The worsening economic crisis in Iran reflects a deeper malaise in the structure of the political economy of the country. Defined by a ‘mercantile mentality’, Iran’s economy is shaped by short-termism, opaqueness and a lack of accountability that determines, and is itself defined by, the absence of the rule of law. Such a mentality does not preclude industry, but it does define the way it is managed, with widespread inefficiency and corruption acting as a deterrent to any form of private investment. This failure to think strategically is most explicitly and catastrophically witnessed in the state’s environmental and water management. The Islamic Republic of Iran has a political economy defined by the ceaseless extraction of wealth, with a system of governance that is defined by it and reinforces it: it is the extractive state par excellence.

The carpet trade in Iran, traditional and long established, is emblematic of the wider economic relations that shape and define the political economy of Iran to this day. Persian carpets have long been famous in the West as a high-value asset, a luxury item and, above all, a status symbol. They have in the western imagination been closely associated with the opulence of Persia, and if its identification with luxury carpets long predates the western encounter, it was the West and western art dealers that firmly established the ‘Persian carpet’ as an object of desire.

Identified with the ‘bazaar’, the traditional marketplace, it is a mentality that has succeeded in permeating much of economic and, by extension, political life in Iran, reflecting the influential role the ‘bazaar’ has played in the political economy of the country. It should come as no surprise that the bazaar – the mercantile community around which much of the country’s economy revolved – was at the forefront of the response to the challenge posed by the West in the 19th century.

The industrial West did not just pose a political and ideological challenge, but also an immediate economic one as Iran became incorporated, somewhat reluctantly, into the global economic system that was emerging. The emerging and competing imperial powers of Russia and Britain sought a range of concessions for trade which not only allowed their cheaper goods easier access to the Iranian market, but in time sought to control aspects of that market. One attempt by a British entrepreneur to take control of the market in tobacco famously led to a revolt in 1891, which is generally considered a moment of ‘political awakening’. The Tobacco Revolt, which presaged the Constitutional Revolution in 1906 and the political realignment of the country towards the modern age, has tended to overshadow the traditional resistance to change that the mercantile community represented. Keen to restore sovereignty, it was not always clear that they accepted the need to adapt the economic system that dominated in Iran.

Students of Iranian development have tended to focus on political change, acutely aware that the sort of data required to conduct an economic analysis does not exist. Iran was far from a bureaucratic state in the 19th century, and there are few, if any, reliable records of economic activity beyond those compiled by foreign diplomats. When Marx and Engels sought to extend their critique of capitalism beyond the bounds of Europe, they found themselves stumped by the absence of data. Engels at least found learning Persian much easier than Arabic and claimed he could read Persian poetry in a matter of weeks, but there was little of substance to inform their economic ideas.

Consequently, Iran is generally viewed in this period as ‘pre-capitalist’, or indeed lumped within Marx’s somewhat general outline of the ‘Asiatic Mode of Production’, which posited some interesting ideas about the nature of Oriental despotism and the atomisation of society on which it depended. But the ‘Asiatic Mode’ has been regarded by scholars as too much of a ‘catch-all’ category for large areas of the world, which Marx was not able to interrogate sufficiently but that he felt, for the sake of completeness, needed to be covered.

I would like to argue that a better way to understand the working of the bazaar in Iran is to apply one of Marx’s other ideas about the origins of capitalism within the mercantile communities of early modern Europe: what he defines as ‘merchant capital’ but which I will describe as ‘mercantile capital’ in order to emphasise that what is being outlined is a mentality rather than a socio-economic group. This is important because, understood as a mentality, we can see how a particular approach to economic activity is not the preserve of a single group and has, in practice, extended well beyond the traditional merchant community – bazaar – to infect all parts of Iran’s political economy.

Marx’s discussion of ‘merchant capital’ appears in volume III of Capital, so it should come as little surprise that most scholars, even avowed Marxists, have barely engaged with it, but it does offer intriguing insights into the functioning, perils and pitfalls of this particular type of capital accumulation. Marx was seeking to look at the roots of the development of capitalism and drew on the earlier work of Adam Smith, who noted  in The Wealth of Nations that:

The inhabitants of trading cities, by importing the improved manufactures and expensive luxuries of richer countries, afforded some food to the vanity of the great proprietors, who eagerly purchased them with great quantities of the rude produce of their own lands. The commerce of a great part of Europe in those times, accordingly consisted chiefly in the exchange of their own rude produce for the manufactured produce of more civilised nations… When this taste became so general as to occasion a considerable demand, the merchants, in order to save the expense of carriage, naturally endeavoured to establish some manufactures of the same kind in their own country.

