Crescent Capitalism: Islam and the Birth of the Free Market

Islamists, leftists and conservatives have long debated whether Islam is compatible with western liberal capitalism. Many have framed the history of capitalism as beginning in medieval Genoa and Venice, and have omitted to mention the modes of exchange, commercial instruments and economic thinking that emerged earlier, outside of Europe—particularly in the Muslim world.

Islam was founded by an entrepreneur in one of the most business-friendly regions of the time, and its holy book enjoined followers to engage in fair, consensual trade, respect private property and fulfil contractual obligations. Islamic legal and commercial innovations helped Europeans kickstart their own transitions from feudalism to capitalism. Beginning in the seventh century, the Muslim world helped connect markets in China, Africa and Europe—and merchants, in turn, often led Islam’s expansion beyond the Arabian heartland. As anthropologist Robert W. Hefner notes, “by any measure, the scriptural and early historical legacy of Islam is among the most market-friendly of all the world religions.”

A Religion of Commerce

Islam has always been heavily linked with commerce. Ancient Arabs, who hailed from a harsh region that was not conducive to agriculture, realised that their survival depended on long-distance caravan trade with foreign partners. And ancient Greek and Roman writers often noted how heavily the Arabs involved themselves in foreign trade. The Roman statesman Pliny the Elder opined that the Arab nations were the “richest … in the world” on account of their trade with the Romans and Persians. The Greek historian Diodorus Siculus concurred, observing that “commercial pursuits are the chief cause of their greater prosperity.”

By the time Muhammad was born, his birthplace, Mecca, was already a strategic hub for trade between the East and the West. Before he became a prophet, Muhammad worked as a caravan trader and as the manager of his own leather tannery. When Muhammad was in his mid-thirties, his uncle introduced him to Khadija bint Khuwaylid, one of Mecca’s wealthiest businesswomen, and she invested in some of his caravans before eventually marrying him.

The economic teachings of other religious leaders, such as Jesus, Abraham and the Buddha were much less specific than Muhammad’s. He had much to say about the trade and fiscal policies of the Muslim society he established, including issues related to taxation, price regulation and competition. And Muhammad was hardly hostile to the acquisition of wealth—at the height of his career, he was probably the richest Arab of his time.

Early Islamic Economic Thought

The Quran, the words and actions of the Prophet and works by early Muslim intellectuals all show that early Islamic economic thought included ideas that we would today associate with classical economics. One of the noteworthy aspects is the Quran’s ban on usury. Although Muslim thinkers did not always give a precise definition of usury, in a broad sense it includes any transaction that extracts disproportionate advantages from customers or denies business partners a fair share of earnings. While the Quran condemns usury, it welcomes fair and consensual trade, as this passage (at 4:29) demonstrates:

O ye who believe!
Eat not up your property,
Amongst yourselves in vanities.
But let there be amongst you,
Traffic and trade,
By mutual consent.

During Muhammad’s time in Medina, he introduced an innovation known as the derestriction of prices. Government price controls had been standard practise since the time of the Babylonian empire. But after a famine in Medina, when food prices spiked and Muhammad’s followers asked him to set a cap on them, he refused, claiming that “prices are in the hands of God,” and that no government had the authority to set them. As historian Benedikt Koehler has noted, this is essentially the same position Adam Smith later took in arguing that markets tend to self-correct as if by an invisible hand.

Muhammad’s policy of letting markets rather than governments set prices had enormous influence on other economic policies in early Muslim society. For example, Muslim jurists asserted that merchants could legitimately raise their prices to maximise profits, and reduce their prices to undercut competitors. Muhammad’s other economic policies included the prohibition of both insider trading and monopolistic practices (the latter were defined as the use of a strong commercial position to force prices higher than they would otherwise be in an openly competitive market).

Early Islamic scholarship helped develop economics as an academic field of study. The fourteenth-century Muslim economic scholar Ibn Khaldun contributed to the theory of supply and demand and the idea that the value of goods is subjective (determined solely by how much people are willing to pay for them). He also pointed out that excessive government tax rates could inadvertently reduce tax yields, while lower tax rates could raise yields—thereby anticipating the Laffer curve by about six centuries.

The early Muslims did not see the pursuit of profit as in any way ignoble. Dimishqi, a twelfth-century Damascus merchant, noted that, “Here, the wealthy person is considered a respected person who deserves people’s esteem because he is rich, is not in need, and makes good use of his fortune.” Muhammad made the same point more poetically:

Whoever desires the world and its riches in a lawful manner, in order to withhold himself from begging, or to provide a livelihood for his family, or to be kind to his neighbours, will appear before God on the Last Day with his face as bright as a full moon.

