It is today commonly believed that free markets and free-market ideology are new Western inventions. In my book The Birthplace of Capitalism: The Middle East, I challenge that notion by pointing out that enterprises, financial institutions, market-based economies, and the intellectual support for economic freedom evolved millennia ago in the Middle East. The book (which is awaiting its international launch) has been received with much enthusiasm, but also some skepticism. I would like to answer this skepticism, to explain that the practices and ideals of voluntary exchange are truly much older than what we commonly today believe.
Did enterprise and sophisticated market practices really evolve in the Middle East 4,000 years ago?
Yes. For long, our knowledge about how the economies of ancient cultures were organized has been limited. More recently, however, historians have found and translated a large number of clay tablets and papyrus rolls from ancient Middle Eastern civilizations. It turns out that writing developed primarily to record economic matters, and much of the writing is reports of various economic transactions. The documents show that private ownership played an important role in early civilization. Yale Law School Professor Robert Ellickson and attorney Charles Thorland explain that in all historic periods studied, individual private land ownership existed at least to some extent in Mesopotamia as well as in Egypt and Israel.
Tablets that have survived from the Assyrian and Babylonian civilizations which document economic affairs often refer to the tamkãrum. Klaas Veenhof and Jesper Eidem, who have written about the history of the Old Assyrian Period, explain that the concept of tamkãrum seems to have somewhat different meanings in different tablets. Broadly, however, the word referred to early capitalist entrepreneurs. The tablets show that the markets in which the tamkãrum were involved included quite advanced concepts, such as commercial partnerships and even joint stock ventures.
Assyria and Babylon
Gojko Barjamovic writes about ancient texts from Assyria, dating some 4,000 years ago, which describe the merchant entrepreneurs of the time. The texts confirm the existence of widely developed financial institutions, specialized agents of trade, complex partnerships, and a juridical foundation for this trade network. They are, in essence, evidence of a relatively complex market model.
In his book The Invention of Enterprise, the American economist Michael Hudson gives some examples of the early Middle Eastern entrepreneurs when he describes “the Egibi and Murashu families of Babylonia in the seventh through fifth centuries BC, who created novel commercial strategies to manage estates and provision the palace and its armed forces.”
It turns out that it was not by chance that Babylonia and Assyria were vibrant economic centers, where much technological achievement happened. It was made possible by the fact that the first enterprises, financial investors, and other building blocks of market economy evolved.
Is it really fair to say that ancient Middle East was a capitalist model?
Capitalism, or a free-market model, is an economic system based on private ownership of the means of production, and also their operation in search of profit. Private property, capital accumulation, wage labor, voluntary exchange, competitive markets, and a price system are the building blocks of capitalism. Although certainly the early model in Mesopotamia was limited compared with contemporary capitalism, it did include key elements such as private property, investments in specialized manufacturing aimed at domestic consumption, as well as exports, market prices, financial speculations, financial partnerships, and private-public contracts. As Dutch historians Robartus Johannes van der Spek and Kees Mandamakers wrote in 2003, ”That market mechanisms played their part in the Babylonian economy seems now to be unquestionable.”
Even more astonishing, the astronomical diaries kept by Babylonian astronomers not only contained daily observations on the position of the moon and the planets, but also information about market prices of commodities such as barley, dates, mustard, sesame, and wool. The prices were recorded monthly, and the records even said what the prices had been at the beginning, middle, and end of each month, as well as how the prices had changed during the weeks.
So, yes, the concepts of enterprise and market economy evolved many millennia ago in the Middle East. Later, we also know that the same concepts developed (probably independently) in China and India. Over time, the economic practices of these ancient civilizations fluctuated between free markets with limited government interference and statist, feudal, and tribal control. Part of the economic model was undeniably free markets. And it continued until the early modern age.
