Great Divergence and Great Convergence: A Theory of Power Dynamics and Social Evolution

Abstract

The economic divergence between Europe and China, recognized as comparably advanced regions in the 18th century, has been a prominent focus in political economy. Adding to the intrigue is China’s recent progress in closing the gap, displaying convergence across diverse economic indicators. Our paper develops a theory of power dynamics and social evolution to integrate both divergence and convergence into a unified framework. It extends the classical argument by North and Weingast (1989) on the commitment problem into a dynamic setting, revealing that credible commitment hinges on the compatibility between state power and social productivity, both subject to dynamic changes. In our model, the state maximizes its fiscal capacity by either employing power-based state production or taxing social production under a relational contract. Crucially, the state can endogenously adjust its power, and the society evolves with its productivity stochastically increases while managing production. An immediate result is that in situations of low social productivity, a high level of power suitable for state production renders any relational contract with the society unsustainable. Conversely, anticipating social evolution, the state may find it self-enforcing to temporarily reduce power -- possibly via a power-sharing agreement -- to initiate social production and foster economic convergence. The subsequent rise in social productivity enables the state to gradually restore its power.