On The Nature of  Prosperity
…In praise of Ibn Khaldun

J.M. Keynes was right when he said, “practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” However, did he know that the most important principles of his theory had been discovered five centuries earlier? 

As early as the mid 14th century, an Arab scholar, philosopher, sociologist, economist and diplomat, Ibn Khaldoun (1332-1406), unveiled the economic principles which are at the heart of Keyne’s General theory.
 
Ibn Khaldun was born in Tunis (North Africa) in 1332, from a very wealthy family of ancient Arabian nobility that predated the Prophet himself. Khaldun studied theology, law, philosophy, history and mathematics, achieving remarkable prestige and recognition in the Arab world. Even rulers from the Christian kingdoms sought his advice. In 1362, Ibn Khaldun left North Africa for Spain, where he entered the service of the Sultan of Grenada. The Sultan was so impressed by the depth and versatility of Khaldun’s knowledge and skills that he made him his chief advisor. The sultan later sent Ibn Khaldun on a special embassy to Pedro the Cruel, King of the Christian Kingdom of Castille, where he gained the esteem and the trust of the Christian King and played an important role in building cooperation between Grenada and Castille. 

In 1382, Ibn Khaldun accepted the post of chief justice in Cairo, which the Mameluk Sultan of Egypt offered him.  He successfully undertook the formidable task of uprooting corruption and inefficiency from the courts. When the hordes of Timour Leng swarmed Damascus in 1400, Ibn Khaldun met Timour Leng as a special envoy of the Sultan of Egypt to negotiate truce.  He managed to stop the slaughter and was even offered a top job by the Mongol King, which he tactfully declined. Ibn Khaldun died in Cairo in 1406 and was buried in the Sufi cemetery outside Bab el Nasr.

In 1375, Ibn Khaldun began writing his general theory of civilizations, his Magnum Opus in which he explains the rise and fall of societies and civilizations. As a witness to the decline of the Islamic society, he tried to understand the causes of its decay. This led him to unravel economic and social laws explaining history, and the real causes of prosperity. He was the first ‘social scientist’ to discover historical cycles. His work on economics and state policy and finance is hundreds of years ahead of his time and, in many ways, surprisingly relevant even today. 

What is most astonishing is that Ibn Khaldun is an unknown precursor of Keynes. In the prolegomena to his Universal History, he unveiled the role of effective demand as a major determinant of production and real wealth in society. Ibn Khaldun rejected in a convincing way what would be known five hundred years later as the dogma of the “Ricardian Savings Constraint”, or artificial scarcity. 

(footnote:  Keynes referred to “the Ricardian Holy Inquisition” according to which the supreme dogma of economics was the “savings constraint”. Few economists of the past (and of the present) have challenged the supreme dogma of natural (artificial) scarcity. 

The following events are imaginary, but the ideas and words of Ibn Khaldun, who was then a senior advisor to the Sultan of Grenada and an informal advisor to the King of Castille, are accurately represented and, as often as possible, directly quoted from his monumental work: “ Prolegomenas and Universal History” in the form of a dialogue      (from “An Arab philosophy of History, Selections from the Prolegomena of Ibn Khaldun of Tunis”).

In our story, Ibn Khaldun meets in Grenada, the Capital of the Islamic Kingdom of Andalousia (the wealthiest kingdom in Europe), an envoy of the King of France. The French army has just been slaughtered by the English at the battle of Crecy and the King of England is claiming the throne of France. The hundred year had began and the plague had claimed its earliest victims.  Both exerted a heavy toll on France. The King of France John the Good is in a desperate situation. His coffers are empty, and he is unable to pay his feudal warlords and the mercenaries who serve him. 

 The year is 1370 AD. The place is Ibn Khaldun’s palace in the City of Grenada, Andalousia (Spain).. 

A conversation between Ibn Khaldun and the Envoy of the King of France

A special envoy of the King of France, the Count of Bourbon (CB), visits Ibn Khaldun (IK) in his residence in Grenada while on a secret visit to the King of Castille to seek financial help for the embattled King of France. 

Ibn Khaldun meets the Count of Bourbon on the patio of his palace…

IK: My Lord Count, I am deeply honored to receive you in my humble sojourn. Blessed be your master King John by the very name of the Holy Prophet for seeking the advice of one of His most humble and faithful servants.

