The Long Divergence: What Turned the Tables Between the West and Islam?





November 21, 2011 • Posted by:Charles Lewis Sizemore, CFA



For centuries the Islamic world dominated the West militarily, economically, and culturally. As late as 1683, when Ottoman forces laid siege to Vienna, Muslim military domination was a legitimate fear for the Christian world.


Excluding the sophisticated Byzantine Empire—which Muslim Arab forces nearly conquered and Muslim Turkish forces did conquer in 1453—and some of the city-states of Italy, the West remained backward and underdeveloped compared to the Middle East for roughly 1,000 years. Prior to the Renaissance the West had nothing that could rival Damascus, Baghdad or the other great cities of the region.


But then, a funny thing happened. Europe emerged as an economic juggernaut and turned the tables on the Islamic world. Starting in the late 1400s and accelerating with the Industrial Revolution of the late 1700s, the West emerged as the dominant military, economic, and cultural force in the world.


The question that has perplexed scholars for ages is why?


None of the popular explanations are satisfactory. Those who would suggest that Islam is hostile to commerce have clearly never walked the streets of a Muslim country or have never spent five minutes discussing business with a Lebanese—Muslim or Christian. Arabs—particularly in the Levant—have capitalism in their blood, as do Turks and North Africans. Try your luck at haggling in a bazaar, and you’ll see what I mean.


The oft-cited Muslim prohibition against the charging of interest also fails to hold water. The charging of interest was prohibited for Christians in the West for most of the Middle Ages, and neither Christians nor Muslims prevented Jewish minorities within their borders from charging interest.


Islam’s founder was also no stranger to the business of making money. Unlike Jesus Christ—who lived his earthly life as a humble carpenter and eschewed worldly possessions—Muhammad was a hard-nosed trader and businessman before he became a religious leader, and the Koran is far more “business friendly” than the Christian New Testament.


The second popular explanation—that the Islamic world is poor due to Western imperialism—makes even less sense. Until roughly 1500 it was the Muslim powers doing the colonizing, not the Christian. And in any event, the West’s eventual colonization of the Islamic world happened only after it had become wealthier, so we’re back to the original question: why did the West rise to the top in the first place?


In his engaging new book The Long Divergence, Timur Kuran believes he has found the answer: the West invented the corporation.


The Christian New Testament is a general guide for spiritual and personal living; it is distinctly not an all-encompassing blueprint for organizing a society. Ever since Christ’s admonition to render to Caesar what is Caesar’s and render to God what is God’s, there has been an understanding that there are secular areas of life for which religion does not have the answer. This left the Christian world free to experiment with concepts such as double-entry accounting, the limited partnership or the corporation.


Not so in the Islamic world. As Kuran writes,


In principle, Islamic law covered all human activity… In commerce and finance, two areas in which the Middle East fell conspicuously behind, Islamic law played a key role. People entered into contracts that followed an Islamic template and were enforced through Islamic courts. They apportioned estates according to Islamic inheritance rules. Residents of the region’s great cities obtained services mostly from waqfs, which were trusts formed under Islamic law and supervised by officials with religious training. Almost all lawsuits involving at least one Muslim were litigated by Muslim judges, under Islamic legal principles.


Interesting, the uniform commercial code imposed by Islam was initially a boon to commerce. Since all Muslims played by the same set of rules and were held accountable in the same Islamic courts, business deals across borders became remarkably easy.


Unfortunately, these Islamic institutions had several limitations that made them unsuitable for the modern era:



The concept of limited liability did not exist in Islamic partnership law. All partners were responsible for the obligations of the partnership, which discouraged risk taking.
Islamic partnerships are designed for specific projects and are not designed to be perpetual going concerns. The partnerships are automatically dissolved with the death of a partner, and any partner can dissolve the partnership at any time. Partners could not sell their ownership interests in the form of tradable shares of stock or pass their ownership interests to their heirs.
Islamic inheritance law ensures that assets are dispersed among wives, children, and even siblings, and the common practice of polygamy among the wealthy meant that there were more heirs entitled to a share of the inheritance. Under sharia, a Muslim only has discretion over one third of his or her assets; the rest is distributed per Koranic guidelines.

These restrictions prevented the multigenerational accumulation of wealth and prevented the emergence of large corporations that were capable of engaging is long-term, global enterprises. Something like the British East India Company, for example, would have been absolutely out of the question.


It was only in the late 1800s that Muslim rulers began to import Western legal institutions, and these were subject to opposition by religious conservatives. But by then, the damage was done. The West had already leapt into the position of world dominance.


Though his explanations may seem too simple to some readers, Mr. Kuran makes a compelling case and he has the research to back it up. The Sizemore Investment Letterrecommends The Long Divergence for any readers that are economic history buffs.


Alas, for the Occupy Wall Street crowd, the book will only provide more proof of the unassailable power of the modern corporation.