Timur Kuran and the Rise of Corporations

 

Timur Kuran, author of The Long Divergence: How Islamic Law Held Back the Middle East, gave an outstanding presentation at the Mont Pelerin Society Conference. It shed a lot of light–to my way of thinking–upon many of the most vexing aspects of modern Turkey: 

Timur Kuran argues that what slowed the economic development of the Middle East was not colonialism or geography, still less Muslim attitudes or some incompatibility between Islam and capitalism. Rather, starting around the tenth century, Islamic legal institutions, which had benefitted the Middle Eastern economy in the early centuries of Islam, began to act as a drag on development by slowing or blocking the emergence of central features of modern economic life–including private capital accumulation, corporations, large-scale production, and impersonal exchange. By the nineteenth century, modern economic institutions began to be transplanted to the Middle East, but its economy has not caught up. And there is no quick fix today. Low trust, rampant corruption, and weak civil societies–all characteristic of the region’s economies today and all legacies of its economic history–will take generations to overcome.

You can read the first chapter here. The great pleasure of hearing him speak or reading his work is the encounter with someone who has a sense that history began well before the second Bush Administration. So many people fail to grasp that.

One of his key questions is this: Why did the Islamic world fail to develop the concept of a corporation, that is to say, an entity designed to encourage investment and profit-sharing and separated from tribal and family loyalty? Why did this notion arise in Great Britain, Holland, Belgium, Switzerland? The answers he proposes are fascinating. 

A passing thought: Economic history isn’t over. Wouldn’t it be interesting to know what economic historians will say, a thousand years from now, about the impact of institutions that are only now coming into being? Who knows which ones will really change things? 

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  1. Profile Photo Inactive
    @StuInTokyo

    We once had an employee from India, a Muslim, very devout guy, and we talked about this subject a lot. He saw the restriction on interest on lent money as being the major factor in the poor performance in most Muslim business men. He told me his father at one time wanted to expand his business, he was a goldsmith, but needed some money to do so, the only place he could secure a loan was from the local town council of sorts, basically the mosque. They decided that it was too risky and did not give him the loan. His uncle wanted to open a factory to manufacture small electronics parts, again, as he put it, “The old men at the mosque” were fearful of the risk, and declined. The uncle moved to Sri Lanka and got a private loan, with interest, and has done very well, providing about 20 good jobs to locals and being able to send his kids to good schools in the US and UK. I know this is all anecdotal, but it sure does make one wonder.

    Domo

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    @Claire

    These aren’t really his arguments at all–they’re more interesting. I wish I could reproduce the paper in toto or quote from it, but alas the rules of the conference say specifically that I can’t. I recommend the book based on it, though. (I haven’t read it yet, but will as soon as I can.)

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    @SpinozaCarWash

    Claire,

    I really appreciate your efforts to educate us on Turkish political and social issues. As an aspiring energy lawyer, I particularly value your posts on natural gas/energy issues in the eastern Mediterranean. I have been singing your praises at the NYU School for Near Eastern Studies, which is just across the street from the law school. Thanks for everything that you do for us on Richochet.

    Jordan

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    @Claire
    Jordan Rodriguez: Claire,

    I really appreciate your efforts to educate us on Turkish political and social issues. As an aspiring energy lawyer, I particularly value your posts on natural gas/energy issues in the eastern Mediterranean. I have been singing your praises at the NYU School for Near Eastern Studies, which is just across the street from the law school. Thanks for everything that you do for us on Richochet.

    Jordan · Oct 5 at 3:53am

    Thanks for the encouragement. Energy lawyers are going to rule the world, I suspect. If it were to do over, I’d love to do what you’re doing. And if you think you’re seeing pieces of this puzzle that I’m missing, let me know.

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    @Pseudodionysius

    Claire,

    Harold Berman was the most famous Western scholar arguing that the Western legal code derives directly from canon law, and if it weren’t for that pre-existing legal code, we would not have developed the extensive legal systems that we have in the Anglo Saxon world, thereby making the development of our modern system of trade and commerce more difficult.

