Role of Private and Public Sectors in Economic Development in an Islamic Perspective

Author: Ed: Ehsan Ahmed

Publisher: International Institute of Islamic Thought (IIIT)

This book is a compilation of selected papers presented at the fifth international Islamic Economics Seminar (1414-1993) jointly sponsored by the International Institute of Islamic Thought and the World Bank. This Seminar adopted the theme of this book.

This work, which is edited by E.Ahmad, includes M. A. Chaudry’s “Why Cannot Neoclassicism Explain Resource Allocation and Development in the Islamic Political Economy”, J. Abu-Rashed’s “Altruism in the conduct of the private and public sectors”, S. M. Ali’s “operation of an Islam Bank under Conventional Banking Framework: A Comparative Efficiency Analysis”.

In all, ten prominent scholars share their valuable insights on their respective fields in this book.

Islamic economic forum urges reduction of trade barriers

An international Islamic economic conference ended Wednesday with calls for the reduction of trade barriers, development of alternative energy sources and stricter regulations in the global financial industry.

The three-day World Islamic Economic Forum in Jakarta, attended by 1,500 delegates from 38 countries, discussed ways to deal with the global financial crisis and food security, as well as exploring possibilities for non-carbon fuels.

A statement issued at the end of the conference called on delegate countries to “reduce regulatory barriers such as food subsidies, which would hinder sustainable food production and trade”.

“The declaration has a host of policy recommendations that, if implemented widely, would enact real change within the Muslim and non-Muslim world,” said Musa Hitam, chairman of the World Islamic Economic Forum Foundation.

The statement urged countries to develop policies to ensure a proper balance between food production for human consumption and energy usage.

Effective regulations are needed in the global financial industry to mitigate risk and failure, the declaration said.

“Governments, corporations and individuals can use this as a road map to not only help out their local communities, but also affect real change within their districts, countries and regions as other people and organisations join in,” said Sofyan Djalil, co-chairman of the conference.

Organisers say the forum aspires to change the global perception of the Muslim world from a conflict zone to a lucrative economic region. It is also aimed at promoting trade and investment opportunities in the Muslim world.

Speakers also called for the promotion of Islamic finance, which has not not been hit as hard as its Western counterpart mainly because Islamic banking prohibits speculation and high levels of debt.

The sixth World Islamic Economic Forum will be held in Malaysia May 18-20, 2010.

Distributive Justice and Need Fulfillment in an Islamic Economy

Publisher: The Islamic Foundation, UK
ISBN: 0-86037-191-3
Edited by Munawar Iqbal
Editor Bio: Munawar Iqbal is currently Professor of Economics and Director of the Research Division at the International Institute of Islamic Economics, Islamabad. Born in 1950, he studied Economics at Punjab University, Lahore; McMaster University, Canada; and Simon Fraser University, Canada. He taught economics at Simon Frasier University and worked at the Pakistan Institute of Development Economics, Islamabad in various capacities before joining the International Islamic University as Director of the School of Economics. He is currently working on various aspects of Islamic economics.

About the book
This book contains some of the papers and discussions from the historical Second International Conference on Islamic Economics held in Islamabad in 1983.

To put the discussion in perspective, an instructive introduction has been added by the editor. Renowned Muslim economists explain the Islamic viewpoint on a number of issues relating to ownership, the distribution of wealth, and distributive justice. The volume reflects current Muslim thinking on some of the most important contemporary Islamic issues. It identifies areas of general agreement, discusses major controversies, and points toward future research directions in the field.

The state of Art in Islamic Economics

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            A Round Table discussion was held in Islamic Research and Training Institute Islamic Development Bank Jeddah in 2004 to review the state of Art in Islamic Economics. The Round Table was attended by the renowned Islamic economists, many of them being IDB prize or Faisal Award holders in Islamic Economics and finance. The discussion started with a key note address by M. Nejatullah Siddiqi[1], a Faisal Prize Laureate and a veteran in the academic field of Islamic economics and finance.  He made a candid remark at the start of his address. He said, if we are not where we wanted to be then either our starting point was wrong or we took a wrong path. Though Siddiqi did not mean what I want to talk about in this note but the remark, on its own, is very relevant for the work done so far on so called Islamic Economics. Very few economists working on discovering Islamic economics realize that if “they want to be there then they should not be where they are now”. Last more than thirty years work on Islamic economics has led the Islamic economists to a place where they themselves are not sure where they are and how to reach where they want to be.

 

The search of Islamic economics, has been mostly confined within the framework of Neoclassical economics — a framework that is being increasing recognised, by conventional economists themselves to be inadequate to explain the economic behavior of modern man. This note argues that Islamic economists would have covered a large part of their distance to their destination of defining Islamic economics as a distinct economic discipline if they had opted for the framework currently known as New Institutional Economics. This note is based on the views expressed by renowned Islamic economists expressed in the Round Table conference mentioned above.

 

Nejatullah Siddiqi rightly blamed the methodology adopted by Islamic economists for not achieving what was expected to be achieved.  “From microeconomics to macroeconomics, management of money to public finances, in each field we worked to derive rules from fiqh.  We did the same when confronted with such novel fields as economic development and international economic relations.  The rules of conduct and policies devised by wise men of Islam to implement the guidance of Allah in certain specific situations were treated as the guidance from Allah applicable to all situations”.

 

According to Nejatullah Siddiqi, this approach suffered from several limitations when analyzing such economic affairs of life that have been most influenced by changing conditions of living.  The limitations arise because, according to Siddiqi, “a finite body of rules framed over the earlier centuries of Islam to enable Muslims to live as Allah wanted them to live could not be used to derive from them general rules applicable in later times without checking their background, underlying socio economic conditions etc…… When circumstances change, it has to be ascertained whether the original ruling serves the purpose or needs modification”.  The lack of vision in this respect, according to Nejatullah Siddiqi, led the Islamic economists to concentrate more on the text than on the Maqasid of Shari’ah (objectives underlying Islamic law).  According to Nejatullah Siddiqi, even Islamic philosophers like Shatibi and Ghazali, who are known to be strong advocates of adaptability and flexibility in Islamic law, put the Maqasid (underlying objectives) into the straitjacket of the so-called five necessities of human life on earth, namely, life, religion, reason, property and posterity (progeny).

