Introduction

The present chapter focuses on international relations and addresses two complementary aspects of the place of the Ottoman Empire in the wider international community. Thus, it explores the empire's relations with other states, empires, and nations, as well as its diplomatic strategies. The chapter offers a distinctive commentary on the global order through the Ottoman perspective. It first focuses on the changing place of the Ottoman empire in the international order, 1700–1922, as it declined from first- to second-rank status. It then examines the changing diplomatic tools employed in dealing with other states, particularly the shift from occasional to continuous methods of diplomacy. Another diplomatic tool, the caliphate, gave the Ottoman state a special religious instrument that it increasingly used for secular state purposes from the eighteenth century onwards. And finally, the chapter provides an overview of Ottoman relations with Europe, central Asia, India, and North Africa.

The Ottoman Empire in the international order, 1700–1922

The place of the Ottoman state and any political system in the international order is a function of many factors, sometimes demographic and economic power. A large and densely settled population is not always a certain barometer of political importance: consider the vast power of eighteenth-century Prussia with its tiny population and the political weakness of nineteenth-century China, the world's most populous country at the time. In the Ottoman case, a relative decline in the global importance of its population paralleled its fading international political importance.

Introduction

During the long nineteenth century, 1798–1922, the earlier Ottoman patterns of political and economic life remained generally recognizable. In many respects, this period continued processes of change and transformation that had begun in the eighteenth century, and sometimes before. Territorial losses continued and frontiers shrank; statesmen at the center and in the provinces continued their contestations for power and access to taxable resources; and the international economy loomed ever more important. And yet, much was new. The forces triggering the territorial losses became increasingly complex, now involving domestic rebellions as well as the familiar imperial wars. Domestically, the central state became more powerful and influential in everyday lives than ever before in Ottoman history, extending its control ever more deeply into society. Its primary tools of control changed from consumption competitions and tax farms to a much larger and professional military and bureaucracy. As a part of the effort to more fully control its population, the state redefined the status of Muslims and non-Muslims and, after some delay sought, towards the end of the period, to re-order the legal status of women as well. And finally, a new and deadly element evolved in the Ottoman body politic – inter-communal violence among Ottoman subjects – that attested to the power of these accelerating political and economic changes.

The wars of contraction and internal rebellions

By the twentieth century, the Ottoman Empire in Europe had receded to a small coastal plain between Edirne and Istanbul.

Introduction

As the following chapter makes clear, history is not merely about leaders and politics but also the masses of people and their everyday lives. In the following pages, I tell about the ways Ottoman subjects earned livelihoods in the various sectors of the economy. This overview of the Ottoman economy is not a lesson in elementary economics, overflowing with statistics at micro- and macro-levels. Rather, it is designed to demonstrate how people in the Ottoman Empire made their livings and how these patterns changed over time. To achieve this goal, the chapter emphasizes a complex matrix that relates demographic information on population size, mobility, and location with changes in the significant sectors of the economy. After reviewing population changes, the chapter turns to the first sector, agriculture that, in 1700, was the dominant economic activity, as it was virtually everywhere else in the world. The chapter then turns to each of the other economic sectors in which people worked – manufacturing, trade, transport, and mining – in the rank order of importance just listed. As will become evident, although the economy remained basically agrarian, agriculture itself changed dramatically, becoming more diverse and more commercially oriented. In addition, Ottoman manufacturing struggled first with Asian, then with European competitors, yet obtained surprising levels of production. If these transformations did not lead to anything approaching an industrial revolution, they nonetheless did sustain improving levels of living until the end of the empire.

Introduction

The era from 1300 until the later seventeenth century saw the remarkable expansion of the Ottoman state from a tiny, scarcely visible, chiefdom to an empire with vast territories. These dominions stretched from the Arabian peninsula and the cataracts of the Nile in the south, to Basra near the Persian Gulf and the Iranian plateau in the east, along the North African coast nearly to Gibraltar in the west, and to the Ukranian steppe and the walls of Vienna in the north. The period begins with an Ottoman dot on the map and ends with a world empire and its dominions along the Black, Aegean, Mediterranean, Caspian, and Red Seas.

Origins of the Ottoman state

Great events demand explanations: how are we to understand the rise of great empires such as those of Rome, the Inca, the Ming, Alexander, the British, or the Ottomans? How can these world shaking events be explained?

In brief, the Ottomans arose in the context of: Turkish nomadic invasions that shattered central Byzantine state domination in Asia Minor; a Mongol invasion of the Middle East that brought chaos and increased population pressure on the frontiers; Ottoman policies of pragmatism and flexibility that attracted a host of supporters regardless of religion and social rank; and luck, that placed the Ottomans in the geographic spot that controlled nomadic access to the Balkans, thus rallying additional supporters.

Introduction

This chapter continues the emphasis presented in chapter 7, a depiction of the everyday lives of Ottoman subjects. To do so, it draws on an unusual body of literature to look at social organization, popular culture, and forms of sociability and it offers a cultural investigation into various forms of meaning. Societies as complex as the Ottoman are to be understood not only in terms of administrative decrees, bureaucratic rationalization, military campaigns, and economic productivity. They structure spaces within which people think about the common issues of life, death, celebration, and mourning. Often those spaces are highly gendered and at other times they bring men and women of certain classes together.

