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.


'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.'

A taut argument, it appears. Though taut may need a few more letters to increase its accuracy.

And wasn't a certain man (rhymes with taut, coincidentally) somewhat important in that whole industrialization thing, or are the author's the sort of dreamy academics who completely dismiss the idea of engineering as being important to powering industrialization? (In this case, hard leftist of all stripes, not just academics, tend to be big fans of engineering industrialization - especially in Russia and China.)

Still, at George Mason? I would have thought you would have gotten off your ass and improved America buy now, considering the rest of us haven't.


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but can they forecast brexit?

But more seriously, couldn't England's dependency on sailing (cuz they're an island) and trade explain England's industrialization without the need for fancy economic theories like market-size industrialization and factor supplier incentives? I.E. England learned to sail around the world trading for stuff and setting up colonies, and all that transport and trade led to learning, development of new technologies, productivity growth, and a more urbanized populous, which led to the industrial revolution? Meanwhile, China's agrarian and rural societies didn't really 'need' to industrialize or have the windfall of transport technology because, at an agrarian level, everything sort of worked for them to begin with? Occam's razor? What am I missing?

Sailing was a big attribute of Spain, Portugal, and the Netherlands, so I don't think sailing is gonna get you to the industrial revolution. And England was a later to the colonization and sea-trade game than the 3 countries listed.

As I recall from my history courses on this, these nations piggybacked on each other. Each subsequent maritime trading power had to possess something (skills, charisma, weaponry, goods, know how, etc) the others didn’t possess. Or at least surpass them. Who did China have to compete against, such that this competition would hone their various skills?

I haven't paid to read the paper. What do they mean by spatial competition?

Geographical relationship = spatial. It's like Porter's competitive advantage - applies to competing firms operating at close quarters. I.e. spatial consideration. Equally so here, I would guess, although I have not read the paper. Based on the quote, the guilds were likely proximate geographically, or spatially. This increased both the competition - and the competitive advantage - as it proportionally increased the rate of change and adaptation.

They posit two stages. Initially, growing city size itself may produce the potential for economies of scale and poaching customers from local rivals, justifying the initial investment in technology.

BUT, as local guilds are unlikely to find technological unemployment a pleasant prospect, they also posit a political block where the guilds play Luddite spoilers and prevent the adoption of said technology.

A second stage kicks off when there's enough potential for inter-city trade and poaching that the local guilds can effectively be bought off, preserving their own income at the expense of regional rivals.

Thanks for the synopsis, saves me having to read the original source, which is hard to do on my dialup modem speed internet connection here in PH anyway.

These type papers tend to generalize from N=1 and find something that is not found outside of N =1. Not sure how spatial is different from market economy, they sound the same to me, but it's a specialist definition I'm sure. A market economy will have clusters of suppliers by necessity (distance is costly). On this last theme, one paper postulates Africa is impoverished due to the 'tyranny of distance': Africa is a big largely landlocked country (the west coast is mostly cliffs dropping into the sea, not many good ports) and it's expensive to travel in such a big country. This might explain why Russia is so backwards as well, and why England, the Netherlands, Germany, France are advanced (small countries interlocked by rivers, compare with mountainous Greece and Turkey). China of course has lots of rivers but they might be backward, historically, due to lack of competition, where, unlike in competitive Europe, there was only relatively content and well-fed Hun Chinese.

The word "capitalism" does not appear in this article and the word "capitalist" (or derivations) appears only twice. Likewise, "agglomeration" or "localization" do not appear. Not sure that you can ignore the "intra" components while looking at the "inter" components.

Vot about zee Chermans?

I'm too lazy to read the paper and none of the comments have brought it up, but did they talk about the effects about the Opium War? That's kind of a big thing.

My thought as well. China was exporting too much and accumulating too much gold, so the Trump of the time used military power and threats to force the Chinese to use opium the British got from India, which included Afghanistan, in abundance.

Lincoln and his administration, e.g. Seward, would to open trade with China, reversing the bad blood from the US support for the Europeans in the Opium wars. That led to the backlash of Chinese Exclusion, which ironically advanced minority rights under the 14th, plus the idea that the excluded class must be twice as good to get respect when exercising 14th Amendment rights.

China seems to have adopted the view that trade outside its region led to conflict leading to war that did not benefit China. China often offered more desired goods for export than others had to offer to China. Thus Europe forcing opium on China.

That said, China was constantly expanding its economy spacially, which ended up in wars, first on its borders, then internally. Resolving internal conflicts required pulling back from expanding greater regional trade. If trade has driven internal conflict, why engage in global trade when history predicted that it would result in the Opium wars.

China argued, much as US isolationists, why should the US spend so much on forcing global trade when so many at home are in poverty. At the time of the Opium wars, life in British slums was pretty horrible, worse than in China. Why didnt the British spend more at home and less for war with Asian nnations.

There are so many things wrong here, but in lieu of writing a long post and to focus on your central thesis, China did not embark on any North Korea style self sufficient state or sakoku after the Opium Wars. Export volumes expanded. They did not keep pace with the increased volume of world trade, because China failed to industrialize and failed to increase per capita incomes.

(China was not particularly at the frontier of productivity; the Opium War should be viewed more through the lens of attempts by British traders to stave off their own bankruptcy from decreasing value of Asian trade, and through the British governments desire to obtain tariffs on foreign merchandise to pay off Napoleonic Wars debt. Rather than through any particularly privileged place of China in productivity, or sign that they was possessed of particular capacity to produce desirable goods, which was not the case.)

Beware the study with with N=1.

Not that I'm saying that they're necessarily wrong, but it is not very unlikely that there are big stochastic elements to why england had the industrial revolution first. Just a few important incidents, a few important people missing/being present, and I could very well see china being first. It's too bad we can't try again from, say, 500 A.D., and look what is different .

(Somewhat OT:)

The worst thing with history is that we can't even know how important stochasticity really is.

For example , the anger was certainly building up before the second world war, but would it have boiled over this bad without Hitler? Or would just some other guy have done mostly the same?

How would the world look without the Prager Fenstersturz? Would the 30 years war have happened? Would it have ended in either side winning instead? How big is the influence on the following history?

I think the most clear case is probably Christopher Columbus. Without him, colonization would probably have happened much later and very differently, which would change history tremendously. This would obviously have an influence on the location and date of industrialization, too.

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