Avner Greif Comment

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

A Review of Avner Greif’s Institutionsand the Path to the Modern Economy:

Lessons from Medieval Trade

GREGORY CLARK∗

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

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1. Introduction

Avner Greif’s eagerly awaited book,Institutions and the Path to the Modern

Economy: Lessons from Medieval Trade, isambitious, complex, long, and difficult. Itwill cause much work and trouble to review-ers. It will vex students for generations tocome. This is in part because the volumeactually contains two very different booksthat have been forcibly married and that co-habit in domestic discord. The first book is arevision of that minor classic in the field ofinstitutional economic history, DouglassNorth and Robert Paul Thomas’s Rise of theWestern World (1973). Here Greif attemptsto locate the eventual rise of WesternEurope to world dominance in its uniquedevelopment of institutions that fosteredeconomic growth, starting in the early middle

ages. The second book is a long, deep,thoughtful, indeed brooding, meditation onthe nature of social institutions in general,their stability, and their dynamics: AProlegomena to any Future InstitutionalTheory. In this second work, the specificinstitutions of medieval trade serve only asillustrations of proposed general principles.

Both of these are bold undertakings, buttheir combination in one volume createsunique difficulties. For those interested inthe rise of Europe and the eventualIndustrial Revolution, the long sections ofabstract rumination over the nature andunderpinnings of institutions, such as chap-ter 2—a twenty-four page discussion of howwe should define the term institution—willmake the book at times an exquisite torture.Also, among the general principles Greifadduces in the theoretical sections is thatthere is no simple mapping between explicitinstitutional rules and the actual operation of∗ Clark: University of California, Davis.

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institutions. Institutions are subtle formswhose real functioning cannot be discernedwithout a deep knowledge of their contextand history. This theoretical conclusion cutsagainst the parts of the book that attempt aquick and superficial link between Europeantrade institutions and European economicsuccess.

For those interested instead in the origin,stability, and evolution of institutions, thebook may serve better. But for them the spe-cific trade institutions cited as examples willnot be the best material, since the details ofthe operations of these institutions and oftheir origins in tenth century Europe aresketchy, so that the empirical tests of any ofthe propositions advanced in the case studiesare extremely limited. This is not the fault ofthe author, who has impressive command ofthe historical sources, but of the extantmaterials from this distant era. Such sourcesdo not allow systematic empirical testing ofthe hypotheses advanced. As terrain to testinstitutional theories, medieval Europe hasthe great advantage of offering interestingand exotic animals. But it has also the disad-vantage that we glimpse these beasts onlyimperfectly, flittingly, far off in the mist.

In this review, the analysis is thus in twodistinct parts. The first deals with the factu-al issue of the role of institutions in the riseof the West. The second with the generaltheory of institutions. The general conclu-sion will be that the book succeeds in neitherof its aims. But this failure implies no dishon-or to the author. Greif is a scholar in the bestsense of the word: someone who has pursuedhis own independent vision of institutionalanalysis. Both questions he addresses areexcruciatingly difficult ones that have defiedresolution for generations. Far better to tryfor the mountaintop and fail than to stayrooted resignedly in the turgid swamplandsbelow.

2. Institutions and the Rise of the West

Why did Western Europe, which was stillin 900 A.D. a backwater compared to the

glories of the Byzantine, Muslim, Chinese,and Indian civilizations, eventually overtakeall these potential competitors, conquermuch of the world, and launch the IndustrialRevolution? In the short (171 pages) but ele-gant and spirited book, The Rise of theWestern World (1973), North and Thomasstate, with an economy few other institution-al economists have matched, “Efficient eco-nomic organization is the key to growth; thedevelopment of an efficient economicorganization in Western Europe accounts forthe rise of the West. Efficient organizationentails the establishment of institutionalarrangements and property rights that createan incentive to channel individual economiceffort into activities that bring the privaterate of return close to the social rate ofreturn . . . if a society does not grow it isbecause no incentives are provided for eco-nomic initiative” (North and Thomas 1973,pp. 2–3).

Growth is thus just a matter of establish-ing the right rules of the economic game.Why then did earlier societies not have effi-cient institutions and why didn’t all societiesdevelop such institutions? North andThomas answer that the rulers of preindus-trial economies were motivated in setting upinstitutions by their private costs and bene-fits: “new institutional arrangements will notbe set up unless the private benefits of theircreation promise to exceed the costs” (p. 6).This has an air of certainty that perhaps onlytruism can deliver. But they flesh out thisclaim by arguing that efficiency institutionsdeveloped in parts of Western Europebecause such factors as population growthchanged the costs and benefits of institution-al forms for rulers between 1000 and 1700 inthe favored parts of Western Europe.

Medieval Europe in 900 AD on the visionof North and Thomas was a world of con-stricted factor and product markets. Mostagricultural labor was supplied throughforced labor with serfdom, capital usage wasdistorted by usury laws, urban labor marketswere distorted by guilds, and land usage was

728 Journal of Economic Literature, Vol. XLV (September 2007)




1 See Robert C. Allen 1982; Gregory Clark 1998; andPhilip T. Hoffman 1989.

limited by common property rights. Outputmarkets were local and limited by guildrestrictions and “just price” laws. Somehow,and exactly how is left endearingly vague,through a favorable conjunction of costparameters influenced by population, envi-ronment, and military technologies, parts ofWestern Europe escaped this environmentand thus achieved economic growth.

