A Review of Avner Greif's Institutions and the Path to the Modern Economy

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Journal of Economic Literature Vol. XLV (September 2007), pp. 727–743

A Review of Avner Greif’s Institutions and the Path to the Modern Economy: Lessons from Medieval Trade

∗ GREGORY CLARK

Avner Greif’s Institutions and the Path to the Modern Economy: Lessons from Medieval Trade (Cambridge University Press, 2006) is a major work in the ongoing project of many economists and economic historians to show that institutions are the fundamental driver of all economic history, and of all contemporary differences in economic performance. This review outlines the contribution of this book to the project and the general status of this long standing ambition.

1. Introduction ages. The second book is a long, deep, thoughtful, indeed brooding, meditation on vner Greif’s eagerly awaited book, the nature of social institutions in general, Institutions and the Path to the Modern A their stability, and their dynamics: A Economy: Lessons from Medieval Trade, is Prolegomena to any Future Institutional ambitious, complex, long, and difficult. It Theory. In this second work, the specific will cause much work and trouble to review- institutions of medieval trade serve only as ers. It will vex students for generations to illustrations of proposed general principles. come. This is in part because the volume Both of these are bold undertakings, but actually contains two very different books their combination in one volume creates that have been forcibly married and that co- unique difficulties. For those interested in habit in domestic discord. The first book is a the rise of Europe and the eventual revision of that minor classic in the field of Industrial Revolution, the long sections of institutional economic history, Douglass abstract rumination over the nature and North and Robert Paul Thomas’s Rise of the underpinnings of institutions, such as chap- Western World (1973). Here Greif attempts ter 2—a twenty-four page discussion of how to locate the eventual rise of Western we should define the term institution—will Europe to world dominance in its unique make the book at times an exquisite torture. development of institutions that fostered Also, among the general principles Greif economic growth, starting in the early middle adduces in the theoretical sections is that there is no simple mapping between explicit ∗ Clark: University of California, Davis. institutional rules and the actual operation of

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institutions. Institutions are subtle forms glories of the Byzantine, Muslim, Chinese, whose real functioning cannot be discerned and Indian civilizations, eventually overtake without a deep knowledge of their context all these potential competitors, conquer and history. This theoretical conclusion cuts much of the world, and launch the Industrial against the parts of the book that attempt a Revolution? In the short (171 pages) but ele- quick and superficial link between European gant and spirited book, The Rise of the trade institutions and European economic Western World (1973), North and Thomas success. state, with an economy few other institution- For those interested instead in the origin, al economists have matched, “Efficient eco- stability, and evolution of institutions, the nomic organization is the key to growth; the book may serve better. But for them the spe- development of an efficient economic cific trade institutions cited as examples will organization in Western Europe accounts for not be the best material, since the details of the rise of the West. Efficient organization the operations of these institutions and of entails the establishment of institutional their origins in tenth century Europe are arrangements and property rights that create sketchy, so that the empirical tests of any of an incentive to channel individual economic the propositions advanced in the case studies effort into activities that bring the private are extremely limited. This is not the fault of rate of return close to the social rate of the author, who has impressive command of return...if a society does not grow it is the historical sources, but of the extant because no incentives are provided for eco- materials from this distant era. Such sources nomic initiative” (North and Thomas 1973, do not allow systematic empirical testing of pp. 2–3). the hypotheses advanced. As terrain to test Growth is thus just a matter of establish- institutional theories, medieval Europe has ing the right rules of the economic game. the great advantage of offering interesting Why then did earlier societies not have effi- and exotic animals. But it has also the disad- cient institutions and why didn’t all societies vantage that we glimpse these beasts only develop such institutions? North and imperfectly, flittingly, far off in the mist. Thomas answer that the rulers of preindus- In this review, the analysis is thus in two trial economies were motivated in setting up distinct parts. The first deals with the factu- institutions by their private costs and bene- al issue of the role of institutions in the rise fits: “new institutional arrangements will not of the West. The second with the general be set up unless the private benefits of their theory of institutions. The general conclu- creation promise to exceed the costs” (p. 6). sion will be that the book succeeds in neither This has an air of certainty that perhaps only of its aims. But this failure implies no dishon- truism can deliver. But they flesh out this or to the author. Greif is a scholar in the best claim by arguing that efficiency institutions sense of the word: someone who has pursued developed in parts of Western Europe his own independent vision of institutional because such factors as population growth analysis. Both questions he addresses are changed the costs and benefits of institution- excruciatingly difficult ones that have defied al forms for rulers between 1000 and 1700 in resolution for generations. Far better to try the favored parts of Western Europe. for the mountaintop and fail than to stay Medieval Europe in 900 AD on the vision rooted resignedly in the turgid swamplands of North and Thomas was a world of con- below. stricted factor and product markets. Most agricultural labor was supplied through 2. Institutions and the Rise of the West forced labor with serfdom, capital usage was Why did Western Europe, which was still distorted by usury laws, urban labor markets in 900 A.D. a backwater compared to the were distorted by guilds, and land usage was

