DisORIENT: Money, Technological Development and the Rise of the West

David Fields and Matas Vernengo1

Abstract: This paper analyzes the revisionist literature on the Rise of the West.
Revisionist authors suggest that the so-called Great Divergence is relatively recent, and
that good luck in the form of silver from the Americas, and abundance of coal, rather
than European exceptionalism was central for the higher rates of growth of GDP in the
West. This paper argues that while the revisionist literature provides relevant critiques of
conventional accounts of the Rise of the West, it remains rooted in marginalist or
neoclassical views of both the role of money and technological progress, and that
abandoning these theoretical foundations would strengthen some of its arguments.

Key Words: Rise of the West, Money, Technological Change

JEL Codes: E50, N00, O30

University of Utah and Bucknell University, respectively. Presented at the ASSA Meetings in San
Francisco, January 4, 2016. The authors thank without implicating conference participants and two referees
for their comments to a preliminary version.

During the last few decades our understanding of the Rise of the West has been reshaped
by economic revisionist works1 by both historians and economists, especially the seminal
works by Wong (1997), Gunder Frank (1998) and Pomeranz (2000).2 In essence this
view suggests that the Rise of the West was considerably later than is often assumed, and
that the so-called Great Divergence only occurred in the nineteenth century. It further
suggests that it was possible only by a combination of luck and military power. The
Wests good luck lay in the discovery of the Americas with their rich deposits of silver
and gold; Chinas bad luck was the absence of coal. Revisionist works criticized
conventional views that attributed the rise of Western Europe and its offshoots to
European exceptionalism, whether cultural (the Scientific Revolution or the Protestant
Ethic) or institutional (property rights, or the very existence of a capitalist system).
In many ways the revisionist literature questions not only conventional
neoclassical mainstream stories of the Rise of the West, such as those based on the New
Institutionalist perspective (North 1981; Acemoglu and Robinson 2012), but also
challenges several radical views, including traditional Marxist views of the development
of capitalism as a mode of production, and obsolete, flawed interpretations of the socalled Asian mode of production. However, the critique of conventional wisdom, while
necessary, surprisingly is built on the orthodox tenets of mainstream neoclassical
(marginalist) economics.
This paper analyzes two particular ways in which the revisionist literature has
relied on mainstream economics. First, the revisionist literature accepts the view that the
money supply is exogenously determined, and even seems to rely on the Quantity Theory
of Money (QTM), despite the fact that mainstream economists have basically abandoned
1

the QTM as the basis for monetary analysis. The revisionist literature also adopts a
supply side view of the process of technological change, often emphasizing that the
choice of techniques is based on supply and demand approach. These issues are discussed
in subsequent sections, with a brief conclusion on the limitations of the revisionist
understanding of the functioning of the economy.

A Metallist Interpretation of the Rise of the West

The revisionist literature suggests that the evidence used by most scholars (e.g.,
Maddison 2000) is incorrect, and that Chinese living standards were comparable to those
in the leading regions of Western Europe as late as the eighteenth century (Pomeranz
2000). Further, Gunder Frank (1998) argues that a world market not only existed before
the rise of the West, but also was centered in China, with Europe lying at the periphery of
the world system. In this system Europe did not have the technological advantage, as is
shown by Europes persistent trade imbalances with China, due both to its desire for
Asian products and to its inability to produce goods demanded in Asian markets. In this
story, without American bullion, Europe would have been unable to engage in trade with
the East.
In this view it was not European technological advantages, but China's desire to
obtain silver bullion via trade, that allowed international trade to expand in the sixteenth
through the nineteenth centuries (Flynn and Girldez 1995). The inflow, first of silver
from Spanish America, and later of gold, mostly from Brazil, led to inflationary pressures
in the world economy allowing Western European nations to buy the Chinese and Indian
2