North and Thomas were wrong on mostspecifics in their interpretation of preindus-trial institutions and their effects. Theyrelied mainly on the untested prejudices ofearlier generations of historians. Thus, forexample, they repeat the conventional wis-dom that common property in land in prein-dustrial northern Europe was an institutionalpathology whose removal was a vital compo-nent of the agricultural revolution of theeighteenth century. Quantitative research inrecent years suggests that common rights, atleast by the seventeenth century, had negligi-ble impacts on agricultural performance.1But the élan and vigor of this vision of theinstitutional roots of economic successattracted many converts to “institutionalism”and helped North to the prominence thatbrought him the Nobel Prize in Economics in1993. North and his followers have never lostthe faith that “Institutions form the incentivestructure of a society, and the political andeconomic institutions in consequence, arethe underlying determinants of economicperformance” (North 1994, p. 359).

For the “institutionalist” program, the aimis to show how economic outcomes dependon the institutional structures of societiesand then explain why efficient institutionswere so rare in the millennia before 1800.Greif is one of the most highly regarded ofthis academic movement, and right from thebeginning of this book stakes similarly strongclaims for institutions. “Studying institutionssheds light on why some countries are richand others poor . . . . The quality of these

institutional foundations of the economy andthe polity is paramount in determining asociety’s welfare” (pp. 3–4).

Later in the introduction, Greif notes thatthe empirical studies of the book concernthe period when “European economy, polityand society were embarking on the road thatled to the Rise of the West, a process thatbegan in the late medieval period with thegrowth of European commerce” (pp. 23–24).To this end, he approvingly quotes RobertLopez, who coined the term the commercialrevolution for the years 950–1350, that longdistance trade “became the driving force ofeconomic progress, and in the end affectedevery aspect of human activity almost asdecisively as the Industrial Revolutionchanged the modern world” (Lopez 1967, p.126). Greif sees the trade expansion of thelate medieval period as a fundamental trans-formation in the possibilities of the medievaleconomy, sparked specifically by institutionalinnovations and not by demography, techno-logical innovation, or any other noninstitu-tional forces. Greif indeed, like Lopez,regards this medieval epoch as a true revolu-tion, an equal of the Industrial Revolution.One aim of the book is to describe andunderstand the institutional roots of the riseof the West.

The Rise of the West is, for Greif, the riseof market institutions and, in particular, mar-ket institutions that permit long distancetrade. Many economists, starting with AdamSmith, assume that markets are an easy andnatural thing, found wherever there are peo-ple, and dating from a time beyond any writ-ten record. Thus as Smith in a lecture in1755 stated, “Little else is requisite to carrya state to the highest degree of opulencefrom the lowest barbarism but peace, easytaxes, and a tolerable administration of jus-tice: all the rest being brought about by thenatural course of things” (Dugald Stewart1858, p. -).

Greif argues instead that the institutionsthat allow long distance trade are complexand difficult to create, and will not emerge

729Clark: A Review of Greif’s Institutions


naturally from a minimum of social order, asSmith seems to assume. Long distancetrade, he assumes, had collapsed in the DarkAges from 500 AD to 900 AD. The path tomodern growth, a tortuous and difficult one,was through the creation of institutions thatsupported trade.

The book’s assumption that long distancetrade was a fragile thing, whose existencedepended on the creation of elaborate insti-tutions that emerged only in very specificcontexts, is hard to square with the archeo-logical record that shows long distance tradeeven before the Neolithic Revolution creat-ed settled agriculture. In Europe by the eraof modern man, 45,000 years ago, there isevidence of continent wide movement ofBaltic Amber and Mediterranean molluskshells. The arrival of settled agriculture inEurope in the Neolithic coincided withabundant finds in tombs of luxury objectstraded over long distances (GeorgeGrantham 2007). Long distance trade waspresent from the dawn of agriculture, andperhaps even before.

Given the assumptions of the author, thebook focuses on describing and analyzingthe institutions associated with long distancemedieval trade. What made agency possiblein trades over long distances where the aver-age speed of travel of information was onemile per hour? How did merchants achievesecurity for their persons and their waresoperating in distant cities where they werealiens? How did medieval trading communi-ties achieve stable self-government withouta seizure of power by one or another faction?Greif is expert on the surviving details ofthese institutions and he adroitly deploys thesomewhat sketchy details that survive ontheir operation.

Thus, in chapter 4, Greif argues that evencities that profit from trade will have anincentive to expropriate or cheat isolatedmerchants who come to trade. The formalargument, intuitively, is that the marginalgain to the city from the last merchant whocomes to trade is 0, so that expropriating

some subset of merchants is always prof-itable even if the expropriated retaliate bynever trading again (pp. 112–13). Withatomistic merchants trade will thus occur atless than socially efficient levels if reputationis the only mechanism available to restrainpredation. Merchant guilds by collectingmerchants into groups that can retaliate forexpropriation against their members allowtrade to rise to optimal levels.

Similarly, chapter 10 (pp. 309–50)describes and analyzes the communityresponsibility systems in Western Europebetween 950 and 1350. In this institution, ifa merchant from town A was found liable fordamages in a commercial dispute in town B,and town B refused to settle the damages,then the appropriate compensation wasseized from any merchant in town A whohappened to come from town B. Thisunlucky victim would then have to appeal forcompensation for his injury in the courts oftown B. Greif again argues that this was anefficient response to the absence of overar-ching legal systems. Town A would have anincentive only to pursue merchants from Bwho caused damages, and town B would havean incentive to lay those damages at the doorof the offender. Through this mechanism,trades became possible that were otherwisenot supportable.

The modeling and the reasoning here areingenious. But the reader expecting fromthis introduction, and from the title of thebook, Institutions and the Path to theModern Economy, a book showing how andwhy the institutions that underpin modernmarket economies first emerged in medievalEurope will be disappointed. For it isunclear if any of the institutions studiedmade any difference to the course ofEuropean growth. There is a crucial differ-ence between a good being supplied atsocially inefficient levels and this deficiencyin supply being quantitatively significant.From the window of his office at Stanford,Greif may be able to see the wealth of SiliconValley all around him, but also the social




inefficiencies represented by California’straffic-clogged roads, its arcane land use andtaxation policies, and by its inefficient water-use laws. All societies have many institutionsthat involve some inefficiencies, but some aremuch richer and more dynamic than others.It accomplishes nothing in terms of econom-ic growth to show that an institution is ineffi-cient. The next crucial step is to show thequantitative impact of those inefficiencies.