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limited by common property rights. Output institutional foundations of the economy and markets were local and limited by guild the polity is paramount in determining a restrictions and “just price” laws. Somehow, society’s welfare” (pp. 3–4). and exactly how is left endearingly vague, Later in the introduction, Greif notes that through a favorable conjunction of cost the empirical studies of the book concern parameters influenced by population, envi- the period when “European economy, polity ronment, and military technologies, parts of and society were embarking on the road that Western Europe escaped this environment led to the Rise of the West, a process that and thus achieved economic growth. began in the late medieval period with the North and Thomas were wrong on most growth of European commerce” (pp. 23–24). specifics in their interpretation of preindus- To this end, he approvingly quotes Robert trial institutions and their effects. They Lopez, who coined the term the commercial relied mainly on the untested prejudices of revolution for the years 950–1350, that long earlier generations of historians. Thus, for distance trade “became the driving force of example, they repeat the conventional wis- economic progress, and in the end affected dom that common property in land in prein- every aspect of human activity almost as dustrial northern Europe was an institutional decisively as the Industrial Revolution pathology whose removal was a vital compo- changed the modern world” (Lopez 1967, p. nent of the agricultural revolution of the 126). Greif sees the trade expansion of the eighteenth century. Quantitative research in late medieval period as a fundamental trans- recent years suggests that common rights, at formation in the possibilities of the medieval least by the seventeenth century, had negligi- economy, sparked specifically by institutional ble impacts on agricultural performance.1 innovations and not by demography, techno- But the élan and vigor of this vision of the logical innovation, or any other noninstitu- institutional roots of economic success tional forces. Greif indeed, like Lopez, attracted many converts to “institutionalism” regards this medieval epoch as a true revolu- and helped North to the prominence that tion, an equal of the Industrial Revolution. brought him the Nobel Prize in Economics in One aim of the book is to describe and 1993. North and his followers have never lost understand the institutional roots of the rise the faith that “Institutions form the incentive of the West. structure of a society, and the political and The Rise of the West is, for Greif, the rise economic institutions in consequence, are of market institutions and, in particular, mar- the underlying determinants of economic ket institutions that permit long distance performance” (North 1994, p. 359). trade. Many economists, starting with Adam For the “institutionalist” program, the aim Smith, assume that markets are an easy and is to show how economic outcomes depend natural thing, found wherever there are peo- on the institutional structures of societies ple, and dating from a time beyond any writ- and then explain why efficient institutions ten record. Thus as Smith in a lecture in were so rare in the millennia before 1800. 1755 stated, “Little else is requisite to carry Greif is one of the most highly regarded of a state to the highest degree of opulence this academic movement, and right from the from the lowest barbarism but peace, easy beginning of this book stakes similarly strong taxes, and a tolerable administration of jus- claims for institutions. “Studying institutions tice: all the rest being brought about by the sheds light on why some countries are rich natural course of things” (Dugald Stewart and others poor....The quality of these 1858, p. -). Greif argues instead that the institutions 1 See Robert C. Allen 1982; Gregory Clark 1998; and that allow long distance trade are complex Philip T. Hoffman 1989. and difficult to create, and will not emerge

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naturally from a minimum of social order, as some subset of merchants is always prof- Smith seems to assume. Long distance itable even if the expropriated retaliate by trade, he assumes, had collapsed in the Dark never trading again (pp. 112–13). With Ages from 500 AD to 900 AD. The path to atomistic merchants trade will thus occur at modern growth, a tortuous and difficult one, less than socially efficient levels if reputation was through the creation of institutions that is the only mechanism available to restrain supported trade. predation. Merchant guilds by collecting The book’s assumption that long distance merchants into groups that can retaliate for trade was a fragile thing, whose existence expropriation against their members allow depended on the creation of elaborate insti- trade to rise to optimal levels. tutions that emerged only in very specific Similarly, chapter 10 (pp. 309–50) contexts, is hard to square with the archeo- describes and analyzes the community logical record that shows long distance trade responsibility systems in Western Europe even before the Neolithic Revolution creat- between 950 and 1350. In this institution, if ed settled agriculture. In Europe by the era a merchant from town A was found liable for of modern man, 45,000 years ago, there is damages in a commercial dispute in town B, evidence of continent wide movement of and town B refused to settle the damages, Baltic Amber and Mediterranean mollusk then the appropriate compensation was shells. The arrival of settled agriculture in seized from any merchant in town A who Europe in the Neolithic coincided with happened to come from town B. This abundant finds in tombs of luxury objects unlucky victim would then have to appeal for traded over long distances (George compensation for his injury in the courts of Grantham 2007). Long distance trade was town B. Greif again argues that this was an present from the dawn of agriculture, and efficient response to the absence of overar- perhaps even before. ching legal systems. Town A would have an Given the assumptions of the author, the incentive only to pursue merchants from B book focuses on describing and analyzing who caused damages, and town B would have the institutions associated with long distance an incentive to lay those damages at the door medieval trade. What made agency possible of the offender. Through this mechanism, in trades over long distances where the aver- trades became possible that were otherwise age speed of travel of information was one not supportable. mile per hour? How did merchants achieve The modeling and the reasoning here are security for their persons and their wares ingenious. But the reader expecting from operating in distant cities where they were this introduction, and from the title of the aliens? How did medieval trading communi- book, Institutions and the Path to the ties achieve stable self-government without Modern Economy, a book showing how and a seizure of power by one or another faction? why the institutions that underpin modern Greif is expert on the surviving details of market economies first emerged in medieval these institutions and he adroitly deploys the Europe will be disappointed. For it is somewhat sketchy details that survive on unclear if any of the institutions studied their operation. made any difference to the course of Thus, in chapter 4, Greif argues that even European growth. There is a crucial differ- cities that profit from trade will have an ence between a good being supplied at incentive to expropriate or cheat isolated socially inefficient levels and this deficiency merchants who come to trade. The formal in supply being quantitatively significant. argument, intuitively, is that the marginal From the window of his office at Stanford, gain to the city from the last merchant who Greif may be able to see the wealth of Silicon comes to trade is 0, so that expropriating Valley all around him, but also the social

