Chinese Economic Performance in the Long Run: Institutional Differences between Europe and China

Institutional Differences between Europe and China

Outside agriculture, China’s bureaucratic system hindered the emergence of an independent commercial and industrial bourgeoisie on the European pattern. The bureaucracy and gentry of imperial China were quintessential rent–seekers. Their legal and customary privileges defined their status, lifestyle and attitudes. They were the group that dominated urban life. They had a strong regulatory bias.

Entrepreneurial activity was insecure in a framework where legal protection for private activity was exiguous. Any activity which promised to be lucrative was subject to bureaucratic squeeze. Larger undertakings were limited to state or publicly licensed monopolies. China’s merchants, bankers and traders did not have the city charters and legal protection which merchants had in European cities. International trade and intellectual contacts were severely restricted. This self–imposed isolation was also a barrier to growth.

Between the fifteenth and eighteenth centuries economic leadership passed from China to Western Europe. This was not due to specially unfavourable conditions in China but to Western exceptionalism. There were several reasons why Europe was better placed to promote the emergence of modern capitalism.

The most fundamental was the recognition of human capacity to transform the forces of nature by rational investigation and experiment. Thanks to the Renaissance and the Enlightenment, Western elites gradually abandoned superstition, magic and submission to religious authority. The Western scientific tradition that underlies the modern approach to technical change and innovation had clearly emerged by the seventeenth century and begun to impregnate the educational system. China’s education system was steeped in the ancient classics and bureaucratic orthodoxy. It was not able to develop the fundamental bases of modern science.

Europe had a system of nation–states in close propinquity. They were outward looking, had significant trading relations and relatively easy intellectual interchange. This stimulated competition and innovation.