If you had to do everything yourself (feed yourself, clothe yourself, shelter yourself), you would be very much poorer than you are now. The ability to specialise and the ability to access resources beyond your immediate vicinity enormously increases your resource use possibilities.
(This, btw, is why "food miles" is such utter crap. It is just a revamping of the late C19th/early C20th "local food" movement. As it was back then, it is richer folk sneering at the only way lower income folk can get cheap food.)
The ability to specialise and to access resources beyond your immediate vicinity relies on transactions. The easier it is to transact, the greater the resource use possibilities. Which is why reduction in transaction costs has been such a key feature in the evolution of mass prosperity. Institutional structures which generate lower transaction costs have tended to be advantaged over those that generate higher transaction costs. More transactions, more resource use possibilities, mean greater social capacity and higher levels of general prosperity.
The trouble is, blocking certain sorts of transactions can be a great way to create or defend privilege. Various forms of social mercantilism restrict the ability to transact, or the ease of transacting, to favoured groups: such as requiring (expensive or time-consuming) official permission. Latin America, for example, has long been bedevilled by that sort of social mercantilism. As has the Middle East (pdf). Such social mercantilism both generates jobs for officials (and possible bribe income) and allows some groups to be advantaged over others.
One sees the same privileging by restricting the ability to transact in many European labour markets: hence high unemployment rates, particularly among young workers. This is a particularly severe problem in Spain.
This is a game that generates problems, particularly for welfare states. Not only does restricting the ability to transact lower the level of economic activity, thereby decreasing the revenue for government; it also increases the reliance on welfare services, raising the expenses for government. Sure, public employment and welfare dependence can be a voter-and-activist base, but one runs into problems of sustainability.
The success of the Australian public policy model has been crucially based on making transacting easier and targeting welfare more precisely, creating a far more sustainable welfare state. A low tax, low debt, low unemployment, high income growth, high low-income growth, public policy model.
Central to this success has been macroeconomic stability founded in a clear monetary policy target. The target is an average of 2-3% inflation over the business cycle. That means that, if output surges, the Reserve Bank (RBA) tightens policy; if output falls away, the RBA loosens policy. In other words, using the MV = Py equation, if y [output] surges, the RBA puts downward pressure on P [prices]; if y falls away, the RBA eases so that growth in P increases.
In other words, the RBA acts to stabiliise growth in Py (or GDP in money terms: i.e. NGDP). Which means it stabilises growth in spending, hence income (since income is just someone else's spending). Stable income growth means a higher transaction path.
Money is a transaction good. In Australia, monetary policy encourages stable growth in transactions. Monetary policy thus allows money to perform its function of being used in transactions, based on stable expectations of income growth.
The RBA does not treat minimising growth in P as the only thing to worry about. In particular, it does not play games with expectations; it does not suddenly shift its intended growth rate in P without telling folk, as the US Federal Reserve [Fed] disastrously did. Nor does it regard driving down income growth to keep growth in P low good policy, as the European Central Bank did, creating the European income, and thus debt, crisis. In Australia, money supply reacts to changes in money demand so as to keep stable growth in income by providing a stable framework for expectations about future income.
Which makes it a lot easier to keep public debt down, since income growth is relatively stable.
What is undermining European welfare states, particularly in Mediterranean economies, is a double "whammy". First, structural failures which restrict the ability to transact (and so the number of transactions); putting downward pressure on government revenue and upward pressure on expenditure. Second, monetary policy failure; so that preserving the "value" of the Euro is regarded as much more important than the level of its actual use in transactions. The mindset which declares the value of money is more important than its level of use.
To summarise the failure of European policy (and the failures of the Fed): it's transactions, stupid. And to summarise the success of Australian policy: it's transactions, of course.
Indeed, the greatest failures of Australian policy are in indigenous policy (with massive social failure in indigenous communities) and land use policy (creating way over-priced [pdf] housing). In both cases, restrictions on transacting are at the heart of the failure. Really, it's transactions, stupid.
Postings on books (mainly non-fiction), a few films and matters of interest by Lorenzo from Oz (aka Downunder)
Wednesday, February 29, 2012
Monday, February 27, 2012
Australian exceptionalism
The Governor of the Bank of Canada recently gave a speech on inflation targeting (via). It was a sensible enough speech except for one thing. (Well, perhaps more than one, but I will let Scott Sumner deal with that.)
What I am going to harp on is: no mention of Australia.
If you are going to discuss sensible monetary policy, it is past time when careful meditation on the Australian experience should be required. No recession since 1991 is a performance to ponder. But the point is much broader than that. Australia is an extremely successful public policy example. What we do works, and was working very well before the recent commodity price surges.
It is just that the success is particularly stark in monetary policy. The Reserve Bank of Australia's monetary policy target of an 2-3% average level of inflation over the business cycle has been extremely successful. So successful that for the Governor of the Bank of Canada to make no mention of it at all in a speech on inflation targeting is risible.
What I am going to harp on is: no mention of Australia.
If you are going to discuss sensible monetary policy, it is past time when careful meditation on the Australian experience should be required. No recession since 1991 is a performance to ponder. But the point is much broader than that. Australia is an extremely successful public policy example. What we do works, and was working very well before the recent commodity price surges.
It is just that the success is particularly stark in monetary policy. The Reserve Bank of Australia's monetary policy target of an 2-3% average level of inflation over the business cycle has been extremely successful. So successful that for the Governor of the Bank of Canada to make no mention of it at all in a speech on inflation targeting is risible.
Sunday, February 26, 2012
Not merely a Greek disaster
This report on Greece from the Daily Mail describes a country spiralling down into social collapse; one where a book of recipes from wartime Greece can be a hit. A society under deep stress through economic problems:
A euro crisis
This is a crisis all about the euro. There are many reasons why Greece is suffering worst from the euro-crisis, but Greece is not causing it. In Nick Cohen’s words:
Poverty levels in Europe—or, at least, those at risk of social exclusion—are high and rising. There is much more at stake than the viability of the European financial system.
As Greece is suffering worst, it becomes the focal point of the crisis. But the Greek austerity measures are cutting so deep, some people may end up paying to have a job. As the Melbourne Weekly reports:
The ECB did it
It is true that the euro was likely a disaster waiting to happen. As Milton Friedman pointed out (pdf), it imposed a single monetary policy on institutionally disparate countries. Mediterranean countries, whose political economy had been based on regular devaluations to maintain competitiveness, were yoked with Northern European countries, which used periodic institutional reform to maintain competitiveness. Early on, Germany was disadvantaged. It then engaged in major economic reform, and became advantaged by the euro. It was, however, always likely that countries whose political economy had relied on devaluation would, over the longer term, suffer more than countries which used institutional reform. Which is what has happened.
(A friend points out that Protestant countries are handling the euro better than Catholic/Orthodox ones. A similar pattern emerged during the deflationary period of the C19th gold standard [scroll down to English version]. Given the central role of public debt, this is not so surprising given that Protestant and Catholic cultures have different attitudes to time, as the work of psychologist Philip Zimbardo explicates. This likely leads into an ethic of personal responsibility and future-directedness that probably makes institutional reform easier. It turns out that the social consequence differences between being “naked before God” and a Church that takes responsibility for absolving the contrite of responsibility are not trivial.)
Even given all this, however, the question remains why did the crisis happen when it did and in the form it did?
To which the answer is: because of the ECB’s tight money policy. (We can even track it on Google Insights.)
‘Tight money’ being defined not by reference to some monetary aggregates (as the relationship between monetary aggregates and economic outcomes is not stable due to such things as institutional change and shifts in expectations), still less by interest rates (since interest rates are far from the only monetary transmission mechanism and interest rates are the price of credit, not money) but by the relationship between money supply and the demand to hold money.
Since the price of money is what you can buy with it, shifts in money demand are registered in prices and spending. The “stickier” prices are, the more any downward shift in spending will be registered in falls in output. Either way, income falls (since someone’s spending is another person’s income). So, if the demand to hold money shifts upward, but money supply is held steady, then spending, and thus income, falls. With the “stickier” prices are, the more such a fall in spending becomes a fall in output. (So yes, supply side reforms making your economy more flexible are a good thing.)
And if income falls, the ability to service debt worsens. If spending falls enough, one can get a severe debt crisis. So a central bank can create tight money simply by not changing what it has been doing, if demand to hold money rises.
And an asset price bust is a classic reason why people want to hold more money (to use less credit and pay back past debts). But it is not the asset price bust that creates the financial crisis; it is the failure of the central bank to respond to the increased demand for money. (Or, worse, reduces the supply of money, which is what the insane Bank of France and the US Fed did in 1929-32, creating the Great Depression [pdf].)
But to be held accountable for the change you fail to make, particularly when there is a highly visible asset price crash and financial shake-up going on, is hard. It takes some reasoning to see underlying causes, as well as mainstream commentators to notice. Alas, monetary policy is not something that is all well understood. Indeed, there are entire theories of macroeconomics that greatly downplay its importance.
The more invisible a responsible institution is to mainstream commentary, the more unaccountable they are. Nor are central bankers at all likely to publicly accept responsibility. People have an incentive to accept theories that reduce their accountability.
So people look at Greece’s dysfunctional political economy; they look at some countries having major debt problems and others not so much; they look at the difficulties inherent in the euro and they see explanations.
With far too many people not looking any further, so not seeing this is a crisis made by the ECB. Europe does not have a public debt crisis. Europe has an income crisis. An income crisis caused by a collapse in spending caused by the ECB’s tight money policy. Of course the crisis hit the most vulnerable and the most dysfunctional first: that is what crises do. But do not let Greek dysfunction distract you from the reality that the ECB caused Europe’s debt crisis.
Yes, the euro was a bad idea. But this crisis has a specific cause: and that cause is the tight money policies of the European Central Bank.
ADDENDA David Beckworth puts it pithily (with graph).
[Cross-posted at Critical Thinking Applied]
What is so shockingly evident as you walk around Athens are the awful parallels between that war-time era and today. The soup kitchens, the beggars, the pensioners picking up discarded vegetables after street markets close, the homeless scavenging for food in bins. These are the signs that can be seen.The scale of the economic problems is remarkable:
Less noticeable is the quiet desperation of dignified people who turn off heating despite the cold and share dwindling savings with jobless relatives. Or the workers unable to afford fares home and the children fainting in school from hunger.
Greece’s economic freefall is calamitous. Gross domestic product is already down 13 per cent since 2008, and is likely to fall a further seven per cent this year.Jobs are scarce:
By contrast, the fall in national output in Britain during the Great Depression was never more than 10 per cent. Such is the speed of collapse that a quarter of Greek businesses have gone bust since 2009.
One in five people live below the poverty line. Rates of crime, disease, homelessness and suicide are shooting up, while capital spending and property prices plummet.
The official unemployment rate has hit 20 per cent — though, as one journalist warned me bitterly, never trust an official statistic in Greece.A similar report from the Melbourne Weekly indicates the depths of the problem:
Nearly half those under 25 are jobless.
University of Athens economist Panagiotis Petrakis ticks off the indicators: standard of living down, by as much as 30 per cent; bank deposits that have not been spirited out of the country are dwindling; almost 70,000 businesses folded in 2010 and bankruptcy is stalking more than 53,000 of the remaining 300,000; unemployment, 25 per cent - but youth joblessness is 47 per cent and rising; a quarter of the population living in poverty; homelessness, up 25 per cent, with well-educated youngsters accounting for much of the rise. Petty crime, doubled.As the Daily Mail reports, the economic crisis is becoming a health crisis:
On top of all that Petrakis detects a slow run on the Greek banks. "It means a slow death for the economy," he forecasts.
It is worried by the growing numbers unable to access healthcare, and watching with alarm the rise in infectious diseases, the increase in mental health problems and the return of malaria after an absence of nearly 40 years.The Melbourne Weekly reports a strong sign of supply-side problems:
"Despite all the economic loss to middle and lower class families, no prices have gone down - not for food, not for medicine," Charakidas says. "The theory is that you have an internal devaluation by lowering wages and pensions and prices will fall - they haven't."The World Bank ranks Greece at 100 out of 183 countries ranked in ease of doing business but 135 out of 183 in ease of starting business, 150 out of 183 in ease of registering property and 155 out of 183 in protecting investors. Attempting to open an online store in Greece is a nightmare:
It took 10 months, a fat bundle of paperwork, countless certificates, long hours of haggling with bureaucrats and overcoming myriad other inconceivable obstacles for one group of young entrepreneurs to open an online store.Economic activity is about having transactions. Greece pays a lot of bureaucrats with generous pension benefits to make it expensive and difficult to be in the business of engaging in transactions. As the Daily Mail reports:
The crisis has given Greeks an image of being feckless and workshy. But surveys have shown this to be wrong — there are more entrepreneurs per head of population than in any other European country, and they work longer hours, too.The crisis comes from a deeply dysfunctional system:
In 2008, the year the financial storm broke, the average Greek worked 2,116 hours throughout the year, compared with the 1,426 hours put in by the average German.
Given the incompetence of the state, people are coming together to sort out their problems — another reminder of that war-time spirit under Nazi occupation.
There is no shortage of finger-pointing and name-calling. Greeks mostly blame their politicians for the mess they are in. Their politicians excoriate their European paymasters, especially the Germans, as much for fuelling the Greek addiction to debt as for the ruthless detox regime to rein it in.Or, as the Daily Mail reports:
The borrowing fed a pact with the devil. The politicians used the money to pay a bloated public sector - one in seven Greeks is on the government teat. The deal was that families and whole communities would support politicians as long as the cheques kept coming. Reporters testing oft-told stories of hospital janitors earning more than doctors because of this system of patronage, known as ''rousfeti'' in Greek, are assured they are not apocryphal.
