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Terpstra's (T.'s) book on the institutional context of long-distance trade represents a significant contribution to the scholarship concerning the economic development of the ancient Mediterranean world. Framed as a response to P. Kay's influential thesis concerning Republican Rome's “economic revolution,” T. seeks to refocus the discussion by adopting a “unifying perspective” on the economy of the ancient Mediterranean, with a view to explaining the long-term trajectory of its development through the lens of neo-institutional economic theory. The book's two main claims are as follows:
First, state formation and consolidation had an aggregate positive effect on the economy of the ancient Mediterranean, starting in the Late Iron Age and peaking some time in the Roman Imperial period. Second, we should not ascribe that effect to ancient states acting as third-party enforcers of private property rights (23).
In support of these claims, T. offers a series of “targeted studies, organized loosely chronologically, into the ways in which ancient states influenced economic performance” (29). Ranging from the influence of state formation on Phoenician trading diasporas (Ch. 2) to the impact of the Hellenistic kingdoms (Ch. 3) and Roman rule under the Principate (Ch. 4) – and later, the Dominate (Ch. 5) – these studies draw out recurring themes such as the relationship between state ideologies and trading activity, and the impact of state formation on economic migration, commercial connectivity, and social trust. A self-professed “social theory–minded historian” (18), the author sustains the argument with reference to the New Institutional Economics (NIE) of D. C. North, on the strength of the proposition that (in North's own words), “Institutions affect the performance of the economy by their effect on the costs of exchange and production.”Footnote 1 Focusing on the consequences of state formation on the cost of transacting, T. concludes that “ancient states were beneficial to growth because they created institutions conducive to economic development, even if that was not necessarily the intention” (24). T.'s final conclusion is that “the economic growth visible in our long-term datasets past ca. 700 BCE was chiefly Smithian in nature and supported by public institutions, which emerged in an ongoing process of state formation” (227).
Contents and critique
The book begins with a substantial introduction (Ch. 1), in which the author sets out the present views regarding the performance of the Mediterranean economy in the long run (i.e., for the period under discussion, 700 BCE–700 CE), with a particular focus on archaeological proxies such as the (now familiar) shipwreck graph and data on levels of lead pollution obtained from Greenlandic ice cores. T.'s key observation is that “the trend lines in both graphs broadly track the formation, growth and disintegration of Mediterranean states” (8), the consolidation of which he associates with the intensification – gradual at first and later more pronounced – of long-distance trading activity during the period ca. 700 BCE–ca. 50 CE. To assess the role of states in this connection, T. concentrates on their role in dispute resolution, drawing on the theoretical work to make a useful distinction between third-party adjudication and enforcement (15).Footnote 2 Arguing that ancient states typically interested themselves in adjudication but left enforcement to (state-sanctioned) self-help, T. identifies them as “natural states” that fell short of the Weberian ideal type of an entity claiming a monopoly on violence (18).Footnote 3 This, T. says, raises the question as to how legal institutions nonetheless contributed to economic development, requiring a more sensitive explanation than has sometimes been forthcoming.
Chapter 2 marks the first of the “targeted studies,” examining the relationship between the Phoenician trade diaspora and public institutions in both a domestic and a Greco-Roman context. In this latter connection, the author explores the interplay of public and private through the dual lenses of the Greek institution of public friendship (proxenia) and the Roman imperial ideology. The central argument of the chapter is that ancient states institutionalized trade diasporas, creating mutual opportunities for cross-cultural engagement, strengthening private ordering, and disincentivizing investment in enforcement infrastructure. The chapter ends with a section on the spread of Carthaginian power, which the author also proposes “had an aggregate positive effect on the economy of the ancient Mediterranean” (76).
