Institutions and the path to the modern economy

I= nstitutions and the path to the modern economy.

Grief – chapter= 1 notes.

Technological features – geographical location, useful knowledge, capital stock.<= /span>

N= on-technological features – laws and enforcement methods, ways of allocating and secur= ing property rights, levels of corruption and trust.

One way of viewing in= stitutions is as these non-technological features.

These institutions im= pact economic outcomes by influencing decisions to: work, save, invest, innovate, prod= uce, and exchange.

Institutions vary acr= oss countries, however. There are multiple ways to address the issues. = What influences the particular form an institution will take in a gi= ven country?

Cultural context,

Religious beliefs,

Social structures,

Wealth distribution,<= o:p>

Political context,

Political traditions,=

Environment at the ti= me of colonization,

Identity of colonial = power,

His approach is to go= beyond identifying the correlation between institutional form and economic outcome. He is trying to get = at the underlying individual incentive structure, how the individuals interact, an= d how this leads to the outcome in question.&nbs= p; If we understand this, we begin to be able to figure out why a particular form is present in a given context.

Neo-institutionalism identifies economic institutions with politically determined rules- rules a= re the outcome of a political process and are imposed ‘exogenously’= ; on individuals.

[Note on background:<= span style=3D'mso-spacerun:yes'>

Institutional economi= cs is a term commonly associated with Thorstein Veblen = and John Commons. They began publishing on these iss= ues in the 1890s. The context was ra= pid industrialization, rapid transformation of the political, economic, and soc= ial structures. These two were Mid-westerners, and are often associated with ‘prairie populism’= ;. Institutional economics differs fr= om neoclassical economics in a focus on: evolution, culture, cultural relativity. Evolution in response to Darwin, and focuse= d on the idea that societies and cultures can evolve. A growing awareness of culture as a complex whole including knowledge, belief, art, morals, law, custom,…and that culture was learned. This leads to an understanding that multiple cultures exist and can be compared, hence cultural relativity. Commons emphasized how economic st= ructures were embedded in political and social structures. This differs from neoclassical economics, where markets are viewed as a universal phenomenon. Here, valuat= ion of an object is not inherent, but a reflection of a learned, evolving, and constructed culture.

Anne Mayhew, The Beginnings of Institutionalism, Journal of Economic Issues, 21(3) September 1987, 9. 971-998

New institutional eco= nomics builds on this and also follows on the ‘transaction cost’ econo= mic analysis of Coase. Williamson, with an analysis of th= e firm as a means of reducing transactions costs, follows. North provided the distinction bet= ween institutions (rules of the game, both formal and informal) and organizations (the groups of people and the governance arrangements they devise). Clearly hard t= o tell apart in reality. ]

G= reif points out it is not the rul= es themselves we need to look at, but the motivation to follow the rules.=

One response is fear = of punishment. But as Grief poin= ts out, that just moves the question back one step to then ask, why is the pun= isher motivated to follow the rule to punish the transgressor?<= /p>

He is after understan= ding how the motivation to follow particular rules is created. Motivation is endogenous, not exog= enous.

‘Private order’ or= der that prevails in the absence of a third party that enforces.

Another way of lookin= g at it – we can assume the state enforces, and the state has a monopoly over= the legitimate use of force, but then we have to figure out how this happened.<= span style=3D'mso-spacerun:yes'> A functioning state is an outcome – how did it come about? So again, we can assume the state, but at some level we have cut off part of t= he question to focus on another piece of the puzzle, but a fundamental issue remains to be answered.

Greif then brings up = the issue of institutional dynamics – the rules change and evolve. What leads institutions to change = and what is the influence of past institutions on subsequent ones?

In game theory, the r= ules can be viewed as either given or the equilibrium of the game. But that leads to a logical problem – how can this be the case and still allow for rules to evolve? At one level, we can say rules cha= nged, new equilibrium outcome, but that reaches outside the game for the change.<= span style=3D'mso-spacerun:yes'> At another lev= el, the rules as an equilibrium does not allow for change (again, without reaching outside the problem). = He also notes that in game theory, the outcome is conditioned on the informati= on sets of each player. But then= we can turn to the institutional economics literature to find that one reasons institutions exist is to create knowledge among players. So that, again, gets us assuming t= he existence of something that we might want to explain.

A contrast is made be= tween structural and agency (functionalist) views of institutions. Structural views them as immutable cultural features, agency views them are created institutions to serve a function. <= /p>

1.2: Comparative and Historical Institutional Analysis.

= 1)&n= bsp; Departing f= rom the practice of viewing institutions as a monolithic entity. So while they have been seen as ru= les, beliefs, norms, behavioral traits, he is making the case that they institut= ions are an interrelated set of these elements.= These are exogenous to the individual.

