The Great Divergence

Modern global economic history generates two great puzzles. First, why and how did the NW Europe and Anglo-America achieve such unparallelled economic take-off (and why was Japan the non-Western society who was most easily able to emulate, and some ways surpass, that achievement)? Second, was the Industrial Revolution the crucial change and why did it take place in NW Europe (specifically Britain) first? There is a related puzzle: how did the Europeans get to be so globally dominant?

One set of answers sees the Industrial Revolution as the great discontinuity. The contrary view is that it was an acceleration of pre-existing growth. One set sees coercion (slaves and colonies) as crucial to European take-off. The other sees them as largely irrelevant extras to domestically-generated growth.

Much of the dispute is about how the world actually was. Was the standard of living in the C18th of NW Europeans comparable to that of Chinese and Japanese or did said Europeans already have higher standards of living? What was the state of basic institutions in the four high-population density societies (Europe, China, India, Japan)?

In the The Great Divergence: China, Europe and the making of the modern world economy Kenneth Pomeranz argues that the standard of living in 1800 of NW Europe, China and Japan was basically comparable with similar levels of market activity and effective property rights (the evidence suggests India may have lagged in both, though not as badly as often suggested). That is, NW Europe had no significant domestic institutional or technological advantage so any divergence cannot be explained by internal characteristics.

Pomeranz further argues, that all three societies were up against significant ecological constraints. The key difference was the use of effective coercion by European states gave them a ‘windfall gain’ from the Americas that managed to evade the looming ecological restraints and provide the resources which created the Industrial Revolution and European global dominance.
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Pomeranz certainly makes a strong case that standards of living in NW Europe, China and Japan were comparable in 1800, with similar levels of technological sophistication. He also makes by far the best case I have seen for the importance of the Americas – both Britain’s “ triangular trade” (manufactures to Africa, slaves to the Americas, raw materials to Britain) and the global flow of silver – in providing resources for the British and European take-off.

But I am not entirely convinced. First, while he admits that it was Europe, and not China or Japan, that discovered and exploited the Americas has to be explained, there is something a bit odd about referring as a ‘windfall’ the European exploitation of the Americas when that exploitation was so deliberately engaged in.

Second, his argument that Europe was facing a ‘Malthusian disaster’ from ecological constraints is rather undermined by the example of Japan, where resource limits led people to stop having as many children – effective ZPG – thereby avoiding a drop in their standard of living (p.292).

Third, nowhere does he address why China did so badly in dealing with the European challenge when Japan did so much better.

Fourth, saying the great divergence was a post-1800 event, although certainly arguable on standard-of-living grounds, looks a bit odd when one considers how much of the globe Europeans already dominated by 1800 (the Americas, India, much of the coast of Africa, plus settlements in Australia).

Fifth, nowhere does Pomeranz grapple with the far greater political diversity of NW Europe over the other regions. That the militarised autocracies of Islam (clearly an also-ran by 1800) and India did worse than the bureaucratised autocracy of China which did worse than the daimyo federalism of Japan is surely suggestive. Much of his arguments about the development of institutions able to blend trade and coercion together seems as much about rulers who were more responsive to their domestic interests as anything else.

Sixth, the scientific revolution nowhere gets considered. The scientific revolution meant that Europe became the first civilisation to, in a systematic fashion, learn how to learn, in a phrase beloved by my old teacher. It shifted Europe from being an adaptor civilisation (admittedly, a good adaptor) to an inventor civilisation, which it hadn’t previously been much. Since the Industrial Revolution is above all else about using new forms of energy and capital, this seems an important point.

The core of Pomeranz’s argument is that the exploitation of the Americas effectively “abolished the land constraint” for NW Europe which allowed NW Europe to break out of the ecological trap China and Japan remained mired in.

