Lecture 2Why China Missed the Industrial Revolution?

Purpose:

• Try to understand the factors that contributed to China missing the Industrial Revolution … This would account for the fact of why China was one of the richest countries in the world in 1500 and far ahead of Europe, but by 1900 was one of the poorest nations in the world and had fallen far behind Europe and some of its European dominated colonies …

• Understand the importance of technology innovation and the role of science in the innovation process in economic development.

Plan for Today:

I. China versus Europe before 1500 AD / 1900

II. Explanations of why China missed the Industrial Revolution – Demand-side hypotheses (NOT)

III. Population, Science and Innovation (building block of theory)

IV.Explanations of why China missed the Scientific Revolution – Supply-side hypotheses (SOME HYPOTHESES NO and OTHERS PLAUSIBLE)

A. China versus Europe before 1500 AD

China Europe____________________________________

before 1500 AD

EnvironmentBooming Mkts SubsistenceUnified Empire City States and ManorsBureaucracy Thousands of fiefdomsMeritocracy Titles InheritedHigh yielding Serfs on common fields Irrigated Ag.Private propertyHigh yields Low yields

Technology Advanced NOT gun powder moats compass draw-bridges paper lances printing iron production (150K tons) iron production (<30K tons)

cosmopolitan cites NOT

“This is the greatest palace that ever was” [Marco Polo speaking of the Imperial Palace in Beijing]

The Glories of Kinsay (today’s Hangzhou)

A. China versus Europe, 1900

China Europe____________________________________

1900

Dirt Poor Ruled the WorldDominated with Little Resistance

Industrial Technology

II. Explanations of why China missed the Industrial Revolution – Demand-side hypotheses (I Do NOT Believe These)

• inadequate capital markets [no]• savings=30%• banks / many informal lending institutions• capital available even in 1930s when land-man ratio

worse

• no markets [no: fantastic markets]

• lack of entrepreneurship? -- system of bureaucracy + meritocracy, killed entrepreneurial spirit

Lack of entrepreneurship?• Let’s ask some Ming/Qing residents:

– Rich merchant (rich and involved in trading of silk)

– Factory owner (involved in silk production at home / limited personal capital)

– Vice magistrate for a county (deputy emperor)

– Bright pupil and parents (fledgling genius)

• Offer from an agent from Macao: “I have a new way of producing silk that could greatly cut costs, improve

quality and make you immensely profitable … wanna invest?”

Lack of Entrepreneurship?

“I don’t think so!” [who said this? … SDR]

• most popular demand-side hypothesis

• China was victim of its own success:

with irrigation and high fertility and peace, land to man ratio very low (i.e., many people/a lot of labor) … therefore, the demand for capital intensive technological change was not there as in Europe

(remember, industrialization took off after the Plague had reduced Europe’s population and wages rose and there was an incentive to create industrial firms with relative capital intensive technology (Douglas North, Nobel Prize paper)

High-level Equilibrium Trap

Assumptions of High Level Equilibrium Trap

• Is the hypothesis true?

• Depends on assumptions:

• But, many of assumption of the hypothesis are questionable:

a. One assumption is that all technological change is capital intensive / labor saving … no, way, often land saving [e.g., Japan during the 1900s] … e.g., new seed varieties saved land, not capital … i.e., if an input is in short supply, those that develop new technologies will figure out how to save on that input …

b. There was no room for capital to improve incomes and output in a labor intensive society … capital is often complementary to labor … looms were adopted in many economies that have lots of labor / technology that allows more intense use of land involves capital (e.g., tractors allows for double cropping) …

c. China experienced the same size of, if not larger, fall in population [Ghengis Khan and rule of the Mongolians] as in Europe … if it was large enough to trigger an Industrial Revolution in Europe, it should have been large enough in China .. [see figure 1 in Lin].

China’s population

Europe’s population

0 AD

Plague in Europe / Ghengis Khan in China

Summary

• so, demand side hypotheses look for reasons why China’s people did NOT want to use (or demand) new technologies …

• what are the main reasons?