= 2)&n= bsp; Trying to c= ombine the structural and agency views. To do this, he is going to focus on the transaction as the basic unit of analysis. More on this in cha= pter two. The mix allows us to foc= us on self-enforcing / endogenous institutions, but also on their evolution. The self enforcing aspect reflects= the agency view. But there is a structural element to understanding the dynamics – institutions are n= ot created anew each time to solve the modified problem, but inherit some of t= he structure from the past as well.

= 3)&n= bsp; Role of game theory. Is game theory an underlying theory of institutional analysis? Is it simply a useful analytical tool? Greif argues the latter= . While game theory is used to arriv= e at institutions as equilibria, he does not believe= that institutions are game theoretic equilibria and = that game theory provides a theory of institutions. Game theory is a tool that is based= on a set of assumptions. At one le= vel, it is problematic due to these assumptions. At another, it leads to multiple outcomes, making it limited as a predictive tool.

= 4)&n= bsp; Inductive reasoning is not going to do it for us, since it only can identify the observables. Institutions run= on the observables (rules) but also the unobservables (norms and beliefs).

So the overall point = of 3 and 4 is that the deductive approach is limited due to the possibility of multi= ple outcomes for a given set of conditions.&nb= sp; The inductive approach is limited by the fact that part of what determines outcomes is not easily observable. Note that this will play a part la= ter in the course when we look at the cross country regressions. Measures of institutions rely on observed items (secure property rights, rules), but these can not capture t= he norms and beliefs that underlie institutions. Outcomes can vary with the same observables if unobserved norms and beliefs vary (and get us back to anothe= r variant of the recurring theme – so why do they vary?).

= 5)&n= bsp; Trying to integrate the “cultural”- institutions as cultural phenomena- a= nd the “institutional”-institutions as rules or contracts. Note that this brings an element o= f the institutional economics of Commons and Veblen noted above back into the mix. And makes it all rather confusing. =

= 6)&n= bsp; Getting at = the fact that culture influences institutional development, and integrating cultural influences into institutions is a mechanism that leads to their persistence.

1.3 = Commercial expansion in the late Medieval period.

Why focus on this? One, records exist. Tw= o, rapid expansion in economic well being.&n= bsp; Long distance trade “became the driving force of economic progress, and in the end affected every aspect of human activity almost as decisively as the Industrial Revolution changed the modern world.” Three, there was not change in technology or endowments that made this happen- they figured out the institutions. Four, this epoc= h is related to the ‘rise of the West’. Given the difference in living sta= ndards we see in the world today, it is an important question – why did this happen? While at one level the answer may be “the industrial revolution happened there first”,= yet again we have just moved the question back a notch – well then, why t= here first? Greif suggests that the institutions formed to allow trade may be part of the answer.

Chapter 3<= /span>

Goods shipped to dist= ant ports.

Could either go, or h= ire somebody there.

Why not go? Travel time, can only be in one place at one time, ship sinks and so do you.

So hire agents in the= place you wish to sell.

“...agency rela= tions are not likely to be established unless supporting institutions are in plac= e” (p. 58)

Reputation based inst= itutions, allows an individual to credibly commit ex ante not to behave opportunistic= ally ex post.

Future utility is con= ditioned on past conduct. With t= he right configuration, self supporting ‘good behavior’ can be the outcome.

Two linkages: agent-merchant and information sha= ring amongst merchants.

Credible threat of collective, multilateral punishment: the short-run gain from cheating today was less than the long run benefit of being honest.

A= set of rules, the ‘merchants’ law’. A= code of conduct that was a social norm, a rule that was not promulgated by an offic= ial source, nor enforced by the threat of legal sanction, but people obeyed any= how.

An informal organizat= ion was the organizational manifestation of this institution. A business net= work. Manifestation = of the institutionalized beliefs that individuals with a particular social identity would share information and collectively punish a cheater.

At the same time, it = works for the members of the network to stay in the group since they do better as= a member than going it alone. <= o:p>

Maghribi (Arabic word for west) are descendants of Jewish traders who left Baghdad in the 10^th century, emigrated to Tunisia then to Cairo.

Free, active trade in the Mediterranean basin. R= isky time consuming trade as well. So, they set up overseas agents.

Agents are ones located in the place where the trading occurs,= merchants are the ones who supply agents with the goods to sell.=

Agents provide trade related services: loading and unloading ships; paying customs, bribes, and transportat= ion fees; storing the goods; transferring to goods to the market; and deciding when, how, and to whom to sell the goods at what price and on what credit t= erms (p. 62).

If an agent cheats a merchant, why not bring him to court.

= 1)&n= bsp; what court and what state did they have in mind.

= 2)&n= bsp; How to track down, and bring to court. Time consuming and expensive.

= 3)&n= bsp; By the time= you finally got it into a court if you could, months or years had passed so any evidence was gone.

Bilateral reputation – you cheat me, you tricky agent, and I am never sending y= ou cloves again.

