We suggest that the economic theories study section be opened with the work of Ibn Khaldoun , - the outstanding thinker of the 14th century, who wrote tractates on a wide variety of issues. The importance, significance and truth of his theories have been time-proved. Ibn Khaldoun’s works on economics, economic surplus and economic policy are no less important currently than they were in his lifetime.

Ibn Khaldoun’s Economic Theory

In his work "Muqaddimah" (Introduction to History) Ibn Khaldoun referred to the reasons of the rise and fall of the countries and the peoples. In particular, the scholar laid emphasis on the cuts of government expenditure on the mercenary army. Many developed countries have used the recommendation and this way are increasing the economic surplus, rechanneling the resources to the sphere of education and human potential development.
The scholar was also against the taxation and tariffs impeding trade and production.

He did not approve of the State participation in the production and trade. He was convinced that bureaucrats are unable to understand the commercial activities principles, and do not have the motivation that the merchants have.
He was predicting the relative decrease of the economic surplus and the decline of the countries where the State participates in the trade and production, and considered the large army to be an impediment for the development of trade, production and the economic surplus growth.
Nowadays, the less developed countries gradually begin to realize the common sense of the economic principles formulated by Ibn Khaldoun. Here, the trend towards privatization begins to be noted.

The developed countries are trying to reduce the investments and the expenditure on the army and the military-industrial complex so that to increase the investments in the education, science and technology sphere, in order to increase the private sector enterprizes efficiency and their external competitiveness. Moreover, the same industrially developed countries follow the policy of the preferential tax treatment promoting the prosperity of trade and production.
Ibn Khaldoun considered these and other economic principles that will be discussed below to be a necessary condition for building a civilized society.

Ibn Khaldoun became the first scholar who systematized the functions of the economics; pointed out the importance of the technical base, production and foreign trade specialization for the creation of the economic surplus; as well as analyzed the role of the State and its stabilization policy as the means of productivity and population employment provision.
Besides, Ibn Khaldoun was interested in the matters of the optimal taxation, cuts in the governmental offices, benefits and means of material incentives, organizational structure, legal and regulatory framework, economic expectations, production, and theory of value.

Moreover, Ibn Khaldoun became the first economist who was equipped with the notion of the economic surplus and proposed a biological theory of the boom and bust of nations. His coherent general economic theory defined his approach to history as well.

No one throughout the history of economic thought had created such a consistent theory of general economics that might explain and predict the rise and fall of civilizations, countries and empires, as Ibn Khaldoun did in his "Muqaddimah". His teaching does not only empirically and theoretically explain the consequences of the State policy in the areas of production and trade, the investments and division of labor notions, but also makes it possible to predict to what extent this or that State is viable.

As the State performs key functions in the social, political and economic life of the country, the society's well-being requires that the role and nature of the State be explained. According to Ibn Khaldoun, the role of the State consists in the protection of law and order fostering the economic activities.
Besides, in a civilized society, the protection of property rights, trade routes, peace and stability are necessary for the performance of trade and production. The economic surplus grows in the countries where the State policy is favorable for the economic activities. To provide for the necessary services and the functioning of the relevant governmental offices, the State should collect a minimum amount of the surplus by means of taxation. Ibn Khaldoun considers that the optimum taxation takes place when the State does not impede the production and trade with the taxes.
If the State tries to increase the size of the red tape and the mercenary army by means of the economic surplus overtaxation, the specialization, production and trade will be depressed. As the result, the economic surplus will be reduced.

That is why "the absolute power growth in the State is the reason for the downfall of economic prosperity and, as a consequence, of the State and the city", because the exaction of overtaxes, the bloated mercenary army and the bureaucratic apparatus "impede the economic activities of the entrepreneurs. This leads to the decrease of the aggregate gross revenue of the State and requires the new measures taking for the increase of this revenue: taxes in kind, excise taxes, confiscations and, what is the worst, the direct intervention of the State in the economic activities by means of the participation in the commerce". In Ibn Khaldoun’s opinion, the State should take the responsibility for the changing of the entrepreneurs’ expectations, organizing the social services for the jobs and trust creation.

Within the framework of the stabilization policy, the State must build the roads and commercial centers, as well as take other measures for the trade and production promotion. However, "the direct intervention of the State in the economic activities by means of the participation in the commerce" may cause the decline of the State and its economy.
The State intervention in the commerce itself will lead to the bureaucratic apparatus and army overgrowth. As the result of the governmental interference in the trade and economic affairs, the entrepreneurs will not be able to engage in trade in a normal way and earn the profit from their enterprizes.

The role of the State in the economy stabilization for the giving rise to the surplus demand had been described by Ibn Khaldoun five hundred years prior to Keynes attracting the world’s attention to the necessity of the excess of demand over supply for the increase of productivity and jobs creation.
According to Ibn Khaldoun, the best State is the state with a minimal bureaucratic apparatus, minimal army the task of which is the law and order ensurance, and the minimal taxation of the citizens for the financing of the State activities.

