Institutions, religion, and the rise of Europe vis-à-vis the Middle East: A long-run reversal of fortunes

Jared Rubin 22 December 2011

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By almost any available economic measure, the Middle East, China, and India were ahead of Europe one thousand years ago. Their science and technology were more advanced than in Europe, their trade flowed in higher volumes and over longer distances, and they employed more complicated financial instruments to facilitate trade. Yet as early as the 17th century Western Europe was clearly on a path to dominate much of the rest of the world economically, technologically, and militarily – eventually colonising much of the world’s land mass. Western Europe and its offshoots have dominated the world economy for centuries, and it has only been in recent decades that China and India have begun to catch up. What happened? How did such a relatively poor and unpopulated area become the world’s dominant economic force? Why didn’t economic growth occur in the rest of the world like it did in Western Europe?

Recent works by Kuran (2010), Greif (2006), Acemoglu et al (2001, 2005), and Engerman and Sokoloff (2002) and others have sought exogenous roots for these economic differences. That is, instead of relying on some ad hoc explanation rooted in cultural superiority, conservatism, or colonial domination, these works attempt to dig deep into the past to find causes that have created differing incentive structures – and hence divergent economic outcomes – in differing regions. Such explanations are attractive because they carefully map the pathway from cause to effect.

Any inquiry into the relative rise of the West can at best be a partial study; there are simply too many factors leading to the relative success of the West to be incorporated into one study. The long-run economic divergence between Europe and the Middle East presents a particularly interesting slice of this broader question. Indeed, to the extent that religion or religious institutions played a role in the economic divergence, these two regions share much more of a common heritage that Europe does with any other part of the world. This makes the comparison more powerful and transparent; if Europe succeeded while the Middle East stagnated despite a similar religious and cultural heritage, what role is left for religion or culture in the eventual divergence of the two regions?

A satisfying explanation must account for some of the general features that precipitated the divergence in economic growth between Western Europe and the Middle East in the last seven centuries. Studying specific cases, however, can point us in the direction of general causes. In a recent study, I argue that studying the history of interest restrictions in Islam and Christianity is particularly useful – such laws were ubiquitous throughout much of the history of both religions, but they were eventually disbanded only in Christianity (Rubin 2011).

The history of interest restrictions in Islam and Christianity

A historical study of interest restrictions points to differences in institutional structures as the driving cause behind different outcomes in Europe and the Middle East. The most important difference between the two regions was the much greater degree to which early Islamic political authorities depended on conforming to the dictates of religious authorities for legitimacy. In both regions, religious legitimisation has historically been extremely important for political authorities. While the importance of religious legitimisation changed over time for endogenous reasons, the initial differences between the two regions were an exogenous remnant of the circumstances surrounding the birth of Islam and Christianity.

To see the unintended consequences of this exogenous institutional difference, consider the following thought experiment (which I have formalised in a game- theory model). What are the incentives that political authorities in ‘weakly-legitimising’ economies face when there is a rise in economically productive actions (such as lending at interest or printing in the Arabic script – the latter was banned for over two centuries by the Ottoman sultanate) which are prohibited by religious authorities? Since political authorities weakly depend on religious legitimacy, they have more incentive on the margin to permit such actions. In turn, more of the laity transgresses the religious authority's law, as they only face otherworldly (and not worldly) costs from doing so. For example, merchants and lenders may go to hell for conducting usurious transactions, but they are not going to jail. Next, consider the response of the religious authority. On the one hand, reinterpreting supposedly ‘eternal’ doctrine undermines its ability to legitimise; on the other hand, few people follow its dictates and it is increasingly marginalised in society. Hence, when enough people transgress its dictates, the religious authority has greater incentive to reinterpret its doctrine and institutional change results.

Consider next the incentives that political authorities in ‘strongly-legitimising’ economies face. Since they rely on religious legitimacy to a greater extent, their laws are less permissive. In turn, merchants and lenders are discouraged from transgressing the law, as they face both worldly and otherworldly costs from doing so. With few merchants and lenders openly breaking its dictates, the religious authority has little incentive to reinterpret, since doing so is costly and there is little to be gained on the margin. The legitimising relationship thus remains strong and no one has incentive to change actions, entailing that the institutions upholding the laws are self-enforcing.

