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Islam and Markets

The relationship between Islam and trade is not well appreciated in the West. The Prophet Muhammad (peace be upon him) and his wife Khadija were both merchants. The Qur’an, the Muslim scripture, is filled with parables using the language of trade. It was merchants, not soldiers, who were mainly responsible for the spread of Islam throughout the world.

Conversely, the rise of the Islamic civilization contributed to the progress of economic development and economic theory. In his history of economics, Murray Rothbard noted the more advanced understanding of markets found among the Scholastics and in the sixteenth-century school of Salamanca, compared to that of the ancient Greeks.1 The Muslim influence on these schools is expected. The Scholastics inherited Greek knowledge from Arabic translations and commentaries, and the Spanish of the sixteenth century had recently conquered the land upon which rested the universities of the Moors.

The rising tide of Islam today is in part a reaction against the Arab socialism that has destroyed the markets of the Muslim world. That the rejection of secularism and of socialism should come hand in hand should not be surprising. One cannot be a Muslim and opposed to freedom of enterprise, as we shall show.

Opposition to free markets can come from a number of directions. It may be rooted in an ideological objection to private property (socialism), in a disdain for material prosperity itself (asceticism), in an antipathy to the variations in wealth that must accompany market mechanisms (economic egalitarianism), or in a mistaken belief that a command economy can better provide economic benefits (authoritarianism). Islam refutes all of these.

In contrast to socialism, Islam enshrines private property as a sacred trust. Everything belongs to God, and it is Man that God has created as His khalîfah, or His agent on earth (Qur’ân 2:30). Each person is individually responsible directly to the Almighty for the faithful execution of this awesome trust (36:54). Therefore that concept of private property well-established among the Semitic peoples is taken as a given by the Qur’an. Rather than modify the concept of property, the Qur’an specifies the terms for its wholesome and just enjoyment and employment. It should neither be used wastefully nor in a way that will deprive others of their justly acquired property (2:188). When one holds the property of others in trust, for example for orphans, one should not divert it to one’s personal benefit (2:2; 4:10), but one should not turn over one’s own property to those incapable of managing it (2:5). When orphans mature they should be given control of their own property (2:6). Inheritance rights are not only respected (4:33), but expanded to include women (4:7). Property rights of women are as sacred as those of men in other cases as well (4:24, 4:32) and the treatment of women as chattel is prohibited (4:19).

The Prophet emphasized the importance of property rights in his farewell pilgrimage by declaring to the assembled masses “Nothing shall be legitimate to a Muslim which belongs to a fellow Muslim unless it was given freely and willingly.”2 The Qur’an mandates the respect for property rights be extended to all human beings regardless of religious faith (3:75).

Islam rejects both monastic asceticism that glorifies poverty and suffering and the Calvinistic variety discussed by Max Weber that esteems the accumulation of wealth at the expense of its enjoyment. Neither poverty nor wealth are proofs of virtue. Rather both are trials of one’s commitment to the higher spiritual order. The Islamic view of the material world is as a neutral stage in which the individual demonstrates submission to the will of God by his choices, including the lawful acquisition and use of God’s bounties. Profit may be pursued even on the day of congregational prayer (62:10).

The rejection of asceticism is not an invitation to hedonistic consumption, however. Moderate in all things, Islam emphasizes the importance of commerce and productivity: “O ye who believe! eat not up your property among yourselves in vanities: but let there be amongst you traffic and trade by mutual good-will: nor kill (or destroy) yourselves: for verily God hath been to you Most Merciful” (4:29).

Upon encountering Islamic social thought, some Westerners are so impressed by the detailed treatment Islamic law gives obligatory charity, they presume that Muhammad set out to impose a leveling of the wealth. There is no foundation for such a belief. On the contrary, the Qur’an denounces envy of the wealth of others: “And in no wise covet those things in which God hath bestowed his gifts more freely on some of you than on others: to men is allotted what they earn and to women what they earn: but ask God of His bounty: for God hath full knowledge of all things” (4:32).

The zakat, as this obligatory charity is called, basically set at 2.5% of accumulated wealth beyond the subsistence level which would qualify one to be a recipient, tools of the trade and current inventories of stock in trade exempted. It is thus an assessment against wealth, not an income tax (although farmers and miners pay a portion of their gross product instead of a percentage of their capital). Insofar as it is not an assessment against income, it does not discourage productivity, but rather discourages idle wealth. Further, the levels of the assessment are not confiscatory, so while it provides a safety net for the poor, it in no way “levels” the wealth nor penalizes the rich.

Finally, the term zakat, itself, comes from the root word meaning “to purify.” The return of a small portion of one’s wealth to the general community therefore purifies the rest from any taint that an initial inequality of assets might suggest. The needs of the unfortunate are met without impairing the productivity of those God has blessed materially.

The fallacy that the command economy can better provide for the material needs of a society has suffered a severe setback with the fall of the Soviet Union. But the command economy was unpopular with Muslim economists from the beginning. There are numerous traditions that demonstrate that the Prophet Muhammad turned to the marketplace to determine the just price of commodities. On learning that his companion Bilal had traded poor quality dates for high quality dates, the Prophet advised him that buying and selling at market prices over barter avoided the dangers of overcharging (ribâ) inherent in barter.3

As might be expected from this respect for the market’s ability to set just prices, Muhammad disliked price controls and limited his interventions to the prohibition of practices like fraud and ribâ. After the caliphs of the early Umayyid dynasty had departed from the Prophet’s practices, the reformer Umar II ordered his governors to leave prices to the market with this advice: “God has made land and waters for seeking His bounties. So let traders travel between them without any intervention. How can you intervene between them and their livelihood?”4

The Islamic analysis of markets reached the level of economic science by the time of the great fourteenth century historian Ibn Khaldun. He rejected the utopianism of the Greek-influenced philosophers. To him, the fact that the policies mandated by God could be scientifically demonstrated as the best social policies was the natural consequence of the fact that the laws of economics and the laws of good living had the same Creator. His understanding of the harmfulness of the command economy can be seen from the titles of the section headings in his magnum opus, the Muqaddimah (Introduction to History), e.g., “Commercial activity on the part of the ruler is harmful to his subjects and ruinous to the tax revenue.”5

Markets antedate the mission of Muhammad. They are especially strong in the Semitic world. Like their cousins, the Jews, the early Arabs had a strong commitment to trade and bargaining. The rise of Islam did not change, nor did it seek to change, the centrality of trade and commerce to the Arab way of life. On the contrary, the establishment of commercial law, the expansion of property rights for women, the prohibition of fraud, the call for the establishment of clear standards of weights and measures, and the uncompromising defense of property rights (even while calling for a greater responsibility for alleviating the plight of the poor and needy) pushed the Islamic civilization to the front of the world’s economic stage and made the Muslim world the defining force in international trade for over 800 years. The Islamic activists throughout the Muslim world can help to usher in a new Renaissance if they avoid the temptation to yield to political pragmatism and hold fast to the pro-market principles of Islam.