In the 16th century, Portuguese explorer Pedro Teixeira, for example, wrote that “mighty Caravans usually report from all parts of Persia, to Hormuz” in order to trade with the outside world, which would have been the Portuguese, other Christians, Muslims, and people of other religions. The Portuguese explorer explained that Hormuz, the market which he called Gerun, was a free-market city where traders and goods from all parts of the world met. The account even includes “free Mart and Fair,” the contemporary word for a free market. The English translation of the original manuscript reads, “To conclude, Gerun is a free Mart and Fair, for all the World, where there is continually a Trade for all Commodities that can be defir’d, convey’d thither from several Parts, with a mighty Concourse of Merchants of several Nations.”
A market economy is based on a legal code that protects private property and voluntary exchange. Did it really exist in the ancient Middle East?
The earliest known law code is the Code of Ur-Nammu. It was found on a tablet, written in Sumerian, which dates back to around 2100–2050 B.C. At its core, the code protects the private property of farmers. More specifically, it details the punishment prescribed to those who violate the rights of others by growing crops on their land without permission.
Around 1754 B.C. we also have the development of the well-known Code of Hammurabi. Its laws were created to suit the needs of a society in which individual farmers, merchants, and artisans owned property, made contractual agreements with each other, handed out receipts, and invested in enterprises. Individuals were responsible for their actions in the marketplace, while the state was responsible for protecting private property and the right of contract. The punishments dealt out to thieves were severe, even including the death penalty. The Code of Hammurabi regulated the conduct of those persons who engaged in the private marketplace. This early code of law, which played a key role in the development of human civilization, evolved in a market-based economy.
The Middle East and China have a history of vibrant market activity, but is that the same as “free markets”?
One can always enter into a long conversation about what is really a free market. In one sense, there are no free markets, since the state always has some interference in the economy. Also, early market economies were of course less developed than modern capitalism. But it is still the same basic concept that has evolved over time. The big change is that Europe, a part of the world that was hostile to economic freedom for many hundreds of years, began around the time of the Renaissance to evolve a more complex market model — and with time Europe gave rise to modern capitalism, which includes corporations, intellectual property rights, stock markets, modern accounting, and other refinements. Yet, all this progress, as I show in The Birthplace of Capitalism: The Middle East, was building on the earlier market practices of the East.
Here is a simple way of illustrating my point: today Adam Smith is believed to be the modern father of economic and of free-market thinking. Why? In part because he was the first in the world to describe the concept of specialization in the marketplace and also the invisible hand of the free market. According to modern Western thinking, Adam Smith could do so because he was observing the first true free-market models of the world. The truth, however, is that none of his observations was new.
The mercenary-general and historian Xenophon is famous for his writings’ having inspired Alexander the Great to invade Persia. He also wrote about the economic practices of ancient Persia — and his is in fact the first known account of specialization on the marketplace.
In The Foundation of the Market Price System, Milton Shapiro notes that Smith was indeed “twenty centuries after Xenophon” in explaining the phenomena of specialization in the marketplace. Perhaps the fact that two intellectuals, separated by two millennia, reached similar conclusions was a mere coincidence. Another explanation is that Adam Smith copied the ideas of Xenophon, but without giving credit. In his chapter in the book A Companion to the History of Economic Thought, Todd Lowry refers to unpublished notes from Adam Smith to claim that Smith had read the work of Xenophon and developed his ideas from that reading, without crediting the Greek historian:
Adam Smith’s discussion of the pin factory is frequently credited with characterizing modern economic theory, since it was in this context that he elaborated the point that specialization is limited by the extent of the market. Meek and Skinner’s publication of a new set of dated notes of Smith’s lectures identifies his development of this point in 1763, and his lecture reads like a paraphrase of Xenophon’s discussion of the role of the carpenter in small and large cities. Marx quoted the passage from Xenophon in full and attributed to it the formulation of division of labor as correlated with the extent of the market while emphasizing quality, not quantity, in production.
We can also turn to ancient China. It is well known that advanced economic practices existed in ancient China, and that for-profit merchants were responsible for organizing economic exchange. This is, for example, evident in Guanzi, an important 7th-century B.C. political and philosophical text. Guanzi explains how merchants analyzed the markets to understand supply and demand throughout ancient China. The merchants traveled far to secure the most profitable exchange. According to the text, their activity resulted in timely and efficient markets that distributed rare goods throughout the land. It also tells of how the merchants instructed their children in the “language of profit.”
