Markets in China and Europe on the Eve of the Industrial Revolution

Abstract

Current orthodoxy suggests that the Industrial Revolution began in Europe because European institutions promoted comparatively high levels of market efficiency. This Paper compares the actual efficiency of markets in Europe and China, two regions of the world that were relatively advanced in the pre-industrial period, but would start to industrialize about 150 years apart. Using data on the spatial dispersion of grain prices from the 17th to the 19th century, the analysis covers economies that, in total, account for about two-fifths of the world's population in the mid-18th century. Our main findings include: first, the efficiency of markets in China and Europe was comparable in the late 18th century, except perhaps for areas of local economic activity, where Europe seems to have been ahead. Second, market efficiency in England was higher than in the Yangzi Delta region; and markets in England also performed better than in Western Europe as a whole. Third, market efficiency in Europe improved between 1780 and 1830 in a dramatic and sudden fashion in comparison to what came before. Rather than being a key condition for subsequent growth, gains in market efficiency and growth might have occurred simultaneously. We discuss the implications of these findings for a number of explanations for long-run growth and the Industrial Revolution.

Keywords: Industrial revolution, growth, trade, trade costs, market efficiency, institutions, geography, religion, vested interests, international comparison, arbitrage, cointegration

JEL Classification: F10, F40, N10, O10