OK, but he can get his cloves elsewhere from other agents.

Multilateral – you are not getting cloves from me or any other Maghribi.

“…economic interdependence, not internalized norms regarding mutual help or altruism, motivated the parties.” (p. 67)

The merchant is able to ‘create a gap between the future utility stream o= f an honest agent and that of a cheater by controlling the expected income stream from the agent’s capital.’&nbs= p; Agents received both a wage premium and a capital premium.

The contracts that do exist seem pretty broadly defined – do whatever you judgment tell you to do. But underlying this was the set of shared norms of the merchant’s law, that carried content about the expectations of wh= at a merchant should do.

Maimonides “If [an agent] enters a partnership with another without specifying any terms, he should not deviate from the custom current in the land in regard to the merchandise they deal with”.

Good in that it is a shared assessment of how to behave, flexible, allows trade = to happen.

Drawback – might spend as much time worrying about how it appears rather than = the outcome thus potentially diminishing efficiency.

The model – cool model, and if you like models, it is a good example.

Sometimes called incentive / self selection constraints and individual rationality / participation constraints.<= /span>

People of the good type will self select into what is on offer if you design the o= ffer right. Use the mechanism to s= ort people by their unobserved ‘type’.

As he shows, part of how this works is that the equilibrium wage acceptable to= a cheater is higher than the equilibrium wage to an honest person (3.2). So as the merchant reduces the wag= e, the cheater types self select out, leaving only the honest types willing to acc= ept the lower wage.

Return to the historical record.

Part of the story is the creation of the group identity – group left Baghdad, went to Tun= isia, then to Egypt. Very cohesive identity formed, and= it is pretty easy to tell who is in or not.

Why did they not go to Europe, Italy in particular? In addition, w= hy did they disappear as a distinct people when their trade opportunity disappeared (rise of Europe pressured the Mediterranean options, shifted to the Indian = ocean until the end of the 12^th century, then under pressure from Egypt they withdraw from that trade, and disappear from history by being reabsorb= ed into the larger Jewish communities)

He establishes a distinction between the intercoalition wage and the intracoalition wage. The idea is that a collective of coalitions (inter) has more uncertainty about implementing the punishment, = so it the intercolition wage is higher.=

Intercoalition agency relations will not be established if the increase in the ga= ins from cooperation does not compensate the merchant for the wage increase.

Also worth noting the ‘dynastic’ element – children inherit the reputations of their parents.

Page 84, first full paragraph, a good summary.

Also notable was the fact that agency relations were per trade venture. They were not long term ongoing commitments. That makes infor= mation gathering and monitoring much easier than would long term commitment. Trade venture over, tally up the results. If there was cheatin= g, catch it early and it won’t spread to other ventures.

But as the trade opportunity disappeared, so did the need for the social identi= ty, and so they no longer self identify as Maghribi= .

OK, well that is one story, but then we get to the next step. What about the role of the state?<= span style=3D'mso-spacerun:yes'>

Chapter four: securing property right= s from the grabbing hand of the state.

Well there

Now we move up a bit in history to long distance trade in late medieval Europe. (around 1100)

Goods brought to central cities or fairs.

Combination of gains to trade and suitable locat= ions for exchange.

See page 95 where the Flemish get attacked for an idea of the problem here.

Mobs are attacking the merchants who are not nationals, and robbing their things. ‘merchants need protection from coercive power’.

His modeling point is that bilateral (merchant to ruler) relations can not allow trade to expand to the efficient level.

Getting your people to come attack their people was not an attractive option at that point in time, as defensive technology was better than offensive.

A multilateral response was an option.

However, with lots of different groups, getting them to share and agree on informati= on (on a signal) was no easy task, making multilateral cumbersome.<= /span>

Second, since there are groups, if one group withdraws, it increases the profitabil= ity of trade for the remaining groups.

So a multilateral response needs not only to coordinate embargo decisions, but also credibly be able to enforce them by sanctioning their own members.

‘security agreements and the associated formal organiza= tions appear to have been crucial to trade expansion’ (p. 100)

Elect a foreign merchant as mayor is one response.

More common, a merchant guild. An administrative body supervises overseas operation of merchants resident in = the territorial area associated with the guild and has regulatory power within = this area.

A mercantile elite. Coordinate information= and action.

The story about Tommaso on 102.

Conditioning future trade on past protection

Use of ostracism to achieve security

Relationship between acquiring information, coordinating action, and being able to boycott.

The Norway story on page 103 illustrates the ability to enforce a boycott could include physical force.

But part of the story was getting a stream of revenues from the town they worke= d in that kept people interested in being part of the guild. Make breaking with it costly.=

Brief discussion of the Han= sa, leading to the model. The Hansa story starts in the 1200s.

Any German merchant a= rriving in a non-German town could join the Kontor, wit= h a Kontor being a trading post of the Hanseatic league – the group focused on Baltic trade in this era.

