The economic theory of Ibn Khaldun and the rise and fall of nations, Selim Cafer Karatas, Ibn Khaldun on economics, the state theory, specialisation and economic surplus, supply and demand, monetary policy, fixed prices, property rights, Ibn Khaldun's theory of the rise and fall of nations.
The Economic Theory of Ibn Khaldun and the Rise and Fall of Nations
by Dr. Selim Cafer Karatas*
Table of contents
2. Ibn Khaldun on economics
3. Ibn Khaldun on the state
4. Specialisation and economic surplus
5. Supply and demand
6. Monetary policy
7. Fixed prices
8. Property rights
9. Ibn Khaldun's theory of the rise and fall of nations
Note of the editor
The first version of this article was published on Muslim Heritage in April 2006. The present version was slightly revised and edited and new illustrations were supplied.
Figure 1: Statue of Ibn Khaldun in Tunis. (Source).
Ibn Khaldun (d. 1406/808) was a 14th century Muslim thinker, born in what is now Tunisia, who wrote on many subjects, including on the rise and fall of nations in his Al-Muqaddimah. His writings on economics, economic surplus and economic oriented policies are as relevant today as they were during his time. His emphasis on reduced government expenditure for mercenary armies has been heeded by many developed countries which are in the process of implementing his policy prescriptions in order to increase economic surplus by shifting resources to education and human development. He opposed taxation and tariffs that discouraged trade and production.
Ibn Khaldun opposed state involvement in trade and production activities. He thought that bureaucrats cannot understand commercial activities and they do not have the same motivations as businessmen. He predicted relative decline of economic surplus and the decline of countries in which state involvement in trade and production exists. He saw a large army as an impediment to the expansion of trade, production and economic surplus.
The common sense economics of Ibn Khaldun is now being understood slowly by less developed countries. The tendency towards privatisation in these countries are a beginning. However, developed countries are aiming to reduce military oriented investments and expenditures in order to invest more in education and technology to increase the economic performance of their private enterprises in international markets. Furthermore, the same industrial countries have followed concessionary taxation policies conducive to trade and production.
These policies and many other economic policies on which this paper aims to reflect have existed as Ibn Khaldun’s policy prescriptions of for a civilised society.
Figure 2: The mosque where Ibn Khaldun studied in Tunis in his youth. (Source)
Ibn Khaldun was the first to systematically analyse the functioning of an economy, the importance of technology, specialisation and foreign trade in economic surplus and the role of government and its stabilisation policies in the increase of output and employment. Ibn Khaldun, moreover, dealt with the problem of optimum taxation, minimum government services, incentives, institutional framework, law and order, expectations, production, and the theory of value. Ibn Khaldun is again the first economist, with economic surplus at hand, who has given a biological interpretation of the rise and fall of the nations. His coherent general economic theory constitutes the framework for his history.
Until Ibn Khaldun and for centuries after him, no one in the history of economic thought has established such a coherent general economic theory to explain and predict the rise and the fall of civilisations, nations and empires as Ibn Khaldun has formulated in his Muqaddima. His theory has the empirical and theoretical power not only to explain the effects of government policies on production and trade, investment and specialisation, but also to predict the very survival of a state.
Figure 3: An autograph of Ibn Khaldun (upper left corner) in a manuscript held in Istanbul (MS C, Atif Effendi, 1936). (Source)
Since the State has important functions in the social, political and economic life of a nation, the role and the nature of the state has to be clarified for the well-being of society. For Ibn Khaldun, the role of the State is to establish law and order conducive for economic activities. Moreover, the enforcement of property rights, the protection of trade routes and the security of peace are necessary for any civilised society to engage in trade and production. Economic surplus would increase in a situation where governmental policies favour economic activities. Government should take a minimal amount of this surplus through taxation in order to provide a minimum of services and necessary public works. For Ibn Khaldun, optimum taxation occurs when governments do not discourage production and trade as a result of taxation.
If the State tries to over-expand its bureaucracy and its mercenary army by over-taxing the economic surplus, specialisation, production, trade and economic activities will be reduced. As a result, economic surplus will shrink. For "the growth of absolute power in the State is the cause of the decline of economic prosperity and, consequently, of the State and the city," because large mercenary armies, bureaucracy and over-taxation "discourage entrepreneurs from engaging in economic activity. This leads to a decrease in the total income of the State and new means of increasing its income have to be devised: taxes in kind curves, excise taxes, confiscation. And worst of all, the direct interference of the State in economic activity by engaging in commerce."