The key difference between this and fully developed capitalism was that one was defined by trade and the profit that arose from exchange and the other by production. One required volatility and had short-term horizons, the other demanded stability and investment and, by necessity, had a long-term perspective. It was the latter, industrial capitalism, which, in Marx’s thesis, was the truly revolutionary mode of production on which modernity hinged.

Merchant or mercantile capitalism was the oldest historical example of capital at work, but it predated and presaged industrial capital and, importantly, should not be considered a subset of the latter. That is not to say they may not co-exist, but they are distinct, and where mercantile capital predominates it serves as an obstacle to the emergence of industrial capitalism; it must decline in importance as the latter emerges.

Moreover, while production and manufacture exist in mercantile capitalist systems, they do so as a consequence of merchants seeking to maximise profits by engaging in production, albeit from the perspective of a trader rather than a producer. Again, it is the mentality that matters. Industrial capitalism similarly fosters trade, but the point of origin is manufacture, and that provides the basis for expansion of trade.

Mercantile capitalism needs very little by way of institutions or structure to operate. In Marx’s telling:

Since merchant’s capital is penned by the sphere of circulation, and since its function consists exclusively of promoting the exchange of commodities, it requires no other conditions for its existence – aside from the underdeveloped forms arising from direct barter – outside those necessary for the simple circulation of commodities and money. Or rather, the latter is the condition of its existence.

This is important because, while mercantile capital might have a system of trust, it requires no laws, and, if anything, eschews transparency. What it requires is a personal network and circulation, the more rapid the better; and access to goods, ideally the trade of sophisticated goods to an underdeveloped economy in exchange for raw materials. Smith’s allusion, quoted above, to the import of luxury goods to ‘great proprietors’ in exchange for the ‘rude produce’ of their own lands serves as a good description of trade in luxury imported items for oil that characterises the economy of the Islamic Republic.

Marx never explains how mercantile capitalism transitions into industrial capitalism. The first is a precondition for the latter, but it does not automatically develop towards it and, on the contrary, has the tendency to hinder it. The suggestion is that political factors are decisive in order to catalyse change in the mode of production, and where political circumstances are ill-suited to this, the mercantile system persists. This worsens ‘the condition of the direct producers, turns them into mere wage-workers and proletarians under conditions worse than those under the immediate control of capital, and appropriates their surplus labour on the basis of the old mode of production’.

Viewed from this perspective, the resistance posed by the mercantile communities to western economic penetration in the 19th century can be seen as more reactionary than progressive. This was fundamentally about protecting interests, not an exercise in nationalist resistance to imperial penetration, as it is often portrayed today. Those Iranian statesmen who, failing to persuade the shah of the merits of political reform, decided to seek an economic route to change by inviting in foreign business interests through the offer of generous concessions, were perhaps more creative in their approach to reform than posterity has judged. Though at the same time one must concede that the dominance of the mercantile mentality had a deleterious effect on westerners, too. The Tobacco Concession of 1890, which was successfully resisted by a coalition of the bazaar, clerics and intellectuals, was not an exercise in industrial capitalism but a trade concession pure and simple.

The Constitutional Revolution of 1906 was the first serious step towards the modernisation of politics in Iran, a new frame of reference within which industrial capitalism might develop. In the event, a lack of institutions hampered progress, which stuttered to a halt, and the country limped towards the Great War with a central government that was unable to govern. The only significant industrial capacity that the country was to develop occurred under the guise of another concession, for oil. This was granted to the British-Australian entrepreneur William Knox D’Arcy in 1901. Oil was finally discovered, after much anxiety, in south-western Iran in 1908.

Despite the fame that was to accrue to the Anglo-Persian Oil Company (APOC – from 1935, Anglo-Iranian Oil Company, AIOC), its beginnings were inauspicious. If Winston Churchill as First Lord of the Admiralty understood the importance of oil, it was not until after the Great War that the impact of this new industry began to be felt in Iran. By this stage, the Constitutional Revolution had entered a new phase of autocracy – ‘enlightened despotism’ – in the view of the many intellectual supporters of Reza Khan, who became the founder of a new Pahlavi dynasty in 1925 as Reza Shah. The modernisation ambitions of the constitutionalists were to be progressed by an autocrat who could ride roughshod over objections and impose change.