CB: My Lord Khladun, I bring you the greetings of my Master who knows of your achievements and of your invaluable services to his cousin the King of Castilla. The King and his Court frequently praise your wisdom and insight; I also have for you a letter from the most reverend Abbott of Cluny, himself. 

IK  Thank you my Lord Count.  Please enter my garden and let us have some refreshment. You must be exhausted after such a long journey. I have a most delectable sherbet with every assortment of fruits, fresh from my gardens. I have even ice from the mountains of Sierra Nevada.

CB Lord IK you are most kind… 

CB (some time later): My Lord, as I have explained in my letter, the King of France seeks your advice and help to develop good policies which would ensure the lasting prosperity of the King and of his subjects. 

IK: I learned about the sad situation afflicting the mighty kingdom of France. We live in tumultuous times. I am myself a witness to a grave crisis afflicting the world of Islam and I am doing my best to help, alas in vain. 

CB: My Lord you are too modest.  The King of France knows that the King of Castille has adopted your ideas, and that his coffers are full and his kingdom prosperous.

IK: You are too kind. However, my advice may be useful to your master who seems wise and in the like of his enlightened cousin the King of Castille.

CB: I would be most honored if you shared your knowledge with an ignorant courtier like me.

IK: My Lord Count, you are too modest. My principles are simple. Even your Lord Abbott of Cluny would agree…

CB: (smiles)

IK: …I have been reflecting for a long time on the hidden causes of the wealth of kingdoms and kings. Cities and empires rise, prosper and decay while new empires and kingdoms rise again. Fortunes are accumulated and lost. We know the ultimate fate of empires and of their kings; the stories are nevertheless different. Some Kings and their empires achieve long lasting prosperity while others falter rapidly... 

CB: How true, my Lord Khaldun 

IK (nodding)–  I always suspected that there must be general laws and principles, which, if applied honestly and diligently by the State, will surely manifest the will of the Almighty to the benefit of the King and for the good of his subjects,…  

IK, pauses and deep breath 

My dear Lord Count, the most important error of all is the ignorance of the laws governing the transformation of human society. After much investigation and research to understand these changes, I believe I have discovered several general laws of history.  I am quite confident that these principles can be, and should be applied, anywhere and anytime in the world. Although the application of such principles does not guarantee success, they are a necessary ingredient in the policy of any wise king.  

CB: My Lord, both the King of France and his servant are eager to learn …

IK (nodding): My first law is the law of historical cycles, supported by my intensive research and studies of the glory and the decline of Islamic societies, states and other empires. My dear Count I have found that all civilizations must go through four stages: The first stage is the emergence of a new civilization and society. The second stage covers a period of growth and prosperity. Stagnation and decadence characterize the third stage where wealth can no longer increase. This brings us to a fourth stage of decline leading to the ultimate collapse. Finally, a new civilization emerges from the ashes of the previous one and another cycle is born. The conditions of the world, and of the nations do not persist in one unchanging state but are transformed with the passage of time and move from one condition to another.  Such is the law laid down by God for his worshippers. 

CB:My Lord, does this mean nothing can be done to prevent the collapse of a kingdom? 

IK: Societies and kingdoms are like living bodies and must abide by the life cycles which rule the universe, which is in the hand of God. Societies, not just life forms, must live in harmony with the laws and principles created by the Almighty. Once understood and respected, these laws can prolong health and minimize disruptions.

CB: I understand my Lord. King Solomon refers to the cycles of history and life in our holy Bible. Moses unveils God’s will when he interprets the dream of the Pharaoh: Seven years of plenty followed by seven years of drought and famine.

IK  My second observation is that the prosperity of the State can only reflect the prosperity of its subjects. This is often misunderstood.  The prosperity of the King depends on those subjects who generate real wealth with skills granted by the Almighty himself.  A sufficient pool of skilled subjects such as farmers, carpenters, weavers, clerics, midwives, physicians, architects and clever artisans of every kind, are necessary if the king wants to harvest the blessings of our creator. The greater the number the skilled subjects, the greater is the potential for prosperity for king and kingdom. 

CB: but surely my Lord, silver and gold are important allies of a powerful king? 

IK:  God created the two precious metals, gold and silver, to serve as the measures of value of all commodities, for other goods are subject to the fluctuation of the market from which they are largely immune. However, I must stress my dear Count, that money is not wealth. 

CB: You have lost me my Lord Khaldun.

