The Growth and Decline of the Modern Sector and the Merchant Class in Imperial China

Abstract This paper offers an explanation of why, in Imperial C hina, the merchant class expanded and the economy modernized up to the 13th century, and why it entered into decline from the 14th century onward. The modernization of C hina required the accumulation of public capital and the building of good institutions, upon which a vibrant class of merchants and entrepreneurs could gradually emerge. This class contributed to the enrichment of the society and the emperor, but its activities also weakened the dominance of the emperor and the élite , who would then prefer to block the modernization of C hina and to restrict the size of the merchant class, putting the economy into long‐run stagnation. However, when the emperor faced severe foreign military threats and when he realized that a modern sector improved the defense capabilities of C hina, he made the opposite choice.