China’s rise as the world’s second-largest economy surely is the most dramatic development in the global economy since the year 2000. But China’s prominence in the global economy is hardly new. Since 500 bce, a burgeoning market economy and the establishment of an enduring imperial state fostered precocious economic growth. Moreover, contrary to the view that China’s economy withered under the dual constraints of Western colonialism and Chinese tradition after 1800, recent scholarship has identified the onset of modern economic growth in response to new incentive structures, investment opportunities, ideas, and technology, laying the foundation for the post-1978 economic miracle. China’s combination of market-led growth under the firm hand of the state has produced a model of economic development that challenges conventional theories of capitalism and economic growth. The spectacular growth of the contemporary Chinese economy also spurred deeper investigation into the Chinese economy – long a neglected field of study, at least in the Western academy. Scholarship on Chinese economic history has now developed to the stage where a Cambridge History devoted to the subject is appropriate and feasible.

When visited by the British trade mission led by Lord George Macartney, who aimed to show off the best of Western trade and technology, the Qianlong Emperor of Qing China was known to have famously replied in 1792, “Our Celestial Empire possesses all things in prolific abundance and lacks no product within its borders. There is therefore no need to import the manufactures of outside barbarians in exchange for our own produce.” Qianlong’s statement came at the height of Qing’s glory, overseeing a remarkable tripling of population and a doubling of territory between the fifteenth and eighteenth centuries. No single political entity at the time achieved such size in both geography and population under such stability and durability.

While China’s rural economy predominated during the imperial era, some of the world’s largest cities were part of the Chinese landscape. From the Song dynasty (960–1279) onward, the number of cities and towns rose, the urban population expanded, and the urban sector of the economy became a significant indication of the wealth and prosperity of the Chinese empire. Even though large cities such as Chang’an and Luoyang had existed both before and during the Tang dynasty (618–907) and featured sites of production and services, they were founded and functioned primarily as political capitals. In the Song era an extensive array of types of cities besides capitals – maritime ports, provincial transport hubs, manufacturing and commercial centers – flourished as trade and cultural metropoles. Chinese cities took on a different configuration during the Song – one may speak of a “new urban paradigm”: in contrast to the cities of the Tang era with their enclosed wards, gridiron streets, tightly controlled markets, and sharp hierarchical social structure, the Song-era city was shaped by mercantile society and managed by pragmatic bureaucrats.

The genesis of Chinese political economy can be traced to the Warring States era (453–221 bce), which was marked on one hand by rapid economic progress (the spread of iron metallurgy, advances in agricultural productivity, the invention of coinage, and the emergence of a private merchant class) and on the other hand by the rise of autocratic states (accompanied by the centralization of political power and mass mobilization for war). The economic principles and policies that later shaped the formation of the first unified empires – what I will designate the militarist–physiocratic state – were enunciated by leading ministers of the most successful autocratic states, such as Li Kui in Wei and Shang Yang in Qin, and set down in works such as The Book of Lord Shang and Han Fei Zi.

“Political economy” is a Western term that carries its own, evolving ideological baggage. For John Stuart Mill, political economy was a science – that which “traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object.”1 Adam Smith used the word “science,” but meant what Mill would have called “art”: for him, “political oeconomy” could be “considered as a branch of the science of a statesman or legislator” and had as its objectives “enabl[ing]” the people to prosper through their own efforts and “supply[ing] the state or commonwealth” with means of payment for “the public services.”2 Smith takes us closer than Mill to what the authors mentioned in this chapter understood as their mission. It is not that Chinese writers were incapable of identifying infallibly observed regularities, but construction of a disciplinary edifice through the systematic “tracing” of such regularities in economic behavior was not a premodern Chinese project.

The long transition – often marred by violence – between Tang and Song discerned by Naitō Konan marked the advent of a new world. The An Lushan Rebellion (755–763) triggered profound political and military crises that shattered the institutions of the Tang dynasty, but also set in motion the slow progression of the market economy, which the Tang leadership began to see as the necessary means to restore its fiscal authority. With the collapse of the equal-field system of state land allocations in the wake of the rebellion, the Tang abandoned the principle of uniform, in-kind taxation of farming households as the basis of its fiscal and military systems. Urgent necessity prompted the adoption of new and more flexible fiscal strategies to secure revenues from commerce and consumption. The expansion of the market economy mitigated the Confucian elite’s traditional hostility toward commerce and acted as a key catalyst for the mercantilist policies pursued by the southern kingdoms during the first half of the tenth century.