 

This fundamental limitation, blamed to be responsible for what went wrong in advancing the discipline of Islamic economics, can be removed, as suggested by Nejatullah Siddiqi, by making fresh Ijtehad.  Otherwise, the deficiency in Fiqh to address economic issues particularly at macro level will remain a basic hurdle in the way of developing the discipline of Islamic economics. 

What Siddiqi is essentially arguing, though he would not agree with my interpretation) is the role of institutions, specially Islamic law. We can read it between the lines quoted above that human behaviour, in the early period of Islam was affected by Islamic law and that the changing human behaviour with the changing times have to be reconciled with Islamic law taking advantage of the built-in adaptability within the law. Siddiqi is emphaising the important role of the institution of Islamic law and according to him “what went wrong” relates to tthis dimension. 

 

“Even those of us who showed an awareness of the need to complement the fiqhi approach by the maqasid approach in order to deliver a meaningful agenda for economic development in modern circumstances, failed to deliver, generally speaking.  Having rightly proclaimed elimination of poverty and reduction of inequality to be objectives of Shari’ah, they felt constrained by fiqh when it came to the means to these goals.  Macroeconomics as developed in Islamic framework is largely affected by this crippling deficiency.  Worse still, with the passage of time the constraining influence of the detailed rules and regulations of fiqh seems to have all but extinguished the spark of maqasid-inspired thinking”.

“If it is the goals of Shari’ah we want to realize, we still have a long way to go.  And more important than that, the road we are traveling on is not the one to take us there (emphasis added).  We may implement all the rules and regulations relating to the economy in our books and still find ourselves far from being near our goals.  The reasons are very simple.  Keeping in view the objectives of Shari’ah related to economic life, appropriate means have to be discovered/invented after a careful understanding of today’s environment.  They could not have been there in our books because today’s environment is so different from the environment in which these books were written”.

It is clear that Siddiqi is talking about nothing but the economic influence of an important and distinct institution “Islamic Law” but he is still short of admitting the role of Islamic law and for that matter role of all Islamic institutions, including ethics, norms, moral values, customs, beliefs, and culture arising out of the beliefs on human behaviour in general and economic behaviour in particular. It is hard to visualize, how to develop a new theory of economics simply by rewriting the “understanding of Islamic law” (known as Fiqh).

Nejatullah Siddiqi suggestion on “where to start” in the development of the discipline of Islamic Economics makes it almost a mission impossible. His suggestion to make new Ijtehad is a good suggestion on its own merit but then it would not be enforced and translated into human behaviour before it becomes a basis for the development of Islamic economics. The starting point proposed by Nejatullah Siddiqi has other serious limitations, irrespective of whether or not it is relevant for the development of Islamic science of Economics. Firstly, there is no centralized and recognized institution that could make the type of Ijtehad on the objectives of Shari’ah that Siddiqi has in mind[2].  Furthermore a fresh Ijtehad, even if it is taken up, is going to be very long term project with no certainty about the type of output Nejatullah Siddiqi expects to come out to help the economists to develop Islamic Economics.  Secondly, the proposed starting point is not in the hand of economists.  It is in the hands of Islamic jurists. Islamic jurists have to be economists too to identify the starting point of the discipline.  Or economists have to be Islamic jurists too to identify the starting point.  Neither of these possibilities are feasible.  As Mabid Jarhi later on pointed out, the two (Islamic jurists and economists) speak two entirely different languages.  Islamic jurists speak the language of textual science based on such branches of knowledge as Ilm-ul-Kalam and Ilm-ul-Rijaal etc.) while the economists are supposed to speak the language of so-called positive science (based on such branches of knowledge as logic and mathematics).

 

Nejatullah Siddiqi also argued, “In a world in which pockets of absolute poverty still exist, a world in which some countries are poorer today than they were in the past, and where increasing inequality within nations as well as between nations threatens civilization as never before, Islamic economics fails to focus on the one issue which has always been the focus of the Prophetic Message: Justice and Equity”.  He emphasized that “Islamic economics needs to come closer to the people in general and the Muslim people in particular.  Its focus must be what concerns people most, not what appears to be more important in theory[3].  This should cause no qualms even to the purists as the former would lead to the latter in due course, if the theory is well conceived.  If it is unemployment and, therefore, lack of purchasing power that is troubling someone it makes little sense to subject him or her to a lecture on zakat or interest free banking.  Unfortunately that is exactly what we have been doing.  No wonder the audience is losing interest”. Without disputing the essence of the statement, the question remains whether all this can be incorporated in the Islamic science of economics without developing a theoretical framework for economic behaviour? Should we do it, borrowing the theoretical framework of conventional economics?  If we rely on the framework of the conventional economics to take care of the concerns raised by Siddiqi, then will we able to get right policy prescriptions by working in the framework which does not aim at achieving what we like to aim at.

 

Nejatullah Siddiqi was not referring to the methodology of neoclassical economics loaded with mathematical, statistical or econometric tools, adopted by most of the economists who ventured into the field of discovering a science that could be called Islamic economics as opposed to the science of modern economics, which is essentially the neo classical economics. Nejatullah Siddiqi, however was, of course, referring to institutions when he said “The acts of caring about others, serving the social interests while protecting one’s own and avoiding any harm to man, animal or the physical environment are not a rarity.  They have never been, as evidenced by our folklores, other art forms and history.  But they are not the current subjects of research in economics and the tools of research in our discipline do not suit them.  Even Islamic economists failed to come up with historical evidence and current empirical data on that kind of behavior, with some notable exceptions.  Core Islamic concepts related to microeconomic behavior like israf, tabzeer, I’tidal, samaha, naseeha, rifq and ihsan were rarely the subjects of textual, linguistic, exegetical, historical and empirical research even in the universities with departments of Islamic Economics.  This kind of research is, however, a must for delineating the evolutionary and dynamic nature of these concepts, something often lost in the dense fog of dated fiqh rules that are diverse and full of differences.  The importance of these moral concepts lies in their closeness to the objectives of Shari’ah as compared to the rules that may have been made for their realization in a particular cultural milieu at a particular time and place.  One who puts these concepts aside in favor of any set of rules runs the risk of losing the way to the goal of fairness flavored with generosity.  As already pointed out in the earlier part of this presentation, many of us seem to have committed this mistake”.  Siddiqi, here is not referring to the methodology of neo classical economics. Instead he is implicitly referring to the approach taken by New Institutional Economics.