The crisis was partly caused by politicians hugely increasing the size of the public sector after the country joined the euro.As Melbourne Weekly tells us, made worse by a tax system which deeply unfair because it is riddled with evasion:
In 12 years, the wage bill of the Greek state sector doubled — and this excludes ‘fakelaki’, the notorious cash-filled envelopes needed when dealing with officials. It was decreed that those in ‘arduous’ jobs could start receiving pensions from the age of 50 — and hairdressers and waiters were among 600 jobs classified as arduous.
A poor state school system employed four times the number of teachers as Finland, the country with the best education system in Europe.
And, famously, a finance minister complained the railways were costing the country so much money, it would be cheaper to pay taxis to take the travelling public wherever they wanted to go.
When privately employed Greeks are not complaining about politicians and the government, they vent about tax. "Taxes are so high because almost everybody else, businessmen, professionals and companies, can evade them - and the schemes introduced to reduce evasion don't work," Dimos Charakidas, a 34-year-old finance and investment consultant told the Herald. 'The injustice then is that the government increases the tax on those who do pay."Part of a wider culture of evasion:
Despite anxiety about rising homelessness, most Greek families own their homes; the rental rate is one of the lowest in Europe.And the voters are not blameless:
The consultant Charakidas explains: "They have loans but they don't pay them and they get renewed protection from bank foreclosure every six months."
The more popular, he explains, is for Greeks to curse their politicians for failing to tell them the consequences of their rampant borrowing. But this is something of a cop-out, he says: "The compromise was that these not-so-good politicians would be re-elected as long as they didn't impose the drastic measures needed to address the impact of the national borrowing."The stress the Greek political system is under is enormous. As conditions become more extreme, so do politics. As Nick Cohen points out:
He sits back, indicating that he is more inclined to a less popular, second argument: "I'm in the minority. I believe you get the government you deserve … and here that means this crisis will get much worse before it gets any better.
Because they oppose the EU, cranks from the left and racists from the right now make more sense to Greeks than their mainstream politicians. The parallels with the 1930s are too obvious to labour.A crisis on this scale has political repercussions.
A euro crisis
This is a crisis all about the euro. There are many reasons why Greece is suffering worst from the euro-crisis, but Greece is not causing it. In Nick Cohen’s words:
But Greek corruption cannot explain why Portugal is in crisis, any more than Italian corruption can explain why Ireland and Spain are in crisis. All five countries are suffering – and France may soon be suffering – because the euro is a monumental mistake. Rather than rectify it, European leaders attack the welfare states, employment protections and public services that the best of the European centre-left fought for after 1945. In the name of saving the euro, everything must go.As British Foreign Secretary William Hague has said, the euro is a burning building with no exits.
Poverty levels in Europe—or, at least, those at risk of social exclusion—are high and rising. There is much more at stake than the viability of the European financial system.
As Greece is suffering worst, it becomes the focal point of the crisis. But the Greek austerity measures are cutting so deep, some people may end up paying to have a job. As the Melbourne Weekly reports:
Amid deep humiliation and great uncertainty about what it means to be Greek and, more particularly, European, enraged Athenians are lashing out as the weight of five grinding years of recession and the promise of perhaps decades of crippling reform and restructuring crushes the living breath from them.And the bailout terms are stark:
The conditions insisted upon by Europe and barely delivered on by Athens, include the axing of 150,000 jobs from an 800,000-strong public sector by 2016 and a 22 per cent slice off the minimum wage - in a country in which average wages have dropped 15 per cent since 2009. The retirement age is to be lifted from 58 to 65 and restrictive closed shops that control the professions and services are to be busted.Distrust of the Greek political class is poisoning the process:
But such is the mutual distrust and a Greek suspicion, reasonably founded on blunt public comments by German, Dutch, Finish and Luxembourg officials, that the Europeans are manoeuvring to cut Greece adrift from the European monetary union, that there are doubts all the money will be forthcoming - without which Greece would default within weeks on bonds worth $17.8 billion.Nick Cohen makes the striking comparison that the EU is treating Greece worse than the US treated a defeated and war-devastated Germany:
European officials are furious that Greek political leaders continue to allude to a need to renegotiate some of the bailout conditions, despite signing undertakings, demanded by the troika, that there would be no walking backwards.
The depth of the naked suspicion was encapsulated in a comment on Wednesday by Wolfram Schrettl, professor of economics at Berlin's Free University, when he told reporters: "Statements and assurances from Greece [that it will abide by loan agreed conditions] are no longer taken at face value. There is a growing belief that Greece is looking for a sucker - and Germany is playing the sucker." …
Apart from anger at Greece's failure to implement earlier agreements there is growing confidence in Berlin and several other capitals that the markets recognise that Greece is beyond redemption and that it could be cast out without a contagion affect in other Euro basket cases - Portugal, Spain, Ireland and Italy.
The EU's terms do not begin to match the altruism the United States showed to the defeated Germans after 1945. America did not pauperise West Germans as many in France and indeed Washington wanted. America guaranteed their security, then gave them loans from the Marshall Plan that allowed the West German economic miracle to begin. Greece has invaded no one and committed no crimes against humanity. Yet the EU, which boasts that solidarity is its founding principle, is forcing it into destitution and chaos.Policy driven by decent, moderate people is driving Greece into disaster and collapse.
Europe does not seem pleasant, prosperous or peaceful today. When historians write about the end of its postmodern utopia, they will note that it was not destroyed by invading armies anxious to plunder Europe's wealth or totalitarian ideologues determined to install a dictatorship, but by politicians and bureaucrats, who appeared to be pillars of respectability, but turned out to be fanatics after all.What we are seeing is the disastrous effects of closed minds, of massive, entrenched groupthink:
The EU cannot take responsibility for what it has done and be magnanimous for reasons British readers may not grasp. Raised in a Eurosceptic country, we do not understand how an absolute commitment to the European project was a mark of respectability on the continent. Like going to church and saying your prayers for previous generations, a public demonstration of commitment to the EU ensured that the world saw you as a worthy citizen. If you wanted to advance in Europe's governing parties, judiciaries, bureaucracies and culture industries, you had to subscribe to the belief that ever-greater union was self-evidently worthwhile.What is most striking is that, in three lengthy reports on the spiraling crisis in Greece (all via), not one mentions the ultimate culprit—monetary policy; or, more precisely, the tight money policy of the European Central Bank (ECB).
The ECB did it
It is true that the euro was likely a disaster waiting to happen. As Milton Friedman pointed out (pdf), it imposed a single monetary policy on institutionally disparate countries. Mediterranean countries, whose political economy had been based on regular devaluations to maintain competitiveness, were yoked with Northern European countries, which used periodic institutional reform to maintain competitiveness. Early on, Germany was disadvantaged. It then engaged in major economic reform, and became advantaged by the euro. It was, however, always likely that countries whose political economy had relied on devaluation would, over the longer term, suffer more than countries which used institutional reform. Which is what has happened.
(A friend points out that Protestant countries are handling the euro better than Catholic/Orthodox ones. A similar pattern emerged during the deflationary period of the C19th gold standard [scroll down to English version]. Given the central role of public debt, this is not so surprising given that Protestant and Catholic cultures have different attitudes to time, as the work of psychologist Philip Zimbardo explicates. This likely leads into an ethic of personal responsibility and future-directedness that probably makes institutional reform easier. It turns out that the social consequence differences between being “naked before God” and a Church that takes responsibility for absolving the contrite of responsibility are not trivial.)
Even given all this, however, the question remains why did the crisis happen when it did and in the form it did?
To which the answer is: because of the ECB’s tight money policy. (We can even track it on Google Insights.)
‘Tight money’ being defined not by reference to some monetary aggregates (as the relationship between monetary aggregates and economic outcomes is not stable due to such things as institutional change and shifts in expectations), still less by interest rates (since interest rates are far from the only monetary transmission mechanism and interest rates are the price of credit, not money) but by the relationship between money supply and the demand to hold money.
Since the price of money is what you can buy with it, shifts in money demand are registered in prices and spending. The “stickier” prices are, the more any downward shift in spending will be registered in falls in output. Either way, income falls (since someone’s spending is another person’s income). So, if the demand to hold money shifts upward, but money supply is held steady, then spending, and thus income, falls. With the “stickier” prices are, the more such a fall in spending becomes a fall in output. (So yes, supply side reforms making your economy more flexible are a good thing.)
And if income falls, the ability to service debt worsens. If spending falls enough, one can get a severe debt crisis. So a central bank can create tight money simply by not changing what it has been doing, if demand to hold money rises.
And an asset price bust is a classic reason why people want to hold more money (to use less credit and pay back past debts). But it is not the asset price bust that creates the financial crisis; it is the failure of the central bank to respond to the increased demand for money. (Or, worse, reduces the supply of money, which is what the insane Bank of France and the US Fed did in 1929-32, creating the Great Depression [pdf].)
But to be held accountable for the change you fail to make, particularly when there is a highly visible asset price crash and financial shake-up going on, is hard. It takes some reasoning to see underlying causes, as well as mainstream commentators to notice. Alas, monetary policy is not something that is all well understood. Indeed, there are entire theories of macroeconomics that greatly downplay its importance.
The more invisible a responsible institution is to mainstream commentary, the more unaccountable they are. Nor are central bankers at all likely to publicly accept responsibility. People have an incentive to accept theories that reduce their accountability.
So people look at Greece’s dysfunctional political economy; they look at some countries having major debt problems and others not so much; they look at the difficulties inherent in the euro and they see explanations.
With far too many people not looking any further, so not seeing this is a crisis made by the ECB. Europe does not have a public debt crisis. Europe has an income crisis. An income crisis caused by a collapse in spending caused by the ECB’s tight money policy. Of course the crisis hit the most vulnerable and the most dysfunctional first: that is what crises do. But do not let Greek dysfunction distract you from the reality that the ECB caused Europe’s debt crisis.
Yes, the euro was a bad idea. But this crisis has a specific cause: and that cause is the tight money policies of the European Central Bank.
ADDENDA David Beckworth puts it pithily (with graph).
[Cross-posted at Critical Thinking Applied]
Thursday, February 23, 2012
Money as transaction good
This is based on a comment I made here
Money is a transaction good: it is used to do transactions. Hence, an economy with three goods (output, money and assets) has two markets. The output market and the asset market with money as the good used in transactions in either (and so both) markets. And anything that can be used as a transaction good is money.
Since money is something used for transactions, we accept payment in money because we can use it in future transactions. It is a store of value in that sense, but, as Nick Rowe explains, a peculiar one. For its value is purely due to its potential use in future transactions.
Which is why fiat money is money in its purest form. It is not "distorted" money or "false" money or "perverted" money: it is money in its purest form for it has no value apart from its value in transactions.
Which leads to lots of interesting questions. Those about what determines the value of money in transactions (how much one gets, or pays for, what) and what determines the range of transactions money in general (or a specific money) is used for. These are related questions, but not the same question. And the ambit question is not only why US$ works in Red Square (even in the days of the Soviet Union) but why there are a whole lot of transactions we engage in which are so personal that using money would be inappropriate.
Money is a transaction good: it is used to do transactions. Hence, an economy with three goods (output, money and assets) has two markets. The output market and the asset market with money as the good used in transactions in either (and so both) markets. And anything that can be used as a transaction good is money.
Since money is something used for transactions, we accept payment in money because we can use it in future transactions. It is a store of value in that sense, but, as Nick Rowe explains, a peculiar one. For its value is purely due to its potential use in future transactions.
Which is why fiat money is money in its purest form. It is not "distorted" money or "false" money or "perverted" money: it is money in its purest form for it has no value apart from its value in transactions.
Which leads to lots of interesting questions. Those about what determines the value of money in transactions (how much one gets, or pays for, what) and what determines the range of transactions money in general (or a specific money) is used for. These are related questions, but not the same question. And the ambit question is not only why US$ works in Red Square (even in the days of the Soviet Union) but why there are a whole lot of transactions we engage in which are so personal that using money would be inappropriate.
Monday, February 20, 2012
Utopian cruelty revisited
The fundamental claim of utopianism is that public policy can change human nature. This can either be based on the view that human nature is malleable or that there is a “true” human nature that has been distorted by (dispensable) aspects of reality.
This is a claim that leads directly to tyranny and murder, for it de-legitimises any manifestation of humanity that contradicts how human nature is “supposed” to be. No manifestation of “erroneous” nature provides any moral constraint on the utopian project. Which, by natural extension, includes any action that can be deemed to get in the way of the project. It becomes a program of moral exclusion, based on some all-trumping vision of how people should be; one that morally discounts how people are.
We can see these patterns operating in monotheism’s apparently endless war against human sexual diversity. Either human nature is “properly” heterosexual—in which case no homosexual love, aspiration, experience or whatever has any legitimacy—or human sexuality is malleable and people can be forced into, or should choose, heterosexuality. Indeed, if homosexuality is not repressed, it will spread.
Both claims are clearly nonsense. People do not choose their sexuality. In all the words, songs, tales, poems, ballads people have composed on love, lust, romance and passion none are about the moment when people choose what they fancy, about choosing their erotic orientation, because no one has that moment. Nor is there any program, therapy or treatment that has anything other than a derisory success rate at changing sexual orientation.
Even the claim that the objection is merely to acts, not orientation, is nonsense, since the acts flow from erotic longings. If the acts are wrong, so is the orientation; it becomes something to be repressed; and, of course, completely illegitimate.
Just to state the obvious—public policy cannot change human sexuality—is to see the utopian nature of the sexual uniformity project. Sure, it is a highly traditional form of utopianism. Sure, it is a utopianism with a narrow focus on a vulnerable minority. But it is utopian all the same.
If public policy cannot change human sexuality, what it can do is punish people for being different. That it can do very well. In particular, it can punish people for being standing contradictions of a theory of human nature.
