Economic Discrimination and Political Exchange: World Political Economy in the 1930s and 1980s Book

I cant believe I'm giving this book 4 stars when I was going to give it 1 or 2.

This is a big, mostly boring, dense book but the core idea promoted in here is fantastic and revolutionary. The overall framework is that if you combine historical episodes with game theory models you can get a better sense of how institutions rise, fall, morph, and work. That may be true, but the issue is that the people who like to read historical episodes with analysis (like me) are not the same people who like to read chapters full of equations and political science theoretical constructs. I was about to abandon the book but then I decided to do something I never do: skip and skim. Once I was doing that, the book became much more interesting and the core insights were able to shine through.

The historical analysis centers on two sets of traders: Magribi and Genoese. The Magribis were a Jewish clan in Muslim areas who were strung around the world and acted as both merchants and agents for each other. They used reputational mechanisms to punish other Magribis who cheated and the potential for ostracism kept people in line. You didn't trade with Magribi who had cheated other Magribis. The Genoese on the other hand did not have that clan relationship and could not know whether someone was honest before trading. They never acted as agents for each other, they always hired other agents. Instead they had to rely on impersonal reputations based on collective punishment on whichever community cheated them. If someone from a town commune cheated them, then they would embargo the whole commune for a time. It was nothing as sophisticated as the impersonal exchange institutions we have now, and modern readers would be horrified by the collective punishment concept, but it was the beginning of these institutions, which developed further over time.

The Magribi analysis has been challenged on historical grounds (differences in reading and interpreting the source material), but I dont think it takes much away from the analysis, as 80% of the historical analysis centers on late Medieval Europe and its institutions like communes (established towns with collective responsibility for their traders) and merchant guilds.

There is a lot in here about institutions and how they are path dependent, self reinforcing, and self degrading. It makes you look at our current institutions with more interest and helps explain why advanced western institutions grafted on developing economies often dont work. This author is following the tradition of Douglas North (who I also couldn't stand reading).

Here are long passages that were important to me (they reflect some conclusions, but do not represent the bulk of what the text is about):

P252:

This relative decline of a kin-based organization of society began in the medieval period and reflected the actions of the church, an interest-based social structure. For ideological or self serving reasons, the church, from as early as the fourth century, weakened European kin-bases social structures. This was achieved by such policies as prohibiting marriages among kin (sometimes up to the seventh degree), encouraging the donation of one's inheritance to the church, advocating consensual marriages, and condemning practices that enlarged the family, such as polygamy, divorce, and remarriage. Such policies remained in force for centuries. In 1059, for example, an encyclical required that "if anyone had taken a spouse within the seventh degree, wlhe will be forced canonically by his bishop to send her away; if he refuses, he will be excommunicated". Many of these policies, such as monogamy, remained characteristics of the European family.

By the late medieval period, kin based social structures were no longer at the center of European institutional complexes. The rise of alternative, non-kin-based social structures in such forms as communes, guilds, fraternities, and universities is a hallmark of this time, reflecting the already substantial relative decline of kin-based social structures. To achieve various goals and fulfill various functions that were traditionally performed by kin-based social structutes (or the state), the Europeans increasingly, and perhaps uniquely, relied on self governed, interest based social structures. More broadly, as further elaborated in Chapter 12, the relative absence of both kin-based social structures and an effective state in late medieval Europe led the Europeans to progressively rely on corporations: non-kin based, self-governed, interest- backed social structures.

P346:

Initially the community responsibility system was a self-reinforcing institution, in that it led to processes that increased the range of parameters within which it was self-enforcing. It reinforced the communal structure on which it was based, motivating communities to define communal membership clearly, to establish the organizations required to indicate who their members were to the rest of society, and to strengthen their intracommunity enforcement institutions.

In the long run, however, the community responsibility system was undermined by the growth of long-distance trade and the increase in the size, number, and heterogeneity of communities. These changes reduced the system's effectiveness, economic efficiency, and intracommunity political viability. For example, they made it easier to falsify one's community affiliation, hindered verification of affiliation, reduced the cost of intercommunity mobility, and made some members of the community worse off than they might otherwise have been. By the late thirteenth century, wealthy members of communities sought exemptions from the community responsibility system, and communities were laboring to abolish it.

The ability to replace the community responsibility system with an alternative institution depended on the institutional environment, particularly on political institutions. In England the political system was conducive to a transition to legal contract enforcement based on individual legal responsibility. Where the state stepped in to provide an effective alternative, economic institutions moved closer, albeit slowly, to the enforcement system that prevails today, in which individual liability is the rule, much impersonal exchange is supported by the legal system, and collective responsibility is consensual and contractual. The asymmetry in the ability to provide alternative institutions within and outside politics created the institutional distinction between national and international trade.