“The fact that Islamic economists have so far failed to rewrite the theories of consumer behavior or that of the firm or to reformulate the understanding of market structures owes itself to insufficient historical and empirical research coupled with the inability to devise analytical tools suited to the study of morally informed behavior and the quest for balance between competing claims”.

This position regarding “self interest”, on the part of Nejatullah Siddiqi, obviously ran counter to the position of conventional economists who treat it as one of the kingpins of science of Economics.   According to him, “An economic theory that whittles down self interest at the very outset and saddles it with care for others, introducing public interest (including the future generations) and defines as the goal of the economy not higher and higher GDP but balanced growth with equitable distribution, will be very different from the one we have . It will certainly be distinct, though not entirely different”.

 The punch line that Nejatullah Siddiqi gave to reiterate his position in the Round Table was:

“Most of us have been busy competing with conventional economics on its own terms, demonstrating how Islam favors creation of more wealth, etc.  We have had enough of that.  It is time to demonstrate how modern man can live a peaceful, satisfying life by shifting to the Islamic paradigm that values human relations above material possessions”. And when it comes to human relations, it is nothing but evaluating institutions and their influence on human behaviour. And probably this is what Nejatullah Siddiqi was referring to when he advised  “Be faithful to Islamic Paradigm”,  for suggesting how to correct what went wrong.

 Some participants of the Round Table looked in other directions.  They were not impressed by the diagnosis made by Nejatullah Siddiqi. They were more honest in revealing their preference for neoclassical framework to discover Islamic Economics.

 Following up on Nejatullah Siddiqi’s keynote address, Mabid Jarhi identified a different set of hurdles in the progress of Islamic economics.  He compared the problem of Islamic economics with the problems of husband having four wives and the husband encountering the problems with each one.  First wife of Islamic Economics, as he puts it, is (conventional) Economics.  Without going into the controversy whether it is marriage or cohabitation, Mabid Jarhi pointed out that we as Islamic Economists could not learn how to make Islamic Economics compatible with conventional economics.  Why they cannot interface?  There are several problems.  What Islamic economics offers to economics is summarily rejected by the later.  What economics offers to Islamic Economics is often not appreciated.  This, as implied by Mabid Jarhi, made Islamic economics to suffer in terms of its progress.  According to him, Islamic Economics needs (conventional) Economics very much to progress. This means Islamic economics have to be found using the methodology of neoclassical economics. Despite his love for the  framework of neo classical economics, he could not help expressing his doubts that this will be sufficient..

 

Mabid Jarhi, looks towards what he referred to as second wife which he named as Fiqh.  To him this is a forced marriage.  Islamic economics has to live with Fiqh.  The problem is that the second wife (Fiqh) and the first wife (Conventional Economics) are not in good terms with each other.  They speak different languages, the former adopting the language of textual science and the later adopting the language of so called positive science.  Making the two wives compatible is problem that is yet to be resolved. Though he did not say it, but it is clear from his love for first wife, he wants the second wife to reconcile. Fiqh is concerned with only a part of the institutional framework of an Islamic society, the Islamic Law.

 

The third wife, according to Jarhi, are the politicians and policy makers.  What Islamic economists see as Islamic economics is quite different from the vision that politicians and policy makers adopt with respect to Islamic Economics.  This lack of compatibility in the views and vision of Islamic economists who are working to develop the discipline with the views and vision of policy makers who apply Islamic economics did not let the discipline of Islamic economics grow.  I remember second International Conference on Islamic Economics in Islamabad in 1983.  While the Islamic economists participating in the conference were keen to discuss the Economics of Zakah, its growth and equity effects on the economy and the institutional developments required to reap the benefit from this pillar of Islamic economic system, the Economic Planning Minister of the country, who inaugurated the conference, asked the Islamic Economists, if Zakah collection can be made a part of the government revenue to be spent on development projects, the projects that may benefit mostly the poor like hospitals, schools etc.  It was disappointing for the Minister when he attended the concluding session of the conference and found out that his proposal was not endorsed by the Islamic economists.  Similar differences have been found on the issue of elimination of interest from the financial system of the economy.  What Islamic economists suggest does not find any support from the policy makers.  The vision and the policies that the policy makers bring hardly convinces Islamic economists to make it part of the discipline of Islamic economics.  Mabid Jarhi’s position that this factor has been constraining the development of the discipline of Islamic economics can hardly be disputed. But it only means that without reference to institutional framework of society, it is hard to talk of Islamic economics.

 

The fourth and, in Mabid Jarhi’s jargon, the worst wife is “Islamic Economist” (ignoring the gender). Islamic Economists have yet to acquire a coherent vision of Islamic economics and how to present it.  They often fail to understand the true contemporary needs of the discipline with respect to its development as a scientific theory at par with the theory of conventional economics. In other words he is emphasizing the significance of neo classical methodology and wants Islamic economists to come to terms with it when theorizing Islamic economics. To sum up, Jarhi wants all three wives to come to terms with the first wife. But if Jarhi is committed to the institution of four wives then he can think in terms of divorcing one of the wives and replacing with another one more acceptable to the other wives. He can think of his Islamic economics divorcing first wife, and replacing it NIE as a new wife. He will find the all four wives easily reconcilable with each other. In economic jargon, if neo classical methodology is set aside and instead the framework of New Institutional Economics is adopted to discover Islamic economics, none of the conflicts mentioned above by Jarhi  will arise.

