INSTITUTIONS AND THE PATH TO THE MODERN ECONOMY

LESSONS FROM MEDIEVAL TRADE

It is widely believed that disparities in economic, political, and social outcomes reflect distinct institutions. There is little agreement, however, among economists, political scientists, and sociologists as to what institutions are, what forces influence their persistence and change, why societies evolve along distinct institutional trajectories, and how we can influence institutional development. This multidisciplinary book develops a concept of institutions that integrates seemingly alternative lines of institutional analysis in the social sciences. It advances a unified framework to study institutional origin, persistence, endogenous change, and the impact of past institutions on subsequent ones.

   The benefits of this perspective are demonstrated through comparative studies of institutions – particularly those that supported trade – in the late medieval European and Muslim worlds. This comparative analysis of the institutional foundations of markets and polities and their dynamics also provides valuable insights on the functioning of contemporary economies. Indeed, the analysis highlights the possible particularities of the European institutions and why and how they contributed to the rise of the modern economy by supporting impersonal exchange, fostering the rise of effective states, and leading to advances in useful knowledge.

Avner Greif is the Bowman Family Endowed Professor in Humanities and Sciences, Professor of Economics, and Senior Fellow at the Institute for International Studies at Stanford University. He is a recipient of fellowships from the American Academy of Arts and Sciences, the MacArthur Foundation, the Econometric Society, the Canadian Institute for Advanced Research, and the Center for Advanced Studies in the Behavioral Sciences, Stanford. He has published articles in such journals as American Economic Review, Journal of Political Economy, Journal of Economic History, American Political Science Review, European Review of Economic History, and Chicago Journal of International Law as well as chapters in many edited books. Greif is also a coauthor of Analytic Narrative (1998), and some of his works have been published in French, Japanese, Persian, and Spanish editions.

POLITICAL ECONOMY OF INSTITUTIONS AND DECISIONS

Series Editors

Randall Calvert, Washington University, St. Louis
Thráinn Eggertsson, University of Iceland and New York University

Founding Editors

James E. Alt, Harvard University
Douglass C. North, Washington University, St. Louis

Other books in the series

Alberto Alesina and Howard Rosenthal, Partisan Politics, Divided Government, and the Economy
Lee J. Alston, Thráinn Eggertsson, and Douglass C. North, eds., Empirical Studies in Institutional Change
Lee J. Alston and Joseph P. Ferrie, Southern Paternalism and the Rise of the American Welfare State: Economics, Politics, and Institutions, 1865–1965
James E. Alt and Kenneth Shepsle, eds., Perspectives on Positive Political Economy
Josephine T. Andrews, When Majorities Fail: The Russian Parliament, 1990–1993
Jeffrey S. Banks and Eric A. Hanushek, eds., Modern Political Economy: Old Topics, New Directions
Yoram Barzel, Economic Analysis of Property Rights, 2nd edition
Yoram Barzel, A Theory of the State: Economic Rights, Legal Rights, and the Scope of the State
Robert Bates, Beyond the Miracle of the Market: The Political Economy of Agrarian Development in Kenya, 2nd edition
Charles M. Cameron, Veto Bargaining: Presidents and the Politics of Negative Power
Kelly H. Chang, Appointing Central Bankers: The Politics of Monetary Policy in the United States and the European Monetary Union
Peter Cowhey and Mathew McCubbins, eds., Structure and Policy in Japan and the United States: An Institutionalist Approach
Gary W. Cox, The Efficient Secret: The Cabinet and the Development of Political Parties in Victorian England
Gary W. Cox, Making Votes Count: Strategic Coordination in the World’s Electoral System

Continued on page following index

INSTITUTIONS AND THE PATH TO THE MODERN ECONOMY

Lessons from Medieval Trade

AVNER GREIF
Stanford University

CAMBRIDGE UNIVERSITY PRESS
Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo

Cambridge University Press
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Information on this title: www.cambridge.org/9780521480444

© Avner Greif 2006

This publication is in copyright. Subject to statutory exception
and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without
the written permission of Cambridge University Press.

First published 2006

Printed in the United States of America

A catalog record for this publication is available from the British Library.

