Avner Greif on Institutions

Phil Hoffman writes:

Avner Greif, Institutions and the Path to the Modern Economy: Lessons from Medieval Trade. New York: Cambridge University Press, 2006. xix + 503 pp. $35 (paperback), ISBN: 0-521-67134-5.

Institutions have captured the attention of many economic historians, and of many other social scientists as well, ever since Douglass North argued that they were the key to understanding long run growth. The widespread interest in institutions ought ultimately to boost the fortunes of economic historians, since they can rightfully maintain that they have something of a comparative advantage in the area. Who, after all, knows better how institutions work, how they change, and what real impact they have?

Economic historians will therefore welcome the appearance of Avner Greif's new book, for among its many virtues, it offers a new and far more profound way of thinking about institutions. Greif, of Stanford University, begins by setting aside the concept of institution that dominates much of economics and political science -- namely, that institutions are politically determined rules which constrain behavior, such as laws or articles of a constitution. While this definition may suffice in some circumstances, it is really ill suited for analyzing why institutions change or why their effects seem to endure so long. Worse yet, it fails to explain why rules are followed in the first place. Saying that people follow rules because they fear the penalties for violating them is unsatisfactory, Greif points out, for what enforces the penalties and makes sure that the police and the courts punish the violators? Historians ought to know this better than anyone else, for we have all studied periods of history when order breaks down and enforcement of laws goes out the window.

Greif's answer is to conceive of an institution as more than just a rule, because there has to be something behind the rule if it is in fact observed. For Greif, an institution is thus a system of rules, beliefs, norms, and organizations that together generate regular social behavior. Consider, for example, the rule from the criminal law that outlaws theft. Part of the reason the law is observed is that it is enforced by organizations such as the police and the courts. But beliefs and norms are at work too. A person will only heed the law if he has internalized a norm that frowns upon theft or if he believes that police are likely to catch him if he tries to steal and that nothing he can do (such as trying to bribe judges or the police) will change the outcome in his favor. In many places, the organizations, beliefs, and norms work, and the rules against theft work. The result is a regularity of behavior -- low crime rates. But in other places, that is not the case. In Chicago in the 1950s, for instance, certain jewelry thieves could go about their business with relative impunity, provided they paid off the police or had their lawyers bribe judges; the rule against burglarizing jewelry stores or holding up gem salesmen was not always observed. The thieves believed that bribing judges and the police would pay off, and at least in some cases it did. But their impunity did not extend to the nearby suburbs, where the police were apparently harder to corrupt.[1]

My account of Greif's definition may seem a bit abstract, but Greif makes it come alive by using it to explore a number of illuminating examples drawn from the history of the Commercial Revolution in the Middle Ages. The examples (the Maghribi traders, medieval merchant guilds, the rise and fall of Genoa, the medieval origins of impersonal exchange, and its ties to the common practice of holding whole communities responsible for individual debts) not only yield a much deeper understanding of how institutions operate but they also shed light on fundamental questions of economic history-- in particular, why the West and the Muslim World diverged in the late Middle Ages. To make sense of these examples, Greif uses two tools -- game theory and careful historical analysis. Neither tool, he argues persuasively, is sufficient by itself, and those who would try to probe institutions with game theory alone are therefore making a terrible mistake. To understand institutions -- and in particular, to grasp how they change -- requires a historian's painstaking attention to the context, and for that reason alone economic historians ought to rejoice in his book, for it amounts to a powerful defense of economic history within the discipline of economics.

That is not the only reason Greif's book should appeal to economic historians, for he also manages to explain why institutions have such long lasting effects and when it is they themselves will change. And he does all this while drawing upon fields ranging from sociology to political science, which should win the book readers throughout all of the social sciences.

Will they all agree with everything Greif says? Perhaps not, but they will have to take him seriously, because his book represents the cutting edge when it comes to the study of institutions. Some readers may perhaps want more quantitative evidence, but they will have to admit that Greif's analytic histories are quite persuasive, and they will have to acknowledge too that appropriate econometric testing of the sort of game theoretical models Greif uses is still in its infancy. Other readers may worry that the historical evidence is perhaps consistent with different game theoretical equilibria and thus with different treatments of Greif's examples. They can certainly make their case, but in the end their accounts are likely to end up complementing Greif's analysis, rather than being a substitute for it.

And that is perhaps another virtue of this path breaking book: by creating new tools for studying institutions, it is likely to inspire research for years to come. By all rights it deserves to do so, in economics, in sociology, in political science, in law, and (to the extent that historians in history departments pay attention to the social sciences) in history too. Economic historians obviously have special reason to prize the book, since it takes up some of the biggest issues in the field and makes a vigorous case for economic history within the larger discipline of economics. But other social scientists will highly value it too, and it will be no surprise if it ends up becoming -- and rightfully so -- a classic.