These authors provide an original perspective on the never-ending debate about the causes of economic divergence between Europe and China in the early modern period. Their analysis complements that of Kenneth Pomeranz in The Great Divergence: China, Europe and the Making of the Modern World Economy (Princeton, N.J.: Princeton University Press, 2000), which argued that China and Europe had comparable economies until 1800. Europe then surged ahead after 1800 because of contingent geographical factors, like the proximity of coal supplies to water in England and the availability of open land in New World colonies. By contrast, Rosenthal and Wong find key indicators of divergence in domestic institutions over a long time period.
Much of their analysis establishes negative results. They show that assertions of essential institutional differences between China and the West fail to fit inconvenient historical facts. They are particularly effective in demolishing arguments that seek the key to European superiority in secure property rights, formal court adjudication, credit contracts, or parliamentary assemblies. They use two approaches to show that institutional differences do not define permanent divergence and do not have easily definable economic effects. First, societies are heterogeneous and institutions are substitutable: depending on relative costs, including convenience, transaction costs, and scale, both societies could use a variety of formal and informal means to settle economic transactions. For example, both China and Europe used formal legal procedures, adjudication in courts, and informal ones, like mediation and kinship relations, but formal institutions predominated in Europe, while informal ones dominated in China. This was not a consequence of deep cultural differences but of the relative scale of transactions. Formal institutions worked better at short distances, whereas informal institutions worked better at long distances, since it was costly to travel to court. The large scale of the Chinese empire, compared to the smaller European states, meant that more trade occurred at long distances and informal institutions dominated, while Europeans specialized in shorter-distance trade and made greater use of formal adjudication.
Second, different institutions, like credit markets, could work efficiently for similar goals. Loans by native banks in China, at 5 to 10% per year, were roughly comparable to bank loans in Europe, so there was no obvious difference in interest rates when adjusted for the type of borrower, degree of risk, and term of loan. And yet, China still had fewer formal credit contracts than Europe. Does this mean that lack of credit impeded Chinese economic growth? Not necessarily, because informal arrangements through kinship relations, share partnerships, and other methods provided substantial credit where it was needed. European fragmentation and disorder favored banks and formal contracts; Chinese imperial peace favored informal arrangements, but both served the same purpose equally well. We might also note that Chinese merchants easily took up Western credit forms when they proved appropriate: Cantonese hong merchants invested in American land and railroads and British steamship companies, and also gave and received personal loans from their foreign counterparts. Once again, credit institutions turn out to be flexible, multiple, and not at all a determining factor in differences of economic performance.
It all comes down to scale and war. Early modern European history is primarily a story of unending war, while China's history is mainly a story of unified empires. Many others have pointed out this difference, of course, but Rosenthal and Wong derive new and surprising indirect effects from it. Industrialization is based on capital-intensive manufacturing located in cities. Manufacturing in pre-industrial Europe moved predominantly to cities to seek security. In relatively more peaceful China, manufacturers pursued lower labor costs in rural areas, developing labor intensive textile manufacturing facilitated by river transport routes in the lower Yangzi valley. The fact that industrialization was based on capital intensive manufacturing instead of rural putting-out systems was an unintended consequence of European warfare, which drove manufacturers into cities and later generated indigenous growth. But this was an unintended consequence of an essentially destructive activity.
European wars also had negative effects on public finance. The Chinese empires financed public goods long before Europe. Once again, the authors slay the specter of the all-powerful Oriental despot. Whenever possible, Chinese emperors endorsed light taxation, non-interference with markets, and greater agrarian and craft production, while their European counterparts had to raise ever higher taxes to prepare for ever more expensive wars. The large-scale development of ever-normal granaries, canals, roads and bridges, water conservancy works, and philanthropy in China contrasted with a much more privatized, less intensive development of these public goods in war-torn Europe. By disclosing the “lost modernities” of the mandarin regimes, in Alexander Woodside's terms, we gain a much more subtle interpretation of the interplay between state and society in both regions. Europeans could sometimes restrain their monarch's ambitions through the exercise of “voice” in parliaments, but more often the rulers devised new techniques for greater extraction. Chinese subjects used the “exit” option, including flight to frontiers or to the informal economy, to limit fiscal demands. Since wars were less frequent, the pressure to raise revenue was also less.
In my view, the authors' contrast is productive but overdrawn. We should not simply contrast peaceful China with warlike Europe, but examine different structures favoring different kinds of military activity. On the European side, continental wars between major states generally ended in the status quo ante bellum, with no economic gain. But expansion on the periphery, as in Russia, Spain, or England's Celtic fringe, could offer large profits, at least for some elites. The authors do not discuss in detail European colonialism, another byproduct of internal European wars. Even if the overall contribution of colonies to industrialization is disputed, some colonies certainly had some positive effects. And England, mainly peaceful after the late seventeenth century, relying on a naval force instead of heavy infantry recruitment, lies outside this model's assumptions.
On the Chinese side, many emperors like Yongle (r. 1403–24) or Kangxi (r. 1662–1722) in fact loved war, and imperial expansion often meant gains of territory, minerals, and expanded markets. Yet even bellicose rulers had to respond to scholarly criticism for unnecessarily burdening the people, so they had to find cheaper ways to wage war. But this was not just a Confucian emperor practicing benevolence. It was a “lock-in effect” of a low taxation regime. Chinese officials, whose local administration was underfunded, had to delegate much authority to local elites, and rulers chose indirect rule in much of the empire to save on costs. Expanding the bureaucracy would require higher taxes and generate resistance—voice as well as exit—from powerful local elites. Astute officials realized that instead of plundering the countryside, they could support commerce and military logistics together. They encouraged militia organizations under local elite control. They bought off and co-opted enemies where possible. Even the Ming Great Wall could be seen as a cost effective infrastructural investment that sent supplies to the frontier, increased commercial integration of the northwest, and offered trade benefits to Mongols across the border.
Although the authors paint with a broad brush, their insights are precise and nuanced. Their brilliant linkage between warfare and economic development will cause scholars to rethink many conventional assumptions. Their book is essential reading for anyone seriously thinking about the economic development of the modern world.
