Beyond the great divergence: Knowledge accumulation in the West and stagnation in the East

Beyond the Great Divergence: Knowledge accumulation in the West and stagnation in the East

This paper intends to explain the great divergence of the West and the East between the 15^th and the 19^th centuries. At the both the West and the East all experienced population expansion, however afterward the West entered into enduring growth, while China remained stagnant. What causes this great divergence? In the modern growth theory, population can be a stimulus for endogenous growth through increasing returns to education and accumulation of human capital, which in turn lead to technological change and growth as in the Western Europe, however this was not happen in China. This paper intends to provide an explanation for this great divergence. We incorporate institutional setting and labor heterogeneity into the human capital-driven growth model, which explains that population expansion is a precondition for growth but it is institutional constraint that may lead to increasing or decreasing labor heterogeneity depending on institutional cost and benefit of knowledge exchange. The cost of control for political stability arises as the population grows, so the ruler has to choose. There is a trade-off between innovations via knowledge spillover and institutional cost of control. If institutional cost outweighs the benefit of knowledge exchange, for social stability reasons institutional constraint will apply to reduce labor heterogeneity which leads to stagnation with expansion of labor supply as in the case of China. If the benefit of knowledge outweighs institutional cost, human capital accumulation will prevail with increasing labor heterogeneity leading to enduring growth and population expansion as in the West.