Islam and the Free Market


Despite the failure of the Soviet Union, the pro-market reforms in China, and collapse of communism in Eastern Europe, the intellectuals and policy makers of the world continue to have an unhealthy attraction to socialism and socialist political philosophies. Perhaps nowhere in the world is it more imperative for the spread of these anti-human economic systems and the repressive states that go hand in hand with them to be stopped than in the Islamic world. Countries with Muslim supermajorities make up an important portion of the world's oil producing nations and this oil is vitally important for maintaining the industrial economy of the West and the large population made possible by that economy. Should the large oil producers become more statist, then the resulting high price and shortages in oil would result in famine and economic depression throughout the West, with the effects eventually revisiting the states that caused those conditions. This paper attempts to examine three interrelated issues: 1) the compatibility between conservative Islamic theology and the free market; 2) the reasons socialism and other statist ideologies have gained such a following in the Islamic world; and 3) if any "third way" Islamic economics combining the compatible elements of Islam, the free market, and socialism could be a feasible temporary solution to statism in Muslim countries.

Before proceeding to the main body of the paper, it may prove profitable to define the free market, statism, and socialism. In this paper a free market is an economic system based on the absolute right to self-ownership and private property. A free market should have no institutions which initiate coercion and force involved in its operation; no state exists to enforce a powerful person's conception of morality or order. Statism is the broad set of political and economic ideologies requiring the existence of a coercive state to provide basic goods and services all the way up to total economic control; statism includes laissez-faire, Western capitalism (where enterprises are often subsidized by government), corporatism, fascism, Nazism, and Soviet-socialism/communism. Socialism consists of a wide variety of political and economic organizations, chiefly following the principles of Marx, Bakunin, and their followers and usually following from the idea of workers owning the means of production, the abolition of private property, and a denial of free will. Some forms of socialism require a state, others do not.

Religion in the 20th century did not get along well with capitalism. Capitalism was condemned as making people greedy, neglecting the poor and disadvantaged, and generally being immoral. The situation with Islam, however, was different. Because of their poverty and lack of education, when oil was discovered in the Persian Gulf area, the Muslim nations could not take advantage of them. The people lacked the infrastructure and the education to create petroleum companies. In addition, many of the territories were controlled by, or lay in the sphere of influence of, the United Kingdom. British and American oil companies were then able to take advantage of the oil finds and lease the areas for extensive periods of time. Over the next several decades, some countries either outright nationalized the oil fields or bought parts of them back. The result is a prevailing statist system throughout the Muslim oil-producing world. The statism feeds back on itself as they often wish to imitate the consumer economies of the West (while keeping true to Islam) and so many enterprises are subsidized. With such prevalent conditions and general ignorance of the Islamic world before the conflicts resulting from the establishment of Israel, it is easy to see why a Western observer might be fooled into believing that Islam and the free market are incompatible, but this assumption is far from accurate.

The Prophet Muhammad and the first few Caliphs were merchants and Islam spread to Indonesia through trade. The Qur'an is adamant about defending the right of private property. Heck quotes Surat al-Nisa, Ayah 5: "Do not give the foolish your wealth, which Allah has made as a means of support for you" and Surat al-Fatir, Ayah 39: "It is He who made you inheritors of the Earth" (Heck, 82). Even more than that, a hadith (tradition of something Muhammad said or did) declares that a merchant's seeking lawful gain to be an act of jihad and another described honest and truthful merchants as standing with the martyrs on Judgment Day! But it raises the question of what constitutes lawful gain. A lawful gain is a profit not made off of usury/interest (Riba), the sale of forbidden items like alcohol and pork products, and gain from "chance." To elaborate on the last part; the chance refers to a contract where the buyer and seller do not know the final price, as in an auction or if someone were to employ a worker to grind grain and promise half the bran and it is impossible to know precisely how much of the final product would be produced.

