This chapter focuses on the political economy of Iran, specifically the evolution, formation and role of the Iranian state before and after the Revolution. Using historical materialist analysis, it attempts to frame the origins of the state within its integration into global capitalism. This will be done by exploring Iran’s economic development in the early 20th century, land reform and industrialization after the Second World War, and responses to economic, political and social conditions, in particular the establishment of the Islamic Republic in 1979.

The state has played a crucial role in nearly all developing countries, especially with transformations in the ‘third world’ after 1945 (katouzian, 1981; Harris, 1983, 1986; Bromley, 1994). Rapid changes in the economy and society took place under the capitalist mode of production that had replaced pre-capitalism, a development that began in the West and later spread to the rest of the world. Iran was no exception to this process, and had to develop its own way of integrating into global capitalism. The transformation included such political developments as that of a parliament based on forms of popular representation. Iran has followed similar patterns of capitalist development to those of other ‘third world’ countries, initially adopting import substitution industrialization (ISI), and with state intervention along capitalist lines. It also had to conform to market demands, Increasingly after the rise of neoliberalism during the 1970s before and after the Iranian Revolution. These demands originated in global markets and were variously adapted locally.

With the global increase in the price of oil in the 1970s, oil-producing countries found themselves overwhelmed with the large flows of income they were receiving.

This book has described the processes and contradictions of capitalist development in Iran before and after the 1979 Revolution, and has examined the role of Islamists historically. The central theme of the book has been the uneven character of capitalist development in Iran and the ways in which Iran’s integration into the world-system has not involved uprooting traditional forces. Hence, the process has involved both continuity and change.

Iran’s development and its integration into global capitalism have been facilitated by the role of energy, especially since 1970. With the growing importance of energy in the world, the oil-producing countries have not only developed but also become fundamental players within the world-system. Along with the other Gulf countries, Iran has turned into a dynamic centre of global political economy, benefiting from the financial muscle it has been able to wield as a result (Hanieh, 2011).

This has given these countries the power to act relatively independently, although they have remained firmly dependent on the global market within the world division of labour, as oil producers and importers of raw materials. In the case of Iran, the country’s economy has become vulnerable to both economic fluctuations in the price of energy and political events, as is evident in the current economic crisis, with US sanctions on Iran.

Since the Revolution in 1979, the energy sector continues to be firmly under theocratic control, albeit within the neoliberal world market. While the form that this neoliberal model has taken in Iran is different from that of many ‘third world’ countries, here, as elsewhere, there have been attempts to privatize national industries and to remove subsides for some commodities.

Iran’s relations with the US have gone through ups and downs since 1945, and with the Revolution it went from being a friend and ally to an enemy. Indeed, it was not just the Iranian Revolution that reshaped the geopolitics of the region; the Soviet invasion of Afghanistan, which took place the same year, also radically altered the strategic equation.

The economic transition of Iran since the end of the Second World War has been remarkable, as it has moved from being on the margin of the global political economy to being an influential state in the world system (Halliday, 1979). A key to this transition has been the role of energy, involving both local and global actors, including states and international companies.

Iran holds a strategic location, with the world’s fourth- and second- largest reserves, respectively, of oil (after Venezuela, Saudi Arabia and Canada) and gas (after Russia), a population of over 85 million (three times larger than both Iraq and Saudi Arabia), a developed infrastructure and a relatively strong state and military force.

As energy became a vital resource for global capitalism, the Persian Gulf states, including Iran, were able, with their enormous income from oil, to embark on huge development projects. This involved these states becoming fully incorporated into global capitalism, with its single market. However, political power continues to be largely in the hands of archaic elites (Halliday, 2001). With the transformation of the region, endogenous elites have begun playing a greater political role, both domestically and within the region.