Divorcing methodology of conventional economics will also remove the problem identified by Siddiqi. Framework of NIE will help to define Islamic economics within the classical fiqh and if Ijtehad brings any change in the Fiqh, the underlying economics can be analysed within the same framework.

 Islamic economics could easily be distinguished from (conventional) Economics, if we could agree upon identifying central theme of Islamic Economics from that of Economics.  Nejatullah Siddiqi, in his key note address tried to do so.  He identified justice rather than maximization of profitability as the goal of man’s economic behavior.  He also challenged the concept of self interest as the motivation underlying man’s economic behavior.  He identified two other elements alongwith the self interest as a key element in Islamic economics, (a) social good or public interest and (b) spirit of helping others and avoiding harm to any one including self.  Many of the participants, however, disagreed with his position.  Neither Siddiqi nor the participants of the round table could realize that Siddiqi is talking of Institutions of Islamic society and neoclassical framework would not be suiatble to include these institutions in its methodology to explaine economic behaviour.

 

Anas Zarqa, an IDB pirze laureate in Islamic Economics, too continued on the lines of the neoclassical economics.  According to him reference to justice will not be meaningful unless it is complemented with efficiency in output as well.  He was also very skeptical of emphasizing the role of morals in the development of Islamic economic theory.  He emphasized that self interest will remain to be a key element in Islamic economic theory despite that there are deterrents on self interest in the system. For Anas Zarqa, too institutions did not matter in the process of theorizing Islamic economics

 

Monzer Kahf , another winner of IDB prize in Islamic Economics, also regarded the emphasis on justice as overstatement.  According to him all systems claim such objectives and hence cannot be used to distinguish one system over the others. Same position was taken by Munawar Iqbal who challenged the position of Nejatullah Siddiqi on self interest and maximization.  According to him, in the world Hereafter, only one’s own interest will be important and this would be reflected in man’s behavior in this world too.  In Islamic economics, we only need to redefine the individual’s objective function (keeping both the worlds in view) while keeping the concepts of self interest and maximization in tact. How to do that? The implicit answer was keep trying within the framework of neoclassical economics.

Siddiqi’s answer to what went wrong only generated controversies rather than giving a lead “where to go from here if we are not right path”

 To Be or Not to Be

             About thirty years ago, when many Muslim economists agreed that Islamic economics has to be a distinct paradigm with its own theoretical framework, it was expected that a lot of economists will be attracted to make contribution to this field and the subject would develop rapidly.  Lot of research work did follow.  But most of the work in this respect, however, could not go beyond the level of discussing only how to apply methodology of neoclassical economics to Islamic rules of economic life. Despite that no significant work could be done in this direction during last 30 years, a group of Economists still believes that this needs to be done and this can be done.

             Meanwhile another group of economists emerged (which included some of those who were initially in the above mentioned group) who believe, that we do not need a distinct theory.  (Neo Classical) Economic theory is general enough to accommodate variations in values and even in rules of behaviour delineating economic systems.  This group believes that Islamic economics can only be perceived as a branch of (neoclassical) economics.  Its analysis must be governed by the same methodology as of Economics.  Its assumptions underlying theories of microeconomic behaviour and macroeconomic phenomena should be the same as that of Economics.

             The position taken by the second group, however, became contradicting when this group following views:

(1)        Fiqh literature on exchange offers a vast area for scientific work on understanding the Islamic concept of markets, market structures, market failures and  management of risks in markets (through such contracts as Salam, Istisna and Juala) and that this is still a virgin area for the Islamic economists to develop their theories.

(2)        Islamic economics can make a difference in the area of macro economics, because the prohibition of interest and the unique system of Zakah introduce significant departments from the conventional system and requires a lot of analysis to get results that may be significantly different from those of conventional models.

 

It is then curious that this group still remains unconvinced that the explicit teachings of Islam on socio-economic justice, on alleviation of poverty, on social and human development and guaranteeing minimum needs for every one in the society require a very distinct theoretical framework to understand how an economy can be managed if these objectives are to be achieved.    A lot has been written on Islamic fiscal and monetary policy, but within the conventional macro-economic models.  This group probably could not deny that all this work did not make an economic sense with respect to the objectives that Islam envisages for an economy to achieve.

           

            The first session of the Round Table, following the key address, specifically focused this question.  Do we need to develop a distinct economic theory to understand and implement economic teachings of Islam or we can do this within the existing economic paradigm, as we have agriculture economics, labour economics, health economics, development economics etc? 

 

            “Two economists, three opinions” is a known adage.  This session saw three economists and two opinions on the issue of “To be or not to be” for Islamic economics.  The economists who discussed this question were Umer Chapra, Monzer Kahf and Mohamed Al-Qari, all IDB Prize Laureates in Islamic economics, banking and finance.  The two opinions were:

            “There has to be Islamic Economics as a distinct scientific discipline”

            and

            “There cannot be Islamic Economics as a distinct scientific discipline”.

 

            Umer Chapra still sticked to his 30 years (or even older) position that there has to be a distinct discipline to be called Islamic economics and it is necessary to have it.  This is the position he expressed also in his book, The Future of Economics: An Islamic Perspective. His claim is based on the belief that Islamic economics is directed towards the realization of a purpose that cannot be understood and realized using the analytical tools developed by conventional economics.  According to him, the need for a separate theory becomes further acute because the set of variables needed for the economic analysis in Islamic paradigm are broader and the mechanism and methods for the allocation and distribution laid down in the paradigm are different.  He argues that once economics get into a discussion of well being in its comprehensive sense, then the task of economics becomes wider, and more difficult and complex.  “Well-being” has to be a value loaded concept to be derived from the value system of Islam. (The reference to the significance of institutions such analysis still goes unnoticed.)