goods that were in high demand in the western world, especially after the consumer
revolution in the Netherlands and England. For example, Gunder Frank (1998: 157)
argues that the evidence suggests strongly that throughout most of Asia the increased
arrival of money from the Americas and Japan did not substantially raise prices, as it did
in Europe. In other words, according to Gunder Frank in Asia increasing demand was
satisfied through use of excess productive capacity and by an increase in the velocity of
circulation, while in Europe bullion inflows caused inflation.3
The fact that prices increased in Europe and not in Asia is seen by Gunder Frank
(1998: 164) as evidence of Asias technological advantage. Although in some sense
Gunder Frank (159) suggests that money stimulated production in Asia, in what he refers
to as Keynesian results he clearly thinks that causality runs from money to output or
prices. This view is similar to the QTM held by some proto-marginalist, as well as by
many marginalist authors, until recently.4 In this view inflation is caused by excess
demand, and the growth of demand, often seen as related to population dynamics, leads
to higher prices. The causality in the equation of exchange (MV = PY) always goes from
the left to the right hand side.
There is, however, an extensive literature going back to classical political
economy that suggests that causality actually runs from the right to the left. This view
holds that the increase in the supply of silver from the Americas only validated the real
causes of inflation. Higher prices and the demand for money, in the absence of American
silver, would (and for a while did) lead to the exploitation of low productivity mines (as it
did in Central Europe in the late fifteen and early sixteen century), or an increase in the
velocity of circulation of money, or both.5
3

More importantly, the role of the state in determining the unit of account and the
standard in which debit and credit relations are established is central in the alternative
view of money creation.6 Money is in this view created by the state, even if in the early
stages of the development of capitalism the role of the state is contested by the rising
bourgeoisie. Determining and maintaining such a standard requires both the power and
authority of the state to establish a particular unit of account, and a central bank to control
and determine the general rate of interest using monetary policy, which in turn affects the
cost of borrowing money and the ability of the state to run deficits and carry debt.
However, the misunderstanding of the role of money in the economy, in particular
the Chartalist notion that money is the creature of the state, creates a more insidious
problem for the revisionist authors.7 It is well known, at least since Cipolla (1965), that
the fundamental advantage of the West with respect to the East stemmed from military,
particularly naval, technology: guns and sails, so to speak. This is for the most part
accepted by revisionist authors, since it reinforces the notion that the Great Divergence is
a recent phenomenon, and that the West was not more efficient, at least not in
manufacturing. However, it is in the ability to finance the state, and the role that
monetary and financial markets played in funding the military apparatus, that the West
might ultimately have had the edge.
The creation of the Bank of England, with the explicit mission of lending money
to the government and acting as the fiscal agent of the crown, allowed for the expansion
of public debt, which reached 260% of GDP during the Napoleonic Wars. In fact, the
creation of the Bank of England had precedents in the creation of Western European
banks like the Venice Bank, the Bank of Amsterdam, and the Stockholms Banco, and is a
4

crucial element of the rise of the Fiscal-Military State (Brewer, 1989), or what
Schumpeter referred to as the Tax State (Vernengo, 2004).8 As noted by OBrien (2013),
the smaller and more urbanized polities of the West found it easier to tax their
populations than the Eastern empires with more extensive territories, larger populations
and less urbanized economies, even if the East was in many respects more advanced than
the West.
In other words, money was central not because American silver allowed an
otherwise unproductive and peripheral Europe to enter Asian markets and buy the
consumer goods it wanted. Instead, money was central because the development of
monetary and financial institutions allowed for the expansion of a militarized state, at the
service of an expanding merchant bourgeoisie capable of opening markets in Asia. The
accumulation of debt and the tax institutions associated with it were instrumental in
providing for the Western military edge.9 But the military advantage and access to
foreign markets that it created had a significant impact on the ability to expand demand,
and that affected technological progress, another problematic area in the revisionist
literature.

A Supply Side View of Technological Change and Development

The revisionist argument regarding technological change and the Rise of the West
follows mainstream marginalist analysis even more clearly than in monetary matters.
Gunder Frank (1998: 286) argues that population/land ratios explained relative
remuneration: that relatively labor-abundant, land-scarce Asia had lower wages than
5

Western Europe because Western Europe (presumably including its American offshoots)
was labor-scarce and land-abundant. High wages in Europe in turn led to labor-saving
technological progress in Europe, which would eventually lead to its hegemonic position
in world markets.10 Pomeranz (2000: 53) criticizes the wage incentive argument
according to which the Chinese manufacturers ignored labor-saving devices because
Chinese labor (unlike European labor) was so cheap. In his view, the obstacle to
continuous expansion in China was the relative scarcity of energy sources, particularly
coal.11 However, his argument accepts the premise that relative factor scarcity was the
mechanism that drove technological innovation.
In other words, Pomeranz and the revisionists argue that growth is limited by
constraints on the supply of factor inputs, and technological progress is ultimately the
result of labor-saving techniques; the distribution of income between wages and profit is
ultimately determined by supply and demand (that is, by relative scarcity), much the
same as in neoclassical historical accounts. Allen (2003) has also suggested that both
high wages and inexpensive energy from cheap British coal were central to explaining
why the Industrial Revolution happened in Britain, even though he remains critical of the
idea that property rights have been the main determinant of investment. For Allen, high
wages and cheap energy forced British producers to innovate to economize labor, leading
to technological innovation and growth, while the absence of those conditions in China
led to stagnation. This view, however, is limited, since it presupposes that economic
agents adopt more productive technologies based on price signals, even without growing
demand. The notion that the relative abundance of factors of production determines their

