Spatial Competition, the Industrial Revolution and the Great Divergence

There is a new NBER working paper on those topics by Klaus Desmet, Avner Greif, and Stephen Parente:

A market-size-only theory of industrialization cannot explain why England developed nearly two centuries before China. One shortcoming of such a theory is its exclusive focus on producers. We show that once we incorporate the incentives of factor suppliers’ organizations such as craft guilds, industrialization no longer depends on market size, but on spatial competition between the guilds’ jurisdictions. We substantiate our theory (i) by providing historical and empirical evidence on the relation between spatial competition, craft guilds and innovation, and (ii) by showing the calibrated model correctly predicts the timings of the Industrial Revolution and the Great Divergence.

From the body of the paper, I found these two sentences especially useful:

First, using city size and location data, we quantify how spatial competition increased in England between 1600 and 1800.  Using the same metric, we show that China at the end of the nineteenth century was about 200 years behind England.


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