Culture, Institutions, and Economic Divergence

I have already posted a few times on here about the interaction between culture and institutions in history. So forgive me for indulging again.

Most of my career I have focused on this interaction. At the broadest level, I have long been interested in why some societies have been relatively successful economically and others have not. This is of course a huge (and hugely important!) question, and I do not pretend to have an answer. This is in part because there is not just one answer. I have focused on the part of that puzzle that interested me the most: what role has religion played in economic divergence between regions? It is this question that brought me into HPE. When you study this stuff you start to realize pretty quickly that one of the dominant ways that religion affects long-run economic growth is through political economy. It is impossible to write the economic history of western Eurasia for, say the last 1400 years, without consider the role religion played in politics.

My interests lie particularly in the roles that Islam and Christianity played in the economic fortunes of the Middle East and Western Europe. There are many reasons this has long interested me. First is the reversal of fortunes. The Middle East was far ahead of Western Europe for a long time after the spread of Islam. Did religion play some role in this? Can it also account for the ultimate reversal of fortunes, when parts of Europe took off? The second reason is that these regions are close to each other, both have Abrahamic religions as the dominant tradition, both have a Roman legacy, and there was much exchange between the two. In other words, there are many more similarities between the two regions than, say, Europe and China. This doesn’t make the “why Europe and not China” question uninteresting, but it does add a layer of complexity to the story. There are many possible reasons behind the reversal of fortunes between Europe and China. That is less true of the Europe-Middle East reversal.

Three Paradigms

In the last decade or so, three dominant paradigms have emerged regarding the reversal of fortunes between Western Europe and the Middle East. Probably the most well-known is the one put forth by Timur Kuran in The Long Divergence. It is a wonderful book with a ton of subtlety. The main theme is that Islamic law worked very well in the early years of Islam, and economic growth resulted. However, there were many unintended, long-run consequences of some laws, particularly those dealing with commerce (e.g., partnership law) or assets (e.g., inheritance). This had all sorts of unforeseeable, downstream economic effects that Kuran lays out beautifully.

A second paradigm, argued most forcefully in a wonderful article by Lisa Blaydes and Eric Chaney, argues that access to slave soldiers made Middle Eastern politics much less stable. Meanwhile, weaker European rulers (who didn’t have independent access to coercive power) had to negotiate with other elites to retain power. Their argument is mainly about the political consequences of these differences, but their argument falls in line with a large literature on the role that constraint on executive power plays in economic fortunes. In short, unconstrained Muslim rulers could more or less do as they pleased. This tends to not bode well for those with economic interests.

A third paradigm, which I have contributed to, and also includes recent contributions from Ahmet Kuru and Jean-Philippe Platteau, looks at the role that religion played in legitimating political power. The broad argument (at least, my version of it) goes that due to historical reasons, Islam was a bit better at legitimating rule than Christianity (although the Church could certainly legitimate rule!). Muslim rulers thus tended to rely more on religious legitimacy. But this meant that other elites had a smaller say at the “political bargaining table.” In Western Europe, as the efficacy of religious legitimacy began to unravel, particularly after the Reformation, rulers turned to parliaments to help keep them in power. Elites in parliaments desired (for their own self-interest!) the types of things that often portend economic success, such as property rights and investment in large-scale public goods.

I think all three of the arguments make a lot of sense. And it is possible (likely, even) that they are all correct. A phenomenon as multi-faceted as a millennium-long reversal of fortunes is surely to have many, many causes.

Moreover, each of the three sets of arguments has some shortcomings. Take the legitimacy-based arguments. Religious legitimacy is only effective if people care about what religious authorities dictate. If their dictates have such negative economic consequences, why do people remain religious, thereby rendering religious legitimacy effective? Is religiosity a cause or consequence of institutional arrangements? Or, take the argument that Muslim rulers were unconstrained due to slave soldiers. If they were indeed so powerful, why did Muslim rulers never delegate power to other (non-religious) elites? Why not get the best of both worlds? What should the powerful ruler fear from delegation? Or, take the argument based on religious proscriptions associated with Islamic law. Muslim rulers must have understood, to some degree, that such proscriptions hampered economic activity. Why, then, did they continue to use Islamic institutions that promoted inefficiencies?

This is hardly to say that any of these theories are wrong. They provide a ton of insight, and any theory which explains everything really explains nothing. But is it possible that the answer to some of these issues comes from considering how these theories interact with each other?

