Economics in early Islam soon evolved a practical bent. Muhammad pronounced: “There is nothing wrong in wealth, but health is better than wealth, and cheerfulness is a blessing,”and even was quoted having issued straightforward investment advice such as: “He who sells a house and does not buy another one instead is not likely to see blessing in that money.”
Arab traders were taken by surprise when Muhammad abandoned price regulation. Abu Yusuf collated three accounts of unfolding events; one of these follows: “Prices rose in the time of the Prophet, and the people came to him asking that a price-limit be fixed which the people could afford, but he said: low and high prices are from God and we are not allowed to go beyond His judgment.”
According to Abu Yusuf, Muhammad enjoined leaving prices to invisible forces: “Prices, high or low,” the Prophet stated, “are in the hand of God.” The Hanifite Mishcat quoted a slightly different version of Muhammad’s words: “God is the maker of rates, and is the giver and curtailer of sustenance.”
Muhammad’s decision was highly contentious and — a very unusual occurrence — there were complaints. Several testimonies report Muhammad’s adherents lodged protests and asked him to abate increases in the price of food. According to Ibn Taymiyah, appeals were filed twice, but Muhammad was unbending and adamant he would not intervene in prices unless he had authority from Allah (“I would rather invoke God.”), and after in vain seeking divine approbation to set prices, stated rises and falls of prices were beyond man’s control. Setting prices, Muhammad asserted, was neither in his, nor for that matter in the gift of any other single human authority, and he would contravene God’s will were he to fix what God wished to vary (“Oh no,” he corrected someone asserting prices were made by man, “God raises and lowers”).
These Hadiths do not state at what point in time Muhammad derestricted prices in Medina, but in any event Muhammad’s approach had already germinated when he was still in Mecca. According to another Hadith, merchants in the market in Mecca accosted Muhammad and enquired whether his prophetic powers included the ability for business forecasts. Meccan traders asked Muhammad: “Does your Lord not tell you when prices will drop or rise, so you can gain in trade?” It was in reaction to this approach, according to Aloys Sprenger, that Muhammad thereupon received the following Koranic revelation:
“Say: I have not the power to acquire benefits or to avert evil from myself, except by the will of God. Had I possessed knowledge of what is hidden, I would have availed myself of much that is good and no harm would have touched me. But I am no more than one who gives warning and good news to true believers.” (Koran 7:188)
Mohammed’s endorsement of price de-regulation in Medina derived from his conception of his prophetic office, developed during his years of adversity in Mecca.
Some incidents consequential to the introduction of free pricing made for amusing anecdotes. According to Baladhuri, there was an entrepreneur in Basra who operated the city’s single bathhouse and could not help boasting about his extraordinary profits to his brother. However, he soon had to rue having taken his brother into his confidence because his brother shared out this confidential information and the monopolist soon faced competitors. Several entrepreneurs were quick to ask the governor’s permission to open new baths, with predictable second round effects: Basrans soon had a choice between eight bathhouses, and the original monopolist to his chagrin found his profits had evaporated. “May Allah cut off from him His mercy!” he cursed his brother — and Baladhuri’s moral of the story is that, in truth, the boasting entrepreneur should have blamed himself for giving away his trade secret.
Coincidentally, this story gives a glimpse of market frameworks of the time: the government regulated market access (bathhouses required a governor’s licence) but did not intervene in price competition. From this anecdote we may infer the rapid rise in living standards, and ready access to capital in Islam’s young cities (eight bath houses entered into competition). Moreover, Baladhuri’s list of investors shows women owned three out of eight baths, which demonstrated women at the time were significant entrepreneurs.
Benedikt Koehler is a retired banker and economist who has edited History of Financial Disasters 1857 – 1923 and written a biography of the cofounder of Deutsche Bank, Ludwig Bamberger. He began publishing articles on Islamic economics in 2009.