Economic Islam
The biggest obstacle to Arab reconciliation with the modern world may not lie in Islam’s incompatibility with Liberal Democracy but in its rejection of the attendant capitalism. Scholarly Muslim reformers are coming to a consensus that there is nothing in the concept of the former that is fundamentally at odds with Islamic principles. Tariq Ramadan in particular advocates that devout Muslims living in the West re-read the scriptures in light of their current circumstances, enthusiastically embrace the societies that have become their own, participate fully in cultural and political life not just as Muslims but as responsible citizens, and become role models for their neighbors through their faith. Nothing wrong with that is there? Well, yes there is a problem. Actually there are at least two. The Islamic prohibition against any form of usury is the first. Zakat, the third pillar of Islam, is the second.
The sixteenth century gave us three crucial innovations leading to the unprecedented prosperity much of the world enjoys today. No one would argue that the scientific method was one. Less widely recognized are John Calvin’s argument that a reasonable rate of interest in exchange for a loan does not amount to usury, and legal recognition of the limited liability corporation. Without all three the industrial revolution might never have occurred, certainly it would not have taken us as far as it has. The three were enthusiastically adopted in Protestant Europe, slowly and with reluctance in Catholic Europe, and not at all in the heart of Islam. One need only look at the development of New World colonies to see the relative effect. Commercial trading enterprises in the North thrived almost from the beginning. The South depended on sponsorship from crown and church and lags behind even today. The lack of an industrial base has been a millstone around the neck of West Asia and North Africa for five hundred years. The differences can be largely explained by the underlying economic systems.
I’m not suggesting that one cannot be a successful capitalist without borrowing money. My paternal grandparents scrimped and saved early in their marriage until they had what was for them a fortune. My grandfather used it a hundred years ago to go into the lumber business. He became a wealthy man for his day following a simple model. He used profits from one transaction to fund the next, never borrowing. Unfortunately for his heirs, his business acumen did not pass to his ten children. By the time the third generation received their inheritance it was little more than the original investment in absolute terms and no longer even a small fortune. That isn’t a complaint. I got a great deal more than money from my parents and grandparents. I tell the story to acknowledge that one need not necessarily borrow one’s way to financial success. My grandfather would have rightly said it is far easier to borrow one’s way to ruin. But it is also true that the judicious use of credit, including interest bearing credit, is the life blood of modern global economics.
Muslims object to usury for the same reason Catholics do. It is prohibited by the scriptures of course and that is because it has been a means of exploiting the poor down through the ages. But unlike Catholics Muslims still generally forbid charging or paying any interest. The conventional loan is illegitimate regardless of purpose or safeguard, with some modern reformers making temporary exceptions in cases of necessity such as mortgage loans for Muslims living in the West. Most don’t make even that concession, though there are Muslim financial institutions that get around the issue by artfully structuring agreements so they don’t appear to be interest bearing debt instruments. Catholics have long since redefined usury so that it applies only to “unreasonable” charges. The problem with the absolutist view is that it ignores the time value of money, the fact that a dollar in hand is worth more than a promise to repay the same dollar in the future. The argument is that only honest labor adds worth, to profit solely from the use of one’s savings is sinful. There is always the equity investment of course. One may build a house and rent it out but that too is a moral trap. The greedy landlord can be and often has been every bit as oppressive as the usurer.
This isn’t a petty argument. The difference severely constrains Muslims in their ability to finance roads, bridges, canals, schools, factories, inventories, accounts receivable, a new automobile, a student loan, or even seed and fertilizer for next year’s crop. It is a major impediment to economic growth in the Middle East, even in those countries sloshing around in petrodollars, and a barrier to some of the most innovative mechanisms for breaking the poverty cycle in large parts of the third world. It concerns us all not just because everyone wants to help the needy, but because integration with the world economy is proving to be a primary incentive for maintaining world peace.
I’m not the only one who thinks that. Just last week Muhammad Yunus won the Nobel Peace Prize for his work in developing the concept of the so-called microloan, very small loans to budding entrepreneurs and others in some of the poorest places on the planet. I’m not so naïve as to believe everybody who gets one of those loans becomes a success story, my grandfather was right about the dangers of credit, nor does the Nobel guarantee sainthood for Yunus. He joins a group known as much for its charlatans as for its statesmen, but if somebody has a better idea how to deal with grinding poverty in Bangladesh I’d like to hear it.
