GEP 15/12: Assessing market (dis)integration in early modern China and Europe

Summary

One of the seminal questions in world and Chinese economic history is why China, in contrast to Western Europe, failed to industrialize during the 18th and 19th centuries: the question about the causes for the ‘Great Divergence.’ Social and economic historians have tried to tackle this question by identifying necessary conditions for industrialization. One prominent condition has been the degree of market integration of an agricultural economy. A long-held view has maintained that Western Europe was characterized by integrated markets, which had taken root because of state-supported property rights institutions, while in China markets were underdeveloped despite the unified political system created by a dynastic empire. This view has been challenged by a revisionist body of scholarship claiming that early modern China was not only on par with Western Europe, but that it came closer to resembling the neoclassical ideal of a market economy than did western Europe. Recent econometric evidence by Shiue and Keller (2007) on grain prices provided empirical support and helped transform what was once a revisionist view into a now conventional view that differences in market integration can be ruled out as an explanation for the Great Divergence.

In this Nottingham School of Economics working paper, Daniel Bernhofen, Markus Eberhardt, Jianan Li and Stephen Morgan challenge these established claims of comparable degrees of market integration in Europe and China on the eve of industrialization. The empirical methodology is rooted in a general equilibrium perspective, which postulates that location-specific grain prices are jointly determined by factors such as local and global weather shocks and by a market’s relative position in the existing trading network. Applying novel econometric techniques to rich panel data on grain prices from China and Europe for the 18th and early 19th centuries the dynamic analysis of price convergence uncovers a prolonged process of market disintegration for the Chinese empire leading to uniformly lower degrees of market integration relative to Western Europe on the eve of Western Industrialization: in terms of market integration the Great Divergence was well under way decades before the start of the 19th century.

GEP Discussion Paper 15/12, Assessing market (dis)integration in early modern China and Europe by Daniel Bernhofen, Markus Eberhardt, Jianan Li and Stephen Morgan

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Authors

Daniel Bernhofen, Markus Eberhardt, Jianan Li and Stephen Morgan

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