The growth and decline of the modern sector and the merchant class in imperial China. Ken Chan and Jean-Pierre Laffargue

Transcription

1 The growth and decline of the modern sector and the merchant class in imperial China Ken Chan and Jean-Pierre Laffargue

2 Research Question: why a modern sector and a large class of merchants do not appear in Imperial China? Emperor s love for dominance; The merchant class (and modernization) threatens the dominance of the emperor and the elites. Neoclassical growth model. Numerical simulation. 2 Imperial China: modern sector & merchants

3 Preference for dominance: 1. The quest for power as an end: North (1984): not all authoritarian governments act to make the society and consequently themselves, wealthier. The reason is that dictators and autocrats may not adopt productive economic policies because they fear that such policies might threaten their power. 2. Social Values and the quest for Social Status: Social status is highly valued in a well-ordered Confusian Chinese society. Modernization and the emergence of a class of merchants disrupted the society, eroded its norms and threatened the status of the emperor and the traditional élite. 3 Imperial China: modern sector & merchants

4 Preference for dominance (continue): The emperor, the political elites and the bureaucrats obtain satisfaction from the strong hierarchical structure of the Chinese society and from the submissive behavior of their subjects. This attitude is referred to as the taste for dominance. 4 Imperial China: modern sector & merchants

5 The Quest for Social Status: Strong evidence from Conspicuous consumption (Jones (2003; p.109): Emperors were surrounded by sycophants. They possessed multiple wives, concubines and harems of young women, a phenomenon that may have been less the prerequisite of wealth and power than the assertion of dominance relationships, the propensity to use people as objects. The amassing of households full of slaves for display purpose rather than work may have had a similar ethological significance. Great attention was paid to submission symbols, kneeling, prostration, the kowtow, in recognition of the emperor s personal dominance. 5 Imperial China: modern sector & merchants

6 The impact of Wars Wars dampen the hostility of the emperor against the emergence of a bourgeoisie: A modern economy, not only increases the income of the emperor and his capability to finance a strong army and navy, it also induces positive externalities, which can improve the efficiency of the Chinese defense system. For instance: the architect of the New Policies in the Song dynasty, Wang Anshi ( ), claimed that his institution reform was to increase state revenues, sufficient to support the army and enrich the society at the same time. 6 Imperial China: modern sector & merchants

7 Define Hostility: Emperor s taste for dominance, dampened by the impact of the modern sector and the merchants on military spending. Main results: High hostility towards merchants: A stagnated equilibrium in an agrarian economy Low hostility towards the merchants: Equilibrium with a high level of public capital, a vibrant merchant class and a modern sector. Mid-level hostility: two equilibria: a stagnated equilibrium and a prosperity equilibrium (with a modern sector) Some supportive historical evidence from urbanization (the merchant class). 7 Imperial China: modern sector & merchants

8 DYNASTIES IN IMPERIAL CHINA Han dynasty (206 BC AD) Sui and Tang dynasties ( AD) Song dynasty ( AD) Yuan dynasty ( AD) Ming dynasty ( AD) Qing dynasty ( AD) SOCIAL CONTROLS Strong local government partly due to powerful local aristocrats; Tributary trade; Checks and balance on the power of the emperor in place. Strong local government partly due to powerful local aristocrats; A very open ideology; Tributary trade as well as substantial foreign trade; Checks and balance on the power of the emperor in place. Aristocrats lost their privileged position; Government began to centralize; Weak or no tributary trade; Substantial foreign trade; Government continues to centralize; Open to foreign trade; Government ran by the Mongols clan. Government continues to centralize; Tributary trade was promoted; Marine trade with foreign nations was banned; Control the civil service examination; No freedom of expression. Government continues to centralize; Tributary trade was promoted; Private trade with foreign countries was banned off-and-on; Control the civil service DOMINAN CE INDEX Moderate % OF URBAN POPULATION OUT OF TOTAL POPULATION (MERCHANTS CLASS) Low 7.9 percent (762 AD, at Mid- Tang) Low 7.6 percent (1120 AD, at Mid- Song) High High 6.1 percent (1506 AD, at Mid- Ming) High 7.4 percent (1650 AD, at early Qing) THREAT OF WAR INDEX Moderate Moderately High High Moderate examination. Note: In the Qing dynasty, the percentage of urbanization was sampled in the beginning of the dynasty, when the economy and the empire were at their peak, rather than at mid-dynasty as for the rest of the urbanization data. Hence, an upward bias of urbanization in the Qing dynasty is imminent. 8 Imperial China: modern sector & merchants Low Low