Coordinated responses= , but had limited ability to punish members.&nbs= p;

E= xample of the Kontor in Bruges. &= #8216;the trading privileges given to the foreign merchants = in Bruges were consta= ntly abused, eventually causing riots’ (p. 106) . The German merchants are harassed,= so they say forget Bruges, we are going to go trade in Aardenburg.

Negotiations, they co= me back. Get picked on again. What happens is the people of Bruges figure out the Spanish and Italians are more organized, the Germans and the= ir Kontor organization are not, so they get inferior treatment. =

Other groups present = in town, so the Kontor can only have a boycott of German merchants, and really only those German merchants resident in the town.

In 1284, German merch= ants embargo Norway, and Bremen traders r= efuse to go along. The other German Kontore then ding Bre= men merchants, thus showing they had figured out a coordinated response.

Thus a second embargo= of Bruges in 1307 lea= ds to real changes in 1309.

‘…once the ability of the German Kontor to coordinate and = impose its decisions on members was well developed, the contract enforcement probl= em could be resolved and trade expanded.’ (p. 107).

Security becomes a pr= oblem, and by 1350s a more coordinated response is needed, so that ‘a Hanseatic embargo of Bruges followed in 1358.

All members of the le= ague refused trade until terms were agreed upon.

‘Although the g= uild was a precondition for trade expansion, its rise in Euro= pe was not caused the new gains for trade.&nb= sp; Rather, its rise in various localities reflects the nature of institutional dynamics as a historical process’ (p. 109)<= /p>

‘Unlike the the= ory of the merchant guild organization as an instrument of monopoly by a local lea= der, the theory presented here predicts that rulers will encourage the establishment of merchant guild organizations of foreign traders with specific rights and an effective organization’ (p. 121)

As time passes, polit= ical integration grows, the role of the guild in enfo= rcing security of property rights diminishes.&nb= sp; The guild starts turning into an anti-competitive trade strangler.

P= rotection of private property as a private good, and when is it a public good.= S= ecurity of property rights can be applied selectively.

C= hapter 5. <= o:p>

Game theory – r= ather than assuming individuals follow rules, it allows us to understand the way = in which behavior is endogenously generated – how individuals gain the information, ability, and motivation to follow particular rules of behavior= .

Problem: while that is pretty neat, it rest= s on us playing along with the assumptions of game theory. Common knowledge of rationality, complete and closed model of the situation…

Quick answer- we do i= t since it works.

‘What is reveal= ed about endogenous institutions by the need to impose various unrealistic assumptio= ns when studying behavior in strategic situations?’ (p. 125)

The only social rules= that can be institutionalized are those that each individual finds optimal to follow. In situations where institutions generate behavior, institutionalized rules and the associated beliefs correspond to self-enforcing behavior. The behavior thus generated suppor= t the institution.

High Risk consumer

Low Risk consumer

Firm is offering two = kinds of contracts, wants the person to select, and in so selecting, reveal their ty= pe.

U= ncertain amount of money to consumer.=

Y₁ is the = outcome with probability (1-)

Y₂ is the = outcome with probability

Y₂< Y<= sub>1

A high risk individua= l (i=3DH) is one for whom>

2 is thus the ‘bad’ outcome, and the ‘bad’ outcome is more likely= for the more risky person.

Insurance company off= ers a contract, payable upon realization of the state (1 or 2). This is defined as a y_1,y₂pair that defines the total resources left to = the consumer from the endowment after the state is realized. The firm gets the = rest of the endowment. If it is negative, then it is a transfer from the firm to the individual as insurance compensation / benefit, if positive a transfer from the individual to the f= irm like a premium payment.

The insurance does no= t know who is high risk and who is low risk: any consumer is high risk from the firm’s point of view with <= span class=3DGramE>probability _.=

So for the firm, the = firms expected profits are:

As the firm, I would = like to define the y_1,y₂ pairs in such a way that the high r= isk type will select one contract, the low risk types another. To do so, I need to add in the fol= lowing constraints:

A high risk consumer = must prefer to (Y_1,Y₂)

A low risk consumer m= ust prefer to (Y_1,Y₂)

A high risk consumer = must prefer to

A low risk consumer m= ust prefer to

Formally, =

I= nstitutional dynamics.<= /p>

Page 153 – the = core questions.

The key issue is that= you need a model that has both stability and change. On the one hand, we have instituti= ons persisting over time in spite of changing environments. On the other hand, we clearly have endogenous institutional change that limits institutional persistence.

Two perspectives in economics:

= 1)&n= bsp; Intentionally created perspective (new institutionalism / political economy) – institutions intentionally created by forward-looking individuals to serve various purposes. Economic institutions are the outcomes of political processes. The past does not constrain institutional changes – the cost of change does. A variant adds in a constraint of = the ‘stickiness of the informal institutions’. This is problematic.

