The starkly different paths of economic and institutional development followed by China and the West is often attributed largely to the Industrial Revolution. This column argues that institutions and culture played a key role in setting Europe and China on divergent paths well before the onset of the Industrial Revolution, but the role they played was mediated by a critical difference between the two civilisations: the nature of their prevalent social organisations. A key factor behind China’s remarkable economic resurgence has been its capacity to adapt traditional institutions and cultural practices to the needs of a modern economy.
The economic and political gaps between China and the West is one of the defining challenges of the modern era. This contrast has deep historical roots, as the two civilizations followed starkly different paths of economic and institutional development. A thousand years ago, Europe was backwards and poor, while China had a rich and sophisticated civilisation. Yet, Europe became the birthplace of democracy and of the Industrial Revolution, while China stagnated until the end of the 20th century and was consistently ruled by autocracies. Why did this happen, and what does it teach us about the modern world?
For more than two decades, the answer to this question has been dominated by Kenneth Pomeranz’s seminal book, The Great Divergence (Pomeranz 2000). His analysis is nuanced and sophisticated, but Pomeranz’s main argument is simple. The divergence occurred only after 1750 and was driven primarily by the Industrial Revolution. Post-1750 growth occurred in Europe mostly for contingent reasons. Europe was fortunate to be close to coal and to the Americas, but its Industrial Revolution was not the result of intrinsic cultural, institutional, or technological superiority over China. Given the persistent institutional divergence between China and the West, this argument has important implications for the future. We may be at the cusp of another dramatic technological revolution, which this time originated in the US, but where Europe, and not China, is now the laggard.
The dismissal of institutions and culture, however, may have been premature. In a recent book (Greif et al. 2025), we argue that both factors played a key role in setting Europe and China on divergent paths of economic and political development, well before the onset of the Industrial Revolution. But the role of culture and institutions was mediated by a critical difference between China and Europe: the nature of their prevalent social organisations.
Social organisations and local cooperation
In the distant past, the reach of the state was severely limited by difficulties in transportation and communication. Yet the functioning of society required forms of protection, dispute resolution, education, risk sharing, infrastructures, and religious services. In both societies these basic public goods were supplied locally, through forms of cooperation sustained by non-state organisations. But, due to their different cultures, the social organisations that became prevalent in these two parts of the world were very different.
In China, during and after the Song dynasty, local cooperation mostly took place within multi-purpose kin-based organisations, like the clan. The diffusion of dynastic organisations was driven by, and in turn supported, the Neo-Confucian culture that became increasingly influential in the second millennium. The emphasis on loyalty to one’s kin and the willingness to cooperate within extended families increasingly became the foundation of Chinese society at the local level (Freedman 1958, Wang 2022). Ancestor worship, an ancient feature of Chinese society, became more pronounced as clan members realised that a shared ancestry was the common denominator that kept them together. Clans developed detailed books of rules in which the loyalty of members and their obligation to cooperate with one another were specified, and the right of ‘elders’ to remain in control was stressed. This evolution of social arrangements was welcome by the Imperial government, which increasingly relied on clans to maintain local law and order and enforce tax collection.
At roughly the same time, much of Western Europe moved in the opposite direction. Extended families remained important, but much of the cooperation that mattered after c. 1000 was gradually taken over by corporations. These were associations held together by a common purpose, not by shared ancestry. For instance, medieval guilds sustained economic and social cooperation. Monasteries and universities provided religious and educational services. Self-governing cities developed the concept of citizenship and enforced cooperation on a range of issues. These corporations provided mutual insurance, conflict resolution, education, and other local public goods, just like Chinese clans, but they rested on very different cultural foundations and governance principles. Unlike Chinese clans, European corporations were open to strangers, scalable, had an exit option, relied on formal governance and enforcement, and their members often belonged to several overlapping associations.
This divergence in European versus Chinese social arrangements co-evolved with cultural divergence. In Europe, the rise of corporations and the demise of extended families were supported by the Catholic Church, which in turn derived benefits from its symbiotic relationship with monasteries and autonomous towns (Goody 1983). In China, the clan system, the growing influence of Neo-Confucianism, and the proliferation of ancestor worship were synergistic. In this sense, the Great Divergence was a self-reinforcing process.
By about 1500, this social divergence was more or less complete. Europe had become a world where people mostly lived in nuclear families and cooperated within local corporations. In contrast, China was organised in clans that gradually assumed the functions of the imperial administration.
Social organisations and institutional divergence
The distinct social structures of Europe and China profoundly shaped their political institutions. Three aspects stand out.