In Chapter 3, attention turns to the Hellenistic kingdom of Ptolemy II Philadelphus (r. 283–246 BCE). Using the Zenon archive, T. interprets the activities of Apollonios, a royal official and private businessman with financial interests in Syria-Palestine, from the perspective of M. Olson's theoretical distinction between “stationary bandits” and “roving bandits” (86). The conclusion is that the behavior of Apollonios, and by extension of the Ptolemaic state, was characteristic of a stationary bandit – which is to say that in order to maximize extraction, they were incentivized to invest in infrastructure that also tended to the public good. Although this included the establishment of a “banking system,” the state never extended its reach to third-party enforcement (123).
Chapter 4 returns to the theme of the institutionalization of business relationships explored in Chapter 2, examining contractual practice during the Roman Imperial period through epigraphic evidence furnished by the archives of Jucundus and the Sulpicii (1st c. CE) and the wax tablets recovered from the Dacian settlement at Alburnus Maior (2nd c. CE). Focusing specifically on the ranking of witness lists by status (a feature first noticed by Andreau in his study of the Jucundus archive), T. argues that the written documentation accompanying the recorded transactions was “publicly embedded” (recalling the terminology of M. Granovetter), giving Roman legal institutions an enforcement-cost advantage over other legal frameworks, strengthening private ordering, and at the same time disincentivizing investment in coercive enforcement infrastructure by the Roman state.
Chapter 5 switches attention to the ways in which state action could produce negative consequences for economic performance. To illustrate this point, the author concentrates on the impact of the Roman imperial adoption of Christianity in the early 4th c. CE and the intolerant stance taken by later emperors toward cultic diversity. Taking the suppression of the Serapis cult as an example, T. argues that religious intolerance damaged the institutional structure supporting trade to the detriment of economic performance more generally.
Chapters 6 and 7 tie up the book. In the Epilogue (Ch. 6), T. discusses the relationship between the collapse of the Roman Empire and the disintegration of the Mediterranean economy, particularly with a view to exploring the consequences of these events for the welfare of the empire's inhabitants. The book ends with the author's concluding remarks (Ch. 7), which argue for the return to a more holistic view of the economy of the ancient Mediterranean from the perspective of the neo-institutionalist paradigm.
T.'s book makes three important contributions. First, it makes the case for a more holistic, unified approach to the economy of the ancient Mediterranean that situates polities within a broader, interconnected framework.Footnote 4 This reorients the focus away from the economies of particular states toward a more unified perspective. Second, T.'s argument that growth in the ancient economy was a long-run process, the origins of which can be traced back into the first half of the first millennium BCE, challenges the more traditional view that growth began much later, about the beginning of the 2nd c. BCE. In this respect, the author's contextualization of trade diasporas provides a valuable insight into the networks that sustained maritime enterprise over generations, even as the social, political, legal, and religious environment changed around them. Third, although T.'s argument that the growth of ancient states was a key determinant of economic growth during the same period is not new, the attempt to provide a more nuanced perspective – one that draws attention to both the positive and negative impact of state behavior on transactional activity – is a significant contribution.Footnote 5
Given that the next section is dedicated to a critique of the logical structure of T.'s argument, I wish only to draw attention to some specific criticisms that may be leveled at the analysis. In Chapter 4, for instance, the author's interpretation of a series of contracts of sale recorded in both the Campanian and Dacian archives is undermined by errors of law. The first of these stems from the misconception that access to Roman law was restricted to Roman citizens (126, 128, 158): although this was true of the ius civile, a substantial body of law was considered to be derived from the ius gentium and was procedurally available to peregrines (and increasingly so from at least the 2nd c. BCE).Footnote 6 The second error concerns the conflation of issues of property and contract: in Roman law, the ius civile derivative modes of transfer of ownership (mancipatio, in iure cessio) were abstract from the reason for which the parties were executing the conveyance (i.e., the causa, such as a contract between the parties).Footnote 7 To say, therefore, that the “central problem” concerns “the question of the contracts’ validity” (158) misrepresents the issue: the bonae fidei contract of sale, deriving from both the ius civile and the ius gentium, was valid and enforceable irrespective of the citizenship of the parties. The specific question raised by the contracts therefore concerns only the use of mancipatio as a means of transferring ownership (this mode of conveyance being restricted only to citizens as part of the ius civile). In any case, because the contract was enforceable and contained clauses making explicit the seller's duty to guarantee against eviction, the buyer still had a contractual remedy in the (unlikely) event that the true dominus (ex iure Quiritium – if indeed there was one) vindicated the property.