But this the book never does, except in anillustrative way. Its proofs about inefficiencyspeak not at all about quantitative signifi-cance. Any tax on trade, for example, willreduce its level below socially efficient lev-els. Trade throughout history has been taxed.But this does not imply that taxation thwartedall trade possibilities and prevented eco-nomic growth before the IndustrialRevolution. Magnitudes matter here, andthe proofs wielded by Greif are not gearedto magnitudes.

Greif does offer some empirical supportto the idea that the absence of security formerchants was a quantitatively importantbarrier to trade. He instances cases whereunprotected merchants were attacked orabused in foreign cities and where tradeexpanded immediately after merchants weregranted privileges in a foreign city (pp.95–105). Trade between Genoa and NorthAfrica doubled, for example, after an agree-ment for protection was reached of Genoesemerchants was reached in 1161 (p. 101).Similarly trade between Catalonia and Sicilyexpanded within months of a 1286 protec-tion agreement (p. 100). But this does notaddress the question of the importance oftrade volumes to the overall efficiency ofpreindustrial societies. For Europe as awhole before 1800, international trade was avery modest economic activity, whose volumeeven by 1800 averaged less than 4 percent ofGDP (Patrick O’Brien 1982).

Those who study history have learned tobe wary of such arguments by example. It istoo easy to choose examples, however unwit-tingly, to support the favored hypothesis and

ignore those that might contradict it. A moredisciplined empirical test would systemati-cally survey trade volumes between city pairsand correlate these with the types of negoti-ated trade protection. The nature of Greif’ssources probably preclude such a systematicempirical enquiry. We shall see also belowthat Greif’s theory of institutions suggeststhat such systematic empirical investigationswould be of limited value.

Another issue that Greif’s empirical con-firmation does not address is whether thegrowth of protections for merchants, or thecommunity responsibility system, werethemselves induced by an increased demandfor trade. As North and Thomas argued inThe Rise of the Western World, institutionsall have costs for their creation and enforce-ment. They only emerge when their benefitsexceed these costs. In a world where tradevolumes were limited by small populationsizes, low incomes and high transport coststrade will be anarchic and unstructured. Butwhen trade volumes rise there is moreincentive to create institutions which facili-tate it. Did the institutions create the tradein medieval Europe or did trade possibilitiescreate their own institutions?

Some institutional economists have beenalert to these problems and have done inter-esting work in trying to uncover the direc-tion of causation by looking for exogenoussources of institutional variation, as withDaron Acemoglu, Simon Johnson, andJames A. Robinson (2001, 2005) or DanBogart (2005). But, for the examples Greifexamines, all of 0the crucial variables seeminherently endogenous, denying theseopportunities.

A further problem with the institutionsdissected in the book is that they are mostlynot those that can explain the eventualEuropean takeoff. For example, there is anextended discussion of Greif’s earlier workon “private-order contract enforcementinstitutions.” This concerns how merchantsmonitor and reward agents operating at dis-tant locations, a significant problem in long




distance trade all the way up to the opera-tions of the East India company in the nine-teenth century. Greif showed, again withingenuity and modeling skill, that the tradingpractices of the eleventh century JewishMaghribi community, where any agentaccused of dishonesty was shunned by theentire community, can allow agents to behired for lower rewards (pp. 58–90). Such aninstitution could even allow for the possibil-ity of agency when individualistic incentiveswould not support this relationship. But didthis matter in practice? It is not evident thatthis was other than a curiosity.

In fact, the long account of these privateenforcement mechanisms lies at cross pur-poses with the main thrust of the book, inso-far as it concerns the rise of the West. This isone of the cases where the desire to theorizeabout the nature of institutions in generalobstructs the desire to tell a story about therise of Europe. The Maghribi equilibrium,not found in the West, allowed more efficienttrade in an eleventh century world of distanceand uncertainty. Yet, Greif notes later, incomparing the individualist Genoese with thecollectivist Maghribis, “the relative efficiencyof individualistic and collectivist systemsdepends on the magnitude of the relativeparameters” (p. 301). The Maghribi systemturned out to be a dead end and the individ-ualist system of the Genoese that relied onsuch third parties as courts for contractenforcement the efficient outcome (becauseit came to dominate). In that case, the longdiscussion of the Maghribi’s is probably notgermain to the rise of the West.

Greif speculates that the early adoption bygroups such as the Maghribi’s of collectivesolutions to the agency problem may have,through creating “different cultural beliefs”(p. 300), locked these communities into acultural system that was inimical to moderngrowth. Yet here, as he readily recognizes,he is guessing at interesting possibilities,unsupported by modeling or empirical evi-dence (p. 301). So the connection of the col-lective enforcement system of the Maghribi

traders, interesting though that institutionwas, to the eventual rise of the west and therelative decline of the Islamic world isunknown. It is certainly clear that theMuslim world by the time of the Ottomanempire had an extensive court system thatarbitrated on all kinds of formal contractsthat look very similar to those of the West(Sevket Pamuk 2006).

His account of the community responsi-bility system is similarly a tale of an interest-ing institution, but one whose importance tothe eventual domination of the west is unex-plored. By the thirteenth century, after all,when the Islamic world was still a vigorouscompetitor of Christian Europe, the com-munity responsibility system was disappear-ing. Greif argues that the communityresponsibility system decayed in the laterthirteenth century because people were lesseasily identified by communities because ofgreater geographic mobility. In support hecites the fact that English merchantsbetween 1257 and 1271 greatly increasedregistration of debts in the chancery rolls,placing the transactions under the jurisdictionof common law (p. 340).2 Whatever the spe-cific reasons, the role of this system in the riseof the West is thus again rather tangential.

