THE QUESTIONABLE EXISTENCE

OF AN ISLAMIC ECONOMIC SYSTEM:

Institutions and Economic Performance in the Islamic World

By

Hervé Guillaud

Third Annual Appalachian Spring Conference in World History and Economics:

A World of Experience

April 26, 2008

2

INTRODUCTION

Today, Muslims around the world often live in developing countries such as

Bangladesh or Pakistan. Despite the fact that many also reside in regions with

much higher incomes such as Indonesia or Malaysia, some neo-Weberian scholars

have argued that Islam may inhibit economic prosperity. Attributing economic

prosperity to religious thought, they claim that while Protestantism would have

acted as an agent of economic advancement, Islam would have been an inhibitor

of it1. On the other hand, many authors in the past few decades have defended the

existence of a specific and prosperous Islamic economic system. They have often

exploited and sometimes reinterpreted history in discussion on current issues to

strengthen their arguments. This essay makes distinctions between the different

arguments and evaluates their respective relevance. This goal requires a long-term

and historical approach to the debate on how institutions and economic

performance diverged between the Islamic world and the West. This question

raises other fundamental debates, such as how Islam has actually shaped the so-

called Islamic world and what is inherent into Islam. It shows that there is no

evidence supporting the view that an Islamic economic system existed in the past

despite a few distinct practices. The core of this essay is built around the

argument that it is hard to uncover links between Islam and economic

1 Marcus Noland and Howard Pack, Islam, Globalization and Economic Performance in the

Middle East, 2004.

3

performance and that the features of societies of the Islamic world that

successively enabled and undermined prosperity might actually not be inherent in

Islam.

One way to approach the institutional and economic differences between

the Islamic world and the West can be through a comparison of these two worlds’

respective “rushes”: the Islamic rush that occurred right after the birth of Islam

and the European overseas expansion that happened after the voyages of

discovery. Islam was born in the seventh century A.D. in Arabia. It rapidly grew

from a small group of nomadic fighters to a wide domination. According to David

Landes, this explosion of commitment was the most important feature of Eurasian

history during the millennium from the fall of the Western Roman Empire to the

European overseas expansion2. As a whole, the Muslim rush was based on the

fighting zeal of new converted men who were convinced that God was on their

side, whereas the European rush rested on superior fire power and was motivated

by profit. The cost conscious European rush was certainly stronger because of its

material basis but the Muslim one was uncompromising.

2 David Landes, The Wealth and Poverty of Nations: Why Some Are so Rich and Some Are so

Poor, W.W. Norton & Company, 1998.

4

THE CLAIM OF A SPECIFIC ISLAMIC ECONOMIC SYSTEM

The question of the differences between the Islamic world and the West in terms

of institutions and economic performance often generates the debate of the

possible existence of an economic system specific to the Islamic world. Most of

the current literature on this topic seems to indicate that an Islamic economic

order indeed existed in the past. Muhammad Abdul-Rauf, who obtained a PhD

from London University and is the author of several books on Islamic and Arabic

language and on Muslim intellectual life, argues that3

3 Muhammad Abdul-Rauf, Muslim’s Reflection on Democratic Capitalism, Aei Studies, 1984.

THE SPREAD OF ISLAM

Source: Feener, M. Islam in World Cultures: Comparative Perspectives. Santa

Barbara (California): ABC Clio, 2004.

5

“The gap separating Muslims from the ideal of Islam’s economic doctrine

widened considerably when the Muslim world fell under European

occupation and when colonial masters replaced traditional Muslim

systems with their own legal and economic institutions. This unhappy

situation lasted for too long and caused deep stagnation and the spreading

of ignorance and poverty”.

Another author named Raguibuz Zaman argues that “the earlier centuries of Islam

were witnesses to the efficient functioning of the Islamic economic system and an

analysis of the workability of this system in modern times will draw upon this

experience”4. These two quotations illustrate one of the challenges in finding

sources comparing the West and the Islamic world: the authors’ bias is

particularly marked because the exploitation of the past is integrated in a larger

argument aiming to justify a clash of civilizations between the West and the

Islamic world. This issue points out a new need in our argument: a clear definition

of the history of social, political and economic institutions in the Islamic world.