= 2)&n= bsp; Evolutionary institutionalism (old institutionalism). Institutio= ns as patterns of behavior reflecting the unintentional consequences of interacti= ons among individuals with limited rationality. Not forward looking / functionalist. Mutation, sele= ction, inertia link the behavior of limitedly rational individuals with institutions. But individuals= are at least forward looking to some degree, and do have some ability to coordi= nate action. And change comes abou= t by exogenous mutation.

T= rying to land somewhere in between. Recognize intentionality, but also history and social interactions.

Chapter 6:=

A first level questio= n is what leads institutions to persist even when conditions change? Inertia seems too dismissive analytically.

I= nstitutions as self-enforcing equilibria. W= ell, where is the change coming from then? Again, the issue is that appealing to exogenous change is unsatisfyi= ng.

P= arameters – exogenous to the game. If they change, a new equilibrium arises.

Variables – det= ermined endogenously as outcomes of the game.

He adds in the idea of quasi-parameters – in the short run, they are exogenous parameters, in the long run, they are endogenous. <= /span>

I= nstitutions as self-reinforcing, as they expand to be robust to more situations (parame= ter values). Institutional hysteresis; an ins= titution will be self enforcing in situations in which, prior to the reinforcement, = it would not have been.

An institution is rep= roduced when the rules and beliefs that enabled, guided, and motivated an individual’s actions are not refuted by observed behavior and outcome= s.

L= ink to the Nash equilibrium idea.<= /o:p>

Again, he is getting = into the issue of game theory analysis compared to institutional analysis. This is of interest if you are wor= king with game theory, but not as critical to get if you are not.

Venice and Genoa as a way to get at this.

Venice organized as a political unit in 697, Genoa in 1096.

By the mid fourteenth century, both were powerful, commercially successful maritime city-states.<= o:p>

Opportunity arises by= decline of Muslim and Byzantine forces around the Mediterran= ean. Also a political opening as the Byzantine empire and the = Holy Roman empire were not really able to exert authority.

Clans and lineages be= came the prominent unit of social organization in both cities.

The strongest clans f= orm alliances to advance shared political and commercial interests.<= /span>

Both governed by olig= archies, leaders were elected, and subject to law.

However, the story he= wants to tell contrasts the two. Venice was able to= hold it together and move beyond the clan organizing principle. Genoa had political order breaking down, contributing = to decline, so the clans became more important.

Start with Genoa.

Initially, Genoa’s economy was based mainly = on piracy, including large scale raids (p. 221).

Later, it gets into l= ong distance trade. “privileged” trade, as they got terms that others= did not in foreign ports. Why?

‘Rulers along t= he Mediterranean shores gave privileges to political unites whose naval and military forces merited their support or neutralityR= 17; (p. 222)

So merchants and poli= tical / military power are linked.

E= lected consuls (1096-1194). Representative= s of the main clans. ‘Con= trol of the consulate enabled clans to gain economically from the city’s resources and power.’ (p.172) The underlying threat is that the clans can attack each other militarily. Mutual dete= rrence became the organizing logic. =

The idea of the consu= l is pretty clear on page 222:

The sanction for thos= e who do not join the commune is that you don’t get to be part of the overseas trade.

Here is the thing = 211; they saw this, and went forward with cooperation in the knowledge of this mutual deterrence. But the cooperation led to expanded trade. <= /span>Which made political power even more rewarding, changing the = nature of the decision process. This leads to an ‘arms race’ – buying up land, building fortresses, patronage networks,…<= o:p>

Two big clans, the Manecianos and the Carmadinos, are the main players.

They held together, t= hough, largely in response to a common external threat. The emperor was trying to regain c= ontrol over northern Italy<= /st1:country-region> (1154). So they could justify cooperation to keep him out of things.&nbs= p;

This external threat = becomes less important when the emperor has to shift attention to civil wars in Germany in 1164. By this time, the we= alth of the clans had increased by the expansion of trade that occurred. But with the external threat remov= ed, they turn to whomping on each other, and they s= ink into a lengthy civil war. Hea= vy fighting in 1189-1194, and the city is in danger= of falling apart completely.

‘An exogenous s= ituation that previously would not have led to the collapse of Genoa’s institution now had a devastating effect’. (p= . 174)

In 1194, the emperor = needs help from Genoa’s navy, and comes up with some ideas to stop them from fighting each other. A new institution: the podesta – a non-Genoese selected by a committee of representatives who themse= lves are selected from the neighborhoods that was large enough that no one clan could dominate it. Hired for a year to serve as Genoa’s military leader, judge, and administrator. Came with his = own judges and soldiers.

What keeps this perso= n from becoming a dictator? Had to have own military, but too weak to fight the clans.

Also, had to be weak = to prevent siding with one clan or the other – can’t tip the balan= ce in return for a promise for payment for collusion.

