DP11976 Spatial Competition, Innovation and Institutions: The Industrial Revolution and the Great Divergence

Author(s): Klaus Desmet, Avner Greif, Stephen L. Parente
Publication Date: April 2017
Keyword(s): adoption of technology, craft guilds, endogenous institutions, Great Divergence, industrial revolution, innovation, inter-city competition, market size, spatial competition
JEL(s): N10, O11, O14, O31, O43
Programme Areas: International Trade and Regional Economics, Economic History, Macroeconomics and Growth
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11976

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.