 

Even if we stick to the position of discussing values within conventional framework without reference to institutions, the question still remains how the “science” of economics can get into a discussion of value based concept of well being?  Even conventional economists have differed on this.  A recent collection of essays gathered in What do Economists Contribute, also identifies choices (conventional) economists make; which clearly reflects that economists do get into discussion of value based concepts.  For example, they make the choices: “which subjects to write on, which premises to follow, which authorities to appeal to, which methods to use, which tones to assume, which audiences to address, which challenges to respond to, which social purposes to serve, ______ all these choices are made each time an economist acts as an economist”[4]. It is claimed that the conventional Economists can do and have been doing all this and still are calling themselves “Economists” (without any prefix) and calling their discusion of values as “Economics” without qualifying it with any prefix. This exactly was the line of argument taken by the other two speakers in the session.

 

            To Monzer Kahf, Ibn Khaldun was the real founder of Economics.  Monzer Kahf argues that “If we were to extend Ibn Khaldun to the subject of our debate today, we would find him discussing “economics” without being afraid to loose his identity; he would accept or reject theories and assumptions on their own merits and according to their reflection of the behaviour of women and men, in their individual endeavours (micro) as well as in their association together (macro) on the basis of the “totality” of human beings. Without departmentalization or segmentation; he would also be able to criticize the established or accumulated ‘economics’ on the basis of its deficiency of its basic utilitarian assumption that ignores other intrinsic human motives”[5].

           

            Monzer Kahf suggested that Islamic economics can only be looked at as the study of an economic system within a certain ideological and legal framework and the study of the individual and collective behaviour of the units within the system in the same way as socialist economics, welfare economics, etc. are looked at.  Islamic economics, thus, according to Monzer Kahf is merely a branch of Economics that studies the units and variables within the Islamic legal and ideological framework, actual or assumed. But who would judge that the neoclassical framework provides objective analysis of different economic systems which are characterized by different institutional framework.

 

            The line of argument adopted by Monzer Kahf, however, had obvious self contradiction.  Socialist economic system is known to be a different system.  It is a different philosophy.  Capitalists will hardly see any Economics in it.  Similarly socialists will see a wrong economics in capitalist system.

            If Monzer Kahf believes that only the modern tools of economic analysis make the science of Economics then he is right that socialist economics and capitalist economics are same because we often apply the same tools to analyse two systems.  But, of course, tools do not make science.  Science is made of logical understanding of specific phenomenon, in specific dimensions with specific objectives.  Tools are often borrowed from other sciences.  It is the difference in the phenomenon to be studied, and the differences in dimensions and objectives of the phenomenon to be studied that can create different science.

 

            We may use tools of another discipline to make certain analysis and, in the process, we may get some “scientific” results but merely the application of tools of another discipline would not make a discipline lose its own distinction.  Tools of analysis of capitalist Economics were used in 1960s by the (Capitalist) Economist, to analyse the Feldman growth model (6) of Russia and Mahalanobis growth model (7) of India.  The two growth models referred to two different economic systems.  The use of tools led to the conclusion that the same model succeeded in Russia but failed in India.  We now know that such analysis was meaningless as far as the objectives of the two systems were concerned. 

 

Economics in Islam is a different phenomenon.  The nature of economic activities and dealings is different.  The objectives of the activities and dealings are different (which Monzer Kahf admits too)[6], the institution to re-enforce the objectives are different.  A logical and scientific study should give us a different scientific discipline which will have to be called Islamic Economics because the name Economics now is referred to mean only Capitalist Economics.  We may still use the framework, theory and tools of capitalist economics to analyse the economic of phenomenon of Islam but only to get misguiding results as obtained in the analysis of Feldman – Mahalanobis models. 

 

Monzer Kahf did not seem to disagree with Umer Chapra that “Islamic Economics [dealing with well-being] may not be able to confine itself just to the economic variables but may have to take into account all [different] factors, including moral, psychological, social, political, demographic and historical that determine well-being in comprehensive sense”.  If Monzer Kahf does not disagree with this then he does not have an argument that Islamic Economics is Economics unless he defines Economics differently than defined by the (neoclassical) Economists.

 

            In the first international conference on Islamic Economics held in Makkah Mukarramah that raised the flag of Islamic Economics as a scientific discipline, Anas Zarqa contributed a paper[7] “to shed some light on certain methodological and philosophic aspects of Islamic Economics and to illustrate its unique approach by reflecting upon an Islamic social welfare function”.  Addressing the question “Can there be an Islamic Economics?” he wrote, “distinct and meaningful Islamic economics is possible, nay, necessary”.  Briefly, his argument was, “that economics is not as innocent of value judgments as we are often led to believe, nor can it ever be.  Neither is Islam devoid of positive assertions about economic reality.  We can then replace non-Islamic value judgments by Islamic ones, and add to the economists’ stock of positive assertions, then work out the consequences”[8].  According to him, “values are involved in (a) Choice of topic to be pursued, (b) Choice of variables and assumptions, (c) Choice of method, (d) Choice of ends and means.  There are thus several areas in economic theory where value judgments have a crucial role to play, and in these areas we can make a distinct contribution as Muslims”.   He further wrote, “Muslim jurists have a central role to play in defining in collaboration with other social scientists, including economists – details of a social welfare function relevant to present-day society.  Once such a social welfare system is so defined, Muslim economists need no longer wander about aimlessly.  They could begin from this function and choose for positive economic studies those problems, variable and inter-relationships most relevant to that welfare.  Economists could then present to Muslim jurists alternative economic policies, clearly stating the effects of each policy on variables relevant to Islamic welfare.  Then and only then can jurists and economists use the welfare function and its supporting heritage of fiqh to provide society with Islamic solutions to current problems”[9]. Zarqa is of course talking of Institution Economics but in reverse order than what is suggested by the framework of NIE. NIE wants economists to start from law to delineate economic theory. Zarqa wants jurists to start from economics to revise their juristic rulings (to help economists to apply to neoclassical methodology.