Ibn Khaldoun studied economics, sociology, politology and other sciences with the view to gain insight into the human behavior and the human history. Almost three hundred years before Adam Smith, Ibn Khaldoun said that the division of labor is an important source of the economic surplus. In his opinion, if the environment is favorable for the specialization, the entrepreneur is interested in the further carrying on of trade and production. Really, the specialization occurs where a person is able to gain benefit from the efforts spent.

Subject to the law and order in place, the specialization is connected with the workforce, trade, production and the size of taxation. Here is what Ibn Khaldoun said about how the segregation of various types of labor activities takes place:
"Each separate type of handicraft needs the workers, and moreover, the experienced workers. The more is the number and the variety of the production stages in this or that handicraft, the more people are involved in it. Besides, each group of the workers is doing their own work. Gradually, various types of work are more and more clearly revealed in the handicraft, and the people who are engaged in them, acquire the still greater experience in what they are doing. The time and the permanent repetition of the same actions foster the creation and gradual settlement of the handicrafts".

With these lines, Ibn Khaldoun had so clearly indicated the principle of the mass production, the importance of learning by doing and the upgrading of professional skills, that no more clarification is needed.
According to Ibn Khaldoun, the division of labor suggests the coordination of various functions of the production factors, when "that which has been obtained owing to the interaction in a group of people, shall meet the requirements of many times more people".
Later in the history, Adam Smith spoke on the same subject in connection with an entrepreneur gaining benefit "from the sale of the products of their labor or from what these workers had added to the cost of the processed materials".

Ibn Khaldoun gave a brief economic evaluation of the division of labor and, accordingly, the coherence inside it: "The joint labor produces more than the workers need and require". On the same occasion, he said that "with the help of the workers’ cooperation it is possible to meet the requirements of a much greater number of people than the number of these workers".

Ibn Khaldoun considers that the entrepreneurs’ function is to coordinate and provide for the interaction of the production factors in accordance with the market forces. According to Ibn Khaldoun, subject to the existence of peace, law and order, the more is the population number, the greater is the number of various types of labor activities.

In Ibn Khaldoun’ opinion, it is obvious that the division of labor, subject to the production factors interaction and coherence, becomes a source of the economic surplus. The partial understanding of the origin of this surplus led Ricardo and Marx to the conclusion of the working class exploitation. That is, Ricardo and Karl Marx are only not too diligent students of Ibn Khaldoun, who interpreted part of his coherent theory of the economic surplus. It was just this misconception that let Marx declare that "labor itself is productive".

As labor is the only source of the surplus value formation, capitalists exploit the workers, appropriating this surplus. To eliminate the labor exploitation by the capitalists, Karl Marx suggested that the social structure of society be changed by means of the revolution and the destruction of capitalists.
On the other hand, Ibn Khaldoun, as well, indicates that "the profit that a person makes is the value derived from his work". He says about "the great profit made owing to a large amount of available workforce who creates this profit".
However, at the same time Ibn Khaldoun takes into account not only the workers’ productive activities, but also that of the entrepreneurs as well. And in such a case, one cannot talk about exploitation.

Ibn Khaldoun considers that both the workers and the entrepreneurs are the respected members of the society, who try to get the most out of their activities in the form of profit and wages. For Ibn Khaldoun, profit is the root cause of commercial endeavors, while the profit expectation leads to the production expansion.

Moreover, "commerce implies trying to make a profit by the capital increase, by means of buying the goods at a low price and their sale at a high price". That is, the point is "to buy cheaper and to sell more expensive".

For Ibn Khaldoun it is obvious that "the profit derived by a person, is the value received from the person’s labor", but this value, the value of work force, is determined by the law of demand and proposal. It is just what Karl Marx and his ardent supporters did not take into account. Ibn Khaldoun considers that the coherence, interaction and focus of the production factors at the economic surplus increase is an important and valuable process which the entrepreneur is engaged in, making every effort to obtain benefits from his economic activities. He spends his time, energy and capital on the search of the goods and services, so that "to buy cheaper and to sell more expensive" and to earn the profit.

Ibn Khaldoun values highly the entrepreneurial initiative owing to which the entrepreneurs efficiently coordinate and direct the production factors. It is just for this reason that they quite rightly deserve the profit from their risky ventures.

Again, several centuries prior to the other scholars, Ibn Khaldoun postulated that the price of the goods and services is defined by the demand and proposal. If the item is rare and is in demand, then its price is high. The merchant will buy such an article where it is cheaper and is not deficient, and will sell it where it is scarce and in demand, at a higher price.
Moreover, he proposed the concept of long-term production costs in the Marshall understanding.

Ibn Khaldoun makes a stand for the stable monetary policy. He is against the authorities speculating in the differences of currency value. The scholar warns that the authorities may yield to temptation to devaluate the money so that to build palaces for themselves and to finance the mercenary army. This process leads to the inflation. The population will lose confidence in the currency. The scholar considered that this was unacceptable and not fair.