9 Model: includes one final good and two sectors (agricultural and modern). The modern sector only adds value to the agricultural good. The emperor s budget constraints: Agricultural tax + modern sector tax = consumption + Investment + military spending: The utility of the emperor (Consumption +d* Dominance): 9 Imperial China: modern sector & merchants

10 (1) Dominance is negatively related to the size of the modern sector Q t (which threatens the emperor s status). (2) But the modern sector Q t is also negatively related to the cost of defense, S t. The net effect of Dominance and the cost of defense, d*d t - S t, is a function of Q t ; It can be linearlized as: d * D t S t = The parameter λ above is the net effect. λ captures the Hostility of the emperor towards modernization. The intensity of foreign threat increases the cost of defense and hence lower λ, the hostility of the emperor towards modernization (or towards the merchants) 10

11 The Traditional Agricultural Sector Assume: Agriculture sector play a passive role. Lewis-type of surplus labor, with reservation wage = 1 and infinite supply. Agricultural output is constant. The taxes paid from the rent of the agricultural sector is constant. Ie., T 1 is a constant. Depending on their business ability, farmers can leave their land and work in the modern sector as merchants. 11 Imperial China: modern sector & merchants

12 The Modern sector The modern sector improves the quality of the basic goods produced by the agricultural sector. The modern sector adds the output, Q t, to the constant output of the agricultural sector. The merchants, M t, who work in the modern sectors, originally come from the pool of farmers who have differential entrepreneurial abilities, e i (i distinguishes merchants),which are uniformly distributed over an interval [0,1]. Define Public Capital (K): Public infrastructures (roads, canals, fortifications) ; administrative institutions (innovationfriendly ) institution ; new technologies, etc. Private capital is not considered in a long-run historical time model, in which private capital is treated as intermediate inputs to production. 12

13 , If farmer i with business abilities e i (> 0), decides becoming a merchant, he will produce in period t: Y ak e The farmer remains in Agriculture if it t i ; otherwise he will become a merchant. There is a threshold K, which depends on λ, above (below) which the modern sector would (would not) emerge: it t i K * / 1 1/ 1 The size of the merchant class Mt and output of the modern sector, Qt, can there be calculated: Y ak e 13

14 Intertemporal choices of the emperor From the emperor s budget constraints: Where K = K t+1 ; The choice variables are K t and t 2t. Choose the following U function for simulation: The optimal choice of the emperor in period t can be represented by the policy function: K f t 1 K t Dynamic programming problem, solved by numerical simulation. 14 Imperial China: modern sector & merchants

15 Simulations: A benchmark case:λ = 0 (no hostility); (s=d=0.4); The equilibrium K, K^ =2.46 > threshold K = 0.095; Modern Sector and Merchant class emerge. 15 Imperial China: modern sector & merchants

16 Hostility towards merchants increases to 0.2: Two equilibria: K^ = 0 and K^ = 1.66 > threshold K = FIGURE 2 (λ=0.2) 16 Imperial China: modern sector & merchants

17 Hostility towards merchants further increases to 0.35: One equilibrium: K^ = 0 17 Imperial China: modern sector & merchants FIGURE 3 (λ=0.35)

18 Time paths of K at various level of hostility 18 Imperial China: modern sector & merchants

19 Time Paths of the tax rates on the Modern Sector, at various level of hostility FIGURE 5 19 Imperial China: modern sector & merchants

20 Time paths of the Output of the Modern Sector, Q t, at various level of hostility FIGURE 6 20 Imperial China: modern sector & merchants

21 Conclusion We have proposed an explanation of the rise of the merchant class in imperial China until the thirteenth century and then of its decline from the fourteenth century onward. The rise of the merchants and the modern sector earns a return for the emperor, in the form of taxes collected from the merchants. But, modernization and the emergence of the merchants disrupted the society, eroded its norms and values and threatened the dominant status of the emperor and the traditional élite. 21 Imperial China: modern sector & merchants

22 Conclusion (continue) The emperor s hostility towards the merchant is defined as emperor s taste for dominance, dampened by the impact of the modern sector and the merchants on military spending. To resist a foreign military threat, the emperor will decrease the hostility towards modernization and the merchants. The emperor will finance or encourage public capital investments, which enhance the economy and the defense capabilities of China. These public investments create positive externalities for the development of a modern sector and to national defense. 22 Imperial China: modern sector & merchants

23 Conclusion (continue) The modern sector will emerge as soon as the public capital is higher than a positive threshold level. Hence, an underdevelopment trap exists. Provide an alternative explanation for inefficient institution (a la Olson (1982), Acemoglu et al (2004 ). 23 Imperial China: modern sector & merchants

24 24 Imperial China: modern sector & merchants Thank You!