactions because of its ambitious scope. It dares to ask big questions. It replies with a novel framework supported by rich research. It pushes specialists outside their comfort zones to wade into other fields and disciplines. It deserves to be read and debated.
