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 under the authority of Chief Justice, a "God-fearing man" to prevent the rulers "fearlessly" from tampering with the value of money and devaluing the currency.
Based upon this idea of Ibn Khaldun, the American Federal Reserve Board, The Bank of England and West Germany's Bundesbank have been following relatively independent monetary policies aiming to keep inflation down and provide a stable currency for their respective economies.
Ibn Khaldun also has something to say about quantity of money. The modern Quantity Theory of Money can be read from his statement that "the quantity of money is of no significance for a country's wealth." For him, as far as monetary policy is concerned, a stable monetary policy aiming at the protection of purchasing power of money is a must as a matter of justice. The population has to be protected from the unjust policies of the rulers when they devalue the currency. A stable and sound currency increases the confidence of people in currency, trade and production. For Ibn Khaldun, what is needed for a society is less government expenditure on palaces and bureaucracy, less expenditure on mercenary armies, less taxation and a stable currency for trade and production.
Ibn Khaldun was not only against state involvement in commercial and agricultural activities, he was also against government involvement in fixing the prices of goods and services. When the government employs force "by buying things up at a cheapest possible price," the ruler "will be able to force the seller to lower his price" and "forces the merchants or farmers who deal in these particular products to buy from him." The rulers "undertake to buy agricultural products and goods from their owners who come to them, at prices fixed by themselves as they see fit. Then, they resell these things to the subjects under their control, at the proper times, at prices fixed by themselves." This kind of policy, according to Ibn Khaldun, has the following consequences:
- "They (the farmers and the merchants) themselves will no longer be able to trade, which is what enables them to earn something and make their living."
- Moreover, this repeated process "takes away from them all incentives to efforts, thus ruining the fiscal (structure)."
- "Furthermore, (the trading of the ruler) may cause the destruction of civilisation."
- Fixed pricing policy "is even more dangerous, harmful, and ruinous for the subjects than the engaging of state in commerce or agriculture which soon turns out to be harmful to the subjects, to be ruinous to the revenues, and to decrease cultural activity."
In light of the above analysis of Ibn Khaldun, it seems clear that the relative increase of poverty in Egypt, Algeria and many parts of Africa and the rest of the world and is due to state control of commerce, industry, agriculture and the service sector with fixed pricing systems.
Indeed, such fixed pricing policies of these countries have forced them to be more dependent on foreign help for food and more indebted than before. However, some of these countries are in the process of slowly following the prescription of Ibn Khaldun. This is an encouraging sign.
After the 1960s, some economists, especially in the United States, started to deal with property rights and its impact on economic development. Ibn Khaldun, on the other hand, had dealt with this issue centuries earlier. The protection and the enforcement of property rights had to be defended as a matter of justice for the survival of civilisation.
For him, "when the incentive to acquire and obtain property is gone, people no longer make efforts to acquire any. The extent and degree to which property rights are infringed upon determines the extent and degree to which the efforts of the subjects to acquire property slacken."
Ibn Khaldun predicts with the following statements the decline of economic activities when property rights are not protected and enforced:
"When attacks (on property) are extensive and general, extending to all means of making a livelihood, business inactivity, too, becomes (general), because the general extent of (such attacks upon property) means a general destruction of the incentive (to do business). If the attacks upon property are but light, the stoppage of gainful activity is correspondingly slight."
Civilisation and its well-being as well as business prosperity depend on productivity and people and people's efforts in all directions in their own interest and profit. When people no longer do business in order to make a living, and when they cease all gainful activity, the business of civilisation slumps and everything decays."
Ibn Khaldun sees a clear connection between property rights and justice. For him, "men persist only with the help of the property. The only way to property is through cultivation. The only way to cultivation is through justice. Justice is a balance set up among mankind."
Whenever, when violation of property rights occurs, it means an act of injustice has been committed. For Ibn Khaldun, "people who collect unjustified taxes commit an injustice. Those who infringe upon property (rights) commit an injustice. Those who take away property commit an injustice. Those who deny people their rights commit an injustice. Those who, in general, take property by force, commit an injustice", and "injustice ruins civilisation."
Ibn Khaldun argues that the importance of property rights has been vigorously emphasised in Islam as a matter of justice. For him this lack of justice "permits the eradication of the human species. This is why the religious law quite generally and wisely aims at emphasizing five things as necessary: The preservation of (1) the religion, (2) the soul (life), (3) the intellect, (4) progeny, and (5) property.
Since, "injustice calls for the eradication of the (human) species by leading to the ruin of civilisation, it contains in itself a good reason for being prohibited."
The relative backwardness of developing communist countries can be attributed to the existence of relatively poor property rights. The theory of Ibn Khaldun, other things being equal, predicts that a country with relatively strong property rights will witness a lively prosperous civilisation, and a country with relatively poor property rights, will stay poor forever.
Given political stability, for the rise of the nations, there must be:
a). A firm establishment of private property rights and freedom of enterprise,
b). Rule of law and a reliable judicial system for the establishment of justice,
c). The security of peace and the security of trade routes,
d). Low taxation in order to increase employment, production and revenues,
e). Less bureaucracy and a much smaller efficient army,
f). No government involvement in trade, production and commercial affairs,
g). No price fixing by the government,
h). A rule that does not give monopoly power to anyone in the market,
i). Stable monetary policy and independent monetary authority that does not play with the value of money,
j). A larger population and a larger market for greater specialisation,
k). A creative education system for independent thinking and behaviour,
l). The collective responsibility and internal desire to establish a just system to encourage good deeds and prevent vice.
