Economic growth in China prior to 1870 was kept in check by the performance of its agricultural sector, where diminishing returns to labour reduced effective demand, discouraged investment in manufacturing, and kept the urban share of population from growing. Economic recovery from the Wars of Transition (1644–1681) ended in 1740, when the rate of growth of total output – especially of food – fell below the rate of population growth. For the next century and a half, the economy shrank on a per capita basis. The resulting higher cost of capital relative to labour discouraged the adoption of labour-enhancing tools, even as the decline in the average size of farms raised demand for basic goods. Symptomatically, labour remained stuck in farming and a preponderance of manufacturing activity remained attached to the peasant household. For a period, the expansion of the frontiers coupled with labour intensification elsewhere were sufficient to feed the population, support trade, and fund the state. After 1800, however, environmental degradation took its toll and markets disaggregated. A period of rising social insecurity and political instability set in at the moment when China faced rising external threats from industrialized and industrializing nations.

The British Industrial Revolution marked the beginning of modern economic growth. This breakthrough built upon earlier episodes of GDP per head growth with the economy remaining on a plateau between these episodes. Growth was accompanied by structural change, with the declining share of agriculture matched by the rise of services as well as industry. As a result, Britain improved its position relative to the rest of Europe (the Little Divergence) and also improved its position relative to the leading Asian economies (the Great Divergence). The chapter examines the proximate sources behind economic growth in Britain during 1700–1870, including investment, growth in the number of workers, and accumulation of human capital. Together, these factors accounted for about two-thirds of the increase in output growth, leaving the other third to be explained by total factor productivity growth. However, the ultimate sources of Britain’s growth lay deeper in geography and institutions. The chapter also examines the effects of the Industrial Revolution on living standards and the impact of trade and empire.