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The Economic Theory of Ibn Khaldun and the Rise and Fall of Nations




Ibn Khaldun (d. 1406/808) was a fourteenth century, Tunisian born Muslim thinker who wrote on many subject including on the rise and fall of nations in his Muqaddima: an Introduction to History. His writings on economics, economic surplus and economic oriented policies are as relevant today as they were during his very own time.




Ibn Khaldun was the first to systematically analyze the functioning of an economy, the importance of technology, specialization and foreign trade in economic surplus and the role of government and its stabilization policies to increase output and employment. Ibn Khaldun, moreover, dealt with the problem of optimum taxation, minimum government services, incentives, institutional framework, law and order, expectations, production, and the theory of value. Ibn Khaldun again is the first economist with economic surplus at hand, who has given a biological interpretation of the rise and fall of the nations. His coherent general economic theory constitutes the framework for his history.




Since the State has important functions in the social, political and economic life of a nation, the role and the nature of the state has to be clarified for the well-being of society. For Ibn Khaldun, the role of the State is to establish law and order conducive for economic activities. Moreover, the enforcement of property rights, the protection of trade routes and the security of peace are necessary for any civilized society to engage in trade and production. The economic surplus could increase in a situation where governmental policies favor economic activities. Government should take a minimum amount of surplus through taxation in order to provide minimum services and necessary public works. For Ibn Khaldun, optimum taxation occurs when governments do not discourage production and trade through taxation.


For Ibn Khaldun, the State has to take the responsibility to change the expectations of the entrepreneurs by implementing the public works to generate employment and confidence. As a part of the stabilization policy, the State should build roads, trade centers, and other activities that encourage production and trade. But "the direct interference of the State in economic activity by engaging in commerce," would cause the decline of the State and the economic activities. The interference of the State in commerce, by itself, will increase bureaucracy and mercenary army. As a result of governmental interference in commercial and economic affairs, the entrepreneurs would be prevented to trade and invest and make profits in their enterprises.


Ibn Khaldun wrote that over-taxation would occur when the demands bureaucracy and mercenary armies would expand beyond "normal" economic surplus. He stated the fact that the larger the bureaucracy and the mercenary armies, the greater over-taxation would be, and the greater burden on economic surplus would be realized. He did not think it proper to increase excess demand through enlarging bureaucracy and the mercenary armies.


Greater production and maximum efficiency can be obtained with trade and specialization through profit-seeking entrepreneurs who bear the consequences of their actions in terms of gains and losses. The entrepreneurs are the ones who have incentives for efficiency and specialization as long as they perceive profits. The bureaucrats, on the other hand, do not have the same incentives for the expansion of trade and specialization in production.




Ibn Khaldun has dealt with economics, sociology, political science and other subjects in order to understand the behavior of man and his history. He indicated the fact that specialization is the major source of economic surplus, almost three centuries before Adam Smith. For Ibn Khaldun, when there is an environment conducive for specialization, the entrepreneur is encouraged to commit himself for further trade and production. Indeed, specialization would occur in a place in which a person is able to get the benefit of his efforts.


Given law and order, for him, specialization is a function of population, trade, production and minimum taxation. On specialization, this is what he says:

"Each particular kind of craft needs persons to be in charge of it and skilled in it. The more numerous the various subdivisions of a craft are, the larger the number of the people who (have to) practice that craft. The particular group (practicing that craft) is colored by it. As the days follow one upon the other, and one professional coloring comes after the other, the crafts-coloring men become experienced in their various crafts and skilled in the knowledge of them. Long periods of time and the repetition of similar (experiences) add to establishing the crafts and to causing them to be firmly rooted."


For Ibn Khaldun, specialization meant the coordination of different functions of factors of production where, "what is obtained through the cooperation of a group, of human beings satisfies the need of a number many times greater (than themselves)."


Later, on the same subject, Adam Smith had this to say: "Thus, generally, to the value of the materials which he works upon, that of his own maintenance, and of his master's profit." However, more succinctly, Ibn Khaldun states the economic rationale behind specialization (and coordination) with this sentence "the combined labor produces more than the needs and necessitates of the workers." On the same subject, he states the fact that "through cooperation, the needs of a number of persons, many times greater than their own (number) can be satisfied." For Ibn Khaldun, providing coordination and cooperation of factors of production is a function that has to be performed by entrepreneurs according to market forces.


Ibn Khaldun considers both the workers and the entrepreneurs as respected members of the society who try to maximize the return for their activities in the form of wages and profits. For him, the profit is the primary motive of economic endeavor, since the expectation of profit leads to the expansion of production. Moreover, "Commerce means the attempt to make a profit by increasing capital, through buying goods at a low price and selling them at a high price." In other words, "the truth about commerce" is to "buy cheap and sell dear."


