In the centuries between the fall of Rome to the European renaissance, one of the leading political, cultural and economic powers in the region was arguably the Islamic Caliphate and its successor states. As such, the scholars of the Islamic world had much to say about economics -- primarily from a juristic standpoint, but also from an analytical one. What is commonly termed "Islamic economics" today refers effectively to this.
The Birth of the Islamic Caliphate (632-661)
The calendar of the Islamic world marks the foundation of Islam in 622 CE, the year of the migration (hijrah) from Mecca to Medina of the fledgling community of Muslims led by the Prophet Muhammad. But for historians, a more significant date is probably 632, the year of Muhammad's death and the election of Abu Bakr as his successor (Caliph), formally "Commander of the Faithful" (amir al-mu'minin). As Abu Bakr was not directly appointed by the Prophet, and possessed no religious authority of his own, many Arab tribal leaders felt little reason to transfer their political loyalties to him. As such, the disparate coalition of Arabs which had formed the early community of Muslims (the ummah, in Arab parlance) began fragmenting. Tribe and after tribe seceded and went on their own way, many of them resuming to their pre-Islamic beliefs and traditions. There was a great likelihood that Islam would not survive the death of its charismatic Prophet.
It is to the political and organizational genius of the early Caliphs, then, that Islam owes its preservation. One of the first tasks was to organize the compilation of the Holy Qur'an, hitherto held orally, believed to be the word of God as revealed to the Prophet Muhammad by the archangel Gabriel. This became the central document of the new religion. The Caliph also deployed the remnant of the Muslim army and whatever political authority he had left to bring the Arab coalition back together ('wars of the ridda'). In the course of this, the recovering Muslims came up against the Arab tribes of the northern frontier, clients of the Byzantine and Persian empires. The enthusiastic energy of the Muslim commanders quickly turned what should have been routine border incursions into an out-and-out invasion of the ageing empires. By 641, in the space of a less than ten years, the bulk of the Persian empire and the Byzantine provinces of Syria, Palestine and Egypt were in Muslim hands.
Abu Bakr had died before the end of the first campaigns, and it fell to his successor, the Caliph Omar, to begin integrating these massive territories into a single political unit -- often called the Islamic empire or Caliphate. The first problem of any empire is to restore law and order, and Omar had to improvise quickly. As it happened, the ethics of Islam (e.g. protection of the weak, the prohibition of fraud, etc.) were compatible with the underlying principles of the various legal traditions found within their empire (Roman, Arab, Jewish, etc.) This made the job of the early Islamic judges (qadi) easier: if a local law did not contradict the Qur'an, it could stand.
On the economic front, the Islamic empire was inaugurated with a massive (if somewhat inadvertent) land reform program. The Bedouin Arabs who did the bulk of the early conquering were nomads. They were not interested in land and so did not "replace" the local pre-Islamic lords that they had deposed or killed in battle, but went off in search of more tangible booty. As such, local peasants were often left to their own devices, and had to organize production, harvesting and storage by themselves. Town and village councils sprouted up spontaneously for the purpose. So, in many areas of the Caliphate, the new subject populations were instantaneously liberated from age-old serfdom and acquired an unheard of degree of political autonomy and economic empowerment. For their part, the Caliphs were happy to see this happen, as it not only secured the loyalty of the conquered peoples, but it also gave them a ready-made system of local administration. The new ownership tenures were ratified by appealing to the Muslim principle that anybody who works on abandoned land, after a certain period of time, automatically takes private possession of it. "He who revives dead land, owns it", the Caliph Omar declared, quoting the Prophet himself.
But this was by no means uniform. Sedentary Muslims in the armies, were quite keen to appropriate and settle down on conquered land. However, their material aspirations were put to an end early on by the remarkable decision by Caliph Omar prohibiting any further redistribution and/or purchase of conquered lands by the Muslim conquerors. This decision to protect local peasant-proprietorship in conquered lands was partly guided by fiscal concerns. By Islamic law, Muslims are tax-exempt. More precisely, zakat, the only tax Muslims paid, was already earmarked for the care of the poor. As a result, the revenues necessary for the running of the empire itself had to be drawn from the payment of jizyah (poll-taxes) and kharaj (land-taxes) by non-Muslims (Dhimmis). It is for this reason that the Caliphs were keenly interested in protecting the property and maintaining the economic well-being of non-Muslims within the empire. But Omar's decision of outright prohibition was too controversial. After some conflict, a compromise was reached. Outright seizures of conquered land were prohibited, but purchases were allowed. The ushr, a tithe on Muslim "seizures and acquisitions" (i.e. all Muslim-owned property outside the Arabian peninsula), was introduced to partly replace the lost revenues.
But this fiscal regime had several unanticipated side-effects. In the first place, it prompted a massive wave of conversions to Islam. Every conversion meant lost tax revenue -- and so we find, time and again, the paradoxical scene of Caliphal authorities discouraging further conversions to Islam. It is indicative of the significance of non-Muslim taxes that Jews, Christians and Zoroastrians -- admittedly second-class citizens within the empire -- were nonetheless treated better and given more protections than tax-exempt Muslims of heterodox sects (Kharijites, Shi'ites, etc.)
The Umayyad Caliphate (661-750)
In 656, the fourth caliph, Othman, was assassinated. A period of civil war followed as various parties vied for succession, ending in 661 with the deposition of the fifth Caliph Ali and the ascension of Caliph Mu'awiya, leader of the Umayyad clan. Ali's partisans, the Shi'ites, staged a rebellion in 680 in an effort to restore Ali's line, but were defeated once again. This was followed up in 683 by a second civil war that nearly broke the empire in pieces..
The Umayyad Caliphs -- particularly Caliph Abd al-Malik (r. 685-705) -- reunited and centralized the Caliphate in the aftermath. To prevent the empire unraveling again, they overhauled its central institutional features. They transformed it from a quasi-democratic "community of Muslims", into an autocratic state, ruled from its new capital in Damascus (Syria) via a set of interlocking aristocratic assemblies, or Shura (council of tribal leaders and provincial governors). The caliph's seat itself was declared hereditary in the Umayyad family -- thereby introducing the dynastic principle for the Islamic empire.
The Umayyads restarted the process of expansion in 670, quickly capturing Byzantine North Africa (Ifriqiya) and, with more difficulty, the Berber kingdoms of the western Maghreb. The conquest and absorption of the Berbers was completed only in 710. In 712, an Arab-Berber army invaded Spain, conquering the peninsula from the Christian Visigoths in a short seven years. That same year, an Arab-Persian army went east, conquering western India. But Muslim expansion petered out shortly after that. A renewed Muslim assault on Byzantium ended at the walls of Constantinople in 719. The Muslim thrust into western Europe was halted by the Franks at Tours in 733 and into Asia at Samarkand in 751. The frontiers of the Islamic Empire were subsequently stabilized at the Pyrenees in the west and the Punjab in the east, with pockets elsewhere. In the subsequent century, itinerant traders and missionaries would spread the faith further into Central Asia, East Africa and Southeast Asia while sea-borne Muslim adventurers from Spain and Africa seized control of the western Mediterranean islands and established enclaves in France and Italy.