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inefficiencies represented by California’s ignore those that might contradict it. A more traffic-clogged roads, its arcane land use and disciplined empirical test would systemati- taxation policies, and by its inefficient water- cally survey trade volumes between city pairs use laws. All societies have many institutions and correlate these with the types of negoti- that involve some inefficiencies, but some are ated trade protection. The nature of Greif’s much richer and more dynamic than others. sources probably preclude such a systematic It accomplishes nothing in terms of econom- empirical enquiry. We shall see also below ic growth to show that an institution is ineffi- that Greif’s theory of institutions suggests cient. The next crucial step is to show the that such systematic empirical investigations quantitative impact of those inefficiencies. would be of limited value. But this the book never does, except in an Another issue that Greif’s empirical con- illustrative way. Its proofs about inefficiency firmation does not address is whether the speak not at all about quantitative signifi- growth of protections for merchants, or the cance. Any tax on trade, for example, will community responsibility system, were reduce its level below socially efficient lev- themselves induced by an increased demand els. Trade throughout history has been taxed. for trade. As North and Thomas argued in But this does not imply that taxation thwarted The Rise of the Western World, institutions all trade possibilities and prevented eco- all have costs for their creation and enforce- nomic growth before the Industrial ment. They only emerge when their benefits Revolution. Magnitudes matter here, and exceed these costs. In a world where trade the proofs wielded by Greif are not geared volumes were limited by small population to magnitudes. sizes, low incomes and high transport costs Greif does offer some empirical support trade will be anarchic and unstructured. But to the idea that the absence of security for when trade volumes rise there is more merchants was a quantitatively important incentive to create institutions which facili- barrier to trade. He instances cases where tate it. Did the institutions create the trade unprotected merchants were attacked or in medieval Europe or did trade possibilities abused in foreign cities and where trade create their own institutions? expanded immediately after merchants were Some institutional economists have been granted privileges in a foreign city (pp. alert to these problems and have done inter- 95–105). Trade between Genoa and North esting work in trying to uncover the direc- Africa doubled, for example, after an agree- tion of causation by looking for exogenous ment for protection was reached of Genoese sources of institutional variation, as with merchants was reached in 1161 (p. 101). Daron Acemoglu, Simon Johnson, and Similarly trade between Catalonia and Sicily James A. Robinson (2001, 2005) or Dan expanded within months of a 1286 protec- Bogart (2005). But, for the examples Greif tion agreement (p. 100). But this does not examines, all of 0the crucial variables seem address the question of the importance of inherently endogenous, denying these trade volumes to the overall efficiency of opportunities. preindustrial societies. For Europe as a A further problem with the institutions whole before 1800, international trade was a dissected in the book is that they are mostly very modest economic activity, whose volume not those that can explain the eventual even by 1800 averaged less than 4 percent of European takeoff. For example, there is an GDP (Patrick O’Brien 1982). extended discussion of Greif’s earlier work Those who study history have learned to on “private-order contract enforcement be wary of such arguments by example. It is institutions.” This concerns how merchants too easy to choose examples, however unwit- monitor and reward agents operating at dis- tingly, to support the favored hypothesis and tant locations, a significant problem in long

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distance trade all the way up to the opera- traders, interesting though that institution tions of the East India company in the nine- was, to the eventual rise of the west and the teenth century. Greif showed, again with relative decline of the Islamic world is ingenuity and modeling skill, that the trading unknown. It is certainly clear that the practices of the eleventh century Jewish Muslim world by the time of the Ottoman Maghribi community, where any agent empire had an extensive court system that accused of dishonesty was shunned by the arbitrated on all kinds of formal contracts entire community, can allow agents to be that look very similar to those of the West hired for lower rewards (pp. 58–90). Such an (Sevket Pamuk 2006). institution could even allow for the possibil- His account of the community responsi- ity of agency when individualistic incentives bility system is similarly a tale of an interest- would not support this relationship. But did ing institution, but one whose importance to this matter in practice? It is not evident that the eventual domination of the west is unex- this was other than a curiosity. plored. By the thirteenth century, after all, In fact, the long account of these private when the Islamic world was still a vigorous enforcement mechanisms lies at cross pur- competitor of Christian Europe, the com- poses with the main thrust of the book, inso- munity responsibility system was disappear- far as it concerns the rise of the West. This is ing. Greif argues that the community one of the cases where the desire to theorize responsibility system decayed in the later about the nature of institutions in general thirteenth century because people were less obstructs the desire to tell a story about the easily identified by communities because of rise of Europe. The Maghribi equilibrium, greater geographic mobility. In support he not found in the West, allowed more efficient cites the fact that English merchants trade in an eleventh century world of distance between 1257 and 1271 greatly increased and uncertainty. Yet, Greif notes later, in registration of debts in the chancery rolls, comparing the individualist Genoese with the placing the transactions under the jurisdiction collectivist Maghribis, “the relative efficiency of common law (p. 340).2 Whatever the spe- of individualistic and collectivist systems cific reasons, the role of this system in the rise depends on the magnitude of the relative of the West is thus again rather tangential. parameters” (p. 301). The Maghribi system There is also reason to doubt the crucial turned out to be a dead end and the individ- factual assumptions that underlie the Greif ualist system of the Genoese that relied on analysis of European experience 950–1350. such third parties as courts for contract This is that it was the development of more enforcement the efficient outcome (because efficient trade institutions that led to a it came to dominate). In that case, the long growth both in the size and in the productiv- discussion of the Maghribi’s is probably not ity of the European economy in these years. germain to the rise of the West. There is no doubt that between 950 and Greif speculates that the early adoption by 1350 western Europe witnessed major groups such as the Maghribi’s of collective growth in population, in urbanization (par- solutions to the agency problem may have, ticularly in northern Italy and Flanders), and through creating “different cultural beliefs” (p. 300), locked these communities into a 2 Between 1250 and 1270 there was an explosion the cultural system that was inimical to modern production of written records of all kinds in England— accounts, court rolls, inquisitions post mortem. And docu- growth. Yet here, as he readily recognizes, ments such as charters showing land ownership began for he is guessing at interesting possibilities, the first time to actually show specific dates for transac- unsupported by modeling or empirical evi- tions. Thus the greater numbers of chancery records may not reflect a migration of merchants to other legal mech- dence (p. 301). So the connection of the col- anisms as much as an economywide adoption of more lective enforcement system of the Maghribi durable methods of recording facts and agreements.