Further, the podesta gets paid at the end of the year- if he sides= with one and not the other, then the one he sided with would have to pay and not share the burden with the others, and they would have no reason to pay him = once in power. The podesta has an incentive to stay in the middle and get paid at the end.<= /span>

At the end of the ter= m, has to stay in the city for 15 days, during which auditors assessed his conduct= . Reputation (want to get another podesta gig elsewhere) and fines (less money than pla= nned) work too.

V= ery clever balance of power.=

Worked for a while, b= ut was not reinforcing. Lasted about 150 years, the ‘golden age of Genoa’. ‘By 1314= the value of Genoa’s trade was more than fourty-six times that in 1160’ (p. 243). = Rapid population growth. To 1339.

The clans still exist= as organizing structures, and still are military rivals. It contained the problem and estab= lished peace, but the clans continue to organize themselves and their patronage networks. Eventually, the sys= tem collapses.

Venice:

Here trying to captur= e the position of the ‘doge’. Originally a Byzantine official, but became that of an elected monar= ch with judicial, executive, and legislative powers.

Clans fight over who = gets to have their member be the doge.=

Rules limit the power= of the doge, curtail the power of the clans to impact the outcome of the election, place administrative control over gains from interclan= cooperation, and make sure these benefits are spread over all clans.

In 1032 and advisory = council established, then over time it moves from elected monarchy to a republican magistracy. They come up with= an election that has an official nominating committee and builds in lotteries = and deliberation.

‘The belief tha= t clans would join together to confront another clan that attempted to use military power to change the rules was self-enforcing because all clans benefited fr= om the rules’ (p. 177)

They weakened the imp= ortance of clans and developed institutions that made one have loyalty to the city,= not the clan.

In 1381, Genoa defeated by Venice<= /st1:place>.

Genoa borrowed from the smaller clans who gained a lo= t of money in the good times, could not pay back, and local creditors organized = into the bank of San Giorgio. This= bank takes over administration, and protects property rights.

Pisa is also discussed as a contrast.

Pisa has one single clan dominating (the Visconti).<= span style=3D'mso-spacerun:yes'> They expanded much more rapidly th= an Genoa, getting more ‘privileges’ since they could make decisions and not factor in how that would impact the political order based on the balance of clan interests.

‘Understanding = Genoa’s poli= tical, economic, and social history required considering the institutions that constrained violence within the city and fostered growth-enhancing policies’. (p. 247)

The details reflected= more than the functions – also reflected institutional elements inherited = from the past. The clans, the beli= efs and norms arising from these clans, stand out.=

The transition to the= podesteria reflects a recognition= of institutional failure. But it was built around institutions inherited from the past. This shaped it= , but also make it not possible to sustain over time.

Move beyond the stand= ard political economy analysis that takes the state as given and focuses on rul= es governing elections, collective decision making, and behavior of the state’s agents. Also mo= ve beyond assumption that state has coercive power.

We need to study the = factors influencing the acquisition and use of coercive power in society.

Study politics and po= litical outcomes as self-enforcing.

Predator ruler and ne= o-Hobbesian perspectives assume the state has a monopol= y over coercive power.

S= tate building as a balance between violence, institutions, and prosperity.

In some cases, peace = comes at the price of limiting prosperity.

A central challenge t= o state building is the ability to motivate the preexisting social structures to mobilize their military and economic resources to create and effective stat= e.

Role of an external t= hreat may be critical.

Genoa’s history also underscores that processes= of state building involve more than reforming political institutions by implem= enting the rules that prevail in effective Western states for electing leaders and collective decision making (p. 250)

Building welfare enha= ncing states requires making a transition to new self enforcing institutions.

Western states may pl= ay a role as role models, globalization and urbanizat= ion may undermine some of the logic of kin based networks.

While kin networks se= rve to undermine the state’s formation in the medieval period, by the end of this period, they had begun to become less important. Tribes were no longer effective so= cial structures. Note that they we= re trying to form city states composed of different groups.

He notes the role of = the church in this decline. Avoid marrying kin, donate inheritance to the church, consensual marriages, condemn polygamy divorce, remarriage.

Rise of alternative n= on-kin based social structures such as communes, guilds, fraternities, and universities. Rely on self governed, interest-based social structures.

Page 254, contrasts t= he Muslim world, where the tribe and lineage retained importance.

I= ssue of marriage patterns as a way to think about social structures.<= span style=3D'font-size:18.0pt'> T= he number of marriages contracted between persons who are related as second cousins or closer is 20%-50%, while less than 1% in the West.

P= re-Islamic, but reinforced by inheritance law.

Chapter 9:=

Return to the idea of= ‘collectivist’ versus ‘individualist’ societies.

Collectivist societie= s are segmented / segregated. =

Individualist societi= es are integrated.