An overview of social relations among groups

All societies, including the Ottoman, consist of complex sets of relationships among individuals and collections of individuals that sometimes overlap and interlock but at other times remain distinct and apart. Persons assemble voluntarily or gather into a number of often distinct groups. On one occasion, they might identify themselves or be identified by others as belonging to a particular group, yet at other times another identity might come to the fore. At a very general level, the Ottoman world may be described as holding the ruling and subject classes and also divisions by religious affiliations such as Sunni Muslim or Armenian Catholic. There were also occupational groups, sometimes but not always organized as corporate groups (esnaf, taife) that we call guilds, as well as huge groups such as women, peasants, or tribes.

The writing of the history of the Ottoman Empire, 1300–1922, has changed dramatically during the past several decades. In the early 1970s, when I began my graduate studies, a handful of scholars, at a very few elite schools, studied and wrote on this extraordinary empire, with roots in the Byzantine, Turkish, Islamic, and Renaissance political and cultural traditions. Nowadays, by contrast, Ottoman history appropriately is becoming an integral part of the curriculum at scores of colleges and universities, public and private.

And yet, semester after semester I have been faced with the same dilemma when making textbook assignments for my undergraduate courses in Middle East and Ottoman history. Either use textbooks that were too detailed for most students or adopt briefer studies that were deeply flawed, mainly by their a-historical approach that described a non-changing empire, hopelessly corrupt and backward, awaiting rescue or a merciful death.

This textbook is an effort to make Ottoman history intelligible, and exciting, to the university undergraduate student and the general reader. I make liberal use of my own previous research. Moreover, I rely quite heavily on the research of others and seek to bring to the general reader the wonderful specialized research that until now largely has remained inaccessible. At the end of each chapter are lists of suggested readings, not always those used in preparing the section. Given the intended audience, only English-language works are cited (with just a few exceptions).

Introduction

This book owes its origins to an event that occurred in Vienna in the summer of 1983, when lines of schoolchildren wound their way through the sidewalks of the Austrian capital. The attraction they were lining up for was not a Disney movie or a theme park, but instead a museum exhibition, one of many celebrations held that year to commemorate the 300th anniversary of the second Ottoman siege of Vienna. In the minds of these children, their teachers, and the Austrian (and, for that matter, the general European) public, 1683 was a year in which they all were saved – from conquest by the alien Ottoman state, the “unspeakable Turk.”

The Ottoman state had emerged, c. 1300, in western Asia Minor, not far from the modern city of Istanbul. In a steady process of territorial accretion, this state had expanded both west and east, defeating Byzantine, Serb, and Bulgarian kingdoms as well as Turkish nomadic principalities in Anatolia (Asia Minor) and the Mamluk sultanate based in Egypt. By the seventeenth century it held vast lands in west Asia, North Africa, and southeast Europe. In 1529 and again in 1683, Ottoman armies pressed to conquer Habsburg Vienna.

The artifacts in the Vienna museum exhibit told much about the nature of the 1683 events. For example, the display of the captured tent and personal effects of the Ottoman grand vizier illustrated the panicky flight of the Ottoman forces from their camps that, just days before, had encircled Vienna.

Overview

A core objective of asset market theory is to explain the risk premium, µj − r0 (the expected rate of return minus the risk-free rate), for each asset. One of the most widely discussed explanations is that provided by the capital asset pricing model.

The CAPM extends the mean-variance model of portfolio selection for an isolated individual investor to the market as a whole. It addresses the question: if all investors behave according to a mean-variance objective and if they all have the same beliefs (expressed by the means and variances of asset returns), then what can be inferred about the pattern of asset returns when asset markets are in equilibrium (in the sense that ‘supply = demand’ for each asset)? Equilibrium does not require that prices are constant across time; it assumes that at each point of time prices adjust so that the demand to hold each asset equals its total stock.

The static version of the CAPM in the presence of a risk-free asset is sometimes known as the Sharpe–Lintner model, named after its originators in the 1960s. If a risk-free asset is absent, the CAPM is referred to here as the ‘Black CAPM’ after its originator, Fischer Black.

The steps in this chapter, listed according to section, are as follows.

1. Assumptions of CAPM. The conditions underlying the CAPM's predictions are outlined in section 6.1.

2. […]

Overview

Financial swaps, like ice cream, come in a variety of flavours and packaging. An early flavour, popular since the 1970s, is the foreign exchange swap, an arrangement in which one currency is exchanged for another at regular intervals over an agreed time period. These foreign exchange (currency) swaps, together with several other sorts of swap, are described in section 17.1, where their affinity with forward contracts is explained. Also described here are ‘swap futures’, a sort of futures contract involving not the delivery of swap contracts themselves but, rather, cash settlements based on interest rate movements, which are relevant in many swap agreements.