Library of Congress Cataloging in Publication Data

Greif, Avner, 1955–
Institutions and the path to the modern economy: lessons from medieval trade / Avner Greif.
p. cm. – (Political economy of institutions and decisions)
Includes bibliographical references and index.
ISBN-13: 978-0-521-48044-4 (hardback)
ISBN-10: 0-521-48044-2 (hardback)
ISBN-13: 978-0-521-67134-7 (pbk.)
ISBN-10: 0-521-67134-5 (pbk.)
1. Commerce – History – Medieval, 500–1500. 2. Social institutions.
I. Title. II. Series.
HF395.G74    2005
381′.09′02 – dc22    2005006468

ISBN-13 978-0-521-48044-4 hardback
ISBN-10 0-521-48044-2 hardback

ISBN-13 978-0-521-67134-7 paperback
ISBN-10 0-521-67134-5 paperback

Cambridge University Press has no responsibility for
the persistence or accuracy of URLs for external or
third-party Internet Web sites referred to in this publication
and does not guarantee that any content on such
Web sites is, or will remain, accurate or appropriate.

To the living memory of my father, Dr. Leon Arie Greif
א ׳ בצנת .ףײרג הירא ןואל ר ״ ד ל ״ אס, יברו ,ירומ ,יבאל

Contents

Abbreviations

Preface

This book grew out of an attempt to gain a better understanding of the causal factors underpinning economic and political outcomes during the late medieval period (circa 1050 to 1350). It was during this period that the Muslim (Mediterranean) World reached what many scholars consider to be the zenith of its commercial integration, whereas expansion of markets in Europe was so pronounced that prominent historians dubbed this phenomenon as “the Late Medieval Commercial Revolution.” Gaining a better understanding of this period therefore has the promise of advancing our knowledge regarding why and how effective markets and economically beneficial polities prevailed in some historical episodes but not in others. Although economists have long emphasized the welfare-enhancing implications of market expansion, we know surprisingly little about the source for historical trajectories of market development.

   This period is also of interest because it was a point of bifurcation in the histories of the Muslim and European worlds. The Muslim world was probably more advanced economically, technologically, and scientifically than Europe during the late medieval period. Indeed, the Europeans learned a great deal from the Muslim world at the time (e.g., Watt 1987). In subsequent centuries, however, the Muslims developed economically and politically along a different path from the Europeans, and became economically worse off in the long run.

   In attempting to understand this period and its implications on subsequent development, I benefited from the training in historical analysis that I received when pursuing an advanced degree at Tel Aviv University. I was particularly fortunate to study under the supervision of Professor Moshe Gil, a specialist in the Muslim medieval world. My training in historical analysis was complemented by further graduate training in economics and economic history at Northwestern University where I had the privilege to work under the supervision of Professors Joel Mokyr, John C. Panzar, and William P. Rogerson.

   My training in these two disciplines is reflected in this book, which combines historical and social scientific modes of analysis. On the one hand, the book aspires to do justice to historical particularities and processes. Indeed, it argues that they are the keys to understanding distinct outcomes and developments in seemingly identical situations. On the other hand, it also recognizes that a purely historical narrative risks being ad hoc and devoid of general insights.

   The analysis conducted here, therefore, also follows the social scientific tradition of relying on explicit theory, using analytical models, and putting conjectures at the risk of being empirically refuted. At the same time, it recognizes the limitations of the social scientific approach: general theory often fails to account for historical particularities; the use of models is restricted by underlying mathematical techniques; and historically specific conjectures often cannot be evaluated using statistical methods.

   Historical and social scientific analyses are therefore complements to each other rather than substitutes, as often assumed. My hope is that the studies presented here will demonstrate the necessity, feasibility, and benefit that is derived from integrating these two scientific modes of analysis.

   In the course of studying the late medieval period, I realized the need to go beyond invoking different technologies, endowments, or preferences, as classical economic theory directs. To understand the outcomes and processes of interest, I had to incorporate in the analysis the impact of institutions. In economics, institutionalists usually identify institutions with either politically determined rules regulating economic activities or contractual and organizational forms chosen by agents interacting within markets. These approaches were too narrow for my purpose because I couldn’t take either the political or market orders as exogenous to the analysis. My aim was to examine the endogenous emergence and dynamics of different polities and economies and not merely behavior in them.

   To understand the endogenous emergence, operation, and implications of different polities and markets, therefore, I had to go beyond viewing institutions as politically determined rules or as the optimal responses of economic agents interacting within markets. Instead of taking markets and polities as exogenous, I had to consider them as endogenous and study their institutional foundations. To take the analysis to this deeper level, I sought to understand the causal factors influencing behavior in economic and political transactions. Such understanding necessitated going beyond studying rules to consider how systems of rules, beliefs, norms, and organizations (social structures) guide, enable, and motivate behavior in various transactions.