If the first Muslim conquests had been more-or-less "accidental", driven by the almost-independent initiative of individual Arab generals, the later conquests had been a bit more deliberate. The Islamic empire was a cash state, dependent on tax revenues rather than demesne lands to function. Its armies also operated on a cash basis, depending on private markets for their supplies, paid out of regimental treasuries. As such, many military campaigns had little more than fiscal goals in mind - an opportunity to plunder, collect tribute and replenish the treasuries. From around 696, under Caliph Abd al-Malik, the Umayyads began minting their own gold coins (dinars), silver coins (dirhams) and copper tokens (flus).
But the second wave of campaigns had not paid for itself. The string of Muslim reverses, particularly at Constantinople, had been expensive. And as the frontiers stabilized, revenues from captured loot evaporated. As the treasuries thinned, the Umayyad lords of Damascus instructed their provincial governors to dynamize local fiscal revenues. This meant sending out tax-collectors to lean on local populations, whether Muslim or non-Muslim, and exacting new taxes and dues, even if they contradicted Islamic strictures. As early as 685, the Umayyads declared that non-Arab Muslims (Mawalis) would pay the same taxes (kharaj and jizyah) as non-Muslims. In some areas, forced labor was introduced (the Qur'an explicitly forbids the enslaving of Muslims). As a result, Berber and Persian converts to Islam, who had fought in the campaigns, felt particularly aggrieved. Contravening Islamic practice, the division of booty, the assignment of duties, pay and benefits, were very different for Arab and non-Arab soldiers. Predictably, the Mawalis resented their relegation to second-class citizenship. Tax revolts and mutinies broke out in various locations, stretching Umayyad finances further and prompting the introduction of even more oppressive measures.
These exactions had become particularly routine in the caliphates of al-Walid (705-715) and Sulayman (715-17), and had driven the Mawalis to exasperation. But in 718, the Umayyad caliph Umar II finally forbade the levying of extraordinary taxation and dues from non-Arab Muslims, thereby defusing much of the tension. But the expensive military reverses in the 720s and 730s had forced caliphal authorities to look for innovative ways to replenish their treasuries. During the caliphate of Hisham from 724, the prohibitions were sidestepped with re-interpretations, e.g. tying the hkaraj to the land itself, rather than to religion of their owners, so that lands that were at any point subject to the kharaj remained under kharaj even if currently owned by a Muslim. . In practice, all they really intended to do was to raise the ushr tax to the higher kharaj level. But the legal device they used to accomplish this was very controversial. What they did was prohibit any further transfers of land ownership from non-Muslims to Muslims; Muslims could only lease these lands in long or perpetual leases, and so, because their owners were nominally non-Muslim, the lands were still subject to the high kharaj tax (whose burden would fall on the tillers). This was certainly the wrong way to go about it. The legal device explicitly interfered in religiously-sanctioned freedoms of private property ownership and transfer.
As resentments mounted, non-Arab Muslims (Mawalis) grew receptive to heterodox religious activists. Many flocked to the Shi'ites, hoping to replace the Umayyyad caliphs with a "better" bloodline. But the Shi'ites were under microscopic surveillance by the Umayyad authorities. Others rallied behind those numerous messianic figures (Mahdis), self-proclaimed divine justicers, that kept popping up everywhere -- but they were ineffectual and disappeared just as quickly. But there was another group that seemed to offer a a more permanent solution: the Kharijites. The Kharijites preached a puritan form of Islam, promising a new political order, where all Muslims would be equal, irrespective of ethnicity or tribal status, and Islamic law would be strictly adhered to. Unlike the Shi'ites or the Mahdis, who promised only to replace one ruler with another, the Kharijites promised a new constitution. The preaching of Kharijite activists fell on the receptive ears of non-Arab Muslims.
The original Kharijites had been a radical group of Ali's followers who had emerged in the 650s and proclaimed that laws are to be decided by God, not man. Initially, they simply meant that they wanted "trial by ordeal" instituted -- so the Caliph should be decided upon in battle ("God gives victory to the chosen"), not by the political agreement of tribal chieftains. When no "battle test" was available, the Kharijites insisted that, at the very least, the Caliph must be a pious and upright Muslim, strictly observing all Islamic commandments. They used this argument to legitimize assassinations of rival claimants to the Caliphate (including the ill-fated Ali) during the early civil wars. Those pretenders, the Kharijites claimed, were impious and motivated by human ambition and thus unfit to rule. They got even more radical in the early Umayyad reign. The true test of an upright Caliph, the Kharijites now claimed, was not merely his personal conduct but also the extent to which the laws he institutes are strictly according to Qur'anic recommendations. "Enjoining the Good, Forbidding the Bad" became the Kharijites rallying cry. :The Kharijites introduced the novel political notion that the Islamic empire should be a nomocracy (rule of law) and not an autocracy (rule of a man) or even a democracy (rule of men).
Ranged against them were the Murj'ites, the "liberals" of the era. Why translate all Islamic ethics and commandments into the law of the land, they asked? If religious principles are a matter of personal conscience and divine justice, than what business is it of human legislators and judges? Not that that gives them the right to ride roughshod over basic human sensibilities (which may be informed by Islamic ethics), but, at their root, laws are a secular human affair, the prerogative of Caliph. If you want to ensure accountability and curb abuses of power, then fiddle with the composition and powers of the assemblies (Shura).
This debate over the nature of law -- secular or religious -- was the central battle in the more urgent struggle over the political future of the Caliphate. The Kharijites echoed the feelings of many in the Muslim community who feared that the Umayyad dynasty, with the connivance of the Shura, was preparing to transform the Islamic Caliphate into a secular autocracy under themselves. Certainly, that is what many of the mistreated Mawalis came to perceive. The choice seemed to be self-evident. If law was secular, as the Murj'ites advocated, then the source of law would be the Caliphs themselves. If law was sacred, as the Kharijites insisted, then by the Islamic legal principle of ijma ("consensus"), the source of law would be in the hands the entire Muslim community. Thus, the Kharijites -- those wild-eyed, violent, intolerant radicals of yore -- can be regarded as the spearhead of a democratic impulse against incipient tyranny, while the liberal Murj'ites were the apologists of authoritarianism..
The original Kharijites had been destroyed and dispersed by Umayyad military campaigns in the 690s, but their message continued to resonate and new Kharijite-type sects, like the Sufrites and the Ibadites, emerged here and there. It helped that the new Kharijites had largely abandoned the murderous tactics of their predecessors and that respectable scholar-jurists had taken up the nomocratic doctrines and made them more sophisticated. Kharijite preachers penetrated population centers and garrisons in the various corners of the caliphate. For non-Arab Muslims in particular, the new Kharijite doctrines were especially appealing , promising to establish the rule of law, a law which granted all Muslims full and equal rights.
The Revolt of Islam (750)
All this came to a head in 740s. In the west, fired up Kharijite preachers, the Berbers revolted against the Arab aristocracy. In the east, around 747, the Persian general, Abu Muslim, forged a disparate coalition of frustrated Muslim zealots (Kharijites, Shi'ites) and disaffected mawalis of various ethnicities (Persians, etc.) against the ruling Umayyads. After a brief civil war, the coalition was victorious and the Umayyad clan massacred. The rebels installed Abu al-Abbas ("as-Saffah") as caliph, thereby inaugurating the Abbasid dynasty of the Caliphate. The capital was immediately transferred to Kufa (Iraq), the old center of Muslim scholars and Kharijite activists.