The cruelty involved is profound: beyond the cruelty of judicial murder, of incarceration, of public denigration; of the panoply of barbarities inflicted in the name of sexual uniformity, there is the cruelty of denial: to deny that you are “properly” human. A cruelty that the war has regularly led parents to impose on their children. If you tell people something is against God and nature, of course some parents will reject their children over it. Poisoning relations between parents and children is a given. As is poisoning people’s sense of themselves.
All utopianism is cruel, for it denies people the right to be themselves. But a utopianism that reaches in and poisons relationships between parent and child, that poisons people’s sense of themselves—that is a truly insidious form of utopian cruelty.
This is a claim that leads directly to tyranny and murder, for it de-legitimises any manifestation of humanity that contradicts how human nature is “supposed” to be. No manifestation of “erroneous” nature provides any moral constraint on the utopian project. Which, by natural extension, includes any action that can be deemed to get in the way of the project. It becomes a program of moral exclusion, based on some all-trumping vision of how people should be; one that morally discounts how people are.
We can see these patterns operating in monotheism’s apparently endless war against human sexual diversity. Either human nature is “properly” heterosexual—in which case no homosexual love, aspiration, experience or whatever has any legitimacy—or human sexuality is malleable and people can be forced into, or should choose, heterosexuality. Indeed, if homosexuality is not repressed, it will spread.
Both claims are clearly nonsense. People do not choose their sexuality. In all the words, songs, tales, poems, ballads people have composed on love, lust, romance and passion none are about the moment when people choose what they fancy, about choosing their erotic orientation, because no one has that moment. Nor is there any program, therapy or treatment that has anything other than a derisory success rate at changing sexual orientation.
Even the claim that the objection is merely to acts, not orientation, is nonsense, since the acts flow from erotic longings. If the acts are wrong, so is the orientation; it becomes something to be repressed; and, of course, completely illegitimate.
Just to state the obvious—public policy cannot change human sexuality—is to see the utopian nature of the sexual uniformity project. Sure, it is a highly traditional form of utopianism. Sure, it is a utopianism with a narrow focus on a vulnerable minority. But it is utopian all the same.
If public policy cannot change human sexuality, what it can do is punish people for being different. That it can do very well. In particular, it can punish people for being standing contradictions of a theory of human nature.
The cruelty involved is profound: beyond the cruelty of judicial murder, of incarceration, of public denigration; of the panoply of barbarities inflicted in the name of sexual uniformity, there is the cruelty of denial: to deny that you are “properly” human. A cruelty that the war has regularly led parents to impose on their children. If you tell people something is against God and nature, of course some parents will reject their children over it. Poisoning relations between parents and children is a given. As is poisoning people’s sense of themselves.
All utopianism is cruel, for it denies people the right to be themselves. But a utopianism that reaches in and poisons relationships between parent and child, that poisons people’s sense of themselves—that is a truly insidious form of utopian cruelty.
Thursday, February 16, 2012
The Long Divergence (3)
This is the third part of my review of Timur Kuran’s excellent economic history The Long Divergence: How Islamic Law Held Back the Middle East. The first part was in my previous two posts.
Having set the analytical framework for analysing the economic history of the Islamic Middle East in Part I, and how interlocking incentives blocked institutional development in Part II, Kuran considers the role of non-Muslim minorities in Part III The Makings of Underdevelopment.
Converging practice
Until the C18th, the various religious communities were broadly even economic development. Then, as economic modernisation began to seep into the region, Greeks, Armenians and, to a lesser extent, Jews became disproportionately important in finance and commerce, particularly in cities. To explain why many centuries of no particular advantage suddenly shifted to notable non-Muslim advantage, Kuran starts with Islamic legal pluralism, where non-Muslims could use autonomous court and legal systems for non-criminal matters. As Europe began to develop the legal infrastructure of economic modernity, Jews and Christians could take advantage of these opportunities when Muslims—required to use Sharia—could not (Pp169-71).
Choice of law came down to choice of forum, since each religious community’s courts applied their own laws: an arrangement that had Roman precedents but became regularised under Pact of Omar, whose alleged origins under caliph Omar I or Omar II (d.720) gave it great legitimacy. The Pact permitted interactions among non-Muslims to choose which law they wished to apply, though interactions with Muslims had to be dealt with via Sharia (Pp172-3).
Choice of law can exercise ex ante (at the time of negotiations) or ex post (at a later date). The former is consensual; the latter might be unilateral, to secure some advantage. The Pact permitted both to non-Muslims. Muslims were limited to choices between different schools of Islamic law: though the differences were minimal in most commercial and financial matters. Since apostasy was punishable by death, Muslims could not opt out of Sharia while dhimmis, in their transactions amongst themselves, could chose to use it or not. So the militarily and politically dominant Muslims had fewer legal choices than their non-Muslim subjects. Given legal choice was not binding ex ante, the normal economic literature on the efficiency benefits of such jurisdictional choice do not apply. How things turned out becomes a purely empirical issue (Pp174-6).
Despite the existence of rabbinical courts (for Jews) and ecclesiastical courts (for Christians), both Jews and Christians made extensive use of the Muslim legal system for commercial and financial matters while continuing to also use their own courts. Any interactions with Muslims was supposed to be dealt with by Sharia while Muslim courts had much better capacity for enforcement—the non-Muslim courts were more like arbitration boards than full courts—greater authority and provided third party courts for interactions across religious communities. In some areas, notably partnership, Sharia handled such matters at least as well as Christian courts and better than Jewish ones. The result was a tendency for legal homogenisation towards Sharia, which meant the institutional and incentive blockages which affected Muslim commercial and financial life also affected those of non-Muslims (Pp180-1).
Christian and Jewish inheritance law differed considerably from Islamic inheritance law: so many dhimmi families took steps to block relatives taking disputes to Islamic courts (such as allowing daughters to inherit and restricting bequests to non-relatives). The effect was to have inheritance patterns converge towards those of Muslim law. Though communal leaders also took steps to discourage use of Muslim law (up to, and including, excommunication). The net effect of this convergence was to lessen the advantage in choice of law. The dominance of Sharia thus blocked legal pluralism from being a vehicle for institutional innovation (Pp182-5).
Rulers recognised minority communities as groups only to the extent that it advantaged the ruler. So the power of the state blocked that path to organising as a corporation (Pp186-7).
Religion mattered for economic life since legal rights and obligations depended on faith. But, for centuries, Islamic legal pluralism was “self-undermining”, operating in the direction of a legal homogenisation that blocked modernisation (p.188).
Advantage emerges
Up until the C18th, non-Muslims had no particular advantage in commerce and finance over Muslims. This then changed dramatically: non-Muslim minorities began to shoot ahead of Muslims in commerce and finance. It started with non-Muslims becoming dominant in trading interactions with Europeans and then spread. By 1912, the non-Muslim 19% of the (shrinking) Ottoman Empire made up 85% of major local traders: 66% were Greek or Armenian (Pp189ff).
Non-Muslims also came to completely dominate new sectors such as insurance:
Any explanation has to focus on what changed: why did this non-Muslim commercial and financial dominance suddenly emerge from the C18th onwards? It starts with:
How did this come to so advantage non-Muslims in the Middle East? Because:
What Kuran outlines is the use of jurisdictional choice, as outlined by Tiebout. Islamic legal pluralism violated two of Tiebout’s assumptions—ability to choice jurisdictions was not symmetrical (Muslims could not opt out of Sharia) and choice of jurisdiction was not binding (people could appeal to Muslim courts after a contract had been entered into). The latter generated uncertainty that encourage homogenisation (including in inheritance practices) with Islamic law and undermined organisation innovation. As the process of protection expanded from the C16th onwards, European powers sought to shield their citizens and protégés from Islamic trials while the kadi monopoly over adjudication involving Muslims came to block Muslims from the most dynamic sections of the Middle Eastern economy (Pp206-8).
Capitulations
And so it is one to the capitulations, which grew out of medieval trade treaties, expanded considerably until they were abolished by the Ottoman government (to much popular rejoicing) at the beginning of the Dynast’s War (aka WWI). The capitulations allowed Western merchants to operate in the Middle East under the rules and organisational forms Europe was developing (Pp209-10).
As with many Islamic practices, they had Christian roots, developing out of the treaties the Eastern Roman (“Byzantine”) Empire made with Western merchants from 1082 onwards whereby Western merchants could operate according to their own laws. French and Italian cities made similar arrangements, albeit on a reciprocal basis. In early Islam, Muslim traders paid lower tariffs than Christian or Jewish subjects who paid less than non-Muslim foreigners. In the C12th and C13th, Fatimid, Ayyubid and Seljuq rulers began to grant treaties giving foreign merchants tariff relief or exceptions (there were imtiyãzãt or privileges in Arabic; ahidnâmes or covenant letters in Turkish). These were often reciprocal arrangements—Arab merchants in Corsica and Sicily could use their own courts while, in the Eastern Roman Empire, visiting Turkish and Arab traders lived in their own enclaves. By reducing tariff discrimination and permitting choice of jurisdiction, the treaties enhanced economic efficiency (Pp210-2).
The Ottoman capitulations began with a 1536 treaty between Süleyman the Magnificent and Francois I of France, allowing the French to become the dominant “nation” in Mediterranean commerce. In 1580, the English secured similar rights. As the Ottoman Empire began to shrink, operating from a position of diminishing military strength, the number and extent of the capitulations began to expand. The importance of maintaining trade flows made unilateral abrogation increasingly implausible. By the early C19th, the capitulations (from the Latin capitula or chapter) were providing foreign nationals and local protégés privileges denied local residents. They came to extend to domestic policy forcing the abolition of various local monopolies and, in the 1838 Anglo-Ottoman Commercial Convention, imposing higher duties on exports than imports. The capitulations became increasingly associated with a loss of local sovereignty (Pp212-3).
The faltering Mamluk regime signed treaties (Venice 1442, Florence 1497) the granted privileges that the Ottomans withheld until the C17th. While the Ottoman capitulations began with reciprocal elements, more and more they focused on foreign concerns:
Taking us through various explanations for the capitulations (coalition forming, limiting the political capabilities of potential domestic rivals, revenue generation, protection of trade routes and securing strategic goods) Kuran notes that none explain the specific pattern of privileges granted (and not granted) and have limited value in explaining the expansion in capitulations over time (Pp215-8).
Many of the provisions were clearly about increasing the predictability of returns from trade and reducing commercial risks: such as shielding European merchants from ad hoc taxation, banning collective punishment for actions of delinquent individuals, applying European inheritance laws, protection from friviolous lawsuits. As the balance of power shifted against the Ottomans, Europeans increasingly sought privileges which ended up with foreign nationals avoiding (for example) charges for municipal services they would pay back in Europe and an Ottoman subject could avoid a tax, fee or fine by simply transferring the asset to a foreigner. Locals complained about foreign advantage, the foreigners about real or imagined inequities: the complaints of the locals generally overlooked that expanding trade required limiting opportunism and arbitrariness in taxation, foreigners generally failed to acknowledge that the drive for predictability had evolved into outright privilege (Pp219ff).
Foreigners moved in significant numbers to the Middle East to take advantage of the commercial opportunities opened up while compensating levies by the Ottoman government fell increasingly on unprotected locals, increasing the uncertainty they laboured under. Both pressures gave locals even more incentive to seek European legal protection. A complicating factor was that that writ of the Ottoman government ran unevenly in the Empire, leading to significant local variations in enforcement. This then led to complaints by foreigners that fed back into expansion of the capitulations negotiated by European governments (Pp223-4).
While early treaties could be rationalised by the sanctioned legal pluralism of dhimmi status and acceptance of (up to 10 year) truce status of Islamic law, these rationalisations became increasingly thin as the treaties expanded in ambit and security. Yet Islamic religious functionaries went along, or even participated in, the process. While never completely in agreement, they never formed organised opposition to the expansion of foreign and foreign-protected local rights. The implication is that ruling groups saw advantages in the treaties (Pp225ff).
The capitulations had effects beyond the fiscal: they also facilitated the importing of European institutions of impersonal exchange to the Middle East. Starting with the requirement that evidence be supported by documentation, not merely oral testimony. While the possibility of differential evaluation of evidence (Muslims have a greater presumption of credibility in Islamic courts) undermined foreign confidence in Muslim courts, this was a constant factor. As European institutions developed, the divergence between them and Islamic courts grew, increasing pressure to block use of them in disputes with Europeans. This started with bans on kadis adjudicating on co-nationals. Then the right to have their cases of a set value (whose comparative value eroded over time due to inflation) heard before the highest tribunal. This was extended to their protégés, who could thus operate as intermediaries, interacting with Muslims in Muslim courts and foreigners under European laws (Pp228ff).
Court processes
Operating in a system of personal exchange, in closed communities dominated by dense webs of interaction where reputation mattered, Islamic courts overwhelmingly relied on oral testimony. As Europeans shifted to impersonal exchange supported by documentation their complaints against Islamic courts mounted. Even if corruption was not involved, assessing the reliability of witnesses in cities with large, floating foreign populations was difficult for a kadi. Rather than using the system of “mixed” tribunals, such as operated in medieval northern Europe, the capitulations instead imposed special procedures for dealing with foreigners (Pp236ff).
Oral testimony was used rather beyond Quranic injunctions (which requires documentation in cross-time transactions) not merely because scribes cost but because:
The legal process elements of the capitulations had a range of effects:
A further unintended consequence was the de-Islamization of commercial life:
Unsupported merchants
European merchants ventured far more to places where they could find protection against local predation than those they could not. One of the striking absences of Islamic Middle Eastern history is the lack of organisational support for Middle Eastern merchants venturing to Europe. This is in contrast to the institutional support networks, based on officers who became known as ‘consuls’, that European merchants established in the Middle East. Attempts at founding Middle Eastern merchant colonies in Europe were few and generally short-lived. Notable exceptions were merchant enclaves in reconquered areas of Spain, the Turkish merchant enclave in Venice from the 1570s to 1838 and the Armenian commercial network based in New Julfa. Despite provisions for their merchants in Europe in the various capitulations, Middle Eastern rulers failed to provide organisational supports to Middle Eastern merchants in Europe. The only case of a Middle Eastern consul was a Venetian Greek appointed to serve Ottoman Greek merchants in Crete but without any special rights (Pp254ff).
