Saturday, August 8, 2009

Institutions and the Path to the Modern Economy

While I am a tad critical at times of modern academe, it is also true that there is a great deal of enlightening scholarship being produced. Not all of which is, alas, terribly accessible.

Avner Greif’s Institutions and the Path to the Modern Economy: Lessons from Medieval Trade is a striking, but often rather densely theoretical, attempt to improve understanding by interweaving historical data with theoretical analysis. In particular, Greif seeks to inject time into analysis of institutions—that is, how they change from the actions of agents.

He looks at three sets of historical data: the Maghribi traders, a group of Jewish traders originally from Baghdad and then from the Maghreb who operated in the C11th and C12th centuries. The rise of the Hanseatic League. The rise and decline of medieval Genoa, Venice’s great rival.

Greif happily uses data from sociologists, anthropologists and social psychologists. Not clear to me that folk from other disciplines are as ready to use findings from economics (those well known evil believers in markets, private property and sceptics about government action). Greif, like his apparent mentor Douglass C North, regards Hayek as a serious thinker with genuine insights into the operation of knowledge and institutions: not an outlook I would expect in many areas of contemporary academe.

In looking at the different outcomes between Islam and Christendom, Greif suggests that the divine sanction of Sharia makes institutional change harder than it was for Christianity. Christianity grew up under Roman law and so (unlike Islam or Judaism) was comfortable with notion of man-made (and thus man-changeable) law.
For example, traders within medieval Christendom developed community responsibility (if you have a grievance from one trader from a particular city, you could make your claim against any other trader from the same city). It was a way of transferring liability and operated as an intermediate means to overcome local (and partial) courts by creating local claimants. As time went on, the system generated increased trade that then, by sheer scale, undermined the system creating, Greif suggests, increased demand on kings and rulers to provide more effective court systems. The notion that demand for public goods helped direct the development of the state is an intriguing one. (It does depend on various forms of consent being important in political development.)

Islam lacked self-governing merchant cities and legal capacity for collective responsibility, so could not get through that intermediate step.

Greif’s case studies bring out that it is important to distinguish between beliefs that may guide policy actions and actual patterns of behaviour (which may not at all reflect such beliefs). Thus, just because official policy was often mercantilist, does not mean that traders behaved according to mercantilist beliefs.

I felt Greif’s take on the abolition of slavery was too simple (pp205-7), both in characterising it as being completely abolished and in suggesting that helped productivity growth. Slavery was not entirely abolished in Latin Christendom. And it was replaced by serfdom, which is another form of bondage. Moreover, Latin Christendom shows greater technological dynamism than Rome quite quickly. But his point that Sharia’ endorsement of slavery kept in going in the Muslim world much longer is certainly an arguable one.

Greif incorporates game theory into his analysis, in a nicely careful and considered way. I often found the most intriguing part of his case studies was his very intelligent characterisation of the choices and risks facing individuals. And how mechanisms evolved to deal with those problems—such as trader's agents being “overpaid” so to be self-policing. (Like modern corporations seem to do with their employees: supervision of effect on output is harder, so pay them more so they have more to lose.)

Greif argues that collectivist versus individualist cultural perspective changes relative costs in potential relationships: particularly choices between using kin networks versus non-kin institutions. (Falling importance of kin connections is something of a long-term trend in Western history.)

Greif is particularly interested in whether institutions are self-reinforcing or self-undermining. He argues that Genoa’s institutional solution to internal strife was less effective than Venice’s in generating reasons to identify with the wider polity rather than one’s own clan. So Venice avoided the civil strife that eventually hobbled Genoa.

The book is difficult going at times: much of theoretical sections I read lightly to get a sense, rather than trying to follow every logical step. I did, however, very much approve the use of empirical data to constantly check the developing theory. And the case studies I found highly informative. Greif makes the institutions of the medieval world and how and why they developed much clearer. (He has responded to a critique of his analysis of the use of reputation mechanisms among Jewish traders in the C11th.)

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