NIE as a means of historical explanation
T.'s main claim is that “state formation and consolidation had an aggregate positive effect on the economy of the ancient Mediterranean, starting in the Late Iron Age and peaking some time in the Roman Imperial period” (23). The argument made in support of the claim may be expressed as follows: Given that (i) the archaeological proxies are broadly reflective of long-term economic developments; (ii) the trend lines for each proxy broadly track the formation, growth, and disintegration of ancient states; and (iii) ancient states created and maintained institutions that tended to reduce the cost of transacting; it follows that (iv) state formation had an aggregate positive effect on the economy of the ancient Mediterranean during the period in question.
My critique of this argument builds on those made by S. Bernard in a review of S. T. Roselaar's monograph Italy's Economic Revolution (2019), another recent study in economic history written from a neo-institutionalist perspective.Footnote 8 In that review, Bernard (briefly) challenged the theoretical background to NIE's model of economic change before entering into a thought-provoking discussion of its fit with the empirical date (principally in the context of Late Republican Rome). This adds to a growing critique (one might even say dissatisfaction) with NIE as a means of historical explanation in the ancient context.Footnote 9 In this review, I therefore wish to assess the persuasiveness of T.'s central claim by examining the structure of historical arguments proceeding from NIE. So far, as I see it, this may be addressed in three parts: (a) evidential interpretation; (b) “causation”; and (c) the relative significance of institutional change when set alongside other factors bearing on economic performance.
Evidential interpretation
Steps (i) and (ii) of T.'s argument (as I have reconstructed it) are concerned with establishing the synchronicity of two historical processes (state formation and economic development) that unfolded over the period ca. 700 BCE–50 CE. As T. acknowledges, the first step rests on the “optimistic” assumption that the archaeological proxies are indicative of longer-term developments in the economy more generally (7).Footnote 10 Assuming that this is correct, the issue that arises concerns T's arguments in favor of the delimitation of the ancient economy from a pan-Mediterranean perspective. In his concluding remarks, T. argues that the “loss of a unifying perspective [on the economy of the ancient Mediterranean] is all the more regrettable as long-term archaeological datasets are increasingly suggesting that we should adopt one” (226). This, however, is to put the cart before the horse: the shipwreck graph – which represents the chronological distribution of shipwreck sites, by number, within a given area (i.e., the Mediterranean Basin and the Black Sea) – can only be interpreted (without further refinement) in service of writing the history of the Mediterranean (in the terminology of P. Horden and N. Purcell), there being no prior relation between each site other than their common geoecological context.Footnote 11 Without drawing out more specific patterns from within the dataset, T. can therefore do nothing other than take an “overarching view.” All this is to say that the archaeological proxies do not suggest, but rather necessitate, a unifying perspective, in virtue of the way in which the data has been collated and represented.Footnote 12
“Causation”
“Correlation does not imply causation.”Footnote 13 As R. G. Collingwood observed, the inductive method of reasoning – which is the method employed by historians in the interpretation of the relationship between historical facts – can never furnish more than a nihil obstat to the view that two or more historical actions were somehow connected; that is, it only permits us to hold that view in the absence of any evidence to the contrary.Footnote 14 So far as the relationship between processes of actions is concerned (e.g., state formation, changes in the intensity of trading activity, etc.), the same observation holds. To supply a positive explanation for the relationship between certain processes therefore requires the application of theory.