The protection of the purchasing power of the money, being one of the priorities of the State policy, must be performed in a fair manner. For this, he proposed to establish the independent credit and financial institutions subordinate to the Supreme Judge, a "God-fearing man", who would not let the rulers to manipulate with the monetary value and devaluate the money.
Besides, Ibn Khaldoun spoke of the amount of money as well. The modern theory of money is based on his statement that "the amount of money does not matter for the welfare of the country".

In the scholar’s opinion, the monetary policy must be stable, smart and aimed at the protection of the purchasing power of the money, which is a matter of fairness. The population must be protected from the unjust policy of the rulers who devaluate the money. The stable national currency enhances people’s confidence to the money, trade and production.

Ibn Khaldoun is not only against the State intervention in the production and agricultural activities; he is also against its interference into the goods and services pricing.
If the State is using its powers and force to "buy up the goods at the lowest price", the ruler "may force the seller to reduce the price" and "compels the merchants or farmers, who need the relevant item, to buy from him". The ruler "starts buying up the agricultural products and goods from their owners who come to him, at the prices which he fixes himself in his sole discretion. Afterwards, when a favorable moment comes, he resells the products and goods to the entrepreneurs who are subject to his authority, at the prices that he himself fixes".

The policy of this kind, considers Ibn Khaldoun, entails the following consequences:

  1. "The farmers and merchants are no longer able to independently carry on the trade which made it possible for them to earn and financially sustain themselves";
  2. Having become permanent, such practice "deprives them of any initiative in the entrepreneurship, which ruins the fiscal structure";
  3. "Eventually, the ruler’s participation in the trade may lead to the destruction of culture and civilization";
  4. The fixed prices policy "is even more dangerous, harmful and destructive for the entrepreneurs than the State participation in commerce or agriculture, which quickly turns out to be harmful to the entrepreneurs, becomes disastrous for their income and reduces the cultural activity".

After the 1960-ies, some economists, especially in the USA, began to refer to the matters of the right of ownership and its influence on the economic development. As for Ibn Khaldoun, he made his judgment on the matter a few hundred years ago. Protection and enforcement of property rights must be enshrined in law and are the key to the survival of civilization.

In Ibn Khaldoun’s opinion, "when the initiative to acquire and receive property disappears, the man makes no effort to acquire it. The degree and frequency of violation of the right of ownership defines to what extent the subject's efforts aimed at the property acquisition weaken".

Ibn Khaldoun predicts a decline in the economic activity if the property right is neither protected nor enforced: "If the attacks on property take a broad and universal character, extending to all means of subsistence, business passivity becomes a widespread phenomenon, because the general nature of the infringement of property means the universal destruction of the initiatives in entrepreneurship. Should the attacks on property be insignificant, then the suspension of the activities with the purpose of profit earning will be, accordingly, of short duration".

Civilization, its well-being and the entrepreneurship prosperity depend on the productivity, work force and the various efforts of the people aimed at the interest and profit making. If the people cease to engage in entrepreneurship to earn a living, if they stop doing something bringing them income, a decline in entrepreneurship occurs and everything declines.

Ibn Khaldoun sees a direct connection between the right of ownership and fairness. For him, "a human being continues to exist only owing to the property. The only way to secure the property is to cultivate it. Cultivation is only possible through fairness. Fairness is the balancing principle in the mankind".

Whenever an attack on property takes place, it is an act of injustice. Ibn Khaldoun says that “people who collect the unfair taxes commit the unrighteous. Those who infringe on the property commit the unrighteous. Those who take away the property commit the unrighteous. Those who do not allow people to enjoy their rights commit the unrighteous. Generally, all those who take away the property by force commit the unrighteous”, and "the unrighteous destroys civilization".

Ibn Khaldoun indicates that the importance of the right of ownership and the respect for justice is manifest in Islam. In his opinion, in the absence of justice, "the extinction of the human race takes place. The religious law says wisely about that, emphasizing the necessity of five things: protection of the religion, protection of soul (life), protection of intelligence, protection of the young ones and protection of property".
As "the unrighteous call to eradicate the human race, bringing to the destruction of civilization, this is already a sufficient reason for the injustice to be prohibited".

Thus, Ibn Khaldoun has become one of the few successful theoreticians who had analyzed the behavior of a human being and the human society as a whole and a part of the whole mankind, its influence on the rise and fall of civilization depending on the economic surplus reduction and growth. In Ibn Khaldoun’s opinion, the civilization life cycle ends with the destruction of the superstructure of the society.

At the beginning, "the pursuit of a luxurious lifestyle inspires the man to the heroic deeds, to fight and overcome difficulties, to create. Then the man fights again, but already not for the sake of the hopes he had cherished earlier. Being pushed by the fear of hunger, he fights just to survive, and like a cave man that fought for the same reason, he manifests his animal nature, returning to the life of an animal".

Obviously, Ibn Khaldoun discovered a great number of the fundamental concepts of economics several centuries prior to their official birth. He discovered the importance and the necessity of the division of labor long before Adam Smith, was ahead of Ricardo in the discovery of the labor theory of value, and ahead of the works of Keynes on the functions of the State as a stabilizer of the economy.