IK: Such forms of wealth as gold, silver, precious stones are only minerals and products having an exchange value.  It is social effort, the search for profit and the use of tools that cause the increase or decrease of the quantity of precious metals in circulation and hence, the real wealth of a King (p.77)

CB: Do you mean to say that gold and silver are merely a reflection of prosperity? 

IK: Precisely.  If there is no sustainability in the creation of wealth, the gold expended by the king never returns to his coffers; an important point which I will clarify later.

CB: My heart tells me that you are right; but my Lord, surely, a King must play a role in the prosperity of his kingdom?

IK: Absolutely.  This brings us to my third observation and law covering the role of the King and his court. My view is that the amount of wealth generated by the principal crafts is, in turn, largely determined by the expenditures of the Crown.  

CB: But, my Lord IK how could this be? You just told me that the prosperity of the king depended on his skilled subjects.

IK: One hand alone does not clap, the king needs his subjects and subjects needs their king. They mutually reinforce one another. 

CB: I see. But I am told by the Church that the king can only spend what he acquired through taxes from his subjects and give back what he has taken?

IK Ah my Lord Count, I respect the opinion of your church but I beg to differ. We must understand the broader implications of the interest of a Kingdom. A decrease in the expenditure of the King leads to a decrease in the amount collected in taxation.  I have observed that the reason for this is that the State and the courts represent the greatest market for the world and continued increase of civilization. (vol. 2 p92). 

CB: The greatest market?   

IK: The growth of luxury and civilization is caused by the increase of population and the rise in the standard of living, which are promoted by the government. For the government gathers the wealth of the subjects and spends it on the court and the officials, who have more prestige than wealth.  The money raised from the subjects goes, therefore, to the courtiers whose expenditure finds its way to the large number of private citizens inhabiting the metropolis, who have dealings with the court and officials, whose fortune consequently grows and whose standard of living rises.  These private citizens soon acquire habits of luxury, which promotes the crafts and arts. This is why you find that cities lying on the periphery of the state, even if they be populous, are less civilized and are close to the nomadic stage, unlike those lying in the center of the country, near the metropolis and seat of government. (p.90)

And this, my dear count, is due to the proximity of the King, whose expenditure flows like water, fertilizing all that it touches…(vol. II p 250) p.90

CB: I understand. Common sense tells me, however, that it would be wise for a King to show restraint and at least build a reserve fund for the rainy days? Isn’t this consistent with your law of historical cycles and necessary to prevent, or at the very least slow the decay? 

IK: My Lord, hoarding money is not like hoarding grain or food supplies. Moses’ advice to the Pharaoh was the right advice for the dark years of Egypt. The Pharaoh had to store up in the seven good years to tide one over for the seven bad years.  Egypt needed huge stocks of grain and staples to help its people pull through a severe drought. The ultimate reserve fund for a king is a healthy, vibrant and skilled population. Should the king hoard the sums derived from taxation or otherwise, or should he not have any money to spend, the amount of money in the hands of his courtiers and officials would decrease, as would also the amount available for their retainers and dependents.  Their expenditure would consequently fall off, and as they constitute the most important groups of buyers, business would slacken and the profits of traders would diminish; tax revenue must necessarily also contract, for taxes are levied principally on transactions, market purchases and profits…(vol II p. 91) p91

CB: And the State will suffer owing to the diminution of tax revenues…

IK: Precisely! Observe my Lord, the prosperity of Egypt during the Fatimite period, and the Abbasside Khalifa during the reign of the blessed Haroun el Rashid. They understood that God inspired money to sustain the creation of wealth and our blessed lawmaker himself decreed that those who hoard money are sinners, who offend God’s will.

CB: Then if I understand well, tax revenues are also generated by former state expenditures, not just business?

IK: Absolutely. This economic law is in full agreement with the teachings of the Lawmaker who wrote “one can only spend what has been spent by others.”

CB: Then the worst policy is to raise taxes without any increase in spending?