This brings us to the third limb of T.'s argument and the conclusion – namely, that ancient states created and maintained institutions that tended to reduce the cost of transacting and that “state formation and consolidation had an aggregate positive effect on the economy of the ancient Mediterranean” (23). As has been pointed out many times, the capacity of NIE to explain the relationship between different historical processes depends on the extent to which its assumptions about, for example, the rationality of the actors involved accords with the evidence for the actual decision-making processes of historical individuals. Moreover, even if we accept the basic proposition (i.e., that institutions affect economic performance by their effect on the cost of transacting, etc.), one may reasonably challenge the extent to which the relationship posited by the theory is actually borne out by the evidence on the ground (i.e., a question of “fit”). Given that both of these issues were explored by Bernard in the review of Roselaar, I shall not go further into them here.Footnote 15
The relative significance of institutional change when set alongside other factors bearing on economic performance
T. offers his thesis as a corrective to what he considers to be the otherwise “compelling” analysis of both D. Hollander and P. Kay – that monetary expansion was the main driver behind economic change, at least during the later Roman Republic (5).Footnote 16 Precisely how institutional change stands as a corrective to this argument, however, is not made explicit. What was the relative significance of institutional change to economic performance when set alongside, for example, the expansion of the money supply during broadly the same period? As far as I am aware, there has – at least among ancient economic historians – been a degree of silence on this point. In Kay's analysis, which I shall examine in more detail shortly, the prospect that NIE might offer some alternative (or complementary) explanation is raised only briefly.Footnote 17 Volumes dedicated to the NIE approach, meanwhile, tend to adduce a multitude of different factors (including the availability of coinage) without discriminating between each as to their relative importance.Footnote 18 The issue, it appears, can be traced to a lack of theoretical precision, particularly with respect to the relationship between NIE and (neoclassical) monetary economic theory.Footnote 19 More significantly, it has not always been fully appreciated that NIE is not a substitute for neoclassical theory. Rather, it is designed to enrich it.Footnote 20 To understand the implications of T.'s monograph (and, indeed, any other contribution arguing from NIE) for the study of ancient economies, we therefore need to be able to articulate the relationship between monetary theory and NIE. In what follows, I will seek to provide some clarification on this point, notwithstanding that the exercise requires us to depart temporarily from the book at issue, if only to be able to return to it at the end.
Put simply, we are interested in the relative significance of changes in the institutional environment and (exogenous) increases in the quantity of money in circulation to the performance of the economy by their effect on transactional activity. In classical economic theory, monetized transactions are represented by the so-called equation of exchange (otherwise known as the “quantity” or “Fisher equation”).Footnote 21 The equation posits that for any given community over any given interval of time, the average money supply (M) multiplied by its average velocity of circulation (V) will be identical to the product of the quantity of goods exchanged (y) multiplied by their average price level (P) (i.e., MV = Py). If the desired unit of analysis is the “transaction,” however, then Py can be reconfigured as the number of transactions that took place in a given period (T) multiplied by the average price paid for each one (PT).Footnote 22 On the money side of the equation, the velocity function must now refer to the transactions-velocity of money; that is, the average frequency across all transactions with which a unit of money is spent (VT). Strictly, the “equation” is a tautology (or identity), in that it holds only that the amount of goods and services bought in a community during a given period can be expressed as the amount of goods and services sold.Footnote 23 As Fisher explained, the exercise “consists simply in adding together the equations for all individual purchases within the community during the year.”Footnote 24 Importantly, either side of the equation of exchange (i.e., MVT, the “money side” = PTT, the “transactions side”) can be used to calculate the expenditure (E) of a given community over a given period, which goes toward the measurement of gross domestic product (GDP; particularly by the expenditure approach). If, after adjustment for inflation, the per capita GDP of a particular community over a given period has increased, this will indicate that the economy has experienced real growth.