Legal and Commercial Innovations

Benedikt Koehler has argued that the development of European capitalism was partly inspired by Islamic legal and commercial innovations, which Europeans learned about from trading and fighting with the Muslim world. For example, the qirad is a commercial instrument first used in pre-Islamic Arabia as a form of venture capital to finance the organisation of long-distance camel caravans. Qirads were profit-sharing agreements between managers and investors, in which only the latter were liable for losses. When the Venetians developed their commenda system, a similar approach used to finance maritime convoys, it was probably because of what they learned from Islamic market practices.

Another Islamic innovation from the days of Muhammad was the waqf, a charitable trust funded by the donation of fixed assets (such as orchards or farmland), the income from which was spent on socially beneficial projects like madrassas (schools), wells, roads and hospitals. Waqfs were legally innovative entities—institutions with their own distinct legal personalities and governance structure, outside the control of both individual members and the state.

Because European organisations such as the Knights Templar and the Franciscan Friars had a presence in the crusader states of the time, they were exposed to these Islamic institutions and sought to replicate them back home. For example, in 1252, Pope Innocent IV established the universitas, which was a novel legal entity at the time. Like the waqfs, they were not owned by their individual members and had a defined set of rights and duties. Later entities, such as institutions of higher learning in Europe—and eventually the modern corporation—were outgrowths of the idea of the universitas.

Major Islamic cities like Alexandria, Cairo and Damascus built infrastructure to host foreign merchants from countries that had established trade treaties with them, and to otherwise facilitate trade with European powers. For example, they established funduqs, staging posts like those used in the former Byzantine and Persian empires. The value of trade between Mediterranean Europe and the Middle East was so enormous that funduqs continued operating even at the height of the Crusades.

As Koehler notes, the epicentres of commercial innovation in Europe were not the centres of political power, such as Rome or Paris; instead they were Venice and Genoa, the city states that engaged in the most trade with the Muslim world. Whether Islamic capitalist innovation sparked European innovation, or the two developed independently, it is clear that capitalist institutions and commercial practices were not solely a European phenomenon.

A Religion on the Move

After Muhammad’s death in 632, the Arabs began empire building. Over the next three centuries, the Muslim empire came to stretch from the Atlantic Ocean to Persia, and to dominate the land and sea trade routes that connected China and Europe. The Muslims hadn’t originated these trade routes—they had been travelled since the time of the Ancient Greeks—but they controlled and intensified activity on them. As Middle Easterners became more urban and consumed more goods and their markets became more sophisticated, they replaced their previous practice of single voyages to China and back with emporia trading: their merchants no longer traded directly with China, but instead sold their goods at intermediate ports on the Malabar coasts in India or in Southeast Asia.

The region surrounding the Indian Ocean became a vast maritime bazaar in which an impressive variety of goods were traded. Goods exported from the Middle East included  frankincense, myrrh, attar, gold brocade, silk piece goods, fine carpets, high quality weaponry, dates, fruits, leather, coffee, Hormuz rock salts, dried fish, and pure-bred horses. Goods imported to the Middle East included gold, silver and metalware from Europe; gold, ivory and timber from East Africa; cotton textiles, precious stones and rice from India; spices, black pepper, sandalwood and tortoise shells from Southeast Asia; and porcelain, silk goods and tea from China. Sea and land caravan routes combined to connect coastal towns with the inland cities of the Muslim world that were the major centres of both production and consumption.

During this period, non-Muslims who traded with the Islamic world would have encountered a dynamic and expanding civilisation, spreading out from the Arabian heartland, but bound together by the enduring concept of an Islamic ummah (community). Religion and commerce were interdependent: during the medieval and early modern period that followed the Arabs’ initial territorial conquests, the further expansion of Islam’s boundaries—into the Malay archipelago, West Africa and elsewhere—was carried out more often by merchants than by warriors.

Early Islam was a highly itinerant religion: trade routes enabled Islamic scholars to travel between the heartland of Islam and its outer reaches. Muslims’ pro-market policies and commercial prosperity fostered urbanisation, cosmopolitanism, openness to new ideas and academic inquiry—and the patronage of Islamic arts and scholarship by a new class of nouveaux riches.