Figure 10: General map of trade routes and empires around 1500. Adapted from Historical Atlas of Islam by Malise Ruthven and Azim Nanji, Harvard University Press, 2004, pp. 54-55
In summary, Ibn Khaldun is one of the few successful theoreticians, who has analysed the behaviour of human beings and society as an integrated whole in their totality as part of greater humanity, in the rise and fall of civilisation paralleled to the rise and fall of economic surplus, respectively. For him, the cycle of civilisation has reached its end with the destruction of superstructure. At the beginning, "the desire for a luxurious mode of life had inspired men to perform heroic deeds, fights, to overcome difficulties, and to build - Now-men fight again, but not for the hopes that they had once entertained. Motivated by the fear of hunger, they fight for mere existence, and like the primordial man who fought out of the same motive, they display the beast in man and return to the life of beasts."
Ibn Khaldun does not give any clue, as far as a limited examination of his work can allow us to judge, whether we could prevent the decline of a civilisation by instilling the dynamism of personal responsibilities in individuals and through research and investment in science and technology to generate further specialisation in goods and services in order to increase economic surplus and keep government bureaucracy and large mercenary armies to a minimum.
It remains a weighty question as to whether the decline of Greek, Roman and Islamic civilisations could have been prevented. We are not sure whether Great Britain's relative decline could have been prevented. The United States and Russia are trying hard to reduce military expenditure and invest more in research, education, and technology to prevent their relative economic competitiveness falling further vis-à-vis Japan and Germany in international markets. It will be seen whether these policies will work in increasing economic surplus.
What is clear is that Ibn Khaldun had "discovered a great number of fundamental economic notions a few centuries before their official births. He discovered the virtues and the necessity of a division of labour before Smith and the principle of labour value before Ricardo" and the role of government in stabilisation policy before Keynes.
The reform movements in Eastern Europe are following the prescription of Ibn Khaldun by privatisation policies and establishing private property rights. They are in the process of getting rid of price controls on goods and services. Moreover, they emphasise the role of entrepreneurship, initiative and free enterprise. Furthermore, they try to get rid of mercenary armies and reduce bureaucracy. They are in the process of reducing the overall economic activity and trading role of government.
It is clear that the policy recommendations of Ibn Khaldun for a civilised society are as relevant today as they were during his time. The countries that follow his recommendations will prosper and the ones that reject them will be in despair.
Figure 11: A translation from Arabic into English of the Muqaddimah of Ibn Khaldun in 3 volumes by Franz Rosenthal (1914-2003): The Muqaddimah: An Introduction to History (New York: Pantheon Books, 1958)
[1.] Ibn Khaldun, The Muqaddima: An Introduction to History, trans. from Arabic by Franz Rosenthal, 3 vols., Bollingen Series, No. 43 (New York: Pantheon, 1958).
[2.] Ibid, vol. 2, p. 281.
[3.] Muhsin Mahdi, Ibn Khaldun's Philosophy of History (Chicago: Univ. of Chicago Press, 1971), pp. 219-220.
[4.] Ibid, p. 221.
[5.] Jean David C. Boulakia, "Ibn Khaldun: A Fourteenth-Century Economist", Journal of Political Economy, vol. 79, No. 5, Sept.-Oct. 1971, p. 1106.
[6.] Adam Smith, The Wealth of Nations (London: Methuen Co., Ltd., 1925), p. 313.
[7.] Ibn Khaldun, The Muqaddima: An Introduction to History, op. cit., vol. 2, p. 250.
[8.] Ibid, vol. 2, p. 235.
[9.] Adam Smith, The Wealth of Nations, op. cit., p. 313.
[10.] Ibn Khaldun, The Muqaddima: An Introduction to History, op. cit., vol. 2, p. 235.
[11.] Ibid, vol. 2, p. 69.
[12.] Karl Marx, Kapital: A Critique of Political Economy, edited by Frederick Engels and revised by Ernest Untelmann (New York: Modern Library, 1906), p. 201.
[13.] Ibid, pp. 824 - 826.
[14.] Ibn Khaldun, The Muqaddima: An Introduction to History, op. cit., vol. 2, p. 289.
[15.] Ibid, vol. 2, pp. 245-246.
[16.] Ibid, vol. 2, p. 297.
[17.] Ibid, vol. 2, p. 297.
[18.] Ibid, vol. 2, p. 240.
[19.] Ibid., vol. 2, p. 245.
[20.] Ibid., vol. 2, pp. 245, 246, 285.
[21.] Ibid, vol. 2, p. 94.
[22.] Ibid, vol. 2, p. 96.
[23.] Ibid, vol. 2, p. 94.
[24.] Ibid, vol. 2, p. 95.
[25.] Ibid, vol. 2, p. 96.
[26.] Ibid, vol. 2, p. 103.
[27.] Ibid, vol. 2, pp. 103-104.
[28.] Ibid, vol. 2, p. 105.
[29.] Ibid, vol. 2, p. 107.
[30.] Ibid, vol. 2, p. 106.
[31.] Ibid, vol. 2, p. 107.
[32.] M. Mahdi, Ibn Khaldun's Philosophy of History, op. cit., p. 221.
[33.] J. D. C. Boulakia, "Ibn Khaldun: A Fourteenth-Century Economist", op. cit., p. 1117.
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* Dr. Selim Cafer Karatas is Executive Director, Islamic Development Bank, Jeddah, Saudi Arabia.