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Islam and the APPLYING NORTHS LAWS OF

free-market MOTION TO THE EDGE OF


economy THE WEST
Saad Azmat ecaf_1886 4..9

This paper uses Douglass Norths theories of institutional economics to explain


progress in Muslim Spain. It argues that it was efficient economic institutions in the
guise of a free-market economy where the property rights of different strata of
society were well protected, which ensured lasting prosperity. This paper postulates
that while a population explosion could have been responsible for the initial growth
in Spain, it was an efficient formalinformal institutional matrix that ensured a high
level of long-term growth.

Keywords: Market economy, institutional economics, Douglass North,


Muslim Spain.

Introduction New institutional economics


This paper analyses the economic growth In the literature on institutions a ne line has
phenomenon in Muslim Spain. It considers been drawn to make a distinction between
fascinating questions such as what made formal and informal institutions, and the
Muslim Spain experience unprecedented importance of each one has been extensively
growth in an era when the rest of Europe was argued. Mantzavinos (2001, p. xi) simply
experiencing the most dismal time of its refers to institutions as nothing more than
history. Questions such as these are an shared problem solutions that individuals
unexplored mystery as very little systematic have acquired while interacting with their
and scientic economic research has been environment. North (1994) argues that there
done to understand them. This paper analyses exist both formal and informal institutions.
the theory of institutions as a source of Informal ones are comprised of things like
long-run growth and applies the idea to norms and self-imposed restrictions; formal
Muslim Spain to show that it was superior ones include laws, constitutions, etc. The
economic institutions in the guise of a market argument in support of the importance of
economy where the property rights of institutions has also been obliquely
different strata of society were well protected substantiated by Coase (1937), who argues the
which led to the rise of the Spanish economy. case for the existence of rms and markets by
The paper argues that while a massive referring to transaction costs, under the
population inux could have been responsible presence of which a formal institution (such
for the economic growth in the immediate as a market) is required to minimise these
years preceding the Muslim conquest of costs. Coase (1960) further extends the
Spain, it was superior economic institutions argument for the prevalence of other
which might have ensured lasting prosperity institutions such as the government, by
in the region. Moreover, this paper also argues referring to the existence of externalities that
that an efcient role of the government in might not be internalised efciently by private
protecting private property, a well-organised individuals in the presence of transaction
scal policy, a competitive merchant class and costs and costly bargaining.
economic freedom experienced by the Jews,
Christians, peasants and serfs might have
Evolution of institutions
resulted in an institutional matrix that could
have been responsible for the ourishing North and Thomas (1973) explain that
pattern of economic growth in Muslim Spain. institutions evolve from an informal set of

2009 The Author. Journal compilation Institute of Economic Affairs 2009. Published by Blackwell Publishing, Oxford
iea e c o n o m i c a f fa i r s ju n e 2 0 0 9 5