There is also reason to doubt the crucialfactual assumptions that underlie the Greifanalysis of European experience 950–1350.This is that it was the development of moreefficient trade institutions that led to agrowth both in the size and in the productiv-ity of the European economy in these years.There is no doubt that between 950 and1350 western Europe witnessed majorgrowth in population, in urbanization (par-ticularly in northern Italy and Flanders), and



2 Between 1250 and 1270 there was an explosion theproduction of written records of all kinds in England—accounts, court rolls, inquisitions post mortem. And docu-ments such as charters showing land ownership began forthe first time to actually show specific dates for transac-tions. Thus the greater numbers of chancery records maynot reflect a migration of merchants to other legal mech-anisms as much as an economywide adoption of moredurable methods of recording facts and agreements.


in the volume of long distance trade. But thecauses of these changes are difficult to dis-entangle: was it demographic change,improvements in agricultural productivity,improvements in industrial productivity?Greif, while he is an innovator in his eco-nomic models, is very old fashioned in hishistory. Greif’s views on the importance oftrade to the medieval revival are those thatoriginated with Henri Pirenne in the 1920s.This earlier view has been displaced inEngland since the 1960s by the arguments ofM. M. Postan emphasizing demography andagrarian technology as the key drivers of themedieval expansion.

Long distance trade in goods such as pep-per from India, for example, existed alreadyin northern Europe by at least 950 AD.3 Thevolume of this trade increased greatlybetween 950 and 1350, but then the popula-tion of Europe also greatly increased overthese years by an unknown magnitude. Bythe thirteenth century, Flanders had becomethe center of an industry producing finewool cloth, which was exported to theMediterranean in exchange for such goodsas spices and silks. England mainly suppliedthe fine wool used in these cloths. Was thegreat expansion of the Flanders cloth manu-facturing industry from the tenth century onthe result of improved trade opportunities?Or did technological and organizationaladvances in Flanders, and/or more efficientproduction of raw wool in England, createthe possibilities for trade that Italian mer-chants merely responded to. So it is hard toknow whether trade was, as Greif assumes,the driving force in the growth of Europeaneconomies from 950 to 1350 or just aresponse to technological and organizationalchanges in some of the constituent territoriesof Europe.

However, since the cost of goods such aspepper in England were almost entirely thetransport and transactions costs in getting itfrom southern India to the end consumerswe can get some idea of the efficiency withwhich this long distance trade was carriedout by comparing prices of goods such aspepper with general prices in England. Thedata for this calculation exists only for theyears after 1220, but that covers a lot of theperiod of the medieval commercial revolu-tion that Lopez identifies. Thus by 1300, thepopulation in England was probably twice asgreat as in 1220, cities like London hadexpanded even more than this and the vol-ume of international trade had also swelled.Figure 1 shows this normalized pepperprice, as well as the estimated linear trend inthese real pepper prices from 1220 to 1350.There is no sign in these years of anyimprovement in the efficiency of the tradingsystem that brought pepper to England.Thus we do not even know if trade institu-tions played any significant role in improvingtrade in medieval Europe.

At the global level the transition betweenthe preindustrial world of slow growth andstagnation and the modern world of rapidgrowth shows up in a change in the meas-ured rate of total factor productivity (TFP)advance from around 0 percent per year in allsocieties before 1800 to closer to 1 percentper year in modern successful economies.We also know this change, at least proximate-ly, was caused largely by innovation in pro-duction techniques, as has been emphasizedby Joel Mokyr and others.4 Again the linkbetween trade institutions and these funda-mental innovations in production techniqueis unknown, but unexplored and unquanti-fied in this work. Certainly, in the one econ-omy where we can measure this, England,there is no sign that the medieval expansionof population, towns and trade in 1209–1315was associated with any great increase in themeasured TFP of the economy. Figure 2


3 Indeed long before this. Islamic silver coins werefound in numbers in coin hordes in the Baltic region evenat the beginning of the ninth century (Ron Findlay andKevin O’Rourke forthcoming). Pamela Nightingale notesthe use of pepper in England even in the eighth century(Nightingale 1995). 4 See Mokyr 1990. See also Clark forthcoming.


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shows the measured TFP of England from1220 to 2000. There are oscillations in thepreindustrial era, but in terms of measuredTFP growth it is not until around 1800 thatwe see a distinct break from the preindustri-al era. The period 1260–1315, the Commer-cial Revolution, is actually associated with adecline in measured TFP in England. Thisis because as population expanded realwages fell without land rents rising tocounterbalance this.

These TFP measures may well understatethe degree of innovation in medieval society,but they certainly show that any assumptionthat an event occurred in Europe in950–1350 that rivaled the IndustrialRevolution in importance is wildly opti-mistic. But at the very least figures 1 and 2show it is premature to hypothesize aboutthe institutional roots of a revolutionarychange in medieval Europe, when we are notsure that anything of great import happened.

Finally, the dual duty of the book as bothEuropean history and general theory leavesno space for discussion of the whole

“Europe versus China” issue that KenPomeranz’s 2000 book has brought to suchprominence. Pomeranz argues that, in 1800,China had an economic system that was asdeveloped, market driven, and individuallyrational as Europe’s. Europe’s advantage thatled to its industrialization lay instead,believes Pomeranz, in the ecological factorsof coal and colonies. Pomeranz’s argumenthas its own problems but, if Greif wants toconvince that European institutions reallywere the key to its success, some attention tothe nature of markets and trade in the Eastwould be potentially illuminating.

