Did Islam create capitalism?

To answer this question we need a definition of capitalism.

According to Dr. Benedikt Koehler, it’s a society in which governments do not intervene in the market practices of entrepreneurs.

If this is the case, it could easily be argued that the Prophet Muhammad (s) set the foundations of capitalism.

The Prophet’s economic policies in Madinah, which included starting a tax-free market and refusing to fix food prices showed his understanding of fiscal competition and the importance of market forces.



This led to a spirit of exploration, initiative, and entrepreneurial innovation, which are characteristic of a capitalist society.

In fact, the Prophet’s statement “Prices are in the Hand of God,” where he refused to set market prices is one of the seminal statements in the history of economic thought says Koehler.

Adam Smith’s famous statement “markets are guided by an invisible hand,” the idea that market forces should occur organically, was practically said by the Prophet 1,000 years before, not just as a theoretical concept but as a practical policy guideline.

There were also three important Islamic innovations that had a huge impact on the future:

1. The Waqf (a charitable endowment for public welfare), which was set up a few years before the Prophet (s) passed away.

2. The gold coin created by the caliph Abdul Malik to create stable money, the first time it was created outside of Europe.

3. The Funduq, which was where traders from abroad could bring their goods, store them and sell them. This promoted international trade and it was primarily Italians who used these, benefitting from tax privileges and legal protections. You can think of it as an offshore trade center.

“In Islam, you have something that is very unusual for a religion: You have a religion that the prophet is an entrepreneur and the first convert [to Islam, Khadija] is a female venture capitalist,” says Koehler,

Unfortunately today we have an excessive and monstrous form of capitalism which leads to inequality, the inhumane treatment of workers and pollution.

While Islam is not capitalist per se (nor socialist or any other system we have today, it’s unique) an Islamic form of capitalism would curb or remove these excesses, because the faith encourages and mandates good, ethical conduct in business, not just profit.

While you can never have a truly free market – there will always be some kind of state interference – according to Islam, minimal state involvement is the best way for an economy to flourish.

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