IK: You could not be more right. In my research on the role of taxes in the decline and fall of empires, I also found that large increases in taxes have signaled the beginning of the decline. The explanation is simple.  When the state abusively increases taxes, it discourages the crafts from applying their skills to the creation of new wealth. 
From this my dear Lord, you must understand that the most important factor making for business prosperity is to lighten as much as possible the burden of taxation on business men, in order to encourage enterprise by giving assurance of greater profits” (88- Vol. II, p.79)

You should distribute taxes among all taxpayers in a fair, just and equitable manner and make them general, not exempting anyone because of his noble rank or great riches, nor even exempting your own officials or courtiers or followers. Do not levy on anyone a tax which is beyond his capacity to pay…(89- Vol. II p. 137 quoted by Ibn Khaldun from Tahir ibn al Hussein)

Taxes should generally remain low and never arbitrarily and indiscriminately increased, for fear of ruining society. This is my third law.

CB My dear Lord could you elaborate on the evidence?

IK: The Abbaside Khalifa collapsed because some ignorant advisors convinced successive khalifs to impose dramatic increases in taxes to pay for mercenaries and purchase luxury imports. This stupidity killed industry and forced the most prominent and highly skilled craftsmen and traders to flee to India, and even to China. Paying for mercenaries or luxury imports sterilizes wealth. According to the Roman historian Titus Livius, the great city of Carthage went bankrupt chiefly because of the extensive use of mercenaries, who spent their money in their homelands…

CB: My Lord Khaldun, I find this law quite stunning, but if taxes are chiefly determined by State expenditures, what is then the ultimate role of taxes?

IK: Taxes recycle or prevent hoarding; hoarding breaks the cycle of prosperity and the creation of wealth. Understanding the relationship between taxation and the sterile accumulation of wealth is key. .. The state must raise taxes when rich people do not spend enough, but must lower taxes as soon as hoarding falls. Most importantly, the state should never hoard money.

This is also necessary because the state must take care of the poor, the widows, the blind and the orphans and pay them special pensions. …And, provided this does not overburden the treasury, my advice to the Sultan is to build hospitals for sick Muslims, with a staff of physicians and attendants who will cure them and minister to their needs. (89- Vol. II, p.139 – quoted from Tahir ibn al Hussein.)

As I said earlier, wealth does not fructify when hoarded and stored in safes; when, however, it is used to improve the condition of the subjects, to safeguard their rights, and to preserve them from harm, it grows and fructifies, greatly benefiting the subjects, as well as strengthening the state and raising its prestige and popularity. The reserve Fund, then should consist of expenditure used to improve the condition of the kingdom and its people (90-Vol II, p.133- Quoted from Tahir al Hussein)

Hoarding must thus be extinguished to achieve durable prosperity and help fund state expenditure on social services. This is the fourth and last law

CB I must ask you this question: to what extent were these principles applied?

IK: My dear Lord, only wise men can rely on the rules of reason. Sadly, very few rulers were wise enough to surrender to the supreme laws of reason, from which these principles derive, and which were all inspired by the Almighty.

As I said earlier, I have found evidence that these principles were applied in the time of the glorious Haroun al Rashid, and later at the apex of the Fatimid dynasty (Coming from Africa ,the Fatimid a chiite sect conquered Egypt in 969. The descendants of their founder ruled as Khalifs until 1191 when Egypt was conquered by Saladin ). I also succeeded in convincing the Castillian Monarch to rely to some extent on these principles. Of course, these principles of policy operate harmoniously only in times of peace. We have been blessed by the peace that has been established between the Christian kingdoms of Castille and Aragon and the Muslims in Spain, thanks to the wise policies of our beloved King of Castille who continued the tradition of Alphonso the Wise, his father.

CB: Now I understand why France is in such a crisis. We are very short of wisdom indeed.  The income of the Crown has collapsed by at least 60 or 70% from its level under the reign of my King’s grandfather, Phillip. The treasury is empty because we had to pay a ransom of four million in gold to free our king who was captured by the English. 

IK: four million!?

CB: Yes, the English are greedy and they have been raiding wealthy estates, kidnapping and looting everywhere. But the war against the English is just one of the many factors afflicting the Kingdom of France. Sadly, my Lord IK, France has broken all your four laws!

IK: My Lord Count, please explain 

CB: We increased our taxes without discouraging hoarding because the high nobility and of course the church escaped taxation. All new taxes are therefore levied on farmers and merchants who are increasingly broke and fleeing the country. This violates your third and fourth laws.

We are also losing our subjects to the black plague while survivors are victims of anarchy and war. Lords are fighting each other and competing for scarce wealth while we are told by the church that the plague has been sent by God and that we must repent for having dared to tax the church. This violates your first law…

Your second law is also broken.  Unlike the King of Castille, the King of France has no real power to coin money . While the Church and the nobility are exempted from taxation, they both levy taxes for their own account.  Very little of the money they raise reaches the king and his coffers are empty. The country is divided. The King has attempted, in vain, to raise taxes both in kind and money. 

