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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

some neo-Weberian scholars have argued that Islam may inhibit economic prosperity. Despite the fact that many also reside in regions with much higher incomes such as Indonesia or Malaysia. they claim that while Protestantism would have acted as an agent of economic advancement. 2004. Islam. 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. They have often exploited and sometimes reinterpreted history in discussion on current issues to strengthen their arguments. 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. 2 . Globalization and Economic Performance in the Middle East. It shows that there is no evidence supporting the view that an Islamic economic system existed in the past despite a few distinct practices. such as how Islam has actually shaped the socalled Islamic world and what is inherent into Islam. This question raises other fundamental debates. On the other hand.INTRODUCTION Today. many authors in the past few decades have defended the existence of a specific and prosperous Islamic economic system. This essay makes distinctions between the different arguments and evaluates their respective relevance. Muslims around the world often live in developing countries such as Bangladesh or Pakistan. Islam would have been an inhibitor of it1. Attributing economic prosperity to religious thought.

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. 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. The cost conscious European rush was certainly stronger because of its material basis but the Muslim one was uncompromising. Islam was born in the seventh century A. It rapidly grew from a small group of nomadic fighters to a wide domination. According to David Landes.performance and that the features of societies of the Islamic world that successively enabled and undermined prosperity might actually not be inherent in Islam. 1998.D.W. in Arabia. Norton & Company. The Wealth and Poverty of Nations: Why Some Are so Rich and Some Are so Poor. 2 David Landes. 3 . whereas the European rush rested on superior fire power and was motivated by profit. the Muslim rush was based on the fighting zeal of new converted men who were convinced that God was on their side. W. As a whole.

Most of the current literature on this topic seems to indicate that an Islamic economic order indeed existed in the past. argues that3 3 Muhammad Abdul-Rauf. 2004. Muslim’s Reflection on Democratic Capitalism. Muhammad Abdul-Rauf. M. Aei Studies.THE SPREAD OF ISLAM Source: Feener. Islam in World Cultures: Comparative Perspectives. Santa Barbara (California): ABC Clio. 4 . 1984. 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. who obtained a PhD from London University and is the author of several books on Islamic and Arabic language and on Muslim intellectual life.

Plainfield Ind.. This unhappy situation lasted for too long and caused deep stagnation and the spreading of ignorance and poverty”.“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. (ed.). political and economic institutions in the Islamic world. This issue points out a new need in our argument: a clear definition of the history of social. 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. 1980. “Policy implication of introducing Zaka into Bangladesh and Saudi Arabia” in Zaman R. Some Aspects of the Economics of Zakah. 5 . 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. 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.

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. most Muslim societies were actually built around separate institutions of state and religion. The first one covered the era of the prophet Muhammad and the first four caliphs5. by comparison with Christian 5 Ira Lapidus.Islamic world as the succession of two Golden ages. Middle Eastern states and religious communities were highly differentiated. clans. 6 . lineages. States were officially committed to the defense of Muslim worship but they were not inherently Islamic institutions. It was the era of the great empires. 1992. This era illustrates this concept of an undifferentiated political community with the integration of individuals. 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. argues Lapidus. and clienteles into a united body. Caliphate’s political identity became increasingly secularized. social and family matters. The much longer Second Golden Age was characterized by a society divided between state and religious institutions. The Golden Age: The Political Concept of Islam. The imperial Islamic society was not built on Arabian structures but on those of previous Middle Eastern societies. Nevertheless. families. characterized by different institutions and social frameworks. By the eleventh century. in Annals of the American Academy of Political and Social Science. The caliphs retained only a nominal role as the official representatives of Islam.

While Islam in the Second Golden Age of Islamic historical societies certainly defined fewer matters than it did during the First Golden Age. 6 David Landes. dissents flourish and create instability which fosters popular initiatives and thus economic growth. which made the distinction between political and religious institutions early in their history. 7 . During the European Middle Ages. In terms of economic performance. Muslims were among the world’s leaders in scientific thought. Norton & Company. as a whole. The Arabic system of notation that generated modern mathematics remains an evidence of these times. 2002. a much more important role than it did in Christian Western societies. 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. The Wealth and Poverty of Nations: Why Some Are so Rich and Some Are so Poor. A Concise Economic History of the World: From Paleolithic Times to the Present. as in the West. Meanwhile. Moreover. it appears that religion remained supreme in Islamic societies6. W.European societies. That is one of the first indications leading to the explanation of the economic performances of the “two worlds”. New York. it was only one of several more or less isolated regions before that time7. 1998. The Islamic world also contained the great caravan routes between the Mediterranean and China. the Islamic world’s location between the Persian Gulf and the Mediterranean offered Islamic societies great commercial possibilities. where authority is divided. 7 Rondo Cameron and Larry Neal.W. religion in Islamic societies played.