The Iranian Revolution and the establishment of the Islamic Republic of Iran in 1979 manifested the apparent contradictions of a religious authority replacing secular rulers in a country that was part of the modern capitalist world-system. The formation of the Islamic Republic was an unexpected event in the 20th century and the establishment of a form of theocracy in which a religious hierarchy managed the state. This created a paradox: the state appeared to be both anti-Western and religious – and so involving a medieval ideology – yet it is functioning within the international capitalist system. Hence, the Revolution and its outcome continue to pose several questions that have preoccupied scholars, students and the interested public. Why did the Revolution occur? How could Islamists take over power and manage the modern state for over 40 years? What is the nature of the Islamic Republic?

By 1979 the Iranian economy and society had gone through significant transformation, with industrialization, urbanization and expansion of the educational system – for example, the literacy rate increased from 12 per cent in 1950 to 36 per cent in 1979. This figure, according to UNESCO, increased in 2016 to 86 per cent – 90 per cent male and 81 per cent female (see http://uis.unesco.org/en/country/ir).

This book attempts to interrogate the relationship between Islam and theocracy on the one hand, and Iran’s trajectory of capitalist development on the other. It aims to clarify various confusions and mystifications about the Islamic Republic of Iran, focusing on how Islam as an ideology has been made consistent with capitalist development from 1979 to the present day.

Since the Iranian Revolution of 1979, Islam has emerged as both one of the world’s fastest-growing religions and a major political force. These developments coincided with the end of the Cold War and the advent of ‘globalization’, regional integration with the global economy, and cultural homogenization. On the contrary, the Islamic revival is perceived as nationalist, inward looking and tending towards anti-imperialist extremism, threatening secularization and democratization (Zubaida, 1989; Arjomand, 1989; Esposito and Voll, 1996; Roy, 2004).

In Iran, both Islamists and secularist organizations competed to win the hearts and minds of the people. They both championed social policy measures meant to address excess poverty and inequality and the pervasive sense of alienation that had accompanied the nation’s rapid modernization.

This was given a global dimension by the 1979 Revolution, which established the world’s first Islamic Republic in a revolutionary movement that, rather surprisingly, happened in one of the most modern and secular countries in the Middle East, raising various questions in the process, not least among them the possible relationship of Islam to the character cieties and economies. Various scholars and politicians in the West spoke of ‘Islamic fundamentalism’, most often defined as some ‘return to 7th-century Islam’, in attempting, somewhat reductively, to define the new regime (Abrahamian, 1993). In this clichéd and polemical view, Iran had now become ‘traditionalist’, and its Revolution and the new government were said to be against ‘modernization’. Islam was portrayed as a static and anachronistic religion, which was incompatible with modernization and threatened instead to hold back development.

The Iranian economy has undergone significant transformations since 1945 when the state embarked on a project of major development. The role of energy in this process has been fundamental, but also the subject of much debate and discussion due to the nature of development and the role of the state. Although oil extraction started at the beginning of the 20th century, revenues only began to influence the economy after the Anglo-Persion Oil Company (APOC) began production in 1908 (yergin, 1991). Oil income paved the way for the integration of Iran’s economy into the global system as well as the political transformations of subsequent decades. It also greatly enhanced Iran’s geopolitical importance, making it a centre of attention for the great powers, especially after the Second World War.

Since the Second World War, the great powers have concurred that Middle Eastern oil must be accessible in the interests of the stability of the global economy, regardless of competition. With the transformation of the world economy since the Second World War, the emergence of the Gulf countries (including Iran) with both huge oil and gas reserves and cash flow for global investment have made them vital actors in the global system (Hanieh, 2011). In addition, the rise of China and India as world economic powers has made the importance of the oil-producing countries even more significant.

The impact of energy on the Iranian political economy has gone through several economic and political phases. The 1950s saw the growth of nationalism and anti-imperialist sentiment in Iran, led by Prime Minister Mohammad Mosaddegh, who called for nationalization of the oil industry.