norms, originating from the way individuals living in a society largely has been ignored. One reason Muslim Spain has not
perceive the reality of things around them. Then they try to been an attractive area of research is the paucity of data.
organise their environment according to these set beliefs. However, such little evidence that is available seems to offer a
Furthermore, North (1994) argues that through a continuous promising explanation of the economics of Muslim Spain.
learning and feedback process eventually a formalinformal The main source of data in this paper is the work of
institutional matrix comes into existence which characterises Constable (1994) on trade in Muslim Spain and Imamuddin
the behaviour of the individuals and provides the incentive (1965) on the internal economics of Spain. Constable (1994)
structure to the society. North and Thomas (1973) substantiate and Imamuddin (1965) have relied on geniza documents,
this process of evolution of institutions by making references fatawa (legal opinions) of Muslim scholars, court rulings in
to historical accounts, such as the development of property legal cases, diaries and anecdotes of merchants, the works of
rights for serfs and peasants and the evolution of the system of Muslim philosophers etc.
absolute monarchy in a well-developed system of government.
The work of North and Thomas (1973) promulgates the
belief that eventually the process of evolution combined with A brief history of pre-Muslim Spain
the curiosity of the human mind to solve the fundamental
Some of the socio-economic conditions prevalent before the
problem of scarcity through a continuous process of struggle
conquest of Spain by Muslims offer a deep insight into why
and change, would result in the development of an idea that
Spain ourished under this new regime. Imamuddin (1965)
would offer a perfected solution for ending the miseries of
analyses the history of Spain before the conquest of Muslims
humanity. The idea of institutional evolution can be summed
and asserts that under the Gothic rule of pre-Muslim Spain the
up in the diagram below:
property rights of only the higher social class, the clergy and
Formal
the military nobility were well protected, whereas the other
Institutions strata of society had no power to alienate their land. In a
Perceived
Outcome
fourteenth-century agricultural-based economy, land
Reality constituted the real capital. The protection of property rights
Informal
Institutions of only the higher social class, clergy and military nobility
implied that a large segment of society was denied the right to
earn large amounts of wealth associated with the ownership of
Feedback
the land, resulting in an institutional matrix that did not
provide the necessary incentive structure to use the work
This diagram indicates that institutions transform beliefs into potential of these people.
societal and economic structures, and the interaction of the Another segment of society that suffered greatly from the
formal and informal institutions form an institutional matrix poor institutional structure was the Jews residing in Spain.
that is prone to modication as a result of a continuous Jews at that time constituted the intelligentsia of society, and
learning and feedback process extending over generations. as a result of their mobile nature potentially they comprised
However, North (1994) rightly asserts that countries that the merchant and trading class (Constable, 1994). The
appear to perform poorly from an economic perspective tend theological differences between the Jews and the ruling
to get caught up in an institutional matrix that does not evolve Christian class resulted in extreme resentment against and
into a system which is capable of inducing economic persecution of Jews. In ad 616, the Gothic King passed an
prosperity and solving emerging societal problems. Careful issuance that the Jews had to be baptised to save themselves
reection on the above process of evolution suggests many from banishment. In the face of this persecution the Jews
different causes to explain this economic stagnation. planned a revolt against the Gothic King in ad 694. However,
Brittan (1985) argues that there can be a clash between the the attempt proved to be abortive and the king conscated all
informal and formal institutions resulting from a belief system their wealth (Imamuddin, 1965). The institutional structure
that can create a motivational framework that might not t acted as a big impediment for the Jewish traders who, as we
well with the requirements of the formal institutional shall see later, once their rights were well-protected under
structure. There can also be other problems with the the Muslims contributed greatly to the economic progress
above-mentioned process. The framework developed by of Spain.
Acemoglu et al. (2005) notes that the experiences of many
developing countries of the world suggest that the incentive to
maintain the status quo of those already in power could result Indicators of the prosperity of Muslim Spain
in a set of institutions that might be completely inefcient. It is widely accepted that with the conquest of Spain by the
North (1994) rightly asserts that it is not any set of institutions Muslims the region started to experience unprecedented
but the most efcient set of institutions that will result in growth. Since measured and organised data for gross domestic
high growth. product is not available, other indicators for growth have been
used to test this belief. One indicator is the amount of food
available to people, as averred in numerous letters and
Muslim Spain: some observations
anecdotes. Moreover, exports are often taken as a measure of
Economic historians have applied the above-mentioned growth: high exports imply that the country is producing
arguments to data from Europe extensively, but Muslim Spain goods well in excess of its needs (at least of the variety