The Abbasid revolution was momentous. The Caliphate was redesigned as a nomocracy, governed by Islamic law (Shari'a). Theoretically, legislation was God-ordained. But by the "consensus" principle (ijma) of exegesis, laws were now in the hands of the entire Muslim community (the ummah). In practice, this was narrowed down to the community of scholar-jurists (the ulama). They were to be the effective "legislators" of the Islamic Empire and, like any normal legislature, they were fragmented into "parties" or "schools of thought" (fiqh). The formal head of the empire, the Caliph, was "elected" by the ulama and was regarded merely as the upholder of Shari'a. He was the executor and ultimate judge, but never the source of law. The Caliph may make one school of law "official", but that did not make adherents of other schools any less legitimate.
Through all sorts of ups and downs, this arrangement was to last well into the 19th Century. The ulama never "delivered" the law back up to the Caliph. Practically every ruler over the Muslims rested their power on their promise to uphold the sacred law. Where the ruler did not comply, the ulama felt entitled to declare him "illegitimate" and lead the revolt against him (formally, a Caliph was "deposed" by having his name dropped from the Friday prayers).
The first task of statecraft in a new nomocracy is, obviously enough, the establishment of the legal code. The old practice of simply letting old laws stand except where they contradicted the Qur'an could no longer do. That expedient allowed immense differences in law and custom to persist across the Caliphate. A secular empire may be able to tolerate these differences; but a nomocracy cannot. If the Caliphate is to rest entirely on the rule of law then, at the very least, that law has to be clear.
So the scholar-jurists set themselves to work constructing Shari'a. Islamic judges (qadi) needed direction, but they had little to go upon. Only a very small fraction of the recommendations in the Holy Qur'an gives anything amounting to specific legal guidance, the remainder being mostly general ethical principles. So the initial phase of just reviewing current practices and checking them against the Qur'an only went so far. The next step was to reconcile the differences between practices. The first attempts at reconciliation were more-or-less arbitrary and unsystematic -- drawing on his personal intuition (raya), the judge would just declare that this version was "more correct" than that one. But that was easy for other jurists to challenge, leading to endless quibbles.
So several prominent legal scholars attempted to lay down more systematic guidelines for legal construction where Qur'anic exegesis was not clear. Two schools of thought on this had clearly emerged by the late 700s. The Maliki (or Medina) School, founded by Malik ibn-Anas, emphasized recourse to ijmi or "consensus" of opinion among the Muslim community. The Hanafi (or Kufa) School, founded by Abu-Hanifa, emphasized recourse to ijtihad or independent "reasoning". Various forms of reasoning were recognized by the Hanafi school: qiyas (reasoning by analogy), istiham (juristic preference, i.e. accounting for specific circumstances, etc.), istislah (benefit to the community) and urf (custom).
To justify their decisions and methods of legal construction, the Hanafi and Maliki jurists often invoked the opinions and practices of early Caliphs, the close companions of the Prophet (the ashrab) and even the Prophet himself, to reinforce their own interpretations. The opinions of the second caliph, Omar, were particularly useful for the Maliki school, while the Hanafi school found much inspiration in Ibn Masud (one of the Prophet's most respected companions).
But how reliable were these old opinions? Nearly a century had intervened since the death of the last companion of the Prophet. A vast number of stories and anecdotes about the lives and opinions of the early Muslims had circulated orally since. Like a game of Chinese whispers, lots of inaccuracies were conveyed as well.. These stories often contradicted each other in different renderings. Many were likely to be wholly false -- because the person who recorded them had a bad memory, or misheard them, or simply fabricated them outright.
As they searched for these early opinions, the scholar-jurists began writing them down, carefully recording the chain of oral transmission -- "I heard x say that y said that z said ... ", always ending in a witness who was actually there physically. The compiled records of the stated opinions and observed practices of the Prophet and his close companions became known as the "Traditions" (Sunna). Strictly speaking, a hadith is merely an extract from the Sunna. However, perhaps confusingly, these terms are also commonly used to distinguish words and actions, i.e. hadith are the stated opinions of the Prophet, sunna are the observed practices of the Prophet and his companions.
.The Golden Age (750-850)
Unlike the Arab-supremacist Umayyads before them, the Abbasid Caliphs were deliberately cosmopolitan -- indeed, perhaps too cosmopolitan. Although they remained committed to the Shari'a project, they were quick to rid themselves of their old puritanical allies. Astonishingly, leaders of the radical sects which had brought them to power were shown the door and some (including the old champion, Abu Muslim) were executed. Seeking to get away from the eagle-eyed jurists of Kufa, the Caliph Abdullah ("al-Mansur") erected a new capital in Baghdad and surrounded himself with ministers in a court which recalled more the splendor of the Sassanid kings of Persia than the puritan simplicity of Medina.
Baghdad quickly rose to become one of the largest and most splendorous cities in the world. Al-Mansur's successors, particularly Caliph Haroun ("al-Rashid") (r.786-809), Caliph Abdullah ("al-Ma'mun") (r.819-33) and Caliph al-Mu'tasim (833-44), presided over what is widely-regarded as Islam's "Golden Age". Keeping in mind the maxim attributed to the Prophet, "Seek knowledge, even unto China", the empire was scoured for every fragment of knowledge, useful or not, Muslim or heathen, that could be found. Legions of scholars -- Muslim, Christian and Jewish -- were brought to Baghdad's "House of Wisdom" to sift through them. Among many other things, the philosophical and scientific works of the Classical Greeks were dug out from obscurity and translated into Arabic. It is needless to repeat here how medicine, astronomy, science, philosophy, mathematics, agriculture, crafts, engineering, etc. were revolutionized in the process and then re-transmitted to Europe.
But Islam itself was also revolutionized. The most famous philosophers during the Golden Age were the Mu'tazilites, a school of theology founded by Wasil bin-Ata in Basra, which had drank deeply from the recently-translated classics. The express purpose of the Mu'tazilite enterprise was to reinforce the pillars of the Muslim faith and Islamic Law with rationalist Greek logos. This would not only "strengthen" faith itself, but it would also endow Islam with a respectable theology that would enable it to respond to Zoroastrian, Jewish and Christian critics who continued to doubt the solidity of the fledgling religion.
The Mu'tazilites stressed the primacy of reason over revelation. God would not command of man that which would be absurd or unreasonable. Consequently, good and evil could be known by all men through reason alone. However, because of human weakness, revelation was necessary to confirm to man what was truly good and to provide men with rules of behavior which unaided reason could not comprehend. Nonetheless, the Mu'tazilites insisted, reason directs the understanding of revelation.
To reinforce their rationalist theology, the Mu'tazilites denounced the literal interpretations of the Qur'an. They insisted that the Qur'an was a creation of God, and not the Word of God -- and like all of His creations, temporal and imperfect. As evidence, they pointed to the multiple attributes and anthropomorphic descriptions of God in the Qur'an -- which, interpreted literally, can lead down the slippery slope to polytheism. The Mu'tazilites also stressed the the freedom of the human will, arguing that predestination was incompatible with Divine justice. They made clever use of Aristotle's "infinite regression" paradox, developing a distinctly Platonic cosmology that argued that God "created" the world from an "eternal matter" with its own "natural laws".