So what we find in the Middle East, as well as in China, are enterprises based on strong protection of private property in the legal code, profit-seeking activity, manufacturing for export markets, early factor markets, financial speculation, and the first written accounts of the invisible hand of the free market. But the story doesn’t stop here: also, the first accounts of free-market ideology are found in the East.
The free-market and fundamental rights worked to reinforce each other in the West. Is there any concept of fundamental, natural rights in the Middle East?
Increasingly, Western academics are pointing to the Middle East as being the first place in which basic human rights (which are natural rights, and therefore arguably predate civilization) were documented. Here, for example, is a text available on the site Humanrights.com:
In 539 B.C., the armies of Cyrus the Great, the first king of ancient Persia, conquered the city of Babylon. But it was his next actions that marked a major advance for Man. He freed the slaves, declared that all people had the right to choose their own religion, and established racial equality. These and other decrees were recorded on a baked-clay cylinder in the Akkadian language with cuneiform script.
Known today as the Cyrus Cylinder, this ancient record has now been recognized as the world’s first charter of human rights. It is translated into all six official languages of the United Nations and its provisions parallel the first four Articles of the Universal Declaration of Human Rights.
In Xenophon’s retelling of a Persian story about the very same Cyrus the Great, the world’s first known defense of voluntary market exchange takes form. While a young prince, Cyrus is asked by his teacher to judge a case. The case is about a tall boy who forces a smaller boy to exchange coats. Typically, when the stronger (tall boy) forces the weaker (smaller boy) to certain economic transactions, we will see the strong benefiting and the weak losing out. If such a case had been presented to the young prince, it would be obvious that it was unjust. But the story of the coat adds a complexity: the tall boy exchanges a shorter coat to the smaller boy, and takes from him a longer coat, and so the transaction favors both parties. The young Cyrus mistakenly believes that the rule of law should be based on whether the economic exchange favored both parties or not, and thus rules it just. He is flogged for this wrong verdict by his teacher, who explains that the rule of law should uphold private property rights and an exchange should be judged only by whether or not it is voluntary.
China and Islam
That is the very basis of free- market ideology, captured in a short story. While the story is the first known account of free-market ideology, it is far from alone. Around 500 B.C., Lao-tzu founded Taoism in China. This Chinese intellectual, who advocated personal and economic freedom, is known as the first libertarian. Around 300 B.C., Mencius, the second-most influential Confusion philosopher, had advanced theories on why market price-setting should be free and property rights protected. Mencius believed that it was wrong for the state to tax market transactions and advocated the rights of the individual.
During the Islamic golden age, numerous intellectuals in the Middle East and North Africa wrote extensive texts defending wealth accumulation and rational self-interest; they explained that government intervention in the marketplace was wrong and vividly argued against high taxes. Around A.D. 1380, for example, Tunisian Islamic scholar Ibn Khaldun, one of the fathers of modern economics and social sciences, wrote extensively on how high taxes destroy societies. Arthur Laffer, the contemporary economist known for the same theory, himself gives credit to Ibn Khaldun.
The intellectual tradition of free markets, much like the practice of market economy, evolved in the East many centuries and even millennia before it reached the West. That may be a controversial claim, but it is supported by the facts at hand. The West has given rise to the modern market economy, and the modern intellectual tradition in support of voluntary exchange, wealth accumulation, and limited government. But all of it is a continuation of the same traditions from the East. The ideals of liberty are, in my view, the best example of how the East and the West have cooperated in creating a better world. After all, modern capitalism and the Renaissance evolved in Italian city states such as Venice, Florence, and Genoa — in a time when they were engaging in extensive trade with Muslims and Jews. Before colonial powers such as the Portuguese and the British started sinking Middle Eastern trade ships and sought to monopolize the world trade, Italian merchants were linking Europe to the free-market system of the Silk Road. Keeping with the Middle Eastern tradition of ending stories with a cliff-hanger I will say that this fascinating cross-cultural exchange, which gave birth to modern market economy, is a story to be told another time.
This article was originally published in the December 2018 edition of Future of Freedom.