 

            Later on at another occasion, Anas Zarqa wrote, “It is important to recognize that values must enter economic analysis, and they did enter traditional economic analysis not because economists conspire to do so but because it was inevitable.  For Muslims, the only source of values is divine guidance through the Qur’an and the Sunnah of Prophet (Pbuh).  Consequently, whatever values are needed in the process of Islamic economic analysis they must be drawn from these two sources.  Given this method, it is not surprising to expect that when Islamic values replace other values that have affected traditional economic analysis the result may be a new kind of economics which is not necessarily or entirely opposite or different from conventional economics.  To put it very simply, perhaps simplistically, if we take out whatever values are there in the process of economic analysis and replace them by Islamic values and work out the analytical consequences, we arrive at a product which can be called Islamic economics”.

 

            It was very surprising to see Anas Zarqa too taking a position on the side of Monzer Kahf in the Round Table discussion.  It is equally surprising that in the same conference, Monzer Kahf too had a different view.  In his paper[10] contributed to the conference he started by saying, “The “utility” analysis developed by the Austrian marginalist school and by Alfred Marshall has its roots both in “economic rationalism” and in “utilitarianism”.  These two sources had great influence in the formation and emergence of the “new capitalism” in the Europe of 17th, 18th and 19th centuries.  During the 19th century Marxism too grew up in the same atmosphere, one may indeed say in the very lap of the new capitalism.  Because of this, it could never shake off the philosophical basis of that brand of capitalism.  That does not mean there are no dissenting voices.  Max Weber, a leading sociologist, has very rightly maintained, in his well known book The Protestant Ethics and the Spirit of Capitalism, that “economic rationalism” is not the only form of rationalism that can explain the economic phenomena.  Thus, for instance, it may be pointed out that Islamic rationalism is another form of rationalism”. 

 

The principal focus of his paper was on “the impulses that motivate, and the goals that are pursued by the consumer in his choice among the goods and services contained in the attainable set, and on the macroeconomics of this behaviour, given the axiomatic system of Islam”[11].

 

            Why renowned Islamic economists like Anas Zarqa and Monzer Kahf had to review their position,  is curious.  It seems that the rigorous attacks from the strong lobby of conventional Economists within Muslim Economists forced these popularly known “Islamic Economists” to shy way from calling their subject as a distinct scientific discipline and to be contended with considering it only as a branch of Economics. If they had taken the approach of NIE and had started from institutions, they would not need to change their positions because this approach does not require them to go to ideology and assumptions. They would start from a factual position. What are the institutions of Islam and this starting point would have remained unchanged and Islamic economists would not have to switch their positions whether there is Islamic Economics or there is no Islamic economics as a distinct discipline on its own merit.

 

Elgari went a step further.  According to him, “It can be either Islamic” or “Economics”, implying that Islamic economics (as a science) does not exist, neither as a distinct discipline nor as a branch of Economics.  In his words, “Islamic economics can never be a scientific discipline”.  His argument goes like this[12]:

 

            “Science is knowledge brought under general principles by observation, experiment and critical testing.  We need it because we don’t know, we don’t understand, and because we want to know and understand.  Through scientific probing, we can explain and discover how the forces around us function.  Once we know how they function we can predict their behaviour and hence have an opportunity to harness their power to our benefit, control them to protect ourselves from their perils.  This will make our life more enjoyable.  It will improve our welfare.  This is true with physics, chemistry, medicine as well as economics.

            “But science is not the only source of knowledge.  As believers, we also have the divine source.  Knowledge correctly derived form the latter is the absolute truth.  While the one derived from science is “relative” at best.  Once we say “Islamic” then we are internalizing knowledge derived from the divine sources.

 

            “If we already know the answers, if we have the conclusions, then observation, experiment and critical testing become a waste of time.  It is an “over kill”.  Now this is the dilemma of Islamic economics, or so the argument goes.  It can either be Islamic or Economics”.

 

            He adds “if I write a paper using the tools of economic analysis to show that use of Mudarabah as a mode of finance improves equity in the distribution of income in the society, this will be a celebrated contribution to the literature of Islamic Economics.  However, if I use the same tools to show that the same Mudarabah (as a mode of finance) is less equitable than borrowing on the basis of interest, then this would be secular economics.

 

            “If I start a research project with the premise that “use of Riba in the economy will increase the rate of employment” this will never be Islamic Economics because we know it is wrong so why bother.  If my investigation nevertheless reached the conclusion that, on the contrary, use of Riba will increase the rate of unemployment, then this will be Islamic Economics par excellence.

 

            “If I study the size of interest-based-lending in a Muslim country, this would not be considered Islamic Economics.  But if at the end I reached a conclusion that such lending has dropped lately because most of banks transactions are now sale based and Mudarabah based, then this suddenly becomes a candidate for the inclusion in the Islamic Economics “hall of fame”.”

 

According to him, “we as Islamic economists already have our conclusions and we define our discipline on the basis of “Islamically correct” conclusions.  I will only accept the “economics” that reaches the same conclusion which I already know to be true because I have the answers from my more reliable source.  If the premise appears to be open to any result that is contrary to our pre-set conclusions, we immediately refuse to accept it.  Once we are assured of the conclusion, we then accept to engage in “scientific” research.  But then the best we can accomplish is to reach a conclusion we already know”.

The fact is that Elgari could not have made a better case against using the methodology of Economics to understand the economics underlying the institutions of Islam. According to it is useless to attempt it. The only course, if want to understand and develop Islamic economics to understand the institutions of Islam how they affect behaviour of economic agents and how it compares with those of other systems in bringing about socio economic change in the society.

 

But Elgari drew a different conclusion by saying that Islamic Economics can never be a scientific discipline. According to him Islamic economists, first need to agree what do we mean by “science” and scientific discipline. El-Gari  gives following example to substantiate this point.

 

“Both the science of psychiatry and the art of voodoo specialize in healing “ailments of the soul”.  Both reach results that are not dissimilar (with all due respect to both categories) with not too different a degree of success.  Yet they are dissimilar because their methodology is obviously different”.

