Islam and the APPLYING NORTHS LAWS OF

free-market MOTION TO THE EDGE OF

economy THE WEST
Saad Azmat ecaf_1886 4..9

This paper uses Douglass Norths theories of institutional economics to explain

progress in Muslim Spain. It argues that it was efficient economic institutions in the
guise of a free-market economy where the property rights of different strata of
society were well protected, which ensured lasting prosperity. This paper postulates
that while a population explosion could have been responsible for the initial growth
in Spain, it was an efficient formalinformal institutional matrix that ensured a high
level of long-term growth.

Keywords: Market economy, institutional economics, Douglass North,

Muslim Spain.

Introduction New institutional economics

This paper analyses the economic growth
phenomenon in Muslim Spain. It considers
fascinating questions such as what made
Muslim Spain experience unprecedented
growth in an era when the rest of Europe was
experiencing the most dismal time of its
history. Questions such as these are an
unexplored mystery as very little systematic
and scientic economic research has been
done to understand them. This paper analyses
the theory of institutions as a source of
long-run growth and applies the idea to
Muslim Spain to show that it was superior
economic institutions in the guise of a market
economy where the property rights of
different strata of society were well protected
which led to the rise of the Spanish economy.
The paper argues that while a massive
population inux could have been responsible
for the economic growth in the immediate
years preceding the Muslim conquest of
Spain, it was superior economic institutions
which might have ensured lasting prosperity
in the region. Moreover, this paper also argues
that an efcient role of the government in
protecting private property, a well-organised
scal policy, a competitive merchant class and
economic freedom experienced by the Jews,
Christians, peasants and serfs might have
resulted in an institutional matrix that could
have been responsible for the ourishing
pattern of economic growth in Muslim Spain.
In the literature on institutions a ne line has
been drawn to make a distinction between
formal and informal institutions, and the
importance of each one has been extensively
argued. Mantzavinos (2001, p. xi) simply
refers to institutions as nothing more than
shared problem solutions that individuals
have acquired while interacting with their
environment. North (1994) argues that there
exist both formal and informal institutions.
Informal ones are comprised of things like
norms and self-imposed restrictions; formal
ones include laws, constitutions, etc. The
argument in support of the importance of
institutions has also been obliquely
substantiated by Coase (1937), who argues the
case for the existence of rms and markets by
referring to transaction costs, under the
presence of which a formal institution (such
as a market) is required to minimise these
costs. Coase (1960) further extends the
argument for the prevalence of other
institutions such as the government, by
referring to the existence of externalities that
might not be internalised efciently by private
individuals in the presence of transaction
costs and costly bargaining.
Evolution of institutions
North and Thomas (1973) explain that
institutions evolve from an informal set of