For Ibn Khaldun, the State has to take the responsibility for changing the expectations of the entrepreneurs by implementing public works to generate employment and confidence. As a part of the stabilisation policy, the State should build roads, trade centres, and other activities that encourage production and trade. But "the direct interference of the State in economic activity by engaging in commerce," would cause the decline of the State and economic activities. The interference of the State in commerce, by itself, will increase bureaucracy and the mercenary army. As a result of governmental interference in commercial and economic affairs, the entrepreneurs would be prevented from trading and investing and making profits in their enterprises.
The tyranny of the State starts with the direct involvement of the State in commercial and economic affairs and causes the decline of the arts and the contraction of trade, production and specialisation. With it, the economic surplus declines. The population would seek an alternative location to the former cities and the centres of productions. When the cities are depopulated, the decline in the demand for goods and services would generate a decline in the civilised mode of life, including civilised economic life. The whole country "starts to revert back to primitivism."
The concept of the role of the government in the policy of stabilisation to generate excess demand was formulated by Ibn Khaldun. This is five centuries before Keynes gained the attention of the whole world by stressing the importance of excess demand to increase output and create public works and confidence in order to increase employment.
Ibn Khaldun wrote that over-taxation would occur when the demands of bureaucracy and mercenary armies expanded beyond "normal" economic surplus. He stated that the larger the bureaucracy and the mercenary armies, the greater over-taxation would be, and the greater would be the burden on economic surplus. He did not think it proper to increase excess demand through enlarging the bureaucracy and the mercenary armies.
Greater production and maximum efficiency can be obtained by trade and specialisation through profit-seeking entrepreneurs who bear the consequences of their actions in terms of gains and losses. The entrepreneurs are the ones who have incentives for efficiency and specialisation as long as they perceive profits. The bureaucrats, on the other hand, do not have the same incentives for the expansion of trade and specialisation in production.
For Ibn Khaldun, the best State is the one that has minimal bureaucracy, minimum mercenary armies to keep law and order, and minimal taxation on its citizens to finance the activities of the State.
Figure 5: Front cover of the first complete scholarly European edition of Ibn Khaldun's Muqaddima in 3 volumes, edited from manuscripts at the Bibliotheque imperiale by the French Orientalist Etienne-Marc Quatremere (1782-1857): Prolegomenes d'Ebn-Khaldoun (Paris: Benjamin Duprat, 1858). (Source)
Ibn Khaldun dealt with economics, sociology, political science and other subjects in order to understand the behaviour of man and his history. He indicated, almost three centuries before Adam Smith, the fact that specialisation is the major source of economic surplus. For Ibn Khaldun, when there is an environment conducive to specialisation, the entrepreneur is encouraged to commit himself to further trade and production. Indeed, specialisation would occur in a place in which a person is able to reap the reward for his efforts. Given law and order, specialisation is a function of population, trade, production and minimum taxation. On specialisation, this is what Ibn Khaldun says:
"Each particular kind of craft needs persons to be in charge of it and skilled in it. The more numerous the various subdivisions of a craft are, the larger the number of the people who (have to) practice that craft. The particular group (practicing that craft) is coloured by it. As the days follow one upon the other, and one professional colouring comes after the other, the crafts-colouring men become experienced in their various crafts and skilled in the knowledge of them. Long periods of time and the repetition of similar (experiences) add to establishing the crafts and to causing them to be firmly rooted."
The concept of mass production, learning by doing and the concept of on the job training have been clearly demonstrated by Ibn Khaldun in this statement which needs no further clarification. However, it is important to indicate that these very concepts had become the subjects of articles in Economic Literature in the late 50's.
For Ibn Khaldun, specialisation meant the coordination of different functions of factors of production where, "what is obtained through the cooperation of a group, of human beings satisfies the need of a number many times greater (than themselves)."