3. The General Theory of Institutions

Despite the title of the work, the materialdirected to laying the groundwork for a gen-eral theory of how to do institutional analy-sis, as opposed to discussing the specific roleof institutions in Europe’s development, pre-dominates. Greif’s general theory of institu-tions starts from a rejection of the notion thatinstitutions are just the politically determined



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

1 Author’s calculation.

2

1.8

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rules of the economic game in any society:the legal rules that define who owns what andhow ownership changes. This institutions-as-rules view, Greif argues, fails to take intoaccount that whatever the formal institutionmay be, the actual constraints that operateon people can be very different. The realinstitutions are the combination of the for-mal rules and actual social practices. He alsoargues that this earlier framework is ill suit-ed to analyzing the formation, persistence,and evolution of institutions. To understandwhy growth promoting institutions took solong to develop we need a different frame-work that analyzes institutions as stable equi-libria, where each participant is maximizestheir benefit by adhering to the rules of theinstitution.

There is certainly profound truth inGreif’s insistence that institutions are gener-ally much more complex than the formalrules and that this creates major difficultiesfor institutional analysis. Any historian, forexample, who used the formal rules of theinstitution of serfdom to analyze medieval

English agrarian society would end up withan absurd description of rural life. Thoughthe formal rules made the serfs the mereinstruments of their lords, equivalent to thefarm animals, with no legal status to appealoutside the court of the lord their master,the serfs ended up expropriating their mas-ters and acquiring for their own use theland on which they were settled at very easyterms. They had to make payments to thecourt of the lord for such behaviors as mar-rying their daughter outside the manor orfor extramarital sex. They had to labor inthe lord’s fields (or at least send a substi-tute). Yet, by 1300 or earlier, the masterswould have gladly replaced their serfs withfree tenants, had they been able, so gener-ous were the customary rents to the ten-ants. The serfs ended up enslaving thelords. Serfdom disappeared in Englandwithout ever being formally abolished.Governments can make any rules theywant, but what institution actually resultswill be determined by much more complexsocial interactions.



Figure 2. Measured TFP, England, 1220–20001

1 See Clark, forthcoming.

400

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Formal usury restrictions can similarlyhave very different practical implicationsthan any reading of the formal rule wouldimply. In early Christianity, and in Islam still,interest was regarded as usury, an immoralactivity. But banning all lending at interestfrustrates many possible mutually beneficialbargains in any economy. Thus, in bothChristianity and Islam, religious scholars soonsought ways of reconciling the pure princi-ples of faith, banning lending at interest, withthe profit opportunities of the market.

While the Catholic church formallyadhered to the doctrine against usurythroughout the middle ages, ingenious the-ologians showed that most types of interestpayment were actually nonusurous. By thelate middle ages, the following exceptions oncollecting interest on loans were all wellaccepted: profits of partnership (as long aseach partner took the risks, returns wereallowed on capital directly invested in anenterprise), rent charges (perpetual loanssecured by real estate were allowed), lifeannuities (permissible since the amount ofthe payment was uncertain), foregone profits(compensation was allowed for profits fore-gone in making a loan), exchange risk premi-um (a premium on a loan was permissible ifit was made in one currency and repaid inanother, to cover the exchange rate risk).The prohibition on usury was thus extreme-ly limited. Since there was still a demand forsuch loans this was met in two ways. The firstwas by allowing Jews, as non-Christians, toengage in such lending. The second was bysimply ignoring the church rules when itproved convenient to the rich and powerful.

Islamic societies similarly found ingeniousways to circumvent the usury ban. The pri-mary one was the double sale. In this trans-action, the borrower would get, for example,both 100 dinars cash and a small piece ofcloth valued at the absurdly high price of 15dinars. In a year he would have to pay back100 dinars for the loan of the cash and 15 forthe cloth. These debts were upheld bySharia courts. A study of Islamic court

records in the Ottoman Empire in the six-teenth century found, even more blatantly,literally thousands of debt contracts beingenforced by the courts. Similarly, the foun-dations set up by pious Muslims to maintainmosques, pay imams, support the poor, orprovide public goods, the waqfs, frequentlyheld cash assets that they lent at interest(Pamuk 2006). Even modern Muslim statesthat ban usury have banking arrangementswhere depositors still collect interest ontheir money, though in a “partnership”instead of explicitly as “interest.” Suchbanks currently operate in Egypt, Kuwait,the Gulf Emirates, and Malaysia. So an insti-tution is a complex of legal rules and people’sresponses to those rules.

As noted above, there is an implicit rejec-tion here, but one not developed explicitly inthe book, of almost all that currently passesfor institutional analysis in economic jour-nals. North and Barry Weingast, for exam-ple, have promoted the Glorious Revolutionof 1688–89, where parliament effectivelybecame the supreme legislative and execu-tive body in England, replacing rule byKings who were constrained only by theneed to have Parliaments authorize taxes(North and Weingast 1989). But Greif wouldargue that the true nature of the change ofinstitution cannot be deduced simply fromthe changes in formal rules. How then canwe ever test the effects of institutions whenwe cannot identify their characteristicsthrough such observable features as theexplicit rules? Greif addresses this problemthrough the technique of the analytic narra-tive discussed below.

In chapter 2, Greif lays out a formal defini-tion of an institution. This is, “An institutionis a system of rules, beliefs, norms and organ-izations that together generate a regularity of(social) behavior” (p. 30). This reviewer waspuzzled by what was gained in the subse-quent analysis from the length and formalismof this section. Each of the component termsin the definition—“rules,” “beliefs,” “norms,”“organizations,” “regularity,” “behavior”—is




itself a loosely defined ordinary languageterm. We do not get clarity by defining oneambiguous concept in terms of six othersequally ambiguous. At one level, this defini-tion is so general that almost any behaviormight constitute an institution. At another,the one specific element it contains, theinsistence on regularity, seems to rule outsome social arrangements that most wouldwant to call institutions. Greif thus states“The object of study is restricted to regular-ity of behavior, meaning behavior that is fol-lowed and is expected to be followed in agiven social situation by (most) individuals.”