2009 The Author. Journal compilation Institute of Economic Affairs 2009. Published by Blackwell Publishing, Oxford

norms, originating from the way individuals living in a society
perceive the reality of things around them. Then they try to
organise their environment according to these set beliefs.
Furthermore, North (1994) argues that through a continuous
learning and feedback process eventually a formalinformal
institutional matrix comes into existence which characterises
the behaviour of the individuals and provides the incentive
structure to the society. North and Thomas (1973) substantiate
this process of evolution of institutions by making references
to historical accounts, such as the development of property
rights for serfs and peasants and the evolution of the system of
absolute monarchy in a well-developed system of government.
The work of North and Thomas (1973) promulgates the
belief that eventually the process of evolution combined with
the curiosity of the human mind to solve the fundamental
problem of scarcity through a continuous process of struggle
and change, would result in the development of an idea that
would offer a perfected solution for ending the miseries of
humanity. The idea of institutional evolution can be summed
up in the diagram below:
Formal
Institutions
Perceived
Outcome
Reality
Informal
Institutions
Feedback
This diagram indicates that institutions transform beliefs into
societal and economic structures, and the interaction of the
formal and informal institutions form an institutional matrix
that is prone to modication as a result of a continuous
learning and feedback process extending over generations.
However, North (1994) rightly asserts that countries that
appear to perform poorly from an economic perspective tend
to get caught up in an institutional matrix that does not evolve
into a system which is capable of inducing economic
prosperity and solving emerging societal problems. Careful
reection on the above process of evolution suggests many
different causes to explain this economic stagnation.
Brittan (1985) argues that there can be a clash between the
informal and formal institutions resulting from a belief system
that can create a motivational framework that might not t
well with the requirements of the formal institutional
structure. There can also be other problems with the
above-mentioned process. The framework developed by
Acemoglu et al. (2005) notes that the experiences of many
developing countries of the world suggest that the incentive to
maintain the status quo of those already in power could result
in a set of institutions that might be completely inefcient.
North (1994) rightly asserts that it is not any set of institutions
but the most efcient set of institutions that will result in
high growth.
Muslim Spain: some observations
Economic historians have applied the above-mentioned
arguments to data from Europe extensively, but Muslim Spain
2009 The Author. Journal compilation Institute of Economic Affairs 2009. Published by Blackwell Publishing, Oxford
iea e c o n o m i c a f fa i r s ju n e 2 0 0 9 5
largely has been ignored. One reason Muslim Spain has not
been an attractive area of research is the paucity of data.
However, such little evidence that is available seems to offer a
promising explanation of the economics of Muslim Spain.
The main source of data in this paper is the work of
Constable (1994) on trade in Muslim Spain and Imamuddin
(1965) on the internal economics of Spain. Constable (1994)
and Imamuddin (1965) have relied on geniza documents,
fatawa (legal opinions) of Muslim scholars, court rulings in
legal cases, diaries and anecdotes of merchants, the works of
Muslim philosophers etc.
A brief history of pre-Muslim Spain
Some of the socio-economic conditions prevalent before the
conquest of Spain by Muslims offer a deep insight into why
Spain ourished under this new regime. Imamuddin (1965)
analyses the history of Spain before the conquest of Muslims
and asserts that under the Gothic rule of pre-Muslim Spain the
property rights of only the higher social class, the clergy and
the military nobility were well protected, whereas the other
strata of society had no power to alienate their land. In a
fourteenth-century agricultural-based economy, land
constituted the real capital. The protection of property rights
of only the higher social class, clergy and military nobility
implied that a large segment of society was denied the right to
earn large amounts of wealth associated with the ownership of
the land, resulting in an institutional matrix that did not
provide the necessary incentive structure to use the work
potential of these people.
Another segment of society that suffered greatly from the
poor institutional structure was the Jews residing in Spain.
Jews at that time constituted the intelligentsia of society, and
as a result of their mobile nature potentially they comprised
the merchant and trading class (Constable, 1994). The
theological differences between the Jews and the ruling
Christian class resulted in extreme resentment against and
persecution of Jews. In ad 616, the Gothic King passed an
issuance that the Jews had to be baptised to save themselves
from banishment. In the face of this persecution the Jews
planned a revolt against the Gothic King in ad 694. However,
the attempt proved to be abortive and the king conscated all
their wealth (Imamuddin, 1965). The institutional structure
acted as a big impediment for the Jewish traders who, as we
shall see later, once their rights were well-protected under
the Muslims contributed greatly to the economic progress
of Spain.
Indicators of the prosperity of Muslim Spain
It is widely accepted that with the conquest of Spain by the
Muslims the region started to experience unprecedented
growth. Since measured and organised data for gross domestic
product is not available, other indicators for growth have been
used to test this belief. One indicator is the amount of food
available to people, as averred in numerous letters and
anecdotes. Moreover, exports are often taken as a measure of
growth: high exports imply that the country is producing