To make things worse, most of the gold and silver coinage is hoarded or exported by the church to Rome. Although we need more money, we cannot possibly tax the church which hoards most of the gold in the country for fear of waging another war with His Holiness, the Pope. 

We have the worst of both worlds: Heavy taxes, hoarding and no state expenditures, plus a dwindling population crushed by war. 

IK:  the future appears grim, but let us not despair…

CB: My Lord IK, there is more. A black plague from Hell is ravaging France. Most of our cities are now half-empty and you cannot imagine the horrible situation in the countryside. It is now more deserted than your African desert of the dead (Sahara). Serfs flee their lords, freeholders wander on the roads searching for a New Jerusalem; death is everywhere. Church bells toll day and night mourning the dead and those who would soon be dead. Meanwhile, the Lords are unceasingly competing for what remains of wealth and people. The very holy bonds of chivalry are vanishing as we journey back to the darkest ages. As if the Devil had not enough, the devilish and impious Edward King of the English pretends that he is the true King of France. King Edward was able to raise a full army without having to pay for it, while my master has to buy soldiers from everywhere, even from Andalusia..  The entire resources of the State are absorbed by war and this is not enough to buy the liberty of our blessed King.  

We are advised by the council to reduce our spending, while we need more and more money to pay the army. To complicate matters, people are starving because the prices of crops are higher than any level history can remember, while some feudal lords squander resources in luxury imports. We are told by the most reverend Abbott of Cluny that we should provide the people with food, but how? We are so short of necessities and money that the English will soon overrun us. France is going to the graveyard

IK:  I understand your despair. Such a waste is tragic. But there is still hope. Logically nothing positive can be expected right away, but in the long run nothing is lost.  Your first priority must be to seek a truce with the English.  Together, we must also look at ways to stop the plague… let us have more refreshment. Would you taste an excellent bottle of red wine? It is a gift from the King of Castilla?

CB:  I am touched by your generous hospitality. You are so keen to make me feel better that you purposely forgot the prohibition of your holy book. Let us hope that our bishops and abbots will someday share your enlightenment…

CB: Only God can save the Kingdom of France from a beast which cannot be tamed and which has so many heads.

IK: My dear count, cheer up. I am confident that things will be better in the end…The laws of the universe speak for themselves. 

CB: Maybe so, my Lord, but if I understand your laws, we have passed the point of no return. As you have explained, we are in the last stage of a historical cycle, witnessing the collapse of our society; it happened so many times before. While the old system is dying, a new civilization has yet to be borne. Both my heart -and your first law, tells me that the next generations will have a better future.  However, it is too far ahead in time, and I am not a prophet. 

IK nods silently

CB My Lord, I promise I will have your work translated as soon as possible. Your ideas must become a pre-requisite for the political education of all the Kings of France.  I hope that when the next cycle starts, our Kings will know and will understand your laws and how to use them wisely. 

IK. My dear friend this is a great honor and a magnificent project. Let us take a walk in the rose garden. I want to show you my favorite place.  I call it the gateway. This is where I withdraw for my meditation….

CB Gladly, my Lord IK

IK Perhaps we should now talk about how we can stop the war against the English and fight the plague instead of the English… 
					
***

The Good Count failed to secure the financial support of the King of Castille who feared the English. At the insistence of IK, however, the King promised that he would to use his political influence to mediate a truce.

The CB returned to war torn France in a somber mood. He knew that the time for Ibn Khaldun’s ideas, or for a truth with the English, had not arrived yet. While the 100-year war raged between France and England, the great black plague spread to all Europe and North Africa, reaching its deadly apex. One quarter of the French population died; anarchy and division increased, sinking the kingdom deeper into a civil war. The Crown went completely bankrupt. Ibn Khaldun lost his son to the plague and later, his entire family died in a ship wreck during their journey to Egypt.

An age of darkness had cast its deadly shadow on the Kingdom of France. 

The work of Ibn Khaldun was never translated and his laws fell into oblivion for centuries.

© Alain Parguez, Henri Sader 2000

Alain Parguez and Henri Sader are both economists working to demystify the sacred dogmas  of finance