Some clarifications concerning the history of the Islamic world are thus

required before any further investigation. Ira Lapidus pictured the history of the

4 Raguibuz Zaman, “Policy implication of introducing Zaka into Bangladesh and Saudi Arabia” in

Zaman R. (ed.), Some Aspects of the Economics of Zakah, Plainfield Ind., 1980.

6

Islamic world as the succession of two Golden ages, characterized by different

institutions and social frameworks. The first one covered the era of the prophet

Muhammad and the first four caliphs5. This first Golden Age is often mentioned

in the current literature because it symbolizes the perfect realization of an Islamic

state: an integrated society under the political and moral leadership of a

charismatic leader. This era illustrates this concept of an undifferentiated political

community with the integration of individuals, families, clans, lineages, and

clienteles into a united body. The much longer Second Golden Age was

characterized by a society divided between state and religious institutions. It was

the era of the great empires. The imperial Islamic society was not built on Arabian

structures but on those of previous Middle Eastern societies. Caliphate’s political

identity became increasingly secularized. The caliphs retained only a nominal role

as the official representatives of Islam. By the eleventh century, Middle Eastern

states and religious communities were highly differentiated. States were officially

committed to the defense of Muslim worship but they were not inherently Islamic

institutions, argues Lapidus.

The difference between the two Golden ages seems to indicate that despite

the common statement that Islam is a total way of life defining political, social

and family matters, most Muslim societies were actually built around separate

institutions of state and religion. Nevertheless, by comparison with Christian

5 Ira Lapidus, The Golden Age: The Political Concept of Islam, in Annals of the American

Academy of Political and Social Science, 1992.

7

European societies, which made the distinction between political and religious

institutions early in their history, it appears that religion remained supreme in

Islamic societies6. While Islam in the Second Golden Age of Islamic historical

societies certainly defined fewer matters than it did during the First Golden Age,

religion in Islamic societies played, as a whole, a much more important role than

it did in Christian Western societies. Moreover, where authority is divided, as in

the West, dissents flourish and create instability which fosters popular initiatives

and thus economic growth. That is one of the first indications leading to the

explanation of the economic performances of the “two worlds”.

In terms of economic performance, it is important to be aware that

although Western Europe was the region of the world that enjoyed the most

dynamic growth from the sixteenth to the twentieth centuries, it was only one of

several more or less isolated regions before that time7. Meanwhile, the Islamic

world’s location between the Persian Gulf and the Mediterranean offered Islamic

societies great commercial possibilities. The Islamic world also contained the

great caravan routes between the Mediterranean and China. During the European

Middle Ages, Muslims were among the world’s leaders in scientific thought. The

Arabic system of notation that generated modern mathematics remains an

evidence of these times.

6 David Landes, The Wealth and Poverty of Nations: Why Some Are so Rich and Some Are so

Poor, W.W. Norton & Company, 1998. 7 Rondo Cameron and Larry Neal, A Concise Economic History of the World: From Paleolithic

Times to the Present, 2002. New York.

8

This essay also needs to involve specific examples. The Ottoman Empire was a

typical despotism in which the rulers took the surplus. Despotism obviously

existed in Europe too, but because of laws, territorial partition, and, within states,

division of power between the center and local authorities, it did not restrain

economic development as much8. Fragmentation generated competition. In

addition, enterprise was opened to a few in the Ottoman Empire, but its extension

was not promoted. Institutional constraints in a society reduce uncertainty by

establishing a stable structure for human interaction. Meanwhile, the institutional

framework structures incentives in human exchange and, thus, does not always

lead to economic effectiveness9. Craftsmen from the Ottoman Empire had once

supplied Europeans but, over time, trade relations with Europe reversed. The

Turks had originally taken over a region once strong but they proved to be unable

to generate wealth from within and promote productivity. Moreover, the

Ottomans never coordinated their vast territory, characterized by provinces with

various climates and resources, into a unified economy. The central government

bureaucracy promoted neither regional specialization nor economic integration. In

the 19th

Century, the Ottoman Empire was known as “the sick man of Europe”. In

the Moghul Empire, productive investment was also negligible, and not

surprisingly, productivity level was significantly below that of Western Europe at

8 David Landes, The Wealth and Poverty of Nations: Why Some Are so Rich and Some Are so

Poor, W.W. Norton & Company, 1998. 9 Douglass C. North, Institutions, Institutional Change and Economic Performance, Cambridge

University Press, 1990.