The goal here is to c= ontrast the story of the 11^th century Maghribi traders with the 12^th century Genoese.

The story line is tha= t the Maghribi correspond to a collectivist society, the Geneose to a individualist society.

For similarities: both economies based on overseas trading, both in roughly the same area with similar technology and goods.

= Maghribis were non-Muslims who adopted the values of the = Muslim society. = Part of a ‘nation’. In addition, they were part of the Jewish community, with expectations about h= ow they should behave towards other people of Israel.

The Geneose ‘had already internalized different cultures and were in the midst of different social and political processes.’ (p. 279). Greek literatu= re as an example of ‘celebrating the individual’, in contrast to Eastern novels that celebrate ‘doing ones duty’.

Individual rather tha= n social group was the center of Christian theology. ‘In Catholicism, praying req= uires a priest; in Judaism, it requires a sufficient number of co believers’= ;.

Feudal world- based on contractual, hierarchal relations that defined the obligations of one individual to another, not towars the larger community. =

For Genoa, there is also the issue that once trade began to expand, there was a flow of immigration, and these people be= came involved in trade. They did n= ot fit into kin structures, and their presence was dealt with by viewing them as individuals.

Maghribi’s social structure as ‘horizontal’, G= enoese as ‘vertical’. Maghribi̵= 7;s were sometimes merchants sometimes agents (70% of traders were recorded as doing both). In contrast, Genoa had distinct merchants and agents (21% of traders were recorded as doing both).

Upward mobility ̵= 6;Under individualistic cultural beliefs an agent’s ability to commit is negatively related to his wealth,…under collectivist cultural beliefs the ability to commit is positively related to one’s wealth’ (p. 286-7)

E= vidence on the growing wealth of commoners in Genoa on page 287. Commoners are getting more involve= d in trade, less concentration in the hands of nobles.

The Maghribis expanded their trade by employing other Maghribis as agents.

The Geneose also emigrated and followed the same pattern, but they also show evidence of non-Genoese agents being employed. <= /span>

A key distinction is = that the Maghribis kept enforcement and trust contained = in the collective group through information sharing, reputation, shared norms, informal contracts and dispute resolution,…

The Geneose did not have this, and needed something to fill this role.

What they developed w= as formal legal and political enforcement mechanisms.

‘In contrast, d= uring the twelfth century the Genoese ceased to use the ancient custom of entering contracts by a handshake and developed an extensive legal system for registering and enforcing contracts.’ (p. 295)

Permanent courts were established. The Podesta and judges serve as legal authorities.

T= he bill of lading as an institutional innovation to deal with trust issues. T= he Geneose used it, the Maghribis knew about it but did not use it since they had solved the problem though t= heir collective action.

Another example, both= started with ‘father son’ operations, which would get the son up and running to operate on his own, upon the death of the father, the fatherR= 17;s business was dissolved.

The Genoese adopted t= he innovation of the ‘family firm’ in the 13^th century.= Permanent part= nership with unlimited and joint liability.=

Agency relations were= to the firm, rather than individual merchants.&nb= sp; Led to collections of merchants pooling capital = in a firm. Then they figure= d out that family firms could sell shares to non-family members.

Chapter 10:

‘Commerce expan= ded particularly during the three hundred years prior to the mid-fourteenth cen= tury even though there were no impartial courts with geographically extensive judicial powers to support exchange…’ (p. 309)

C= ommunes, which exist somewhere between communities and states as a political entity.=

C= ommunity responsibility system.

If you are from anoth= er commune, and default, if your commune does not make good, we can take the g= oods from another member of your commune as compensation.

Could default only by= ceasing to trade with the other commune

T= urns communities into ongoing organizations with infinite life spans that internalize the cost of default by each member.

M= otivates people to establish organizations to record identity and origin, and to rep= ort bad behavior to an organization.

“the missing link in our understanding of the institutional development that led= to modern markets”

R= eputation based have low start up cost= , high marginal cost.

Law based have high start up cost, low marginal cost.

A domestic based inst= itution that fosters trade across jurisdictional boundaries.

L= ocal courts, with limits to jurisdiction.

L= ocal courts hard to view as unbiased agents of justice.

Quote on page 328.

By 1256 cities that w= ere home to 65% of the urban population had clauses allowing impounding goods under = the community responsibility system.

Based on ex post sign= al, rather than ex ante reputation, so an innovation from the reputation mechan= isms we have looked at.

W= ithin the communities, setting up a response to ensure compensation for the person who had goods impounded by the person who triggered the punishment. <= o:p>

University students w= ere held liable (page 332) and asked for immunity in 1155 in B= ologna and 1171 in Florence.

Also, it was applied = to commercial matters for which there was a clear a= bility to identify default – not agency relationships.

Certifying agents: merchants of the same community tr= aveled together, lodged together, and witnessed each other’s contracts. Dialects and c= ustoms.