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in the volume of long distance trade. But the However, since the cost of goods such as causes of these changes are difficult to dis- pepper in England were almost entirely the entangle: was it demographic change, transport and transactions costs in getting it improvements in agricultural productivity, from southern India to the end consumers improvements in industrial productivity? we can get some idea of the efficiency with Greif, while he is an innovator in his eco- which this long distance trade was carried nomic models, is very old fashioned in his out by comparing prices of goods such as history. Greif’s views on the importance of pepper with general prices in England. The trade to the medieval revival are those that data for this calculation exists only for the originated with Henri Pirenne in the 1920s. years after 1220, but that covers a lot of the This earlier view has been displaced in period of the medieval commercial revolu- England since the 1960s by the arguments of tion that Lopez identifies. Thus by 1300, the M. M. Postan emphasizing demography and population in England was probably twice as agrarian technology as the key drivers of the great as in 1220, cities like London had medieval expansion. expanded even more than this and the vol- Long distance trade in goods such as pep- ume of international trade had also swelled. per from India, for example, existed already Figure 1 shows this normalized pepper in northern Europe by at least 950 AD.3 The price, as well as the estimated linear trend in volume of this trade increased greatly these real pepper prices from 1220 to 1350. between 950 and 1350, but then the popula- There is no sign in these years of any tion of Europe also greatly increased over improvement in the efficiency of the trading these years by an unknown magnitude. By system that brought pepper to England. the thirteenth century, Flanders had become Thus we do not even know if trade institu- the center of an industry producing fine tions played any significant role in improving wool cloth, which was exported to the trade in medieval Europe. Mediterranean in exchange for such goods At the global level the transition between as spices and silks. England mainly supplied the preindustrial world of slow growth and the fine wool used in these cloths. Was the stagnation and the modern world of rapid great expansion of the Flanders cloth manu- growth shows up in a change in the meas- facturing industry from the tenth century on ured rate of total factor productivity (TFP) the result of improved trade opportunities? advance from around 0 percent per year in all Or did technological and organizational societies before 1800 to closer to 1 percent advances in Flanders, and/or more efficient per year in modern successful economies. production of raw wool in England, create We also know this change, at least proximate- the possibilities for trade that Italian mer- ly, was caused largely by innovation in pro- chants merely responded to. So it is hard to duction techniques, as has been emphasized know whether trade was, as Greif assumes, by Joel Mokyr and others.4 Again the link the driving force in the growth of European between trade institutions and these funda- economies from 950 to 1350 or just a mental innovations in production technique response to technological and organizational is unknown, but unexplored and unquanti- changes in some of the constituent territories fied in this work. Certainly, in the one econ- of Europe. omy where we can measure this, England, there is no sign that the medieval expansion 3 Indeed long before this. Islamic silver coins were of population, towns and trade in 1209–1315 found in numbers in coin hordes in the Baltic region even was associated with any great increase in the at the beginning of the ninth century (Ron Findlay and measured TFP of the economy. Figure 2 Kevin O’Rourke forthcoming). Pamela Nightingale notes the use of pepper in England even in the eighth century (Nightingale 1995). 4 See Mokyr 1990. See also Clark forthcoming.

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2 

1.8 

1.6 

1.4 

1.2 

1 

0.8  Real Pepper Price 0.6 

0.4 

0.2   − − − − − − −

0         1200 1220 1240 1260 1280 1300 1320 1340

Figure 1. The Price of Pepper in England Relative to All Other Goods, 1221–13491 1 Author’s calculation.

shows the measured TFP of England from “Europe versus China” issue that Ken 1220 to 2000. There are oscillations in the Pomeranz’s 2000 book has brought to such preindustrial era, but in terms of measured prominence. Pomeranz argues that, in 1800, TFP growth it is not until around 1800 that China had an economic system that was as we see a distinct break from the preindustri- developed, market driven, and individually al era. The period 1260–1315, the Commer- rational as Europe’s. Europe’s advantage that cial Revolution, is actually associated with a led to its industrialization lay instead, decline in measured TFP in England. This believes Pomeranz, in the ecological factors is because as population expanded real of coal and colonies. Pomeranz’s argument wages fell without land rents rising to has its own problems but, if Greif wants to counterbalance this. convince that European institutions really These TFP measures may well understate were the key to its success, some attention to the degree of innovation in medieval society, the nature of markets and trade in the East but they certainly show that any assumption would be potentially illuminating. that an event occurred in Europe in 950–1350 that rivaled the Industrial 3. The General Theory of Institutions Revolution in importance is wildly opti- mistic. But at the very least figures 1 and 2 Despite the title of the work, the material show it is premature to hypothesize about directed to laying the groundwork for a gen- the institutional roots of a revolutionary eral theory of how to do institutional analy- change in medieval Europe, when we are not sis, as opposed to discussing the specific role sure that anything of great import happened. of institutions in Europe’s development, pre- Finally, the dual duty of the book as both dominates. Greif’s general theory of institu- European history and general theory leaves tions starts from a rejection of the notion that no space for discussion of the whole institutions are just the politically determined

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400 

350 

300 

250 

200 

150  Efficiency (1860–9=100 100 

50 

 − − − − − − − −

0          1200 1300 1400 1500 1600 1700 1800 1900 2000

Figure 2. Measured TFP, England, 1220–20001 1 See Clark, forthcoming.

rules of the economic game in any society: English agrarian society would end up with the legal rules that define who owns what and an absurd description of rural life. Though how ownership changes. This institutions-as- the formal rules made the serfs the mere rules view, Greif argues, fails to take into instruments of their lords, equivalent to the account that whatever the formal institution farm animals, with no legal status to appeal may be, the actual constraints that operate outside the court of the lord their master, on people can be very different. The real the serfs ended up expropriating their mas- institutions are the combination of the for- ters and acquiring for their own use the mal rules and actual social practices. He also land on which they were settled at very easy argues that this earlier framework is ill suit- terms. They had to make payments to the ed to analyzing the formation, persistence, court of the lord for such behaviors as mar- and evolution of institutions. To understand rying their daughter outside the manor or why growth promoting institutions took so for extramarital sex. They had to labor in long to develop we need a different frame- the lord’s fields (or at least send a substi- work that analyzes institutions as stable equi- tute). Yet, by 1300 or earlier, the masters libria, where each participant is maximizes would have gladly replaced their serfs with their benefit by adhering to the rules of the free tenants, had they been able, so gener- institution. ous were the customary rents to the ten- There is certainly profound truth in ants. The serfs ended up enslaving the Greif’s insistence that institutions are gener- lords. Serfdom disappeared in England ally much more complex than the formal without ever being formally abolished. rules and that this creates major difficulties Governments can make any rules they for institutional analysis. Any historian, for want, but what institution actually results example, who used the formal rules of the will be determined by much more complex institution of serfdom to analyze medieval social interactions.