2009 The Author. Journal compilation Institute of Economic Affairs 2009. Published by Blackwell Publishing, Oxford
6 applying norths laws of motion to the edge of the west

exported). The prices of goods are also taken as an indicator of says that there were in Andalusia 80 cities of the rst order, more than
the standard of living of the people, as low prices can be 300 of the second grade and numerous small towns and villages. There
viewed as an outcome of high production. Lastly, the were 12,000 hamlets and villages on the bank of Guadalquivir alone,
population inux in Spain is considered as a measure of while today the whole of Andalusia has only 800 aldias [villages].
prosperity as it is often assumed that people like to move to a
region that is more prosperous than one where material Imamuddin (1965) further argues that the population of
comfort is lacking. Cardova was more than one million in the later Caliphate
Numerous references can be found in the narrations of the period, while Constantinople had only one million
merchants, geniza documents, and the diaries of those living in inhabitants. Moreover, diminishing returns and capacity
Spain that food and other goods were available in abundance. constraints were far from offsetting production resulting from
Imamuddin (1965) refers to McCabe (1935) who asserts that in high population growth as some evidence suggests that large
Muslim Spain food was abundant and cheap to such an extent portions of land were uncultivated in the pre-Muslim era
that 30 million people prospered on a land which a few (Imamuddin, 1965). Constable (1994) also argues that other
centuries later was unable to provide for a population of six natural resources such as mines, which were a rich source of
million. The abundant nature of food can be inferred from the minerals later used for exports, were found closed by the
storage facilities that had to be developed to preserve it. Muslims after the invasion.
Imamuddin (1965) argues that wheat could be preserved for North and Thomas (1973) argue that increasing population
about ten years anywhere in Spain. This abundant nature of results in people dispersing towards different and faraway
production resulted in high exports. Muslim Spain had lands when diminishing returns set in and, depending on the
commercial relations with Italy, Morocco, Beriberi (North climatic conditions of the area, they start to specialise in the
Africa), Egypt, Greece and Syria, parts of Africa and various particular crops in which they have a comparative advantage,
other regions of Europe and Asia including India and China which they trade with people in other regions, and hence
(Imamuddin, 1965). Various documents suggest that prices promote trade and growth. High population growth and a
were so low that in the fourteenth century eight pounds of large volume of trade supports the proposition that this is
grapes were sold for a single dirham (Constable, 1994). what happened in Muslim Spain.
However, there is also evidence that after the demise of the
Umayyads, rampant ination existed in the Taifa period,
which Constable (1994) attributes to the devaluation of the Institutional change in Muslim Spain
currency and unstable politics.
There was a huge inux of people, especially Jews, from There was a clear-cut institutional change after the Muslims
different communities and regions throughout the period of took power in Spain. We now discuss the institutional mix of
Muslim rule. This is conrmed by a number of letters of Muslim Spain by analysing the following categories: the
recommendation addressed to the Jewish community in Spain economic system; taxation; money; merchants and free trade;
and also through their children, such as Yusuf b. al-Shami peasants and slaves; Jews and Christians.
(d. 1141), the son of a Syrian immigrant residing in Spain
(ibid.).
Economic system
Muslim Spain had a market economy where the interaction of
Reasons for the prosperity of Muslim Spain supply and demand determined the level of prices for most
North and Thomas (1973) are among those who strongly argue goods. This fact is reected in many geniza documents and in
that institutions are responsible for the long-term growth of the scholarly work of Ibn Khaldun (1958, II, pp. 337338, 340)
any economy. The available evidence suggests that Spain who writes that if a merchant wanted to make a prot he
experienced immediate growth, which it was able to sustain would take his goods to another country. Where they are
for a long period. The next section will look at the possible more in demand than in his own . . . when goods are few and
causes of both the short-term and long-term growth in rare their prices go up. There are many historical mentions of
Muslim Spain. uctuation in prices caused by changes in demand and supply.
In 822 a severe famine caused a sharp increase in prices
(Constable, 1994). Moreover, some letters suggest that prices
would also rise in the case of a cargo being lost at sea,
Population explosion in Muslim Spain although high taxes and poor government policy are also
Some authors have argued that Spain was agriculturally very mentioned. Some letters suggest that the merchants were
rich and climatically very suitable for cultivation (Imamuddin, aware of the effect of demand and supply on price and tried to
1965) and, in an era where production was mainly use it to their advantage. In the following letter, one of the
labour-intensive, an increase in population meant a higher eleventh-century writers writes to his partners:
level of production (assuming that diminishing returns have
not set in). According to this thesis, the signicance of the . . . pepper was dead . . . the price was down to 130 [quarter dinars per
Muslim conquest was the opening of the land to a population pound] but still no one bought it . . . while I am writing this letter it is
inux, which meant increased production and hence growth. the night before the sailing of the ships pepper has become much
Imamuddin (1965, p. 23) quotes Maqqari who more in demand, for the foreigners had sold all they had, while boats