Yet notably, if significant changes were made to the architecture of the new state, it failed to provide a coherent legal framework for an industrial take-off. What limited industry did develop was state-led, and by the 1930s the largest industrial conglomerate in the country by some measure remained the AIOC. For all its subsequent notoriety, the AIOC transformed the industrial landscape of Iran, catalysing a sea change in working culture and effectively fostering the country’s first ‘working class’, complete with the emergence of new political ideas, such as communism. In 1929 AIOC employed 15,245 people, tripling to some 55,000 in 1949. Such was the rapidity of its growth that the company imported labour from the Indian sub-continent to compensate for what it perceived to be the lack of reliable labour in Iran.

This mode of development operated at an accelerated rate under Reza Shah’s son, Mohammad Reza Shah (1941-79). The development of the state, which had begun under Reza Shah, witnessed the development of a judiciary, but the legal system served the burgeoning state and failed to provide an environment sympathetic to free-market, private-sector industrialisation. The industrialisation of the country remained state-led, and the state was identified with the person of the shah. The result was the persistence of a fragile state, opaque and dependent upon the authority and power of the ruler.

None of this was conducive to long-term industrial planning, unless it was guided and implemented at the highest levels, and there was little incentive for the dominant mercantile mentality to change. Acutely aware of the inherent volatility of the political situation, the dominant mode of capital accumulation remained mercantile – the acquisition of capital continued through trade, preferably rapidly and with the minimum of transparency. This situation was reinforced after 1973 when the exponential rise in the price of oil provided Iran with a surfeit of liquidity.

With a limited industrial capacity, much of this new capital flowed into the purchase of manufactured goods from abroad and the development in Marxist terms of a ‘comprador bourgeoisie’, politically connected and now increasingly rich. Those elements of the traditional bazaar that bought into the Pahlavi state reaped the benefits. Many others excluded from this bonanza could only watch in envy (and no little disgust), as did many other ordinary Iranians, at the explosion in corruption and the inflation that followed. Many were impressed with the might of the new Iranian state, supposedly the Japan of the Middle East, but few bothered to dig deeper beneath the surface. A good comparison would be Habsburg Spain, the ‘superpower’ of early modern Europe, for whom the silver of the New World flowed in and out with alarming ease, such that its ‘power’ was to prove all too transient.

The fate of Iran was to be, on multiple levels, much worse. In the 1970s, the Shah, suffused with oil wealth, sought to tackle the mercantile mentality not by changing the political framework – something he might have done with much more ease than his predecessors given his overall position – but through physical imposition. His intention by the end of the 1970s to physically transform the bazaar had more to do with aesthetics than attitudes (though there was the view, as with his father’s dress codes, that one would lead inexorably to the other).

In the event, the bazaar, along with many other parts of Iranian society, revolted, resulting in a dramatic retrenchment of traditional norms, identified in the literature with the dominance of the clergy but driven by the bazaar and the mercantile mentality they championed. What limited progress the shah may have made now fell by the wayside, and commerce, to paraphrase Marx, returned with a vengeance to dominate industry. Not only did members of the traditional mercantile community seize control of the state industries but they occupied the space vacated by many of the ‘bourgeoisie’ who had now fled the country.

Their demands for an Islamic system of governance with limited taxation and interference soon faced the real practical problems of running a modern state, but what emerged was the worst type of hybrid political economy in which a revolutionary class versed in the tradition of mercantile capitalism eschewed investment in favour of systematic extraction. This was mercantile capitalism, compounded by authoritarianism and empowered by revolutionary – often paranoid – ideology.

As Marx notes: ‘Merchant’s capital, when it holds a position of dominance, stands everywhere for a system of robbery, so that its development among trading nations of old and modern times is always directly connected with plundering, piracy, kidnapping, slaves, and colonial conquest.’ The important distinction to note here is that these processes occurred within Iran before they moved beyond its borders. The plundering, piracy and kidnapping (hostage taking), as well as the colonisation of the mind, took place within the body politic of Iran as much as, and before, it extended its influence outwards. This political economy was re-entrenched during the presidency of Hashemi Rafsanjani (1989-1997), the epitome of the mercantile president, the self-proclaimed ‘general of reconstruction’, who sought to mould the postwar Islamic Republic in his own image.