goods well in excess of its needs (at least of the variety
6 applying norths laws of motion to the edge of the west
exported). The prices of goods are also taken as an indicator of
the standard of living of the people, as low prices can be
viewed as an outcome of high production. Lastly, the
population inux in Spain is considered as a measure of
prosperity as it is often assumed that people like to move to a
region that is more prosperous than one where material
comfort is lacking.
Numerous references can be found in the narrations of the
merchants, geniza documents, and the diaries of those living in
Spain that food and other goods were available in abundance.
Imamuddin (1965) refers to McCabe (1935) who asserts that in
Muslim Spain food was abundant and cheap to such an extent
that 30 million people prospered on a land which a few
centuries later was unable to provide for a population of six
million. The abundant nature of food can be inferred from the
storage facilities that had to be developed to preserve it.
Imamuddin (1965) argues that wheat could be preserved for
about ten years anywhere in Spain. This abundant nature of
production resulted in high exports. Muslim Spain had
commercial relations with Italy, Morocco, Beriberi (North
Africa), Egypt, Greece and Syria, parts of Africa and various
other regions of Europe and Asia including India and China
(Imamuddin, 1965). Various documents suggest that prices
were so low that in the fourteenth century eight pounds of
grapes were sold for a single dirham (Constable, 1994).
However, there is also evidence that after the demise of the
Umayyads, rampant ination existed in the Taifa period,
which Constable (1994) attributes to the devaluation of the
currency and unstable politics.
There was a huge inux of people, especially Jews, from
different communities and regions throughout the period of
Muslim rule. This is conrmed by a number of letters of
recommendation addressed to the Jewish community in Spain
and also through their children, such as Yusuf b. al-Shami
(d. 1141), the son of a Syrian immigrant residing in Spain
(ibid.).
Reasons for the prosperity of Muslim Spain
North and Thomas (1973) are among those who strongly argue
that institutions are responsible for the long-term growth of
any economy. The available evidence suggests that Spain
experienced immediate growth, which it was able to sustain
for a long period. The next section will look at the possible
causes of both the short-term and long-term growth in
Muslim Spain.
Population explosion in Muslim Spain
Some authors have argued that Spain was agriculturally very
rich and climatically very suitable for cultivation (Imamuddin,
1965) and, in an era where production was mainly
labour-intensive, an increase in population meant a higher
level of production (assuming that diminishing returns have
not set in). According to this thesis, the signicance of the
Muslim conquest was the opening of the land to a population
inux, which meant increased production and hence growth.
Imamuddin (1965, p. 23) quotes Maqqari who
2009 The Author. Journal compilation Institute of Economic Affairs 2009. Published by Blackwell Publishing, Oxford
says that there were in Andalusia 80 cities of the rst order, more than
300 of the second grade and numerous small towns and villages. There
were 12,000 hamlets and villages on the bank of Guadalquivir alone,
while today the whole of Andalusia has only 800 aldias [villages].
Imamuddin (1965) further argues that the population of
Cardova was more than one million in the later Caliphate
period, while Constantinople had only one million
inhabitants. Moreover, diminishing returns and capacity
constraints were far from offsetting production resulting from
high population growth as some evidence suggests that large
portions of land were uncultivated in the pre-Muslim era
(Imamuddin, 1965). Constable (1994) also argues that other
natural resources such as mines, which were a rich source of
minerals later used for exports, were found closed by the
Muslims after the invasion.
North and Thomas (1973) argue that increasing population
results in people dispersing towards different and faraway
lands when diminishing returns set in and, depending on the
climatic conditions of the area, they start to specialise in the
particular crops in which they have a comparative advantage,
which they trade with people in other regions, and hence
promote trade and growth. High population growth and a
large volume of trade supports the proposition that this is
what happened in Muslim Spain.
Institutional change in Muslim Spain
There was a clear-cut institutional change after the Muslims
took power in Spain. We now discuss the institutional mix of
Muslim Spain by analysing the following categories: the
economic system; taxation; money; merchants and free trade;
peasants and slaves; Jews and Christians.
Economic system
Muslim Spain had a market economy where the interaction of
supply and demand determined the level of prices for most
goods. This fact is reected in many geniza documents and in
the scholarly work of Ibn Khaldun (1958, II, pp. 337338, 340)
who writes that if a merchant wanted to make a prot he
would take his goods to another country. Where they are
more in demand than in his own . . . when goods are few and
rare their prices go up. There are many historical mentions of
uctuation in prices caused by changes in demand and supply.
In 822 a severe famine caused a sharp increase in prices
(Constable, 1994). Moreover, some letters suggest that prices
would also rise in the case of a cargo being lost at sea,
although high taxes and poor government policy are also
mentioned. Some letters suggest that the merchants were
aware of the effect of demand and supply on price and tried to
use it to their advantage. In the following letter, one of the
eleventh-century writers writes to his partners:
. . . pepper was dead . . . the price was down to 130 [quarter dinars per
pound] but still no one bought it . . . while I am writing this letter it is
the night before the sailing of the ships pepper has become much
more in demand, for the foreigners had sold all they had, while boats

