Based on Broadberry and Zhai (2025)
Historical
national accounting reveals that the Great Divergence between Europe
and Asia was not a sudden 19th-century event, but a slow process rooted
in centuries of divergent productivity trends. While northwest Europe
began a sustained climb in GDP per capita after the 14th century, the
Yangzi Delta—China’s most advanced region—entered a cycle of growth and
contraction. The fundamental
driver of this split was differing paths of innovation, captured by
trends in Total Factor Productivity (TFP).
The
classic narrative points to the Black Death as a Malthusian
catastrophe, but its true economic impact was more paradoxical. By
decimating Europe’s population, it created a severe labor shortage,
shattering the feudal system and making labor expensive. This shock
provided a powerful, sustained incentive for labor-saving innovation,
initiating a period of positive TFP growth in Britain. However, this
framework has a limitation. It assumes that such a demographic shock is a
sufficient condition for sustained growth, yet other regions
experiencing similar plagues did not see the same long-term result.
Subsequent
models highlight the role of specific institutional environments. The
Netherlands in the 16th century, for instance, acted as a decentralized
commercial hub where trade networks and financial innovation fueled a
second wave of TFP growth. Empirical studies of the period, however,
challenge a purely deterministic view. While Britain and the Netherlands
saw sustained progress, other European powers like Spain, despite
massive resource inflows, did not. This suggests that while the Black
Death created the initial conditions, it was the presence of competitive
states, commercialized agriculture, and emerging property rights that
allowed the productivity gains to be locked in and built upon.
Some
theories explore whether advanced economies can self-insure against
stagnation. The case of the Yangzi Delta presents what historians call a
"high-level equilibrium trap". A state where the economy was so
efficient within its existing technological and resource constraints
that it removed the incentive for radical innovation. With a large,
cheap labor force, it was cost-effective to throw more people at a
problem rather than invent a machine to solve it. This created a stable
but fragile equilibrium, where the system was optimized for stability
rather than growth, leaving it vulnerable to external shocks and
incapable of generating its own sustained TFP growth.
A
crucial missing piece in many narratives is the role of equity, in the form of human and institutional capital.
The work of Rampini and Viswanathan (2009) in a different context shows
that agents with limited net worth may rationally forgo hedging because
the opportunity cost of capital is too high. In historical terms,
China’s imperial state, with its focus on stability and revenue
extraction, directed its "social equity" away from risky, disruptive
entrepreneurship and into maintaining the status quo. Meanwhile, in
Europe, the high "return" on scientific and commercial ventures after
the Black Death made investing in innovation a rational choice, despite
the risks.
The
disconnect between the theoretical potential for growth and the reality
of stagnation raises critical questions for understanding economic
development. Why do some societies develop institutions that foster
creative destruction while others optimize for stability? Can sustained
TFP growth only be triggered by a catastrophic shock, or can it be
engineered through policy? The story of the Great Divergence suggests
that the most powerful economic forces are not just resources and labor,
but the invisible architectures of incentive and risk that guide a
society's capacity for change.
__________
References
Broadberry, Stephen, and Runzhuo Zhai. "Innovation and the Great Divergence." (2025).
Rampini, Adriano A., and Sridhar Viswanathan. "Collateral and capital structure." Journal of Financial Economics 109.2 (2013): 466-492.
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