Critics of the microloan decry the injustice of the typical 20% interest rate when the rich can get much better terms. I would call it a fact of economic life. If the loan helps somebody get on his feet it is worth the cost. I can buy eggs in cartons of four, a dozen, or two dozen. There are stores in South Dallas that sell them one egg at a time. Everyone expects to pay more per egg for smaller numbers per transaction. The moral quandary comes in when the store makes its profits selling eggs to people who can only afford one, especially if they make large profits on millions of eggs. If they don’t the same people go without the eggs unless the government or charity steps in, which brings me to zakat.
It’s usually translated as charity but it is an obligation so it can also be described as a tax. Every Muslim is required to submit to God and make the profession of faith, pray five times a day, and if able pay the zakat, fast during Ramadan, and make the pilgrimage to Mecca once in his lifetime. I’ve over simplified but those are the five pillars. A number of modern Muslim reformers offer the zakat as an alternative economic system to capitalism. Bear with me, this gets tricky. The idea is to better manage the charitable giving, use it not just to feed the poor but to enable them to feed themselves, become self sustaining, and eventually pay their own zakat in turn. Over time more and more Muslims will be raised out of poverty and begin to participate on an equal footing in growing world prosperity. Reformists advocate changing the independent administration of zakat as it is currently practiced and direct it into more centrally controlled funds that can be applied more effectively. Western society does something like that today with systems of government grants, tax credits, and charitable foundations. Many of them are designed to promote economic activities and commercial projects that are deemed worthwhile by whoever controls the funds.
That’s the rub isn’t it? The people deciding which projects get funded do so without necessarily giving top priority to financial viability. If we learned any economic lesson in the last century it was that central control of monetary allocation cannot compete with liberal capitalism where the investor takes his chances with loan or equity based on his own best estimate of the risks and rewards involved. Communism proved an abject failure despite ideals quite similar at their highest level to those of Muslims. How can you argue with the manifesto “from each according to means, to each according to need?” We try to do something like that with our programs of progressive taxation. Even the early church practiced a form of the philosophy. It has its place but it has never worked as a stand alone system, not on a massive scale.
Before I go too far down this path I should also acknowledge that there was a time when Islamic economics did work. The power of the eighth century Abbasid Caliphate was grounded at least as much in trade as in its military strength, and the sixteenth century had its highlights for Ottomans too. Having lost virtually the entire Turkish fleet at Lepanto in 1571, in the last of the world’s great naval battles involving ships all powered by oars, the Grand Vizier told the Venetian ambassador they had merely cut off his beard. It would grow back. In six months they had rebuilt with new, more modern ships and went uncontested in most of the Mediterranean for another century. When asked by Selim II if his treasury could afford it the Vizier replied that if the Sultan wished he could plate the ships with gold.
The sixteenth century would prove to be the high water mark for Muslim dominance, militarily, economically, and culturally. Modern reformers (Muhammad Yunus is an exception) tend to be philosophers and theologians, not historians, not social scientists, and not economists. In attempting to reform zakat, they are trying to tweak a system that has been around for fourteen centuries and has been ineffective for at least five. The plan seems to be “we’ll get it right this time.” I don’t see much cause to think they will. Capitalism has been in a constant state of renewal from its inception. Despite its flaws we have learned to prevent many of the worst excesses. Bankruptcy laws mean we no longer turn debtors over to the torturers until they pay what they owe, antitrust legislation has more or less curbed the robber barons, and the decline of colonialism has put a brake on the rapacious nature of empire.
Tariq Ramadan and others rail at what they consider to be institutions of repression in the modern world, principally the World Trade Organization, the International Monetary Fund, the World Bank, and the multinational corporation. They aren’t alone. The 1999 riots in Seattle demonstrated wide spread discontent in the West too toward the evils of globalization in general and those institutions in particular. But like the Luddites before them these protestors are on the wrong side of history. The third world will emerge from poverty. They will do it despite the best intentions of moralizers like Ramadan and they will do it within the next generation or two. I think they will be led by their women. It is notable that most recipients of microloans are poor and uneducated women who see nothing evil in seizing an opportunity to become independent and reliably feed their children, even if it means paying higher rates of interest than their better off neighbors.
