Great Divergence/Convergence: A Theory of Power Dynamics and Social Evolution

• In Event: Political Transitions

Abstract

The economic divergence between Europe and China, recognized as comparably advanced regions in the 18th century, has been a prominent focus in political economy literature. Adding to the intrigue is China’s recent progress in closing the gap, displaying convergence across diverse indicators. Our paper develops a theory of power dynamics and social evolution to integrate both divergence and convergence into a unified framework. It extends the classical argument by North and Weingast (1989) regarding commitment problem into a dynamic setting. The analysis reveals that credible commitment hinges on the compatibility between state power and social productivity, both subject to dynamic changes. In our model, the state maximizes its fiscal capacity by choosing between power-based state production or taxing social production via relational contract. Moreover, the state may adjust its power endogenously and social evolution may occur under social production with stochastically increasing social productivity. Without knowledge of dynamic social evolution, an initial high endowment of state power and productivity discredits the social contract, trapping the state in state production, thereby causing economic stagnation and contributing to divergence. Conversely, with such knowledge, it is self-enforcing for the state to reduce power temporarily to align with initially low social productivity, thereby effectively establishing social production. The ensuing social evolution fosters economic convergence, ultimately enabling the reinstatement of divergent power. Our theory explains why a historically strong state impeded China’s entry into the modern economy in the imperial era but failed to prevent its emulation of Europe’s economic success in the modern era.

Authors

• Zhaotian Luo, University of Chicago

• Shuyi Yu