Consider, for example, Western Europeanand East Asian marriage patterns before1800. These were crucial determinants ofliving standards in the Malthusian era. InEast Asia, marriage was early and universalfor women, occurring typically within a tightband around age 19. Many people would callthis marriage behavior an institution and,under the Greif definition, it would clearlyqualify. In Western Europe, in contrast, firstmarriage occurred at all ages from 16 to 40,with a mean age of about 26. Typically tenpercent of women never married. Theabsence of regularity in individual behaviorseemingly implies that Greif would say that,in contrast to Asia, Western Europe lacked amarriage institution. Yet, though individualbehavior was highly variable in Europe,there were high degrees of regularity fromyear to year, and from village to village, inthe proportion of women who married andin the average age of marriage. Explainingthat regularity thus becomes an interestingissue for historical demographers and therehave been a number of explicitly institution-al explanations for these regularities. Butalso, more widely, institutions that allowindividual choice can be just as much insti-tutions as those that constrain all persons toa narrow field of action. “Do what you want”can be as much an institution as “Do X.”

There are other instances of regularities inbehavior that we would not want to call insti-tutions. Thus, in the preindustrial era,

Europeans typically bathed little, while theJapanese bathed frequently. Was that a dif-ference in social institutions? Most peoplewould describe this as a difference in tastes.But undoubtedly it is a regularity of behaviorinduced by a system of rules, beliefs, norms,and organizations.

The purpose of the above is not to engagein a debate about how exactly institutionsshould be defined, but to suggest that suchdefinitional exercises are premature. Itwould seem better just to work up fromexamples of institutions toward a more gen-eral conception, rather than begin with longencompassing abstract analysis that can onlyreally be tested by considering specificexamples.

As noted, Greif defines an institution as aself-reinforcing set of behaviors. Greif pio-neered in applying game theory to historicalinstitutional analysis and his 1993 study ofthe Maghribi traders remains a classic of thisstill modest genre. This was certainly anexciting development for economists. Forthe first time, seemingly grounded the expla-nation of informal institutions in optimizingindividual rational behavior. Behaviors thatwould seem to the layman to be based onblind irrational custom could be shown to beconsistent with individual optimization.Given the incredible intellectual elaborationof game theory, and its meager harvest interms of actual economic applications, thefinding was welcome to both game theoristsand to economic historians. The Maghribistudy also allowed for the possibilities ofinstitutional change resulting just fromchanges in parameters. Since the equilibri-um depended on certain parameter values,changes in transportation costs or observ-ability could terminate the old equilibriumand lead to a new one. The 1993 articleseemed to point to new micro foundationsfor institutions that would ground them inindividual maximizing behavior.

But this book is almost certainly not whatmany economists who welcomed the 1993article expected as the generalization of its




ideas. Some indeed will be shocked by, andperhaps hostile to, the path Greif has taken.Were economists of a more literary bent, theword apostasy would be on their lips. In asearch for generality, Greif concludes thatsuch a set of limited rational actor assump-tions is not constraining enough to describereal-world institutions. For a start, “multipleequilibria usually exist in the repeated situa-tions central to institutional analysis” (p.125). There have to be more constraints onthe structure of the interaction to explain theequilibrium. These constraints include “cog-nitive norms” (p. 128) as well as “the socialand normative foundation of behavior” (p.143). Issues such as “losses of esteem,”“norms,” “fairness,” or “social exchange” haveto be introduced. Also such social and nor-mative behavior is “situationally contingent”(p. 144).

Greif posits this as just an extension andelaboration of the original individualisticrational-actor game theoretic ideas. Oncewe are compelled to admit, however, intothe explanatory apparatus almost the entiresociological zoo of ill defined and unmeasur-able constructs, we lose all explanatorypower. Explanatory power requires fewobjects and small degrees of freedom. Greifnotes that “a useful feature of game theory isthat it allows us to study all intertransaction-al linkages—economic, coercive, social andnormative—simultaneously” (p. 147). Buthe does not seem to appreciate the price ofthis generality in terms of testability. All weare left with is the idea that people operat-ing within institutions act as they dobecause, given the cognitive, intellectual,cultural, and normative constraints theyface, their actions seem to them as being thebest available. But, in an informal sense, weknew that already. Without any considera-tion of the ins and outs of game theory, wecan appreciate that any lasting institutionlikely constitutes some set of self-reinforc-ing behaviors. Yanomamo males, for exam-ple, engaged in recurrent raids against otherbands aimed at capturing women and

revenging previous raids (Napoleon A.Chagnon 1983). This was clearly an institu-tion in the sense of Greif and must be main-tained by some kind of self-reinforcing setof behaviors. But we knew that, even if wehad never studied game theory. So whatinsights have we gained from page afterpage of elaboration on the idea of equilibriaand the elements that enter into them (pp.124–53)? If we were able to reduce all suchsocial equilibria to a game theory equilibri-um of purely self interested rational individ-uals interacting with common knowledgethat would be a radical, novel, and testabletheory. This book denies that possibility, butwithout providing any alternative that hasempirical content.

So far we have just considered the expla-nation of stable social institutions. But insti-tutions can and do change over time. Insearch of a general theory of institutions,Greif has to also give an account of theirdynamics, which he does at length on pages158–216. It is clear that, in some cases, justa change in some other parameter can makethe institutional equilibrium no longer self-reinforcing, and lead to another equilibri-um. But, given the pervasiveness ofmultiple equilibria noted above, we cannotget even any potentially deterministicdynamics without resorting to all the elabo-rations discussed above. How then do pastinstitutions influence the present? Greifposits that past institutional elements“reside in individuals’ memories, constitutetheir cognitive models, are embodied intheir preferences, and manifest themselvesin organizations” (p. 188). Thus the institu-tional histories of societies matter as theysettle on which of a range of technological-ly feasible institutional forms to use now.Here again the multiplication of terms andconcepts continues. We learn about the“fundamental asymmetry,” “institutionalrefinement,” “the inclusion effect,” “institu-tional complexes,” “institutional trajecto-ries,” “contextual refinement,” and more.The problem here is the multiplication of




theoretical entities well ahead of even thehandful of cases of institutional change thatare analyzed in the book.

