We live in a world that has been shaped by a process that began some 250 years ago in northwestern Europe. We often call it the Industrial Revolution because one of its most dramatic features was the appearance of industrial manufacture with the rise of the factory system. However, this was only one element and not the most significant. Moreover, concentrating on industrialization suggests that the change is now complete. The process continues.
It has several important aspects, which are mutually reinforcing. The most obvious is continuous intensive economic growth. Intensive growth is marked by constant innovation and increased efficiency: doing new things and doing more with less. Extensive growth, the historical norm, means more of the same and doing more with more, that is, with no increase in efficiency or productivity. Another important part of the process is continuous technological innovation and improvement. This both reflects and encourages a growth of theoretical knowledge. (See Joel Mokyr's The Gifts of Athena: Historical Origins of the Knowledge Economy.) Yet another part is the development of increasingly complex economic institutions and instruments.
All historians recognize the existence and importance of this phenomenon. However, they disagree about many other related matters. In particular there is no real agreement about how this process started and why it happened in Europe rather than some other part of the world. Why not in the Islamic world or in India? Above all, why not in China? The last question is the truly difficult one. As Kenneth Pomeranz points out in The Great Divergence: China, Europe and the Making of the Modern World Economy, economically China was on an equal footing with Europe until the mid-eighteenth century or later. In fact, for the greater part of human history China was by far the most innovative and technologically advanced of the great civilizations. The list of important inventions first made in China is almost endless. So why did the revolutionary process not start there?
Actually, it did start in China before it did in Europe. As Eric Jones has pointed out in Growth Recurring: Economic Change in World History, China had an "industrial revolution" comparable to that of eighteenth-century Europe-some 800 to 900 years ago. It happened under perhaps the most maligned yet fascinating of China's imperial dynasties, the Song.
The Song reunited China following the division and chaos of the Five Dynasties (907-960). The dynasty was founded by two remarkable brothers, Song Taizu (960-976) and Song Taizong (976-997). They introduced a number of important changes in the economic policy and organization of the Empire. One was a measure that gave peasant farmers true property rights in their land, above all the right to sell it. The result was the emergence of a market in land, which led to the consolidation of smaller farms and the appearance of commercial agriculture. Even more important was their fiscal policy. Traditionally the Chinese state had depended on taxes levied on the peasantry, most often paid in kind. Song Taizu laid down the principle "Agrarian taxes must not be increased." Consequently, the Song came to depend increasingly on taxes on trade and so systematically encouraged it.
This had dramatic results. China rapidly became a highly monetized economy. In 750 only 4 percent of all taxes was paid in money, but by 1065, 50 percent was paid that way. …