remuneration is also problematic. It is far from clear that technological innovation in a

high-wage region necessarily results from choosing cost-reducing techniques.
A more plausible story is that higher wages and larger markets required more
investment to expand capacity to meet increasing demand. Central to growth and
development have been institutions that allow for the expansion of demand, including
those that allow for higher wages, expanding consumption and also avoiding external
constraints. The role of the State has been crucial in the process of capitalist development
in a number of ways. These include creating domestic markets, promoting their
expansion, and funding research and development. They also include reducing balance of
payments constraints, both by guaranteeing access to foreign marketssometimes
militarily, as in the Opium Warsand by reducing foreign access to domestic markets. In
this view, what England had and China lacked was a rising bourgeoisie that had to
compete to supply a growing domestic market that had acquired new tastes, and hence
increasingly demanded goods that were previously imported like cotton from India, and
tea and porcelain from China (McKendrick 1982).12 Expanding demand would have
increased the demand for money and credit, and these in turn would have adapted
endogenouslyin part by financial innovation, in part by changes in the velocity of
circulation. This would have made the adoption of relatively expensive energy options
economical, with the costs being passed through to prices.
This is not to deny that supply constraints exist; of course they do. But it suggests
that they are often exaggerated in economic history. 13 Garegnani and Palumbo (1998)
argue that many historians do implicitly describe demand-led growth, but economists
tend to emphasize supply-side conditions, as do the revisionist historians. As noted by
7

Landes (1969: 77): it was in large measure the pressure of demand on the mode of
production that called forth new techniques in Britain, and the abundant, responsive
supply of factors that made possible their rapid exploitation and diffusion. The point will
bear stressing, the more so as economists, particularly theorists, are inclined to
concentrate almost exclusively on the supply side. As it turns out, many historians too
are inclined to overemphasize the supply side, and that is particularly true of the
revisionist authors, perhaps influenced in part by the consensus view in economics.

Conclusion
While useful in reinterpreting the Rise of the West, revisionism has remained centered
around views of money and of the process of technological change that are ultimately
problematic, based on both logic and empirical evidence. In conventional marginalist
logic, money does not have a prominent analytical role. In addition, in neoclassical
economics the relative abundance of factors of production determines their remuneration,
and hence supply and demand are central to the choice of technique.
An alternative to the revisionist literature is provided by what might be termed
classical-Keynesian political economic analysis. In this view, the forces that allow for the
expansion of effective demand mark the historical evolution of capitalism. As noted,
what England had that China lacked was not secure property rights, nor the rule of law,
nor silver from the Americas, nor even coal, but a strong state and a rising bourgeoisie
that had to compete to provide for a growing domestic market. This meant increased
demand for a uniform standard of money and credit, which the Bank of England created
8

in the form of the pound sterling, and this paved the way for financial innovation that was
key in technological change and development.

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Notes
1

Goldstone (2000) refers to the revisionist authors as the California School. However,

from the perspective of economic theory is not clear that all the authors share a common
understanding for the causes of the Rise of the West. These authors are referred to here
simply as revisionist.
2

In turn, these authors build on the work of authors that also criticized conventional

views on the Rise of the West, in particular the work of Abu-Lughod (1989) and
Chaudhuri (1990). Although they have an analytical affinity with the World Systems
literature, e.g., Arrighi (1994), they reach different conclusions, and are often critical of
this literature. The same could be said with respect to the Marxist literature on the rise of
capitalism, for example Maurice Dobb, which are seen as Eurocentric. For a world
systems perspective on the Rise of the West see Mielants (2007).
3

It is far from clear why Asia had excess capacity, and money led to more production,

while in Europe it led to higher prices. However, in both cases it seems that Says Law
reigns supreme, in the sense that the supply constraint in the long run is not affected by
demand.
4