Chapter 11, titled Interactive, Context-Specific Analysis (pp. 350–76), is essentiallya primer on how to apply the approach out-lined in the rest of the book to the analysis ofinstitutions. Greif here starts from the basisthat we will never be able to predict institu-tional structure from exogenous features ofthe situation—including institutional history.He thus must reject the general feasibility ofprojects such as that of Acemoglu, Johnson,and Robinson (2001, 2005), or Stanley L.Engerman and Kenneth L. Sokoloff (2002),which seek exogenous roots for current insti-tutional differences. Given the many poten-tial stable equilibria in each institutionalcontext, the outcomes are inherentlyunknowable. After the attention given toelaborating the theory of institutional stabil-ity and dynamics in the preceding 350 pages,this conclusion comes as something of a sur-prise. The structure and tone of the previousdiscussion is that of laying the groundworkfor a theory of institutions. The reader nowlearns that the extended theory encompass-es a perhaps uncountable number of possi-ble institutional equilibria, so that there canbe no advance prediction.

Just as deductive methods cannot succeed,Greif asserts also that inductive generaliza-tion about institutional forms will also fail toreveal any patterns. This is because unob-servable elements of the situation—beliefsand norms—are crucial to the determina-tion of the outcome. The same observableelements will be associated with radicallydifferent institutional equilibria. Further,as discussed above, the observable ele-ments of institutions—rules, organizationstructures—often provide little insight intothe actual functioning of the institution.Greif’s work thus implicitly rejects most ofthe work currently classified under the insti-tutionalist banner, which all too happily takesvariations in formal political and legal frame-works as definitive measures of institutional

variation, and then correlates that with eco-nomic performance.5

On pages 357–76, Greif summarizes hispositive strategy for institutional analysis.First, learn the history and context of theinstitution. Next, the investigator should for-mulate the simplest conjectural model thatmight explain the equilibrium using onlyobservable elements. The model shouldthen be tested, and perhaps altered, basedon empirical evidence, but “what is to beavoided in this interactive analysis is the tau-tology in which the model is adjusted to fitthe evidence” (p. 366). This empirical evi-dence will include qualitative as well asquantitative material.

As conducted in the book, this is essential-ly the method of “analytical narratives” pop-ularized by Greif and Robert Bates,Margaret Levi, Jean-Laurent Rosenthal, andWeingast. An analytical narrative consists ofmatching institutional detail to a formal, ormore often informal, interpretation of thesituation as some kind of rational choiceequilibrium, interpreted in the broad senseabove (Bates et al. 1998). It is not clear howthis is distinguished from such things asHarvard Business School case studies. Asapplied by Greif and his colleagues, an “ana-lytical narrative” seems to be just an inter-pretation of an institution in terms of aloosely defined equilibrium. This is fine asan approach to generating hypotheses, butas an endpoint of analysis, as it generally is inthe book, it offers little conviction.

Consider, for example, Greif’s applicationof the technique to the institution of thePodesteria introduced in Genoa in 1194, fol-lowing factional fighting 1164–69 and1189–94. The Podestà was a ruler hired for alimited term from outside the city, who waspermitted by his contract to bring with himsome magistrates and military retainers.These officials were initially imposed by


5 Such works would include North and Weingast 1989;Acemoglu, Johnson, and Robinson 2001; and Edward L.Glaeser and Andrei Shleifer 2002.



Emperor Barbarossa as a way of controllingthe Italian cities in his domains, but quicklybecame instead the servants of the cities.Greif interprets the key function of thePodestà in Genoa as being to serve as a bal-ance of power between warring clans, strongenough to ensure that no clan would be pow-erful enough to attempt to take power on itsown, but weak enough to be unable to takepower himself. But though he begins byinterpreting the role of the Podestà in thelanguage of speculation fitting to the limitedsources at his disposal—“theoretically”“arguably” “might” (pp. 241–42)—as thechapter develops the tone becomes one ofproof and certainty. Two pages later,

The Podesteria . . . was a self-enforcing insti-tution: the belief that any attempt by a clanto gain political dominance by using forcewas futile deterred clans from doingso . . . . The Podestà himself was motivatednot to allow one clan to become weakeither, as his compensation was conditionalon no clan dominating Genoa at the end ofhis term. As we have seen, the system wasset to ensure that no clan would be able tocommit to pay a Podestà his promisedremuneration if that clan gained controlover Genoa. (p. 244).

In fact, we have seen none of these things.They are just the consequences of a certaingame-theoretic interpretation of the role ofthe Podestà. There is presumably notenough evidence in the sources to test whatthe relative military strength of the variousclans versus the podestà was. This is not tosay that Greif’s interpretation is incorrect.Just that the loss of the clear distinctionbetween evidence and hypothesis is anundesirable aspect of the analytical narrativetechnique as applied here.

An institution very similar to the Podestà,for example, was independently created inthe black townships of South Africa underapartheid. Weekly competitions were heldbetween male Zulu song and dance groupsperforming a style of music calledIsicathamiya. These contests were by tradi-tion judged solely by a lone white man,

found by the participants by scouring thestreets immediately before the contest forsomeone who would accept the offer of beerand cigarettes as payment (Veit Erlmann1992). This judge would thus generally haveno insight into the conventions and aesthet-ic of the performers, he could only serveonce, but under apartheid his impartialitywas assured. Hiring such a judge was costlyto the performers: he had unknown tastes, itcost time to locate him, he had to be sup-plied beer and cigarettes. These whitejudges, often homeless or teenagers, did notcommand armed contingents in a complexgame where they supplied a balance ofpower, as Greif supposes for Genoa. Theirsole function was to award prizes in anassuredly faction free way. Given the limitedsources for medieval Italy, how do we knowthat the Podesteria of the Italian city stateswas not more like the apartheid eraIsicathamiya judges—disinterested distribu-tors of prizes in faction-riven societies—thanthe powerful game-playing protagonistsGreif supposes?