Detailed historical analysis of the history of interest (usury) restrictions in Christianity, supported by the theoretical framework laid out above, show that the factors which undermined Church authority in the late mediaeval period were in part made possibleby widespread merchant transgression of the Church’s dictates. As more profitable commercial opportunities became available, merchants further evaded the Church’s anti-usury dictates and sought protection from secular authorities, which provided greater incentive for rulers to provide security and legalise interest, which encouraged merchants to even further evade Church dictates, and so forth. Hence, the Church’s loss of power vis-à-vis secular rulers was both a cause and a consequence of the initial rise of commerce and the resulting interactions between merchants, the Church, and political authorities.

On the other hand, in the Islamic world such a sequence of events never occurred, despite similarly conducive ‘initial’ economic conditions. From the dawn of Islam, lenders incurred worldly and otherworldly costs from openly lending at interest. To avoid these costs, they circumvented interest restrictions by employing ruses which violated the spirit but not the letter of the law. Because these ruseswere arguably within the confines of the law, they were relatively inexpensive for Muslim religious (and political) authorities to permit. Moreover, because merchants were lending at small cost while facing significant sanctions for transgressing the ban, they had little incentive to further ‘push the envelope’. An absence of lay “push” provided no incentive for political or religious authorities to reinterpret, entailing an inhibitive equilibrium in which lending at interest was permitted, but only if a sufficient transaction cost was undertaken.

This history reveals how small differences in institutional arrangements and initial conditions can have immense consequences. The interactions between the relevant players pushed the institutional paths of the Islamic world and western Christendom in vastly different, self-enforcing directions. On the one hand, the interaction between the rise of secular authority and vast European trade networks supported further economic developments such as complex financial instruments, impersonal exchange, and the corporate form. On the other hand, the constraints faced in the Islamic world discouraged such a path – or at least, a greater shock was necessary to undermine the political and religious relationship than in Christendom. Instead, less economically beneficial institutions, such as the waqf and smaller, personal exchange networks persisted for centuries in the Islamic world.

The gate of independent reasoning

This reveals an important route through which religion directly impacts economic outcomes – the perpetuation of laws inhibiting economically productive actions. By refraining from attributing anything inherent in religion as the force underlying the economic divergence, this framework encourages a reconsideration of traditional notions of conservatism in the Islamic world. The most influential of these ideas is that the "gate of independent reasoning (ijtihād)” was closed in the tenth century (CE).

Until recently, historians generally agreed that in this period some informal consensus arose that independent reasoning, an important method of reinterpretation in the first three Islamic centuries, was no longer an acceptable means of finding truth and that henceforth jurists were only allowed to follow precedents.

This framework suggests an alternative metaphor. The "gate of ijtihād" may have been closed, but the gate was not locked. All that was necessary for the gate to be opened was a sufficient number of individuals attempt to push it open. But, due to the incentives supported by the prevailing institutions, few had incentive to ‘push the envelope’ (the gate), and observed behaviour led to the appearance that the gate was closed and locked.

Once inhibitive equilibria emerged in the tenth century, beliefs in the gate's closure were supported, further reinforcing the relationship between Islamic religious and political authorities. This insight allows us to view Islamic legal and economic history through a different lens by looking beyond the scope of observed actions to understand the institutions, behaviours, and incentives underlying them.

References

Acemoglu, D., S. Johnson, and J. Robinson (2001), "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review (91) 1369-1401.

Acemoglu, D, S Johnson, and J Robinson (2005), "The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth," American Economic Review 95: 546-579.

Engerman, SL, and KL Sokoloff (2002), "Factor Endowments, Inequality, and Paths of Development among New World Economies." NBER Working Paper 9259.

Greif, A (2006), Institutions and the Path to the Modern Economy. Cambridge: Cambridge University Press.

Kuran, T (2010), The Long Divergence: How Islamic Law Held Back the Middle East. Princeton: Princeton University Press.

Rubin, J (2011), “Institutions, the Rise of Commerce, and the Persistence of Laws: Interest Restrictions in Islam and Christianity”, Economic Journal, December.

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Topics:  Development

Tags:  religion, interest restriction