CAPITALISM

Among the claims of the contemporary literature known as "Islamic economics" is that Islamic law provides an economic system conducive to free exchange. Where this system allegedly differs from capitalism, which also promotes economic freedoms, is that it avoids sharp inequalities, chronic corruption, and mass exploitation. If Muslims restructure their economic relations according to Islamic stipulations, say the proponents of Islamic economics, they can obtain all the benefits of capitalism without incurring its costs. Specifically, they can achieve prosperity, steady innovation, and material security—all traits associated with today's advanced market economies—within a framework based on honesty and brotherly cooperation.

If this logic resonates with many Muslims, the reason is that the current economic performance of the Islamic world is generally disappointing. The predominantly Muslim countries included in the annual "Corruption Index" of Transparency International all rank as substantially "more corrupt" than the typical advanced economy. Except for the small oilexporting countries of the Arabian peninsula, not a single Muslim-governed state is among the world's wealthiest countries, and many Muslim countries are impoverished. The Islamic world's participation in world trade is low in relation to its share of global population. Although the basic economic institutions of the Islamic world are formally similar to those of the successful market economies, there is a consensus that they do not perform as well.

Like many secular critics of capitalism, Islamists attribute this situation to Western imperialism. Starting in the eighteenth century, they argue, European traders and financiers, along with the states that supported them, destroyed local crafts, monopolized natural resources, secularized the judicial system, and gradually took over key aspects of economic governance. They also lowered the Islamic world's standards of honesty and weakened its ethic of brotherly cooperation.

Institutional Sources of Underdevelopment

In fact, European imperialism was a result, rather than the leading cause, of the Islamic world's economic shortcomings. Prior to embarking on the global colonization drive whose results included the economic subjugation of the world's Muslim peoples, the West underwent a sustained institutional transformation that gave rise to modern capitalism. During this transformation, which began around the eleventh century, the institutions of the Islamic world also experienced changes, but these were relatively minor. As late as the nineteenth century, the contractual forms recognized by the Islamic court system were essentially those developed a millennium earlier. The concept of a juridical person had no place in Islamic law. Nor did Islamic law recognize joint-stock companies or corporations. Although money lending remained a flourishing profession among both Muslims and non-Muslims, there were no banks. For these reasons, among others, the Islamic world's economic system was now inefficient in relation to the emerging capitalist system of the West. It is this handicap that subjected the Middle East and the rest of the Islamic world to Western economic domination.

As this domination was taking shape, the Islamic world experienced no general economic decline in the absolute sense. But it started showing clear signs of underdevelopment, as measured by the living standards, productivity levels, and institutional dynamism prevailing in the West.

In early stages of the West's economic ascent, the Islamic world's market institutions were at least as efficient as their Western counterparts, and in some respects more so. Its partnership laws, which were codified by jurists generally familiar with the needs of merchants and investors, gave traders a remarkable array of contractual options. Although interest was formally banned, financiers easily circumvented the prohibition, which, in any case, was often interpreted loosely, as disallowing only exploitative interest charges. Disputes between partners, and between buyers and sellers, were settled informally through arbitration or formally through the Islamic courts, whose jurisdiction covered all economic transactions. A wide range of social service organizations, including schools, charities, commercial centers, and rest stops for caravans, were established in a decentralized manner through waqfs, or Islamic trusts. The typical waqf also served as a wealth shelter, for its assets were relatively safe from confiscation and its founder could shower himself, his relatives, and even his descendants with material benefits. To a degree, the privileges enjoyed by waqf founders compensated for the chronic weakness of private property rights. For several centuries—estimates of the end point range from the fourteenth century to the eighteenth century—this system afforded the Islamic world a standard of living that was equal, if not superior, to that of Europe.

The Rise of Modern Capitalism

Meanwhile, the West underwent the momentous structural transformation that resulted in capitalism. This transformation included the strengthening of individual property rights, the recognition of juridical persons in a growing number of sectors, and a sustained broadening of the menu of contractual forms available to investors, traders, workers, and consumers. By the eighteenth century, and unmistakably by the nineteenth, the relative sophistication of Europe's economic institutions allowed its financiers and merchants to dominate economies all across the globe. The main reason why the Islamic world fell into a state of underdevelopment is that changes taking place outside the Islamic world had the effect of reducing the efficiency of pre-capitalist economic institutions based on Islamic law.

Why Islamic law itself failed to generate the basic institutions of capitalism has long been a matter of controversy. One thing is certain. The explanation is not, as nineteenth- and early-twentieth-century thinkers were inclined to believe, that Islam is inherently hostile to commerce or prosperity. The classical sources of Islam are replete with provisions designed to facilitate exchange and production. Nor can the lag be attributed to policies aimed at retarding growth. The Islamic world's structural transformation was delayed because certain institutions well suited to the economic conditions of classical Islam produced unintended consequences.