2009 The Author. Journal compilation Institute of Economic Affairs 2009. Published by Blackwell Publishing, Oxford
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arrived and only local people had some left. Thus it was sold for Indications are that the quality of coins varied considerably
140142. I took collateral for the sale of my pepper at 140142. during different times and rulers. In the Imarat period the
(Constable, 1994, p. 75) coins weighed between 2.14 and 2.60 grams, and the exchange
rate between silver and gold coins varied considerably between
The market economy, however, was not completely 10 : 1 and 17 : 1 (ibid.). Later coins were clipped for example,
laissez-faire. The government actively sought to encourage in the case of the high-quality coins minted during the reign of
competitive behaviour. Markets were divided into different Abd al-Rahman III in the tenth century (Imamuddin, 1965). It
quarters with each quarter being inhabited by a particular appears that in the Umayyad period Sudanese gold was
class of people selling similar products (Imamuddin, 1965). circulating in abundance in Muslim Spain, and prices
This grouping of shops selling similar products ensured that remained low (Constable, 1994), reecting a booming Spanish
everyone sold at the market price. However, the government economy. However, after the demise of the Umayyads, there
did engage in some price intervention. Imamuddin (1965) was a severe ination, which Constable (1994) attributes to
reports that the market inspectors called Muhtasibs checked unstable politics and devaluation of the currency. The
prices regularly and for some goods, such as food items, they subsequent denunciation of currency debasement by Muslim
would even x the prices. Moreover, known hoarders were not scholars was based on simultaneous normative and empirical
allowed to buy more than a particular quantity (Constable, grounds. Umar Chapra (2008) writes:
1994).
Since debasement of currencies is in sheer violation of the Islamic
Taxation emphasis on honesty and integrity in all measures of value, fraudulent
practices in the issue of coins in the fourteenth century and afterwards
The role of the government as an economic agent was well
elicited a great deal of literature on monetary theory and policy. The
recognised by scholars of the period, as the famous Spanish Muslims, according to Baeck, should, therefore, be considered
scholar, Ibn Khaldun (1958, II, p. 103) writes that when they forerunners and critical incubators of the debasement literature of the
stop spending, businesses slump and commercial prots fourteenth and fteenth centuries (Baeck, 1994, p. 114).
decline . . . the dynasty is the greatest market, the mother and
base of all trade. Evidence suggests that the government
administered many aspects of the society such as the local Merchants and free trade
industry, agriculture, port facilities, shipping, taxes and the
money supply. Muslim Spain had a well-developed system of Merchants and traders played a very important role in Spains
taxation: Muslims had to pay 2.5% of wealth (Zakat) and local economic success. The large volume of trade resulted in a
non-Muslims paid a head-tax of 1248 dirhams ( Jizya) ourishing shipping industry. The geniza documents make it
