Islam and the Market

Prior to the Arab Spring, many would have followed the consensus that the Middle East, or Islamic countries in general, are allergic to democracy. Perhaps the large demonstrations in Tahrir Square and the overthrow of tyrannical regimes from Tunisia to Egypt have changed their minds (sadly, ISIS has likely reversed this change in awareness, although their largest victims are fellow Muslims), but it’s important to remember the catalyst of the Spring had everything to do with lack of economic freedom. Let’s backtrack to the day a young fruit and vegetable dealer named Muhammad Bouazizi was arrested outside his food cart for not providing the right bureaucratic documentation. The height of his frustration peaked due to the predatory anti-market nature of the Tunisian State that he committed suicide by lighting himself on fire and created a national shift in consciousness from then on.    

When it comes to commerce, the spread and rise of Islam can solely be based on its historical embrace of trade and mutual exchange. After all, the Prophet Muhammad was himself a merchant capitalist who emphasized the sanctity of private property and wealth accumulation. He is quoted to have said, “He who makes money pleases God”, and was also known to have looked at price-fixing in disdain, noting that “only God governs the market”. All of these fundamental elements would be taken away if Islam spewed anti-capitalist sentiment. Based on careful analysis of the post-Islamic Enlightenment, we are now more closer to understanding that it was the monopolization, delay, and fixation of the Sharia legal code which failed to generate the right incentives for merchants and producers to implement modern organizational methods that would have provided a solid framework to create an industrial economy.

Prior to 1200, Middle Eastern Islamic countries were equally, if not more, economically developed than their European counterparts -- especially in Cairo and Baghdad, which were glamorized for their sprawling bazaars; this was attributed to the lucrative trade route of the Muslims known as the Golden Web. It extended from Baghdad to Samarkhand and well into Bukhara- it was a goldmine for Muslim merchants looking to get spices from Yemen, frankincense from Arabia, and purple silk from Syria.

According to economic historian Timur Kuran, “Around roughly the tenth century, the Middle East was an economically advanced region of the world, as measured by standard of living, technology, agricultural productivity, literacy or institutional creativity. Only China might have been more developed.” The Middle East is a victim of historical legal impediments whose time-preference was higher in scoping the vision of the future, fraught by failing to restructure Islamic legal code to fit for the numerous changes in the destiny of commerce.                                   

One of the most critical impediments to Islamic economies was partnership laws. While Europe was building up large corporate enterprises that had hundreds, even thousands of shareholders, businesses in the Islamic world had limited partnerships not exceeding more than six people. The rationale of this condition is based on Islamic contract law, whereby if one of the business partners dies, the partner must liquidate the assets of the deceased over to the heirs. However, this did not imply the business must be abolished with the death of a partner, but the complication compounded with skewed egalitarian Sharia inheritance laws, which stated that two-thirds of any estate are to be distributed amongst relatives, both male and female, made it difficult for companies to achieve economies of scale due to their longevity being impeded and length of specialization cut short, thus making Islamic companies only temporary. Furthermore, families tended to be quite large due to the practice of polygamy, so due to many heirs being recipients of the inherited wealth, often the business would just dissolve. As Timur Kuran says, “Middle Eastern entrepreneurs minimized the risk of premature termination by keeping their partnerships small and ephemeral.” The consequence for Islamic economies resulted in a long-term game of catch-up soon as the Industrial Revolution commenced.             

Some scholars contend that the conceit of fatalism contributed to the inadequacy of Middle Eastern economies, as ‘everything is in God’s hands’ motto let idleness triumph, but there is more empirical proof that the underdevelopment of the Middle East came about through the imperial Ottoman bureaucratizing special endowments called ‘waqfs’. There were two kinds of waqfs depending on its waqfiyya, or deed, whereby the founder would decide what its primary function would be. Either they were charitable waqfs, or family waqfs. Charitable waqfs were established as a social function, primarily operating as a religious center, and eventually expanding to take care of the poor, providing health services, schools, libraries, and the overall provision of public goods. Family waqfs were used to establish property rights for families in need of a safe haven to stash their savings away from the confiscation by the sultan. Due to the sanctity that waqfs were given, they were tax exempt by the State. However, according to Murat Cizacka, “Given the authoritarian governments in power, the rulers could expropriate the private property for the sake of the ummah.”                        

Furthermore, when complications erupted in the case of family waqfs (since charitable waqfs operated under the public radar and its utilization of resources were transparent), they ran into more controversial problems that could not be as easily resolved in court, unlike charitable waqfs. The endowment deeds often were destroyed or damaged by war, and this lead to their expropriation by the Ottoman government. Under new state management, the organizational structures of waqfs had to change due to an increasing population, while still implementing old methods to provide non-profit social services and education, Europe was now providing similar services through a thriving profit-bearing corporate sector, as well as adopting double-entry bookkeeping and joint-stock companies. According to Kuran, "Westerners had access to commercial banks that could channel capital mobilized from the masses into large-scale productive ventures.                                     

Essentially, the catalyst of the waqfs’ stagnation was their very strict adherence to religious code. Competition was not allowed due to it being mandated by Sharia Law. Through the legal system, by regulation of the ulema, waqfs attained a monopoly on the provision of public goods, including even the use of school textbooks. Additionally, a correlation can be drawn between the decentralized period of waqfs, in which Islamic countries were at the peak of international trade and prosperity, and the era of centralized control by the Ottoman state that was preceded by a lagging and underdeveloped Middle Eastern economy. As Kuran states, “the waqf was economically inefficient because of its perpetuity, inflexibility, lack of self-governance and absence of separate legal personality.”          

In conclusion,anti-competitive resentment is not an ‘Arab’ or ‘Islamic’ characterisistic. After all, Arabs are one of the most educated minorities in America. Arab-American adults with at least a high school diploma number 89%. Forty-five percent of Arab-Americans have a bachelor’s degree or higher, compared to 27% of Americans at large.18% of Arab-Americans have a postgraduate degree, which is nearly twice the American average of 10%. In the same way that Russia was a victim of communism, the Middle East is a victim of brutal extractive regimes whose main enemies have commonly been their own people, and whereby the institutional impediments dictated the market, rather than the market dictating them.