The Mu'tazilites were celebrated during the Golden Age and showered with honors by the Abbasid Caliphs. The success of Mu'tazilites also helped the Hanafi legal school, which was perhaps closest to them in spirit. The Mu'tazilites reached the apex of their influence with the "inquisition" (mihna) imposed by Caliph al-Ma'mun in 833, whereby all persons of rank -- including jurists -- were forced to make a public profession confirming the "createdness" of the Qur'an.
While often compared to the great Enlightenment figures of 18th C. Europe, the Mu'tazilites were seen in a much different light by their contemporaries. The scholar-jurists, in particular, found their theories -- particularly the "createdness" of the Qur'an doctrine -- profoundly disturbing. For if the Qur'an is "imperfect" and faith only understandable by "reason", then the implication is that the some men are better interpreters of the revelations than others. Many immediately suspected the Mu'tazilites of attempting to establish an Islamic priesthood. Was that their intention? It is not unlikely.. Until the advent of Islam, a powerful priesthood had been central part of Persian society. For the openly and unabashedly Persophile Abbasid court of Baghdad, the restoration of this privileged caste in some form or other would have been the ultimate act of nostalgia. The Mu'tazilites, many of whom were of Persian origin themselves, rather enjoyed being fawned over by the Abbasid Caliphs and likely wouldn't have minded it.
But for the scholar-jurists of Kufa and elsewhere, the notion of an Islamic priesthood was anathema. In 750, they had risked life and limb to overthrow the Umayyads and restore the law to the Muslim community. Now the Mu'tazilites were trying to "steal it back" by denying the capacity -- and thus, implicitly, the right -- of the average man to interpret the Qur'an himself. This could not be. They did not throw out an autocracy merely to see it replaced by a theocracy (and not merely so, for a priesthood under the Caliph's thumb would indirectly deliver control of the law to him as well -- autocracy revisited).
The 833 mihna -- the Mu'tazilite inquisition about the "createdness" of the Qur'an -- was the last straw. It is one thing to profess a philosophical doctrine, it is quite another to impose it, for then you are indeed acting in the capacity of a priest. Legions of scholar-jurists, particularly of the Maliki school, refused to swear to it. So did many government officials, particularly those of Arab extraction who resented the new Persian dominance. Non-compliant jurists and officials were dismissed from their posts, barred from mosques, imprisoned and some even tortured and executed, by the Abbasid authorities. The martyrdom of the few encouraged the opposition of the many. As the tidal wave began to form, the Abbasids realized they had overstepped.
The Sunni Revolution (850-900)
The mihna was repealed soon after the ascension of the new Abbasid Caliph Mu'tawakkil in 847. The Mu'tazilites were scuttled out of court and a reaction against the excessive rationalism and Persophilia of the "Golden Age" was set in motion. It did not occur all of a sudden, but proceeded slowly over several decades. What emerged from it is something known today as "Sunni Islam", the most widely practiced or orthodox version of Islam.
The bards of the Sunni revolution was the Ash'arite school of theology, founded by the renegade philosopher, Ali al-Ash'ari, as a direct answer to the Mu'tazilities Advocating the primacy of revelation over reason, the Ash'arites defended literal interpretation of the Qur'an. They admitted that the Qur'an was material, given that it was revealed in a particular human language, at a particular time, in a particular location, etc. However, they stopped short of admitting that it was a "creation" of God. The Qur'an is still "perfect" and unequivocal, it is just the imperfection of human language that has caused the confusion and difficulties. Reason can play a role in disentangling a truer understanding from the thickets of imperfect language, but literalness should never be abandoned, reason can never trump the Word. The Ash'arites also reconciled predestination with Divine justice by distinguishing human will from human acts. Invoking Neo-Platonist doctrines, they noted that the function of reason and language was to circumscribe and divide, thus God -- One and Absolute -- cannot be "accessed" by rational analysis and understanding, but rather only through extra-rational revelation and mystical experience - thus opening the way for Sufi practices.
But switching the Baghdad court's favorite philosophers does not a revolution make. The main event occurred in the foundations of Islamic law. This had nothing to do with the fancy logical acrobatics of theologians, but with a more gradual movement which was now gathering speed. The movement stemmed from the groundbreaking 815 treatise of the jurist Muhammad al-Shafi'i, founder of the Shafi'ite School of legal thought. Al-Shafi'i had grown increasingly uncomfortable with the great variations and inconsistencies in legal practice which the Malikite and Hanafite scholars had allowed to persist. To fix this, al-Shafi'i insisted that there are only five sources of legal knowledge, and placed them in strict order of importance:
(1) the Holy Qur'an;
(2) the Hadith (sayings attributed to the Prophet);
(3) the Sunna (practices attributed to the Prophet and his close companions);
(4) the ijma (consensus among religious authorities)
(5) qiyas (reasoning by analogy).
Notice that, contrary to the Hanafi, the Shafi'ites denied the legal validity of any form of reasoning other than reasoning by analogy. And, against the Maliki, consensus is relegated to a lowly position on the list. But that's not the important point. The important point is that the Sunna are elevated to a position superior to either consensus or reasoning. This would have tremendous consequences.
At first glance, it may seem that all al-Shafi'i accomplished was the foundation of just another school of legal thought, barking in a cacophany of legal debate. But in practice, Islamic law changed its nature completely. Prior to al-Shafi'i, Islamic law had been a dynamic and progressive jurisprudence. New decisions were made according to the most recent precedent and would, in turn, set the precedent for the next. Al-Shafi'i's hierarchy of sources turned that around. The most important precedent was not the latest, but the first, as found in the Sunna. A single interpretation or decision by the Prophet himself or one of his companions automatically trumps all consensus and reasoning by the latest and brightest jurists.
This was core of the Sunni revolution. Previously, Malikites and Hanafites might invoke the opinions of the Prophets and his companions to support their own opinion, but they were merely consulting them, not giving them authoritative primacy. If the Prophet said one thing in the past, but consensus in the present says otherwise, than the latter is taken up. The Prophet and his companions, however upright and wise, are just another group of men, after all, who lived in a different time and society anyway. No longer. By al-Shafi'i's doctrine, the opinions of the Prophet and his companions, being closer to the divine origin, were consequently superior. Their logic, their reasoning, their decisions and practices are more authoritative.
Islamic law did not embrace the Shafi'ite school itself in any exclusive manner, but rather but rather al-Shafi'i's arguments about the primacy of the Sunna filtered to the other schools of jurisdprudence. Their differences remained: the Maliki continued to emphasize consensus, the Hanafi the several types of reasoning. But all schools, step-by-step, began to acknowledge the authoritative supremacy of the Sunna right after the Qur'an.
This process was given a shot-in-the-arm by the labors of hadith scholars, such as al-Bukhari, Muslim, Abu Dawud and others towards the late 800s. They did not merely collect and record the hadith, but sifted through them, painstakingly reconciled and corrected the chains of transmission and evaluated and coded them by their degree of authenticity. The Sunna, heretofore a disparate and incongruous collection, became systematic and readily-accessible to the jurists. The availability of the Sunna, perhaps more than the arguments of al-Shafi'i, is what really persuaded the other schools to hop on board.