After critiquing various received explanations (Pp260-3) Kuran points out the incumbency advantages the French trading networks in the Middle East (the first supported by an extensive treaty) possessed. As trading expanded, the advantages of incumbency eroded, leading to establishing of rival networks and supporting consuls (English, Dutch, etc). Except for the New Julfa Armenians, the Middle East lacked organised mercantile communities while the institutional stagnation of the Middle East meant that Middle Eastern merchants lacked the organisational basis for enduring commercial arrangements of the Europeans: such as trading under the same name indefinitely (Pp264ff).
European merchants had the crucial ability, and willingness, to organise collectively to protect their interests: Middle Eastern guilds were far more creatures of rulership. Within the Middle East, the vast web of waqf-funded protected caravanserais and Muslim rulers interested in promoting (and profiting from trade) kept private predation down while competition between rulers limited official predation. The commonality of Islamic law and the short tenures of kadis (which limited incentive to favour locals) encouraged accessible adjudication of disputes over long distances. None of these factors operated for Middle Eastern merchants in Europe. While, to the South and East of Islam, Islamic institutions provided trading advantages which led to expansion of local areas using Islamic law, creating incumbency advantages to Middle Eastern Muslim merchants (Pp271ff).
Europe’s varied laws and fragmented political authority gave European merchants far more incentive (and capacity) to organise. Conversely:
Kuran argues that, as European commercial advantage (and trade) expanded, the incentive to invest in extra effort for Middle Eastern merchants in Europe weakened further: why bother when Europe came to you and the organisational gap was large and increasing? The European incumbency advantage increased, with any competitive pressure coming from other Europeans. The institutional blockages already identified produced very different capacities of merchants to organise, including to elicit the support of their own rulers (Pp275-6).
In conclusion
Having taken the reader on this analytical journey, Kuran draws it together in Part IV Conclusions which is a single chapter: Did Islam Inhibit Economic Development?. This is not a simple question, as Islam had many institutions that worked well. Indeed, there were few signs of any serious economic disadvantage until the C17th, however blindingly obvious such disadvantage may have become by the second half of the C19th. It is only by looking at what economists call relative and dynamic efficiency that this pattern can be understood (Pp279-80).
Islamic law carried Muslim commerce across Africa and Eurasia. Nevertheless, it also created commercial stagnation:
Conversely, because Europe led the process of economic modernisation, it came to dominate global trade. A process which then, from the C18th onwards, lifted up non-Muslim minorities in the Middle East because they could choose non-Muslim law due to the capitulary process (Pp283-7).
Kuran divides the Islamic institutions into those present in Islam’s first few decades—inheritance system, acceptance of polygyny, the ban on ribã, absence of corporation, choice of law limited to non-Muslims, prohibition of apostasy, absence of merchant organisations—and those that developed mostly or entirely later—contract law, waqf, court system, capitulations. He provides a brief discussion of each of the former features, if and how it (eventually) blocked economic modernisation plus whether and how that has been overcome or bypassed (Pp287-92).
Kuran turns to the current scene, where the Middle East remains economically backward even though:
Islamism Kuran regards as mixed in consequences. It has contributed to political uncertainty but it has also attended to marginal groups and its attacks on modernisation are limited to:
The economic transformation of the West provides the Middle East with both great problems and great opportunities (since institutions can simply be imported). Kuran considers Islam and the capacity for change. He concludes that the evidence is that institutional change is eminently possible (Pp298-301).
Kuran concludes that substantial blockages still exist, including the notion that outsiders are responsible for the Middle East’s underdevelopment. Still, his final conclusion is that:
Kuran’s fine study is immensely informative about the drivers of economic history, the interaction between law and economic development and the processes of institutional change. Profoundly informative on Middle Eastern it is hardly less so on European history. It is economic history at its best.
Having set the analytical framework for analysing the economic history of the Islamic Middle East in Part I, and how interlocking incentives blocked institutional development in Part II, Kuran considers the role of non-Muslim minorities in Part III The Makings of Underdevelopment.
Converging practice
Until the C18th, the various religious communities were broadly even economic development. Then, as economic modernisation began to seep into the region, Greeks, Armenians and, to a lesser extent, Jews became disproportionately important in finance and commerce, particularly in cities. To explain why many centuries of no particular advantage suddenly shifted to notable non-Muslim advantage, Kuran starts with Islamic legal pluralism, where non-Muslims could use autonomous court and legal systems for non-criminal matters. As Europe began to develop the legal infrastructure of economic modernity, Jews and Christians could take advantage of these opportunities when Muslims—required to use Sharia—could not (Pp169-71).
Choice of law came down to choice of forum, since each religious community’s courts applied their own laws: an arrangement that had Roman precedents but became regularised under Pact of Omar, whose alleged origins under caliph Omar I or Omar II (d.720) gave it great legitimacy. The Pact permitted interactions among non-Muslims to choose which law they wished to apply, though interactions with Muslims had to be dealt with via Sharia (Pp172-3).
Choice of law can exercise ex ante (at the time of negotiations) or ex post (at a later date). The former is consensual; the latter might be unilateral, to secure some advantage. The Pact permitted both to non-Muslims. Muslims were limited to choices between different schools of Islamic law: though the differences were minimal in most commercial and financial matters. Since apostasy was punishable by death, Muslims could not opt out of Sharia while dhimmis, in their transactions amongst themselves, could chose to use it or not. So the militarily and politically dominant Muslims had fewer legal choices than their non-Muslim subjects. Given legal choice was not binding ex ante, the normal economic literature on the efficiency benefits of such jurisdictional choice do not apply. How things turned out becomes a purely empirical issue (Pp174-6).
Despite the existence of rabbinical courts (for Jews) and ecclesiastical courts (for Christians), both Jews and Christians made extensive use of the Muslim legal system for commercial and financial matters while continuing to also use their own courts. Any interactions with Muslims was supposed to be dealt with by Sharia while Muslim courts had much better capacity for enforcement—the non-Muslim courts were more like arbitration boards than full courts—greater authority and provided third party courts for interactions across religious communities. In some areas, notably partnership, Sharia handled such matters at least as well as Christian courts and better than Jewish ones. The result was a tendency for legal homogenisation towards Sharia, which meant the institutional and incentive blockages which affected Muslim commercial and financial life also affected those of non-Muslims (Pp180-1).
Christian and Jewish inheritance law differed considerably from Islamic inheritance law: so many dhimmi families took steps to block relatives taking disputes to Islamic courts (such as allowing daughters to inherit and restricting bequests to non-relatives). The effect was to have inheritance patterns converge towards those of Muslim law. Though communal leaders also took steps to discourage use of Muslim law (up to, and including, excommunication). The net effect of this convergence was to lessen the advantage in choice of law. The dominance of Sharia thus blocked legal pluralism from being a vehicle for institutional innovation (Pp182-5).
Rulers recognised minority communities as groups only to the extent that it advantaged the ruler. So the power of the state blocked that path to organising as a corporation (Pp186-7).
Religion mattered for economic life since legal rights and obligations depended on faith. But, for centuries, Islamic legal pluralism was “self-undermining”, operating in the direction of a legal homogenisation that blocked modernisation (p.188).
Advantage emerges
Up until the C18th, non-Muslims had no particular advantage in commerce and finance over Muslims. This then changed dramatically: non-Muslim minorities began to shoot ahead of Muslims in commerce and finance. It started with non-Muslims becoming dominant in trading interactions with Europeans and then spread. By 1912, the non-Muslim 19% of the (shrinking) Ottoman Empire made up 85% of major local traders: 66% were Greek or Armenian (Pp189ff).
Non-Muslims also came to completely dominate new sectors such as insurance:
In Istanbul, as late as 1922, not one insurance company had been founded by Muslims or counted Muslims among its managers (p.194)Non-Muslim dominance in finance also extended to industrial concerns: steam-powered factories, water, gas, electricity, tram, subways—these were founded by non-Muslim capital and overwhelmingly managed by non-Muslims. The income and wealth of non-Muslims shot ahead of Muslims, with major land-transfers from Muslims to non-Muslims. Muslims were dramatically under-represented in residents of prestigious new neighbourhoods, bank customers, buyers of insurance and in business-ownership in new commercial centres outside the traditional guild system (Pp194-5).
Any explanation has to focus on what changed: why did this non-Muslim commercial and financial dominance suddenly emerge from the C18th onwards? It starts with:
By the eighteenth century the organizational revolution in the West was generating an explosive growth in global commerce (p.197).This included soaring trade between Europe and the Middle East which accelerated in the C19th. European advantages became increasingly obvious:
European companies and businessmen had access to cheap credit from financial enterprises that pooled the savings of thousands. They could raise capital through stock markets. They could have their disputes resolved by courts familiar with the ongoing organizational advantages and accustomed to dealing with legal persons. Because companies were long-lived, they could establish reputations that would not vanish with the death of a shareholder or employee. Europeans also benefited from the assistance of consuls posted in commercial centers of the Middle East. These consuls gathered information about bureaucratic procedures, local customs, commercial opportunities, and individual reputations. They helped to settle the estates of Europeans who died in the Middle East according to European inheritance systems. They resolved conflicts under the laws of their own countries … they enabled foreign merchants and companies to operate, to a degree, within an institutional framework transplanted from Europe (p.198).As so often in serious economic history, one is struck by how things so much anti-market, anti-private property analysis ignores, dismisses or rejects have been crucial to the creation of mass prosperity. (Though this agreement in a single village which set off China’s march to mass prosperity is probably the most striking historical example.)
How did this come to so advantage non-Muslims in the Middle East? Because:
Exposure to the West’s steadily developing commercial culture expanded the jurisdictional choice set of the Middle East’s local Jews and Christians. It permitted them to overcome the limitations of indigenous legal systems by exercising their legal choices differently, in favour of the modernizing systems of the West. So it is that their choice of law, which was denied to Muslims, enabled them to pull ahead in the new global environment produced by the West’s organizational revolution (p.198).To use European law, Jews or Christians had to acquire its protection. Originally, this was done by a letter of patent (berat), an extension of the older habit of hiring dragomans (from tercümans, interpreters). Consuls charged fees for their services. The interactions grew, giving Jews and Christians a path to economic modernisation (Muslims had rarely been hired, probably because their testimony would count more in an Islamic court). By the end of the C18th, the Austrians were protected 200,000 subjects in an empire of 30m. Merchant houses grew up, which could appeal to Western courts. Muslims were blocked from this route since it would have involved a radical challenge to Islamic law. The pattern of commercial success reflected these pressures: Muslim merchants remained successful in inland cities, non-Muslims did not flourish particularly in coastal cities without consuls (Pp196ff).
What Kuran outlines is the use of jurisdictional choice, as outlined by Tiebout. Islamic legal pluralism violated two of Tiebout’s assumptions—ability to choice jurisdictions was not symmetrical (Muslims could not opt out of Sharia) and choice of jurisdiction was not binding (people could appeal to Muslim courts after a contract had been entered into). The latter generated uncertainty that encourage homogenisation (including in inheritance practices) with Islamic law and undermined organisation innovation. As the process of protection expanded from the C16th onwards, European powers sought to shield their citizens and protégés from Islamic trials while the kadi monopoly over adjudication involving Muslims came to block Muslims from the most dynamic sections of the Middle Eastern economy (Pp206-8).
Capitulations
And so it is one to the capitulations, which grew out of medieval trade treaties, expanded considerably until they were abolished by the Ottoman government (to much popular rejoicing) at the beginning of the Dynast’s War (aka WWI). The capitulations allowed Western merchants to operate in the Middle East under the rules and organisational forms Europe was developing (Pp209-10).
As with many Islamic practices, they had Christian roots, developing out of the treaties the Eastern Roman (“Byzantine”) Empire made with Western merchants from 1082 onwards whereby Western merchants could operate according to their own laws. French and Italian cities made similar arrangements, albeit on a reciprocal basis. In early Islam, Muslim traders paid lower tariffs than Christian or Jewish subjects who paid less than non-Muslim foreigners. In the C12th and C13th, Fatimid, Ayyubid and Seljuq rulers began to grant treaties giving foreign merchants tariff relief or exceptions (there were imtiyãzãt or privileges in Arabic; ahidnâmes or covenant letters in Turkish). These were often reciprocal arrangements—Arab merchants in Corsica and Sicily could use their own courts while, in the Eastern Roman Empire, visiting Turkish and Arab traders lived in their own enclaves. By reducing tariff discrimination and permitting choice of jurisdiction, the treaties enhanced economic efficiency (Pp210-2).
The Ottoman capitulations began with a 1536 treaty between Süleyman the Magnificent and Francois I of France, allowing the French to become the dominant “nation” in Mediterranean commerce. In 1580, the English secured similar rights. As the Ottoman Empire began to shrink, operating from a position of diminishing military strength, the number and extent of the capitulations began to expand. The importance of maintaining trade flows made unilateral abrogation increasingly implausible. By the early C19th, the capitulations (from the Latin capitula or chapter) were providing foreign nationals and local protégés privileges denied local residents. They came to extend to domestic policy forcing the abolition of various local monopolies and, in the 1838 Anglo-Ottoman Commercial Convention, imposing higher duties on exports than imports. The capitulations became increasingly associated with a loss of local sovereignty (Pp212-3).
The faltering Mamluk regime signed treaties (Venice 1442, Florence 1497) the granted privileges that the Ottomans withheld until the C17th. While the Ottoman capitulations began with reciprocal elements, more and more they focused on foreign concerns:
as the economic institutions of the two sides diverged, reciprocity became increasingly symbolic (p.214).Increasingly, the capitulations gave signatories “most favoured nation” status with tariffs and expanded exemption from Islamic law and courts—to the extent that, while the kadi monopoly over Muslims was never formally infringed, increasingly there were ways around even that (Pp214-5).