Later, Adam Smith had this to say on the same subject: "Thus, generally, to the value of the materials which he works upon, that of his own maintenance, and of his master's profit." However, more succinctly, Ibn Khaldun states the economic rationale behind specialisation (and coordination) with this sentence "the combined labour produces more than the needs and necessitates of the workers." On the same subject, he states the fact that "through cooperation, the needs of a number of persons, many times greater than their own (number) can be satisfied." For Ibn Khaldun, providing coordination and cooperation of factors of production is a function that has to be performed by entrepreneurs according to market forces.
For Ibn Khaldun, given law and order and the security of peace, greater specialisation will be realised when there is a large population with minimum taxation and free trade (without impediment and restriction to trade). For Adam Smith, on the other hand, specialisation is a function of the market: the greater the market, the greater the specialisation. In fact, there is not so much difference between Ibn Khaldun and Adam Smith. The greater population implies greater market for many products. It means greater specialisation.
Figure 6: Beginning of the manuscript of Ibn Khaldun's book of world history Kitab al-‘Ibar wa-diwan al-mubtada' wa-al-khabar fi ayyam al-‘Arab wa-al-‘Ajam wa-al-Barbar. 261 leaves; 26.5 x 17.5 cm, written in various hands, copied in 1140 H / 1728. The manuscript is housed at Beinecke Rare Book and Manuscript Library, Yale University, New Haven, CT., call number: Arabic MSS suppl. 359. (Source)
For Ibn Khaldun, it is obvious that specialisation through cooperation and coordination of factors of production is the source of economic surplus. A partial interpretation of this surplus led Ricardo and Marx to the conclusion of the exploitation of the working class. In other words, Ricardo and Karl Marx are poor indirect students of Ibn Khaldun by partially interpreting his coherent general theory of economic surplus. This misdirection and partial blindness led Marx to say that "labour itself is productive labour."
Since according to Ricardo and Marx labour is the only source of value, then the surplus taken by capitalists is a sign of exploitation. To prevent the exploitation of labour by capitalists, Karl Marx suggested changing the social structure of society by revolution and destroying the "lover of force," the capitalist.
Ibn Khaldun, on the other hand, clearly indicated that "the profit human beings make is the value realised from their labour." For Ibn Khaldun, "large profits [are] because of the large amount of (available) labour, which is the cause of (profit). However, Ibn Khaldun considered not only the activities of the workers, but also of entrepreneurs to be productive. In that case, no exploitation would occur.
Ibn Khaldun considers both workers and entrepreneurs as respected members of society who try to maximise the return on their activities in the form of wages and profits. For him, profit is the primary motive of economic endeavour, since the expectation of profit leads to the expansion of production. Moreover, "Commerce means the attempt to make a profit by increasing capital, through buying goods at a low price and selling them at a high price." In other words, "the truth about commerce" is to "buy cheap and sell dear."
For Ibn Khaldun, it is clear that "the profit human beings make is the value realised from their labour," but this value, the price of labour, is determined by the law of supply and demand. These points were missed by Karl Marx and his ardent followers.
For Ibn Khaldun, the coordination, cooperation and direction of factors of production in increasing economic surplus is a productive and costly process which is undertaken by entrepreneurs who try hard to make a surplus on their economic activities. They spend time, energy and capital in searching for goods and services "to buy cheap and sell dear", in order "to make profit." Ibn Khaldun praised the initiative of entrepreneurs for their productive activities in coordinating and directing the factors of production; they rightly deserved profit from their risky undertakings. Karl Marx, Ricardo and others did not agree with this point.
Ibn Khaldun, again centuries ahead of his time, postulated that prices of goods and services are determined by supply and demand. When a product is scarce and in demand, its price is high. The merchant will buy the goods "where they are cheap" and plentiful and "selling them at a high price" where they are scarce and in demand. Naturally, when a product is plentiful, its price is low: "the inhabitants of a city have more food than they need. Consequently, the price of food is low, as a rule, except when misfortunes occur due to celestial conditions that may affect (the supply of) food." Moreover, Ibn Khaldun demonstrated the concept of long-run cost of production in the Marshallian sense.
Ibn Khaldun defends a stable monetary policy. He is against the authorities playing with the value of currency. He fears that the authorities may be tempted to devalue the currency in order to build palaces and finance mercenary armies. This process will cause inflation and the population will lose confidence in the currency. These developments are considered to be unjust. As a supreme policy for the society, the protection of the purchasing power of money has to be implemented as a matter of justice. To do that, he proposed an independent monetary agency unde