The insistence on the uniqueness of eachinstitution makes the possibility of moving tocertainty in interpreting institutions such asthe Podesteria remote. The Podesteria wasfound in most Italian city states by the earlythirteenth century. That would suggestempirical tests of the Greifian interpretationof the institution in Genoa. For example, inFlorence a Podesteria on the Genoese modelwas firmly established by 1207, and thePodestà continued as the sole executive untilthe democratic revolution of 1250. InFlorence, however, the various Podestàstood by largely ineffective as armed conflictrecurred between 1215 and 1250 betweenthe factions that became the Guelphs andthe Ghibellines.6 In Pisa, in contrast, “he[the Podestà] represented the domination ofone group over another” (p. 306). Why, onGreif’s theory of the Genoese Podesteria



6 Ferdinand Schevill 1961; Francis A. Hyett 1903; W.F. Butler 1906.


would the Florentines want to hire a highpriced supernumerary unable to quell fac-tional violence? Why did Pisa, dominated byone faction, need such a useless ornament?And why would the Pisan Podestà ever getpaid at the end of his term based on theanalysis reported above?

Greif would answer, I believe, that aloneand uniquely in Genoa the Podesteria suc-ceeded in its inventors’ design. But the per-sistence of the form in other city states in verydifferent conditions suggests that the officemay have fulfilled functions very different tothe one Greif posits for Genoa. Greif canreject this criticism by analogy by insisting onthe uniqueness of each social configuration.But this creates seemingly insurmountablebarriers to ever getting to the truth about thefunctioning of particular institutions.

Does the Genoese Podesteria, in place for150 years until 1339, explain the economicsuccess of Genoa in these years? Again thefocus on Genoa makes an answer impossi-ble. Other cities with the same formal insti-tutions and reasonable internal order, suchas Pisa, did not do so well. Yet others, such asFlorence, with a Podesteria ineffective inquelling internal violence, flourished in theearly thirteenth century though the streetsoften ran with the blood of the contendingfactions. So, in sum, the analytical narrativeprovides no secure answer as to how theGenoese Podesteria functioned and certain-ly no hint of its role in explaining Genoa’seconomic success.

The language of fact continues in the sec-tion of the chapter describing the decline ofthe Genoese Podesteria in the fourteenthcentury. This is ascribed to changes in cer-tain parameter values that eliminated the oldself-sustaining equilibrium, such as the risein wealth accumulation by nonclan members(pp. 224–26). Yet there is no evidenceoffered as to the values of these parameters.All that Greif knows, as fact, is that thePodestà was unable to prevent armed fac-tional feuding within the city by the earlyfourteenth century. Even that, as we saw for

Florence, is not a clear cause of its demise asan institution. The best the analytical narra-tive can offer here is a conjecture about thefunctioning of the institution: and even thatconjecture is applicable only to Genoa, notFlorence, Milan, Pisa or any other northernItalian city.

The problem here, in part, is that actualsituations quickly become too complicatedto model successfully using game theory.Genoa not only had feuding clans, but avariety of outsiders such as the Pope, theHoly Roman Emperor, and other city states,who could potentially ally themselves withindividual clans, and internally a group ofnonnobles, the popolo, with rising politicalinfluence. This was a cast of actors that onlyShakespeare in his pomp could do justice to.The analytic narrative becomes likewisemuch more of a traditional political historycase study, with a more elaborate vocabularyincorporating game theory intuitions.

In settling on analytical narratives as theway of resolving the radical indeterminacyembodied in game theory, Greif also closesinstitutions off from some promising otherpaths that might help narrow the range ofpossible equilibria and their dynamics. Oneof these is just the constraint of economicefficiency. Institutions and societies areoften in competition and in such competi-tion the societies that can generate moreeconomic output have generally beenfavored. Radically inefficient equilibria tendthus not to survive. A second constraint,explored by evolutionary anthropologists, isthat of reproductive competition in thehunter gatherer era that dominated humanhistory, which may have hard wired somedispositions towards trust and cooperation.Chagnon thus tries to explain Yanomamoviolence as a self-reinforcing strategy thatrewards with reproductive success maleswho participate.7


7 Chagnon 1988. Alexander Field (forthcoming),explores this issue of potential biological substrates tobehavior.



In summation, Greif intends in his book todevelop at least the outline of a new, microgrounded theory of institutions. Stating,explaining, and elaborating this theory takes503 densely written pages, including aprimer on game theory. By the end, howev-er, this reviewer, to the contrary, read itmostly as a demonstration of the impossibil-ity of a systematic account of institutionsalong the lines he proposes. The efflores-cence of concepts, combined with the con-striction of possible empirical tests, makesthe hallmark of any scientific account, pre-diction and testing, impossible. And thisshows in the case studies conducted in thebook. Each institution in his formulation hasto be analyzed in its full idiosyncracy, aidedby the expert judgment of the investigator asto the social and epistemological context.But, as we saw in the case of the Podesteria,that kind of analysis, even in the hands of acareful enquirer like Greif, is fraught withthe danger of conflating conjecture and fact.Kant’s Prolegomena to any Future Meta-physics as a Science never led to his pro-posed science of metaphysics. UnfortunatelyGreif’s Prolegomena to a future institutionaltheory similarly serves mainly to indicate thebarriers to a science of institutions.

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