Book Summary: State, Economy and the Great Divergence” by Peer Vries

Title: State, Economy and the Great Divergence: Great Britain and China, 1680s-1850s
Author: Peer Vries
Scope: 3.5 stars
Readability: 3.5 stars
My personal rating: 4 stars
See more on my book rating system.

If you enjoy this summary, please support the author by buying the book.

Topic of Book

The author compares the economic policies of Britain and China between the 1680s and the 1850s that explain British industrialization and Chinese stagnation. 

Key Take-aways

  • The idea that Great Britain industrialized due its being a free trade state with limited government intervention in the economy is a myth.
  • From the mid-17th century until well into the Industrial Revolution, Britain practiced mercantilism.
  • Britain had high taxes, particularly excise taxes, and a large national debt.
  • In matters related to the internal market, Britain clearly and increasingly promoted laissez-faire. In matters directly related to international competition and ‘national interest’ it did not and continued to be quite interventionist up until several decades into the nineteenth century.
  • Nor was China’s economy as state-dominated as previously believed. China’s central government can best be described as a kind of ‘agrarian paternalism’. China’s domestic economy, with its many small producers and consumers, its extremely large number of markets and its substantial level of market integration. Government only interfering in the market mechanism when it feared that ‘people’s livelihood’ was endangered.

Important Quotes from Book

One of the most lively and interesting debates in global economic history is that on ‘the Great Divergence’, that is the emergence of a huge gap in the levels of wealth, development and growth between various parts of the world in the eighteenth and nineteenth centuries. In that debate, comparisons between Western Europe – in particular Great Britain – and China play a prominent role. Why did Great Britain first industrialize instead of China? Why did Great Britain not develop like China?

Serious scholarly attention to the economic history of Ming (1368–1644) and Qing China was long overdue in Western historiography. For too long prejudiced cliches had abounded. In the new and booming field of global economic history, China deserved not only serious study but clearly also some rehabilitation. The negative, primitive image of China that was reproduced time and again, especially by people who hardly knew anything about China’s imperial past, definitely needed correcting. But I am afraid that, as is so often the case in scholarship, a tendency has emerged to err in the opposite direction. The healthy wish to break with a tradition of focusing almost exclusively and even somewhat obsessively on what ‘the East’ lacked in contrast to ‘the West’, must not, as now often is the case, lead us to ignore major differences that did exist. Scholars who systematically focus only on the similarities between Western Europe and China, in the end will be more or less forced to explain the undeniable Great Divergence of the nineteenth century by referring to ‘contingency’, ‘accident’, ‘fortuitous circumstances’ and the like, as indeed many of them do.7 Personally, I don’t think that is a very satisfactory way of explaining major historical divergences.

I recently published a book, Escaping Poverty that tried to provide an overall analysis of the emergence and possible explanations of the Great Divergence. The underlying goal of this text is to point at one such specific major difference that very well may have been an important cause of the Great Divergence.

That really major difference would be the importance, role and function of the state.

What I intend to do in this text, is to show how fundamentally different Great Britain (and, more in general, Western Europe) and China were in these respects.

My thesis is that when it comes to the way in which the state impinged on economic life in these extremes of Eurasia, it is not surprising resemblances but surprising differences that catch the eye.

Chronologically, my analysis will focus on what one could call ‘the very long eighteenth century’. For Great Britain that would be the period from 1688, when with the Glorious Revolution many important changes in the organization of the British state were either introduced or institutionalized, to 1849, when with the formal repeal of the Navigation Acts a new era in British economic policy started.9 For Qing China the period discussed will be from the 1680s when, with the end of the Three Feudatories War, the Qing dynasty began to effectively rule over the whole of mainland China, and on top of that incorporated Taiwan, to the 1840s, when with the First Opium War (1839–42) China was ‘opened’ and a fundamentally new phase in its economic history began.

For me the Great Divergence is caused by the emergence of modern economic growth in a specific part of the world and its absence in the rest of it.

