Saturday, 24 November 2012

Response to Timur Kuran

Response to ‘Is Islamic law to blame for the Middle East's economic failures?’

In a recent Time magazine article by journalist Michael Shuman, it was suggested that Islamic Law was the impediment for economic growth and prosperity. The basis of this claim was attributed to the work of an American Economics Professor named Timur Kuran and the reference for his work was quoted in the article as his 2010 book entitled ‘The Long Divergence’.

The crux of Kuran’s argument is that the structures enshrined within the Sharia limited the ability of the Islamic World to grow in line with the correspondence growth that emerged in the West during the industrial revolution.

The essence of the division he argues was that the West developed not only on the means of production front, but critically on the ability to form large capital structures were the resources could be pooled for large projects like never before. So essentially through the joint stock company and the peripheral institutions such as stock markets the West had the edge as the Company structure and institutions in Islam were orientated towards small partnerships and the private equity model of finance.

If the end game was to have a world where the distribution of wealth was so skewed that the year on year trend, as measured by the Gini Coefficient, was heading towards greater and greater wealth concentration then perhaps Kuran’s argument holds. However this is far from what most societies aspire towards and an alternative branch and root vision is required for economic management that moves the goal posts from the paradigm of absolute growth.

The economic axiom upon which the Classical school emerged was to allow the free market to maximise production and this would lead to solving the problem of distribution as a by-product. This is in contrast to the axiom of the Shariah which is to solve the issue of distribution and growth being a by-product. So to judge both solutions through the prism of the same axiom conceals the correct frame of reference.

It is true that the Sharia rules relating to corporate ownership are based around the partnership model and there are natural limits to the amount of stock that can be amassed. However what Kuran fails to state is the context of this rule in the overall economic solution enshrined within the Sharia framework. To consider the correct context would dismiss the argument very quickly and to not present the Islamic argument in the native context is tantamount to indoctrinating unaware readers into a ‘sound bite’ narrative that is hardly academically rigorous to be treated seriously by anyone wanting to see an alternative vision for economic management.

This context is that of the private sector vis-a-vis its scope and limits in the Shariah model. The projects that historically lend themselves to the large scale corporate entities, such as public utilities, are in public ownership and not in the private sector so the need for such public pooling of capital is not a reality in the Islamic model. These projects, which have very large setup costs, are owned collectively in the public sector and fees are taken for the delivery of such programs which are delivered free of the profit motive. This means that things like plasma TV’s, microwave ovens etc can be developed and traded in the private sector but public properties like oil procurement and refining, electricity generation and distribution, healthcare and drug research are all owner collectively through mass projects that the society as a whole pools resources towards. So the limitation cited does not hold.

Furthermore one might argue that those areas left to the private sector would also crawl as far as innovation and technological progression and this would limit the ability of the private sector to growth at a rate needed for effective competition with the Western economies. This argument is predicated on large private sector entities able to generate large R & D facilities that would not be possible without the stock market model. This is a misnomer as there is baggage inbuilt within the Capitalist paradigm that at face value favours enterprise but on deeper inspection limits advancement and innovation. In particular is the concept of intellectual property.

In the Sharia, there is a different concept towards ownership. Ownership is the right of disposal and this includes the right to benefit from technology developed by others. So if a company developed a technology in an area, then another company would be entitled to dissect that technology were possible, and improve it and bring to market the newer technology. This would lead to technology progressing much faster that the fewer but larger advancements made under the patent protection model. The former approach is in line with the distribution perspective enshrined within the Sharia alternative and the latter is more in line with the concentration of wealth paradigm that has caused such misery across the world were the Capitalist model has permeated to. In short more companies would be able to taking smaller bites from the pie than the fewer but larger bites taken by the joint stock companies protected by patents. The net effect would be a more rapid development to market lifecycle leading to more innovation and technological advancement in real terms further negating the need for large scale stock market centric wealth pooling. Furthermore with more eating from the pie there will be stronger demand as more are raised out of poverty and this would have a strong positive reinforcement effect on overall development.

As far as the other argument such as laws of inheritance acting as a disincentive for wanting to grow companies under a family legacy even under the private equity model, this argument presupposes that concentration is desirable and wealth is the means of happiness. Clearly another offshoot of the secular Capitalist philosophical basis that has alternative concepts to fend off when the Shariah equivalents are brought to the table.

So if the Islamic model was so robust, why did it fail to keep pace one may ask?

The confusion between economic concepts such as company structure and physical objects and technologies lay at the core of this question. Some in the Islamic world were calling for everything to be rejected and by so doing ‘throwing the baby out with the bathwater’. As a knee jerk reaction to this others started to call for everything the west was calling for to be adopted and the hybrid that was settled upon did nothing to offer a genuine alternative able to make full use of technological advancement but not at the cost of more equitable distribution, a balance that is impossible in the liberated free market model. The lack of a coherent response was itself a symptom of the political and intellectual decline when ironically the Islamic world substituted material wealth for intellectual wealth as the basis of its strength. The complacency that crept into the Islamic world after the zenith of its strength shortly before the renaissance in the West is a more accurate reason for the Islamic world lagging behind and not, as suggested by Kuran, the Sharia itself which is as applicable today as it ever was.

So what is the message for the Arab spring? The Islamic institutions and concepts need not be modernised but understood as having been the basis of the strength of the Islamic world and not the cause of its weakness. Once this is understood, the entire world will see that only the Shariah model can deliver on the twin goals of growth and distribution that has availed western theorists from the Classical school to date.

November 2012



  1. I would disagree with some of your analysis.

    The rise and prosperity of the west did not relate to the joint stock company and such trivia. The causes were acquisition of capital - without which such mechanisms would be totally irrelevant. Capital was acquired through theft, plunder and genocide of the Americas. This was followed by use of slaves to produce cheap commodities allowing a new social class to emerge and take power in Europe.

    This over time allowed the Europeans to overtake the Muslim world exponentially, one that was still on an upward incline. For it to compete, it too no doubt would have to undertake the criminality of the West - something it was unwilling to do!

  2. I do not disagree with your comment and I was not suggesting otherwise. I was simply explaining that the lack of a financial sector in the Islamic model (which does not exist yet i may add) is not a handicap as suggested by Mr Kuran.

    The equity based finance model is far more stable and all inclusive as far as wealth distribution than the Capitalist alternative.