    I won’t get into the development of justifications for distinguishing between usury and interest and Vitoria’s International Law , but did Kuran contrast Islam’s institutions or lack thereof with comparable ones in the West?

    ps What all of us really want to know is whether the food that’s served at the conference is better than what James Delingpole and Rob Long are concocting at Chez Ricochet Chalet.

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    @Pseudodionysius

    I also assume he’s making the argument (my finger is hovering over the kindle purchase of it right now) that Islam’s institutions were adapted to a militarily omnivorous civilization conquering land and mediating family land disputes but unable to create institutions and legal jurisprudence to deal with naval sea voyages, colonization and the eventual divorce settlement of Ivana Trump.

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    @Claire
    Pseudodionysius: I also assume he’s making the argument (my finger is hovering over the kindle purchase of it right now) that Islam’s institutions were adapted to a militarily omnivorous civilization conquering land and mediating family land disputes but unable to create institutions and legal jurisprudence to deal with naval sea voyages, colonization and the eventual divorce settlement of Ivana Trump. · Oct 5 at 5:02am

    I’m feeling that I probably posted about this too soon, violating my objection to discussing books that I have not in fact read. I probably shouldn’t try to represent his arguments (or take a strong position on them) before reading the book. Suffice to say, if it’s now political anathema to say that “corporations are people,” we’re pretty much doomed.

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    @ctruppi

    For a great read on this subject on a global scale, I refer you all to Harvard Prof David Landes’ “The Wealth & Poverty of Nations”. He takes the reader on a global, historical journey and shows how (and why) different nations were able to take varying degrees of advantage of the industrial age which left some countries (in northern Europe and North America in particular) wealthy and other countries (Middle East, Africa, South America) in poverty. His theory is that beyond Adam Smith there are cultural issues which have an enormous impact on this disparity for both ends of the scale. It’s a long read, but very compelling.

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    @StevenZoraster

    According to “The Long Divergence”, the Waqf, the only way Muslims could create an enterprise that could outlive the founder had to be established for only one purpose and that purpose could never change.

    For example an Islamic investment of money for a water well or a caravan resting place could never be diverted to other uses as economic conditions changed.

    Meanwhile, western corporations branched out towards what were, hopefully, better investments. One of the early English joint stock companies, the “English East India Company”, was formed to trade with – well, the East Indies, but eventually became focused on trade with India and China. And of course, rule in India.

    The “City Journal” had a review of “The Long Divergence” online at

    http://www.city-journal.org/2011/21_3_muslim-economy.html

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    @genferei

    Thanks, Claire – that first chapter was fascinating. What do you make of Turkey’s place in the various charts he has there (essentially showing Turkey mid-way between the Arab Middle East and the West i.e. OECD minus Turkey, on various measures of social, institutional and political ‘development’)?

    This surprised me at first, and then again when I thought about it, but for the opposite reason:

    “In 1844, the first date for which comprehensive population figures exist, Christians and Jews comprised at least 45 percent of the population of the Ottoman Empire, the region’s largest state. Three centuries earlier, they formed 35 percent of the population in Istanbul, and 18 percent in Damascus.”

    Those not at Mount P might like to watch the series of videos starting here: Timur Kuran – Why the Middle East Became Economically Underdeveloped (from Sabanci University, if you excuse the romanisation).

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    @Viator

    No discussion of Islam and institutions would be complete without talking about slavery.

    For substantially more than a millennium much of the work and fighting in the various emirates, sultanates and caliphates was done by slaves. Widespread slavery lasted from the time of Mohammed up until the great British abolitionist movement made it impossible although in some parts of Muslim Africa more than 10% are enslaved to this day. White slaves (preferred) came from the coasts of Europe, pirating and Slavic areas (hence slave). Black slaves came from east and west Africa. The Turkish Janissaries (slave army) were exterminated by the Turks in 1826 after a 500 year history. Most of the great buildings we associate with Islam were built by slaves and that included the architects. One of the great economic engines was the trade between the Islamic states of the Mediterranean coast and the African gold coast where a pound of salt mined by slaves in the middle of the Sahara desert could be exchanged for a pound of gold on the African gold coast. The caravans which brought salt south brought slaves north.

    1,250 years of slavery may have something to do with The Long Divergence.

