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The Rise Of The West: How Interest Restrictions And Institutional Change Drove The Economic

  • Published Date: December 2011

Restrictions on taking interest on loans and other economically inhibitive laws persisted much longer in the Islamic world than in western Christendom. According to research by Professor Jared Rubin, this difference between the two religions resulted from the greater degree to which the early Islamic political authorities depended on conforming to the dictates of religious authorities for legitimacy.

He shows how such small differences in institutional arrangements and initial conditions can have immense long-run consequences. The divergent paths of interest restrictions in Islam and Christianity shed light on the more general institutional features that precipitated the enormous divergence in economic growth between Western Europe and the Middle East over the last seven centuries.

Professor Rubin’s study, published in the December 2011 issue of the Economic Journal, shows that the interactions between the relevant economic players – religious authorities, political authorities and merchants – pushed the institutional paths of the Islamic world and western Christendom in vastly different directions.

In Europe, the interaction between the rise of secular authority and vast trade networks supported further economic developments, such as complex financial instruments, impersonal exchange and the corporate form.

In the Middle East, constraints faced by merchants and political actors discouraged such a path – or at least, a greater shock was necessary to undermine the legitimising relationship between political and religious authorities than in Christendom. Instead, less economically beneficial institutions, such as smaller, personal exchange networks, persisted for centuries in the Islamic world.

How did these outcomes arise? This study provides theoretical and historical analyses suggesting that the differential persistence of economically inhibitive laws (such as restrictions on taking interest) in the two religions resulted from the greater degree to which early Islamic political authorities depended on conforming to the dictates of religious authorities for legitimacy.

A theoretical model analyses how changes in productivity affected the interactions between political authorities, religious authorities and economic actors. Professor Rubin shows that when the legitimising relationship is sufficiently weak (as in Europe), institutions that support economically inhibitive laws are less likely to be long lasting.

This occurs because political authorities have greater incentive to permit economically productive actions that are prohibited by religious authorities. In turn, more merchants transgress the religious authority's law, as they only face otherworldly (and not worldly) costs from doing so.

With more merchants breaking its dictates, the religious authority has greater incentive to reinterpret its doctrine. Since merchants transgress religious laws to a greater extent and the religious authority eventually reinterprets, the legitimising relationship is undermined to a greater extent, resulting in institutional change.

This does not happen in economies where the legitimising relationship is strong (as in the Middle East), as merchants are discouraged from transgressing the law. With few agents openly breaking its dictates, the religious authority has little incentive to reinterpret, since doing so is costly and there is little to be gained. The legitimising relationship thus remains strong and no one has incentive to change actions, which entails that the institutions upholding the laws are long lasting.

The theoretical model is substantiated with an analysis of the history of interest restrictions, which were at one time important (but economically inhibitive) laws in both religions.

More broadly, the theoretical and historical insights in this study reveal how small differences in institutional arrangements and initial conditions can have immense long-run consequences. This sheds light on an important route through which religion has a direct impact on 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.

Instead of viewing stagnant economic outcomes as a result of some inherent cultural or religious conservatism (as has been suggested by many previous scholars), this study makes it possible 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.

ENDS

Notes for editors: ‘Institutions, the Rise of Commerce, and the Persistence of Laws: Interest Restrictions in Islam and Christianity’ by Jared Rubin is published in the December 2011 issue of the Economic Journal.

Jared Rubin is at the Argyros School of Business & Economics, Chapman University, California.

For further information: contact Jared Rubin on +1 (714) 516-4530 (email: jrubin@chapman.edu); or Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com).