In Box

Money Market

How the West was won -- in the Middle Ages

It's one of the best-known but least understood of historical trends: Until the 13th century, the Middle East and North Africa were far more scientifically and economically advanced than medieval Europe. But while the European Renaissance was followed by the rise of capitalism and the Industrial Revolution, the Arab world stagnated for centuries. What happened?

The traditional view, held by early 20th-century theorists like Max Weber and modern historians like Bernard Lewis, is that cultural factors -- Islam's conservative nature, the "Protestant work ethic" -- were the reason. But in a recent paper published in The Economic Journal, economist Jared Rubin pinpoints a more specific and potentially far more decisive factor: the Western ability to loan money at interest.

Both Islam and early forms of Christianity ban usury, defined as the charging of interest on a loan. In both cultures, businesses developed methods to get around the prohibition. A popular stratagem in early Islamic finance was the mukhatara, or "double-sell." For example, a debtor might sell a creditor something for $100 and then immediately buy it back for $110 to be paid at a later date, the $10 becoming in effect a form of interest on the $100 loan.

Today, schemes like mukhatara remain the only legal way to charge interest in much of the Muslim world. But secularizing governments in the West gradually did away with the ban on usury during the 14th and 15th centuries, allowing them to develop the sophisticated banking services needed to generate capital for, say, building factories or funding massive construction projects, Rubin says. The split might have come, Rubin points out, because Islam evolved as a binding social code, intimately entwined with the political systems it dominated and absorbed throughout the Ottoman Empire, whereas Christianity developed as a dissident movement separate from the political institutions of the Roman Empire.

So how, then, to account for today's booming Islamic economies in the Persian Gulf and Southeast Asia and billions of dollars invested in so-called "sharia-compliant" financial services? Rubin considers these new methods just variants on the age-old workarounds, but not enough to propel Islamic economies past Western GDPs. If you get left behind in the Middle Ages, it takes more than a few shortcuts to catch up to the future.

In Box

Strange Trade

Recent research reveals the surprising unintended consequences of free trade

Free trade advocates say it's an engine of economic growth; opponents think it perpetuates global inequality. But the unintended effects of all that cross-border traffic -- which has nearly quadrupled around the world since 1990 -- may be even more interesting. Here's a look at some of the most surprising conclusions from recent research on trade.

1. Trade makes countries shrink.
Increased international trade lowers a country's birth rate, in part because it exposes countries to gender norms that bring women out of the home and into the workplace.

--John A. Doces, International Interactions


2. Trade is less important than marriage.
Facing a shortage of available wives, Chinese families are increasing their savings rates to increase their sons' competitiveness in the marriage market. This drives down China's exchange rate, contributing to a global trade imbalance.

--Qingyuan Du and Shang-Jin Wei, National Bureau of Economic Research


3. Trade built the ancient civilizations of Mesoamerica.
"Far from being isolated developmentally, [the cacao trade] integrally tied populations in the American Southwest to the socio-political and economic activities of Mesoamerican states."

--Dorothy K. Washburn, William N. Washburn, and Petia A. Shipkova, Journal of Archaeological Science


4. Trade doesn't turn low-tech countries into high-tech ones.
Despite hopes that globalization would allow developing countries to innovate themselves into prosperity, 30 years of increased trade has only brought steeper and more intransigent gaps between low-tech and high-tech countries, with the high-tech countries maintaining their edge through specialization that can take years to match.  


5. Trade can improve your basketball game.
An increase in the number of foreigners playing in domestic basketball leagues correlates with improved performance for the national team, even if it's composed only of domestic players.

--J. Alvarez, D. Forrest, I. Sanz, and J.D. Tena, Labour Economics


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