Ancient China, India and other great agricultural empires were exceptionally well-developed in comparison to other nations such as Great Britain and USA long before the start of the modern period. In China BCE, it was discovered that a combination of liquid iron and wrought iron could produce steel much more effectively than any method before it. This method was brought into use in Europe in the 19th century, thousands of years later. This is among many examples of the inventiveness and prosperity of agricultural empires before the modern period, which began around the 18th century. With this knowledge, the fact that industrialisation did not begin in these empires seems unusual, considering the innovation the empires possessed and the power they had over other countries for some thousand years.
To understand why the industrial revolution originated in Europe instead of the agricultural empires, it is important to look at both the proximate and fundamental causes of growth. The proximate causes will be in some part modelled mathematically and also explained to show why there was stagnation for so many years and why there was a change to the modern era, which ultimately led to the industrial revolution. The proximate causes are technological progress and capital accumulation. The fundamental causes will explain why the proximate causes did not work as well in some countries in comparison to others and explain setbacks that agricultural empires such as China received. This will answer why the industrial revolution began in Europe rather than the agricultural empires.
The following model for a traditional economy is a simplified summary from Aghion and Howitt (Aghion & Howitt , 2009).
Before the modern period and modern economies, the world was made up of traditional economies, dominated by agriculture, whereby GDP was produced using only labour and land. In this economy, output is shown as
Y=AX^ L^(1-), 0 1 (1)
where Y is output, A is technology (or how efficiently the factors are combined), X is land and L is labour. From this, an equation for GDP per capita can be derived, which is found to be:
y=AX^ L^(-) (2)
Where y = GDP per capita. This equation shows that for a given quantity of land, any additional unit of labour will decrease GDP per capita, which would cause a decrease in productivity and wages. However, this may then raise the question as to how growth would be able to occur in a traditional economy. The answer is found by taking the derivative of (2) to find growth rate of GDP per capita, which is:
g= g^A-n (3)
Here, g is growth of GDP per capita, g^A is technological progress, and n is population. This shows that growth can only occur through technological progress – one of the proximate causes. Also, although in this derivation n is treated as an exogenous variable, it should be treated as an endogenous variable because a higher level of GDP per capita can affect fertility rates and mortality rates, which together will change the population. Therefore, the final equation for growth in a traditional economy is
g= g^A-n(y) (4)
where n is now a function of the growth in GDP per capita. This model shows that growth will eventually converge to zero since as g^A increases, so too does n(y) until they are equal to each other, which results in stagnation. This is also known as a Malthusian trap (Malthus, 1798).
Using equation (4) for growth in a traditional economy, the first reason why the industrial revolution began in Europe instead of in the great agricultural empires can be discussed. Since the agricultural empires had higher growth in population than the countries in Europe, due to higher fertility and lower mortality rates at the time (Clark, 2007), it resulted in a lower equilibrium level of GDP per capita before the modern era and, as a result, left the agricultural empires with lower levels of technological progress in the traditional era. This set them back in their transition to the modern era as technological progress occurred later than in Europe.
In transitioning to the modern era, the key principle is that wages begin to be higher in the modern sector than in the traditional sector (Aghion & Howitt , 2009). Consequently, workers choose to move to the higher wage sector and capital begins to accumulate (capital accumulation is the second proximate cause). Since, in the traditional economy, technological progress and GDP per capita increased in Europe faster than in countries such as China and India, the dormant modern economy was brought to life earlier and therefore gave Europe more time to accumulate capital and begin the industrial revolution. As time went on, more and more entrepreneurs entered the higher wage industries and came up with revolutionary inventions (Mokyr, 1992), which fuelled the industrial revolution and resulted in its origin being in Europe and not in the agricultural empires.
However, there is evidence to suggest that in Japan and China birth rates were in fact lower than in Europe (Pomeranz, 2000). The evidence is: in Japan young women were employed away from their villages which meant fertility rates decreased; in China there was active delaying of pregnancy in marriage and there were efforts taken to reduce the number of children through abortion and infanticide in both countries. This lowered population growth and sheds some doubt on the previous explanation being a reason why there was a later transition into the modern economy and the industrial revolution in agricultural empires. As a result, it is important to now look at the fundamental causes of growth, as opposed to the proximate causes, and uncover why the proximate causes did not work as well in the agricultural empires and what setbacks these empires received.