He gave another example, “Farmers everywhere developed, over the centuries, methods for predicting winter storms, rainfalls and the arrival of spring, through observing the behaviour of animals, signs of the stars and changes in trees and plants.  Meteorology tries to do the same thing: They too predict the weather.  Until very recently, they both had the same degree of accuracy yet they were different because their methodology is different”.

 

Again, both these examples that El-Gari offered to conclude that Islamic Economics cannot be a distinct science, can equally and strongly be used to say the opposite; that objective methodology would make Islamic economics a science and can be different from the science of what is now known as ‘Economics’ as Vodoo is different from psychiatry.

 

Elgari’s statement that “Islamic economics uses the tools of science to reach conclusions we already believe to be true and correct” only reflects a confusion about what we mean when we present Islamic Economics as a distinct discipline.  In the name of Islamic Economics, we can do three things:

(1)               We can explain Economic concepts from the original sources without any reference to any theoretical framework.  This is the approach usually adopted in the faculty of Religion, in Muslim universities, and is widely available in the literature on Islam.

(2)               We can analyze the economic concepts mentioned in the original sources utilizing the theoretical and analytical framework of conventional Economics.  A large number of contributions have been made in this form to the literature known as Islamic economic literature but very little of this has gone into the text books or teaching material to be used in Economics and Business faculties at university level.

(3)               Developing Islamic economics in two stages. First developing our own understanding about axiomatic assumptions and reasons about economic behavior of man, the institutional framework for economic activities in civilized societies and objectives of economic pursuits in the framework of a defined socio-economic system; second using this understanding to develop our own framework for economic analysis and using framework for understanding the economic behavior and the implications of Islamic teachings on economic matters on human, social and economic development of the society.  Not much work has been done in this direction.  Naqvi (11) and Chaudhry (3) probably are the only major works that can be mentioned in this category.  These works, despite being quite scholastic, have yet to play a catalytic role in developing a distinct discipline.

 

Elgari basically is referring to the works of type 2 mentioned above which can easily be ruled out as work showing Islamic economics as a distinct discipline.  This work can best be described as application of science of Economics to the economic teachings of Islam.  What we can rightly call Islamic economics is the type 3 work mentioned above.  In the type 3, we can bypass the first step if we agree to consider NIE as the closest framework for our purpose. NIE is raising the same questions that Islamic economists are raising and NIE is giving a framework how to answer these questions.

 

Nejatullah Siddiqi, in the course of discussion on what went wrong, had made the remark that if we know we are wrong, we definitely took a wrong path.  It does not mean that we can never reach right destination.  There is still a possibility that there is a right path which can take us to right place.  If we have been doing type 2 work, it does not mean that type 3 work does not exist.  It only means that if we want reach our destination, then type 2 work is not the point where we should be.

 

Elgari was referring to work of type 2 rather than to the work of type 3 when he said:

“Do we need economists to show us that Riba based banking is “bad” for every body?  —- yet Islamic economist in what we call “Islamic Economics” have gone ahead and used the most sophisticated tools of analysis (from the capital economics) just to show that Riba is bad for you”.

 

Elgari was missing the point. This type of Islamic economics may or may not have its own merit, (and I will rather agree with Elgari that there is no net gain from such an effort) but the subject under discussion is science of Islamic economics which would require finding a suitable framework or developing our own scientific framework in which the economic rationality of concepts like prohibition of Riba, Israf, “wrongfully” usurping the property of others etc. could be understood by relating them to the objective of the overall system of life in Islam and arrive at better basis for predicting behavior and policy perspectives obtained as to how to achieve these objectives in the contemporary realities about economic behavior of man within the contemporary institutional framework.

 

Creating such distinction between the “[capitalist] theory” of Economics and “Islamic theory” of economics would distinguish science of Islamic Economics from science of Economics. 

 

We will be thus serving not only the Muslims but others as well if we can show that “Islamic theory” is closer to realism, broader in scope and coverage and more useful in its conclusion towards human development and human betterment because of the institutional framework it works with.

 

Duality or Middle Path?

 

            Anas Zarqa took a compromised position[13].  He brushed aside a categorical answer to the question of “To be or not to be”.  Instead, he preferred to consider Economics as a broad discipline which already has several schools of thought, (though he did not specifically say but it implied that what we have been referring to as conventional economics or capitalist economics is only one of the schools).  What we will develop in the perspective of Islamic teachings and Islamic system of life will be Islamic School of Economics.  This is a good compromise.  It does not contradict the position taken by Monzer Kahf.  It will be Economics.  It also does not contradict Umer Chapra and Abdul Rahman Yousri and others who believe that we should have our own discipline to be called Islamic Economics which would be different from conventional discipline of Economics. The question is what Islamic school of economics represent.

 

            Anas Zarqa’s line of argument was as below:

 

            All “Islamic” social sciences such as Islamic economics and finance, have two sources of knowledge, the Divinely revealed, and the humanly generated.

 

            The possibility of apparent inconsistency between the two sources has long been recognized and addressed by early Muslim thinkers and jurists.  Ibn Taymmiyah, as Anas Zarqa claimed, devoted a whole book to this, concluding that resolution of the variance should be achieved by accepting the “certain” (from the humanly generated source) and rejecting the uncertain.  If both (i.e. from divinely source of knowledge as well as from the humanly generated source of knowledge) are uncertain, then we should give preference to that which is more nearly certain.

 

                        Two important questions arise in taking this position.  First question, Anas Zarqa himself raised and answered during the Round Table discussion, related to the validity of incorporating values in scientific analysis.  The second question that he did not raise during the Round Table but had it in his mind when he was presenting Islamic Economics as a distinct science in his earlier writings related to the benefit and rationality of using the framework of conventional economics to develop the discipline of Islamic economics.