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    @CasBalicki

    Can someone please tell me how a corporation with loyalty and profit distribution to shareholders might spring from the roots of a tribal culture owing loyalty and sustenance to family first and clan second? The culture still practices cousin marriage for reasons of loyalty, and this despite the high incidence of birth abnormalities. Ask yourselves, how is a culture that is unwilling to look outside the family for marriage partners ever going to develop a corporate form of enterprise.

    It should also be pointed out that dividends/profit sharing is not interest, and as a consequence the restriction against interest should serve as a fillip to establishing a corporate structure. Lastly, in tribal cultures all resources are first owned by the tribe, so how can you have any entity other than a tribe employing resources in furtherance of a bright idea. Tribes don’t get bright ideas, individuals do.

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    @CasBalicki

    Another significant restraint on Islamic advancement is that it is an honour-shame culture. If your public honour is compromised by so little as a daughter leaving the squat without a headscarf, how are you going to get your act together to take a flier on a U-Ride Camel rental business? If I am not mistaken, this is a problem the US military encountered in training the Iraqi army officer corps. No one was willing to make a decision lest they err for error equals shame. The defense against such shame, even in a fire-fight, is to have your commanding officer, you know the guy farthest from the field, issue orders.

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    @Pseudodionysius

    I’m feeling that I probably posted about this too soon, violating my objection to discussing books that I have not in fact read.

    Fair enough, but then please post on what people are wearing and eating. You still owe us that champagne from shoe video from when you, Mollie and Judith were dancing with the stars in Israel.

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    @CaptAubrey

    My one sop to diversity is that I am facebook friends with some folks who post imbecile, lefty, slogans. One such I read recently was, “I’ll believe corporations are people when they hang one in Texas” It occured to me then that the elimination of debtors prison, the creation of limited liability and the corporation are truly hallmarks of our economy. On the other hand, the socialisation of losses and the creation of moral hazzard from bailouts is a big problem that we have to deal with. Thank God we have the ability to deal with that problem by electing people who won’t do it anymore etc.

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    @DavidWilliamson
    Claire Berlinski, Ed.:

    One of his key questions is this: Why did the Islamic world fail to develop the concept of a corporation, that is to say, an entity designed to encourage investment and profit-sharing and separated from tribal and family loyalty? Why did this notion arise in Great Britain, Holland, Belgium, Switzerland? The answers he proposes are fascinating.

    Good question! This is why Islamists and International Socialists have a lot in common, in spite of their apparent contradictions.

    You could see this in Iran, where the Islamists came to power on the backs of the Marxists, and then squashed them.

    This is now playing out on a wider stage, worldwide.

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    @

    Well, I know moneylending is a major form of investment and Islam prohibits “riba” or “usury” and its prohibition of “gharar” creates difficulties in providing insurance and completely undermines financial derivatives. See here.

    Therefore, if you prohibit debt financing and make it difficult or impossible to reduce risk via insurance or derivatives, entrepreneurial activity will wane considerably and economic growth and development will stagnate.

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    @Roberto
    Capt. Aubrey: On the other hand, the socialisation of losses and the creation of moral hazzard from bailouts is a big problem that we have to deal with. Thank God we have the ability to deal with that problem by electing people who won’t do it anymore etc. · Oct 5 at 8:30am

    I’ll believe it when I see it.

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    @StevenZoraster

    I think the heart of Kuran’s arguments are available online in an article titled

    “Institutional Causes of Economic Underdevelopment in the Middle East: a Historical Perspective”. The article is in the “IEA Conference Volume Series, 2008”.

    It is available at the url:

    http://econ.duke.edu/~tk43/papers/Article%2056.pdf

    Google Scholar is a wonderful search tool

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    @Charlotte
    Pseudodionysius: (my finger is hovering over the kindle purchase of it right now)

    Waaaaaaaiiiiiit a second…you have fingers?!

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    @Pseudodionysius
    Charlotte

    Pseudodionysius: (my finger is hovering over the kindle purchase of it right now)

    Waaaaaaaiiiiiit a second…you have fingers?! · Oct 5 at 1:45pm

    Metaphorically speaking, yes.

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