ntil the late Middle Ages, the Muslim Middle East was at least as economically developed as Europe. Then, beginning with the rise of the great Italian traders in the 14th century, Europeans pulled ahead, while the Islamic world gradually declined. By the 19th century, European economic influence had translated into political domination of the Middle East. The Islamic world has never fully recovered, and that disparity feeds resentment today.
What happened? The puzzle is vexing not only because Muslim traders had been so successful in earlier eras but because they remained successful in trade with other regions, like India and East Africa. They were not bad at business; to the contrary, they were good at it.
This is the sort of big-picture question that interests economists who study "institutions" — the laws, regulations and norms that provide the underpinnings for economic life. After the work of the Nobel laureate Douglass C. North, these scholars recognize that development does not take place in a vacuum. The institutions that work well for certain types of economic activity may not work as well for others. Discovering new and better institutions is as important as discovering new technologies or business practices. And that trial-and-error process can take time.
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Since 1997, Timur Kuran, an economist at the University of Southern California, has been investigating the connection between institutions and the economic decline of the Muslim Middle East. In a paper, "The Islamic Commercial Crisis: Institutional Roots of the Delay in the Middle East's Economic Modernization," he proposes an answer: Islamic partnership law and inheritance law interacted to keep Middle Eastern enterprises small, never allowing the development of corporate forms. (A version of the paper can be downloaded at papers.ssrn.com/abstract_id=276377.)
In the Middle Ages, both Islamic and European law required that a partnership dissolve if one partner died or was incapacitated. That tended to limit the size of such arrangements. The typical partnership would be, say, two financial backers and one trader who brought merchandise to or from a distant locale. The more people involved, the more likely the partnership would have to dissolve in the middle of a venture.
In Europe, the consequences of a partner's death could be limited. Inheritance law often allowed a person to designate heirs. So a particular son might inherit the partnership share. The partnership would still have to dissolve technically, but it could be immediately reconstituted. Even in places where inheritance law was more rigid, heirs were generally limited to the nuclear family, keeping down the number of claimants and, therefore, the potential for disrupting partnerships. As a result, European partnerships were able to expand over time, allowing more ambitious, better-financed ventures.
Under Islamic law, by contrast, inheritance was prescribed in rigid detail, with all sorts of family members — uncles, cousins, siblings, parents, and so on — getting pieces of the estate. There was no way to limit a stake to a single heir. These prescriptions were rooted in the Koran, which meant they were virtually impossible to alter. The fragmentation produced by inheritance law, combined with the strictures of partnership law, kept Middle Eastern enterprises small. That, in turn, limited the pressure to evolve new economic forms.
"Why did you get the joint stock corporation and the modern corporation in Europe?" Professor Kuran asked. "Because as these partnerships expanded, they created problems that had to be resolved by putting pressure on the legal system to recognize new institutions." For instance, partners who wanted to pull out and sell their shares needed a financially graceful way to do so, leading to transferable shares and stock exchanges.
"As these problems arise, the legal system responds," Professor Kuran said. "The same thing doesn't happen in the Islamic world because the partnerships don't grow."
That difference did not matter for a long time, because the small partnerships were still extremely successful, and most of their trade was with Africa or Asia. Only in the 18th century, when trade with Europe became a big part of Middle Eastern commerce, did the difference between the systems become important.
At that point, Christians and Jews in Islamic countries also suddenly had a business advantage. As religious minorities, they had been able to choose whether to do business under Islamic law or, with mutual consent, under some other law. Although their own religions also provided laws and courts, they generally relied on Islamic law.
When Europeans started dominating Middle Eastern trade, however, they brought European courts with them. That gave Middle Eastern religious minorities a new option: to use European law. "So," Professor Kuran said, "a local Christian in Istanbul suddenly gets the idea he could start running his business under French law and take his disputes to the French court in the city, and to have his contracts notarized by a French notary, effectively moving under French law. This happens on a very large scale."
Since European institutions had evolved to better suit the scale of modern businesses, in which thousands of people may be involved as investors and employees, Christians and Jews using those laws began to prosper in comparison to their Muslim neighbors. Only in the 19th century did Middle Eastern governments begin adopting secular commercial laws that allowed Muslim-owned enterprises to grow.
Today, Professor Kuran says, Islamic inheritance law poses no problems to large- scale endeavors. The estate simply divides up the securities among the heirs, and the business goes on undisturbed. Secular corporate law lets religious inheritance law work in a modern economy.
"I'm not talking about blanket condemnation of Islamic law," he said emphatically. "That is patently false. I don't believe it and I don't argue it." Rather, he views the situation as an unintended consequence of institutions that were suited for the times in which they developed.
"When the inheritance law was put into place, the early Muslims in the seventh century were not thinking about the consequences for commerce with Europe 1,000 years later," he said. They were addressing inequities in their own day, including the problems of daughters left with no inheritance. "But in the process," he said, "they created another problem 1,000 years down the road."