D= ecline of the system in the late 13^th century. <= o:p>

System was self-undermining. Increase in intercommunity interactions, the number and size of communities, and intracommunity heterogeneity diminished the system= 217;s effectiveness, increased the economic costs, and undermined the intracommunity political viability (p. 338).

Lots more trade and t= raders, coming from different places, makes it easier to pretend to be from somewhe= re else. Also, people from aroun= d the town would pretend to be from town, agree to a transaction, cheat, then go back to the residence outside the jurisdiction= of the town

I= ncreasing social mobility between communities. Defaulters fle= eing their communities.

= Intracommunity differences in benefits and costs undermine the political viability of this institution.

Also as cities grow l= arger, it becomes more and more problematic to punish a community for one member&#= 8217;s transgression. Big merchants = also want to get rid of it, since they are not likely to be the tricky ones, and they suffer for some smaller merchant’s transgression.

In England, they abolish it in 1= 275, and trade suffers. However, t= hey then develop statutes to replace it based on territorial law, individual re= sponsibility, central administration of justice, and collateral. Other states were not in a positio= n (Germany, Italy) to make such laws at t= his point, so the next step depended on political conditions.=

C= alls into question the contention that the rise of the state was a precondition for the rise of markets.

This makes a contrast= ing argument – the institutional demand created by the market influenced = the development of state-governed, law based institutions (p. 347).<= /span>

If the state was able= to respond, and could be restrained from abusing property rights, trade took o= ff.

11 is a discussion of= the issues that arise when you use the approach taken in this book.

Wrapping up:

“Institutions a= re the engine of history” (p. 379)

The first two section= s we have pretty much covered the main points.

1= 2.3, perhaps worth noting again that this study contrasts with other studies in = that ‘the institutional foundations of the late medieval commercial expans= ion did not depend on enforcement provided by a centralized state that dispensed impartial justice’ (p. 388).

It does not seem that= you need an effective state to ensure market expansion and development. Private order, self enforcing inst= itutions are what we have seen. Howeve= r, this was not a ‘spontaneous ordering’ of economic agents. Intentional and coordinated efforts by many individuals, and a lot of trial, error, and evolution. =

Social structures are critical to the shape these things take and the path they follow. Contrast willingly entered into corporations with a state.

P= rivate order institutions within the context of a state.

The states of Europe were week in this period after years of inva= sions and internal fragmentation. W= eak states provide an opportunity for economic agents to self organize. But why not rely on kin networks?<= span style=3D'mso-spacerun:yes'> Why not a theocracy?

Kin networks had been= effectively challenged by the church, and individualism had been fostered. This made return to tribal / kin networks less likely.

On the other hand the= church was not strong enough to be an effective state like structure – too m= any squabbling kings, countries, intrigues….

But we don’t se= e a Hobbesean war of all against all. Instead, people self-organized to = gain from cooperation. This allowe= d them to gain economic wealth and eventually political power, which influences fu= ture political trajectories. Expli= citly man made law, rather than divine law. Self-governance, formal decision making procedures are put in place.

‘Individualism = and corporatism were the hallmark of institutions that supported the late medie= val commercial expansion and political changes’ (p. 391)<= /p>

Although efficiency enhancing and self enforcing, it is also notable that these institut= ions were inherently self-undermining. Each one of these eventually ran its course, and something new had to come into being. <= /span>

Distinguish this peri= od from the modern period: growth in = this period was ‘Smithian’ based on specialization and trade. Mod= ern era growth relies on science and technology to alter production functions.<= span style=3D'mso-spacerun:yes'>

Also notes the contra= st to the Muslim world – the state’s relationship to the Maghribi’s did not involve changing laws / crea= ting laws to allow trade to expand. It was a given set of rules to operate within.

P= age 399 quote.

‘In modern deve= loping countries, kin-based social structures predominated and the process of development has been conducted with the intention of first building an effective centralized state.’ (p. 401)

Where successful, pol= iticians can use it to serve their own interests.&n= bsp; Where not successful, it was not in the interest of the politicians = to implement welfare enhancing policies / institutions.

Participatory / commu= nity circumvention of the state also runs into problems of incentives. Institutions shape the incentives = facing decision makers.

Institutional change = may not be needed for growth spurts, but it appears they are needed to sustain grow= th.

Plopping down institu= tions from the West has not been very successful, and from what has been presented here, that should not be a surprise.

Successful reform req= uires much more than changing rules; it requires creating new systems of interrel= ated institutional elements that motivate, enable, and guide individuals to take particular actions. (p. 403)

‘Economies in n= eed of institutional reform are not without institutions’

S= ummary on 404.

The form the institut= ions will take is context specific, but the functions are broadly applicable. Deal with commitment problems, dea= l with information problems, deal with building in incentives and sanctions, wield coercion so that it enhances welfare.=