The small causes of large trends

Timur Kuran’s The Long Divergence: How Islamic Law Held Back the Middle East joins the classics of economic history. It adds another piece to the jigsaw of understanding the contributory factors to the long trends of economic growth. Kuran emphasises institutional factors, whereas Kenneth Pomeranz in The Great Divergence explains China’s falling behind the West after 1800 in terms of inferior access to resources. David Landes in The Wealth and Poverty of Nations, and Joel Mokyr in The Gifts of Athena, emphasise culture and knowledge. My instincts – and modern development and comparative economics – lean toward the institutional explanations, but history is over-determined and I’m not sure we’ll ever have a definitive recipe for increasing long-term growth potential.

The preface  and Chapter 1 of The Long Divergence should be read by everyone interested in comparative economic history as a model for thinking about how to go about this assessment. Kuran sets out his goal as identifying the long-term effects of certain economic institutions, those shaped by classical Islamic law. He is clear that he is not making any wider social assessment. In 1700 or 1750, the gap in living standards between workers in Istanbul and London or Amsterdam was not that high. Economic institutions in the Middle East had proven just as effective as those in the west. Yet growth then diverged until the early 20th century. The reason, in a nutshell, is:

“Europe was making the transition from personal to impersonal exchange. In other words, economic relations based on personal connections were giving way to ones depending on complex organisation.” (p20)

The Islamic legal framework – emphasising personal relationships, finite-duration partnerships and oral testimony – prevented this move to large organisations with their own legal personhood, with the development of large scale also inhibited by patterns of marriage and inheritance in the Middle East. It was not until western economic organizational structures were imported or imposed in the mid-19th century that the region could get onto the same trajectory of economic growth. A good companion to this book – which taught me a lot about a region I don’t know much about –  is Douglas W Allen’s The Institutional Revolution (I reviewed it here), which describes in some detail the way British economic institutions changed in the 18th century, enabling the Industrial Revolution.

As Kuran points out, the disadvantage of the Islamic legal approach with its emphasis on personal relations and trust, would absolutely not have been apparent in the 18th century. On the contrary, the economic institutions were evidently favourable in many ways, including the vigour of international trade and the provision of welfare. But the dynamic consequences of a small static difference were huge (p281).

Economic institutions that work well in terms of long-run growth in a certain context will become dysfunctional when the context changes. This is in fact the meta-message I took away from The Long Divergence, as it seems pretty clear to me that western economic institutions are losing their long dynamic advantage, and we in Europe and the US are not doing all that well on institutional reform. Large scale, impersonal exchange and the erosion of personal trust are damaging, given the new technological basis of production.

Kuran writes:

“[A] common fallacy is the perception that major social phenomena, such as the decline of a civilization, must have major causes …. [A] chain of responses to a minor initial distinction can produce a cumulatively huge effect.” (p31)

Or as T.S.Eliot put it with poetic licence in The Hollow Men, things end “not with a bang, but a whimper.”

The Long Divergence: How Islamic Law Held Back the Middle East