arrived and only local people had some left. Thus it was sold for
140142. I took collateral for the sale of my pepper at 140142.
(Constable, 1994, p. 75)
The market economy, however, was not completely
laissez-faire. The government actively sought to encourage
competitive behaviour. Markets were divided into different
quarters with each quarter being inhabited by a particular
class of people selling similar products (Imamuddin, 1965).
This grouping of shops selling similar products ensured that
everyone sold at the market price. However, the government
did engage in some price intervention. Imamuddin (1965)
reports that the market inspectors called Muhtasibs checked
prices regularly and for some goods, such as food items, they
would even x the prices. Moreover, known hoarders were not
allowed to buy more than a particular quantity (Constable,
1994).
Taxation
The role of the government as an economic agent was well
recognised by scholars of the period, as the famous Spanish
scholar, Ibn Khaldun (1958, II, p. 103) writes that when they
stop spending, businesses slump and commercial prots
decline . . . the dynasty is the greatest market, the mother and
base of all trade. Evidence suggests that the government
administered many aspects of the society such as the local
industry, agriculture, port facilities, shipping, taxes and the
money supply. Muslim Spain had a well-developed system of
taxation: Muslims had to pay 2.5% of wealth (Zakat) and local
non-Muslims paid a head-tax of 1248 dirhams ( Jizya)
(Imamuddin, 1965). Moreover, according to an eighth-century
legal scholar Abu Yusuf, taxes on merchants carrying goods
also varied: whereas Muslims had paid 2.5%, local
non-Muslims paid 5% and non-Muslim foreigners paid a 10%
tariff (Constable, 1994, p. 128). In return for these taxes people
were granted freedom and protection of their lives and
property. An eleventh-century geniza document explains the
case of a merchant who sent a cargo of wool from Alexandria
to Almeria explaining that the total value of the wool was 30
dinars and he had to pay three dinars (10%) in Egypt and three
dinars (10%) in Almeria (Constable, 1994). Rulers who
attempted to augment these means of collecting taxes received
criticism from Islamic scholars who believed that they should
be restored to their legal limit (ibid.). Ibn Khaldun praised
Abd al-Rahman III for rescinding the illegal taxes of his
predecessors (Imamuddin, 1965, p. 60).
Another source of revenue for the king was the money
received from the royal lands which the king possessed in
almost all provinces. The annual revenue from these lands
amounted to 765,000 dinars during the reign of Abdul
Rahman III (Imamuddin, 1965). Taxes and other government
revenues were used for scal policy measures. For example, in
the famine of ad 988989, the royal granary of Mansur, which
contained 200,000 mudds of wheat by the year ad 884885
was emptied (ibid.).
Money
The rst example of the dirham used as money in Spain comes
down to us from the period ad 722723 (Imamuddin, 1965).
2009 The Author. Journal compilation Institute of Economic Affairs 2009. Published by Blackwell Publishing, Oxford
iea e c o n o m i c a f fa i r s ju n e 2 0 0 9 7
Indications are that the quality of coins varied considerably
during different times and rulers. In the Imarat period the
coins weighed between 2.14 and 2.60 grams, and the exchange
rate between silver and gold coins varied considerably between
10 : 1 and 17 : 1 (ibid.). Later coins were clipped for example,
in the case of the high-quality coins minted during the reign of
Abd al-Rahman III in the tenth century (Imamuddin, 1965). It
appears that in the Umayyad period Sudanese gold was
circulating in abundance in Muslim Spain, and prices
remained low (Constable, 1994), reecting a booming Spanish
economy. However, after the demise of the Umayyads, there
was a severe ination, which Constable (1994) attributes to
unstable politics and devaluation of the currency. The
subsequent denunciation of currency debasement by Muslim
scholars was based on simultaneous normative and empirical
grounds. Umar Chapra (2008) writes:
Since debasement of currencies is in sheer violation of the Islamic
emphasis on honesty and integrity in all measures of value, fraudulent
practices in the issue of coins in the fourteenth century and afterwards
elicited a great deal of literature on monetary theory and policy. The
Muslims, according to Baeck, should, therefore, be considered
forerunners and critical incubators of the debasement literature of the
fourteenth and fteenth centuries (Baeck, 1994, p. 114).
Merchants and free trade
Merchants and traders played a very important role in Spains
economic success. The large volume of trade resulted in a
ourishing shipping industry. The geniza documents make it
clear that some of the cities such as Almeria ourished in the
eleventh and twelfth centuries because of the development of
their ports (Constable, 1994). To facilitate trade further, the
government played an important role by implementing
policies that strengthened international trade links and
ensured free trade. Constable (1994) argues that during the
second half of the twelfth century treaties were signed between
the Pisa and the Muslim rulers in Valencia, Denia and the
Balearics. Almohads treaties with Genova were renewed at
about 15-year intervals and generally included clauses
guaranteeing safe conduct for shipping, tariff reductions for
Genoese traders and the right to maintain hostelries ( funduqs)
in Almohad ports. Other treaties include one between Genova
and Arles signed in 1155 (ibid.). Road routes were also
protected by the government also encouraging trade. Sancho
IV of Naverre and Muqtadir Zaragoza entered a treaty in 1069
to ensure that the roads between the two kingdoms provided a
safe and secure route for travellers (ibid.).
There were times when religious conicts stopped the
trade between the Christian world and Muslim Spain, but
during periods of religious tolerance trade ourished. For
example, in 1234 Pope Gregory IX granted permission for
Castle in the region of Toledo to trade with Muslim territories
(ibid.). Especially in the thirteenth century, however, both
sides imposed sanctions on trade, although there is evidence
that during times of peace Christian merchants frequently
visited Spain, as their rights were protected by precedent