The most interesting thing about thinkers like Ramadan is just that, they are thinking about their faith within the context of the world around them for the first time in many, many years. They will get some of it wrong and I think Ramadan has gotten the economics wrong. A lot of other Muslims are thinking too, and not all of them have PhDs. Most of them are just trying to make a living. Some are devout, some not. Some are trying to get rich. More than a few see opportunities to do it, and not only from oil revenues. Participation in the world trading community has created more wealth in the six decades since WWII than has been seen in any comparable period in history. To join in that one must be something of a capitalist. One must certainly play by the rules of international commerce and that means adhering to the dictums of the WTO and the other institutions so many find so objectionable. One must also make a fundamental concession to reality. If you wish to use someone else’s money for a period of time, you are going to have to pay the owner a reasonable return on his investment.
I have a prediction. Muslims have historically taken their moral guidance from their religious intelligentsia, the ulama. The ulama are not well organized and one becomes a member by reputation more often than by appointment. They often disagree and no one can speak for them as a group. In recent years the more progressive among them have begun to recognize the pressures of a shrinking world and to advocate change in many long held cultural practices. They are consistently faithful to the scriptures however, re-interpreting passages that seem to allow it, continuing to read literally those that appear to require that. Among the least flexible of those relate to economic life, particularly regarding usury. My prediction is this. The ulama will either change their economic teaching, change it quickly, or their moral authority will go the way of that of the clergy in my church regarding issues of human sexuality.
It’s been two generations since the birth control pill was introduced. At about the same time Catholic women in the West began entering the workforce in large numbers, particularly middle class women. The church took stances on the pill, on other forms of birth control, and on sexuality in general that were inconsistent with the laity’s desire and new found ability to control family life, especially the number and timing of children. Within a few short years the battle was over. Catholic men and women by and large stayed in the church, attended Mass, and though they didn’t ignore the clergy, made their own decisions in the privacy of the bedroom. The clergy reluctantly adapted. We now rarely hear homilies on birth control and I haven’t heard anybody mention Humanae Vitae in years. If a Catholic wants a divorce today he can get one. If he wants a new marriage blessed by the church he has to call the divorce an annulment but he can get that too.
Something like that will happen with economic Islam. Muslims are going to integrate with the world trading community. To do it they will have to embrace liberal capitalism and its institutions. Economic prosperity depends on it. The ulama will have to find a way to reconcile it with their faith, either by reinterpreting the scriptures or by following the Catholic example and at least keeping quiet about it. Otherwise they risk becoming irrelevant. They would cringe at the comparison but they have the same problem the communist commissars had. Their people watch the world around them enjoying dramatic improvements in living standards and ask why that can’t be them. To rapidly increasing numbers the answer is, it can. The good news for the rest of us is it will require renunciation of violence.
The sixteenth century gave us three crucial innovations leading to the unprecedented prosperity much of the world enjoys today. No one would argue that the scientific method was one. Less widely recognized are John Calvin’s argument that a reasonable rate of interest in exchange for a loan does not amount to usury, and legal recognition of the limited liability corporation. Without all three the industrial revolution might never have occurred, certainly it would not have taken us as far as it has. The three were enthusiastically adopted in Protestant Europe, slowly and with reluctance in Catholic Europe, and not at all in the heart of Islam. One need only look at the development of New World colonies to see the relative effect. Commercial trading enterprises in the North thrived almost from the beginning. The South depended on sponsorship from crown and church and lags behind even today. The lack of an industrial base has been a millstone around the neck of West Asia and North Africa for five hundred years. The differences can be largely explained by the underlying economic systems.
I’m not suggesting that one cannot be a successful capitalist without borrowing money. My paternal grandparents scrimped and saved early in their marriage until they had what was for them a fortune. My grandfather used it a hundred years ago to go into the lumber business. He became a wealthy man for his day following a simple model. He used profits from one transaction to fund the next, never borrowing. Unfortunately for his heirs, his business acumen did not pass to his ten children. By the time the third generation received their inheritance it was little more than the original investment in absolute terms and no longer even a small fortune. That isn’t a complaint. I got a great deal more than money from my parents and grandparents. I tell the story to acknowledge that one need not necessarily borrow one’s way to financial success. My grandfather would have rightly said it is far easier to borrow one’s way to ruin. But it is also true that the judicious use of credit, including interest bearing credit, is the life blood of modern global economics.
