Book Summary: “Institutions and the Path to the Modern Economy” by Avner Greif

Title: Institutions and the Path to the Modern Economy
Author: Avner Greif
Scope: 3 stars
Readability: 2 stars
My personal rating: 3 stars
See more on my book rating system.

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Topic of Book

Grief seeks to develop a theory of institutions and their influence on economic growth. He also describes the world of the Muslim and Genoan merchants between 1050 and 1350.

My Comments

I would not recommend reading this book.

Though this book is often quoted in the literature of economic history, I found it very difficult to read. In fact, I am still not sure that I understand what the author was trying to say. I do not even feel comfortable writing my usual “Key Take-Aways” section for this book.

Important Quotes from Book

This book grew out of an attempt to gain a better understanding of the causal factors underpinning economic and political outcomes during the late medieval period (circa 1050 to 1350).

A central question in the social sciences and history is therefore why societies evolve along distinct trajectories of institutional development and why some societies fail to adopt the institutions of those that are more economically successful.

This book draws upon detailed historical studies to motivate, illustrate, and present a new perspective – comparative and historical institutional analysis – that goes a long way toward advancing institutional analysis in general and addressing this question regarding the evolution of societies in particular. First, it provides a unifying concept of the term institution to integrate the many, seemingly alternative, definitions that prevail in the literature. Second, it studies institutions on the level of the interacting individuals while considering how institutionalized rules of behavior are followed even in the absence of external enforcement. Third, it advances a unified conceptual and analytical framework for studying the persistence of institutions, their endogenous change, and the impact of past institutions on subsequent institutional development. Finally, it argues that institutional analysis requires going beyond the traditional empirical methods in the social sciences that rely on deductive theory and statistical analysis.

This new perspective makes explicit what institutions are, how they come about, how they can be studied empirically, and what forces affect their stability and change. It explains why and how institutions are influenced by the past, why they can sometimes change, why they differ so much from one society to another, and why it is hard to devise policies aimed at altering them.

The historical research presented here suggests that the West developed distinct institutions as early as the late medieval period. The organization of society in the West was centered on intentionally created institutions. Neither the state nor kin-based social structures, such as tribes and clans, were central to these institutions. Instead, the organization of society was centered on interest-based, self-governed, non-kin-based organizations. These organizations – mainly in the form of corporations – were vital to Europe’s political and economic institutions during the late medieval growth period as well as the modern growth period.

Several factors, particularly institutional elements inherited from the past, contributed to the emergence of this societal organization during this period: individualistic cultural beliefs and weak kin-based organizations (which to some extent reflected the church’s interests and actions), the institutional weakness of the state, and norms legitimizing self governance. This historical heritage implied that gains from cooperation could not be achieved by relying on institutions that were based on either kin-based organizations or the state. At the same time, economic and coercive resources were distributed with relative equality so that the resources of many individuals had to be mobilized before the interests of the relatively powerful could be advanced. Interest-based, self-governed, nonkin- based economic and political corporations were therefore established.

An institution is a system of rules, beliefs, norms, and organizations that together generate a regularity of (social) behavior.

One of the central questions about the institutional foundations of markets concerns the power of the state. The simplest economic view of the state – as an entity that enforces contracts and property rights and provides public goods – poses the following problem: a state with sufficient coercive power to do these things also has the power to withhold protection or confiscate private wealth, undermining the foundations of the market economy.

In the medieval era, before a trading center was established a ruler might pledge that foreign merchants would be secure and their rights respected. Once trade was established, however, the ruler faced the temptation to renege on his pledge – by failing to provide the promised protection or by using his coercive power to abuse the merchants’ property rights.1 Before the emergence of the nation-state, foreign merchants could expect little military or political aid from their countrymen. Without something tangible to secure the ruler’s pledge, foreign merchants were therefore not likely to frequent a trading center – an outcome that could be costly for both the ruler and the merchants. What institutions, if any, mitigated this problem?

By enabling coordination and motivating each merchant to participate in collective retaliation, the merchant guild organizations changed the set of self-enforcing behavioral beliefs in the transaction between each individual merchant and the ruler. The merchant guild organizations rendered self-enforcing the belief that rulers would respect merchants’ rights as trade expanded.

Institutions are the engine of history because, they constitute much of the structure that influences behavior, including behavior leading to new institutions. It emphasizes that many of the elements and features of modern, welfare-enhancing Western-style institutions were already present or in the process of emerging during the late medieval period: individualism, man-made formal law, corporatism, self-governance, and rules reflecting an institutionalized process in which those who were subject to them had a voice and influence. Institutions may well be the engine of history, and to the extent that the Rise of the West is due to its underpinning institutions, the roots of this rise may have begun to take hold as early as the late medieval period.

If you would like to learn more about the role institutions play in creating economic growth, read my book From Poverty to Progress.

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