Classical political economy authors, including Adam Smith, did not hold the QTM. In

fact, many classical authors believed that money supply responded to the needs of trade
in accordance with the so-called Real Bills Doctrine. That view was further developed by
Thomas Tooke and his Banking School. Green (1992) suggests that most classical
authors believed in what he refers to as the Law of Circulation of Money. It should be
noted that not all marginalist authors believed in the QTM. Knut Wicksell is a case in
13

point, and modern macroeconomics has a decidedly Wicksellian flavor. For a long while,
however, the QTM dominated the mainstream of the profession under the aegis of Milton
Friedman. On the limitations of mainstream views of money see Ingham (1996).
5

In this view, the sources of inflation are associated to the real transformations of the

productive structure, with the rise of merchant capitalism, and the social conflicts that it
generated, in particular pressures for higher wages, which were often affected by
population dynamics, and other factors influencing the bargaining power of workers. See
Vernengo (2006).
6

The central problematic in the historical evolution of capitalism is the implementation

of a monetary invariant so that debt contracts (the ultimate locus of value creation...)
may be written in terms of the unit at different dates (Mirowski 1991: 579). Some
authors would go further and suggest that the essence of capitalism lies in the elastic
creation of money by means of readily transferable debt (Ingham 2004: 108).
7

For a Chartalist view of money see Wray (1998). Note that by State here we mean the

alliance between the crown and the nascent mercantile bourgeoisie that took over in
England after the Glorious Revolution. The process by which the State took over and
regulated money and financial markets is long and beyond the scope of this paper.
8

Taxation expanded significantly to fund the military state. Also, this allowed for what

has been termed a Military Revolution (e.g. Parker, 1988).

9

However, the reasons for the militaristic nature of the Western economies is not well

developed in the Fiscal-Military State literature. Chase (2003) argues that early firearms
were not very effective when used against cavalry because of their overall lack of
mobility, poor rates of fire, and limited accuracy. As a result, their effectiveness was
14

restricted to infantry and siege warfare, and they were not used in regions threatened by
nomads, which include all the Oriental Empires, in which cavalry warfare was dominant.
That is why the Chinese invented guns, but failed to keep up with Western developments.
The same could be said about sailing techniques, and the combination of guns and sails.
10

Gunder Frank (1998) refers, less problematically, to population/land ratio, while

Arrighi (1999: 337) uses labor/capital ratios in his critique of Gunder Frank, arguing that
capital was more abundant in Europe. Arrighis criticism does not discuss the wellknown problems with assuming that remuneration of factor of production is directly
related to the relative abundance/scarcity of one factor with respect to the other. In
Arrighis view the problem with Gunder Franks argument is that his view that Europe
was capital abundant, clashes with the very idea that China was the destination of the
silver from the Americas and the ultimate sink of the worlds money. This suggests that
capital is equated with money, and, in particular, with bullion. It is clear that capital must
be measured in monetary terms, but a full discussion of the limitations of Arrighis
conception of capital, which is not only comprised by the material means of production,
but also by the social relations of production, is beyond the scope of this article.
11

Pomeranz (2000: 192), in fact, admits that: Europes new financial institutions and the

broader patterns of military fiscalism were well suited to organizing armed settlement and
trade overseas. In his view, Europe had an advantage because it lifted the energy
constraint to growth, not because of the access to silver.
12

McKendrick (1982: 9) argues that a: consumer revolution occurred in England in the

eighteenth century along with the Industrial Revolution. On the consumer revolution see
also Berg (2005) and de-Vries (2008).
15

13

In that case, technological change is not the cause of growth, but the result. As in

Adam Smith's story, it is the extent of the market (demand) that limits the division of
labor (productivity). In modern parlance the idea is known as the Kaldor-Verdoorn Law
(e.g. Jeon and Vernengo 2008). Obviously there is certain serendipity in the process of
technological innovation, and, hence, the pressures of a growing market do not uniquely
determine technological progress. The point is more that there is no reason for an
invention to be pursued systematically if it does not somehow provide for an existing and
pressing need. For example, steam engines were known for millennia, way before
Newcomen and Watt, but had no relevant productive use until they were employed for
pumping water out of mines. Only then the potential of the machine was comprehended,
and the real work of incremental improvements that made it really useful started.

16