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

Abstract

Why was economic development retarded in the Middle East relative to Western Europe, despite the Middle East being far ahead for centuries? 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. This entailed a feedback mechanism in Europe in which the rise of commerce led to the relaxation of interest restrictions while also diminishing the Church’s ability to legitimise political authorities. These interactions did not occur in the Islamic world despite equally amenable economic conditions.

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