(Imamuddin, 1965). Moreover, according to an eighth-century clear that some of the cities such as Almeria ourished in the
legal scholar Abu Yusuf, taxes on merchants carrying goods eleventh and twelfth centuries because of the development of
also varied: whereas Muslims had paid 2.5%, local their ports (Constable, 1994). To facilitate trade further, the
non-Muslims paid 5% and non-Muslim foreigners paid a 10% government played an important role by implementing
tariff (Constable, 1994, p. 128). In return for these taxes people policies that strengthened international trade links and
were granted freedom and protection of their lives and ensured free trade. Constable (1994) argues that during the
property. An eleventh-century geniza document explains the second half of the twelfth century treaties were signed between
case of a merchant who sent a cargo of wool from Alexandria the Pisa and the Muslim rulers in Valencia, Denia and the
to Almeria explaining that the total value of the wool was 30 Balearics. Almohads treaties with Genova were renewed at
dinars and he had to pay three dinars (10%) in Egypt and three about 15-year intervals and generally included clauses
dinars (10%) in Almeria (Constable, 1994). Rulers who guaranteeing safe conduct for shipping, tariff reductions for
attempted to augment these means of collecting taxes received Genoese traders and the right to maintain hostelries ( funduqs)
criticism from Islamic scholars who believed that they should in Almohad ports. Other treaties include one between Genova
be restored to their legal limit (ibid.). Ibn Khaldun praised and Arles signed in 1155 (ibid.). Road routes were also
Abd al-Rahman III for rescinding the illegal taxes of his protected by the government also encouraging trade. Sancho
predecessors (Imamuddin, 1965, p. 60). IV of Naverre and Muqtadir Zaragoza entered a treaty in 1069
Another source of revenue for the king was the money to ensure that the roads between the two kingdoms provided a
received from the royal lands which the king possessed in safe and secure route for travellers (ibid.).
almost all provinces. The annual revenue from these lands There were times when religious conicts stopped the
amounted to 765,000 dinars during the reign of Abdul trade between the Christian world and Muslim Spain, but
Rahman III (Imamuddin, 1965). Taxes and other government during periods of religious tolerance trade ourished. For
revenues were used for scal policy measures. For example, in example, in 1234 Pope Gregory IX granted permission for
the famine of ad 988989, the royal granary of Mansur, which Castle in the region of Toledo to trade with Muslim territories
contained 200,000 mudds of wheat by the year ad 884885 (ibid.). Especially in the thirteenth century, however, both
was emptied (ibid.). sides imposed sanctions on trade, although there is evidence
that during times of peace Christian merchants frequently
visited Spain, as their rights were protected by precedent
Money
(ibid.). In the Umayyad period, ninth-century Maliki scholar
The rst example of the dirham used as money in Spain comes Sahnun gave a fatwa (legal opinion) that it was not permissible
down to us from the period ad 722723 (Imamuddin, 1965). to capture Christian ships that carry merchants known for