(ibid.). In the Umayyad period, ninth-century Maliki scholar
Sahnun gave a fatwa (legal opinion) that it was not permissible
to capture Christian ships that carry merchants known for
8 applying norths laws of motion to the edge of the west
their commercial relations with Muslims. Moreover, there
exists a tenth-century fatwa regarding a Christian captive who
escaped and later returned as a merchant. It was ruled by the
judge adjudicating the case that at times of peace this man
and other Christians like him were secure against recapture
(ibid.).
Peasant and slaves
In the era between ad 700 and 1500 it was mainly the peasants
and serfs that constituted the active labour force. Therefore,
the prosperity of any economy at that time depended on what
rights the formalinformal matrix protected to provide a
sufcient motivational framework for this community. In
pre-Muslim Spain, peasants did not enjoy proprietary rights.
However, with the advent of Muslim rule, things changed
drastically. In Muslim Spain the peasants and serfs were given
the rights to alienate their lands (Imamuddin, 1965).
Furthermore, their status as an important section of society
was fully recognised and this led to many peasants and serfs
occupying high posts in the country. A Duri held a
police-ofce towards the year 920; Aah (923), Qand, Tarafa,
Khalaf, Badr, who all belonged to the peasant and serf
community, occupied distinguished positions including civil
and military ofces (ibid.).
Jews and Christians
The Jews at that time constituted the intelligentsia of the
society. They co-operated fully with the Muslims in raising the
country to riches and prosperity. The government gave them
social and religious protection and in return they contributed
greatly to the economy by taking an active part in trade and
commerce. Jewish merchants had a monopoly in the slave
trade and trade in luxury goods (ibid.). Many were educated
and knew Latin, Greek, Hebrew, Spanish and Arabic, and had
a substantial inuence on the government. By the time of Abd
al Rahman III, they began to take a very prominent part in
running the country. Hasdai ebn Sharput (ad 945970) was
the treasurer, court physician and minister of Abd al Rahman
III and was also responsible for translating the Dioscorides
into Arabic from Greek (ibid.). A similar attitude was adopted
towards Christians, who were also allowed to take part in the
administration of the country (ibid.). Both the Jews and the
Christians formed the economic backbone of the country and
the government generated considerable revenue from their
presence. In return, they were granted protection to their lives
and property and in civil matters. The Jews had their own
nancial ofcer who used to collect tax from them and
forward it to the state, and their internal legal matters were
decided by their own judges according to the Visigothic laws
(ibid.).
Conclusion
This paper started by outlining the theory of institutions
which North has used to good effect to explain much of the
progress in the Western world. We have applied these ideas to
the history of Muslim Spain to shed light on whether the
theory of institutions could be used to explain its prosperity.
2009 The Author. Journal compilation Institute of Economic Affairs 2009. Published by Blackwell Publishing, Oxford
Notwithstanding the fact that data related to Muslim Spain
are very scarce, this paper has shown to good effect that such
data as are available support the view that superior economic
institutions are the driving force behind the unprecedented
growth experienced in Spain. We have shown that while a
population explosion could have been the initial stimulus for
the early years of success, meaningful evidence supports the
proposition that it was efcient economic institutions that
were responsible for the long-term growth in Muslim Spain.
We have shown that notwithstanding some specic
government interventions probably aimed against the
hoarding of perishable foodstuffs, the economic system of
Muslim Spain was in essence a free-market economy where the
interaction of demand and supply determined the prices for
most commodities. Muslim Spain evidenced governmental
involvement in the market primarily through activities seen in
modern nation-states such as market inspection, taxation and
management of the money supply. An efcient system of
formal institutions in Muslim Spain protected property rights
and safeguarded the lives and wealth of individuals belonging
to different social strata of the society, including merchants
and traders, irrespective of their religious and cultural origins.
This system ensured that a large populous of merchants traded
to and from Muslim Spain freely, among them a large number
of Jewish merchants who sought permanent residence in
Muslim Spain at a time when Jewish residency in most of
Europe was problematic.
Peasants and serfs especially beneted from the matrix of
institutions. Since Muslim Spain was an agricultural society,
they constituted the active labour force of the community. The
protection of their rights, such as the ability to alienate their
land, gave them an opportunity to excel and an incentive to
work hard in cultivating the lands. The extension of religious
freedom and protection to the local Christians and Jews
further ensured that a ourishing system of trade and
commerce came into existence. The greater commitment of
the government towards proper execution and development of
these institutions during a good part of the 700 years of
Muslim rule culminated in an environment conducive to
growth and prosperity.
Acknowledgements
The author wrote this paper during his graduate studies at the
University of British Columbia, Canada. Currently, he is a
faculty member of the Business School at Lahore University of
Management Sciences.
References
Acemoglu, D., S. Johnson and J. Robinson (2005) Institutions as the
Fundamental Cause of Long-run Growth, in P. Aghion and
S. Dulaur (eds.) Handbook of Economic Growth, Amsterdam:
Elsevier.
Baeck, L. (1994) The Mediterranean Tradition in Economic Thought,
London: Routledge.
Brittan, S. (1985) Two Cheers for Self Interest, London: Institute of
Economic Affairs.
Chapra, M. (2008) Islamic Economics: What It Is and How It
Developed, in R. Whaples (ed.) EH.Net Encyclopedia. Available at:
http://eh.net/encyclopedia/article/chapra.islamic.