This history calls into question the conventional wisdom that the rise of the European state was a precondition for the rise of markets. The community responsibility system suggests the importance of the opposite line of causation: the institutional demand created by the market influenced the development of state-governed, law-based institutions. When and where the state could respond to this challenge while being constrained from abusing rights, markets subsequently prospered.

... Similarly, the extent to which institutions similar to [the community responsibility system] prevailed in other premodern societies has not yet been examined. It may well be that the system was unique to Europe, because it rested on two pillars - self-governed mercantile communities and man-made law, which these communities participated in formulating - that were not common in other premodern market societies. In the Muslim world, for example, communities were not self governed and the prevailing religious law rejected the notion of collective responsibility central to the community responsibility system. If the community responsibility system was unique to Europe, it is likely to have been among the factors accounting for Europe's subsequent commercial development.

P389:

The second conclusion is the particularities of the social structures central to these intentional and coordinated efforts. Historically, the social structures that substituted for an effective state had been kin-based, such as lineages or tribes. In late medieval Europe, however, at least in the towns, which were the center of economic and political change and the forerunner for future developments, this had not been the case. The dominant social structures were self-governed, interest-based, and intentionally established organizations (whose existence did not depend on the participation of a particular member) among individuals unrelated by blood. They were self governed in the sense that their members participated in specifying the rules that regulated their activities. Participation rendered rules legitimate. In other words, economic and political *corporations* were central to the institutional underpinning of the late a European commercial expansion. Corporations and the subsidiary organizations they established, such as courts, were central to all the European institutions examined here, the merchant guild institution, the political institutions of Genoa and Venice, and the community responsibility system.

Corporations reflect the intentional and coordinated effort to create institutions, as well as a means for doing so. The produced legitimate rules and altered self-reinforcing beliefs in a central economic or political transaction by linking them to other economic and coercive - legal or otherwise- transactions. Incentives were often provided by both economic reputation and coercion. This was also the case in many other medieval corporations not examined in this work, such as monastic orders, military orders of knighthood, associations of mutual insurance, and universities.
...
Indeed even the European states of this period are best studied as institutions central to which are self-governed, non-kin-based corporations. Projecting the image of the later, more centralist and absolutist European state on the late medieval one is misguided. The late medieval polities, were, to a surprising degree, self-governed, political corporations; laws and rules were man made; and citizens - albeit often not all of them - had a political voice and representation. Effective representation was backed by the economic importance and coercive power of the citizens who were often organized into corporations within the state. The general nature of these earlier European politics as self-governed, non-kin-based corporations is reflected in the rise of bodies for political representation throughout Europe, from England in the west to Hungary and Poland in the east, from Sicily and Spain in the south to Germany in the north. Even the holy roman empire officially became a constitutional monarchy in 1356.

The conjoined influence of several factors contributed to the rise of corporations. Centuries of invasions and internal defragmentation weakened the European states. The weakness of the state in the late medieval period provided an opportunity for economic agents to self-organize, but does not explain the particularities of their responses. Why corporations? A kin-based organization of society or a theocracy were possible alternatives. Historically such societal organizations often emerged in the absence of an effective state. ...

The church had weakened kin-based structures (such as clans and tribes) in Europe... This hindered the establishment of institutions based on large-scale, kin based social structures and collectivist beliefs. The church itself was not in a position to provide an effective alternative to the state in the late medieval period. Its administrative structure was weakened by the medieval warfare and upheavals and the later conflicts with the Holy Roman Emperor and various kings. ...

The result was not, as Hobbes would have us believe, a war of all against all. Rather, the weakness of large scale, kin based social structures and individualism enabled and motivated commoners to self-organize to gain from cooperation (although this cooperation was sometimes at the expense of others). This enabled them to gain economic and political power alongside feudal lords and kings. Political development was marked by a republican movement and the increasing corporate nature of the polity. In doing so the Europeans built on the beliefs and norms inherited from the Roman and Germanic legal traditions, which made explicit man-made (rather than divine) laws, self governance, and formal decision making processes a focal point (indeed even European canon law is man-made). They also built on the idea of corporations, which, after all, date back tot the Roman time. ...

The cultural beliefs and norms associated with individualism, corporatism, and the implied legitimacy of man-made law in which those who are governed by them have an influential voice became central to European societal organization. Individualism and corporatism were the hallmarks of institutions that supported the late medieval commercial expansion and political changes.

... the associated institutions were effective when those with coercive power cared about their economic reputations and were constrained from abusing power by others with economic and coercive powers. They were socially beneficial when there was an intra-corporation uniformity of economic interests, and the distribution of intra-corporation resources was such that that coercion could have been used only to discipline members whose actions undermined economic cooperation and economic gains. Finally, they were efficient when inter-corporation interactions were confined to economic, rather than military, competition and when economic resources could not be used to forestall competition.