2009 The Author. Journal compilation Institute of Economic Affairs 2009. Published by Blackwell Publishing, Oxford
8 applying norths laws of motion to the edge of the west

their commercial relations with Muslims. Moreover, there Notwithstanding the fact that data related to Muslim Spain
exists a tenth-century fatwa regarding a Christian captive who are very scarce, this paper has shown to good effect that such
escaped and later returned as a merchant. It was ruled by the data as are available support the view that superior economic
judge adjudicating the case that at times of peace this man institutions are the driving force behind the unprecedented
and other Christians like him were secure against recapture growth experienced in Spain. We have shown that while a
(ibid.). population explosion could have been the initial stimulus for
the early years of success, meaningful evidence supports the
proposition that it was efcient economic institutions that
Peasant and slaves
were responsible for the long-term growth in Muslim Spain.
In the era between ad 700 and 1500 it was mainly the peasants We have shown that notwithstanding some specic
and serfs that constituted the active labour force. Therefore, government interventions probably aimed against the
the prosperity of any economy at that time depended on what hoarding of perishable foodstuffs, the economic system of
rights the formalinformal matrix protected to provide a Muslim Spain was in essence a free-market economy where the
sufcient motivational framework for this community. In interaction of demand and supply determined the prices for
pre-Muslim Spain, peasants did not enjoy proprietary rights. most commodities. Muslim Spain evidenced governmental
However, with the advent of Muslim rule, things changed involvement in the market primarily through activities seen in
drastically. In Muslim Spain the peasants and serfs were given modern nation-states such as market inspection, taxation and
the rights to alienate their lands (Imamuddin, 1965). management of the money supply. An efcient system of
Furthermore, their status as an important section of society formal institutions in Muslim Spain protected property rights
was fully recognised and this led to many peasants and serfs and safeguarded the lives and wealth of individuals belonging
occupying high posts in the country. A Duri held a to different social strata of the society, including merchants
police-ofce towards the year 920; Aah (923), Qand, Tarafa, and traders, irrespective of their religious and cultural origins.
Khalaf, Badr, who all belonged to the peasant and serf This system ensured that a large populous of merchants traded
community, occupied distinguished positions including civil to and from Muslim Spain freely, among them a large number
and military ofces (ibid.). of Jewish merchants who sought permanent residence in
Muslim Spain at a time when Jewish residency in most of
Europe was problematic.
Jews and Christians
Peasants and serfs especially beneted from the matrix of
The Jews at that time constituted the intelligentsia of the institutions. Since Muslim Spain was an agricultural society,
society. They co-operated fully with the Muslims in raising the they constituted the active labour force of the community. The
country to riches and prosperity. The government gave them protection of their rights, such as the ability to alienate their
social and religious protection and in return they contributed land, gave them an opportunity to excel and an incentive to
greatly to the economy by taking an active part in trade and work hard in cultivating the lands. The extension of religious
commerce. Jewish merchants had a monopoly in the slave freedom and protection to the local Christians and Jews
trade and trade in luxury goods (ibid.). Many were educated further ensured that a ourishing system of trade and
and knew Latin, Greek, Hebrew, Spanish and Arabic, and had commerce came into existence. The greater commitment of
a substantial inuence on the government. By the time of Abd the government towards proper execution and development of
al Rahman III, they began to take a very prominent part in these institutions during a good part of the 700 years of
running the country. Hasdai ebn Sharput (ad 945970) was Muslim rule culminated in an environment conducive to
the treasurer, court physician and minister of Abd al Rahman growth and prosperity.
III and was also responsible for translating the Dioscorides
into Arabic from Greek (ibid.). A similar attitude was adopted
towards Christians, who were also allowed to take part in the Acknowledgements
administration of the country (ibid.). Both the Jews and the
Christians formed the economic backbone of the country and The author wrote this paper during his graduate studies at the
the government generated considerable revenue from their University of British Columbia, Canada. Currently, he is a
presence. In return, they were granted protection to their lives faculty member of the Business School at Lahore University of
and property and in civil matters. The Jews had their own Management Sciences.
nancial ofcer who used to collect tax from them and
forward it to the state, and their internal legal matters were
decided by their own judges according to the Visigothic laws References
(ibid.).
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This paper started by outlining the theory of institutions London: Routledge.
which North has used to good effect to explain much of the Brittan, S. (1985) Two Cheers for Self Interest, London: Institute of
progress in the Western world. We have applied these ideas to Economic Affairs.
Chapra, M. (2008) Islamic Economics: What It Is and How It
the history of Muslim Spain to shed light on whether the Developed, in R. Whaples (ed.) EH.Net Encyclopedia. Available at:
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2009 The Author. Journal compilation Institute of Economic Affairs 2009. Published by Blackwell Publishing, Oxford
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trans. and ed. by F. Rosenthal, 3 vols, New York: Pantheon Books. Saad Azmat is a Teaching Fellow at the Faculty of Accounting &
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Cultural History of Muslim Spain, 7111492 AD, Leiden: E. J. Brill. of Management Sciences (saad_azmat@hotmail.com).

2009 The Author. Journal compilation Institute of Economic Affairs 2009. Published by Blackwell Publishing, Oxford