Author: Dr. Benedikt Koehler*
Tensions tearing at the basis of Islamic societies are never more acute than when stoked in the name of Islam. Idealists invoking Islam as a lever for change spark upheavals that time and again hand power to cynics. Looking for an explanation why Islamic societies wallow in paralysis, some suggest Islamic societies stagnate because Islam itself does not admit of contemplating change in society, that Islam, to put it simply, comes without a toolkit for handling social change. To think so is tempting – but wrong.
The very agenda of social sciences, why and how change occurs in society, was mapped by Ibn Khaldun who produced a coherent body of analysis of why societies rise, peak, and wane. Ibn Khaldun spread himself across so many disciplines and spheres of work, one wonders how so many activities fit into a single CV. Ibn Khaldun was born in 1332 in Tunisia to a family with a tradition of diplomatic service in Spain and the Maghrib, and he initially followed in his family’s footsteps into a diplomatic career that took him to act as lead negotiator in several diplomatic missions, but he fell from favour at court and chose to move to Egypt where he served as a senior judge until his death in 1406.
Ibn Khaldun’s moves and career changes suggest his relations with his superiors were tempestuous, and it seems he did not mellow with age – in Egypt he was hired, fired and rehired several times over. In any case he put his observations of policy-making from close quarters to good use in a body of writing that ranges from history to religion. For an Islamic intellectual at the time, that breadth of interest was not uncommon, blending history and religion was in character with Islamic scholarship in its classical period.
What was different about Ibn Khaldun was that he did it in a way that was altogether new. Ibn Khaldun was an historian, but Ibn Khaldun branched out from narratives of unique occurrences to trace developments that could be generalised across time and place. In other words, Ibn Khaldun shaped history as a branch of social science. Ibn Khaldun’s exploration of what dynamics trigger change in society displays the skill set of a political economist.
Ibn Khaldun’s Muqaddimah, which means as much as “Preface,” is a multi-volume tract which starts with explaining the origins of civil society, moves on to a set of do’s and don’ts for government relations with civil society, specifies how to tell good taxes from bad ones, and sums up the nature of entrepreneurship. That Ibn Khaldun was ahead of his time, although an estimable achievement alone to readers today, matters less than another, one that has a bearing on Islamic society today, which was that Muqaddimah’s package of policy analysis and advice shows Islam not only tolerates but actually promotes a dynamic civil society.
Islamic scholars had a keen interest in comparative analysis of societies and how they develop at different stages. This all-embracing outlook may stem from the unique geography of the realm of Islam, a vast territory that had grown very quickly and bordered on Europe, China, and India. But Arabs did not have to observe peoples across the border to pique their interest in why cultures develop in different ways.
Arabs only had to look around their own neighbourhood to see cultures follow different tracks, because even inside their empire Arabs for many centuries were outnumbered by Jews and Christians who retained religious freedom and with it their way of life. The curiosity of Islamic scholars also extended to cultures older than their own. The oldest description of Hinduism is by the eleventh-century polymath Al Biruni, and the Greek philosophy of Antiquity in large parts has come down to us via Islam.
Ibn Khaldun drew on a rich repository of historical literature, indeed he conceived Muqaddimah as an introduction to the study of history from the very beginning. Every culture has its own creation myths, stories about how societies first come into being, and so does Islam. Ibn Khaldun, however, departed from traditional narrative by replacing it with analysis of motives. His assertion why mankind prefers to live together rather than apart is due, quite simply, to enlightened self-interest. Once people who live on their own realise they are liable to starve, they band together, and the struggle for survival induces individuals to gravitate to whatever jobs they do best. People come together through working together:
“The power of the individual human being is not sufficient for him to obtain (the food) he needs, and does not provide him with as much food as requires to live…he cannot do without a combination of many powers among his fellow beings.”
Through division of labour society is formed – not the other way round. Here is Ibn Khaldun’s starting point: society is an arrangement to make everyone involved better off. Moreover, division of labour has triggered a second round effect because productivity gains do not level out, and Ibn Khaldun follows this thought to see where it leads: as division of labour proliferates, there is a continuing rise in productivity, and more and more wants and needs are catered to.
