------------ EH.NET BOOK REVIEW --------------  
Published by EH.NET (August 2006)  
  
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.  
  
Reviewed for EH.NET by Philip T. Hoffman, Division of Humanities and   
Social Sciences, California Institute of Technology.  
  
  
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.  
  
Reference:  
1. Edward Baumann, _Polish Robbin' Hoods: Inside Story of the Panczko   
Brothers - The World's Busiest Burglars_. Los Angeles: Bonus Books,   
1992.  
  
  
Philip T. Hoffman, who is Richard and Barbara Rosenberg Professor of   
History and Social Science at the California Institute of Technology,   
has recently finished _Surviving Large Losses_ (forthcoming, Harvard   
University Press), a study of financial crises, coauthored with   
Gilles Postel-Vinay and Jean-Laurent Rosenthal.  
  
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