RUI ESTEVES

Dr. Rui Esteves's dissertation focuses on economic questions, pays close attention to institutions, and uses empirical work to support its claims.

The first chapter teaches us the need for the right institutions to make the free market work efficiently. The institution in question is the bondholders' organization. Estevez discusses the incentive problems of sovereign debt, and provides a game-theoretic model of sovereign defaults. Supporting the model, the empirical work in this chapter shows that bondholders' corporations were associated with quicker resolution of default, and smaller losses for bondholders. Reputation is enough to make markets work, if there are institutions to collect and share information about reputation. Pure competition is not sufficient, but the market can work if institutions are structured so as to provide the right incentives. Multi-lateral institutions are not necessary to make sovereign debt work.

The second chapter examines the claim that, while British investment was market-oriented, German investment was “politicized.” To examine this question, Dr. Esteves uses existing data on British foreign investment, combined with a new data set on German investment that he compiles from reports in the financial press. In compiling the data, he considers the reliability of different sources, rejecting tax data, and favoring the newspaper that contemporaries considered most reliable. Esteves finds that German investment was not all that different from British investment, and that German investors did follow market incentives when making their investment decisions. Markets work. He also concludes that, contrary to what other studies have found, adherence to the gold standard did attract investment. Dr. Esteves's answer is different because he measures the effect of the gold standard on the quantity of investment, not on the price. He concludes that investors did favor countries on the gold standard, but they did so by rationing credit to non-gold countries, rather than by demanding higher interest rates from non-gold countries.

In the third chapter, Dr. Esteves pulls out his microscope to examine the foreign exchange market in Portugal. This chapter offers a very detailed description of the institutions of the Portuguese foreign exchange market. We even find out how debased coins were detected. Of course the chapter also makes a theoretical point. Using weekly exchange rates for a period of 37 years, and data on gold shipments, Esteves shows that the standard model of gold points is not sufficient to explain the movements of gold. Institutions matter, and the Bank of Portugal was an active participant in the foreign exchange market.

I think the overall message of this dissertation is that institutions matter. You may have known that already, but Dr. Esteves provides support for the claim. What I would have liked to see in this dissertation is more discussion of why it matters for aspects of the economy outside the financial markets. Did the institutions examined in this dissertation affect the growth rates of non-European countries? What impact does the efficiency of the financial markets have on the real economy?

STEVEN NAFZIGER

We turn now to a dissertation that demonstrates that institutions matter less than we thought they did. Our second presenter, Dr. Steven Nafziger, uses data from household surveys to challenge longstanding claims about nineteenth-century Russian communes. Dr. Nafziger takes an institution that we may have thought of as hopelessly inefficient, and shows that, in actual practice, communes did not prevent peasants from behaving as rational economic actors.

At the micro level, this dissertation is based on a tremendous amount of data collection work. Dr. Nafziger has gone to the archives and sorted through a valuable data source that has not previously been used by economic historians, the records of regional governments called zemstva. Specifically, Nafziger makes use of three different surveys conducted by the Moscow province zemstvo in the late nineteenth century, two from 1876–1877, and one from 1899–1900. These surveys provide information at the village or commune level, and the later survey also provides household-level information.

At the macro level, this dissertation has important implications; it challenges the way we think about nineteenth-century Russia. Gerschenkron argued that the peasant communes that replaced serfdom retarded Russian economic development by reducing the incentives to invest in agriculture and by limiting labor mobility. Nafziger challenges both of these claims.

Former serfs did not own land individually, but were members of communes that owned land. Households farmed the land allotted to them by communes, but these allotments did not constitute secure property rights because the communes periodically redistributed the land. Because soil fertility was important in agriculture, and redistribution of land could cause a household to lose whatever investments they made in soil fertility, communal property rights have been accused of reducing agricultural investment and thus productivity. Nafziger tests this claim by measuring the relationship between the frequency of land redistribution and crop yields. He concludes that the relationship is weak, and provides an explanation for why land redistribution was not as bad as we thought. The re-allocation of land was not a random event, but a predictable response to changes in household labor supply.