Taking us through various explanations for the capitulations (coalition forming, limiting the political capabilities of potential domestic rivals, revenue generation, protection of trade routes and securing strategic goods) Kuran notes that none explain the specific pattern of privileges granted (and not granted) and have limited value in explaining the expansion in capitulations over time (Pp215-8).
Many of the provisions were clearly about increasing the predictability of returns from trade and reducing commercial risks: such as shielding European merchants from ad hoc taxation, banning collective punishment for actions of delinquent individuals, applying European inheritance laws, protection from friviolous lawsuits. As the balance of power shifted against the Ottomans, Europeans increasingly sought privileges which ended up with foreign nationals avoiding (for example) charges for municipal services they would pay back in Europe and an Ottoman subject could avoid a tax, fee or fine by simply transferring the asset to a foreigner. Locals complained about foreign advantage, the foreigners about real or imagined inequities: the complaints of the locals generally overlooked that expanding trade required limiting opportunism and arbitrariness in taxation, foreigners generally failed to acknowledge that the drive for predictability had evolved into outright privilege (Pp219ff).
Foreigners moved in significant numbers to the Middle East to take advantage of the commercial opportunities opened up while compensating levies by the Ottoman government fell increasingly on unprotected locals, increasing the uncertainty they laboured under. Both pressures gave locals even more incentive to seek European legal protection. A complicating factor was that that writ of the Ottoman government ran unevenly in the Empire, leading to significant local variations in enforcement. This then led to complaints by foreigners that fed back into expansion of the capitulations negotiated by European governments (Pp223-4).
While early treaties could be rationalised by the sanctioned legal pluralism of dhimmi status and acceptance of (up to 10 year) truce status of Islamic law, these rationalisations became increasingly thin as the treaties expanded in ambit and security. Yet Islamic religious functionaries went along, or even participated in, the process. While never completely in agreement, they never formed organised opposition to the expansion of foreign and foreign-protected local rights. The implication is that ruling groups saw advantages in the treaties (Pp225ff).
The capitulations had effects beyond the fiscal: they also facilitated the importing of European institutions of impersonal exchange to the Middle East. Starting with the requirement that evidence be supported by documentation, not merely oral testimony. While the possibility of differential evaluation of evidence (Muslims have a greater presumption of credibility in Islamic courts) undermined foreign confidence in Muslim courts, this was a constant factor. As European institutions developed, the divergence between them and Islamic courts grew, increasing pressure to block use of them in disputes with Europeans. This started with bans on kadis adjudicating on co-nationals. Then the right to have their cases of a set value (whose comparative value eroded over time due to inflation) heard before the highest tribunal. This was extended to their protégés, who could thus operate as intermediaries, interacting with Muslims in Muslim courts and foreigners under European laws (Pp228ff).
Court processes
Operating in a system of personal exchange, in closed communities dominated by dense webs of interaction where reputation mattered, Islamic courts overwhelmingly relied on oral testimony. As Europeans shifted to impersonal exchange supported by documentation their complaints against Islamic courts mounted. Even if corruption was not involved, assessing the reliability of witnesses in cities with large, floating foreign populations was difficult for a kadi. Rather than using the system of “mixed” tribunals, such as operated in medieval northern Europe, the capitulations instead imposed special procedures for dealing with foreigners (Pp236ff).
Oral testimony was used rather beyond Quranic injunctions (which requires documentation in cross-time transactions) not merely because scribes cost but because:
documentation carried the risk of transferring information to state officials prepared to grab resources wherever possible. Oral contracting kept financial information private except in the event of a dispute requiring litigation by a kadi (Pp247-8).Documentation was normally required to be supported by credible oral witnesses: while this could be waived by invoking the necessity principle (darûra based on the Quran “Allah desires your well-being, not your discomfort) , it was the presumption Islamic law operated under (Pp246ff).
The legal process elements of the capitulations had a range of effects:
In shielding foreigners from undocumented claims, the capitulations lowered the cost of interregional exchange. In stimulating document use, they facilitated the introduction of organizations that pool the resources of strangers and enjoy legal standing, such as the incorporated banks established in the nineteenth century. They also extended the planning horizons of foreigners and enhanced the credibility of their long-term commitments (p.249).Europeans operated in enclaves that adapted to European institutional advances while local institutions stagnated: advantages that encouraged minorities to share via legal protection. (Muslims were blocked via being obligated to use Islamic courts.) The capitulations contributed both to European commercial domination and the ascent of non-Muslim minorities. Rulers achieved increase trade, some of which they appropriated through taxes and fees, without having to tackle shifting Islamic law. Thus, they chose a different path to dealing with bias against foreigners and differences in legal systems than European rulers. The unintended consequence was the advantaging of non-Muslim minorities over Muslims (Pp249ff).
A further unintended consequence was the de-Islamization of commercial life:
foreign economic success gave Muslims an appreciation for institutions developed outside the realm of Islamic law. For example, they demonstrated the advantages of binding the tax-collecting hand of the state and of pooling savings within banks (p.252).Eventually, this led to the creation of special commercial courts (a practice even in Saudi Arabia “whose economy is nominally under a divine and time-invariant law”). Interim attempts, such as creating “Europe merchants” (Avrupa tüccaris) for non-Muslims and “auspicious merchants” (hayriye tüccaris) who were given tax breaks and the right to have their disputes before the highest tribunals either failed, or had little success outside the Balkan and Anatolian hinterlands, because they did not give access to the organisational forms that European merchants and their protégés could use. Though a rising use of documentary evidence is evident in Istanbul courts from the C17th onwards. The Islamic Middle East did adapt, though with a considerable time lag (Pp249ff).
Unsupported merchants
European merchants ventured far more to places where they could find protection against local predation than those they could not. One of the striking absences of Islamic Middle Eastern history is the lack of organisational support for Middle Eastern merchants venturing to Europe. This is in contrast to the institutional support networks, based on officers who became known as ‘consuls’, that European merchants established in the Middle East. Attempts at founding Middle Eastern merchant colonies in Europe were few and generally short-lived. Notable exceptions were merchant enclaves in reconquered areas of Spain, the Turkish merchant enclave in Venice from the 1570s to 1838 and the Armenian commercial network based in New Julfa. Despite provisions for their merchants in Europe in the various capitulations, Middle Eastern rulers failed to provide organisational supports to Middle Eastern merchants in Europe. The only case of a Middle Eastern consul was a Venetian Greek appointed to serve Ottoman Greek merchants in Crete but without any special rights (Pp254ff).
After critiquing various received explanations (Pp260-3) Kuran points out the incumbency advantages the French trading networks in the Middle East (the first supported by an extensive treaty) possessed. As trading expanded, the advantages of incumbency eroded, leading to establishing of rival networks and supporting consuls (English, Dutch, etc). Except for the New Julfa Armenians, the Middle East lacked organised mercantile communities while the institutional stagnation of the Middle East meant that Middle Eastern merchants lacked the organisational basis for enduring commercial arrangements of the Europeans: such as trading under the same name indefinitely (Pp264ff).
European merchants had the crucial ability, and willingness, to organise collectively to protect their interests: Middle Eastern guilds were far more creatures of rulership. Within the Middle East, the vast web of waqf-funded protected caravanserais and Muslim rulers interested in promoting (and profiting from trade) kept private predation down while competition between rulers limited official predation. The commonality of Islamic law and the short tenures of kadis (which limited incentive to favour locals) encouraged accessible adjudication of disputes over long distances. None of these factors operated for Middle Eastern merchants in Europe. While, to the South and East of Islam, Islamic institutions provided trading advantages which led to expansion of local areas using Islamic law, creating incumbency advantages to Middle Eastern Muslim merchants (Pp271ff).
Europe’s varied laws and fragmented political authority gave European merchants far more incentive (and capacity) to organise. Conversely:
Although the Middle Eastern solution worked reasonably well in parts of the world with inferior commercial institutions, it was less well suited than the western solution to legally alien territories already equipped with efficient commercial institutions. Precisely because it was designed to counteract local judicial biases, the western approach provided the means for bargaining with rulers over extraterrestrial legal rights and privileges. When Venetian merchants negotiated collectively with Mamluks over legal protections, they did something to which they were already accustomed (p.274).Muslim merchants lacked equivalent organisations, skills or outlooks.
Kuran argues that, as European commercial advantage (and trade) expanded, the incentive to invest in extra effort for Middle Eastern merchants in Europe weakened further: why bother when Europe came to you and the organisational gap was large and increasing? The European incumbency advantage increased, with any competitive pressure coming from other Europeans. The institutional blockages already identified produced very different capacities of merchants to organise, including to elicit the support of their own rulers (Pp275-6).
In conclusion
Having taken the reader on this analytical journey, Kuran draws it together in Part IV Conclusions which is a single chapter: Did Islam Inhibit Economic Development?. This is not a simple question, as Islam had many institutions that worked well. Indeed, there were few signs of any serious economic disadvantage until the C17th, however blindingly obvious such disadvantage may have become by the second half of the C19th. It is only by looking at what economists call relative and dynamic efficiency that this pattern can be understood (Pp279-80).
Islamic law carried Muslim commerce across Africa and Eurasia. Nevertheless, it also created commercial stagnation:
The partnership termination rule, like the lack of entity shielding, thus discouraged the formation of large and long-lived partnerships. … In allowing polygyny, Islam compounded the incentives to keep partnerships atomistic and ephemeral. …Such as standardised accounting, business press, incentives to trade in shares:
The stagnation in size and longevity of Middle Eastern partnerships had dynamic consequences. Exchange remained largely personal, removing the need for transformations essential to the modern economy (p.281).
In sum, several self-enforcing elements of Islamic law—contracting provisions, inheritance system, marriage regulations—jointly contributed to the stagnation of the Middle East’s commercial infrastructure (p.281).The increasing complexity commercial organisations in Europe underwent from the C10th to the C19th did not happen in Islam. For the reasons already explored in the analysis but very usefully summarised (Pp281-3).
Conversely, because Europe led the process of economic modernisation, it came to dominate global trade. A process which then, from the C18th onwards, lifted up non-Muslim minorities in the Middle East because they could choose non-Muslim law due to the capitulary process (Pp283-7).
Kuran divides the Islamic institutions into those present in Islam’s first few decades—inheritance system, acceptance of polygyny, the ban on ribã, absence of corporation, choice of law limited to non-Muslims, prohibition of apostasy, absence of merchant organisations—and those that developed mostly or entirely later—contract law, waqf, court system, capitulations. He provides a brief discussion of each of the former features, if and how it (eventually) blocked economic modernisation plus whether and how that has been overcome or bypassed (Pp287-92).
Kuran turns to the current scene, where the Middle East remains economically backward even though:
With the possible exception of the Islamic apostasy law, not one of the institutions that turned the Middle East into an economic laggard by delaying its organizational modernization remains an obstacle to economic development in the twenty-first century (p.293).His answer involves various forms of path dependence covering missing complementary institutions, weak civil society and reactions to economic failures. The emigration of economically advanced minorities has been part of the problem. But so has the persistence of the apostasy ban (Pp293-7).
Islamism Kuran regards as mixed in consequences. It has contributed to political uncertainty but it has also attended to marginal groups and its attacks on modernisation are limited to:
a few pet issues: the immorality of interest and insurance, the unfairness of certain inequalities, the mixing of the sexes that accompanies tourism, and the destructiveness of unregulated advertising and consumerism (Pp297-8).With division between Islamists on even these issues. But the Middle East would have to grow faster than Europe to catch up: in failing to do so, gaps that opened up centuries ago persist (Pp297-8).
The economic transformation of the West provides the Middle East with both great problems and great opportunities (since institutions can simply be imported). Kuran considers Islam and the capacity for change. He concludes that the evidence is that institutional change is eminently possible (Pp298-301).
Kuran concludes that substantial blockages still exist, including the notion that outsiders are responsible for the Middle East’s underdevelopment. Still, his final conclusion is that:
A predominantly Muslim society is not inherently incompatible, then, with an economy based on free competition, openness to borrowing and innovation, and a government eager to support, rather than stifle, private enterprise (p.302).The economic success of, for example, Malaysia supports this contention.
Kuran’s fine study is immensely informative about the drivers of economic history, the interaction between law and economic development and the processes of institutional change. Profoundly informative on Middle Eastern it is hardly less so on European history. It is economic history at its best.
Monday, February 13, 2012
The Long Divergence (2)
This is the second part of my review of Timur Kuran’s excellent economic history The Long Divergence: How Islamic Law Held Back the Middle East. The first part was in my previous post. The concluding part is in my next post.
Having set the analytical framing, Kuran them moves on to “Part II: Organizational Stagnation”. His entry point is the question he posed at the end of Part I:
Early Islam
Kuran starts by taking the reader through how early Islam promoted economic activity. The Qur’an is profit-positive, characterising profit as Allah’s bounty to humanity. The Haj, the annual pilgrimage to Mecca, was also a great economic event: pilgrimages were often funded by trade and the Qur’an endorses the Haj having an economic role. The scale of the Haj provided a stimulus to economic activity, but also likely discouraged the development of secular fairs (which were important in economic development in medieval Europe) (Pp45-8).
One of the key factors in economic development is promoting cooperation among non-kin. Islamic law tended to be commerce positive not least because a large majority of Islamic jurists (up to 75%, according to one study) primarily made their living from commerce. The development of Islamic partnership law promoted non-kin cooperation (even across confessional boundaries); more than Talmudic partnership law, as it allowed wider latitude in arrangements. Sharia promoted wide-ranging, long-distance trading that linked across three continents under a common legal system (Pp48ff).