Other schools of thought emerged during this time. There were two further (and stricter) off-shoots of Shafi'itism: the Hanbali legal school (founded by Ahmad ibn-Hanbal) which further reduced the role of sources (4) and (5) and the Zahiri legal school (founded by Dawud ibn Khalaf) which insisted on strict literalism and eliminated (5) outright.
Another interesting outcome from the Shafi'ite revolution is that it gave the Shi'ites the impetus to embrace legalism. The Shi'ites had been disappointed by the settlement of the 750 Abbasid revolution. Their objective had been narrowly political: replacing the Umayyad caliph with the one from Ali's line. They were not particularly interested in Islamic law -- indeed, the Shari'a project seemed positively contrary to their cause: if legislation was God-ordained and in the hands of jurists, then it did not really matter who the Caliph was. The Shafi'ite revolution changed all that, because it gave authoritative power to a few "great men" (i.e. the Prophet and his companions). All the Shi'ites had to do was expand the list of great men to include their champions (they also struck out the first three Caliphs as usurpers). So, the practices and opinions of the Shi'i Imams were compiled and a Shi'ite legal school was born. The Shi'ites created a class of jurists of their own, talking in the same language and voicing similar principles as their Sunni counterparts, just drawing on a different set of traditions. The fact that the Imam was still around, then there was a "living" source for the law, i.e. innovations could be introduced. The "occultation" of the last Imam (which most Shi'ites believe happened in 872), didn't cramp their style. The jurists just took on the oracular role of speaking on behalf of the "hidden" Imam. The current legislative authority of Shi'ite jurists, an authority their Sunni counterparts never have had, was justified by the claim that they are still being inspired by the "hidden" Imam. So, in a sense, the Shi'ite traditions are still a work-in-progress.
Philosophy vs. theology
In the realm of theology, the scuttling of the Mu'tazalites in 849 did not put an end to rationalism or philosophy. Hellenism was ingrained deep in the Islamic intellectual world, so there was a counter-reaction by several rationalist philosophers, like al-Kindi in the 9th Century, al-Farabi in the 10th, Ibn Sinna in the 11th and Ibn Rushd in the 12th. Drawing upon Aristotle and with increasing sophistication, the rationalists sought to reconcile rationalist philosophy and revealed theology. Their works were particularly influential on Scholastic Christian scholars like St. Thomas Aquinas, and Jewish theologians like Moses Maimonides.
But the efforts of the Islamic rationalists were countered by Abu Hamid Al-Ghazali in the 11th Century. Using Aristotelian arguments himself, al-Ghazali reiterated the Ash'arite position, stressing the primacy of revelation over reason, arguing that rationalist philosophy had nothing to say about matters of theology. Al-Ghazali's sophisticated theology was embraced as the "dogma" of Sunni Islam.
The significance of al-Ghazali's doctrine on the intellectual development of the Muslim theology has been variously interpreted. Some critics like to point out that by "killing off" the rationalists, al-Ghazali might have inadvertently stifled the continued development of science and philosophy in the Islamic academies. But the actual effect of al-Ghazali's work was precisely the opposite, for by strictly separating science from religion, al-Ghazali liberated science from being a handmaiden to theology and allowed scientific inquiry to be pursued for its own sake. Philosophical inquiry inside theology may have suffered, as the best minds in Muslim theology no longer felt compelled to dig through classical philosophy or engage in rationalist calisthenics. But scientific inquiry did not miss a beat - and the output of Muslim scientists continued unabated and even accelerated, their methods more comfortably rational and empirical than ever. The scientific method could now take wing without worrying about stepping on theological toes. Much of the best scientific work of the Islamic world came after al-Ghazali, not before. In that respect, to lament al-Ghazali's "victory" over theological rationalists like Ibn Rushd would be akin to regretting Sir Francis Bacon's "victory" over the equivalent Aristotlean Scholastics of his own time.
One of the vital legacies of the Sunni Revolution of the 850s was the dispensation of the caliph himself. With the law now in the hands of the jurists, separated from temporal authorities, it did not matter much who the ruler was, or if Muslims were even under Muslim rulers at all. From the 9th Century down to the modern era, Muslims have lived in a variety of states of all kinds of political stripes - many with rulers who reached the heights (or depths) of absolute despotism. But the law was never delivered back into the hands of political rulers. There was nothing in Islamic philosophy that approached the idea of the "divine right of kings". Jurists remained independent, and that independence was maintained even under the most ambitious of despots. And it remained true in practice. The outcome of legal cases involving private citizens versus government officials were not a foregone conclusion. Nor cases involving men of different social rank, or even Muslims versus non-Muslims. The rules of jurisprudence, the sources, were clearly set out and by and largely adhered to in the courts, regardless of political power or official favoritism.
The irrelevance of rulers allowed for the fragmentation of the Islamic world into multiple political entities. Already in the 750s, the Abbasids did not rule the entire Islamic world, but had to contend with break-away Muslim states on their peripheries - like the Umayyad emirate in Spain, Kharijite and Shi'ite states in the Maghreb, etc. They were not only under independent rulers, many did not even acknowledge the Caliph in Baghdad as their notional caliph.
The theory was tested perhaps most vigorously in the aftermath of the Mongol conquest of Baghdad in 1258. This was not the first time Muslims had come under non-Muslim rule - it had happened before during the Spanish recoquista, the Crusader states of the Levant, etc. But the Mongols had put an end to the Abbasid caliphate. The scholar-jurists of the Muslim world debated how to react. Some, like Ibn Tamiya, preached the necessity of restoring the caliphate, and dusted off the doctrine of jihad or holy war, to expel the Mongol conquerors. But the general consensus of the scholar-jurists was that the ruler was irrelevant, even non-Muslim ones, so long as they upheld or respected Islamic law in Muslim communities, it was the duty of Muslim subjects to remain loyal to the constituted political authorities, whatever their political, ethnic or religious characteristics may be.
The term "Islamic economics" has been given various meanings by different economists. But by and large it refers to the legal aspects, specifically how Islamic law understands and implicates economic organization and practice.
Commerce and Property
In contrast to the Christian scholars, Islamic scholars were certainly less troubled by commerce and capitalism. The Prophet Mohammed, after all, had been a merchant and so were many of his early followers (Mecca was a major commercial center in the 7th Century). Thus, throughout the Sunna, we find continual references to private enterprise, profit and commerce. The Holy Qur'an and the Hadith are peppered with statements in praise of merchants -- e.g. the Prophet is said to have said "Merchants are the messengers of this world and God's faithful trustees on Earth" and "He who makes money pleases God", etc.
Islam, unlike Christianity, did not have to grapple too much with the problems of church property, or square the contradictions between spiritual goals and material facts in religious institutions. While some sects extolled the spiritual ideal of poverty, it never achieved the prominence that can be found in Christianity or Buddhism. Although poor preachers, holy men and Sufi "saints" were respected, and some even venerated, in local communities, Islam does not have a tradition of religious mendicants. Admittedly, there was a class of professional beggars, who justified themselves by scripture and were even incorporated into guilds in several Arab cities.
Although Islam stresses that God is the ultimate owner of all property (S. III.189), it recognizes the right of human "trustees" to dispose of it as if it were privately owned. As detailed in the Sunna, private ownership was certainly the norm among the Prophet's followers. The right to private ownership is not disputed among legal schools. There were quibbles, however, about the details of transferring property (particularly inheritance).
