Capitalism and Confucianism: Was Weber Right?

Abstract

Max Weber claimed that capitalism failed to develop in imperial China due to the incompatibility between Confucianism and modern capitalism. To examine Weber’s China thesis, I investigate the causal relationship between capital and the degree of Confucian influence in Chinese localities. Since formal banking sector and civil law were both absent in imperial China, I use county level data on money business and historical keju statistics to represent capital formation and local Confucian influence respectively. In particular, I use 1914 county level numbers of money business (Qianye) as historical local intensity of informal finance, to regress contemporary county level amount of capital of micro-credit companies to examine the persistence of informal finance. Using the number of issues discussed by local commercial chambers to instrument historical finance, I find that the persistence is significant and strong. I also investigate if Confucianism determined informal institution. To implement, I use the numbers of Jinshi as a proxy of Confucian tradition to instrument dispute resolution institution, and find Confucian influence is conducive to the development of informal institution, which in turn, facilitated the development of informal finance.