Islamic partnerships lacked legal personhood: all legal interactions were between individuals. Most variations also required a partner’s principal to consist of currency: they could not invest in merchandise directly. A merchant’s mission was also incomplete until he had sold all the merchandise bought with the currency. This could lead to sub-optimal exchanges and, while legal ruses existed to get around such problems, they added to the transaction costs involved (Pp59ff).
While Islam had been commercially dominant in its early centuries, its share of global trade began to shrink substantially. Kuran quotes Angus Maddison’s figures that the Middle East’s share of world GDP was 10% in 1000 but had plummeted to 4% by 1600 and 2% by 1700. By contrast, the west European share surged from 9% in 1000 to 22% in 1700. Islam’s institutional advantage had clearly vanished (Pp61-2).
Fragmenting wealth
Kuran examines the limitations of Islamic partnership law—what he calls its “persistent simplicity”—assembling considerable illustrative data (Pp63ff). Then it is on to the limitations of the Islamic inheritance system: subject to the most detailed set of economic rules in the Qur’an. While the rules:
As an aside, this system also embedded a permit raj into operation of the most important asset, land—a pattern that continues to bedevil the Middle East (pdf).
Various techniques were developed to circumvent the Qur’an’s inheritance rules, but they were patchy in operation (p.80). One of the most common was use of a waqf or trust: an institution whose benefits and limitations later becomes a key focus of Kuran’s analysis.
Kuran compares this to the situation in Western Europe, where there was considerable variety but one key feature—inheritance rules were not based in religious law, so far more easily open to change. The spread of primogeniture provided Western Europe for a simple mechanism to keep wealth intact across generations: far more so than in the Islamic Middle East (Pp81-2). Kuran notes that the Qur’an’s rules clearly made more sense for a pastoralist society, where herds could be “bred up”, than an agrarian one, where concern to discourage fragmentation of land made more sense. As the Industrial Revolution advanced and more divisible forms of wealth became more important, inheritance rules evolved in a more egalitarian direction. Kuran also cites control over irrigation system as a key feature of state power in the Middle East—he argues this would also encourage more egalitarian inheritance rules, to discourage concentrations of land that might threat state control of water supply; a pattern that operates far back in Middle Eastern antiquity (Pp82-3).
Islam also permitted polygyny, though it was largely the preserves of the rich and powerful, so a sign of status. Polygyny allowed the forming of wider kin connections (so helped networking) but increased the dispersion of assets (since the Qur’an mandated equal treatment of wives and their children). It also encouraged an egalitarian inheritance system, otherwise families would be reluctant to offer their daughters: so polygyny and egalitarian inheritance were mutually supporting institutions, while primogeniture was much easier where only one spouse was legally recognised (Pp84-5).
The European inheritance system made enduring partnerships much more likely than in the Middle East with much more capacity for experimentation, and so a need for innovation, leading, over time, to a wider range of organisational forms and commercial techniques. Europe was set off on a path of expanding innovation while the Middle East stagnated, one sign of which is the paucity of private records as historical sources. That, until the C19th, Middle Eastern trade was predominantly with regions where Islamic institutions were competitive or advantaged undermined any incentive to break out of the mutually supporting nature of Islamic inheritance and partnership arrangements (Pp85ff).
Critiquing various existing explanations for Middle Eastern economic stagnation, Kuran points out the above pattern is an example of unintended secondary consequences. Islamic institutions worked quite well in context but their mutually supporting nature blocked further institutional development (Pp93ff).
Natural persons only
The corporation—a critical characteristic of which is legal personhood—did not reach the Middle East until 1851 and did not “take off” until the Ottoman Parliament passed a corporation law in 1908. Kuran traces the Roman origins of corporate entities, the rise of “self-declared” corporate entities during the period of weak European states (notably the Church, subsections thereof, and cities) and its expansion into granted corporate status (through charters). That Christianity grew up under a strong state (the Roman Empire) encouraged Church focus on faith, morality and community: not political and economic organisation. This led to acceptance of parallel legal systems and a secularised legal domain (Pp97ff).
Eastern Roman law was much more centrally controlled than what developed further West. Still, both it and Zoroastrian law (where temples could own property and make loans) had the legal building blocs of corporation: yet it is absent from Islamic law. Kuran puts the failure down to the tribal milieu of pagan Arabia, with its continuing feuds:
In trusts we trust
Islam did develop an organisation capable of indefinite existence: this was the waqf or trust. Trusts existed in Roman and pre-Islamic Law. At one level, the waqf was a stunningly successful institutional form, financing an enormous array of services. It was not, however, a corporation: it had a single founder, its rules and purpose could not be changed, it had no self-governance beyond carrying out the original instructions. This accorded with the Islamic concept of communal unity and anti-factionalism in a way a self-governing organised group did not (Pp110-2).
Founding a waqf provided status and prestige; it also protected property against expropriation. This was particularly useful given a founder could appoint himself caretaker (mutawalli), appoint relatives to positions and nominate his own successor (so getting around Islamic inheritance laws). Commitment to providing designated social services was something of a quid pro quo with rulers for foregoing expropriation opportunities. The capacity for change was extremely limited, abandonment of the activity would lead its assets to be distributed to the poor and combining waqfs, or pooling their capital, was forbidden. This profoundly blocked innovation in the use of capital. An example Kuran uses is contrasting medieval European universities—which rapidly became self-governing institutions, able to change their curricula and subjects offered—to waqf funded madrasas of the Middle East, whose far more stagnant curricula and subject offerings helped turned the Middle East into an intellectual backwater (Pp112-5).
Europe booms
While medieval Europe had corporations, they did not really take off as a commercial form until the C16th, though proto-business corporations (such as the Genoese Bank of San Giorgio, founded 1407) had emerged earlier. They were a means of raising fixed and working capital, and handling risk. As merchants experimented with arrangements, new needs triggered new innovations. Economic activity expanded; 770 European ships sailed to Asia in the C16th: 6,661 did in the C18th, with English and Dutch corporations accounting for three-quarters of the total. Both partnerships and corporations involve various trade-offs (hence their prevalence varies by sector) but the larger the activity, the more likely the corporate form is to be employed (Pp115ff).
Kuran considers the ways in which importing of European commercial and legal forms could have taken place, including through trade, observing resident European merchants, and the operation of the “capitulations” which allowed European merchants to operate under their own law, via local consuls, thus avoiding the problems of Muslim inheritance law in particular. Islamic law was never completely frozen, it showed capacity to adapt over time (particularly in matters of rulership). Kuran argues that, if some major constituency had pressured the courts to go down the corporation path, likely ways would have been found (Pp121ff).
The Middle East doesn’t
The small and short-lived partnerships generated by Islamic inheritance law blocked demand for a range of innovations which, in Europe, led to the development of the corporation. For example, lack of standardised bookkeeping blocks measurement of net worth in investor-accessible ways and makes bankruptcy fraught. The tendency of successful merchants to turn their wealth into real estate to support a waqf, in response to the weakness of private property rights, also blocked innovation. Especially as capital, skill, networks and motivations thus constantly flowed out of the profit-oriented private sector to the non-profit sector (Pp126-8).
Nor was the waqf a source of innovation. Minimising risk (and thus managerial discretion) was early established as a central principle. To the extent it was permitted, changing waqf was expensive. Kadis had little incentive to agree to move a waqf in a self-governing direction—there was no collective entity able to negotiate on the behalf of kadis, their tenures were often brief and insecure (encouraging get-as-much-as-you-can attitude) and they derived income from enforcing waqf rules and disputes about a caretaker’s actions. The lack of legal personhood elsewhere—even officers of the state had personal liability—compounded the block to developing corporate forms (Pp129-31).
Guilds did develop, but they lacked common assets and internal dispute resolution procedures while their heads were state-appointed. The unification of most of the Middle East under Ottoman rule meant a strong, unitary state with little incentive to permit any autonomy beyond that useful for itself. Tax farming developed some of the elements of corporations, such as trading in tax farming shares. However, in the early C19th, the Ottoman state became concerned about its increasing difficulty in keeping track of who owned what and systematically confiscated tax farms from 1812 to 1842 (Pp132ff). The Middle East’s lack of stable competing jurisdictions worked against development of formal autonomous social forms.
There were some exceptions in the dispersal of assets through inheritance—the Armenian merchants of New Julfa, Iran and the Karimi merchants of Mamluk Egypt. But their very oddity (which likely comes from very specific features) demonstrates how strong the barriers were. The persistent simplicity of partnerships, a function of the Islamic inheritance system; the supply of social services through the waqf; the operation of state policies. These all blocked the development of the commercial corporation. Kuran points out that institutional forms (such as corporations and legal personhood) were imported from the West from the mid C19th onwards and now operate with little complaint from even the most ardent Islamic purists. It is not some feature(s) essential to Islam that were the issue, but interlocking incentives (Pp136ff).
Fumbling finance
Then it is on to Credit Markets Without Banks. Kuran is deeply sceptical that the ban on interest (or, more specifically, the explicit banning of riba, an age-old arrangement where failure to pay a loan on time doubled the liability, often leading to penury and debt enslavement) explains much. Credit markets continued to exist in the Middle East and Europe also had bans on levying interest (Pp143-5).
From the Quranic ban on riba, Islamic jurisprudence (arising in societies long used to financial restrictions) argued that all interest was illegal, on the grounds that it enriched the lender without compensating benefit to the borrower. Debt enslavement from borrowing for consumption was a recognised social evil:
Despite the ban, no Islamic economy was entirely interest free: an inevitable result of exchanges between agents with different risk tolerances. (Though the ban on debt enslavement was apparently enforced.) Compartmentalisation and casuistry was used to evade the ban on interest. Both techniques being recognised and enforced by Islamic courts (though which techniques were recognised by which school of law varied). But these techniques still raised costs, entailed extra risks and blocked open and honest discussion of interest and credit, including the time value of money (Pp147ff).
Christian Europe had many of the same qualms (and bans on) the levying of interest as the Islamic Middle East. However, beginning in the C13th, debates began to shift attitudes so that, by the C15th, most theologians thought interest could be legitimate. A process that accelerated until, by the C19th, the morality of interest was not much questioned. The more stable partnerships of Europe developed into active and inactive partners that developed into share trading. The ability to accumulate wealth across generations led to much wealthier private lenders. The corporate form was adopted by banking. Interest rates fell: those on long-term borrowing in England fell from 14% in 1693 to 3% in 1739 (Pp153ff).
In Anatolia and the Balkans, the cash waqf developed. While purists denounced it as illegal, pragmatism eventually won out. However, the cash waqf retained the limitations of the institutional form: single founder and caretaker, set rules (often including a set interest rate), inability to pool capital, inability to benefit from changing circumstances (indeed, they rarely lasted beyond a century). Most parts of the Middle East did not even develop it at all (Pp158ff).
In the C19th, European banking spread to the Middle East, though significant locally-owned banks did not develop until the late C19th and predominantly Muslim owned ones until the early C20th. The aim was to evade the difficulties of traditional moneylenders:
The now familiar barriers to institutional (and thus economic) development—the Islamic law of partnerships and inheritance system, the waqf, the individualism of Islamic law—also operated to block financial innovation. This had to be (eventually) introduced from outside, from Europe. Kuran dismisses both the Islamist view of such as destructive westernisation or the dependency theory notion of them as imperialist instruments of dependence. On the contrary, he seems them as vehicles of institutional development rationally welcomed (and adopted) by local agents (Pp164ff).
The third and final part of this review is in my next post.
Having set the analytical framing, Kuran them moves on to “Part II: Organizational Stagnation”. His entry point is the question he posed at the end of Part I:
What was the cutting edge of commerce in the seventh century, and in what ways did Islam matter (p.41).The chapter headings outline the path of his analysis: Commercial Life Under Islamic Rule, The Persistent Simplicity of Islamic Partnerships, Drawbacks of the Islamic Inheritance System, The Absence of the Corporation in Islamic Law, Barriers to the Emergence of a Middle Eastern Corporation, Credit Markets without Banks.
Early Islam
Kuran starts by taking the reader through how early Islam promoted economic activity. The Qur’an is profit-positive, characterising profit as Allah’s bounty to humanity. The Haj, the annual pilgrimage to Mecca, was also a great economic event: pilgrimages were often funded by trade and the Qur’an endorses the Haj having an economic role. The scale of the Haj provided a stimulus to economic activity, but also likely discouraged the development of secular fairs (which were important in economic development in medieval Europe) (Pp45-8).
One of the key factors in economic development is promoting cooperation among non-kin. Islamic law tended to be commerce positive not least because a large majority of Islamic jurists (up to 75%, according to one study) primarily made their living from commerce. The development of Islamic partnership law promoted non-kin cooperation (even across confessional boundaries); more than Talmudic partnership law, as it allowed wider latitude in arrangements. Sharia promoted wide-ranging, long-distance trading that linked across three continents under a common legal system (Pp48ff).
Islamic partnerships lacked legal personhood: all legal interactions were between individuals. Most variations also required a partner’s principal to consist of currency: they could not invest in merchandise directly. A merchant’s mission was also incomplete until he had sold all the merchandise bought with the currency. This could lead to sub-optimal exchanges and, while legal ruses existed to get around such problems, they added to the transaction costs involved (Pp59ff).
While Islam had been commercially dominant in its early centuries, its share of global trade began to shrink substantially. Kuran quotes Angus Maddison’s figures that the Middle East’s share of world GDP was 10% in 1000 but had plummeted to 4% by 1600 and 2% by 1700. By contrast, the west European share surged from 9% in 1000 to 22% in 1700. Islam’s institutional advantage had clearly vanished (Pp61-2).