Adam Smith (1723–90) is claimed to have said: ‘Little else is required to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice.’21 His impact has been enormous, even, as so often is the case, among people who have never read a word of his texts. Many scholars have claimed – and many still do – that Smith’s ideas with regard to the role of the state in economic development – i.e. as they interpreted them – were correct. Many scholars have defended the thesis that the history of the rise of the West, first and foremost that of Britain, the first industrial nation – again, in their interpretation of his ideas – has proved that Smith was right. In their opinion the West rose when and because Western rulers took Smith’s frowning on state intervention and mercantilism very seriously.

In the ‘Smithian’ interpretation of British economic history, that fits in quite neatly with the Whig interpretation of Britain’s overall history, the primacy of Britain and its industrialization are by and large regarded as the culmination of a long process in which Britain’s economy increasingly became characterized by free and fair competition and in which government increasingly tended to behave according to ‘Smithian’ logics.

Here I will confine myself to saying that I consider these claims extremely naive. In my view they completely ignore the harsh realities of ‘competition’ in the early modern world.

This ‘classic’ story of how the West grew rich has always been underpinned by the fundamental tenet of classical or neoclassical mainstream economics that the invisible hand of free and perfect competition would be a guarantee for economic success. In the last couple of decades, the so-called ‘new institutional economics’ is having a substantial impact on Western economic thought. This impact can also be traced in economic history, although economic historians of course have always continued to be much more aware of the role of institutions than most ‘hard-core’ economists. Douglass North, the main exponent of new institutional economics, has been very active as an economic historian and has published widely on the rise of the West and on Britain’s economic development… In all of his work an almost direct and, in any case, very smooth connection is assumed between the right institutions, economic development and economic growth including industrialization.

In particular since the publication of John Brewer’s The Sinews of Power, the thesis that in the ‘very long eighteenth century’ the impact and role of the state in Britain’s economy would have been fairly small has become highly contested. I have the impression that support for contesting views that regard Britain, to put it in Brewer’s terms, as a fiscal-military state are on the increase… What I refer to here is the specific configuration as it existed in early modern Britain and various other parts of Western Europe, where the state first and foremost was a war machine, absorbing on a systematic basis unheard-of amounts of resources for warfare.

Political scientists Hobson and Weiss in the 1990s defended the thesis I will defend here, that ‘“strong” states … are vital for national economic development and industrial transformation’.

Among historians studying Qing China one also finds shifting opinions. Here we see a development in the ‘opposite’ direction. What we witness is major shift. As far as I can see, the dominant interpretation has now become one in which the policies of China’s central government can best be described as a kind of ‘agrarian paternalism’. According to this view, China’s domestic economy, with its many small producers and consumers, its extremely large number of markets and its substantial level of market integration, basically operated along ‘Smithian’ lines. China during the long eighteenth century is considered to have been a commercialized market economy – or as Adam Smith would say, ‘a commercial society’ – with government only interfering in the market mechanism when it feared that ‘people’s livelihood’ was endangered.

Among specialists a much more varied, if not outright confusing, picture of the British and Chinese states in the early modern world has emerged. At least two quite differing pictures of Britain’s state can be discerned: one that shows Britain at the time as a state clearly heading for laissez-faire, another one emphasizing that what really characterized Britain until the 1840s were its extended fiscal and military apparatus and its mercantilist policies. When it comes to China, the idea of an Oriental despotic state certainly lingers on in some circles, but here the idea of China as an ‘agrarian paternalist’ polity has become increasingly popular, not to say dominant, at least among sinologists.

Our comparative analysis of the importance, role and function of the state in the economies of (Great) Britain and China during the very long eighteenth century has revealed major differences. 