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Formal usury restrictions can similarly records in the Ottoman Empire in the six- have very different practical implications teenth century found, even more blatantly, than any reading of the formal rule would literally thousands of debt contracts being imply. In early Christianity, and in Islam still, enforced by the courts. Similarly, the foun- interest was regarded as usury, an immoral dations set up by pious Muslims to maintain activity. But banning all lending at interest mosques, pay imams, support the poor, or frustrates many possible mutually beneficial provide public goods, the waqfs, frequently bargains in any economy. Thus, in both held cash assets that they lent at interest Christianity and Islam, religious scholars soon (Pamuk 2006). Even modern Muslim states sought ways of reconciling the pure princi- that ban usury have banking arrangements ples of faith, banning lending at interest, with where depositors still collect interest on the profit opportunities of the market. their money, though in a “partnership” While the Catholic church formally instead of explicitly as “interest.” Such adhered to the doctrine against usury banks currently operate in Egypt, Kuwait, throughout the middle ages, ingenious the- the Gulf Emirates, and Malaysia. So an insti- ologians showed that most types of interest tution is a complex of legal rules and people’s payment were actually nonusurous. By the responses to those rules. late middle ages, the following exceptions on As noted above, there is an implicit rejec- collecting interest on loans were all well tion here, but one not developed explicitly in accepted: profits of partnership (as long as the book, of almost all that currently passes each partner took the risks, returns were for institutional analysis in economic jour- allowed on capital directly invested in an nals. North and Barry Weingast, for exam- enterprise), rent charges (perpetual loans ple, have promoted the Glorious Revolution secured by real estate were allowed), life of 1688–89, where parliament effectively annuities (permissible since the amount of became the supreme legislative and execu- the payment was uncertain), foregone profits tive body in England, replacing rule by (compensation was allowed for profits fore- Kings who were constrained only by the gone in making a loan), exchange risk premi- need to have Parliaments authorize taxes um (a premium on a loan was permissible if (North and Weingast 1989). But Greif would it was made in one currency and repaid in argue that the true nature of the change of another, to cover the exchange rate risk). institution cannot be deduced simply from The prohibition on usury was thus extreme- the changes in formal rules. How then can ly limited. Since there was still a demand for we ever test the effects of institutions when such loans this was met in two ways. The first we cannot identify their characteristics was by allowing Jews, as non-Christians, to through such observable features as the engage in such lending. The second was by explicit rules? Greif addresses this problem simply ignoring the church rules when it through the technique of the analytic narra- proved convenient to the rich and powerful. tive discussed below. Islamic societies similarly found ingenious In chapter 2, Greif lays out a formal defini- ways to circumvent the usury ban. The pri- tion of an institution. This is, “An institution mary one was the double sale. In this trans- is a system of rules, beliefs, norms and organ- action, the borrower would get, for example, izations that together generate a regularity of both 100 dinars cash and a small piece of (social) behavior” (p. 30). This reviewer was cloth valued at the absurdly high price of 15 puzzled by what was gained in the subse- dinars. In a year he would have to pay back quent analysis from the length and formalism 100 dinars for the loan of the cash and 15 for of this section. Each of the component terms the cloth. These debts were upheld by in the definition—“rules,” “beliefs,” “norms,” Sharia courts. A study of Islamic court “organizations,” “regularity,” “behavior”—is

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itself a loosely defined ordinary language Europeans typically bathed little, while the term. We do not get clarity by defining one Japanese bathed frequently. Was that a dif- ambiguous concept in terms of six others ference in social institutions? Most people equally ambiguous. At one level, this defini- would describe this as a difference in tastes. tion is so general that almost any behavior But undoubtedly it is a regularity of behavior might constitute an institution. At another, induced by a system of rules, beliefs, norms, the one specific element it contains, the and organizations. insistence on regularity, seems to rule out The purpose of the above is not to engage some social arrangements that most would in a debate about how exactly institutions want to call institutions. Greif thus states should be defined, but to suggest that such “The object of study is restricted to regular- definitional exercises are premature. It ity of behavior, meaning behavior that is fol- would seem better just to work up from lowed and is expected to be followed in a examples of institutions toward a more gen- given social situation by (most) individuals.” eral conception, rather than begin with long Consider, for example, Western European encompassing abstract analysis that can only and East Asian marriage patterns before really be tested by considering specific 1800. These were crucial determinants of examples. living standards in the Malthusian era. In As noted, Greif defines an institution as a East Asia, marriage was early and universal self-reinforcing set of behaviors. Greif pio- for women, occurring typically within a tight neered in applying game theory to historical band around age 19. Many people would call institutional analysis and his 1993 study of this marriage behavior an institution and, the Maghribi traders remains a classic of this under the Greif definition, it would clearly still modest genre. This was certainly an qualify. In Western Europe, in contrast, first exciting development for economists. For marriage occurred at all ages from 16 to 40, the first time, seemingly grounded the expla- with a mean age of about 26. Typically ten nation of informal institutions in optimizing percent of women never married. The individual rational behavior. Behaviors that absence of regularity in individual behavior would seem to the layman to be based on seemingly implies that Greif would say that, blind irrational custom could be shown to be in contrast to Asia, Western Europe lacked a consistent with individual optimization. marriage institution. Yet, though individual Given the incredible intellectual elaboration behavior was highly variable in Europe, of game theory, and its meager harvest in there were high degrees of regularity from terms of actual economic applications, the year to year, and from village to village, in finding was welcome to both game theorists the proportion of women who married and and to economic historians. The Maghribi in the average age of marriage. Explaining study also allowed for the possibilities of that regularity thus becomes an interesting institutional change resulting just from issue for historical demographers and there changes in parameters. Since the equilibri- have been a number of explicitly institution- um depended on certain parameter values, al explanations for these regularities. But changes in transportation costs or observ- also, more widely, institutions that allow ability could terminate the old equilibrium individual choice can be just as much insti- and lead to a new one. The 1993 article tutions as those that constrain all persons to seemed to point to new micro foundations a narrow field of action. “Do what you want” for institutions that would ground them in can be as much an institution as “Do X.” individual maximizing behavior. There are other instances of regularities in But this book is almost certainly not what behavior that we would not want to call insti- many economists who welcomed the 1993 tutions. Thus, in the preindustrial era, article expected as the generalization of its

