Spatial Competition, Innovation and Institutions: The Industrial Revolution and the Great Divergence

48 Pages Posted: 6 Mar 2017  

Klaus Desmet

Southern Methodist University (SMU); Centre for Economic Policy Research (CEPR)

Avner Greif

Stanford University - Department of Economics; Canadian Institute for Advanced Research (CIFAR)

Stephen L. Parente

University of Illinois at Urbana-Champaign - Department of Economics

Date Written: Feb 28, 2017

Abstract

Why do some countries industrialize much earlier than others? One widely-accepted answer is that markets need to be large enough for producers to find it profitable to bear the fixed cost of introducing modern technologies. This insight, however, has limited explanatory power, as illustrated by England having industrialized nearly two centuries before China. This paper argues that a market-size-only theory is insufficient because it ignores that many of the modern technologies associated with the Industrial Revolution were fiercely resisted by skilled craftsmen who expected a reduction in earnings. Once we take into account the incentives to resist by factor suppliers’ organizations such as craft guilds, we theoretically show that industrialization no longer depends on market size, but on the degree of spatial competition between the guilds’ jurisdictions. We substantiate the relevance of our theory for the timing of industrialization in England and China (i) by providing historical and empirical evidence on the relation between spatial competition, craft guilds and innovation, and (ii) by showing that a model of our theory calibrated to historical data on spatial competition correctly predicts the timing of industrialization in both countries. The theory can therefore account for both the Industrial Revolution and the Great Divergence.

Keywords: Industrial Revolution, Great Divergence, craft guilds, spatial competition, inter-city competition, market size, endogenous institutions, innovation, adoption of technology

JEL Classification: N10, O11, O14, O31, O43

Suggested Citation

Desmet, Klaus and Greif, Avner and Parente, Stephen L., Spatial Competition, Innovation and Institutions: The Industrial Revolution and the Great Divergence (Feb 28, 2017). Available at SSRN: https://ssrn.com/abstract=2927147

Klaus Desmet

Southern Methodist University (SMU) ( email )

6212 Bishop Blvd.
Dallas, TX 75275
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Avner Greif (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
650-725-8936 (Phone)

Canadian Institute for Advanced Research (CIFAR) ( email )

180 Dundas Street West, Suite 1400
Toronto, Ontario
Canada

Stephen L. Parente

University of Illinois at Urbana-Champaign - Department of Economics ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States

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