Profit, too, was sanctioned. Buying low and selling high was regarded as natural, not immoral. Unlike their Christian counterparts, most Islamic scholars and jurists did not worry about "just price". The "just price" is whatever price was deemed acceptable by traders.
There were restrictions, of course. The merchant must conduct his trade honestly and he must not deal in impure goods (e.g. wine, pigs, etc.). Common goods (e.g. water, grass) were given special protection. Zakat, the duty of regular charity, was enforced and took a substantial bite out of profits. Conspicuous consumption was discouraged ("Eat and drink: but waste not by excess for God loveth not the wasters" (S.VII.31)) and periods of abstention (notably, the fasting month of Ramadan) were instituted as a reminder ("so that ye may learn self-restraint." (S.II.183)). The hoarding of wealth was deplored ("And there are those who bury gold and silver and spend it not in the way of God: announce unto them a most grievous penalty" (S.IX.34)). Speculation upon necessities, such as food, in times of great need, was frowned upon. The prohibition of usury (riba) and dealing in uncertainty (gharar) -- which we shall return to momentarily -- naturally placed limits on the size and scope of commercial ventures.
Nonetheless, outside this relatively small set of reminders and restrictions, Islamic legal codes and authorities took a generally laissez-faire attitude on economic matters. Crimes against property, such as theft, were subject to harrowing penalties. Some scholars recognized the "legitimacy" of theft in cases of "dire need" (when, it must be assumed, zakat is not being properly collected and administered), but this was a minority opinion.
Theoretically, government appropriation was justified in the case of "misuse" of private property (hijr). An example of "misuse" is when property is hoarded or left unutilized. The Prophet is said to have said that if land is left uncultivated or undeveloped for three years, the owner will cease to have any right to it, a principle enshrined by Caliph Omar's declaration ("he who revives dead land, owns it; but the demarcator has no right after three years"). Also condemned are the use of property to harm others (e.g. building a dam on your land to deprive your neighbors of water) or to procure extra-economic benefits (e.g. political enfranchisement). Profiteering is also considered "misuse". The Prophet is said to have said: "Whoever withholds cereals that they may become scarce and dear is a sinner."
The "misuse of property" idea served as the basis of the Islamic condemnation of monopolistic practices. This was particularly emphasized by the Hanbali jurists, Ibn Tamiya and Ibn al-Qayyim. Although puritanical, they were also quite "progressive" in the sense of emphasizing that the State was responsible for social welfare. They introduced the notion of the "price of the equivalent" -- which is the closest Islamic scholars dared come to the idea of "just price". They discussed how how competition (and the lack of it) will draw actual market prices nearer to (or away) from it.
Initially, the property of conquered peoples did not receive quite the same protection in the law, but once Omar, the second caliph, prohibited the distribution and purchase of conquered lands by Muslims, a new system was instituted whereby the property of non-Muslims were afforded full protection upon payment of jizyah and kharaj taxes.
The Prohibition of Usury
The Islamic position on usury was no less complicated than the Christian one. Scriptural exigency was clearer the Qur'an, e.g. "Those who devour usury will not stand except as stands one whom the Evil One by his touch hath driven to madness. That is because they say "Trade is like usury," but God hath permitted trade and forbidden usury." (S.II:275; see also S.II.278).
So from the outset, it seems clear that Qur'an forbids usury. But what is usury? This is unclear and left unexplained. The Arabic term, riba, means merely "increase" and early Islamic jurists had scant else to go on. As a result, Islamic scholars have had to look to other legal sources for explanation, and an enormous body of scholarship has swirled around this. Most of them focused on the following Hadith attributed to the Prophet: "Exchange gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, similar to similar, hand to hand. He who gives or takes more incurs riba, the giver and taker are equal (usurers)". In another narration, the following was added "Should the kind of commodities differ, then exchange as you wish provided that the exchange is hand to hand."
This Hadith has given the outline for the Islamic law on usury. But the different schools of Islamic legal thought interpreted it differently. The Zahiri school, for instance, said that the ban on usury should only apply to the six commodities mentioned (the ribawi: gold, silver, wheat, barley, dates and salt); usury in all other commodities is permissible. The Hanafi, Hanbali and Shi'a schools extended the ban on usury by analogy to all commodities which are measured by weight (like gold and silver) or volume (like wheat, salt, barley and dates). So, items like beans and rice, measured by volume, would could under the usury ban, while cloth, measured by length, would be exempt. The Shafi and Maliki schools extended the ban by analogy to all foodstuffs and excluded all non-foods (except the two mentioned metals) from the ban. Curiously, all schools permitted usury in money that was made neither of gold nor silver (e.g. minor coins, like the copper flus, were exempt).
The ban on usury, may seem innocuous once we have limited the ban to a certain types of goods. But most financing occurred precisely in the form of these goods -- gold, silver, grain, etc. and so it put a large crimp on many things.
As long as the gold dinar and the silver dirham reigned over the Islamic world, this seemed a practicable resolution. But when bills of exchange began circulating (as early as the 8th Century), the debate picked up once again. Some said that dealing with bills was like dealing with interest-bearing debt and thus banned, while others insisted they dealt with the traded commodities, and thus whether interest was permissible was contingent on the commodity. Some said that because they were ultimately backed by gold and silver, then the usury ban applied; others claimed that as they were made of paper, then they were like flus, a money of a different "metal", and thus exempt.
The issue of rent was a bit more complicated as it has features very similar to usury. In the strictest interpretation, a landlord cannot demand a "fixed" amount of crop or monetary payment as rent but only a share of the harvest or profits. However, most jurists maintain that a fixed rent is acceptable if the landlord has contributed long-term improvements to the land, such as drainage, fencing, etc., in which case rent takes on the legal character of the landlord's "wage". If a landlord makes no contributions to the land, however, scholars agree that he cannot demand a fixed rent.
Of course, what is determined in theory has to be distinguished from what happens in practice. Usury is prohibited in Shari'a outright, but, no matter how strict the school of thought, individual jurists are allowed to exercise discretion and thus, in practice, many exceptions slide by. The penalties for riba (unlike other offenses, like drinking wine) are traditionally very light -- often a civil matter quickly and quietly resolved with a fine. The disincentive was not very high. Nonetheless, Muslim merchants and financiers developed a variety of financial arrangements to serve as an alternative to debt . Acceptable forms of financing include the following:
(1) musharaka (partnership): this is the simplest financing method. Two (or more) people pool their resources in a joint venture, participate in its management and share the profits and losses on a pre-determined basis.
(2) mudarabah (silent partnership): also known as the Commenda in Europe, this form of financing operates as a kind of mutual fund. One party puts up the capital, the other puts in the entrepreneurial skill. The lender is entitled to a pre-determined share of the profits (and losses), but not a guaranteed return. Some jurists argue for asymmetric distribution, i.e. the lender's share in case of profits is less than his share in case of losses. The logic is that the entrepreneur's contribution of time and effort is already a sunk cost.
