Trade and empire before the Industrial Revolution
The Great Divergence
● GD is the difference in economic performance between China and Europe
○ China was more developed than Europe in 1000 (Song Peak) and had
greater inventions - paper, printing
○ Europe industrialised first, creating a gap by 1800
Measurement
● Silver wages suggest an early divergence (before the IR)
○ Silver wages - local wages divided by silver. Gives the amount of silver
that can be bought with daily nominal wages
○ Indian silver wages were 21% of English wages in the late 1500s
○ Early divergence due to institutional differences
■ Emphasis on commerce, productivity and urbanisation in Europe
● Grain wages suggest a late divergence
○ Grain wages - how many kgs of grain can be bought with a daily wage
○ Indian wages were 20% of English wages in the 1800s
○ Useful as grain is used by everyone
○ However - some countries (LDCs) have a CA in agriculture, reducing
the price of grain and increasing the grain wages
● Real wages tell us how much the nominal wage can afford
● Allen (2011) calculates welfare ratios - how many goods baskets a family can
buy
○ Barebones basket covers essentials - no improvement in SoL
○ European Respectability Basket allows for some comfort
Why
Different demographic regimes
● Europe had a delayed marriage pattern, a later age of first marriage and not
all women married (average age of 23-26, 1600-1850)
● China had younger universal marriage (average of 17-20, 1550-1930)
● China had a higher fertility rate and higher resource pressure
○ Asia remained Malthusian for longer
● Europe had higher wages due to preventative checks and higher labour costs
● More technology in Europe decreased the need for labour
Government formation
● Roving bandits create no incentive to produce > subsistence - surplus is taken
○ Bandits monopolise theft and become stationary, creating tax
● Stationary bandit is better than the roving bandit as they do not tax at 100%
, ● Lower taxes encourage production - generates more revenue than 100% tax
● Democracy increases production and competition - competing revenue down
● Challenging the autocrat decreases tax rates - increased competition
● China had a stable autocratic regime with few challengers
● Europe was fast transitioning to “democracy”
● Glorious Revolution started the transition to democracy following the English
civil war and exile of James II (1688)
○ Generated functioning credit markets and rising state capacity
○ Led to the division of powers and constrained the executive via the
independent judiciary - more democratic institutions and more revenue
The European Miracle
● European miracle - rise in GDP pc from the eve of the industrial revolution to
the mid 1700s (phase 2)
● Features of the European miracle:
○ Competing and decentralised states
○ Private institutions
■ Independent legal system, religious authorities, merchant class
■ Development of banking institutions
○ Late medieval commercial revolution increased trade and finance
○ Late medieval agricultural revolution - structural change and movement
away from agriculture
Phase 1: 1300-1600
● European revival of trade after the fall of the Roman Empire - Venice, Genoa,
Florence
● Technological dominance in shipping / commerce
● State involvement
○ Shipbuilding - naval defence for merchant’s ships in Venice
○ Organisation of trade convoys for safety
● Institutional quality and reduction of transaction costs
○ ‘Democratic’ governance, political and legal institutions, property rights
Innovative institutions in Europe
● Medieval merchant guilds (Greif 2000)
● Guilds are a set of rules to ensure trade occurs
○ Force individuals to commit to the rules before trading
○ Prevented commitment problems by having punishments
○ Ensured coordination across markets
● Stronger in Europe from 1300-1500 (present -1600)
● Protect the interests of merchant travellers
○ Makes it harder to trade with other cities due to a lack of trust
The Great Divergence
● GD is the difference in economic performance between China and Europe
○ China was more developed than Europe in 1000 (Song Peak) and had
greater inventions - paper, printing
○ Europe industrialised first, creating a gap by 1800
Measurement
● Silver wages suggest an early divergence (before the IR)
○ Silver wages - local wages divided by silver. Gives the amount of silver
that can be bought with daily nominal wages
○ Indian silver wages were 21% of English wages in the late 1500s
○ Early divergence due to institutional differences
■ Emphasis on commerce, productivity and urbanisation in Europe
● Grain wages suggest a late divergence
○ Grain wages - how many kgs of grain can be bought with a daily wage
○ Indian wages were 20% of English wages in the 1800s
○ Useful as grain is used by everyone
○ However - some countries (LDCs) have a CA in agriculture, reducing
the price of grain and increasing the grain wages
● Real wages tell us how much the nominal wage can afford
● Allen (2011) calculates welfare ratios - how many goods baskets a family can
buy
○ Barebones basket covers essentials - no improvement in SoL
○ European Respectability Basket allows for some comfort
Why
Different demographic regimes
● Europe had a delayed marriage pattern, a later age of first marriage and not
all women married (average age of 23-26, 1600-1850)
● China had younger universal marriage (average of 17-20, 1550-1930)
● China had a higher fertility rate and higher resource pressure
○ Asia remained Malthusian for longer
● Europe had higher wages due to preventative checks and higher labour costs
● More technology in Europe decreased the need for labour
Government formation
● Roving bandits create no incentive to produce > subsistence - surplus is taken
○ Bandits monopolise theft and become stationary, creating tax
● Stationary bandit is better than the roving bandit as they do not tax at 100%
, ● Lower taxes encourage production - generates more revenue than 100% tax
● Democracy increases production and competition - competing revenue down
● Challenging the autocrat decreases tax rates - increased competition
● China had a stable autocratic regime with few challengers
● Europe was fast transitioning to “democracy”
● Glorious Revolution started the transition to democracy following the English
civil war and exile of James II (1688)
○ Generated functioning credit markets and rising state capacity
○ Led to the division of powers and constrained the executive via the
independent judiciary - more democratic institutions and more revenue
The European Miracle
● European miracle - rise in GDP pc from the eve of the industrial revolution to
the mid 1700s (phase 2)
● Features of the European miracle:
○ Competing and decentralised states
○ Private institutions
■ Independent legal system, religious authorities, merchant class
■ Development of banking institutions
○ Late medieval commercial revolution increased trade and finance
○ Late medieval agricultural revolution - structural change and movement
away from agriculture
Phase 1: 1300-1600
● European revival of trade after the fall of the Roman Empire - Venice, Genoa,
Florence
● Technological dominance in shipping / commerce
● State involvement
○ Shipbuilding - naval defence for merchant’s ships in Venice
○ Organisation of trade convoys for safety
● Institutional quality and reduction of transaction costs
○ ‘Democratic’ governance, political and legal institutions, property rights
Innovative institutions in Europe
● Medieval merchant guilds (Greif 2000)
● Guilds are a set of rules to ensure trade occurs
○ Force individuals to commit to the rules before trading
○ Prevented commitment problems by having punishments
○ Ensured coordination across markets
● Stronger in Europe from 1300-1500 (present -1600)
● Protect the interests of merchant travellers
○ Makes it harder to trade with other cities due to a lack of trust