North. 1990. and not surprisingly. does not always lead to economic effectiveness9. the Ottoman Empire was known as “the sick man of Europe”. productivity level was significantly below that of Western Europe at 8 David Landes. 9 Douglass C.This essay also needs to involve specific examples. Cambridge University Press. In the Moghul Empire. characterized by provinces with various climates and resources. and. W. Norton & Company.W. The Wealth and Poverty of Nations: Why Some Are so Rich and Some Are so Poor. enterprise was opened to a few in the Ottoman Empire. but its extension was not promoted. Moreover. Fragmentation generated competition. thus. The central government bureaucracy promoted neither regional specialization nor economic integration. territorial partition. The Ottoman Empire was a typical despotism in which the rulers took the surplus. productive investment was also negligible. over time. In addition. 8 . Institutional Change and Economic Performance. trade relations with Europe reversed. 1998. Meanwhile. division of power between the center and local authorities. the Ottomans never coordinated their vast territory. into a unified economy. Institutions. within states. Institutional constraints in a society reduce uncertainty by establishing a stable structure for human interaction. The Turks had originally taken over a region once strong but they proved to be unable to generate wealth from within and promote productivity. Despotism obviously existed in Europe too. Craftsmen from the Ottoman Empire had once supplied Europeans but. but because of laws. In the 19th Century. the institutional framework structures incentives in human exchange and. it did not restrain economic development as much8.

11 Douglass C.ggdc. D. Institutions. Institutional Change and Economic Performance. Cambridge University Press.net/Maddison/.the time of conquest in the mid-eighteenth century10. In spite of their lack of historical evidence. 2004. 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. 1990. Malden (Massachusetts): Blackwell Publishing. The Moghul Economy and Society. http://www. 1971. Urban industry and trade had less security against the arbitrary demands of the state than was the case in Western Europe. 9 . North. in Class Structure and Economic Growth: India & Pakistan since the Moghuls. authors such as Muhammad Abdul Rauf and Raguibuz Zaman have argued that a whole coherent Islamic system of 10 Angus Maddison. Technological and even more institutional characteristics explained this relative backwardness. A New Introduction to Islam. APPROXIMATE EXTENT OF THE GREAT EMPIRES Source: Brown.

How do they describe it? Did the Islamic world have distinct practices that could have affected its economic performance? First of all. in The American Economic Review.economy. Few contributions to the literature have focused on solving economic problems. the question of the existence of an Islamic economic system has to be examined again. The prohibition of interest became 12 Thomas Philipp. Money is not merchandise and cannot be sold or bought. Also. a country whose creation was justified by the assumption of the existence of an Islamic identity which demanded an exclusive Islamic way of life. Islam initially regarded mercantile activities with esteem. The Idea of Islamic Economics. 1990. Since the Islamic world seemed to have distinct practices regarding money. 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. in Die Welt des Islams. 13 10 . since Muhammad himself was a merchant. The Discontent of Islamic Economic Morality. However. The case of Pakistan. Zakat (the paying of alms) should play a dominant role in the redistribution of wealth aimed at greater social justice. 1996. may indicate that such an Islamic economic system exists12. with its own mechanism. the charging of interest (riba) is prohibited. indeed existed. 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. Timur Kuran.

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. What does the Islamic order consist of? It focuses on social justice. government interference on behalf of the public interest and the insistence on the right to private property. Islamic banks have claimed to shun interest and disguised lending operations based on interest 14 Thomas Philipp. arbitrage speculation and indexation. 1990. prevention of exploitation. Since 1975. Timur Kuran. They exploit the past in order to achieve their goals. 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. in order to protect Muslims from un-Islamic influence14. 15 11 . such as those of several western European countries15. Practices that Islamic economists tend to find un-Islamic also include insurance. The Discontent of Islamic Economic Morality. in Die Welt des Islams. 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. Muslim merchants devised numerous credit instruments to facilitate their trade throughout the history of the Islamic world.the centerpiece of Islamic economics because interest is a major cog of economic life almost everywhere. 1996. in The American Economic Review. The Idea of Islamic Economics. Although usury was forbidden. An exception to the general resistance to institutional redesign has been banking.

through the use of terms like “commission. in The British Journal of Sociology.” Depositors and borrowers perceive Islamic banks as morally acceptable because they contributed to Islamic causes. Islamic economists disagree among themselves on many matters except the abolition of interest and the importance of Zakat. 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. Their programs are often full of contradictions. Islam would be an inhibitor of it. according to them16. Capitalism and the Weber theses. However. 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. 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. June 1974. Instead of Protestantism acting as an agent of economic advance. attempts to assess the impact of distinct practices associated with Islam suggest that they have little impact on the 16 Bryan Turner. 12 . Islam. the fundamental sources of Islam themselves harbor many inconsistencies. As a whole.

since Islam seems to have a culture incompatible with capitalism. in The American Economic Review. 1996. what could explain the relative current economic underperformance of the Islamic world? 17 Timur Kuran. It would be an easy but wrong conclusion to say that. Research has generally failed to uncover links between Islam and economic performance. 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. it did not produce capitalism and thus could not provide prosperity.accumulation and allocation of capital17. 18 Marcus Noland and Howard Pack. Globalization and Economic Performance in the Middle East. 13 . 2004. Islam. The Discontent of Islamic Economic Morality. If Islam is not a relevant reason. Moreover.