While musharka and mudarabah may be convenient financing methods for businesses, consumer loans cannot really be financed this way as there are no "profits" to be redistributed. The following religiously-acceptable set of purchase/sale contracts are meant to replicate consumer loans:
(3) murabaha ("cost-plus-profit" financing): the financier acts as the purchasing agent for the borrower, and then sells the goods to the borrower with a fixed mark-up on the purchase price (e.g. a bank buys a house for "itself" and then sells it to the borrower with a 10% profit for its "services"). The borrower is allowed to defer payment.
(4) ijara wa iktina (hire-purchase, leasing) Instead of handing the home-buyer a mortgage, a bank "enters" into a partnership with a customer to jointly own a house. For use of the portion of the house "owned" by the bank, the customer pays "rent" to the bank (i.e. pays interest) and, over time, "buys out" the bank's share (i.e. pays back principal). Once again, this is virtually indistinguishable from an interest-bearing loan, except in the legal code.
The banning of usury complicated, but did not end, debt finance. There were always ways to "create" interest-bearing loan contracts. The simplest is simply via "delayment fees". For instance, in a murabaha contract, the financier could increase the mark-up the longer the deferment period (e.g. 1 month deferment means 11% mark-up, 2 months, 12% mark-up, etc.). Alternatively, they could charge a high mark-up for a long period (e.g. 20% for one year) and then offer a discount for "quick repayment". These delayment fees and speeding-up discounts effectively replicated interest, but their legal status is different.
The "repurchase agreement" (known both in the Christian and Muslim worlds as the mohatra contract) was the perhaps the most common dodge. Agent A would sell agent B a worthless item (e.g. a candlestick) for 110 dinars payable in a year's time, and then immediately turn around and buy the candlestick back from agent B for 100 dinars in cash now. In effect, agent A has just made a one-year loan to agent B at 10% interest -- but it looks like a pair of legitimate purchases and sales. Of course, in the end, no good but gold exchanged hands and so a strict judge may be able to condemn it. So a slight variation has agent A buy back something else (say, a matchbook) from agent B for 100 dinars and so there are two clearly separate transactions. As the money has been exchanged for different goods, all we can detect is a price ratio between candlesticks a year hence and matchbooks now, no hint of usury is (legally) in sight. The Hadith, recall, says that in trading one good for a different good, the price is whatever is decided upon by the traders. No "just price" calculations come into play and if agent B wants to pay exorbitant amounts for candles and A overpay for matchbooks, so be it.
Another famous dodge is the contractum trinius, composed of three separate contracts: (1) agent A invests 100 dinars in agent B; (2) agent A sells agent B his right to any profit above, say 30 dinars, for a fee of 15 dinars; (3) For a fee of 5 dinars, B agrees to absorb all losses from the enterprise. The net result is a 100 dinar loan from A to B with a fixed interest payment of 10 dinars.
Islamic jurists condemned these kinds of tricky practices and tried hard to provide workable definitions of usury to handle these dodges. They carefully defined and condemned riba al-nasi'ah (interest on money lent), riba al-fadl (interest obtained via trading contracts) and riba al jahiliyyah (delayment fees). However, not all schools or jurists agreed to their definitions. Liberal judges, usually Hanafi, were often willing to let riba al-fadl to slip through. Some jurists went even further, arguing that the ban on interest should only apply to consumption loans, while productive loans were exempt. The argument here was based on the historical "fact" that in the time of the Prophet, when usury was first banned, most loans were consumption loans. Others argued that the prohibition only applies to excessive usury. This argument is based on the Qur'anic verse "Oh ye who believe! Devour not usury, doubled and multiplied; But fear God; that ye may prosper." (S.III.130). However, the condemnation of usury is so vehement and unequivocal in the Hadith (the Prophet is said to have compared it to incest) that such a contention cannot stand.
Gambling and Risk
A few words must be given to the prohibition of gambling (gharar). Medieval Islamic jurists expanded the definition of "gambling" beyond its scriptural confines to include trading wherever risk or uncertainty is involved. This was done in response to Egyptian soldiers using their paychecks (drafts on local grain deposits) to speculate on the grain market at a time of great need. Banning their speculative activity by calling it gharar, rather than on some other legal basis, was probably a mistake. All things in life (especially commercial life) are uncertain. Nonetheless, the ban is technically in place, although many jurists (for good reason) have chosen to take its teeth out.
The basis for the ban is the Prophet's disapproval, documented in the traditions, of certain types of transactions with uncertain outcomes. These include the sale of unborn offspring of animals (existence is uncertain -- they may be stillborn), the advance sale of the fruit of a tree prior to ripening (the quantity of ripe fruit is uncertain), the sale where the outcome is based on the throw of a pebble (pure gambling) and the sale by a cloth vendor in which he does not give the buyer a proper opportunity to examine the cloth (trade is not transparent).
By analogy, waiters working for tips or salesmen working on commission are deemed to be engaged in gharar because one cannot predict the volume of trade and thus the income that will be forthcoming. The prohibition of gharar is more easily circumvented than that of usury since it only needs a more careful definition of the contract. For instance, instead of hiring a hunter and pay him a fixed amount per rabbit caught (as yet unknown), hire him on the basis of the hours of labor he puts into catching rabbits (clear and well-defined). Similarly, with waiters and salespeople who would otherwise rely on tips or commissions.
However, some jurists say that the ban only applies if the outcome of a particular enterprise is purely uncertain, in the sense that there is nothing systematic the entrepreneur can do to affect that outcome. Because the number of rabbits caught, the satisfaction of customes or the number of sales is systematically dependent upon the efforts of the hunter, waiter and salesman respectively, then the outcome is not completely "uncertain" and thus not subject to the prohibition of gharar.
Other jurists have stressed a stricter definition of gharar which is more in line with its "gambling" origins. Ibn Taimiya for instance, noted that the main element of "gambling" is that who gains and who loses is purely dependent on chance. When two people bet on a toss of a coin, one will win completely and the other lose completely. If, however, the winner agrees to share his gains with the loser, then the bet is not, strictly speaking, gharar.
This stricter definition of gharar however still implicates many common activities, notably insurance. Jurists claim that conventional insurance is gharar because when a claim is not made (as chance dictates), one party (the insurance company) acquires all the gains (the premium), while the other party (the insured) gets nothing. In their view, conventional insurance contracts are pure gambles: the insurance company "bets" that I do not get sick while I bet that I get sick. As an alternative vehicle, Islamic jurists recommend "cooperative insurance" (takaful), where the insurance company is, in effect, a "community fund". Members of this "community" contribute premiums to indemnify any member of the community who experiences a specific loss.
The issue of forward contracts are trickier, since they inevitably involve uncertainty. In the Hadith, the Prophet is said to have said "Whoever buys cereals he shall not sell them until he obtains their possession" and "Bargain not about that which is not with you." This is obviously impracticable and the Sunna has numerous instances of forward contracts being undertaken by both merchants and farmers. So, the prohibition has been given a narrower meaning. Specifically, Islamic law allows salam contracts on commodities, where goods are paid for in advance, only their delivery is deferred. The Hanafi school stresses that even though delivery is deferred in a salam contract, the goods must already be in existence somewhere; the other schools allow them to "come into being" in the interim period. Commodity futures contracts where both payment and delivery of commodities are deferred to the future are expressly forbidden by all schools. The exception to this is istisna, or a futures contract on manufactured goods. Goods that need to be manufactured do not need to be paid in advance, nor is it necessary to determine a date of delivery.