“Through co-operation, the needs of a number of persons, many times greater than their own number, can be satisfied.” At last, the process concludes by creating demand for authorities that serve the public interest because the economy needs a dependable framework to function. Thus there emerges the need for stable government, and “When royal authority is acquired, it is accompanied by a life of ease and increased opportunities.”
A virtuous cycle evolves a successful society, a win-win situation that has created a symbiosis of the economy and government. “Luxury is the consequence of wealth and prosperity; and wealth and prosperity are the consequences of royal authority.”
The Economics of Taxation
When he writes about tax, Ibn Khaldun switched from policy analysis to policy prescription. Ibn Khaldun considered tax the most important bit of kit a government has in its toolbox. Entrepreneurs need to earn profit and when taxes are low, will come forward, but when taxes are high stay at home:
“the strongest incentive for cultural activity is to lower as much as possible the amounts of individual imposts levied upon persons capable of undertaking cultural enterprises. In this manner, such persons will be psychologically disposed to undertake them, because they can be confident of making a profit from them.”
One might suspect Ibn Khaldun’s argumentation to have set him on a collision course with Islamic dogma, for the following reason. On the one hand, following Ibn Khaldun, the principal purpose of government is whether it has policies that promote rather than hold back economic growth. But Islam, on the other hand, tells a good government from a bad one by checking whether it complies with precepts of the Koran. Islamic fiscal guidelines, however, are perfectly aligned with the needs of an entrepreneurial society. Ibn Khaldun refers to the Koran to give his readers a useful steer: “when the dynasty follows the ways of Islam, it imposes only such taxes as are stipulated by the religious law, such as charity taxes, the land tax, and the poll tax. These have fixed limits that cannot be exceeded.” The Koran, for Ibn Khaldun, is a block to tax creep.
Railing against taxation was commonplace in medieval Egypt. Maqrizi, a student of Ibn Khaldun, was led to sigh, “just about the only thing we are allowed to do without paying tax is breathe.” Koranic guidance to keep taxes low often is ignored by governments, wrote Ibn Khaldun, an unintended consequence of rising prosperity. Members of the ruling class aspire to a better lifestyle and give in to temptation to widen the compass of taxation as a means to raise income. Such is the thin end of the wedge, because with every tax that goes up, the incentive to do business goes down. At first, incremental burdens are so small they are hardly noticed and therefore no one bothers complaining, but later, once the precedent is established, one new tax after another is piled on, each one on its own inconsequential and thus unobjectionable, until finally there comes a tipping point when the effort of doing business no longer pays off.
“The gradual increases in the amount of the assessments succeed each other regularly, in correspondence with the gradual increase in the luxury customs and many needs of the dynasty … Eventually, the taxes will weigh heavily upon the subjects and overburden them. Heavy taxes become an obligation and tradition, because the increases took place gradually, and no one knows specifically who increased them or levied them. …”
Tax increases, therefore, in the final analysis are self-defeating.
“It should be known that at the beginning of a dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.”
(This intuition is familiar to anyone acquainted with the work of the economist Arthur Laffer who was one of the intellectual mentors of Ronald Reagan’s tax reduction agenda. Arthur Laffer, in fact, acknowledged the correspondence.)
Ibn Khaldun on state-run Enterprises
Ibn Khaldun was an early vocal opponent of state-run enterprises. Taxation, he pointed out, is not the only way a government can raise money, another is to go into business on its own account. But he warns, to go down this road is an even greater mistake than increasing tax. There are three pitfalls on this path and government is liable to fall into one of them.
The first is because governments often put managers in charge because they have friends in high places rather than necessarily have the right qualifications.
“The ruler is often influenced to choose such a (course) by those sorts of people – I mean, merchants and farmers – who bring him into contact with the profession in which they have been reared. … The ruler, therefore, must guard against such persons, and not pay any attention to suggestions that are harmful to his revenues and his rule.”
