Since the very beginning, writers on history of economic thought had tended to ignore the contribution of Muslim scholars to the subject. They start with the Greek philosophers and Roman jurists and administrators. They also mention opinions of some Christian fathers who lived in the early centuries of the Christian era. Then they jump to middle ages when Europe came out from darkness to light; and thinking on different natural and social sciences began, leaving a wide gap of about five centuries. This was exactly the period when Muslims ruled the greater part of the known world, established powerful empires, developed economies and contributed to the promotion of culture and science including economics.
Demand and Supply
Perhaps the earliest explicit statement on the role of demand and supply in determination of price came from the leading jurist Imam Shafi’i (767 – 820) who said that, “the value of a commodity changes each time there is change in the price, due to increase or decrease of people’s willingness to acquire the commodity (demand) and depending whether it is available in small quantity or large quantity (supply).” Another early expression of the role of demand and supply came from Al-Jahiz in his work, al-Tabassur bi’l-Tijarah (the Insight in Commerce) where he observed that, “Everything becomes cheaper if its amount increases except knowledge as its value is enhanced if it increases.”
A very clear and rather detailed exposition of demand and supply, and the way prices tend to be determined, was provided by Ibn Taymiyyah (1263 – 1328). In a reply to an inquiry addressed to him he says, “Rise and fall in prices is not always due to an injustice (zulm) by certain individuals. Sometimes the reason for it is deficiency in production or decline in import of the goods in demand. Thus, if desire for the good increases while its availability decreases, its price rises. On the other hand, if availability of the good increases and the desire for it decreases, the price comes down. This scarcity or abundance may not be caused by the action of any individuals; it may be due to a cause not involving any injustice, or sometimes it may have a cause that does involve injustice. It is Almighty Allah who creates desires in the hearts of people (the taste).”
Value based on Marginal Utility
Muslim scholars perceived valuation based on marginal utility as early as the 9th century, without using the terminology. For instance, Imam Shafi`i says: “A poor man assigns to one dinar much greater value for himself, while a rich man may not consider hundreds of any big value due to his riches.” Al-Shaybani (749 – 805) recognized even the idea of ‘disutility’ as he says, “… a person eats for his own utility and there is no utility after being full stomach, rather there could be ‘disutility’.” In addition, the subjective nature of utility is best described by Ibn Al-Jawzi who says, “The extent of pleasure from food and drink will depend on how strong is the thirst or hunger. When a thirsty or hungry person reaches his initial condition (of satiety), after that, forcing him to take more of food and drink will be highly painful (of great disutility).” Thus, it is clear that to these scholars that the value of an object is a subjective thing and depends on its diminishing marginal utility.
And when the prayer has been concluded, disperse within the land and seek from the bounty of God, and remember God often that you may succeed (Qur’an 62:10)
Inspired by this verse and others, Muslim scholars gave high value to engagement in production activities. To this end, Al-Shaybani classified productive activities into four categories: services, agriculture, trade and industry. Al-Ghazali (1058 – 1111) classified them into five categories: farming (food for people), grazing (food for animals), hunting (including exploration of mineral and forest products), wearing (textiles or clothing) and building and construction (for dwelling). He also suggests another classification of industries quite similar to that found in contemporary discussion i.e. primary, secondary and tertiary; which refer to agriculture, manufacturing, and services respectively.
Linkages and Interdependence of Industries
Linkages of industries and their interdependence were first mentioned by Al-Shaybani. But it was Al-Ghazali who clarified it when he says; “the farmer produces grains, the miller converts it into flour, and the baker prepares bread from the flour.” He also stated that, “the blacksmith makes the tools for farmer’s cultivations and the carpenter manufactures the tools needed by the blacksmith. The same goes for all those who engage in the production of tools and equipments, needed for production of foodstuffs.”
Division of Labour
After describing various functions involved in production of our daily food, Al-Ghazali says: “a single loaf of bread takes its final shape with the help of perhaps more than a thousand workers.” He argues further by using the example of a needle. “Even the small needle becomes useful only after passing through the hands of needle-makers about twenty five times, each time going through a different process.” One can see how analogous this is to the classical pin-factory example of Adam Smith (1723 – 1790) seven centuries later in making the same arguments.
Nature and function of money
According to Qudamah bin Jafar (b. 873), money has been invented out of human need to exchange goods with each other and specialization in one’s profession. He has visualized various difficulties of barter exchange termed by modern economists as non-proportionality of exchangeable objects, indivisibility of goods, absence of a common measure of value, problem of double coincidence of wants, etc. This led to the use of a common denominator for their transactions – gold, due to qualities like durability, easy minting and availability in a reasonable quantity. Suitability of gold and silver to work as money has also been emphasized by later scholars, e.g. Al-Ghazali and Ibn Khaldun. According to Ibn Miskawayh (923 – 1030) a Muslim philosopher, money measures value of various goods and services and establishes equality between them which is not possible in direct exchange without the medium of money. He considers gold, in its capacity of money, as ‘the standard for all and everything.’ It is best kind of store of value because ‘he who sells many things and picks up gold in exchange for the articles and as a substitute for all of them, has done the right thing, since he can get thereby whatever he wishes and whenever he wishes.’
Gresham’s Law before Thomas Gresham
Ibn Taymiyyah and Al-Maqrizi (1364 – 1442), the two scholars of Mamluk period saw and analyzed the phenomenon known in the West as Gresham’s Law. According to this law where two different money units of the same face value but varying intrinsic value (in terms of the purity of metals) are circulated, the bad money drives out the good money. Ibn Taymiyyah says: “If the intrinsic values of coins are different, it will become a source of profit earning for the wicked men, who will collect the bad coins and exchange them for good money and then they will take them to another country and shift the bad money of that country to this country.” Thomas Gresham was born in 1519 while Ibn Taymiyyah died in 1328.