The Spread of Islam in Southeast Asia

During their early territorial conquests, Arabs had developed skills as shipbuilders, navigators, sailors and maritime traders. By the time it reached the Malay archipelago in the thirteenth century, Islam had become a maritime civilisation: Muslim shipping carried missionaries and scholars from Arabia to ports across India and Southeast Asia: and the small Muslim trading communities situated in those ports helped Islam take root in those regions.

Over time, the rulers of the port communities converted to Islam, creating a string of scattered Islamic kingdoms that fringed the larger, long-established Hindu and Buddhist kingdoms in Indonesia’s plains and upland valleys. The earliest of these Islamic kingdoms were Lamreh and Pasai, strategically located in the far western part of the Malay archipelago, on the northern tip of Sumatra and at the head of the Straits of Melaka. They provided services for Muslim ships that carried spices from the Hadramaut region of southern Arabia and cloth from Gujarat in northwestern India. The rulers of Lamreh and Pasai announced their Islamic credentials to the traders who operated the Muslim sea networks by using the Muslim title of sultan and adopting Arabic names. The Muslim traveller Ibn Battuta (1304–1367) visited the kingdom of Pasai in roughly its fiftieth year as a sultanate, and reported that its sultan was fulfilling the duties of a Muslim ruler: he supported visiting Islamic scholars, launched wars against non-Muslim territories, and levied extra taxes on non-Muslims.

By the 1430s, the rulers of Melaka on the Malay peninsula had also adopted Islam. Melaka was a prosperous trading kingdom which had secured favoured trading status with Ming China. In 1436, Melaka’s ruler, hoping to entice Muslim traders to come to his city, renamed himself Sultan Muhammad Shah, and promised to give the traders access to China’s markets. During the fifteenth and sixteenth centuries, local rulers on the northern coast of Java turned their communities into Islamic states as well.

Some residents presumably converted to Islam because they associated it with prosperity and a sophisticated, urbanised status. A prosperous merchant class emerged in these cities, and its members patronised the arts and challenged the authority of their rulers in a manner very like that of their counterparts in Renaissance Europe. The adoption of Islam involved lifestyle changes that impacted these markets. For example, Islamic dietary requirements had an adverse impact on pig breeders and on producers and sellers of palm wine, while Muslim women’s dress, which required additional yards of cloth, stimulated the growth of local textile industries.

The Spread of Islam in West Africa

Merchants were also the vanguards of Islam in West Africa. Although the trade routes that connected sub-Saharan Africa with the Mediterranean coast predated Islam, North African Muslim merchants came to dominate them and intensified their use, trading gold, leather, ivory, ostrich feathers and slaves across the Sahara.

Ibn Khaldun, in his book Muqaddimah, refers to the merchants who entered Sub-Saharan Africa as “the most prosperous and wealthy of all people.” He observes that mutual trust was an essential ingredient in organizing successful long-distance caravans. Trade was therefore carried out primarily by merchants connected by kinship, ethnicity and religion. Merchants operated within a common Islamic legal framework and contractual culture, overseen by local scholars versed in both Islamic legal doctrine and local customs. Furthermore, merchants traveling across the harsh Libyan desert felt safer because they were able to find reliable accommodation in Sufi-run lodges, which also provided arbitration courts to settle business disputes.

The caravans that crossed the Sahara could be enormous: they included an average of around a thousand camels (some caravans, according to Ibn Khaldun, could include as many as 12,000), as well as an eclectic assortment of porters, navigation experts, cooks, imams, musicians and prostitutes. The nomadic Tuaregs offered support services such as camel herding, guidance and protection. Some of those accompanying these caravans were slaves—their average death rate on all cross-Sahara routes is estimated to have been over 20%.

The spread of Islam in West Africa followed a pattern similar to its spread in Southeast Asia. At first, small Muslim enclaves were established within non-Muslim kingdoms. Then, over the next few decades, several Muslim trading states, notably the Mali and Songhai empires, emerged within the region, helping facilitate more widespread conversions and greater patronage of Islamic institutions.

These states and their rulers became legendary for their immense wealth. In 1324, Mansa Musa, one of the best known rulers of the Mali Empire, famously made a pilgrimage to Mecca, where his lavish spending caused a crash in the value of gold in Egypt, Mecca and Medina (it has been estimated that this led to economic losses across the Middle East amounting to about US$1.5 billion in today’s dollars). Many wealthy West African merchants, like their Southeast Asian counterparts, also pursued religious study and actively promoted Islamic culture. For example, the towns of D’Jenne and Timbuktu, founded by Muslim merchants along the Niger River in the thirteenth century, became known both for their commercial prosperity and as centres of Islamic intellectual culture.