Unintended Consequences

One of these institutions was the Islamic inheritance system. Outlined in the Qur?an, the Islamic inheritance system requires two-thirds of a person's estate to be apportioned among members of his or her extended family according to criteria dependent on the composition of the possibly numerous heirs and their relationships to the deceased. Prior to the modern era, this system raised the cost of keeping productive enterprises intact across generations. Equally important, because the death of even one partner resulted in termination of the enterprise, and in the dissolution of its assets, the prevailing inheritance rules created incentives for keeping partnerships small and ephemeral. Consequently, the growing complexity that characterized the productive, financial, and commercial enterprises of Europeans was not observed in territories under Islamic law. By contrast, the relative flexibility of European inheritance regimes allowed practices designed to keep estates intact, such as primogeniture. These practices facilitated the establishment of larger and longerlasting enterprises, which then stimulated the development of increasingly sophisticated accounting systems, specialized markets, and contractual forms in order to minimize operating costs.

Until the Western-inspired economic reforms of the nineteenth century, Islamic civilization offered no corporate structures capable of serving as prototypes for durable financial or mercantile organizations. The one major Islamic institution that some consider an exception is the waqf. Established to provide a service in perpetuity, a waqf, like a corporation, was meant to outlive its founder and employees. Nevertheless, it lacked most of the freedoms associated with corporate status. Most significant, it was supposed to refrain from remaking its internal rules and modifying its objectives. Still another unintended effect of the waqf system was that, by enhancing material security, it dampened incentives for seeking stronger property rights. Economic historians generally believe that in the West the strengthening of individual property rights played a critical role in the rise of modern capitalism.

By the nineteenth century, it was clear that the traditional economic institutions of the Islamic world had become a liability. The institutional borrowings that followed included new forms of organization, including complex partnerships, joint-stock companies, and corporations. Another historical break that occurred at this time was the establishment of various secular courts to adjudicate commercial and financial disputes involving contractual forms alien to traditional Islamic law.

Weberian Thesis

The foregoing institutional explanation for the under-development of the Middle East calls into question its most celebrated alternative: the Weberian thesis, which traces the origins of capitalism to the ideological creativity of the Protestant Reformation. Weber's argument was challenged by R. H. Tawney, who showed that capitalist institutions preceded, even created, what Weber called the capitalist spirit. Tawney's observation suggests that where capitalist institutions failed to evolve through locally driven processes, as in the Islamic Middle East, vigorous and successful entrepreneurship would be limited.

At the time that Weber wrote, bilateral trade between the Islamic world and western Europe was almost entirely under the control of Europeans, who provided much of the requisite financing, know-how, and transportation. It thus seemed that the Middle East lacked the entrepreneurship essential to modern capitalism. In fact, the infrastructure of capitalism was inadequate, and Middle Easterners, being latecomers to operating under modern economic institutions, lacked basic experiences and resources. Significantly, it was during the twilight of the traditional Islamic economic order and the transition to modern capitalism—the eighteenth century to the early twentieth century—that the Christians and Jews of the region by and large gained economic ground against its Muslims. Entitled since the early days of Islam to choice of law, which they had sometimes exercised in favor of indigenous non-Muslim contractual forms, the Christian and Jewish religious minorities began using modern contractual forms about a century before Muslims were able to do so. Equally important, many operated under the protection of European-operated courts, as opposed to local Islamic courts.

See alsoCommunism ; Economy and Economic Institutions ; Globalization .

BIBLIOGRAPHY

Çizakça, Murat. A Comparative Evolution of Business Partnerships: The Islamic World and Europe, with Special Reference to the Ottoman Archives. Leiden: E. J. Brill, 1996.

Ibrahim, Mahmood. Merchant Capital and Islam. Austin: University of Texas Press, 1990.

Issawi, Charles. "The Entrepreneurial Class." In The ArabWorld's Legacy. By Charles Issawi. Princeton, N.J.: Darwin Press, 1981.

Kuran, Timur. "Islam and Underdevelopment: An Old Puzzle Revisited." Journal of Institutional and Theoretical Economics 153 (1997): 41–71.

Kuran, Timur. "The Provision of Public Goods under Islamic Law: Origins, Impact, and Limitations of the Waqf System." Law and Society Review 35 (2001): 841–897.

Rodinson, Maxime. Islam and Capitalism. Translated by Brian Pearce (1966). Reprint, New York: Pantheon, 1973.

Timur Kuran