Islamic law has imposed several constraints on the financing of government activity. There are four sources of religiously-ordained revenues:
(1) Zakat, the duty of regular charity is one of the "five pillars" of Islam, as inseparable to the identity of a Muslim as regular prayer. In practice, it is a redistributive property tax. Zakat is not optional. Voluntary charity (sadaqah) is encouraged, but zakat is obligatory for all Muslims and backed, if need be, by the full force of the civil authorities. Almost from its inception, zakat has been collected by the State on behalf of the poor. It is a tax on property held for more than a year, assessed after deductions for living expenses. The theological reasoning for zakat is not only to provide for the poor, but also to "punish" idle property and encourage it to be put into circulation.
As with all such things, the legal schools were divided on what exactly is subject to zakat. From the original sources, the consensus was that gold, silver and the profits of trade are taxed at 2.5% per annum. Livestock is taxed at the same rate. Agricultural and farming produce is taxed at 10% p.a. if irrigated naturally by rain and by 20% p.a. if irrigated artificially. The reasoning for this differential, based on a Hadith, is that artificial irrigation deprives others of a scarce resource (water in this case) and thus it is the responsibility of the depriver to compensate the community for it. Mines and extracted natural resources are taxed at 20% for the same reason. Zakat on modern property -- such as industrial machinery, dividends on stock, etc. -- is assessed by analogy.
(2) Jizyah is the poll tax paid by non-Muslim dhimmis (Jews and Christians) and commanded in the Qur'an (S.IX.29),. Some have considered this a tax in order to "punish" dhimmis for failing to be steadfast in the true religion. Others have taken it simply as the purchase of a "right" to live in a community of Muslims and have their persons, property and religious rituals protected by law, as well as to be exempt from military service. In practice, the payment of jizyah, while higher than zakat, was not crushing.
Jizyah has the characteristics of a poll tax, in that the amount is owed is assessed per head, rather than per dinar of income. But it is not a uniform tax across all people. For starters, there are classes of people - the very poor, women, the elderly, disabled, monks, etc. - that are entirely exempt from jizyah. Moreover, even its assessment on free, able-bodied men was often qualified by income. For instance, Amr ibn al-As, after conquering Egypt, set up a census to measure the population for the jizya, and thus the total expected jizya revenue for the whole province, but organized the actual collection by partitioning the population into wealth classes, so that the rich paid more and the poor less jizya of that total sum. Elsewhere, it is reported customary to partition the population into three classes for jizyah collection, e.g. 48 dirhams for the rich, 24 for middle class and 12 for the poor.
In many communities, the burden of jizyah often fell in practice on the wealthy alone, whom by solidarity or custom, assumed the payment of the jizyah for the poorer members of the community. Landlords paying the jizyah of his tenants was routine (often more expedient, and taken out of rents anyway).
(3) Kharaj is the tax on the produce of lands conquered in the course of the expansion of Islam, but kept in the hands of non-Muslim tillers. This was perhaps the major source of government revenue during the early Islamic Empire.
(4) Ushr is a tithe on conquered lands held or bought by Muslims or previously uncultivated lands brought into cultivation by Muslims. Today, ushr is charged for the use of State-owned lands.
(5) The Caliphal fifth. is a 20% tax on war spoils, that was instituted in the early days of the Islamic conquest, the rate mandated in the Qur'an (S.8:41). Initially earmarked for the maintenance of the Prophet's family, after the Prophet's death, it was re-directed by the early Caliphs for the central administration and armies of the Caliphate. The Hanafi school argued the caliphal fifth extends to spoils discovered after the war is over, such as hidden treasure troves and (more significantly), it was extended by analogy to mining. However, other schools (e.g. Shafi'ite, Hanabilite) regarded troves and mining as subject only to the conventional rates (e.g. zakat). Curiously, the prominence of Hanafi school in the west led to the institutionalization of the tax in Muslim states in Spain. After the reconquista, the Christian states of Castile, Portugal, etc. adopted the tax themselves as the quinto real ("royal fifth"). It became an important part of crown finance for the Iberian monarchies, and was extended to their overseas empires in the Americas, Africa and Asia.
As zakat is earmarked for redistribution to the poor, the jizyah, kharaj and ushr were the only real sources of revenue for the government. This led to the paradox that the greater the amount of conversions into Islam, the smaller the tax revenues (the ushr rate is lower than the kharaj rate). For this reason, we find several instances in history when Caliphs tried to dissuade further conversions or forbid the transfer of property from non-Muslims to Muslims and even to just disregard the law and apply jizyah and kharaj taxes on certain segments of the Muslim population (see above for the historical account).
To make up for this "deficiency" in tax base, some legal schools recognize that the state can "sell" its "services" and has the right to "charge" for them in the form of taxes, duties, etc. However, whether it can compel such payments is a point of contention. In principle, at least, "trade", even between State and citizen, must follow all the laws of commerce, e.g. it must be mutually agreed upon, transparent, no asymmetries in information, etc.
Monetary policy is implicated in this. By outlawing gold-for-gold usury, seignorage was forbidden: as much gold must be given back as coins as is submitted in ingots (although scholars allow a fee to cover minting costs). Many jurisst considered debasing currency is considered to be pure theft and fraud. Government borrowing was also difficult, as interest could not be paid and, for most government activities, there is no clear "profit" to be shared. Of course, Muslim princes violated this repeatedly, or simply borrowed from non-Muslims.
The predisposition of Islam towards commerce extends, perhaps unsurprisingly, to foreign commerce as well. While European princes were erecting all sorts of protective barriers to keep out long-distance trade and "protect" locals from the vicissitudes of the market, the princes of the Islamic kingdoms were bending over backwards to encourage foreign merchants to come trade and settle in their lands. As mentioned, the Prophet and many his early companions were merchants, and 7th C. Mecca was an important commercial entrepot for foreign trade, so there was from outset a decent respect, socially and in the law, for foreign trade, if not quite a theory of it. Even after trade routes changed, the Hajj, the obligatory pilgrimage to Mecca, brought Muslims together from the far-flung corners of the world, bringing with them information about different lands, resources and trading opportunities. Foreign business deals and partnerships were often struck up between merchants on the pilgrimage. Arab merchants themselves extended trade (and their religion) well beyond the political boundaries, to India, Central Asia, sub-Saharan Africa and southeast Asia. And that respect was extended to others - Armenians and Jews lived and traded virtually unhampered throughout the Muslim empires.
The Arab historian and social philosopher, Ibn Khaldun (1377) was quick to point out the link between commercial enterprise, capital accumulation and the well-being of a kingdom. Khaldun warned princes of the ruinous long-term consequences of trying to interfere in the economic affairs and trade of private citizens.
By geographic happenstance, Muslim lands lay exactly on the trade routes between Europe, Africa and Asia and everybody knew that the fortunes of the state rose and fell with the volume of trade that passed through it. As such, Muslim princes were not completely devoid of mercantilist instincts, and undertook various efforts to ensuring that trade routes passed through their territories rather than their rivals. This sometimes meant wars to control ports and shipping lanes or making exclusive deals with specific groups of foreign traders, e.g. Mameluke sultanate of Egypt with the Venetian Republic, the Persian Il-Khanate with the Genoese, the Ottoman empire with the Levant Company, which often entailed freezing out other foreign competitors.
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