9

the time of conquest in the mid-eighteenth century10

. Technological and even

more institutional characteristics explained this relative backwardness. The

parasitic state apparatus did not enable an optimal use of the production

possibilities and the absence of incentive structure prevented the development of the

innovation industry11

. Urban industry and trade had less security against the

arbitrary demands of the state than was the case in Western Europe.

In spite of their lack of historical evidence, authors such as Muhammad Abdul

Rauf and Raguibuz Zaman have argued that a whole coherent Islamic system of

10

Angus Maddison, The Moghul Economy and Society, in Class Structure and Economic Growth:

India & Pakistan since the Moghuls, 1971, http://www.ggdc.net/Maddison/. 11

Douglass C. North, Institutions, Institutional Change and Economic Performance, Cambridge

University Press, 1990.

APPROXIMATE EXTENT OF THE GREAT EMPIRES

Source: Brown, D. A New Introduction to Islam. Malden (Massachusetts): Blackwell

Publishing, 2004.

10

economy, with its own mechanism, indeed existed. How do they describe it? Did

the Islamic world have distinct practices that could have affected its economic

performance? First of all, since Muhammad himself was a merchant, Islam

initially regarded mercantile activities with esteem. However, the charging of

interest (riba) is prohibited. Money is not merchandise and cannot be sold or

bought. Also, Zakat (the paying of alms) should play a dominant role in the

redistribution of wealth aimed at greater social justice. Since the Islamic world

seemed to have distinct practices regarding money, the question of the existence

of an Islamic economic system has to be examined again. The case of Pakistan, a

country whose creation was justified by the assumption of the existence of an

Islamic identity which demanded an exclusive Islamic way of life, may indicate

that such an Islamic economic system exists12

. One of the keys to evaluating

theories might be to analyze the authors’ interest in defending what they stand for.

A main point that must be considered is the fact that the idea of a specific Islamic

economic system is of rather recent origin. The so-called Islamic economics are

actually driven by cultural rather than economic concerns: its main purpose is not

to improve economic performance but to help prevent Muslims from assimilation

into the emerging global western culture13

. Few contributions to the literature

have focused on solving economic problems. The prohibition of interest became

12

Thomas Philipp, The Idea of Islamic Economics, in Die Welt des Islams, 1990. 13

Timur Kuran, The Discontent of Islamic Economic Morality, in The American Economic

Review, 1996.

11

the centerpiece of Islamic economics because interest is a major cog of economic

life almost everywhere. Although usury was forbidden, Muslim merchants

devised numerous credit instruments to facilitate their trade throughout the history

of the Islamic world. The need to show the relevance of Islam and its adaptability

has generated a process of reinterpretation of the past to transform the traditional

beliefs and institutions to enable social and political change. Practices that Islamic

economists tend to find un-Islamic also include insurance, arbitrage speculation

and indexation. The main objectives of Islamic fundamentalism promoting

Islamic economics are promoting an Islamic common market and weakening the

economic ties between the Muslim world and the West, in order to protect

Muslims from un-Islamic influence14

. They exploit the past in order to achieve

their goals. What does the Islamic order consist of? It focuses on social justice,

prevention of exploitation, government interference on behalf of the public

interest and the insistence on the right to private property. This order differs from

the denounced forms of capitalism and communism but actually seems to be close

to the kind of capitalist economy aimed at social democratic legislatives, such as

those of several western European countries15

. An exception to the general

resistance to institutional redesign has been banking. Since 1975, Islamic banks

have claimed to shun interest and disguised lending operations based on interest

14

Thomas Philipp, The Idea of Islamic Economics, in Die Welt des Islams, 1990. 15

Timur Kuran, The Discontent of Islamic Economic Morality, in The American Economic

Review, 1996.

