Institutions and Their Discontents

This essay takes up Oscar Gelderblom’s book, Cities of Commerce, as an opportunity to considered the limits of institutional economic history. It poses the general question what historians actually know as opposed to assume about the function of economic institutions in the past. It asks who creates or manipulates these institutions, political authorities or economic agents. It then examines why institutions are created, to achieve competitive advantage or to legitimize mercantile practice. Finally, and most importantly, it wonders to what extent institutions functioned as expected, that is, to what extent they limited opportunism by raising its associated costs. In each instance, this essay points to the tension between the logical and the historical in economic history. Douglass C. North famously defined “institutions” as the “formal rules, informal rules, and their enforcement characteristics” that define “the way the game is played,” any socially imposed constraints on human behavior that permit certain expectations of what others will do in a given circumstance. They are, so North, particularly important in economic life, because they facilitate human interaction by reducing uncertainty and its associated cost. That North received the Nobel Prize for his theory in 1993 may have helped to legitimate it in the eyes of a generation of scholars, but attention to the role of institutions in economic life is by no means new, its current vogue notwithstanding. As early as the mid-nineteenth century, 1 Douglass C. North, Understanding the process of economic change, Princeton, 2005, 48. See also: Lance E. Davis and Douglass C. North, Institutional Change and American Economic Growth, Cambridge, UK, 1971; Douglass C. North and Robert P. Thomas, The rise of the Western World, Cambridge, UK, 1973; Douglass C. North, Institutions, institutional change and economic performance, Cambridge, UK, 1990. AUP – 156 x 234 – 3B2-APP flow Pag. 0061 61 VOL. 11, NO. 4, 2014 German opponents of Smithian, classical economics, the so-called Old School or German Historical School, rejected any notion of isolated individuals, acting in accordance with selfish, unchanging economic motives that failed to account for the influence of religion, politics or ethics. North managed thus to wrestle institutions from the grip of the Methodenstreit and to endow their study with a degree of contemporary relevance and intellectual rigor. Economists and economic historians have since embraced institutions with real enthusiasm. The majority of recent works – certainly, the most frequently cited among them – attend particularly to the means and methods by which the “rules” are enforced, particularly with regard to property rights and contract disputes. Many scholars follow North’s lead, arguing that strong territorial states alone hold the key, because, supposedly, they alone possess the military might and legal authority to protect foreign trade and adjudicate commercial disputes. These assertions fail obviously to account for the early expansion of trade, especially in Europe, where states were under-developed. To explain economic growth in circumstances of political fragmentation, other scholars focused on the development of privateor public-order responses to opportunism. Avner Greif argued originally and famously that Jewish merchants active in the Maghrib during the eleventh century relied not on legal contracts enforced by courts of law, as did their Western counterparts, but rather on multilateral reputation mechanisms enforced by coalitions of merchants. His critics, chief among whom was Sheilagh Ogilvie, responded that Greif had failed to demonstrate either the existence of reputation mechanisms in the hands of Eastern coalitions, the private-order option, or the efficacy of contract enforcement in the hands of Western courts, the public-order option, in his explanation of how the West grew rich. Their criticism proved somewhat too round in that the empirical evidence indicated, as Jessica Goldberg later demonstrated, the resort of reputation and enforcement mechanisms, both in the East and in the West. To this debate, Oscar Gelderblom has contributed a new work and a valuable perspective, by turning from states to cities. In Cities of Commerce, 2 Douglass C. North, Violence and social orders: A conceptual framework for interpreting recorded human history, New York, 2009. 3 Avner Greif, Institutions and the path to the modern economy: Lessons from medieval trade,