Nafziger also takes up the claim that restrictions on land and labor markets prevented efficient allocation of resources. The communal system did limit land sales, and a household could not leave the commune unless it could buy its future debt and tax obligations. If adjustment in both land and labor markets was blocked, households would presumably find it difficult to reach economic efficiency. However, Nafziger shows that these restrictions did not prevent households from adjusting land and labor inputs. He demonstrates that land and labor markets not only existed, but were extensive. Land sales were not common, but land rental was. Ten percent of households rented out land, and 41 percent of households rented in land. While it may have been difficult for households to exit their commune, about 17 percent of member households were not physically present in the village. Eight percent of households hired agricultural laborers, and nonagricultural employment was common. Nafziger also shows that peasants used these markets to adjust household inputs following a shock such as the death of a family member. Households experiencing the death of an adult member were more likely to rent out land, and were less likely to engage in nonagricultural employment. In spite of the communal structure, peasants did participate in land and labor markets, and did respond to economic incentives.

The main lesson of this dissertation is that markets work better than you thought they did, even in the past when the institutional structure was much different from today. The other lesson I take from this dissertation is that it is not enough to theorize about what effects various institutions might have on development, or to draw inferences from macroeconomic data. We must do the hard work of collecting the micro-level data that will allow us to test our hypotheses. Without these tests, our speculation might lead us far astray. What is missing from this dissertation? Nafziger could have included some formal modeling of the household's decision making. Also, all the data come from the Moscow province. Are the results representative of all of Russia, or are they specific to this region? Peasants of this region may have had better access to nonagricultural employment than peasants in other regions.

JARED RUBIN

Our third presenter, Dr. Jared Rubin, explains the birth and death of the economic institution called usury. What I like about this dissertation is that it provides a rational economic explanation for an institution that is usually attributed to culture. It changed the way I think about usury laws. Before reading this dissertation, I thought that the law against usury was a cultural institution that may have made sense religiously or socially, but made no sense at all economically. Now I see usury laws as an institution that had value for a particular time and place, but that persisted too long in some societies.

At the heart of this dissertation are the two models presented in chapters two and three. Dr. Rubin explains in his second chapter why the law against interest emerged in the fourth century. In a world where loans were mainly for consumption, and the church provided insurance against starvation, the incentive structure encouraged people to borrow too much, assuming that the church would bail them out if things got too bad. There had to be some limits on loans to ensure the survival of the church as an institution.

The third chapter explains why usury laws persisted longer in the Islamic world than in the Christian world. This chapter fits in well with the general historical project of trying to explain the great divergence in world incomes. The Islamic world was, for a time, ahead of Europe, but then lost its ascendancy and stagnated. Economic historians have blamed the conservatism of Islam, seen in hostility to new technology and the persistence of usury laws, for this stagnation. The questions becomes why, after usury laws had ceased to be optimal economic institutions, Islamic countries kept these laws longer than Christian countries. Dr. Rubin provides an explanation that is ultimately based in historical accident, and not irrationality. The explanation lies in the relationship between religious and political authority in each tradition, a relationship which is itself rooted in the historical circumstances in which each religion emerged. Because Christianity emerged under a strong state, the Roman empire, it developed a clear distinction between religious and secular authority. Islam, on the other hand, emerged in a region where the state was weaker, leading to less separation between religious and political authority. The degree of overlap between religious and secular authority then explains how open each society was to change. In Christianity, where the government was relatively separate from the church, governments felt more freedom to alter the rules and to adopt policies that went against church teachings. Church leaders, who did not want to become irrelevant, were then pressured into modifying their positions. In Islam, by contrast, usury remained illegal, so religious leaders did not feel pressure to re-interpret their religious teachings.

To support his claims, Dr. Rubin turns to texts written by contemporary Christian and Islamic authorities, looking for evidence that is consistent with his explanation but hard to explain with competing hypotheses. Rubin notes that in the fourth century we observe a shift in how usury is discussed. While earlier texts emphasized the sin of the lender, in the fourth century church officials began to emphasize the sin of the borrower. If usury is wrong because it is a sin for the rich to take advantage of the poor, then it is the lenders who are sinning, and the borrowers are just victims. But if we accept Rubin's argument that usury is mainly about limiting the need for church charity, then it makes more sense to preach against borrowing, as opposed to lending. The sermons of church leaders seem to fit Rubin's thesis.

This dissertation is mainly about the economics models explaining the rise and fall of usury. The historical work is textual rather than statistical. This is perhaps inevitable given the limits of the data available. I do find myself wanting an empirical test of the theory presented, though I have no idea what such a test would look like. The dissertation is well-grounded in historical detail, and provides lots of details about institutions developed to circumvent usury laws.

The lesson I take from this dissertation is that, if an institution seems economically irrational, it is probably because no one has yet been clever enough to explain why the institution was implemented. I thank Dr. Rubin for explaining to me the institution of usury laws.

In summary, I would like to thank the authors for what they have taught me about economic history, and say that we all look forward to hearing more from you in the future.