Great question! The short answer, in the context of the China example, is that the capital bottleneck is the first gear in the model. Whether banking/lending would relax the constraint depends on the next gear up the chain—i.e. it depends why capital was scarce in the first place.
Here are a few possibilities:
malthusian poverty trap: all excess resources go to expanding the population, so there is little-to-no surplus to invest in capital.
institutions: weak property rights or poor contract enforcement mechanisms, making it difficult to invest.
coordination problem: there’s plenty of people with surplus to invest, and plenty of people with profitable ways to invest it, but the coordination problem between them hasn’t been solved.
Introducing banking/lending would potentially solve the last one, but not the first two. In the constraint language, banking technology introduces new constraints: it requires contract enforcement, and it requires people with excess resources to invest (among other things). Those new constraints need to be less taut than the old capital constraint in order for the technology to be adopted.
In the case of China, banking/lending technology was almost certainly available—it simply wasn’t used to the same extent as in Europe. I have heard both the malthusian trap and the institutions explanations given as possible reasons, but I haven’t personally studied it enough to know what was most relevant.
Great question! The short answer, in the context of the China example, is that the capital bottleneck is the first gear in the model. Whether banking/lending would relax the constraint depends on the next gear up the chain—i.e. it depends why capital was scarce in the first place.
Here are a few possibilities:
malthusian poverty trap: all excess resources go to expanding the population, so there is little-to-no surplus to invest in capital.
institutions: weak property rights or poor contract enforcement mechanisms, making it difficult to invest.
coordination problem: there’s plenty of people with surplus to invest, and plenty of people with profitable ways to invest it, but the coordination problem between them hasn’t been solved.
Introducing banking/lending would potentially solve the last one, but not the first two. In the constraint language, banking technology introduces new constraints: it requires contract enforcement, and it requires people with excess resources to invest (among other things). Those new constraints need to be less taut than the old capital constraint in order for the technology to be adopted.
In the case of China, banking/lending technology was almost certainly available—it simply wasn’t used to the same extent as in Europe. I have heard both the malthusian trap and the institutions explanations given as possible reasons, but I haven’t personally studied it enough to know what was most relevant.