Institutions, the Rise of Commerce, and the Persistence of Laws: Interest Restrictions in Islam & Christianity

Abstract:     
Why was economic development retarded in the Middle East relative to Western Europe, despite the Middle East being far ahead for centuries after the fall of Rome? A theoretical model inspired and substantiated by the history of interest restrictions suggests that this outcome emanates in part from the greater degree to which early Islamic political authorities derived legitimacy from religious authorities relative to those in Europe. This entailed a feedback mechanism in Europe in which the rise of commerce led to the secular (and eventually religious) relaxation of interest restrictions while also diminishing the Church’s ability to legitimize political authorities. These interactions did not occur in the Islamic world despite equally amenable economic conditions.

Number of Pages in PDF File: 50

Keywords: Islam, Christianity, Political Institutions, Religious Institutions, Institutional economics, Conservativism, Legal Persistence, Comparative Institutional Economics, Interest, Usury, Ijtihad

JEL Classification: N43, N45, O17, O33, P51, Z10, K00, K42, C73, H11

working papers series