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ideas. Some indeed will be shocked by, and revenging previous raids (Napoleon A. perhaps hostile to, the path Greif has taken. Chagnon 1983). This was clearly an institu- Were economists of a more literary bent, the tion in the sense of Greif and must be main- word apostasy would be on their lips. In a tained by some kind of self-reinforcing set search for generality, Greif concludes that of behaviors. But we knew that, even if we such a set of limited rational actor assump- had never studied game theory. So what tions is not constraining enough to describe insights have we gained from page after real-world institutions. For a start, “multiple page of elaboration on the idea of equilibria equilibria usually exist in the repeated situa- and the elements that enter into them (pp. tions central to institutional analysis” (p. 124–53)? If we were able to reduce all such 125). There have to be more constraints on social equilibria to a game theory equilibri- the structure of the interaction to explain the um of purely self interested rational individ- equilibrium. These constraints include “cog- uals interacting with common knowledge nitive norms” (p. 128) as well as “the social that would be a radical, novel, and testable and normative foundation of behavior” (p. theory. This book denies that possibility, but 143). Issues such as “losses of esteem,” without providing any alternative that has “norms,” “fairness,” or “social exchange” have empirical content. to be introduced. Also such social and nor- So far we have just considered the expla- mative behavior is “situationally contingent” nation of stable social institutions. But insti- (p. 144). tutions can and do change over time. In Greif posits this as just an extension and search of a general theory of institutions, elaboration of the original individualistic Greif has to also give an account of their rational-actor game theoretic ideas. Once dynamics, which he does at length on pages we are compelled to admit, however, into 158–216. It is clear that, in some cases, just the explanatory apparatus almost the entire a change in some other parameter can make sociological zoo of ill defined and unmeasur- the institutional equilibrium no longer self- able constructs, we lose all explanatory reinforcing, and lead to another equilibri- power. Explanatory power requires few um. But, given the pervasiveness of objects and small degrees of freedom. Greif multiple equilibria noted above, we cannot notes that “a useful feature of game theory is get even any potentially deterministic that it allows us to study all intertransaction- dynamics without resorting to all the elabo- al linkages—economic, coercive, social and rations discussed above. How then do past normative—simultaneously” (p. 147). But institutions influence the present? Greif he does not seem to appreciate the price of posits that past institutional elements this generality in terms of testability. All we “reside in individuals’ memories, constitute are left with is the idea that people operat- their cognitive models, are embodied in ing within institutions act as they do their preferences, and manifest themselves because, given the cognitive, intellectual, in organizations” (p. 188). Thus the institu- cultural, and normative constraints they tional histories of societies matter as they face, their actions seem to them as being the settle on which of a range of technological- best available. But, in an informal sense, we ly feasible institutional forms to use now. knew that already. Without any considera- Here again the multiplication of terms and tion of the ins and outs of game theory, we concepts continues. We learn about the can appreciate that any lasting institution “fundamental asymmetry,” “institutional likely constitutes some set of self-reinforc- refinement,” “the inclusion effect,” “institu- ing behaviors. Yanomamo males, for exam- tional complexes,” “institutional trajecto- ple, engaged in recurrent raids against other ries,” “contextual refinement,” and more. bands aimed at capturing women and The problem here is the multiplication of

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theoretical entities well ahead of even the variation, and then correlates that with eco- handful of cases of institutional change that nomic performance.5 are analyzed in the book. On pages 357–76, Greif summarizes his Chapter 11, titled Interactive, Context- positive strategy for institutional analysis. Specific Analysis (pp. 350–76), is essentially First, learn the history and context of the a primer on how to apply the approach out- institution. Next, the investigator should for- lined in the rest of the book to the analysis of mulate the simplest conjectural model that institutions. Greif here starts from the basis might explain the equilibrium using only that we will never be able to predict institu- observable elements. The model should tional structure from exogenous features of then be tested, and perhaps altered, based the situation—including institutional history. on empirical evidence, but “what is to be He thus must reject the general feasibility of avoided in this interactive analysis is the tau- projects such as that of Acemoglu, Johnson, tology in which the model is adjusted to fit and Robinson (2001, 2005), or Stanley L. the evidence” (p. 366). This empirical evi- Engerman and Kenneth L. Sokoloff (2002), dence will include qualitative as well as which seek exogenous roots for current insti- quantitative material. tutional differences. Given the many poten- As conducted in the book, this is essential- tial stable equilibria in each institutional ly the method of “analytical narratives” pop- context, the outcomes are inherently ularized by Greif and Robert Bates, unknowable. After the attention given to Margaret Levi, Jean-Laurent Rosenthal, and elaborating the theory of institutional stabil- Weingast. An analytical narrative consists of ity and dynamics in the preceding 350 pages, matching institutional detail to a formal, or this conclusion comes as something of a sur- more often informal, interpretation of the prise. The structure and tone of the previous situation as some kind of rational choice discussion is that of laying the groundwork equilibrium, interpreted in the broad sense for a theory of institutions. The reader now above (Bates et al. 1998). It is not clear how learns that the extended theory encompass- this is distinguished from such things as es a perhaps uncountable number of possi- Harvard Business School case studies. As ble institutional equilibria, so that there can applied by Greif and his colleagues, an “ana- be no advance prediction. lytical narrative” seems to be just an inter- Just as deductive methods cannot succeed, pretation of an institution in terms of a Greif asserts also that inductive generaliza- loosely defined equilibrium. This is fine as tion about institutional forms will also fail to an approach to generating hypotheses, but reveal any patterns. This is because unob- as an endpoint of analysis, as it generally is in servable elements of the situation—beliefs the book, it offers little conviction. and norms—are crucial to the determina- Consider, for example, Greif’s application tion of the outcome. The same observable of the technique to the institution of the elements will be associated with radically Podesteria introduced in Genoa in 1194, fol- different institutional equilibria. Further, lowing factional fighting 1164–69 and as discussed above, the observable ele- 1189–94. The Podestà was a ruler hired for a ments of institutions—rules, organization limited term from outside the city, who was structures—often provide little insight into permitted by his contract to bring with him the actual functioning of the institution. some magistrates and military retainers. Greif’s work thus implicitly rejects most of These officials were initially imposed by the work currently classified under the institutionalist banner, which all too happily takes 5 Such works would include North and Weingast 1989; variations in formal political and legal frame- Acemoglu, Johnson, and Robinson 2001; and Edward L. works as definitive measures of institutional Glaeser and Andrei Shleifer 2002.