Section 17.2 applies an elementary comparative advantage argument that provides a rationale – not the only one – for the existence of swaps. Although swaps are acknowledged to be low-risk financial instruments, they are not risk-free; the attendant risks are outlined in section 17.3. During the life of a swap, the parties to it may need to determine the swap's market value – i.e. what a third party would be prepared to pay for it. This is the subject of section 17.4. Finally, section 17.5 reviews the case of Metallgesellschaft, a large German conglomerate that incurred damaging losses from trading in derivatives, of which swap contracts were a significant component.

Swap agreements: the fundamentals

Swap contracts often include complicated provisions that tend to obscure their fundamental principles – principles that turn out to be simpler than they appear at first glance.

Overview

Futures contracts and the markets in which they are traded represent one of the most important classes of financial derivatives. A crucial feature of futures contracts is that certain actions, such as the delivery of some asset or commodity, are deferred from the present to a determinate date in the future, though many aspects of the actions to be executed are agreed at the outset. But at least as important as this is the fact that futures contracts are themselves traded. Thus, it is necessary to distinguish between the promise to deliver (the futures contract) and whatever object it is that is to be delivered (the underlying asset).

It may seem puzzling that the promises to deliver may, and very often do, vastly exceed the total amount of the commodity that could conceivably be delivered. This chapter, and the following two, seek to demystify what at first sight may appear to be the magical operation of futures markets. Once the specialized jargon and administrative complexity are stripped away, the principles of futures trading become much less puzzling, and, indeed, can be understood by applying conventional economic reasoning.

Futures contracts evolved from a simpler sort of agreement, the forward contract. Section 14.1 begins by describing forward contracts, the features of which serve to highlight the distinctive aspects of futures markets. Having described the main characteristics of futures, section 14.2 outlines how futures exchanges operate in practice.

Overview

This chapter explores in greater depth than chapter 4 the study of portfolio decisions when investors act to optimize a mean-variance objective function.

In addition to its significance as a testable theory of asset demand, mean-variance analysis plays two other roles: (a) it provides a method for the practical construction of portfolios; and (b) it forms the foundation for the capital asset pricing model, the subject of chapter 6.

Although mean-variance analysis and the CAPM are close relatives, it is important to distinguish between the two. Mean-variance analysis provides a theory of individual behaviour regardless of whether the market, as a whole, is in equilibrium. The CAPM, building on mean-variance analysis, provides a theory of asset prices in market equilibrium. This chapter addresses only the former problem – of individual behaviour – and is silent about the implications of market equilibrium for asset prices.

The analysis in this chapter proceeds in a sequence of steps, each of which builds on the previous one. The steps are summarized as follows.

1. A review of the basic concepts of mean-variance analysis.

2. The choice between two risky assets: the objective here is to construct a frontier between the expected rate of return on each portfolio and the portfolio's standard deviation of return. No risk-free asset is available.

3. […]

Overview

Arbitrage was introduced in chapter 1, where it was argued that an unintended consequence of the quest for arbitrage profits is to link asset prices together in predictable ways. This short chapter delves more carefully into the precise implications of arbitrage trading. It is rather abstract because the analysis concentrates on exploring fundamental principles. Although, initially, the principles may seem irrelevant for practical applications, they form the building blocks of many models that are of immediate relevance in explaining observed patterns of asset prices.

Section 7.1 reflects on the pitfalls commonly encountered in applications of the arbitrage principle (i.e. the assertion that arbitrage opportunities vanish in market equilibrium). Having acknowledged the pitfalls, section 7.2 ignores them and offers a formal statement of the arbitrage principle. Section 7.3 continues the analysis with the statement of two additional and equivalent ways of expressing the arbitrage principle: in terms of the existence of state prices and the risk-neutral valuation relationship (RNVR).

Together, sections 7.2 and 7.3 describe three fundamental propositions that capture the essence of the arbitrage principle. (Appendix 7.1 sketches a proof of the propositions.) Although the propositions have wide relevance, especially in the study of financial derivatives (e.g. options), they are rarely applied directly to calculate asset prices. Instead, the propositions make precise why arbitrage plays such a key role in finance.

Overview

The previous chapter outlined an approach to asset price determination that focuses on stocks. In summary: the realized market price is such that the existing stock of each asset is willingly held by investors in the aggregate – the demand to hold the stock is equal to its supply. A second approach to price determination focuses on flows: the asset price is such that the flow of purchases over a short interval of time equals the flow of sales. That is, the total demand from all those investors who seek to add to their holdings of the asset equals the total supply of all those investors who seek to reduce their holdings. The two paradigms are not necessarily incompatible. Neither is necessarily right or wrong. They are just different ways of analysing the same thing – namely, what determines asset prices.

This chapter, unlike most that follow, adopts the second paradigm. Viewing prices as determined by flows of assets is particularly useful in exploring the details of how prices are set in practice and the behaviour of those who set them. Following a brief review of some basic features of market activity in section 2.1, section 2.2 studies the commonest trading mechanisms found in asset markets. Section 2.3 considers asset markets from the perspective of industrial organization and reviews the nature of competition within and between the markets.