Coase, R. (1937) The Nature of the Firm, Economica, November,
386495. Reprinted in R. Coase, The Firm, the Market and the Law,
Chicago: University of Chicago Press, 1988.
Coase, R. (1960) The Problem of Social Costs, Journal of Law and
Economics, October, 144. Reprinted in R. Coase, The Firm, the
Market and the Law, Chicago: University of Chicago Press, 1988.
Constable, O. R. (1994) Trade and Traders in Muslim Spain, Cambridge:
Cambridge University Press.
Ibn Khaldun, A. (1958) The Muqaddimah. An Introduction to History,
trans. and ed. by F. Rosenthal, 3 vols, New York: Pantheon Books.
Imamuddin, S. M. (1965) Some Aspects of the Socio-economic and
Cultural History of Muslim Spain, 7111492 AD, Leiden: E. J. Brill.
2009 The Author. Journal compilation Institute of Economic Affairs 2009. Published by Blackwell Publishing, Oxford
iea e c o n o m i c a f fa i r s ju n e 2 0 0 9 9
Mantzavinos, C. (2001) Individuals, Institutions and Markets,
Cambridge: Cambridge University Press.
McCabe, J. (1935) The Splendor of Moorish Spain, London: Watts & Co.
North, D. C. (1994) Economic Performance Through Time, American
Economic Review, 84, 3, 359368.
North, D. C. and R. P. Thomas (1973) The Rise of the Western World:
A New Economic History, Cambridge: Cambridge University Press.
Saad Azmat is a Teaching Fellow at the Faculty of Accounting &
Finance, Suleman Dawood School of Business, Lahore University
of Management Sciences (saad_azmat@hotmail.com).