New York: Orbis Books. 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 ethnoreligious groups. R.Source: Armour. Islam. and the West: A Troubled History. After addressing the parameters mentioned above. Christianity. By comparison. it is important to point out that the morality advocated by Islamic economics emphasizes generosity to solve social problems. medieval Western Europe saw a promotion of 14 . 2002.

This argument. 15 . the prophet Muhammad. These Islamic societies have also often been unable to generate a capable workforce.W. Refusing this technology meant cutting Muslims off from the mainstream of knowledge20. exchanges. a point already mentioned. Norton & Company. W. in The American Economic Review. added to the evaluation of the degree of division of the authority. 1998. The Discontent of Islamic Economic Morality. the printing press was perceived in the Ottoman Empire as an instrument of heresy. 1996 20 David Landes. when analyzing Islamic societies’ behavior toward foreign influence. But do these features have anything to do with Islam? As already mentioned in this essay. Islam’s founder. In addition. For example. cultural exchanges may give a clue. 19 Timur Kuran. is certainly an important issue regarding the explanation of the economic performance of the “two worlds”. This facilitated interactions. this difference in moral systems contributed to Europe’s growing economic dominance over the Islamic world19. After the Middle-Ages. Islamic world societies have shown over time a tendency to mistrust new techniques that have come from the West. was a merchant and Islam is supposed to regard mercantile activities with esteem. and thus economic development. The Wealth and Poverty of Nations: Why Some Are so Rich and Some Are so Poor.an individualist morality limiting the economic significance of subgroup identities.

W. feminists emphasize the egalitarian ideals of early Islam22. Women. Norton & Company. As a whole. W. optimal economic growth cannot occur without 21 David Landes. 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. 1998. The Wealth and Poverty of Nations: Why Some Are so Rich and Some Are so Poor. whatever Islam is or is not the reason of the relative subordination of women. On the other hand. Pew Global Attitudes Project. 2002 and 2003. This seems to be a great handicap of Muslim Middle Eastern societies21. November-December 1991. But once again. 22 Deniz Kandiyoti.70 60 50 40 30 20 10 0 North Western Eastern Am erica Europe Europe Latin Am erica Asia Africa Egypt Jordan Lebanon PERCENTAGE THAT RESPONDED “GLOBALIZATION IS GOOD” Source: Pew Research Center for the People and the Press. A significant indication of a nation’s development potential is the status of women. Islam and the State. in Middle East Report. it is hard to argue that Islam justifies the relative subordination of women. 16 .

W. even among OPEC members. most Muslim societies were actually built around separate institutions of state and religion. However. it appears that despite the common statement that Islam is a total way of life. Moreover. Oil producing countries have not developed an advanced economy while the supply of oil is probably precarious23. The Wealth and Poverty of Nations: Why Some Are so Rich and Some Are so Poor. 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.liberating all available forces of development. oil has created wealth but has not generated an economic transformation. 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. W. 1998. 23 David Landes. After definitions and clarifications. 17 . This obviously includes the labor potential and also the intellectual and creative potential of women. Norton & Company. Has oil changed anything? Oil producing countries enjoy the highest incomes in the Muslim Arab world.

The Discontent of Islamic Economic Morality. most Muslims seem to be prepared to use financial and commercial mechanisms developed in the West25. 2004.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. 25 Timur Kuran. in The American Economic Review. 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. Globalization and Economic Performance in the Middle East. 18 . While many Muslims consider their identity under threat and Islamic fundamentalism treats every moral and institutional adaptation as evidence of cultural capitulation. This surely fostered popular initiatives and thus economic growth in the West. dissents flourish and create instability. Where authority is divided. 1996. 24 Marcus Noland and Howard Pack Islam.

1992. B. Cameron. Feener. Lapidus. R. The Moghul Economy and Society.W. Turner. Capitalism and the Weber theses. Islam and the State. 1996. In Middle East Report. The Idea of Islamic Economics. NovemberDecember 1991. Kandiyoti. Muslim’s Reflection on Democratic Capitalism. Islam. A Concise Economic History of the World: From Paleolithic Times to the Present. D.. 1990. 1998. New York: Oxford University Press. June 1974. Islam in World Cultures: Comparative Perspectives. 1971. Some Aspects of the Economics of Zakah. Landes. Islam. In The British Journal of Sociology. Kuran. M. http://www. I.net/Maddison/. Institutional Change and Economic Performance. Noland. 2004. Santa Barbara (California): ABC Clio.BIBLIOGRAPHY: Abdul-Rauf. In Annals of the American Academy of Political and Social Science. The Golden Age: The Political Concept of Islam. 2002. and Pack. The Wealth and Poverty of Nations: Why Some Are so Rich and Some Are so Poor. 1984. Chapter 2 of Class Structure and Economic Growth: India & Pakistan since the Moghuls. North. Washington. H. In The Middle East. Institutions. The Discontent of Islamic Economic Morality. 1990. and Neal. T. DC: Aei Studies. 2004. 19 . Women. Philipp. Norton & Company. L. 1980. Plainfield Ind. T. In Die Welt des Islams. Maddison. A. Zaman. New York: Cambridge University Press. D. New York: W. M. Globalization and Economic Performance. R. M. In The American Economic Review. D.ggdc.