Unifying the Paradigms

This is question I ask in a new working paper with Alberto Bisin, Avner Seror, and Thierry Verdier. It presents a theory supported by historical narrative. In it, we build a model that tries to incorporate elements of all three of the major theories into one, unifying framework. In general, I think this is a useful exercise. We often don’t do enough thinking about how competing theories interact with each other.

The key thing we add to the frameworks is a model of cultural transmission. This should be no surprise – Bisin and Verdier are pioneers of bringing these types of models into economics. I think understanding these processes is important for understanding the broader, institutional and economic divergence. How can we understand why religion has had such power in political economy outcomes if we do not understand why religion tends to persist (or not)?

I will try to summarize the model as concisely and as jargon-free as possible. In short, we think of religiosity as being transmitted intergenerationally. Such transmission is costly (e.g., sending your kids to Sunday school), and it is only done if parents think there is a benefit for their children. Meanwhile, rulers gain legitimacy from religious authorities, which lowers the cost of tax collection (and thus increases their capacity to rule), although it comes at the cost of having religious proscriptions which slow economic growth. The capacity of religious authorities to legitimate rule is based on the institutional past. In return for legitimacy, rulers invest in religious infrastructure (e.g., mosques, tax breaks, suppression of rival religions), which benefits both religious authorities and the religious segment of the population.

All of these assumptions are consistent with the literature. In particular, they help us unify two of the three theories: those based on religious proscriptions associated with Islamic law (i.e., Kuran’s theory) and those based on legitimacy. We find from a basic setup with minimal (and, I believe at least, fairly straight-forward) assumptions, that two equilibria emerge in which institutions and religious culture reinforce each other. In what we can call (for lack of a better term) a “theocratic equilibrium,” rulers provide clerics with religious infrastructure, clerics legitimate the ruler, and the religious part of the population expends resources to transmit religious values to their children. This is all the more likely to arise when the capacity of clerics to legitimate rule is strong.

This helps resolve two of the puzzles noted above. First, in the “theocratic equilibrium,” it is in the interest of parents to transmit religious values, since they know that religious individuals in the next generation will have a better life. This is true in spite of the negative economic consequences associated with religious proscriptions. Second, it also addresses why Muslim rulers continued to use Islamic institutions associated with economic inefficiencies. In short, this was a feature of a self-reinforcing equilibrium in which (religious) culture and institutions reinforced each other. So, laws and institutions that were at one point in time beneficial persisted long after it became clear that they hampered economic activity.

What about the third theory posed by Blaydes and Chaney relating slave soldiers and constraints on executive power to economic divergence? To address this theory, we extend the model to consider when a ruler will yield political power (as well as a share of tax revenue) to other elites in return for greater overall tax revenue. Rulers face a tradeoff. Decentralization increases overall tax revenue, but it also decreases the power of religious clerics in political bargaining. It follows directly from our logic that a ruler will only want to decentralize power when s/he has little religious legitimacy (i.e., the capacity of clerics to legitimate is low). Here, decentralization reinforces a “secular equilibrium” in which clerics have little political power and people do not place much credence in the dictates of religious authorities.

This helps explain why Muslim rulers, even with their slave soldiers, did not simply decentralize political power in return for revenue. Doing so would have undermined the equilibrium in which highly effective religious legitimacy was important. The presence of slave soldiers reinforced this equilibrium, since it gave rulers all the less reason to decentralize.

What’s the Big Picture?

This is admittedly an ambitious project. But it is the type of project I think is undertaken too infrequently. There is often too much emphasis placed on theoretical novelty. Although new theories do indeed tend to build on others, novelty is always rewarded above all else.

Because of this there are a number of important phenomena, such as the reversal of fortunes between Western Europe and the Middle East, for which there are many theories, but not enough in depth analysis of how the theories complement each other. When studying big, macro events that take place over a long time over a wide space, it is unlikely that one theory will explain everything. There is room for all of the theories to be correct! That is certainly the case here. But it is also true that the sum may be more than the parts. By considering frameworks which can account for multiple theories at the same time, it is possible to gain even more insight into some of the bigger questions in the social sciences.

Author(s)

  • Jared Rubin is a professor of economics at Chapman University. He is an economic historian interested in the role that Islam and Christianity played in the long-run “reversal of fortunes” between the economies of the Middle East and Western Europe. His book, Rulers, Religion, and Riches: Why the West got Rich and the Middle East Did Not (Cambridge University Press, 2017), which addresses these issues, has won multiple book awards.

One thought on “Culture, Institutions, and Economic Divergence

Leave a Reply