12

through the use of terms like “commission.” Depositors and borrowers perceive

Islamic banks as morally acceptable because they contributed to Islamic causes.

As a whole, Islamic economists disagree among themselves on many matters

except the abolition of interest and the importance of Zakat. Their programs are

often full of contradictions; the fundamental sources of Islam themselves harbor

many inconsistencies.

RELIGION AND ECONOMIC PERFORMANCE: WHAT IS INHERENT

IN ISLAM?

Recent decades have seen a revival of the neo-Weberian attribution of economic

prosperity to religious thought. Neo-Weberian scholars have argued that Islam’s

ethic could not generate the social framework enabling the Muslim Middle East to

be lifted out of a feudal system. They have justified their argument by the

combination of an unquestioned and mystical acceptance of the world and a

warrior religiosity that characterized societies of the Islamic world, according to

them16

. Instead of Protestantism acting as an agent of economic advance, Islam

would be an inhibitor of it. However, attempts to assess the impact of distinct

practices associated with Islam suggest that they have little impact on the

16

Bryan Turner, Islam, Capitalism and the Weber theses, in The British Journal of Sociology,

June 1974.

13

accumulation and allocation of capital17

. Research has generally failed to uncover

links between Islam and economic performance. It would be an easy but wrong

conclusion to say that, since Islam seems to have a culture incompatible with

capitalism, it did not produce capitalism and thus could not provide prosperity.

Moreover, Islam embraces a diversity of societies and cultures and the lessons of

its writing are often contradictory and can be used to almost any purpose18

. If

Islam is not a relevant reason, what could explain the relative current economic

underperformance of the Islamic world?

17

Timur Kuran, The Discontent of Islamic Economic Morality, in The American Economic

Review, 1996.

18

Marcus Noland and Howard Pack, Islam, Globalization and Economic Performance in the

Middle East, 2004.

14

After addressing the parameters mentioned above, it is important to point out that

the morality advocated by Islamic economics emphasizes generosity to solve

social problems. Has this morality fostered development or acted as a constraint

throughout the history of the Islamic world? This collectivist morality encouraged

an individual Muslim to interact primarily with members of his or her own ethno-

religious groups. By comparison, medieval Western Europe saw a promotion of

Source: Armour, R. Islam, Christianity, and

the West: A Troubled History. New York:

Orbis Books, 2002.

15

an individualist morality limiting the economic significance of subgroup

identities. This facilitated interactions, exchanges, and thus economic

development. After the Middle-Ages, this difference in moral systems contributed

to Europe’s growing economic dominance over the Islamic world19

. This

argument, added to the evaluation of the degree of division of the authority, a

point already mentioned, is certainly an important issue regarding the explanation

of the economic performance of the “two worlds”. In addition, when analyzing

Islamic societies’ behavior toward foreign influence, cultural exchanges may give

a clue. Islamic world societies have shown over time a tendency to mistrust new

techniques that have come from the West. For example, the printing press was

perceived in the Ottoman Empire as an instrument of heresy. Refusing this

technology meant cutting Muslims off from the mainstream of knowledge20

.

These Islamic societies have also often been unable to generate a capable

workforce. But do these features have anything to do with Islam? As already

mentioned in this essay, Islam’s founder, the prophet Muhammad, was a merchant

and Islam is supposed to regard mercantile activities with esteem.

19

Timur Kuran, The Discontent of Islamic Economic Morality, in The American Economic

Review, 1996 20

David Landes, The Wealth and Poverty of Nations: Why Some Are so Rich and Some Are so

Poor, W.W. Norton & Company, 1998.

16

A significant indication of a nation’s development potential is the status of

women. This seems to be a great handicap of Muslim Middle Eastern societies21

.

But once again, it is hard to argue that Islam justifies the relative subordination of

women. Conservatives argue that the Quran and the lives of prominent women in

the early modern period of Muslim history provide evidence that the status of

women is divinely set. On the other hand, feminists emphasize the egalitarian

ideals of early Islam22

. As a whole, whatever Islam is or is not the reason of the

relative subordination of women, optimal economic growth cannot occur without

21

David Landes, The Wealth and Poverty of Nations: Why Some Are so Rich and Some Are so

Poor, W.W. Norton & Company, 1998. 22

Deniz Kandiyoti, Women, Islam and the State, in Middle East Report, November-December

1991.