The adding together of transactions in pursuit of the measurement of GDP is a counting exercise. To argue for one or another factor as relatively more significant as a driver of (real) economic growth, however, requires a theory as to the relationship between each of the variables (M, VT, PT, and T) in the equation of exchange. Classical quantity theory, for example, holds that an exogenous increase in the quantity of money (M) in any given monetary regime will lead, all else being equal, to an increase in the average price level (i.e., inflation).Footnote 25 Its roots can be traced to the scholars of the Salamanca School in the 16th c.,Footnote 26 who sought an explanation for the price revolution that followed the import of enormous quantities of gold and silver from the New World.Footnote 27 After a period of popularity among Roman monetary historians during the 1920s and 1930s, however, most scholars have rejected the classical adherence to the (super)neutrality of M in favor of the Keynesian view as to “the extreme complexity of the relationship between prices and the quantity of money.”Footnote 28 This provides space for Kay, for example, to argue that “during the second century [BCE], increased inflows of bullion combined with the contemporaneous expansion in the availability of credit to produce a large increase in monetary liquidity. This in turn resulted in a major upward inflection in Roman economic activity…”Footnote 29
In order to account for the relatively low and steady rate of inflation over the same period, however, Kay simultaneously identifies the same factors as among the main drivers of real growth:
The general lack of major inflationary pressures is all the more remarkable given that there is also considerable evidence that the activities of early Roman financial intermediaries provided a mechanism for the creation of money beyond the available supply of precious metals, thereby serving to expand Rome's total money supply….Such a mechanism would have served to expand Rome's money supply and, thereby, to encourage an increase in effective demand. In other words, a growth in bank lending would have led to an expansion in the volume of commercial transactions and activity.Footnote 30
The reference to the generation of “effective demand” is Keynesian in origin. However, when we trace this back to Keynes's assertion that “money is the drink that stimulates the system to activity,”Footnote 31 problems with the application of the General Theory to the ancient evidence begin to arise. For Keynes, the primary effect of a change in the quantity of money on effective demand was through the rate of interest.Footnote 32 More accurately, Keynes's view was that an exogenous increase in the money supply stimulates transactional activity by generating a demand for securities, reducing interest rates, and incentivizing investment.Footnote 33 It followed, therefore, that
this particular analysis will only be useful and significant in so far as there is some specially direct or purposive connection between changes in the quantity of money and changes in the rate of interest. Our reason for supposing that there is such a special connection arises from the fact that, broadly speaking, the banking system and the monetary authority are dealers in money and debts and not in assets or consumables.Footnote 34
Keynes's General Theory, then, is predicated on the existence of “an organized market for dealing in debts,” without which individuals’ liquidity preference due to the precautionary motive would be greatly increased at the expense of the speculative motive (i.e., “the object of securing profit from knowing better than the market what the future will bring forth”).Footnote 35
Whatever one thinks about the existence of organized markets for trading in securities in antiquity, skepticism about taking a Keynesian approach to the explanation of the functioning of ancient economies does not rule out the likelihood that the exogenous expansion of the money supply could provide a stimulus for economic activity. J. R. Hicks, for example, well points out that the history of monetary evolution can be understood as the development of ever more sophisticated ways of reducing transaction costs, and that the standardization upon one commodity (or a small number of them) to serve as an intermediary facilitates specialization in trade.Footnote 36 Even so, this can hardly be the whole explanation. What was the relative contribution of real factors to economic development during the same period?
This is the point at which NIE may be brought in. In 1911, I. Fisher wrote that the only influences that could directly affect price levels were the volume of trade, the velocities of circulation of money and of deposits, and the quantities of money and of deposits.Footnote 37 Any other influences must, he continued, operate indirectly through these five, which are the constituent elements of the equation of exchange. On the indirect influences affecting the velocity of circulation of money and deposits, Fisher identified, among other things, the systems of payment in the community, under which heading he discussed the frequency and regularity of receipts and disbursements. On the influences on the volume of trade, he listed, among other things, the conditions connecting producers and consumers, including facilities for transportation, relative freedom of trade, the character of monetary and banking systems, and business confidence. On the latter, Fisher said that “confidence, not only in banks in particular, but in business in general, is truly said to be ‘the soul of trade.’ Without this confidence there cannot be a great volume of contracts. Anything that tends to increase confidence tends to increase trade.”Footnote 38
Although rudimentary, Fisher's analysis identifies real factors as exerting an indirect influence on price levels through their effect on the other variables in the equation of exchange besides the volume of money and deposits in circulation (M). Given that, moreover, the average price level responds to changes in the other variables, this means principally the volume of trade (T) and the (transactions-)velocity of circulation of money and deposits (VT).