Taking into consideration differences in population, the revenue that Great Britain’s central government collected was many times larger than that of its Chinese counterpart. The same applies to its expenditures. In (Great) Britain these were so high that government incurred huge debts that it, however, always managed to honour. In China government until halfway into the nineteenth century never spent more than it received. The amount of money Great Britain’s government handled per capita was huge in nominal terms (i.e. expressed in silver equivalents) as well as in real terms (i.e. expressed in terms of domestic purchasing power or in terms of labour days). It added up to a very substantial part of Great Britain’s GDP. In comparison to it, the income of China’s central government per capita paled, in absolute as well as in real terms, and it amounted to a substantially smaller part of GDP. China’s central government collected far less money from its subjects and far fewer labour days than was the case in Britain. Whereas in Great Britain the role of indirect taxes was very prominent, in China land taxes continued to provide the bulk, by far, of government revenue. In Great Britain the collection of government revenue was more centralized and uniform, regionally as well as when it comes to social groups, than it was in China. All substantial payments to government in Great Britain had to be made in silver, gold or paper money. In China substantial amounts of taxes continued to be paid in kind or in copper, the least valuable of the precious metals. Looking at the way in which revenue was collected, Great Britain clearly was more efficient and less corrupt than China, where people quite often had to pay much more to (semi-)officials than was officially due and where a smaller percentage of official revenue came at the disposal of government. In both countries war was the main expenditure. When it comes to welfare spending fixed by central government – regardless of who actually implemented it – Great Britain spent a higher percentage of GDP on it than China. Great Britain’s tax system was permanently discussed and often changed. That of China was surprisingly immobile. Revenues and expenditures of Great Britain’s government per capita, moreover, steeply increased – nominally and in real terms – until the end of the Napoleonic Wars to then more or less become stable in real terms. Again, the situation in China was quite different. Government income and expenditure there per capita in nominal terms was more or less stable but almost certainly declined substantially in real terms between the beginning of the seventeenth century and 1850.

The fact that it collected so much money enabled Great Britain’s government to, again, relatively speaking, have a much larger ‘bureaucracy’ and employ many more soldiers and navy personnel than the Qing rulers. When we talk about Britain’s bureaucracy in this book, we basically are discussing its ‘fiscal bureaucracy’. In other sectors of civil administration, Great Britain until long into the nineteenth century continued to be run by ‘amateur gentlemen’. At the local level, British society clearly was left to its own devices and at that level the cherished image of Britain as a ‘selfruling gentlemanly society’ indeed reflected an actual situation. The bureaucrats that Britain did have operated in a professional, well-trained and well-paid bureaucracy at the level of central government and were more than anything else concerned with collecting as much tax money as possible for the state. That is more than can be said of their Chinese counterparts who, relatively speaking, only formed a tiny group and, as a rule, were underpaid, severely understaffed and not professionally trained for their jobs. Britain’s soldiers and sailors operated in an army and navy which were much better equipped, much better organized and much more disciplined (i.e. simply much stronger) than their Chinese counterparts. Whereas in Great Britain the number of civilian and military personnel as a percentage of total population stayed about the same over the period 1750–1850, it sharply decreased in China. Considering what has been said before, it will not come as a surprise that Great Britain’s system of public finances was much more sophisticated than that of China and enabled government to borrow and pay back enormous amounts of money. Its monetary system was more closely watched by government, more uniform, less inefficient and less complicated than China’s. The economy of Great Britain could dispose of more and better money, in the form of coins as well as in the form of private or official paper money. Its interest rates were also lower.

Whereas government efficiency and infrastructural power increased in Great Britain, the opposite occurred in China after the heydays of the Qing.

Let me, to make clear what I mean by that claim, briefly repeat what is meant by infrastructural state power and by the three elements of which it consists. Infrastructural power has been defined as ‘the capacity of rulers to actually penetrate civil society and to implement political decisions logistically throughout the realm’ – that is, their capacity to get things done – consists of three elements: penetrative power, extractive power and negotiated power. I consider Qing China as weak – and weakening over time – in terms of its penetrative power. Its capacity to reach into and directly interact with the population actually was minimal and decreased. Its extractive power also was relatively small. As compared to Great Britain it only extracted few resources, financial, material and human, from society and in this respect too things did not improve. For such ‘extractive power’ to be stable, routinized, enduring and substantial, it presupposes negotiation with the main social power groupings. That was lacking in Qing China, again in contrast to Great Britain. We see no such process of negotiating and no nationwide network of autonomous groupings with which government could have negotiated in an ‘institutionalized’, regular setting. Qing China thus also was quite weak as compared to Great Britain when it comes to the negotiated aspect of infrastructural power.

