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Muslims were responsible to the "ulema" for taxes and legal matters. Only members of the Muslim millet could bear arms (including the forcibly converted janissaries), and were exempt from some taxes. Balkan Orthodox Christians (Greeks and Slavs combined at first) were under the authority of the Patriarch of Constantinople. In case of confict, Islamic law and state practice took precedence but otherwise the laws and institutions of the Orthodox millet remained in force (largely unchanged from local customs before the conquest). Because so much administrative, fiscal and legal business took place through the millet, the Orthodox church acted as a "state within a state." Jews were administered through the chief rabbi in Istanbul, both the Sephardic Jews who came to the Eastern Mediterranean from Spain and the Ashkenazi Jews who were expelled from Central Europe. Finally, various small Christian minorities like the Armenians were part of a hierarchy under the Gregorian archbishop of Bursa.
2) Place of residence also affected the rights of the common people. Peasants could not leave their land and move into cities, because the Turks feared that the countryside would be depopulated. City life was attractive because urban dwellers were exempt from certain taxes and labor dues, and from auxiliary military duties (service as wagon-drivers, for example). Peasants paid taxes in kind: about a tenth of their produce went to their timariot landlord. Much of the rest of their crop was purchased by the state at a low price to feed the urban poor. Villages were liable for some duties as a community, including a small cash rent for use of the sultan's land, and had to contribute labor to work the timariot's estate (Western European peasants were liable for similar but larger burdens at this time). Mountain areas unsuited for agriculture were granted to nomadic tribes who paid taxes in kind: butter, yogurt, oil, cheese and other foods needed to feed the cities or the army.
3) In the cities, subjects were grouped according to their occupations. Craftsmen were members of guilds, which often had monopoly control of production, for example of salt or candles. Guilds regulated their own industries and taxed themselves to raise money for social welfare functions for their members. Guild representatives sat as a city council to advise the "kadi" or mayor. Fire departments, hospitals and other city services were supported by tax-exempt endowed foundations (vakf).
This was the idealized Ottoman system. Why did the Ottoman state decline? There were limits to what the principles of dynasty, Islam and military conquest could achieve. When the state passed beyond those limits, those same principles acted together again but instead created a cycle of failure.
The tensions between Muslims and non-Muslims also led to hostility and contempt for Christian European culture. Until 1600, Ottoman medical, mathematical and military science was as good as that of the West but after 1600 advances in science that originated outside the Muslim world were rejected. The Ottomans therefore failed to keep up in science, technology, metallurgy, navigation and other fields. No printing press, for example, was established in Turkey until 1727. Backwardness had military consequences and after 1650 Turkey's wars nearly all ended in defeat.
http://www.lib.msu.edu/sowards/balkan/lecture3.html
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