Over the past few decades, a significant amount of research has been conducted in search of the causes underlying the “rise of the West”.Footnote ¹ In relation to the Middle East, this research takes on a special significance. By almost any account, the Middle East was far more advanced economically and scientifically than Western Europe as late as the thirteenth century. Yet, Middle Eastern economies did not develop nearly as rapidly as Western European ones did in the ensuing centuries, and were far surpassed economically after the Industrial Revolution.

Until recently, popular explanations for the economic divergence suggested that the “conservative” or “mystical” nature of Islam discouraged curiosity, risk-taking, innovation, and mechanization.Footnote ² In this view, Islam is seen as inherently hostile to commerce and finance. While on the surface such explanations may appear to be nothing more than the machinations of scholars attempting to pit one culture versus another, there are indeed empirical phenomena that could lead one to believe in their validity. In particular, there have existed numerous religious norms and laws—such as prohibitions on taking interest (the focus of this dissertation) and printing, suppression of women, and laws against mass education—that have existed or persisted for much longer in Islam than in Christianity despite being inhibitive to economic development. It is thus possible that religion has played some salient role in the divergence.

Given the history of scholarship on this topic, this dissertation addresses the question, “What role did religion play in the divergence, if any?” In order to gain some traction on this rather large problem, I focus on one key aspect of the general economic divergence—the emergence and persistence of economically inhibitive religious laws and norms. Indeed, while laws such as those deterring printing, mass education, or taking interest certainly have had a significant impact on economic prosperity in their own right, I attempt to go one step further, asking “What are the general forces and incentives underlying the divergence of such norms?”

More specifically, I analyze the consequences of one exogenous institutional difference between the Islamic world and Western Christendom—the greater degree to which the political institutions are dependent on the religious institutions in the former. This difference is exogenous because it is a remnant of the circumstances surrounding each religion's birth. Christianity was born within the Roman Empire, where it was both unnecessary and infeasible for the Christians to create a legal system based on religious principles. Islam, on the other hand, was formed at a time of weak centralized power and tribal feuding in the Middle East—due to the resulting institutional vacuum, Islamic ideals quickly became those of the state, which was in need of a practical, unifying ideology. This argument thus falls into a broader literature that seeks exogenous roots of institutional and economic differences.Footnote ³

The analysis is centered around a general model of inhibitive law persistence inspired by one of the most ubiquitous economically inhibitive religious laws—bans on taking interest (usury). Interest bans have been common to many religious traditions—at some point in their histories, Islam, Christianity, Judaism, and Hinduism have shared some sort of anti-interest sentiment. Yet, over the last millennium, Islamic and Christian philosophies on interest have developed quite differently. Most strikingly, even though a rather staunch prohibition existed in both traditions as recently as the fifteenth century, the ban has since dissipated in Christianity while persisting to the present day in Islam. Because we generally think of interest as having an equilibrating effect on an economy, particularly when interest-bearing transactions occur between two willing parties, it is natural to ask, “Why do such bans exist in the first place? Why and how do they persist?”

Indeed, before inquiring into the persistence and divergence of interest bans, one necessary question must first be addressed: Why do they exist in the first place? It is essential to answer this question before analyzing the phenomena underlying their persistence—if interest bans emerge as equilibrium outcomes in certain economic settings, then their persistence is only puzzling when these conditions change. Moreover, this question is especially relevant in the context of the Christian interest ban, which has not always been a part of Christian doctrine, but emerged in the fourth century. The historical emergence of the ban thus presents an unexploited opportunity to understand the economic forces underlying the introduction of interest bans.

In chapter two of my dissertation, I argue that in the fourth century, the Church was facing, ironically enough, a Samaritan's dilemma. It could not commit to not assisting needy believers—who frequently took high interest consumption loans—fearing that it would lose them to slavery or starvation. In turn, its commitment to providing social insurance for its poorest constituents encouraged over-borrowing. I model this problem faced by the Church and show that a solution to this commitment problem in the fourth century—but not before—was to impose an interest ban. As I show in this chapter, the Church banned interest only after it was able to provide social insurance for its constituents, a fact that undermines hypotheses popular in the economics literature explaining interest laws as a primitive means of providing social insurance.Footnote ⁴

The rest of my dissertation analyzes the institutional structures underlying the persistence of interest bans in Islam and Western Christianity in economies where loans are also taken for investment. This distinction is essential—in chapter two I claim that interest bans were an equilibrium outcome in fourth-century Christendom due to the externalities (imposed on the Church) associated with high-interest consumption borrowing (that is, defaulting borrowers needing assistance to survive). However, in economies where investment loans are profitable and available, interest bans inhibit economically beneficial transactions between two willing parties while imposing no externalities.

In chapter three, I formulate a general model that analyzes how the interactions between political authorities, religious authorities, and the laity affect the sustainability of economically inhibitive religious laws under varying institutional settings. The basic tension is the one between the political authority, which has incentive to maximize the productivity of the laity, and the religious authority, which has incentive to uphold its “eternal” doctrine. I show that when the political authority's dependence on the religious authority is sufficiently large, it is costly for the former to permit religiously prohibited actions, so they are unlikely to do so. In turn, only a small portion of the laity transgresses the prohibition, because this entails worldly and other-worldly costs. With few individuals breaking its dictates, the religious authority has little incentive to enact a costly reinterpretation. Thus, the players' interactions entail that no agent or authority has incentive to “push the envelope,” and the institutions upholding the law are self-enforcing. However, when the level of dependence is small, the institutional structure supports such incentives, and the institutions undermine the related laws, encouraging endogenous institutional change. This argument turns the “conservative nature of Islam” theory on its head—while we see conservativeness in Islam, this is not necessarily due to the nature of Islam, but is instead a result of the respective institutional structures and the ensuing incentives they create and behaviors they support.

Though this dissertation certainly does not claim that the interest prohibition was the cause of the Middle East's relative underdevelopment, it does glean broad insights from a focused case study on the development of interest philosophy. In chapter four, I exploit the fact that interest theory diverged between Islam and Christianity over the last millennium in order to shed light onto both the institutional elements that allowed for the ban's persistence in Islam as well as the specific economic attributes that led to its dissipation in Christianity. I show that even though the direct practical effects of the interest bans have not always been clear (as numerous mechanisms and contractual forms have been employed in Western Europe and the Middle East to skirt the ban), interest theory clearly diverged in the two religions in very observable ways. The effects of the ban were most apparent in the financial institutions it entailed—the need to skirt the ban enabled rigid, religious-based institutions such as the cash waqf to emerge in the Muslim world, and such institutions were much less flexible in accommodating daily exigencies than the European banking system.

I employ this history to help substantiate the specific and sometimes unexpected predictions arising from the model proposed in chapter three. Not only does this argument help uncover the institutional forces underlying the persistence of interest bans, but, in the bigger picture, it also supports the broader hypothesis that the institutional structures of Western Europe and the Middle East have supported behavior that entailed that economically inhibitive religious norms were more likely to persist in Islam than they were in Western Christianity. When applied more generally, this insight highlights one (of the many) important aspects of the economic divergence between the Muslim world and Western Christendom.