Qing China certainly was not a developmental state. Its governments wanted security and a certain ‘traditional’ welfare, but not structural changes and innovations, the essential precondition and essence of modern economic growth.

One should, however, not lose sight of the very important fact that in various respects China’s rulers simply were far less keen on having and wielding such infrastructural power than their British counterparts.

Government in Great Britain, considering the norms of the time, not only was a big spender and an important employer, but also played a quite prominent role in trying to actively steer the economy in a certain direction. It was quite interventionist, first and foremost in matters of international economic relations. Its economic policy was mercantilist with all that implies and which means that government showed two faces.

In matters related to the internal market, apart I would say from some aspects of the labour market, it clearly and increasingly promoted laissez-faire. In matters directly related to international competition and ‘national interest’ it did not and continued to be quite interventionist up until several decades into the nineteenth century.

Government systematically tried via every possible means – taxation, subsidies, tariffs, bans and so forth – to support and promote sectors of production and trade that it regarded as important for the national economy. It ‘negotiated’ with entrepreneurs and traders, often supported them and was even willing to go to war to help them. Government policies in China were very different.

We have already pointed at the fact that Great Britain’s government was much more nationalist than China’s when it came to the economy. More in general one can conclude that it tried to create a ‘British state’ and a ‘British nation’.

During the period in which it was transformed into an industrial nation (i.e. between roughly 1750 and 1850), it continued to be quite fiscal-military, till at least the 1820s, and in many respects mercantilist till at least the 1840s… in the 1850s it indeed was the free-trade nation par excellence, but scholars agree that by then it was a full-blown industrial nation. The take off into self-sustained growth and the development of a modern industrial society overwhelmingly took place in a fiscal-military, mercantilist setting.

To begin with, it was all but inevitable to behave like a mercantilist. What alternative would governments have had in the context of the cutthroat interstate competition that existed in early modern Europe?

States that did not develop a big and strong military apparatus were doomed politically as well as economically.

It is stretching credibility to claim that Great Britain, the most mercantilist country in the world, first became so wealthy and then on top of that industrialized in spite of them.

When it comes to the domestic situation, mercantilism as economic nationalism overall clearly was pro-market. Mercantilists favoured the creation of free and fair, smoothly functioning national markets and their policies were instrumental in extending and liberating the market economy. Considering the overwhelming importance for all major European economies of their domestic market this of course is far from irrelevant.

What in any case has to be studied more in depth are the consequences of the fact that mercantilism actually was much more than just a fascination with bullion and/ or a strategy of collusion of government and monopolists. It also, and I would say in practice primarily, was a policy of strengthening the national economy with a focus on strengthening manufacturing and trade to so strengthen the nation and the state. It would be misleading to call it an industrialization policy: before Great Britain actually industrialized no one knew what modern industry was. But I would want to call it developmental: it certainly consisted of measures that, often successfully, aimed at developing,that means on producing goods with high(er) added value, that were (more) knowledge and capital intensive and that were better than those of foreign competitors so that they could be sold abroad for a good price. Concepts that immediately come to mind are ‘benchmarking’, ‘protectionism’, ‘export orientation’, ‘import substitution’ and ‘conquering markets’. Mercantilism clearly favoured producers and traders over consumers.

In a mercantilist world the best way for a government to support its economy was to be an outstanding mercantilist. In the very long eighteenth century mercantilism was the game that was played: the British excelled in it. Next to several other ‘advantages’, that is what brought them the Industrial Revolution.

Mercantilism, to use that shorthand, without any doubt contributed to and facilitated the emergence of Great Britain’s modern economy in which after 1850 the service sector with its shipping, banking, insurance, foreign investment and, more in general, services creating ‘invisible’ exports was the most important sector of the economy. These activities already were a very substantial source of income in Britain before the Industrial Revolution and had always been tightly connected to the fiscal-military, mercantilist state.

Mercantilism and the fiscal-military or rather fiscal-naval state, in my view, did not cause modern economic growth in Great Britain in the sense that they would be a sufficient condition for it, but considering the specific conjuncture in which Great Britain took off, I would certainly consider them a necessary condition for the emergence of the first modern industrializing economy.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s