The Middle East has provided the world with no shortage of crises in the last century and this one so far. Both the current political stand-off between the US and Iran and the civil wars in yemen and Syria demonstrate the degree to which these events have a long history. From the late 18th century until the First World War and the disintegration of the Ottoman Empire in its aftermath, the region has been a battleground for competing Western powers. Since the discovery of oil in Iran, one of the key concerns for the great powers has been, and remains, oil and its strategic influence.

Iran’s territory and population are among the largest in the Persian Gulf. It has a huge economic potential and the capability of exercising great military power. Iran’s aspiration to be a regional power is partly a response to the perceived threat of imperial domination since 1979, especially by the US. The US, having expanded its military presence, with Donald Trump attempting to force Iran into subordination to Washington’s will, has been the main cause of anxiety for the government of the Islamic Republic, which sees this as a threat to its security, stability, regional status and even survival.

Before the 1979 Revolution, Iran was an important ally of the West, including the US after the Second World War. Since 1979, Iran has been seen by the West, especially the US, and its regional allies such as Saudi Arabia, as a destabilizing actor with a radical message. The character of Iran’s regional policies has caused anxiety and been a constant source of controversy among other states in the region, especially Saudi Arabia, the UAE and Israel.

The Iranian Revolution of 1979 is an ongoing subject for debate among scholars and analysts around the world. It stands as one of the more remarkable world events in the period since the end of the Second World War. It achieved its goals through the use of what, for George Sorel, is the essence of myth: an abrupt break with the recent past that is achieved only by means of ‘expressions of a will to act’ (Sorel, 2005: 28). The main achievements of the Revolution abolished the monarchical rule of the Pahlavi dynasty to set up the Islamic Republic of Iran, with a modern constitution and parliament that also operates within an explicitly theological framework.

Compared with other modern uprisings and revolutions, such as those in Russia and China, the Iranian Revolution was notable for the role played in it by religion and religious leaders. In the 1970s, observers ranging from Western social scientists to Iranian government intelligence sources were primarily united in their belief that the Shah’s regime was relatively strong and its opposition forces fragmented. Many scholars believed that there was little likelihood of any instability sufficient to threaten the Shah’s regime. This analysis was based on the existence of improved economic conditions, a strong modern state machinery and political stability, especially compared to the period before the Second World War. As events unfolded in the late 1970s, it became possible for commentators to foresee the overthrow of the Shah’s regime, but very few expected to see Islamists at the forefront of the uprising, let alone to witness the establishment of a state with religious leaders at its core.

Earlier chapters presented an analysis of the material forces underpinning the contemporary Iranian political economy. This chapter describe the nation’s ideological and political superstructure, and relate the uses made of religion and its development in response to economic, political and social developments historically.

This chapter will trace the inception of the Islamic Republic and the evolution of the post-revolutionary Iranian state. In doing this, I will examine the underlying causes of the development of what may be called a ‘hybrid’ system, combining elements of democracy, totalitarianism and authoritarianism, which developed after the Revolution (Abrahamian, 2008). This system emerged at the end of the secular regime of Mohammad Reza Shah Pahlavi, replacing it with a theocratic regime, in a process in which a mass revolutionary movement played a crucial role. The confusion over the nature of this system has continued to puzzle academics and political analysts; indeed, it is the only model of theocratic government in the world today that resembles a traditional theocracy. While ‘totalitarian’ governments are said to claim absolute power in public life, authoritarian governments tend to allow a limited degree of pluralism, which can be compatible with elections. The founding leader of the Iranian Revolution, khomeini, was explicit in suggesting that in his ideal state, power would reside with the ulama. In the absence of the Prophet and his cousin, Ali ibn Abi Talib (who ruled 656–661), whom Shi’ites consider to be the first Imam, the effective government of the fourth Caliphate, the ulama, should lead the community.

In many respects, the nation’s development has been driven by both revolutionary ideals and the Islamic Republic’s pursuit of its survival through recourse to pragmatism in national, regional and international contexts.