   Studying institutions as interrelated systems as rules, beliefs, norms, and organizations turned out to be both challenging and rewarding. By the ad hoc invoking of unobservable beliefs and norms, for example, any outcome can be explained, implying that we have explained nothing of consequence. It is therefore imperative to have a way to restrict the set of admissible institutions. In restricting this set, I found it conceptually sound and empirically rewarding to combine historical and microanalytical – particularly game-theoretic – analyses. Combining historical and game-theoretic analyses enabled me to do justice to the diversity of the possible systems of rules, beliefs, norms, and organizations on the one hand, while analytically restricting and empirically evaluating the set of admissible institutions and outcomes.

   Moreover, this approach revealed new ways to advance the study of the thorny issue of institutional dynamics. In what ways do institutions influence trajectories of subsequent institutional and therefore historical development? Economists usually assert that institutional dynamics reflect optimal responses of decision makers to current and expected conditions. Social scientists working in other disciplines and historians, however, assert that institutional dynamics reflect the shackles of history. Each side of this debate captures a potentially important aspect of reality, but neither is satisfactory by itself. By considering institutions from the broader perspective advanced here and combining the historical and the microanalytical frameworks, we can bridge these two approaches. It is possible to better understand when and why an institution persists in a changing environment, how it unleashes processes that lead to its demise, and how past institutions – perhaps even those that are no longer effective in influencing behavior – influence subsequent ones.

   The formation and implications of distinct beliefs, norms, and organizations (social structures) have been extensively studied in disciplines other than economics, such as sociology, political science, and cognitive science. Hence, this book builds on analytical and conceptual frameworks developed in disciplines outside economics. It particularly highlights the benefits of merging the study of institutions, as conducted in mainstream economics, with the study of cultural and social factors, as conducted in sociology. By focusing on beliefs, norms, and organizations, which has traditionally been the domain of sociological analysis, this work became a part of the “sociological turn” of institutional analysis in economics. Sociological variables are invoked to account for the diversity found in institutional forms and development.

   My attempt to gain a better understanding of a particular historical episode necessitated attempting to advance institutional analysis. Many social scientists maintain that institutions matter and that institutional dynamics is a historical process. The ability to study institutions and their dynamics is therefore crucial to understanding the reasons for the uneven distribution of welfare among and within different societies and what can be done to improve this situation. The framework outlined in this book attempts to advance our ability to conduct a comparative analysis of the institutional foundations of past and contemporary markets and polities and their dynamics.

   Because this book contains an analysis of a particular historical episode and a general framework for studying institutions, it is made up of several overlapping components. The first is a detailed study of institutions that provided the foundations for markets and polities during the late medieval period; the second is a comparative analysis of institutions in the European and Muslim worlds during that period; the third is a conceptual, analytical (specifically game-theoretical), and empirical framework for studying institutions and their endogenous dynamics. Indeed, the analyses of specific institutions are presented in this book as illustrations of the main aspects of this framework.

   This book is therefore multifaceted and hence there are many ways to read it. Some readers will read it as presenting a theory of economic and political institutions in which historical case studies illustrate particular theoretical assertions. Some will read it as a statement of why and how we should introduce endogenous dynamics into institutional analysis, or why a context-specific, theoretically informed, case-study analysis is useful. Some will read this book as a comparative study of the institutional foundations of late medieval markets and states in the European and Muslim worlds that fostered our understanding of these particular historical episodes and their dynamics. Others will read it as a study of the interrelations between institutional development and cultural and social evolution, or as a call for expanding institutional analysis in economics by incorporating cultural and social factors. For some it will be read as a confirmation of the applicability of game theory to empirical institutional analysis, while others will read it as social science history. As for myself, the book reflects an attempt to gain a better understanding of a particular historical episode and to learn about institutions in general from this period.

   My greatest professional debt in producing this book is to my two teachers: Joel Mokyr and Douglass C. North. Joel and Doug spent many hours inspiring, encouraging, and providing me with detailed comments. Their faith in this project was instrumental in moving it forward. Masahiko Aoki, Randall Calvert, Philip T. Hoffman, Timur Kuran, David Laitin, Steve Tadelis, Barry Weingast, and Oliver Williamson have also provided me with detailed comments on various drafts of this manuscript. This preface seems also an appropriate opportunity to thank Elhanan Helpman who influenced my professional development since my undergraduate days.