The Adaptability of Islamic Capitalism in the Nineteenth Century

In the seventeenth and eighteenth centuries, Muslim participation in the Eurasian trade was affected by the diversion of shipping around the Cape of Good Hope, as well as increased European domination of the Indian Ocean. Nonetheless, Islamic juridical institutions and commercial instruments demonstrated great adaptability in the face of the evolving nature of global capitalism.

For example, from the late eighteenth to late nineteenth centuries, the Indian Ocean became a burgeoning commercial arena, linking the markets of Arabia, East Africa and India: a development spearheaded by the Omani Empire, which controlled a significant stretch of East Africa. Aware of the opportunities presented by the lucrative trade in the region, thousands of Arabs, Balochs, Swahilis and Indians became entrepreneurs, seeking credit to fund caravan expeditions into central Africa in search of ivory and slaves (penetrating as far as the Congo), or maintain clove and date plantations nearer the coast.

In order to facilitate this trade, merchants and consumers turned to a traditional Islamic instrument: the khiyar sale. As legal historian Fahad Bishara has documented, the khiyar sale was traditionally conceived by jurists as a regular sales contract with the option (khiyar) for either party to rescind the contract within a specified period. By the mid-nineteenth century, the Muslims of the Indian Ocean region had reimagined the khiyar sale as an instrument to mobilize their property in order to generate capital.

The reimagined khiyar sale was in effect a form of pawnship. A planter or commercial aspirant could sell his property on condition that he had the right to buy it back within a specified period. In exchange, he received an agreed upon sum of money—in effect, a loan, for which the property provided temporary security. Meanwhile, the person to whom the property was temporarily sold retained the right to any income that the property generated in the interim (for example, from the sale of crops or rent). In effect, that income constituted the interest on the loan.

This reimagination of the khiyar sale resulted from much bottom-up experimentation by commercial actors on the ground, and jurists often found ways to reconcile these transactions with traditional Islamic jurisprudence. Once this new practice was established, a secondary market for these khiyar sales developed: creditors seeking to pay off debts or to access credit could transfer their outstanding obligations to other creditors. This gave real estate in East Africa and the Arabian Peninsula the liquidity that people needed in order to navigate the dynamic credit networks of the western Indian Ocean region.

The Culture Wars: Muslim Edition

Throughout history, the cohesiveness of the ummah (Islamic community) was frequently challenged by a problem that all capitalist societies seem to run into: the social alienation and dislocation that prosperity inevitably brings. This was an issue even in the earliest days of Islam. Shortly after Muhammad’s death, riches from the Arab conquests flooded the city of Medina. Property prices soared and money trickled down to all levels of society. But then the sense of camaraderie that Medinans had felt in the early days of Islam dissipated, and as the seventh century wore on, it was replaced by tensions between the plutocrats, with their conspicuous consumption habits, and the less affluent masses.

Some of the more traditionally minded Muslims believed that the Muslim duty to strive for Allah’s favour had been replaced by mindless materialism. Divisions within the ummah came to a head, and, by the mid-seventh century, civil war had broken out. As a result, the Rashidun Caliphate (the caliphate of the first four successors of Muhammad) was replaced by the Umayyad dynasty.

Today, many Muslim countries remain heavily interlinked with our globalised economy and have experienced rapid economic growth rates, leading to the rise of a global Muslim middle class eager to use their newfound spending powers in a way consistent with the ethical guidelines of their faith. According to the 2020/21 State of the Global Islamic Economy Report, in 2019 Muslims worldwide spent the equivalent of US$2.02 trillion within the Muslim economy: composed of purveyors of food, pharmaceuticals, cosmetics, fashion, travel, media and recreation, all structured to comply with Islamic ethical consumption requirements. The report projects that global Muslim expenditure on halal goods and services will reach US$2.40 trillion by 2024. While this offers huge economic potential, it has also helped spark culture wars within the Muslim world over how to reconcile the ethical constraints demanded by Islam with the social freedoms and lifestyle options that modern consumerism enables.

Some Muslim intellectuals also worry that modern Islamic financial instruments may be merely clumsy imitations of western financial practices. Historical analysis may provide some comfort: as demonstrated by the adaptation of the khiyar sale to modern conditions in the nineteenth century, Islamic commercial instruments and institutions have constantly evolved and adapted to the rhythms of global capitalism.

As the Muslim world continues to struggle with the tension between tradition and modernity, those of us who advocate economic freedom can only hope that Muslims will continue to cherish the free market traditions of their faith.