As the political authority of Islam expanded, so too did the commerce Muslims engaged in. Since they were forbidden to lend money at interest some banking functions fell upon the Jews as in medieval Europe, but many jurists started to figure out ways to get around prohibitions. The Hanafi legal School began producing "Books of Ruses and Circumventions" where they found legal ways to do essentially illegal things. For example, based on a hadith that asserted "Sell gold for gold . . . at an equal rate according to weight, for an inequality in point of weight is usury" the economists argued that one could charge interest not by lending four cows and getting six cows back, but by lending four cows and getting the value of six cows back, but in some other good (Heck, 94). Many Islamic economists even argued that trade was the only way to make a profit and counseled that the proper way to make a profit from trade was by using supply and demand – buy low, sell high. However, acting to manipulate supply and demand (like trying to corner a market), was prohibited (Heck, 90, 92).

But the deciding feature of the free market in this case would be that the prohibitions were not enforced coercively. However, Islam and Islamic states have usually been united. As a result the moral precepts of the Qur'an were enforced and the market was not as free as it could have been. That said, it is still clear that the Muslims made a significant contribution to economics and commerce and that economists like Ibn Khaldun laid a lot of the groundwork for the School of Salamanca and Adam Smith.

Muhammad was not a socialist (Rodinson, 23). Yet several Islamic nations have become socialist or were ruled by socialist governments, such as Libya, Algeria, and Yemen. The Baath Party which ruled Iraq for decades and still rules Syria is a socialist party. However, there is one overriding historical reason for this: the Cold War. The United States was capitalist and supported Israel, the Soviet Union was communist, so it supported Israel's enemies: the Arabs. Soviet and American arms clashed throughout the Cold War in the Middle East and it was only natural that the Soviets would insist on accepting a little ideology in exchange for weapons. Leftist intellectuals even dug up the semi-mythical figure of Abu Dharr, a Companion of the Prophet, who was exiled for advocating the abolition of private property, to "prove" that communism was fundamental to Islam (Rodinson, 25). Once the Arab states failed to destroy Israel, however, Soviet influence began to decline. The strong statist streak remains for historical reasons related to oil and colonialism and the tendency of rulers to increase their power.

Third-way Islamic economics is an attempt to derive an economic system that follows the rules of Islam without the drawbacks of capitalism or socialism. It originally began development in the 1960's after the failure of the first post-colonial governments. Unlike secular economics, which only evaluates people socially, Islamic economics evaluates people in the context of both society and religion (Mannan, 19). Furthermore choice is guided by Islamic values and the result is "integrated exchange and one-way transfer" (Mannan, 19). In addition, and providing the truly distinguishing factor between Islam and secular economics, is that Islamic economics makes value-judgments (Mannan, 20). Secular economics does not distinguish between ends; a secular economic theory does not say goal X or Y is good or bad, it leaves such determination to individual choice; whereas Islamic economics, by its nature of being guided by the tenets of Islam, will say that manufacturing and selling alcohol in a Muslim country is bad (Mannan, 20). In this manner, it can be seen that Islamic economics is essentially secular economics, but tempered by religious ethics. Similarly GK Chesterton and Hillaire Belloc developed a third-way economic theory called Distributism by analyzing laissez-faire economics with an emphasis on Catholic social teaching. Again, the success of Islamic economics in defending freedom is limited in so far as it demands coercion to enforce its laws.

To close out this paper, I believe it is worthwhile to sum up the essential points. Firstly, the free market is compatible with Islamic theology; and secondly, socialism has very little real attraction to the majority of Muslims. However, it is clear that the power of the state must be restrained in Muslim nations if they are to develop sound economies. One of the consequences of state/foreign-ownership of oil fields and refineries is that most of the labor is foreign and so the rulers and the foreigners are making money while the citizens continue in poverty. A freer market would mean greater opportunity for entrepreneurship and therefore of wealth creation. History has shown that Muslims, like anyone else, are more than capable of building commercial enterprises and creating wealth. All they need is to be let free.


May 14, 2008