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Emperor Barbarossa as a way of controlling found by the participants by scouring the the Italian cities in his domains, but quickly streets immediately before the contest for became instead the servants of the cities. someone who would accept the offer of beer Greif interprets the key function of the and cigarettes as payment (Veit Erlmann Podestà in Genoa as being to serve as a bal- 1992). This judge would thus generally have ance of power between warring clans, strong no insight into the conventions and aesthet- enough to ensure that no clan would be pow- ic of the performers, he could only serve erful enough to attempt to take power on its once, but under apartheid his impartiality own, but weak enough to be unable to take was assured. Hiring such a judge was costly power himself. But though he begins by to the performers: he had unknown tastes, it interpreting the role of the Podestà in the cost time to locate him, he had to be sup- language of speculation fitting to the limited plied beer and cigarettes. These white sources at his disposal—“theoretically” judges, often homeless or teenagers, did not “arguably” “might” (pp. 241–42)—as the command armed contingents in a complex chapter develops the tone becomes one of game where they supplied a balance of proof and certainty. Two pages later, power, as Greif supposes for Genoa. Their The Podesteria...was a self-enforcing insti- sole function was to award prizes in an tution: the belief that any attempt by a clan assuredly faction free way. Given the limited to gain political dominance by using force sources for medieval Italy, how do we know was futile deterred clans from doing that the Podesteria of the Italian city states so....The Podestà himself was motivated was not more like the apartheid era not to allow one clan to become weak Isicathamiya judges—disinterested distribu- either, as his compensation was conditional on no clan dominating Genoa at the end of tors of prizes in faction-riven societies—than his term. As we have seen, the system was the powerful game-playing protagonists set to ensure that no clan would be able to Greif supposes? commit to pay a Podestà his promised The insistence on the uniqueness of each remuneration if that clan gained control institution makes the possibility of moving to over Genoa. (p. 244). certainty in interpreting institutions such as In fact, we have seen none of these things. the Podesteria remote. The Podesteria was They are just the consequences of a certain found in most Italian city states by the early game-theoretic interpretation of the role of thirteenth century. That would suggest the Podestà. There is presumably not empirical tests of the Greifian interpretation enough evidence in the sources to test what of the institution in Genoa. For example, in the relative military strength of the various Florence a Podesteria on the Genoese model clans versus the podestà was. This is not to was firmly established by 1207, and the say that Greif’s interpretation is incorrect. Podestà continued as the sole executive until Just that the loss of the clear distinction the democratic revolution of 1250. In between evidence and hypothesis is an Florence, however, the various Podestà undesirable aspect of the analytical narrative stood by largely ineffective as armed conflict technique as applied here. recurred between 1215 and 1250 between An institution very similar to the Podestà, the factions that became the Guelphs and for example, was independently created in the Ghibellines.6 In Pisa, in contrast, “he the black townships of South Africa under [the Podestà] represented the domination of apartheid. Weekly competitions were held one group over another” (p. 306). Why, on between male Zulu song and dance groups Greif’s theory of the Genoese Podesteria performing a style of music called Isicathamiya. These contests were by tradi- 6 Ferdinand Schevill 1961; Francis A. Hyett 1903; W. tion judged solely by a lone white man, F. Butler 1906.

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would the Florentines want to hire a high Florence, is not a clear cause of its demise as priced supernumerary unable to quell fac- an institution. The best the analytical narra- tional violence? Why did Pisa, dominated by tive can offer here is a conjecture about the one faction, need such a useless ornament? functioning of the institution: and even that And why would the Pisan Podestà ever get conjecture is applicable only to Genoa, not paid at the end of his term based on the Florence, Milan, Pisa or any other northern analysis reported above? Italian city. Greif would answer, I believe, that alone The problem here, in part, is that actual and uniquely in Genoa the Podesteria suc- situations quickly become too complicated ceeded in its inventors’ design. But the per- to model successfully using game theory. sistence of the form in other city states in very Genoa not only had feuding clans, but a different conditions suggests that the office variety of outsiders such as the Pope, the may have fulfilled functions very different to Holy Roman Emperor, and other city states, the one Greif posits for Genoa. Greif can who could potentially ally themselves with reject this criticism by analogy by insisting on individual clans, and internally a group of the uniqueness of each social configuration. nonnobles, the popolo, with rising political But this creates seemingly insurmountable influence. This was a cast of actors that only barriers to ever getting to the truth about the Shakespeare in his pomp could do justice to. functioning of particular institutions. The analytic narrative becomes likewise Does the Genoese Podesteria, in place for much more of a traditional political history 150 years until 1339, explain the economic case study, with a more elaborate vocabulary success of Genoa in these years? Again the incorporating game theory intuitions. focus on Genoa makes an answer impossi- In settling on analytical narratives as the ble. Other cities with the same formal insti- way of resolving the radical indeterminacy tutions and reasonable internal order, such embodied in game theory, Greif also closes as Pisa, did not do so well. Yet others, such as institutions off from some promising other Florence, with a Podesteria ineffective in paths that might help narrow the range of quelling internal violence, flourished in the possible equilibria and their dynamics. One early thirteenth century though the streets of these is just the constraint of economic often ran with the blood of the contending efficiency. Institutions and societies are factions. So, in sum, the analytical narrative often in competition and in such competi- provides no secure answer as to how the tion the societies that can generate more Genoese Podesteria functioned and certain- economic output have generally been ly no hint of its role in explaining Genoa’s favored. Radically inefficient equilibria tend economic success. thus not to survive. A second constraint, The language of fact continues in the sec- explored by evolutionary anthropologists, is tion of the chapter describing the decline of that of reproductive competition in the the Genoese Podesteria in the fourteenth hunter gatherer era that dominated human century. This is ascribed to changes in cer- history, which may have hard wired some tain parameter values that eliminated the old dispositions towards trust and cooperation. self-sustaining equilibrium, such as the rise Chagnon thus tries to explain Yanomamo in wealth accumulation by nonclan members violence as a self-reinforcing strategy that (pp. 224–26). Yet there is no evidence rewards with reproductive success males offered as to the values of these parameters. who participate.7 All that Greif knows, as fact, is that the Podestà was unable to prevent armed fac- 7 Chagnon 1988. Alexander Field (forthcoming), tional feuding within the city by the early explores this issue of potential biological substrates to fourteenth century. Even that, as we saw for behavior.