   While writing this book, I was fortunate to benefit from a particularly favorable work environment at Stanford University. I have greatly benefited from interactions, stimulations, and valuable comments regarding this project from members of the Comparative Institutional Analysis and Economic History groups in the Economics Department, particularly from Masahiko Aoki, Paul David, Marcel Fafchamps, Paul Milgrom, Steve Tadelis, Yingyi Qian, and Gavin Wright. Many other Stanford scholars working on institutions also contributed in many ways to this project. James D. Fearon, John W. Meyer, Stephen H. Haber, Stephen D. Krasner, David Laitin, and Robert Powell were particularly instrumental. Paul Milgrom, Barry Weingast, and David Laitin collaborated with me on projects that grew from or were later incorporated into this book. While I was working on this manuscript, I also had the good fortune to collaborate with and learn from Robert Bates, Margaret Levi, Jean-Laurent Rosenthal, and Barry Weingast while coauthoring Analytic Narratives with them.

   Several organizations sponsored conferences and seminars where I gained important feedback on the manuscript. These include the Center for New Institutional Social Science at Washington University, the Center for the Study of Economy and Society at Cornell University, the Mercatus Center at George Mason University and the Liberty Fund, and the Canadian Institute for Advanced Research. These events were organized by Itai Sened, Victor Nee and Richard Swedberg, Paul S. Edwards and Brian Hooks, and Elhanan Helpman, respectively. In addition to their comments, I benefited greatly from input by participants, particularly Lee Benham, Peter J. Boettke, Randall Calvert, Bruce G. Carruthers, Stanley Engerman, Philip T. Hoffman, Jack Goldstone, David Harbord, Jack Knight, Michael Macy, Chiaki Moriguchi, Gary Miller, John V. Nye, and Norman Schofield. Avanish Dixit, Thráinn Eggertsson, Steve A. Epstein, Henry Farrell, Judith Goldstein, Peter Gourevitch, Yaron Greif, Leonard Hochberg, Jeffrey Rogers Hummel, Peter Katzenstein, Margaret Levi, Bentley Macleod, Chris Mantzavinos, Tetsuji Okazaki, Daniel Posner, John Pencavel, Robert Powell, Rudolf Richter, Gerard Roland, Andy Rutten, Kenneth Shepsle, Shankar Satynath, Kathleen Thelen, and Carolyn Warner also provided me with valuable comments.

   The able research assistance of Saumitra Jha, Navin Kartik, Na’ama Moran, Lucia Tedesco, and Joanne Yoong contributed much to the research reported in this book. I am similarly in debt for the valuable lessons I received from my students and post docs, particularly Kurt Annen, Gregory Besharov, Ryo Kambayashi, Kivanc Karaman, Aldo Musacchio, Mu Yang Li, Nese Yildiz, and Pai-Ling Yin.

   Grants from the National Science Foundation, fellowships from the MacArthur Foundation and the Canadian Institute for Advanced Research, and support from the Stanford Humanities Center and the Center for Advanced Studies in Behavioral Sciences at Stanford gave me both the resources and the time to complete this work. My assistant, Deborah Johnston, provided me with valuable support, going over endless versions of the manuscript among many other contributions. Barbara Karni, through her able editing, contributed much to render the exposition accessible. The editorial team at Cambridge University Press – Lewis Bateman, Brian R. MacDonald, and Eric Schwartz – were similarly of immense help.

   The endless energy and impressive intellect of my mother, Koka Lea Greif, has always been a source of inspiration for me. Last, and not least, I am in debt to my wife Esther Greif and our children, Adi, Yaron, and Arielle, who stood by me during the years I worked on this manuscript. They were a constant source of support and motivation, and I greatly appreciate the personal sacrifices they willingly made to enable me to complete this book.

Various chapters in this book build on material previously published by the author.

   Chapters 3 and 9 draw on “Reputation and Coalitions in Medieval Trade: Evidence on the Maghribi Traders” ( Journal of Economic History, 1989), by permission of the Economic History Association; “Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition” (American Economic Review, 1993), by permission of the American Economic Association; “Contract Enforceability and Economic Institutions in Early Trade: Lessons from the Commercial Revolution” (American Economic Review, 1992), by permission of the American Economic Association; and “Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies” (Journal of Political Economy, 1994, copyright by the University of Chicago, all rights reserved), by permission.

