Following my previous posting, culture may influence economic development indirectly through another channel. Shulz and Williamson (2003) argued that the channel is financial and commercial institutions. The authors argue that the reason for relatively poorer performance of Catholic economies was because the incompatibility of institutions in Catholic countries with modern capitalism. For example, the medieval church regarded charging interest as a kind of economic transaction where “one of the parties would not be taking advantage of the other because of greater bargaining strength,” hence they tended to restrict interest. On the other hand, the (Calvinist) Protestants “viewed the payment of interest as a normal part of commerce, thereby making it possible for modern debt markets to develop.”
Catholic and Protestant countries also differed in their attitudes towards protection of creditors’ rights. The authors found that countries which main religion is Catholic tend to protect the right of creditors less than the Protestant countries. Catholic Church regarded private property and economic as subject to the good of society. That implies that some to a certain degree private property is a ‘common goods.’ However, the Church has an authority to define what goods considered as ‘common.’
On the other hand, as the authors argued, Protestantism reform led to a better protection for creditors because of the philosophy that:
Individuals were responsible for their actions and that they had to live up to the contracts they entered into of their own free will … there was no role for higher legal or religious authorities to step in and change contract terms for the good of society or for laws to be approved that would hinder individuals from entering contracts.
Consequently, according to the authors, protection to private property was higher in Protestant countries because the definition of the common good is passed down to the individual members rather than decided by a centralized power of Church.
The lack of compatibility to modern capitalist institution was also the reason for underdevelopment in the Middle Eastern Islamic world. This is the main point of a study by Timur Kuran (2003). According to Kuran, there were two main issues with the Islamic commercial institutions. First, the Islamic business partnership law came in a package with the inheritance law that provides a mandatory inheritance shares to all sons and daughters. While this kind of partnership was well suited the medieval economy in which it developed, it raised the costs of dissolving a partnership following a partner’s death. This has kept Middle Eastern commercial enterprises small and short-lived. Second, on the contrary with the Islamic system, European inheritance systems facilitated large and durable partnerships by reducing the likelihood of premature dissolution. As the result, European enterprises grew larger than those of the Islamic world.
The two studies above offered an alternative view on the role of culture in economic development. Culture, specifically religious norms, shape institutions. And the commercial institutions affect economic performance. Analyzing institution as the channel through which culture affect the economy can strengthen the argument that culture matters for economic development. However, there is still room to argue whether culture is the only variable, or the most important one, that explains how institutions were shaped. Such approach also can not explain what makes culture change, and how it changes overtime.