0

10

20

30

40

50

60

70

North

America

Western

Europe

Eastern

Europe

Latin

America

Asia Africa Egypt Jordan Lebanon

PERCENTAGE THAT RESPONDED “GLOBALIZATION IS GOOD”

Source: Pew Research Center for the People and the Press, Pew Global Attitudes

Project, 2002 and 2003.

17

liberating all available forces of development. This obviously includes the labor

potential and also the intellectual and creative potential of women. Has oil

changed anything? Oil producing countries enjoy the highest incomes in the

Muslim Arab world. However, even among OPEC members, oil has created

wealth but has not generated an economic transformation. Oil producing countries

have not developed an advanced economy while the supply of oil is probably

precarious23

.

CONCLUSION

Engaging a comparison between the Islamic world and the West often means

finding sources in which authors’ bias is particularly marked because the

exploitation of the past is integrated in a larger argument aiming to justify a clash

of civilizations. After definitions and clarifications, it appears that despite the

common statement that Islam is a total way of life, most Muslim societies were

actually built around separate institutions of state and religion. Moreover, the

assumption that Islam could be an inhibitor of prosperity does not seem true in

spite of some features common between many societies of the Islamic world that

could indicate a tendency to refuse cultural exchanges with the western world – a

feature in some way paradoxical since the founder of Islam was a merchant.

23

David Landes, The Wealth and Poverty of Nations: Why Some Are so Rich and Some Are so

Poor, W.W. Norton & Company, 1998.

18

Christian Western societies that made for instance the distinction between

political and religious institutions early in their history seem more fragmented and

more individualist than Islamic society where religion remained supreme. Where

authority is divided, dissents flourish and create instability. This surely fostered

popular initiatives and thus economic growth in the West.

The population of the Arab region is expected to increase by around 25

percent between 2000 and 2010 and by 50 to 60 percent by 202024

. While many

Muslims consider their identity under threat and Islamic fundamentalism treats

every moral and institutional adaptation as evidence of cultural capitulation, most

Muslims seem to be prepared to use financial and commercial mechanisms

developed in the West25

.

24

Marcus Noland and Howard Pack Islam, Globalization and Economic Performance in the

Middle East, 2004.

25

Timur Kuran, The Discontent of Islamic Economic Morality, in The American Economic

Review, 1996.

19

BIBLIOGRAPHY:

Abdul-Rauf, M. Muslim’s Reflection on Democratic Capitalism. Washington,

DC: Aei Studies, 1984.

Cameron, R. and Neal, L. A Concise Economic History of the World: From

Paleolithic Times to the Present. New York: Oxford University Press, 2002.

Feener, M. Islam in World Cultures: Comparative Perspectives. Santa Barbara

(California): ABC Clio, 2004.

Kandiyoti, D. Women, Islam and the State. In Middle East Report, November-

December 1991.

Kuran, T. The Discontent of Islamic Economic Morality. In The American

Economic Review, 1996.

Landes, D. The Wealth and Poverty of Nations: Why Some Are so Rich and Some

Are so Poor. New York: W.W. Norton & Company, 1998.

Lapidus, I. The Golden Age: The Political Concept of Islam. In Annals of the

American Academy of Political and Social Science, 1992.

Maddison, A. The Moghul Economy and Society. Chapter 2 of Class Structure

and Economic Growth: India & Pakistan since the Moghuls. 1971,

http://www.ggdc.net/Maddison/.

Noland, M. and Pack, H. Islam, Globalization and Economic Performance. In The

Middle East, 2004.

North, D. Institutions, Institutional Change and Economic Performance. New

York: Cambridge University Press, 1990.

Philipp, T. The Idea of Islamic Economics. In Die Welt des Islams, 1990.

Turner, B. Islam, Capitalism and the Weber theses. In The British Journal of

Sociology, June 1974.

Zaman, R. Some Aspects of the Economics of Zakah. Plainfield Ind., 1980.