All this provides a framework within which to articulate the relative significance of changes in the money supply and institutional change with respect to economic performance. The equation of exchange is a truism that relates to all the purchases made by money in a certain community during a certain time.Footnote 39 For this reason, it can be used to calculate the expenditure of a community over a period, which goes toward the calculation of GDP (by the expenditure approach). If the GDP of the community has increased over that period, then we say that the economy has grown. Two factors, however, affect whether the growth of an economy amounts to improved economic performance. First, if the rise in GDP was due to an increase in the size of the population, then the growth of the economy will have been “extensive” because it did not reflect an increase in output per capita. For growth to be “intensive,” the quantity of goods and services produced per person – not just total output – must have increased. Second, even with intensive growth, this will only amount to real growth insofar as the increase in the value of the total output exceeds inflation during the same period. Improved economic performance may therefore be expressed in terms of changes in its real per capita GDP over time.
The basic proposition of the New Institutionalism is that “institutions affect the performance of the economy by their effect on the costs of exchange.” Because the performance of an economy in mainstream economic thought depends on changes in GDP, and GDP can be calculated with reference to the equation of exchange, this means that institutions affect economic performance by their effect on the direct influences on price levels as expressed through the equation of exchange. Equally, given that monetary theory concerns (among other things) the effect of changes in the money supply and circulation of money and deposits on economic performance, the relationship between monetary theory and NIE is mediated through the equation of exchange. It follows from this that any changes in a community's institutional environment that tend to reduce the cost of transacting have the potential to lead to an increase in the number and value of transactions taking place within a given period (T) and (in more limited circumstances) to an increase in the velocity of circulation of money and deposits (VT). If it leads to an increase in VT, then the increased velocity will tend to combine with the exogenous increase in the money supply to produce inflationary pressure, unless this is met by an increase in T on the other side. In as far as institutional change facilitates trade by reducing the cost of operating in the market, this will have the effect of holding down the average price level (and therefore inflation), creating slack in the economy and enabling exogenous increases in the money supply to take effect as real growth. On this analysis, increases in the money supply and institutional change can work together to produce real growth – the first by providing liquidity, and the second by counteracting inflation. One theory might be, for example, that the expansion of the money supply during the later Roman Republic would have had a greater inflationary effect but for the impact of real factors (such as institutional change).
In this connection, Kay's thesis may usefully be contrasted with observations made by M. Weber, who lamented some 100 years ago the “mistaken tendency now current to overestimate the importance of [the supply of precious metals] for the structure of the whole economy itself.”Footnote 40 Commenting on the influx of precious metals into the Italian peninsula following Rome's conquests during the 2nd c. BCE, Weber went on to observe thatFootnote 41
the fact that the booty was used as it was and not otherwise – for example, it was not hoarded, as in the Near East – must have been due to the prior existence of certain conditions. In other periods of Antiquity, the presence of large stores of precious metals did in fact fail to have a “creative” significance; that is, they did not lead to the development of qualitatively new forms of economic activity.
Weber attributed this to “the unique political structure of the Roman state.” In this book, T. simultaneously challenges the prevailing narrative of the origins of economic growth in the ancient Mediterranean world and joins the ranks of those who would argue for the importance of institutional change, while at the same time acknowledging the complexity of the relationship between the formation of states and transactional activity. For these reasons, T.'s book represents a significant contribution that is sure to stimulate further discussion.