Fragmenting wealth
Kuran examines the limitations of Islamic partnership law—what he calls its “persistent simplicity”—assembling considerable illustrative data (Pp63ff). Then it is on to the limitations of the Islamic inheritance system: subject to the most detailed set of economic rules in the Qur’an. While the rules:
clearly subordinated personal preferences to the extended family’s need for financial security and predictability (p.78)and may have strengthened female inheritance rights, they also:
made it difficult to keep property intact across generations (p.79).This inhibited the creation of commercial or landowning elites able to restrain rulers while also dispersing productive assets. To keep land in viable productive units, it was generally classed as state land, thus not covered by Islamic inheritance law, with tenants paying land tax. They could not sell, grant or partition their plots without official permission (Pp79-80).
As an aside, this system also embedded a permit raj into operation of the most important asset, land—a pattern that continues to bedevil the Middle East (pdf).
Various techniques were developed to circumvent the Qur’an’s inheritance rules, but they were patchy in operation (p.80). One of the most common was use of a waqf or trust: an institution whose benefits and limitations later becomes a key focus of Kuran’s analysis.
Kuran compares this to the situation in Western Europe, where there was considerable variety but one key feature—inheritance rules were not based in religious law, so far more easily open to change. The spread of primogeniture provided Western Europe for a simple mechanism to keep wealth intact across generations: far more so than in the Islamic Middle East (Pp81-2). Kuran notes that the Qur’an’s rules clearly made more sense for a pastoralist society, where herds could be “bred up”, than an agrarian one, where concern to discourage fragmentation of land made more sense. As the Industrial Revolution advanced and more divisible forms of wealth became more important, inheritance rules evolved in a more egalitarian direction. Kuran also cites control over irrigation system as a key feature of state power in the Middle East—he argues this would also encourage more egalitarian inheritance rules, to discourage concentrations of land that might threat state control of water supply; a pattern that operates far back in Middle Eastern antiquity (Pp82-3).
Islam also permitted polygyny, though it was largely the preserves of the rich and powerful, so a sign of status. Polygyny allowed the forming of wider kin connections (so helped networking) but increased the dispersion of assets (since the Qur’an mandated equal treatment of wives and their children). It also encouraged an egalitarian inheritance system, otherwise families would be reluctant to offer their daughters: so polygyny and egalitarian inheritance were mutually supporting institutions, while primogeniture was much easier where only one spouse was legally recognised (Pp84-5).
The European inheritance system made enduring partnerships much more likely than in the Middle East with much more capacity for experimentation, and so a need for innovation, leading, over time, to a wider range of organisational forms and commercial techniques. Europe was set off on a path of expanding innovation while the Middle East stagnated, one sign of which is the paucity of private records as historical sources. That, until the C19th, Middle Eastern trade was predominantly with regions where Islamic institutions were competitive or advantaged undermined any incentive to break out of the mutually supporting nature of Islamic inheritance and partnership arrangements (Pp85ff).
Critiquing various existing explanations for Middle Eastern economic stagnation, Kuran points out the above pattern is an example of unintended secondary consequences. Islamic institutions worked quite well in context but their mutually supporting nature blocked further institutional development (Pp93ff).
Natural persons only
The corporation—a critical characteristic of which is legal personhood—did not reach the Middle East until 1851 and did not “take off” until the Ottoman Parliament passed a corporation law in 1908. Kuran traces the Roman origins of corporate entities, the rise of “self-declared” corporate entities during the period of weak European states (notably the Church, subsections thereof, and cities) and its expansion into granted corporate status (through charters). That Christianity grew up under a strong state (the Roman Empire) encouraged Church focus on faith, morality and community: not political and economic organisation. This led to acceptance of parallel legal systems and a secularised legal domain (Pp97ff).
Eastern Roman law was much more centrally controlled than what developed further West. Still, both it and Zoroastrian law (where temples could own property and make loans) had the legal building blocs of corporation: yet it is absent from Islamic law. Kuran puts the failure down to the tribal milieu of pagan Arabia, with its continuing feuds:
Because of this resulting insecurity, people stood to gain from an ideology capable of unifying peoples through all-inclusive bonds of solidarity.There is a conspicuous absence in this Quranic community building:
…[Islam] fostered an ideology conducive to weakening kinship ties, reducing intertribal violence, and enhancing material security. It also facilitated collective action against outsiders, as evidenced in the early conquests (p.105).
No collective economic actor appears in the Quran, let alone a collectivity considered a legal person (p.106).So, no basis from which to develop legal personhood:
At the point when the Quran becomes a closed book, tribal bonds remained strong … Over the next few centuries, as the medieval Church weakened tribal bonds among Christians through the prohibition of marriage within kin groups, tribalism remained a potent force among Muslims (p.106).Moreover, the all-encompassing nature of Islam was a further barrier:
Like the commitment to a union of tribes in one great family, the lack of a formal separation between the religious and secular thus conflicted with the concept of incorporation, and all the more so with the ideal of incorporation at will (p.107).The development of Islamic jurisprudence was highly individualist, muftis and kadis acted as individuals, not members of some corporate entity:
In keeping religious interpretation decentralized, Islam thus denied the Muslim community a corporate prototype (Pp107-8).Since the learned class was paid for giving its opinions and judgements, it had no interest in encouraging self-governing bodies which might reduce the demand for their monopoly of adjudication services. Islamic political theory also did not recognise intermediate groupings of Muslims—all Muslims were members of an Islamic community conceived as unitary: an outlook the carried over into courts, the levying of tariffs, and so on. This also discouraged recognition of sources of intermediate loyalty that might promote factionalism (Pp107-9).
In trusts we trust
Islam did develop an organisation capable of indefinite existence: this was the waqf or trust. Trusts existed in Roman and pre-Islamic Law. At one level, the waqf was a stunningly successful institutional form, financing an enormous array of services. It was not, however, a corporation: it had a single founder, its rules and purpose could not be changed, it had no self-governance beyond carrying out the original instructions. This accorded with the Islamic concept of communal unity and anti-factionalism in a way a self-governing organised group did not (Pp110-2).
Founding a waqf provided status and prestige; it also protected property against expropriation. This was particularly useful given a founder could appoint himself caretaker (mutawalli), appoint relatives to positions and nominate his own successor (so getting around Islamic inheritance laws). Commitment to providing designated social services was something of a quid pro quo with rulers for foregoing expropriation opportunities. The capacity for change was extremely limited, abandonment of the activity would lead its assets to be distributed to the poor and combining waqfs, or pooling their capital, was forbidden. This profoundly blocked innovation in the use of capital. An example Kuran uses is contrasting medieval European universities—which rapidly became self-governing institutions, able to change their curricula and subjects offered—to waqf funded madrasas of the Middle East, whose far more stagnant curricula and subject offerings helped turned the Middle East into an intellectual backwater (Pp112-5).
Europe booms
While medieval Europe had corporations, they did not really take off as a commercial form until the C16th, though proto-business corporations (such as the Genoese Bank of San Giorgio, founded 1407) had emerged earlier. They were a means of raising fixed and working capital, and handling risk. As merchants experimented with arrangements, new needs triggered new innovations. Economic activity expanded; 770 European ships sailed to Asia in the C16th: 6,661 did in the C18th, with English and Dutch corporations accounting for three-quarters of the total. Both partnerships and corporations involve various trade-offs (hence their prevalence varies by sector) but the larger the activity, the more likely the corporate form is to be employed (Pp115ff).
Kuran considers the ways in which importing of European commercial and legal forms could have taken place, including through trade, observing resident European merchants, and the operation of the “capitulations” which allowed European merchants to operate under their own law, via local consuls, thus avoiding the problems of Muslim inheritance law in particular. Islamic law was never completely frozen, it showed capacity to adapt over time (particularly in matters of rulership). Kuran argues that, if some major constituency had pressured the courts to go down the corporation path, likely ways would have been found (Pp121ff).
The Middle East doesn’t
The small and short-lived partnerships generated by Islamic inheritance law blocked demand for a range of innovations which, in Europe, led to the development of the corporation. For example, lack of standardised bookkeeping blocks measurement of net worth in investor-accessible ways and makes bankruptcy fraught. The tendency of successful merchants to turn their wealth into real estate to support a waqf, in response to the weakness of private property rights, also blocked innovation. Especially as capital, skill, networks and motivations thus constantly flowed out of the profit-oriented private sector to the non-profit sector (Pp126-8).
Nor was the waqf a source of innovation. Minimising risk (and thus managerial discretion) was early established as a central principle. To the extent it was permitted, changing waqf was expensive. Kadis had little incentive to agree to move a waqf in a self-governing direction—there was no collective entity able to negotiate on the behalf of kadis, their tenures were often brief and insecure (encouraging get-as-much-as-you-can attitude) and they derived income from enforcing waqf rules and disputes about a caretaker’s actions. The lack of legal personhood elsewhere—even officers of the state had personal liability—compounded the block to developing corporate forms (Pp129-31).
Guilds did develop, but they lacked common assets and internal dispute resolution procedures while their heads were state-appointed. The unification of most of the Middle East under Ottoman rule meant a strong, unitary state with little incentive to permit any autonomy beyond that useful for itself. Tax farming developed some of the elements of corporations, such as trading in tax farming shares. However, in the early C19th, the Ottoman state became concerned about its increasing difficulty in keeping track of who owned what and systematically confiscated tax farms from 1812 to 1842 (Pp132ff). The Middle East’s lack of stable competing jurisdictions worked against development of formal autonomous social forms.
There were some exceptions in the dispersal of assets through inheritance—the Armenian merchants of New Julfa, Iran and the Karimi merchants of Mamluk Egypt. But their very oddity (which likely comes from very specific features) demonstrates how strong the barriers were. The persistent simplicity of partnerships, a function of the Islamic inheritance system; the supply of social services through the waqf; the operation of state policies. These all blocked the development of the commercial corporation. Kuran points out that institutional forms (such as corporations and legal personhood) were imported from the West from the mid C19th onwards and now operate with little complaint from even the most ardent Islamic purists. It is not some feature(s) essential to Islam that were the issue, but interlocking incentives (Pp136ff).
Fumbling finance
Then it is on to Credit Markets Without Banks. Kuran is deeply sceptical that the ban on interest (or, more specifically, the explicit banning of riba, an age-old arrangement where failure to pay a loan on time doubled the liability, often leading to penury and debt enslavement) explains much. Credit markets continued to exist in the Middle East and Europe also had bans on levying interest (Pp143-5).
From the Quranic ban on riba, Islamic jurisprudence (arising in societies long used to financial restrictions) argued that all interest was illegal, on the grounds that it enriched the lender without compensating benefit to the borrower. Debt enslavement from borrowing for consumption was a recognised social evil:
In the overwhelmingly agrarian economies of antiquity, loans for production or commerce were uncommon and governments rarely borrowed. The main purpose for borrowing was to meet personal subsistence needs (p.146).Harvests being variable and unpredictable, such borrowings could go horribly wrong, leading to the:
the ubiquitous and socially destablizing danger of enslavement for unpaid debt. Throughout the ancient world … defaulters were routinely sold into slavery and often shipped to foreign lands. Such horrible consequences tainted all interest earnings, making profit-reaping lenders appear as greedy exploiters (p.146).Hence:
… the Islamic view that interest produces unjustified enrichment simply re-expresses an ancient prejudice common to the eastern Mediterranean (p.146).Something we can see, for example, in Aristotle’s denunciation of interest.
Despite the ban, no Islamic economy was entirely interest free: an inevitable result of exchanges between agents with different risk tolerances. (Though the ban on debt enslavement was apparently enforced.) Compartmentalisation and casuistry was used to evade the ban on interest. Both techniques being recognised and enforced by Islamic courts (though which techniques were recognised by which school of law varied). But these techniques still raised costs, entailed extra risks and blocked open and honest discussion of interest and credit, including the time value of money (Pp147ff).
Christian Europe had many of the same qualms (and bans on) the levying of interest as the Islamic Middle East. However, beginning in the C13th, debates began to shift attitudes so that, by the C15th, most theologians thought interest could be legitimate. A process that accelerated until, by the C19th, the morality of interest was not much questioned. The more stable partnerships of Europe developed into active and inactive partners that developed into share trading. The ability to accumulate wealth across generations led to much wealthier private lenders. The corporate form was adopted by banking. Interest rates fell: those on long-term borrowing in England fell from 14% in 1693 to 3% in 1739 (Pp153ff).
In Anatolia and the Balkans, the cash waqf developed. While purists denounced it as illegal, pragmatism eventually won out. However, the cash waqf retained the limitations of the institutional form: single founder and caretaker, set rules (often including a set interest rate), inability to pool capital, inability to benefit from changing circumstances (indeed, they rarely lasted beyond a century). Most parts of the Middle East did not even develop it at all (Pp158ff).
In the C19th, European banking spread to the Middle East, though significant locally-owned banks did not develop until the late C19th and predominantly Muslim owned ones until the early C20th. The aim was to evade the difficulties of traditional moneylenders:
In the second half of the nineteenth century, and in many places even later, peasants without access to banks paid interest rates varying between 20 percent and 100 percent, with their crops serving as collateral. By contrast, European agricultural interest rates had fallen to around 4 percent. Commercial interests, too, were high in traditional markets. In those of Lebanon and Syria they stood at 24 per cent in the mid-nineteenth century. Meanwhile the silk guilds over Istanbul were paying 18 percent, as compared with the 5 percent paid by their counterparts in Lyon, France (Pp162-3).Which puts the above concerns about interest and money-lending in agrarian societies in context, as well as the scale of European advantage. European institutions, such as the consular courts, operated to spread modern banking to the Middle East (Pp161ff).
The now familiar barriers to institutional (and thus economic) development—the Islamic law of partnerships and inheritance system, the waqf, the individualism of Islamic law—also operated to block financial innovation. This had to be (eventually) introduced from outside, from Europe. Kuran dismisses both the Islamist view of such as destructive westernisation or the dependency theory notion of them as imperialist instruments of dependence. On the contrary, he seems them as vehicles of institutional development rationally welcomed (and adopted) by local agents (Pp164ff).