Muslims object to usury for the same reason Catholics do. It is prohibited by the scriptures of course and that is because it has been a means of exploiting the poor down through the ages. But unlike Catholics Muslims still generally forbid charging or paying any interest. The conventional loan is illegitimate regardless of purpose or safeguard, with some modern reformers making temporary exceptions in cases of necessity such as mortgage loans for Muslims living in the West. Most don’t make even that concession, though there are Muslim financial institutions that get around the issue by artfully structuring agreements so they don’t appear to be interest bearing debt instruments. Catholics have long since redefined usury so that it applies only to “unreasonable” charges. The problem with the absolutist view is that it ignores the time value of money, the fact that a dollar in hand is worth more than a promise to repay the same dollar in the future. The argument is that only honest labor adds worth, to profit solely from the use of one’s savings is sinful. There is always the equity investment of course. One may build a house and rent it out but that too is a moral trap. The greedy landlord can be and often has been every bit as oppressive as the usurer.
This isn’t a petty argument. The difference severely constrains Muslims in their ability to finance roads, bridges, canals, schools, factories, inventories, accounts receivable, a new automobile, a student loan, or even seed and fertilizer for next year’s crop. It is a major impediment to economic growth in the Middle East, even in those countries sloshing around in petrodollars, and a barrier to some of the most innovative mechanisms for breaking the poverty cycle in large parts of the third world. It concerns us all not just because everyone wants to help the needy, but because integration with the world economy is proving to be a primary incentive for maintaining world peace.
I’m not the only one who thinks that. Just last week Muhammad Yunus won the Nobel Peace Prize for his work in developing the concept of the so-called microloan, very small loans to budding entrepreneurs and others in some of the poorest places on the planet. I’m not so naïve as to believe everybody who gets one of those loans becomes a success story, my grandfather was right about the dangers of credit, nor does the Nobel guarantee sainthood for Yunus. He joins a group known as much for its charlatans as for its statesmen, but if somebody has a better idea how to deal with grinding poverty in Bangladesh I’d like to hear it.
Critics of the microloan decry the injustice of the typical 20% interest rate when the rich can get much better terms. I would call it a fact of economic life. If the loan helps somebody get on his feet it is worth the cost. I can buy eggs in cartons of four, a dozen, or two dozen. There are stores in South Dallas that sell them one egg at a time. Everyone expects to pay more per egg for smaller numbers per transaction. The moral quandary comes in when the store makes its profits selling eggs to people who can only afford one, especially if they make large profits on millions of eggs. If they don’t the same people go without the eggs unless the government or charity steps in, which brings me to zakat.
It’s usually translated as charity but it is an obligation so it can also be described as a tax. Every Muslim is required to submit to God and make the profession of faith, pray five times a day, and if able pay the zakat, fast during Ramadan, and make the pilgrimage to Mecca once in his lifetime. I’ve over simplified but those are the five pillars. A number of modern Muslim reformers offer the zakat as an alternative economic system to capitalism. Bear with me, this gets tricky. The idea is to better manage the charitable giving, use it not just to feed the poor but to enable them to feed themselves, become self sustaining, and eventually pay their own zakat in turn. Over time more and more Muslims will be raised out of poverty and begin to participate on an equal footing in growing world prosperity. Reformists advocate changing the independent administration of zakat as it is currently practiced and direct it into more centrally controlled funds that can be applied more effectively. Western society does something like that today with systems of government grants, tax credits, and charitable foundations. Many of them are designed to promote economic activities and commercial projects that are deemed worthwhile by whoever controls the funds.
That’s the rub isn’t it? The people deciding which projects get funded do so without necessarily giving top priority to financial viability. If we learned any economic lesson in the last century it was that central control of monetary allocation cannot compete with liberal capitalism where the investor takes his chances with loan or equity based on his own best estimate of the risks and rewards involved. Communism proved an abject failure despite ideals quite similar at their highest level to those of Muslims. How can you argue with the manifesto “from each according to means, to each according to need?” We try to do something like that with our programs of progressive taxation. Even the early church practiced a form of the philosophy. It has its place but it has never worked as a stand alone system, not on a massive scale.
Before I go too far down this path I should also acknowledge that there was a time when Islamic economics did work. The power of the eighth century Abbasid Caliphate was grounded at least as much in trade as in its military strength, and the sixteenth century had its highlights for Ottomans too. Having lost virtually the entire Turkish fleet at Lepanto in 1571, in the last of the world’s great naval battles involving ships all powered by oars, the Grand Vizier told the Venetian ambassador they had merely cut off his beard. It would grow back. In six months they had rebuilt with new, more modern ships and went uncontested in most of the Mediterranean for another century. When asked by Selim II if his treasury could afford it the Vizier replied that if the Sultan wished he could plate the ships with gold.
