Friday, June 3, 2016

The origins of the Great Divergence

While the world is witnessing global convergence (essentially the catch up of Asia with the West), the debates  about the origins of the Great Divergence—the take-off of the West and absence of growth in the Rest—are going strong. I just finished an excellent book ("Escaping poverty") by Peer Vries who reviews the origins of modern economic growth and proposes his own theory on what made the West, and in particular, Great Britain start the Industrial Revolution and China not.

Vries has two characteristics which are not abundant, in the same person, among economists: erudition and common sense. Very often common sense and cleverness, exhibited by more business-inclined types in economics, go without much historical knowledge. But heavy erudition sometimes renders authors other-worldly, a strange feature in a social scientist that economists are supposed to be.  

I would like to discuss Vries’s book under four headings: organization of the book, his theory of why the Industrial Revolution happened in England, his view why China’s chances to begin an industrial revolution were “nil”, and (some) of his critiques of other economic historians.

Organization of the book. Vries divides the book in three parts. In  the first, he reviews all factors which, according to economists, are conducive to economic growth in general; in the second part, he discusses each of these factors as it applies to the explanation of the Industrial Revolution, and in the conclusion, he …well…summarizes them again.

The causes of growth are nicely divided into direct causes, the ones that we would readily put in the production function: geography and factor endowments; the proximate causes: trade and innovations; and the “deep causes”: institutions, state and culture.

The structure has certain advantages of symmetry, but I found it a bit tedious. It taxes the patience of the reader and provokes some fatigue because essentially the same issues (and even some sentences) are repeated in the general and “applied” sections. I also think it is unfortunate that Vries has not set up in a separate chapter his own views on the origins of the Great Divergence. As it is, his views have to be pieced together from various parts of the book. To this I turn next, and I hope to faithfully reflect Vries’ opinions.

Why did England take off? I found Vries’ explanation very compelling, perhaps because it is also somewhat eclectic. But the reality seldom obeys our abstract schemata. Vries agrees with Bob Allen’s view that the key ingredients in British industrialization were expensive labor and cheap energy and money. This led to labor-saving innovations which were at the origin of the technological revolution. But England also had, Vries argues, a very strong “infrastructal” state that until 1830 followed protectionist policies and often manipulated tariffs and taxes to help domestic producers, engaging in what would be today viewed as “industrial policy”. Furthermore, England had a big government, high taxes, high government expenditures, “yuge” Navy, enormous debt to GDP ratio, and extravagantly highly paid government officials. Externally, the country pursued  imperialist and mercantilist policies. Finally, and quite importantly, workers became the proletariat who had to go to the market to sell their labor (that is, lacked the cushion of working on own plot of land), and labor force became “commodified”.

England, in this short sketch, presents four distinguishing features:
Favorable factor endowments
Capitalism: rational profit-making and commodification of labor
Big government

Outside projection of power (“fiscal-military, mercantilist and imperialist state”, p. 433).

It is the addition (appendage, as it were) of an acquisitive, determined and big state that distinguishes Vries’ explanation from others which, as he points out, present an idealized Smithian picture of a government of low taxes, strong property rights, and tolerable administration of justice. His views on the importance of the use of force in international trade (on the open seas, “the distinction between peaceful, consensual trade and simple piracy was often very thin if not simply non-existent”, p. 148) makes his views close to Findlay and O’Rourke’s (whose work Vries cites very favorably) and even the world-system theorists. But with the latter, he agrees only that mercantilism and imperialism helped West’s take off but cannot explain it. Which brings us to why China has, as Vries several times mentions, “nil” chance of starting the technological revolution.

Why China did not take off? Here Vries is obviously at odds with the California school as well as with dependency theorists (respectively, Pomerantz and Frank) who believe that China had as great a likelihood, say, around 1750, of becoming the first industrial power as did western Europe. Vries sees many reasons why this was unlikely. Consider the four features that made England take off: they are all reversed in the case of China. China’s labor was cheap, energy and money were expensive. Chinese government was weak, paternalistic and unable to collect taxes. China had no army to speak about and was not engaged in military operations beyond its borders. And finally, production in China was organized in family units: it was the land of household mode of production (p. 204), or as Marx would have said, petty commodity production. Thus, workers could stay at home and work together with their families, often living cklose to the subsistence level. What was lacking was the reserve Army of the unemployed who in order to survive had to “feed” the capitalist engine in the West.

But while China was very unlikely to achieve a technological breakthrough, it was an equally or more market-oriented society as the West, at least as far as market for the consumption goods was concerned; China’s markets were more integrated than European, it conducted greater amount of long-distance trade, and its government was much smaller. So here we would, looking from a neoclassical angle, behold all the ingredients that should help China grow (integrated market, small government, low taxes). Yet  they did not. Qing China, in effect, in Vries’ rendering, sounds much more Smithian than Britain (p. 354) but precisely because it was more Smithian it failed to develop.

Critiques. As I already mentioned,  Vries presents a rich, very erudite review of an enormous literature and critiques a number of narratives that have either enjoyed or still enjoy significant currency among economists. Let me mention, for lack of space, but a few them.

Jared Diamond and Ian Morris are “savaged” for their geographical determinism: “As general statements, claims about challenges and responses [are mechanistic], and do not explain anything at all” (p. 165).

Gregory Clark and Oded Galor with their views on the importance of fertility behavior for  human capital formation and innovation cannot explain such seemingly anomalous development where high increase in population does not produce more innovations, or decline in fertility does not improve investment in skills: “unified growth theory has nothing to offer historians” (p. 197).

Daron Acemoğlu and James Robinson start from an unproven assumption that market is always good for growth and their “metanarrative is a stylized generalization of a very...positive interpretation of modern history of Great Britain and the USA” (p. 137).  In addition they never define “extractive” or “inclusive” institutions. David Landes as well as Acemoğlu and Robinson “reproduce all the standard clichés when it comes to Asian institutions” (p. 59).

The California school is just plain wrong on China’s level of development being close to the European level prior to the take-off and Andre Gunder Frank writes “with his usual lack of nuance and overdose of self-assurance” (p. 340).

Peer Vries has written a great book from which one can learn a lot, not solely to improve one’s understanding of the past but to stimulate one’s thinking about the factors that make economies grow today.

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