This immediately raises the rich-Portugal/poor-Switzerland difficulty. It is a typical problem of ‘foreign exploitation made Europe rich’ models that they end up “explaining” why Portugal – the longest running European colonial empire – became so "rich" and Switzerland – a landlocked country which never had any overseas colonies – "remained" so poor. Most of the Americas were controlled by Portugal and Spain, who notoriously did not achieve precocious industrial take-off. Nor did the loss of most of its American colonies put much of a dint in Britain’s economic development. Pomeranz grapples with the problem by emphasising the importance of the American trade for Britain, but that does less work than he wants, since trade is a moveable feast. The point is not only that the Europeans were global traders, but China and Japan – though major parts of global trade networks, Pomeranz is particularly revealing about Chinese take-up of New World products – were not global traders. It begins to look like a you have to be in it to win it story and Pomeranz has not examined enough why the Asian weren’t in it, given they demonstrably had the resources to do so.

Industrialisation can demonstrably be copied without possession of overseas colonies. Indeed, Europe became richer after they divested themselves of the same. To make his thesis work, Pomeranz has to distinguish mightily between first development and later adaptations, which he doesn’t really address.

But the biggest problem is that getting around land constraints by extra land is that was precisely what was not new about NW Europe in 1800. This was an old pattern in history. Ask the Mongols. Indeed, as Pomeranz acknowledges, Qing China also greatly expanded its borders (just not, he says, the right sort of land). The big story in Europe is about changes in uses of capital. Europe took a leap from living standards being overwhelmingly about the labour/land ratio to living standards being overwhelmingly about the labour/capital ratio. Just because you have lots of extra land, does not mean you engage in a capital transformation.

Pomeranz is ultimately left to argue that China and Japan were institutionally capable of engaging in that transformation, but didn’t because they didn’t get those extra resources. But Portugal and Spain got those extra resources, and didn’t engage in that transformation either. Which goes back to those resources being traded. A trade Britain had little coercive control over after 1783, nor, come to that, did Spain and Portugal after 1820 and 1822 respectively, a particular problem for Pomeranz since he emphasizes how much the real economic take-off did not take place until after 1820. Pomeranz does not persuasively connect the dots from abolishing the land constraint to capital transformation.

What Pomeranz is arguing is that the European exploitation Americas massively shifted the land/labour ratio in Europe's favour. But, on that basis, European standards of living should have been significantly higher than East Asian standards of living, which Pomeranz is at pains to argue they were not, and Spain and Portugal should have been economic front-runners, which they weren't. Having established that the Chinese took up new world products with some enthusiasm, the individual products of the American ecological bounty cannot be a distinguishing feature.

There are some clear limitations on any such effect. First, the sudden export of the Eurasian disease pool to the Americas depopulated the continents, requiring the importation of labour. Settlers and indentured servants (mainly convicts) counted for some, slaves the rest. Now, even given that slaves were only supported to efficient subsistence level, the importing of over 9 million slaves from a non-European population reduced the land/labour ratio. Second, the Atlantic itself was a significant distance barrier, both to European labour mobility and to trade (particularly compared to the land/labour effects of the Black Death). Third, any claim that said trade was particularly likely to be put (in the case of Britain but not Spain and Portugal) into capital expansion then turns attention back to the importance of NW European institutions, particularly Britain's.

Pomeranz himself acknowledges (pp 178-9) that C18th British and Dutch interest rates were particularly low (3% for Dutch best borrowers, 4-5% for British, around 12% in Japan and China). Cheap capital indicates plentiful capital, that people are reasonably confident about foregoing current consumption for future benefit (what economists call time preference). The advantage for a putative capital transformation is obvious. Why did Dutch and British investors have such higher confidence than Chinese and Japanese investors? Why was the effect particularly strong for the Dutch, who had no significant American colonies? Is not knowledge transformation plus institutional arrangements which produced cheap capital a much more plausible explanation, given the centrality of the British and Dutch for all three?

But that I think Pomeranz’s central argument does not hold up, does not mean The Great Divergence is other than a very useful and informative history. I learnt a great deal about the global economy at the point when the great economic transformation was about to happen, and certainly have a much more informed respect for Chinese economic achievement.