For Ibn Khaldun, it is clear that "the profit human beings make is the value realized from their labor," but this value, the price of labor, is determined by the law of supply and demand. These points were missed by Karl Marx and his ardent followers.


For Ibn Khaldun, the coordination, cooperation and direction of factors of production in increasing economic surplus is a productive and costly process which is undertaken by entrepreneurs who try hard to make a gain for their economic activities. They spend time, energy and capital to search for goods and services "to buy cheap and sell dear," in order 'to make profit." As a result, Ibn Khaldun praised the initiative of entrepreneurs for their productive activities in coordinating and directing of factors of production. Then, they very rightly deserved profit from their risky undertakings. Karl Marx, Ricardo and others went astray on this point as well.




Ibn Khaldun, again centuries ahead of his time, postulated that prices of goods and services are determined by supply and demand. When a good is scarce and in demand, its price is high. The merchant will buy the goods "where they are cheap" and plentiful and "selling them at a high price" where they are scarce and in demand. Naturally, when a good is plentiful, its price is low: "the inhabitants of a city have more food than they need. Consequently, the price of food is low, as a rule, except when misfortunes occur due to celestial conditions that may affect (the supply of) food." Moreover, Ibn Khaldun demonstrated the concept of long-run cost of production in the Marshallian sense.




Ibn Khaldun defends a stable monetary policy. He is against the policies of the authorities to play with the value of currency. He fears that the authorities may be tempted to debauch with the value of money in order to build palaces and finance mercenary armies. This process will cause inflation and the population will lose confidence in the currency. These developments are considered to be unjust. As a supreme policy for the society, the protection of purchasing power of money has to be implemented as a matter of justice. To do that, he proposed an independent monetary agency under the authority of Chief Justice, a "God-fearing man" to prevent the rulers "fearlessly" from tampering with the value of money and debauching the currency.


Upon this idea of Ibn Khaldun, American Federal Reserve Board, Bank of England and West Germany's Bundesbank have been following relatively independent monetary policies aiming to keep inflation down and provide a stable currency for their respective economies.




Ibn Khaldun was not only against state involvement in commercial and agricultural activities, he was also against government involvement in fixing the prices of goods and services. When the government employs force "by buying things up at a cheapest possible price", the ruler "will be able to force the seller to lower his price" and "forces the merchants or farmers who deal in these particular products to buy from him." The rulers "undertake to buy agricultural products and goods from their owners who come to them, at prices fixed by themselves as they see fit. Then, they resell these things to the subjects under their control, at the proper times, at prices fixed by themselves."




After the 1960s, some economists, especially in the United States have started to deal with property rights and its impact on economic development. Ibn Khaldun, on the other hand, centuries ago had dealt firmly with this issue. The protection and the enforcement of property rights had to be defended as a matter of justice for the survival of civilization.


For him, "when the incentive to acquire and obtain property is gone, people no longer make efforts to acquire any. The extent and degree to which property rights are infringed upon determines the extent and degree to which the efforts of the subjects to acquire property slacken."


Ibn Khaldun predicts the decline of economic activities when the property rights are not protected and enforced with the following statements:

"When attacks (on property) are extensive and general, extending to all means of making a livelihood, business inactivity, too, becomes (general), because the general extent of (such attacks upon property) means a general destruction of the incentive (to do business). If the attacks upon property are but light, the stoppage of gainful activity is correspondingly slight."


Ibn Khaldun sees a clear connection between property rights and justice. For him, "men persist only with the help of the property. The only way to property is through cultivation. The only way to cultivation is through justice. Justice is a balance set up among mankind."


Whenever, the violation of property rights occurs, it means the commitment of an injustice act. For Ibn Khaldun, "people who collect unjustified taxes commit an injustice. Those who infringe upon property (rights) commit an injustice. Those who take away property commit an injustice. Those who deny people their rights commit an injustice. Those who, in general, take property by force, commit an injustice," and "injustice ruins civilization."




In summary, Ibn Khaldun is one of the few successful theoreticians, who has analyzed the behavior of human beings and of society as an integrated whole in their totality as part of greater humanity in the rise and fall of civilization paralleled to the rise and fall of economic surplus, respectively. For him, the cycle of the civilization has reached its end with the destruction of superstructure. At the beginning, "the desire for a luxurious mode of life had inspired men to perform heroic deeds, fights, to overcome difficulties, and to build - Now-men fight again, but not for the hopes that they had once entertained. Motivated by the fear of hunger, they fight for mere existence, and like the primordial man who fought out of the same motive, they display the beast in man and return to the life of beasts."



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