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In summation, Greif intends in his book to Clark, Gregory. 1998. “Commons Sense: Common Property Rights, Efficiency, and Institutional develop at least the outline of a new, micro Change.” Journal of Economic History, 58(1): grounded theory of institutions. Stating, 73–102. explaining, and elaborating this theory takes Clark, Gregory. Forthcoming. A Farewell to Alms: A Brief Economic History of the World. Princeton: 503 densely written pages, including a Princeton University Press. primer on game theory. By the end, howev- Engerman, Stanley L., and Kenneth L. Sokoloff. 2002. er, this reviewer, to the contrary, read it “Factor Endowments, Inequality, and Paths of Development among New World Economics.” mostly as a demonstration of the impossibil- NBER Working Papers, no. 9259. ity of a systematic account of institutions Erlmann, Veit. 1992. “‘The Past Is Far and the Future along the lines he proposes. The efflores- Is Far’: Power and Performance among Zulu Migrant Workers.” American Ethnologist, 19(4): cence of concepts, combined with the con- 668–709. striction of possible empirical tests, makes Field, Alexander. Forthcoming. “Beyond Foraging.” the hallmark of any scientific account, pre- Journal of Institutional Economics, 3. Findlay, Ron, and Kevin O’Rourke. Forthcoming. diction and testing, impossible. And this Power and Plenty: Trade, War and the World shows in the case studies conducted in the Economy 1000–2000. Princeton: Princeton book. Each institution in his formulation has University Press. Glaeser, Edward L., and Andrei Shleifer. 2002. “Legal to be analyzed in its full idiosyncracy, aided Origins.” Quarterly Journal of Economics, 117(4): by the expert judgment of the investigator as 1193–1229. to the social and epistemological context. Grantham, George. 2007. The Prehistoric Origins of European Economic Integration.” Unpublished. But, as we saw in the case of the Podesteria, Greif, Avner. 1993. “Contract Enforceability and that kind of analysis, even in the hands of a Economic Institutions in Early Trade: The Maghribi careful enquirer like Greif, is fraught with Traders’ Coalition.” American Economic Review, 83(3): 525–48. the danger of conflating conjecture and fact. Hoffman, Philip T. 1989. “Institutions and Agriculture Kant’s Prolegomena to any Future Meta- in Old-Regime France.” Journal of Institutional and physics as a Science never led to his pro- Theoretical Economics, 145(1): 166–81. Hyett, Francis A. 1903. Florence: Her History and Art posed science of metaphysics. Unfortunately to the Fall of the Republic. New York: Dutton. Greif’s Prolegomena to a future institutional Lopez, Robert S. 1967. The Birth of Europe. London: theory similarly serves mainly to indicate the M. Evans. Mokyr, Joel. 1990. The Lever of Riches: Technological barriers to a science of institutions. Creativity and Economic Progress. Oxford; New REFERENCES York; Toronto and Melbourne: Oxford University Press. Acemoglu, Daron, Simon Johnson, and James A. Nightingale, Pamela. 1995. A Medieval Mercantile Robinson. 2001. “The Colonial Origins of Community: The Grocers’ Company and the Politics Comparative Development: An Empirical and Trade of London: 1000–1485. New Haven and Investigation.” American Economic Review, 91(5): London: Yale University Press. 1369–1401. North, Douglass C. 1994. “Economic Performance Acemoglu, Daron, Simon Johnson, and James A. through Time.” American Economic Review, 84(3): Robinson. 2005. “The Rise of Europe: Atlantic 359–68. Trade, Institutional Change, and Economic North, Douglass C., and Robert Paul Thomas. 1973. Growth.” American Economic Review, 95(3): The Rise of the Western World: A New Economic 546–79. History. Cambridge: Cambridge University Press. Allen, Robert C. 1982. “The Efficiency and North, Douglass C., and Barry R. Weingast. 1989. Distributional Consequences of Eighteenth Century “Constitutions and Commitment: The Evolution of Enclosures.” Economic Journal, 92(368): 937–53. Institutions Governing Public Choice in Bogart, Dan. 2005. “Turnpike Trusts and the Seventeenth-Century England.” Journal of Transportation Revolution in 18th Century Economic History, 49(4): 803–32. England.” Explorations in Economic History, 42(4): O’Brien, Patrick. 1982. “European Economic 479–508. Development: The Contribution of the Periphery.” Butler, W. F. 1906. The Lombard Communes: A Economic History Review, Second Series, 35(1): 1–18. History of the Republics of North Italy. London: Pamuk, Sevket. 2006. “Evolution of Financial Fisher Unwin. Institutions in the Ottoman Empire, 1600–1840.” Chagnon, Napoleon A. 1983. Yanomamo: The Fierce Unpublished. People. Third edition. New York: Holt, Rinehart, and Pomeranz, Kenneth. 2000. The Great Divergence: Winston. China, Europe, and the Making of the Modern World

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Economy. Princeton Economic History of the New York: Frederick Ungar. Western World series. Princeton and Oxford: Stewart, Dugald. 1858. “Account of the Life and Princeton University Press. Writings of Adam Smith, L.L.D.” In The Collected Schevill, Ferdinand. 1961. History of Florence: From Works of Dugald Stewart, vol. 10, ed. Sir William the Founding of the City through the Renaissance. Hamilton, 1–98.

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