Is Islam Compatible with Free-Market Capitalism? An Empirical Analysis, 1970–2010

Are majority-Muslim countries laggards when it comes to developing liberal economic institutions? Using an Index of Economic Freedom and its component parts, this study finds that Muslim-dominant countries (>50% of the population) are positively associated with free-market capitalism. Protestant dominance is also positively correlated, but the association stems from just two components of the index, mainly “legal security and property rights protection.” Surprisingly, Protestant countries correlate negatively with “small government” and “freedom to trade,” two critical components of free-market capitalism. Muslim dominance shows positive correlations with all areas except for “legal security and property rights.” The results are consistent when assessing similar variables measuring property rights and government ownership of the economy collected by the Varieties of Democracy Project. Capitalistic policies and institutions, it seems, may travel across religions more easily than culturalists claim.

That is by Indra de Soysa, I call it speculative but nonetheless an underrated point, via the excellent Kevin Lewis.

Comments

No.

The question is; is Islam compatible with the rest of the world?

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Wut? What majority-Muslim country has ANYTHING interesting to do with free-market capitalism??

Well, since you asked,,, UAE, particulary Dubai but also the other Emirates to varying degrees.

LOL! Yeah, open to capital! LOL!

Main foreign investment into UAE seems to be human capital of South Asains, who are treated like slaves. Yeah, this is what the West means by free-market capitalism!

Why do the South Asian's want to come to work in UAE and other Arabian countries? Could it be that they are being offered a better choice than anything on offer at home?

Some of them come because they are lied to in their home country, and when they arrive their passports are taken (In Saudi Arabia anyway).

Greentee. Have you ever actually been to Dubai?

“Surprisingly, Protestant countries correlate negatively with “small government” and “freedom to trade,”

Protestant or post-Protestant?

Because a decline of religiosity often seems to correlate with an increase in statism. The exchange of one comfort in authority with another, but with more negative economic baggage.

In Reformations, Carlos Eire discusses how, after the Catholic Church was "reformed" by Calvinists and Lutherans, municipalities took over the various charity functions that the church was once in charge of.

Protestant countries correlate negatively with “small government”

Post-1970, a major cause has to be the rise of feminism. Government is the ersatz husband for single women.

Not only that; corporate bosses are the ersatz husbands for all female employees. As a female employee feels married to her stratospherically high-status corporate husband she necessarily regards her male colleagues as lower status and feels impelled to emphasize this to them (in the manner of the mistress of a manor rebuking peasants for being too forward) by running to HR with complaints.

Apparently the difference between production and government redistribution programs (which are disproportionately favored by single women) is lost on feminist scolds.

Bazaars.
In NYC only immigrants start small businesses. I think that huge businesses fly them over here and give them a business-starting-kit that includes step-by-step legal help. It doesn't even enter the heads of natives to start a business; everyone knows that it's simply impossible.

Muslim states are poor and unstable; they have neither the Kuznets Curve, nor Communist command economies. Hence "small government". They further have little ability to import substitute or industries to protect so are "free to trade".

Nice joke at the expense of the free market ultras though.

The question itself is stupid because there is no single Islam. Like any religion, it has a plethora of interpretations and new ones will continue to emerge. Some of those will be compatible, some will not. All one has to do is look at the radically different manifestations of Christianity throughout history as a case study. Even over the relatively short time span in the study, popular manifestations of Islam have evolved significantly.

That's silly---like saying because mammals have internal differences I cannot differentiate between mammals and reptiles--bad category error--please to learn some philosophy of science, Sir!

Capitalistic policies and institutions, it seems, may travel across religions more easily than culturalists claim.

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What about separation of church and state? Is banning school prayer compatible with Allah?

Robert Wright (in his book The Evolution of God) has argued that the spread of Christianity facilitated the growth of trade as the result of the trust created between different people with the same religion. As for the actual religion of Christianity, the religion practiced and promoted by Jesus, I would say it is incompatible with capitalism: Jesus promoted and practiced a communal existence, without private property. Of course, that's not what's believed by most followers of Jesus, but that's the nature of religion: people believe what they wish to believe.

The parable of the talents (Matthew 25 14-30) shows that Jesus- or at least the Gospel's author- was familiar with the concept of realizing a return on an investment and did not condemn the idea on principle. Yes, the parable is really about using one's spiritual gifts to good effect, but the market metaphor would not have been employed if the first Christians had viewed the idea as morally problematic

Market freedom is correlated to British colonialism. Almost every former British colony is a bastion of economic freedom except those countries which fell under the influence of the USSR during the 20th Century. Islam is not really the major influence here.

Except for "legal security and property rights?" And how was the play Mrs. Lincoln?

10 countries with most Muslims and corresponding Index of economic Freedom rank:
India - 130
Indonesia - 69
Pakistan - 131
Bangladesh - 128
China - 110 (the total so far is almost one billion Muslims)
Nigeria - 104
Egypt - 139
Iran - 156
Turkey - 58
Ethiopia - 142
That's 1.48 billion Muslims, and they live under a weighted Index of Economic Freedom of 114.17 (between Solomon Islands and Greece).
The same for countries with most Christians:
United States - 18
Brazil - 153
Mexico - 63
Philippines - 61
Nigeria - 104
Russia - 107
Congo (DR) - 147
Italy - 79
Ethiopia - 142
Germany - 25
That's 995 million Christian, living under a weighted Index of Economic Freedom of 84.75 (between Fiji and Cote d'Ivoire).

If you remove Nigeria and Ethiopia, which are on both lists, the Christian list adds Colombia (42) and South Africa (77) - improving the average, and the Muslim one adds Algeria (172) and Sudan (161) - making that average worse.