Assessing the mix of monetary and fiscal policies is a regular feature of informed commentary.1 The timeless issues relating to the framework for monetary and fiscal policy and their appropriate degree of co-ordination have been exposed by the COVID-19 crisis. I have previously argued that the sequence of arbitrary fiscal rules that have been formulated by successive governments in the past decade do not make much economic sense, as they do not match a well-defined social welfare criterion.2 I have also argued that the framework for monetary policy needs a close examination after the experiences of the global financial crisis and nearly twenty-three years of operational independence of the Bank of England.3

Over the course of the twentieth century, economic policy increasingly took on the obligation of maximising household welfare subject to available resources in the presence of markets that need regulation, information, co-ordination and the ready supply of public goods. Within that large set of policies – ranging from education to defence – which manage a complex economy that sits itself within a world of exchange and trade, what do central bankers seek to do? The imperative to stabilise is clear. This is not so much a problem about exploration, experimentation and innovation but about creating conditions under which plans can be formulated and exercised with some degree of certainty that monetary and financial exchange will be safeguarded.

In this chapter we will examine how key institutions were mobilized to shape China’s early modern business practices under weak state engagement of the economy, and a growing foreign presence. Business practices in the late imperial period rested on four pillars, each a fundamental part of the institutional framework that structured social and economic life. The first, family, provided templates for the utilization of capital and labor and the mobilization of trust, tools that proved as useful for China’s late imperial commercial economy as for the early modern economy of industrial enterprise and global engagement. The second might be termed the system of private ordering that served generations of Chinese merchants and others in combining capital and establishing the terms of economic interaction, often through written contracts whose provisions established highly flexible forms of partnership that continued to form the basis of most Chinese business until the early PRC. The third, native place, in significant ways mirrored the intangible assets provided by ties of kinship, offering a predetermined basis for co-operation, nurturing and protecting group interests and skills and, like the fourth, grounding these intangibles in very tangible organizations catering to inhabitants of a particular city, region, or province.

Continental East Asia during the first millennium bce transitioned from a redistributive “gift-giving economy” (or “prestige-good economy”) to a thriving market economy that was at least partly monetized. This transformation – gradual but all-encompassing and irreversible – led to a veritable “economic miracle” during the Warring States period (c. 450–221 bce), which brought unprecedented prosperity to large portions of the population. It will here be discussed through its reflections in the material record, spanning the eight centuries from c. 1000 bce down to approximately the time of the Qin unification in 221 bce.1 During this period, the Zhou kingdom and its constituent polities formed a relatively homogeneous culture area encompassing the middle and lower Yellow River basin and the middle Yangzi basin. Archaeological discoveries attest that, over time, many of the surrounding smaller and sociopolitically less complex regional cultures – defined by archaeologists on the basis of their material remains – were increasingly drawn into the Zhou orbit.

China is one of the seven regions in the world where agriculture developed independently, and among the earliest, with cultivation of cereal crops dating back to at least 7000 bce. The unique repertoire of crops first cultivated in China – millet, rice, and soybeans – remained staple foods throughout Chinese history, although millet was mostly displaced by wheat, an import from West Asia, by 1000 ce. The long history of the development of agriculture and the rise of cereal cultivation as the mainstay of human livelihood and economic activity dramatically altered the natural landscape, its landforms, soils, and waters as well as its flora and fauna. Domestication of the environment to serve human needs for food, clothing, shelter, and fuel repeatedly realigned the balance between human populations and natural resources. The strain of burgeoning human populations and their demands on these resources necessitated continual technological innovation to sustain agricultural production and conserve natural resources. By the year 1000 the human impact had utterly transformed the ecology of northern China, especially in the watershed of the Yellow River.

Beginning in the late 1970s, China’s economy produced the largest growth spurt in recorded history. This striking departure from the economic experience of the previous 200 years encourages onlookers to view recent economic success as a “miracle” that requires neither economic nor historical explanation. Such thinking ignores common elements that have shaped China’s long-term economic trajectory: forces propelling spurts of innovation and growth, restrictions that often impede these dynamic forces, and enduring features of China’s polity that generate tensions between centralized authoritarian power and economic growth. Neglect of these historical legacies invites misconceptions about the current boom’s origin and the economy’s likely future path. History and economics figure prominently in our analysis of both.