The sixteenth century would prove to be the high water mark for Muslim dominance, militarily, economically, and culturally. Modern reformers (Muhammad Yunus is an exception) tend to be philosophers and theologians, not historians, not social scientists, and not economists. In attempting to reform zakat, they are trying to tweak a system that has been around for fourteen centuries and has been ineffective for at least five. The plan seems to be “we’ll get it right this time.” I don’t see much cause to think they will. Capitalism has been in a constant state of renewal from its inception. Despite its flaws we have learned to prevent many of the worst excesses. Bankruptcy laws mean we no longer turn debtors over to the torturers until they pay what they owe, antitrust legislation has more or less curbed the robber barons, and the decline of colonialism has put a brake on the rapacious nature of empire.
Tariq Ramadan and others rail at what they consider to be institutions of repression in the modern world, principally the World Trade Organization, the International Monetary Fund, the World Bank, and the multinational corporation. They aren’t alone. The 1999 riots in Seattle demonstrated wide spread discontent in the West too toward the evils of globalization in general and those institutions in particular. But like the Luddites before them these protestors are on the wrong side of history. The third world will emerge from poverty. They will do it despite the best intentions of moralizers like Ramadan and they will do it within the next generation or two. I think they will be led by their women. It is notable that most recipients of microloans are poor and uneducated women who see nothing evil in seizing an opportunity to become independent and reliably feed their children, even if it means paying higher rates of interest than their better off neighbors.
The most interesting thing about thinkers like Ramadan is just that, they are thinking about their faith within the context of the world around them for the first time in many, many years. They will get some of it wrong and I think Ramadan has gotten the economics wrong. A lot of other Muslims are thinking too, and not all of them have PhDs. Most of them are just trying to make a living. Some are devout, some not. Some are trying to get rich. More than a few see opportunities to do it, and not only from oil revenues. Participation in the world trading community has created more wealth in the six decades since WWII than has been seen in any comparable period in history. To join in that one must be something of a capitalist. One must certainly play by the rules of international commerce and that means adhering to the dictums of the WTO and the other institutions so many find so objectionable. One must also make a fundamental concession to reality. If you wish to use someone else’s money for a period of time, you are going to have to pay the owner a reasonable return on his investment.
I have a prediction. Muslims have historically taken their moral guidance from their religious intelligentsia, the ulama. The ulama are not well organized and one becomes a member by reputation more often than by appointment. They often disagree and no one can speak for them as a group. In recent years the more progressive among them have begun to recognize the pressures of a shrinking world and to advocate change in many long held cultural practices. They are consistently faithful to the scriptures however, re-interpreting passages that seem to allow it, continuing to read literally those that appear to require that. Among the least flexible of those relate to economic life, particularly regarding usury. My prediction is this. The ulama will either change their economic teaching, change it quickly, or their moral authority will go the way of that of the clergy in my church regarding issues of human sexuality.
It’s been two generations since the birth control pill was introduced. At about the same time Catholic women in the West began entering the workforce in large numbers, particularly middle class women. The church took stances on the pill, on other forms of birth control, and on sexuality in general that were inconsistent with the laity’s desire and new found ability to control family life, especially the number and timing of children. Within a few short years the battle was over. Catholic men and women by and large stayed in the church, attended Mass, and though they didn’t ignore the clergy, made their own decisions in the privacy of the bedroom. The clergy reluctantly adapted. We now rarely hear homilies on birth control and I haven’t heard anybody mention Humanae Vitae in years. If a Catholic wants a divorce today he can get one. If he wants a new marriage blessed by the church he has to call the divorce an annulment but he can get that too.
Something like that will happen with economic Islam. Muslims are going to integrate with the world trading community. To do it they will have to embrace liberal capitalism and its institutions. Economic prosperity depends on it. The ulama will have to find a way to reconcile it with their faith, either by reinterpreting the scriptures or by following the Catholic example and at least keeping quiet about it. Otherwise they risk becoming irrelevant. They would cringe at the comparison but they have the same problem the communist commissars had. Their people watch the world around them enjoying dramatic improvements in living standards and ask why that can’t be them. To rapidly increasing numbers the answer is, it can. The good news for the rest of us is it will require renunciation of violence.
posted by Onfoot at 5:11 PM
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