The first is their legal systems. In China, where the state was stronger from the beginning, the legal system was designed top-down with two main goals: to maintain stability and to govern relations between the administration and its subjects. Civil law was secondary, as commercial disputes were usually settled by clans through arbitration, with magistrates intervening only when these failed. In Europe by contrast, where the state was initially much weaker, the legal system had a bottom-up origin. Legal principles first emerged from private contracts within corporations and merchant communities during the Commercial Revolution of the 12th and 13th centuries, eventually becoming codified law due to the work of legal scholars in universities (which themselves were an example of a corporation). This early focus on civil law had several implications: it clarified the legal personality and rights of corporations, strengthened them politically, and influenced state formation. Justice and law enforcement were among the first state functions, anchoring the principle of the rule of law – limiting sovereign authority and establishing equality before the law (Strayer 1970). This early judicial role also underpinned the rise of national parliaments, which early on adjudicated elite disputes, oversaw officials and handled petitions (Boucoyannis 2021). In Europe, estates and assemblies proliferated after 1150 and laid the foundations for participatory government and the emergence of representative assemblies that negotiated with rulers.
Second, the rise of corporations – particularly autonomous cities and religious organisations – created countervailing powers to monarchs. To secure taxation, rulers granted these bodies ‘immunities’, or rights of self-government, often in exchange for revenue. These immunities anticipated modern civil and political rights, granting privileges to members of specific economic and political groups rather than by birth or ethnicity. In China, the absence of corporate organisations and of self-governing cities meant that privileges could not be assigned to such groups. Powerful clans probably enjoyed preferential treatment in the recruitment of the state bureaucracy and exerted greater influence, but they had no formal rights or representative institutions comparable to those in Europe.
Finally, European corporate governance provided models for constitutional design. Corporations had to solve problems of hierarchy, decision making, accountability, and conflict resolution. Medieval jurists, drawing on their experience with guilds, universities, and religious orders, adapted these principles to the governance of polities, linking corporate organisation to constitutional thought. Nothing like this could happen in China, given the nature of its prevailing organisations.
Social organisations and economic development
The different social arrangements in Europe and China also shaped economic development and knowledge accumulation. European corporations (monasteries, universities, and later scientific societies and academies) were central to the creation and accumulation of knowledge that ultimately led to the Industrial Revolution. Moreover, political fragmentation within and between European states allowed innovators to escape censorship and suppression. Autonomous cities were central to the creation of a network of intellectuals who could find shelter from reactionary priests and rulers. In China, by contrast, education and knowledge were largely controlled by the state. Clans provided schooling, but its purpose was to prepare candidates for the imperial civil service exams. The curriculum, dominated by neo-Confucian doctrine and administered by officials, prioritised moral order and regime stability over scientific inquiry.
Beyond their contributions to knowledge accumulation and discoveries, European corporations advanced economic development in two other ways. First, they facilitated the growth of deep financial markets and long-distance trade through impersonal, legally supported institutions such as the East India Companies and other joint stock companies. Second, European corporate structures also encouraged a capitalist organisation of production, where owners of capital have control rights and are the residual claimants of the returns on investment, while workers earn a fixed wage. This structure incentivised labour-saving innovation and the exploitation of economies of scale. In China, by contrast, interactions were mostly between related individuals, and this slowed down the transition from a local to an impersonal economy (Harris 2020). Moreover, household production and labour-sharing arrangements were more widespread, which made labour-saving innovations less attractive.
Due to their different social arrangements, cultural traits evolved in opposite directions in China and Europe, and this too directly affected economic development. The absence of ancestor worship and lower respect for seniority made Europeans more prone to criticise accepted wisdom and to innovate. More generally, comparing a wide range of societies, Henrich (2020) and Schulz et al. (2019) have found that stronger kinship ties are negatively associated with specific cultural traits that are generally deemed to favour economic growth, such as impersonal trust, moral universalism, analytic thinking, individualism, willingness to cooperate with strangers.
Modern China
The Great Reversal was partially undone during the 20th century. Did this happen because Mao Zedong was able to eradicate the cultural legacy of Confucianism and the social influence of clans? The answer is no. Mao did try to do that, and his campaigns damaged traditional structures. But they failed to eliminate kinship values, which re-emerged after Mao’s death. Even at the height of Maoist totalitarianism, kinship ties continued to play a significant role and mitigated the effects of the disastrous policies that led to the Great Famine of 1959-61 (Chen et al. 2024). On the contrary, a key factor behind China’s remarkable economic resurgence under Deng Xiaoping was its capacity to adapt traditional institutions and cultural practices to the needs of a modern economy. In the absence of strong property rights and formal legal institutions, kin-based networks helped sustain market activity and economic growth. Informal cooperation, rooted in kinship and local community ties, substituted for the legal and financial infrastructures that had supported Western development. Unlike the emperors who ruled after the fall of the Song dynasty in 1279, China’s modern leadership has pursued explicitly pro-growth policies, which fuelled the country’s exceptional economic progress since the early 1980s. Time will tell if Chinese institutions can remain supportive of continued growth in an autocratic polity in which personal freedom and access to information are tightly controlled by a centralised government.
Source : VOXeu