• supply-side hypotheses look for reasons why they were not able to develop (or supply) new technologies

III. Population, Science, and Innovation …

• To understand Lin’s hypothesis, it is important to understand how progress in the world is made … the most important source of sustained growth is: innovation … [more than 90% of US growth since 1900 is from innovation …]

• More basic question to answer why China was so far ahead in 1500 but why it missed the Industrialization Revolution is what have been the sources of technological change

Model of Technological Invention [see Lin, figure 2]

• In pre-modern times, it comes from genius/tinkerers discovering breakthroughs … and taking advantage of higher productivity from new inventions, given the current stock of scientific knowledge and resource base …

• In pre-modern times, the pace of invention was a function of population … since China had a larger population (twice the size of Europe), it had more genius AND more inventions and was the most advanced country in the world …

New technology breakthroughs

Innovations are making improvements within the bounds of existing technologies

In premodern times, both innovations and new technology breakthroughs came from genius’ that discovered “things” by accident … new technology breakthroughs are VERY VERY rare … mostly innovations within existing technologies

Because China had a larger population more genius’ more innovations richer country …

Model of Technological Invention – 2 [see Lin, figure 2]

• With science, the knowledge stock pushes invention distribution to the right … and the scope for making invention rises … the Scientific Revolution in modern times allowed for Scientists and Experimental methods to do two things: shift science stock to the right at a faster pace / make invention breakthroughs at a faster pace …

• Since Europe made the breakthrough in the Scientific Revolution first (alla Galleo / daVinci / et al.), they were able to greatly accelerate the rate of accumulation of Science, which greatly accelerated the rate of technological change, which gave Europe its lead …

New technology breakthroughs

Innovations are making improvements within the bounds of existing technologies

In modern times, science produces both innovations and new technology breakthroughs much faster … because they use experimental methods …

Now: whoever invests most into Science and Technology grows the fastest … this is one reason why the US and Japan are such rich countries today … the government’s and businesses invest a lot in to Science/Engineering/ R&D ..

• SOME HYPOTHESES NO and OTHERS PLAUSIBLE

• #1. Needham (famous British social scienties): Bureaucracy that let China flourish, provide no incentives to its members search for or accept the new ideas and breakthroughs and gains that came from the Science and Technology … they were happy enough with the Imperial salary … Europe, on the other hand, did not have such a bureaucracy … they had profit-oriented manor lords/kings and their relatives …

do you believe this?

Explanations of why China missed the Scientific Revolution

Supply-side hypotheses

Lack of entrepreneurship?• Let’s ask some Ming/Qing residents:

– Rich merchant (rich and involved in trading of silk)

– Factory owner (involved in silk production at home / limited personal capital)

– Vice magistrate for a county (deputy emperor)

– Bright pupil and parents (fledgling genius)

• Offer from an agent from Macao: “I have a new way of producing silk that could greatly cut costs, improve

quality and make you immensely profitable … wanna invest?”

• So: Needham’s explanation – like the high level equilibrium trap hypothesis – is probably not valid …

• But there are other supply side hypothesis!

Supply-side Hypothesis #2

• #2. China’s Confucian ideology was anti-technology (stressed human relations) and since there was only one state, with an all powerful Emperor who was not motivated by making more money from science, it could enforce the anti-technology bias, while Europe had all of the small city-states that were competing against each other

[NO: this is an anachronistic (out-of-date) view of China as this huge, unified, all-powerful state … actually, China has always been very decentralized and there are lots of examples of how pre-modern technological breakthroughs were adopted and propagated …]

Supply Side Hypothesis #3

• #3. Lin’s hypothesis of Why China missed the Industrial Revolution ..

– Agrees with Needham that it is a question of explaining why China did not embrace Scientific Revolution … [why was Leonardo daVinci Italian?]

– Science relies on knowledge of math and experimental methods

– A system was needed to build human capital in the population .. in Europe this happened in the local universities … these were missing in China

Lin’s hypothesis, continued• Because of history of bureaucracy / meritocracy … the gifted

in China had fewer incentives than their European contemporaries to acquire the human capital required for modern scientific work … they wanted to qualify for the bureaucracy … this meant they had to pass the civil service exam …

• Competitive civil service exams required an ENORMOUS effort to pass … 6 years just to memorize nearly 500,000 characters .. [that gets you into first grade] … then many times more … [had to memorize the equivalent of 6 NY City telephone books – verbatim … or 10 Kobe telephone books!] … all of this material was on philosophy / history and literature … NONE on science or math …

• Once they passed the exam, they became busy officials [i.e., they got a job] and had no time to devote to studying math or science …

Conclusion of Lin

• THEREFORE: this was the constraint: incentive system created by the specific form of China’s civil service exam and officialdom, fewer gifted people in China than Europe acquired the human capital necessary to launch China’s scientific revolution … with no scientific revolution, there was no industrial revolution … and, China, a country that was the richest in the world in 1500, turned into one of the poorest in Eurasia by 1900 …

Additional insights

• I think we also need “plat-tectonics”

• Why didn’t China import technology AND run the meritocracy system?

• Shut down oceanic trade … pirates … tried to ignore them …

• Years of isolation … left China with no modern army to fight Europeans … they tried to hide … and they were left behind “behind Closed Doors”