The third and final part of this review is in my next post.
Friday, February 10, 2012
The Long Divergence (1)
I love (good) economic history. It explains how things work. Particularly if it is done with the understanding that the history of what did happen is also the history of what did not happen.
Timur Kuran’s The Long Divergence: How Islamic Law Held Back the Middle East is good economic history. Part I (Introduction) sets out the question to be explained: why and how, after an initial, lengthy period of Islam being as economically successful (often more so) than Western Christendom, did it come to fall so far behind (the “Great Divergence”)? Why did it take so long to begin to adapt Western institutions, and why did it do so when it did? Questions of not only what did happen, but also what did not (e.g. a blanket refusal to adapt, an willingness to adapt appearing earlier). Another of the virtues of Kuran’s study is providing maps defining what he means by ‘Islamic Middle East’, as this changed somewhat over the centuries.
Institutions matter
This is a study centred on the evolution and effect of institutions. Kuran defines an ‘institution’ as:
Kuran gives short shrift to attitude explanations (“conservatism”, “fatalism”) pointing out that such features common to many societies and enduring features of human societies cannot explain variations between them (or across time). The issue is the resilience of private institutions when innovation and borrowings in other fields (e.g. tax collection) never ceased. Where C16th Islamic merchants and financiers gave no sign of finding traditional arrangements problematic, their C19th European found such increasingly inadequate. Once the greater wealth and success of Europeans became increasingly obvious, that then created pressure for change in the Middle East (Pp10-1).
The result was, from the mid-C19th onwards, a series of importings, adaptations and innovations as merchants, financiers and others in the Middle East attempted to replicate European success. This was the local reflection of the modern economic epoch whose:
Organisational capacities mattered. There may not be a single path to mass prosperity but what is required is:
Stuck in the personal
While Europe was moving from personal to impersonal exchange, the Middle East remained dominated by personal exchange, with courts often deciding cases purely on oral testimony. From the C16th onwards, the Ottoman Empire signed various “capitulations” which allowed foreign merchants to have their property dealt with under their law: this, for example stopped the break-up of estates which was a feature of Islamic law—advantages which were not passed on to local merchants. Kuran notes that, except with regard to Europe from the C16th onwards, Islam often had institutional advantages compared to other cultures that fostered spread of Islam and Islamic institutions (since Muslims were expected to live according to the dictates of Islamic law) (Pp19ff).
But such dictates did not constrain non-Muslims who, outside the areas of taxation and security, were able to follow their own laws. In 1844, the first full Ottoman census, 45% of the population of the Ottoman Empire were Christian; in the C16th they were 35% of the population of Istanbul (p21). So, how the economic life of non-Muslims operated matters in explaining the historical outcomes. Given the balance of advantage in institutions shifted over time, Kuran provides a discussion of the difference between static and dynamic features (Pp22-4).
Religion matters
Having framed the question of the “Puzzle of Economic Underdevelopment” so well in the first chapter, Kuran moves on to considering the economic role of Islam. This mattered because:
Considering causation
Kuran discusses briefly the problems with various approaches to explaining historical causation on the scale he is concerned with:
Kuran rejects analyses based on fixed advantages or disadvantages, for:
But, as Kuran notes, analyses based on permanent Islamic inferiority have exactly same failing and so are unable to explain early Islamic success. The entire historical trajectory has to be explained (Pp37-8).
Kuran distinguishes between local and global optimality: one judges between possibilities that one is aware of. This changes both due to changes in geographical and temporal breadth of view. Hence, Turan informs us, that:
This review continues in my next post.
Timur Kuran’s The Long Divergence: How Islamic Law Held Back the Middle East is good economic history. Part I (Introduction) sets out the question to be explained: why and how, after an initial, lengthy period of Islam being as economically successful (often more so) than Western Christendom, did it come to fall so far behind (the “Great Divergence”)? Why did it take so long to begin to adapt Western institutions, and why did it do so when it did? Questions of not only what did happen, but also what did not (e.g. a blanket refusal to adapt, an willingness to adapt appearing earlier). Another of the virtues of Kuran’s study is providing maps defining what he means by ‘Islamic Middle East’, as this changed somewhat over the centuries.
Institutions matter
This is a study centred on the evolution and effect of institutions. Kuran defines an ‘institution’ as:
a system of socially produced regularities that shape, and are in turn shaped by, individual behaviours (p.6).Such incorporates:
consciously created social regularities, such as state-imposed litigation procedures and tax regulations. It also encompasses patterns that emerge as byproducts of other choices, such as procedural expectations based on history, customary contractual practices and organizational norms (p.7).The institution that Kuran most focuses on is Islamic law (i.e. Shar’ia), something he displays a very nuanced understanding of:
In principle, Islamic law covered all human activity. As a matter of practice, certain spheres of life were governed by rules divorced from religious considerations. In the political discourse of the Ottoman Empire (1299-1922) there was even a category of law known as “ruler’s law” (kanun), as distinct from Islamic law, and also a third category, customary law (orf), which rested on precedent rather than religious scripture or learning (p.7).He is not interested in what theory said, but in what actually happened in practice:
In commerce and finance, two areas in which the Middle East fell conspicuously behind, right up to modern times Islamic law played a key role. People entered into contracts that followed an Islamic template and enforced through Islamic courts. They apportioned estates according to Islamic inheritance rules. Residents of the region’s great cities obtained services mostly from waqfs, which were trusts formed under Islamic law and supervised by officials with religious training. Almost all lawsuits involving at least one Muslim were litigated by Muslim judges, under Islamic legal principles (p.7).with a lively sense of what did not happen:
The domains of the three bodies of law were not immutable. Where Islamic law created identifiable handicaps for investors, merchants, artisans, or moneylenders, efforts might have been made to facilitate the circumvention of problematic provisions (p.7).By, for example, developing their own specialised courts: something that did not happen prior to the C19th (Pp7-9).
Kuran gives short shrift to attitude explanations (“conservatism”, “fatalism”) pointing out that such features common to many societies and enduring features of human societies cannot explain variations between them (or across time). The issue is the resilience of private institutions when innovation and borrowings in other fields (e.g. tax collection) never ceased. Where C16th Islamic merchants and financiers gave no sign of finding traditional arrangements problematic, their C19th European found such increasingly inadequate. Once the greater wealth and success of Europeans became increasingly obvious, that then created pressure for change in the Middle East (Pp10-1).
The result was, from the mid-C19th onwards, a series of importings, adaptations and innovations as merchants, financiers and others in the Middle East attempted to replicate European success. This was the local reflection of the modern economic epoch whose:
chief characteristic is self-sustaining economic expansion at an unprecedented rate; although contractions can occur, they amount to temporary reversals along an upward path. This epoch has additional characteristics: rapid technological change, a doubling of life spans, massive urbanization, and the means of mobilizing abundant capital through complex private organizations (p.13).Contemporary Muslim reformers may have not understood the full package (scholars are still arguing over it) but they had some sense that new things were required and were willing to agitate for them.
Organisational capacities mattered. There may not be a single path to mass prosperity but what is required is:
fundamental institutional transformations to enable savers, investors, lenders, borrowers, merchants and producers to operate on a much larger scale than ever before, through organizations incomparably larger, and over time horizons far longer than would have made sense in the Middle Ages. If this is granted, it is simply a matter of historical record that until well after 1750, considered the star of modern economic growth, the Middle East lacked the organizational forms and techniques that distinguish the present epoch from the two previous epochs—prehistory to 8000BCE and settled agriculture from then to 1750 (p.14).Kuran notes that first Arab Human Development Report (pdf) (2002) pointed to a “freedom deficit” and a “human capabilities/knowledge deficit” as characteristics of the contemporary Arab world:
Two centuries ago, observers of the region would have recognized instantly what they meant (p.14).Kuran then examines causality in history as part of establishing his case of why institutional factors, specifically private organisations, were so important in explaining the economic divergence and patterns he is interested in, (Pp14ff).
Stuck in the personal
While Europe was moving from personal to impersonal exchange, the Middle East remained dominated by personal exchange, with courts often deciding cases purely on oral testimony. From the C16th onwards, the Ottoman Empire signed various “capitulations” which allowed foreign merchants to have their property dealt with under their law: this, for example stopped the break-up of estates which was a feature of Islamic law—advantages which were not passed on to local merchants. Kuran notes that, except with regard to Europe from the C16th onwards, Islam often had institutional advantages compared to other cultures that fostered spread of Islam and Islamic institutions (since Muslims were expected to live according to the dictates of Islamic law) (Pp19ff).
But such dictates did not constrain non-Muslims who, outside the areas of taxation and security, were able to follow their own laws. In 1844, the first full Ottoman census, 45% of the population of the Ottoman Empire were Christian; in the C16th they were 35% of the population of Istanbul (p21). So, how the economic life of non-Muslims operated matters in explaining the historical outcomes. Given the balance of advantage in institutions shifted over time, Kuran provides a discussion of the difference between static and dynamic features (Pp22-4).
Religion matters
Having framed the question of the “Puzzle of Economic Underdevelopment” so well in the first chapter, Kuran moves on to considering the economic role of Islam. This mattered because:
certain institutions of great significance for investment, productivity and exchange were grounded in Islamic teachings (p.25).He notes the primary nature of religious status in Islamic societies and that the ruling dynasties all consulted Muslim scholars even as they adapted to changing circumstances. He also warns against the tendency to read secular classifications back into a (religious-status dominated) past. As Kuran’s concern is with comparative outcomes, he focuses on the most advanced institutions: the places where there would be the most pressure for institutional adaptation, noting that such centres moved over time in the history of the Middle East, as they did in European history. The Ottoman dynasty was the most durable rulership as it was quickest to adapt, but tendencies to secularisation only developed after the comparative economic underdevelopment of the Middle East became clear. One of Kuran’s persistent targets is Islamist claims about the past, that the problem was the failure to adhere to “properly” Islamic institutions:
Prior to the mid-nineteenth century, the Ottomans tried to extend the reach of Islamic institutions and raise awareness of them … So links between Islam and economic performance, where present, should be observable in the Ottoman context (p.28).One of Kuran subheadings is ‘Unintended Consequences and the Potency of Minor Distinctions” (p.29):
Until modern times Middle Eastern cities lacked a corporate status; none of them had standing before the law as an organisation, as thousands of Europeans already did in the Middle Ages. To make sense of the Middle Eastern pattern, we need to pinpoint a social mechanism that kept them wedded to a traditional form of administration. Likewise, explaining why their financial markets remained atomistic requires finding one or more mechanisms that prevented the emergence of banks (Pp29-30).Kuran regards exaggerating what individual actors could have foreseen and willed as “a common error”. The question is why folk in the Middle East acted differently than, for example, English kings, merchants, financiers and borrowers (p.30):
… the institutions of early Islam had unintended effects … the Islamic inheritance system lowered the Muslim share of global commerce and delayed Middle Eastern industrialisation. The effects were not planned, and neither became an issue during the rise of Islam, as the inheritance rules took shape. They are among the unintended consequences of institutions meant to spread wealth, strengthen families, and promote political stability (Pp30-1).Yes, the rules benefited wives and daughters but they also had other second order effects:
A full-blown inquiry into the economic effects of a religion must look beyond short-run and direct effects to longer and indirect consequences … Second-order effects are often more significant for economic development than the corresponding first-order effects (p.31).Kuran emphasizes that small differences can prove historically very significant over the long run of history, which makes unintended consequences loom large:
Identifying initial institutions, relationships, and incentives without prejudging whether they affected later developments, we must look for social mechanisms that made certain factors self-amplifying, triggered chain reactions, and fostered rigidities (p.32).This means that both past failures and past successes can limit future options. In Islam, the waqf, or trust, was a highly effective way to provide services. Its very success blocked the development of municipalities and corporations. Other processes can, however, lead to accelerating development:
Societies that achieve a critical mass of ideas experience self-sustaining growth; others stagnate (p.33).In particular, some regions led the way to impersonal exchange while others stagnated. Modernising defensively and by imitation means one tends to remain an organisational laggard. In understanding such patterns, the analytical trick is to explain both change and stagnation (Pp33-4).
Considering causation
Kuran discusses briefly the problems with various approaches to explaining historical causation on the scale he is concerned with:
the key to the West’s observed process of modernization is that its institutions were self-undermining and ultimately self-transforming. The corresponding institutional complex in the Middle East proved generally self-enforcing, if not self-reinforcing (p.36)Kuran is very much interested in dynamic analysis, in changes (or lack of them) over time.
Kuran rejects analyses based on fixed advantages or disadvantages, for:
The usefulness of a stable institution will vary over time, depending on the evolution of other institutions, relative prices, and technology (p.36).Kuran notes that the colonial period provided many benefits to the Middle East. (Those who doubt that might consider Afghanistan: never colonised, and with the most pathetic levels of infrastructure in the region.) The Islamist view of the problem as being a decline from successful Islamic purism:
invokes a timeless and context-independent concept of efficiency … it thus overlooks that useful institutions might become dysfunctional as the global economy evolves (p.37).A point that Australian economic reformers have regularly made: that reform is a continuing imperative because there is no permanent “best practice”, or even “good enough”. More broadly, the question of why the West became the most dynamic of civilisation is also the question of why others did not.
But, as Kuran notes, analyses based on permanent Islamic inferiority have exactly same failing and so are unable to explain early Islamic success. The entire historical trajectory has to be explained (Pp37-8).
Kuran distinguishes between local and global optimality: one judges between possibilities that one is aware of. This changes both due to changes in geographical and temporal breadth of view. Hence, Turan informs us, that:
I point to dynamic disadvantages of institutions that distinguished scholars have characterized as evidence of economic success. Likewise, I identify as globally inefficient practices that, from a strictly local perspective, look very useful (p.39).Institutional advantage is very much a moveable feast.
This review continues in my next post.