Anxious to retain political control both within his own person and the broader revolution, Rafsanjani echoed previous rulers in failing to take the necessary steps to change the political economy, for fear of losing power – a natural and inevitable consequence of transparency, accountability and the rule of law, necessary prerequisites for investment and industrialisation but anathema to the mercantile mentality. The latter, therefore, conspired with and reinforced the move away from any restructuring of the political economy.

One immediate consequence of this for Rafsanjani and his successors was a failure to secure any form of serious investment either from Iranians or indeed foreign companies, who approached the opaque environment with trepidation. As one foreign businessman noted to me, why should we invest when the Iranians don’t? Any investment, certainly of a strategic nature, tended to be handled by the state, which of course served to strengthen the state further against any embryonic private sector.

The belief that an oil company might be big enough to overcome these difficulties was quashed not only by the real difficulty of navigating the Iranian economy but also by sanctions. International sanctions were not the cause of Iran’s economic difficulties (many Iranians note that ‘internal’ sanctions – red tape and corruption – are much worse), but they did exacerbate those difficulties, and it should come as no surprise that those who gain most from Iran’s eclectic and opaque political economy favour the retention of sanctions. Moreover, sanctions at the very least allow for the passing of blame elsewhere.

The problems are much more serious. The mercantile mentality makes Iran’s integration into the global economy considerably more problematic. Not only are attitudes to capital accumulation different, they speak a different language. This became apparent in the relatively halcyon years of the Rafsanjani presidency during the 1990s, when engagement with the outside world was encouraged on the basis that it would help with Iran’s exports. A reluctance to sign up to standards and conventions (such as those fostered by the World Trade Organization) may have prevented western ‘penetration’ of the Iranian economy, but it also hindered Iran’s ability to sell abroad.

A good example of Iran’s ability to squander its international markets can be seen in the fate of its traditional carpets. Iran’s carpet merchants approached their business from a commercial rather than a manufacturing mindset, complacent in the belief that their brand was secure (Iranian carpet merchants, unlike their Turkish counterparts, rarely haggled).

Their products were high-end luxury items, handwoven by villagers in appalling conditions, with no rights and no prospect of benefiting financially from their handiwork. As demand grew, so commissions increased, and carpet merchants were able to turn an impressive profit for items acquired at a fraction of the cost they sold them for. Marx provides a good description of what happens within Iran, where the rights of traditional workers are effectively non-existent: ‘So long as merchant’s capital promotes the exchange of products between undeveloped societies, commercial profit not only appears as outbargaining and cheating, but also largely originates from them.’ At the microeconomic level this is the extortive economy of an extractive state.

The interesting aspect of this market, as noted above, was that it was cemented by western art dealers, not the merchants themselves, reinforcing their complacency. When, after a decade of revolution and war, Iran’s carpet merchants sought to re-engage their international market, they found a distinctly difficult environment. Not only was the West no longer a captive market, tourism had also been devastated. But even more problematic was that others had muscled into their market. The handwoven luxury market remained, but this was not a mass market, and, the older the carpet, the better its value. Machine-woven carpets principally from India and China had stolen a march, and the Iranians found themselves frantically trying to catch up, but their own approach and attitude to business hindered them. Even when the traditional bazaar eventually sought help from the government, they found a mentality that reflected their own attitudes and complacency back at them.

What is remarkable about the political economy of Iran is that it is a traditional – pre-modern – system seeking to navigate its relations with a global system that has moved on. The belief that international markets are just waiting for Iran’s return is widespread among the revolutionary elite and was witnessed with Rouhani’s somewhat fanciful notions in 2016 that other airlines would simply move aside to allow Iran Air to re-establish its traditional routes. Significant steps were taken during the Pahlavi era, but they were far from enough to prevent a retrenchment of traditional systems after the revolution.

The mercantile mentality – short-term, opaque and unaccountable – has infected much of the political economy of Iran, both feeding and in turn being reinforced by a revolutionary ideology and a retrenching autocracy. It drew comfort and became complacent from a wealthy inheritance and steady (if now diminishing) oil revenues, hiding behind the hostility of the West and sanctions (largely self-inflicted) to excuse any serious attempt to address the problem. There are many Iranian economists who understand the scale of the problem, and they are also aware that Iran faces a very Soviet dilemma. Structural reform – political and economic – is essential if Iran is to realise its potential, but the stark reality is that, with diminishing popular legitimacy, the first casualty of such a process will be the revolution and the ‘mercantile bourgeois’ republic it created.