So, in summary, the average Muslim lives in a country with significantly worse Index of Economic Freedom. I have a feeling the author's results will change significantly if he dropped UAE (population ~10 million; rank 10) and Qatar (population 2.6 million, rank 29). I mean, maybe expecting social scientists to control for outliers and do robustness checks is a little much, but one can hope...

Why would the authors assume that small governments or free trade are in any way associated with capitalism?

What is Islamic economics? How does it work? Can it be applied in the 21st century? Islamic economics is based on five things: No inflation, no interest, no taxes, and it is also free market economy with some characteristics of socialism. Economy grows only when money circulates among people, if it stops circulating, the economy stops growing. But some people may just keep their money with themselves and to prevent that inflation and interest was created. Inflation reduces the value of money, when people know that their money will keep losing its value, they are more likely to spend it as soon as possible. In addition to that, what is the point of keeping your money with you, so when you can simply deposit it in the bank and it will keep increasing constantly. And the bank will spend it by lending it to others, and that is why interest was created. In other words, inflation and interest keep motivate people to spend and the economy keeps growing.

And the whole idea of Islamic economics is that there are other ways to motivate people to spend besides inflation and interest. Well, what are they? First of all, Islamic economics is resources-based economy and not based on money. Money is only used to exchange the resources. Secondly, in Islamic economics there is something called Zakat. Every year, 2.5% of your money will be taken an will be given to the poor. If you know that your money will be decreasing by 2.5% every year what’s the point to save money? It better to spend them now rather than keeping them. And as mentioned before that the money is only used to exchange the resources and this 2.5% will be given to the poor which will also be spent on consumption goods so there is always an increase in demand. When there is an increase in demand, the demand curve will shift to the right, at the same time when suppliers know that there is always a demand, there is no point to keep the goods, thus is always better to sell them as soon as possible and produce more, so the supply also increase and when there is an increase in supply, the supply curve also shifts to the right. Now, we have a new equilibrium and the price did not increase but the production increased. In other words, the economy grew without inflation.

What about those who want to invest? Well, there is a solution for that. Islamic economics offers that instead of earning interest from the bank on the deposit money, why don’t we do it in a different way. Once you deposit your money in the bank, your money will be used to finance the projects which will grow the economy in general. It can be infrastructure projects or any other project. Your money will be increasing in the bank but without the interest, so the increase will come from the profits that came out of these projects. Off course some projects may fail but in general most of the projects will succeed. So, the deposited money in the bank will keep increasing and at the same time there is no interest on it and at the same time the economy keeps growing.

How about taxes? In Islamic economics, “No Taxes” does not mean “No Taxes at All” but rather it means no income tax because there is something called Zakat. One may say that Zakat is only 2.5% while income tax is up to 40%. Off course it is better for the people but not for the government. Well, let’s compare Zakat and income tax. Let’s say you have a salary for $1000 (or $12,000 a year) and your salary will double in 20 years. So, if you are paying an income tax of 20% then you have to pay $2400 tax and $4800 tax after 20 years, and it is really difficult to get rich paying high-income tax. And now if you do not have to pay income tax and only have to pay Zakat which is 2.5%. Even though you have a salary of $2000, you are still not going to pay Zakat, why? Because to pay Zakat you must have a certain amount of wealth. In general, you are not going to pay anything until you get enough amount of wealth. And generally, you have more opportunities to get rich. Let’s say after 20 years you have built a wealth of $200,000 since you had more opportunities. So, you have to pay Zakat of $5000 which is 2.5% out of your wealth. In general, Islamic economics gives you more opportunity to get rich and once you are, you have to pay Zakat which is greater than the income tax. I said that the Islamic economics is a free market economy where you can buy and sell anything as long as it is not prohibited in Islam.

Resource:
Market Voice (2016). Islamic Economics. Retrieved on 23 December 2018 from https://www.youtube.com/watch?v=D_E6UFALHRE&t=0s&index=2&list=PL08xgUZpc5h3gnuQPBAnM1IMO-jlM3t1U

The "Gold Dinar" is an interesting topic, it is the 100% gold-backed monetary system applied nowadays in Malaysia for foreign trade. In 1997 the economic crisis almost destroyed the economy in Malaysia, Afterwards, the Islamic gold-based monetary system was adopted by the government and was allowed to fully function (in contrast to the system in the Middle East where conventional banking (usury) does not allow for the system to operate efficiently). Below is a good reading, Malaysia has one of the strongest economies in present day.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3093794

https://www.researchgate.net/publication/265156239_GOLD_DINAR_THE_IMPACTS_ON_THE_ECONOMIC_SOCIAL_ORDER_1

https://books.google.com/books/about/The_Islamic_Gold_Dinar.html?id=NqZzQgAACAAJ

Is Catholicism compatible with hereditary kingship and feudalism?

Except for oil-rich countries, heavily muslim countries are way down the list of economic activity given their levels of education. The oil-rich ones are nearly socialist in that the gov owns the oil fields--not so small government.

Yes and No. It depends on how orthodox one is.

Take Christianity in the USA. Most people find both system and belief compatible, yet not all. Some orthodox branches want to restrict free information flows on scientific issues (such as banning teaching on evolution), or restrict basic services to individuals such as abortions, or even sales of wedding cakes to certain non-practitioners.

I took history of economics 35 years ago (but who's counting) and I remember the rise of mercantilism and that it's evolving body of thought was at first in direct conflict with the philosophy of the Christian churches. It took a hundred years to work itself (mostly) out. Therefore the question of Islam and capitalism is one of timing. Now versus in decades into the future. Religious belief is not fixed, but evolves.

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