There are many development economists who believe that institutions are the most important fundamental cause of growth, for example Acemoglu and Robinson (Acemoglu & Robinson , 2012), and believe that this may prove why the proximate causes of growth did not advance the agricultural empires like they did in Europe. A bad economic institution is one in which the rules and policies are such that they do not encourage citizens to innovate and invest. Bad economic institutions arise because of bad political institutions, which are often ruled by governments with absolutist power. In China, there was an absolutist rule by the emperors which created bad economic institutions, thus preventing capital accumulation and technological progress, which can be shown by the opening of Atlantic trade in the 16th century.
The introduction of Atlantic trade had a large positive impact on economic growth for the European countries involved (Acemoglu , Johnson, & Robinson , 2002), which helped fuel the industrial revolution. China may have benefited from the trade but were not able to, since trade was heavily restricted between the 15th and 19th century. This was because the emperor feared others would get too powerful and he would be overthrown. Due to China’s lack of international trade, markets were not competitive, which resulted in a lack of innovation from entrepreneurs, which in turn led to lower levels of technological progress and capital accumulation. As a result, the industrial revolution began in the European countries where the proximate causes had not been impeded by poor political institutions, but instead had been promoted by good institutions.
Another reason linked to institutions and why the industrial revolution began in Europe is that there was the Glorious Revolution of 1688 in the UK. This revolution overthrew James II, who was in power at the time and who planned for a more absolutist rule, similar to what could be found in most agricultural empires. This overthrowing meant that better political institutions were put in place by William III, which led to more trust, secure property rights, open markets and, ergo, good economic institutions. This change from the monarchy and aristocracy to parliament resulted in the industrial revolution taking place in the UK due to inventions by entrepreneurs who were incentivised to do so by the good institutions resulting from the Glorious Revolution.
Despite this, there are different ideas about why, in the UK, industrialisation started much sooner than in the agricultural empires, which to some economists are more appropriate answers to the question than the aforementioned Great Revolution. To begin with, one argument is that it was because in the UK there was a higher relative price of labour to capital, combined with a low relative price of coal (Allen , 2011), relative to other countries. This meant that wages were much higher than interest rates and, therefore, accumulating capital was much more profitable than employing more workers as it was cheaper to do. This incentivised more entrepreneurs to invest in capital which led to the industrial revolution before any of the agricultural empires. It could therefore be deduced that even if there was no Glorious Revolution of 1688, investment in capital would have been so profitable that it was inevitable for industrialisation to occur first in the UK and Europe.
Although this may be true, it could be argued that the price of labour relative to capital would not have been as high if the Glorious Revolution had not taken place. The Glorious Revolution put in place good economic institutions which advocated secure property rights and an efficient judiciary and financial sector. This meant that trust in the system was high and therefore led to lower interest on capital, making the price of capital relative to labour lower and the investment profitable. Therefore, it may have been the case that with no Glorious Revolution capital accumulation would have been less profitable and the industrial revolution may have had been slower to start in Europe and perhaps have begun elsewhere.
Although the counter-argument to Allen (2011) here is that good institutions caused the high relative cost of labour to capital, there is research to suggest that the institutions in Britain and China were not much different in the 18th century when the industrial revolution began (Pomeranz, 2000). This increases the validity of Allen’s (2011) argument and can allow further insights into why the industrial revolution began in Europe that do not depend on how good or bad the institutions were in each country.
Pomeranz (2000) chooses to focus more on the geography and luck in Europe and China because of how similar he found the institutions to be. The features important to the start of the industrial revolution were not uniquely European, thus requiring this alternative explanation. Coal was an integral part of industrialisation, as it was the main energy-generating resource, and therefore easier access to coal meant an easier start to industrialising. In England, coal reserves were found in locations conveniently placed for large manufacturers, which made transportation costs low and transportation itself quick and efficient. In China, however, there were large coal reserves far from the south and east where the large manufacturers were situated. Considering the size of China, it is clear that transportation costs would have been much higher and resulted in a lower availability of coal. This combined with the fact that in England coal was much cheaper than in China, it shows how disadvantaged China was in comparison to Europe and why Europe was first to industrialise.
What also put Europe first in the race to industrialise was the fortuitous discovery of the Americas and the availability of resources that came with the discovery. The large amount of resources available to Europe gave it an important advantage in terms of economic development, especially thanks to the flow of cotton, which was one of the main manufactured goods in the UK at the time. Since China did not have similar access to these resources, it left itself far behind Europe in terms of development and resulted in much later industrialisation, despite its prosperity as a great agricultural empire.