A second is that a government-owned business is liable to rig the market in its favour: “men in power in a country who engage in commerce and agriculture, reach a point where they undertake to buy agricultural products and goods, at prices fixed by themselves as they see fit.”
Another obstacle is that governments are exposed to conflicts of interest. There is nothing to stop government from mandating prices and thereby cutting profit margins for everyone else, but then, once capital available in the economy stops increasing, business volumes start to contract. “When the farmer gives up agriculture and the merchant goes out of business, the revenue from taxes vanishes altogether or becomes dangerously low.”
These risks have a compounding effect. When a state-backed business imposes price controls to lock in profit margins, private sector investment returns whither and merchants are forced out of business.
Ibn Khaldun’s Theory of Prices
Political philosophers in ancient Greece and Rome did not concern themselves with teaching how business works. Muqaddimah, on the other hand, is one of the first works of political economy that investigates business economics at length. Separate sections investigate components of prices; why prices fluctuate; and the essence of entrepreneurship.
The first building block of prices is the value of labour, “gains and profits, in their entirety or for the most part, are value realized from human labour.” Taxes are another cost passed on to customers, “customs duties raise the sales (prices), because small businessmen and merchants include all their expenses, even their personal requirements, in the price of their stock and merchandise. Thus, customs duties enter into the sales price.”
Third, merchants need to take into account supply and demand conditions in markets where they compete, “when goods are few and rare, their prices go up. On the other hand, when the country is near and the road safe for travelling, they will be found in large quantities, and the prices will go down.”
Prices reflect the costs a merchant can manage as well as uncertain ones beyond his control, but the final component, the one that matters most in this equation, is the entrepreneur’s margin of profit:“an old merchant said to a person who wanted to find out the truth about commerce ‘I shall give it to you in two words: ‘buy cheap and sell dear. There is commerce for you.’ “
Ibn Khaldun’s definition of entrepreneurship, such as it is, works well, however. It is anchored in his outlook as a devout Muslim who finds guidance in all things in the Koran. A merchant “strives to make a profit, so that he may spend what God gives him to obtain his requirements and necessities through barter.” This sentence flows so smoothly one might skim over the reference that a merchant’s profits have their source in “what God gives him.” However, the connotation of these words resonates deeply, as the Koran has a term for God’s bounty, rizq, a term which may be the origin of the term we use today to describe that aspect of enterprise that is the quintessence of entrepreneurship: risk.
This whistle-stop tour of Ibn Khaldun’s Muqaddimah is but a sampler of his work but may have said enough to show Ibn Khaldun pushed the boundaries of historical scholarship out into social science. In Europe, Ibn Khaldun’s works reached a wider audience when they were translated in the nineteenth century, at a time when social sciences in Europe even then were in their infancy. But even today, Ibn Khaldun’s work has aged well and his insights often are as fresh as they were when he penned them.
It may have startled some readers to see Ibn Khaldun articulated many notions centuries before they were expressed in the West. The Laffer curve is one example, but there are others, such as John Marshall’s dictum, “the power to tax is the power to destroy (1819),” and William Graham Sumner’s “forgotten man” who ends up bearing tax burdens (1883).
But Ibn Khaldun matters not only as an ideas man ahead of his time. Ibn Khaldun lived through an age of frequent regime changes that threatened corrosion of the Islamic realm from within, and foreign invasions visited devastation across the Middle East. Ibn Khaldun lived in an age of despair but did not much care for a quiet life. On the contrary, he wanted to look threats in the eye, and one of his travels took him to an encounter with the feared warlord Timurlan, a meeting that Ibn Khaldun recorded at length in his autobiography (another of his vast range of works).
If turmoil had an effect on Ibn Khaldun, it must have been as a spur to learn about different societies, and what is urgent today about the achievement of Ibn Khaldun, who did not flinch from engaging with policy-making at the highest (and most dangerous) level, is that he demonstrated how to combine firm religious orthodoxy with irrepressible curiosity in mechanisms of social change.
* Dr. Benedikt Koehler is a historian and former banker, specializing in early Islamic economics. Koehler delivered the inaugural lecture for the Legatum Institute’s “History of Capitalism” course.