   Chapter 4 draws on “Coordination, Commitment and Enforcement: The Case of the Merchant Gild” ( Journal of Political Economy, 1994, copyright by the University of Chicago), by permission. A modified version of Chapter 6 was published as “Theory of Endogenous Institutional Change” (coauthored with David Laitin, American Political Science Review, 2004), by permission of the American Political Science Review. Chapter 8 draws on “Self-Enforcing Political Systems and Economic Growth: Late Medieval Genoa” (in Analytic Narratives, 1998), by permission of Princeton University Press.

   Chapter 10 draws on “Institutional and Impersonal Exchange from Communal to Individual Responsibility” ( Journal of Institutional and Theoretical Economics, 2000), with the permission of Springer Publishing Group; “Impersonal Exchange without Impartial Law: The Community Responsibility System” (Chicago Journal of International Law, 2004, 5:1, pp. 109–38), with permission of the journal.

Other books in the series (continued from page iii)

Gary W. Cox and Jonathan N. Katz, Elbridge Gerry’s Salamander: The Electoral Consequences of the Reapportionment Revolution
Jean Ensminger, Making a Market: The Institutional Transformation of an African Society
David Epstein and Sharyn O’Halloran, Delegating Powers: A Transaction Cost Politics Approach to Policy Making under Separate Powers
Kathryn Firmin-Sellers, The Transformation of Property Rights in the Gold Coast: An Empirical Study Applying Rational Choice Theory
Clark C. Gibson, Politicians and Poachers: The Political Economy of Wildlife Policy in Africa
Stephen Haber, Armando Razo, and Noel Maurer, The Politics of Property Rights: Political Instability, Credible Commitments, and Economic Growth in Mexico, 1876–1929
Ron Harris, Industrializing English Law: Entrepreneurship and Business Organization, 1720–1844
Anna L. Harvey, Votes without Leverage: Women in American Electoral Politics, 1920–1970
Murray Horn, The Political Economy of Public Administration: Institutional Choice in the Public Sector
John D. Huber, Rationalizing Parliament: Legislative Institutions and Party Politics in France
Jack Knight, Institutions and Social Conflict
Michael Laver and Kenneth Shepsle, eds., Making and Breaking Governments: Cabinets and Legislatures in Parliamentary Democracies
Michael Laver and Kenneth Shepsle, eds., Cabinet Ministers and Parliamentary Government
Margaret Levi, Consent, Dissent, and Patriotism
Brian Levy and Pablo T. Spiller, eds., Regulations, Institutions, and Commitment: Comparative Studies of Telecommunications
Leif Lewin, Ideology and Strategy: A Century of Swedish Politics (English edition)
Gary Libecap, Contracting for Property Rights
John Londregan, Legislative Institutions and Ideology in Chile
Arthur Lupia and Mathew D. McCubbins, The Democratic Dilemma: Can Citizens Learn What They Need to Know?
C. Mantzavinos, Individuals, Institutions, and Markets
Mathew D. McCubbins and Terry Sullivan, eds., Congress: Structure and Policy
Gary J. Miller, Managerial Dilemmas: The Political Economy of Hierarchy
Douglass C. North, Institutions, Institutional Change, and Economic Performance
Elinor Ostrom, Governing the Commons: The Evolution of Institutions for Collective Action
J. Mark Ramseyer, Odd Markets in Japanese History: Law and Economic Growth
J. Mark Ramseyer and Frances Rosenbluth, The Politics of Oligarchy: Institutional Choice in Imperial Japan
Jean-Laurent Rosenthal, The Fruits of Revolution: Property Rights, Litigation, and French Agriculture, 1700–1860
Michael L. Ross, Timber Booms and Institutional Breakdown in Southeast Asia
Alastair Smith, Election Timing
David Stasavage, Public Debt and the Birth of the Democratic State: France and Great Britain, 1688–1789
Charles Stewart Ⅲ, Budget Reform Politics: The Design of the Appropriations Process in the House of Representatives, 1865–1921
George Tsebelis and Jeannette Money, Bicameralism
Georg Vanberg, The Politics of Constitutional Review in Germany
Nicolas van de Walle, African Economies and the Politics of Permanent Crisis, 1979–1999
John Waterbury, Exposed to Innumerable Delusions: Public Enterprise and State Power in Egypt, India, Mexico, and Turkey
David L. Weimer, ed., The Political Economy of Property Rights: Institutional Change and Credibility in the Reform of Centrally Planned Economies