 

            Let us take the second question first.  The question is whether it is possible to benefit from the duality or taking a middle path that Anas Zarqa is referring to.  He is in fact, advising us taking a middle path when he is saying that we accept the “certain” from humanly generated knowledge and reject the “uncertain” and, by implication, try to develop the “uncertain” into “certain” part using the Divinely revealed knowledge and hence getting a discipline that would be referred to Islamic school of Economics.  To me, this is not what we may refer to as benefiting from duality.  Does he mean that we also use humanly generated knowledge to change the “uncertain” of Divinely revealed knowledge.  With all those Fatawas emanating from Azhar University and other scholars that bank interest is not prohibited, do we mean that we have an “uncertain” thing in Divinely revealed knowledge and let us, as Islamic economists make, it “certain” using the scientific knowledge of economics and then call it scientific development of Islamic Economics?  I believe Anas Zarqa did not really mean duality.  He probably meant taking a middle path.  In the following sense:

 

We have two streams of knowledge, Divinely revealed and humanly generated.  We should run (during our life and meeting our worldly needs) in between these two streams.  We take all what we have from the Divinely revealed source of knowledge but from humanly generated source of knowledge, we pick only what we need but it is not in conflict with the ‘chemistry’ of Divine stream.  The criteria and methodology of selection of what is in the humanly generated stream of knowledge that would be beneficial for us and is not in conflict with the “chemistry” of Divine knowledge will develop a discipline that we will call Islamic school of economics.

 

            Even this course of action, call it duality or middle path, may not lead us to where we want to go in terms of Islamic Economics.  We do know one of the two streams (i.e. humanly derived knowledge and which we call Economics) is a very fast moving stream and the other stream (i.e. Divinely revealed knowledge which is mostly expressed in terms of what we call Fiqh literature) is a very slow moving stream, if it is moving at all.  Running in between the two with the intention of getting “certain” of both the streams, we may quite likely end up ignoring the second stream, if we tried to concentrate on finding “certain” from the first (fast moving) stream or we may quite likely end up missing a lot of “certain” things from first (the fast moving) stream if we tried to concentrate on the second (slow moving) stream.  This is like running on a razor edge path with very high probability of falling injured in one of the streams.  In fact, this middle path walk has been the strategy many of us have been using during the last 30 years and found ourselves in the state described above.

 

            I explained earlier,  three things that we can do in the name of Islamic Economics:

(1)        We can explain economic concepts mostly from Fiqh sources, failing to keep pace with the developments in science of economics.  In this process we simply fell injured into the Fiqh stream.  This material can be seen in the Fiqh of Islamic banking.  This part of Islamic Economics is finding it difficult to get validity and acceptability even in Fiqh stream.

(2)        We can pick up concepts from fast moving Science of Economics without finding enough time to look into the Fiqh stream.  In this process, we simply fell injured into the stream of economics.  This Islamic economics is not finding acceptability even in Economics.

(3)        The third thing that can be done is to develop an altogether a different stream with its own source, direction and chemistry.  It may or may find things to be picked up from current streams of Fiqh and economics and it may benefit from several other streams (other sciences). We may or may not give it a name Islamic Economics or Economics.  What we do need to realize is that we need altogether a different stream to meet our vision and our needs.  Duality may be a possibility but not relevant for consideration as a method discovering our own stream relating to the economic activities and behavior of economic agents. 

 

            The other question that Anas Zarqa himself raised, can values be incorporated in scientific analysis?  This is, in fact, the same question that Mohamed Elgari also raised during his presentation and led him to vote against the existence of a distinct discipline that can be called Islamic Economics on the grounds that values cannot be incorporated in the scientific analysis.  Anas Zarqa referred to Bergson-Samuelson conclusion[14] that values have to be imported from outside Economics in order to weave them in the positive cause-effect economic statements to make social welfare function which can then be used to evaluate any policy change.  Value-free evaluation of any policy over another is impossible.  Thus, according to Anas Zarqa, even in Economics, you cannot make positive analysis to prove one policy action (e.g. prohibition of Riba) to be better or worse than the alternative policy (to allow Riba) without incorporating values in Economics. Economics does make such comparison by importing values from outside (e.g. from constitution, law etc.).  Hence Islamic economics too can still claim to be a science even if it is value based.  The difference will be made by the sources of values and nature of values.  In Islamic economics, the values will be derived from Divine revelation[15]

 

            Anas Zarqa referred to the same duality in his paper cited earlier in which he claimed “to shed some light on certain methodological and philosophical aspects and to illustrate its unique approach by reflecting upon an Islamic social welfare function”[16].  I, therefore, could not understand why, after 30 years, he had to deviate from his own claim that “distinct and meaningful Islamic Economics is possible, nay necessary”[17].  This, he further asserted at that time, “is building an almost new theory.   ……. This, as Muslims we must do if we are to contribute genuine Islamic solutions to human problems and if we are to stop acting as “free loaders in the social sciences of today”.

 

            With his own elaboration during his presentation during the Round Table, it seems very clear that Anas Zarqa did not really mean it when he said that we cannot have Islamic Economics, and instead we can only have Islamic School of Economics.  As I mentioned above, if we properly investigate into economics in the Islamic system and investigate economic behavior of man in the light of the perspective that Islamic sources provide us on the man’s  approach to earning and making a living in this world within a given set of institutions, we are compelled to find a framework, different from that of conventional economics, to make this investigation scientific.  We may need to give it our own name if the name Islamic Economics does not fit it.  If we have to think of it as a school, then we may consider it as a school of Shari’a and Fiqh as clearly implied in Siddiqi’s key note address mentioned earlier but definitely not as school of Economics, because of the reason explained above.  We already have different schools of Fiqh.  We may come up with a school that is talking about Fiqh addressing to the subjects that  economists are normally concerned, and the subjects that economists should be concerned but do not like to be concerned with , and the subjects that economists are shy to be concerned with and the subject that economists are ignorant to be concerned with.  This school may or not be using the language that conventional economists use, but it will use a scientific language that scientists including economists will not find difficult to understand.  This may seem to mean throwing the ball of economics to the court of Fiqh scholars who have been blamed in this Round Table discussion for not making Ijetehad to allow Muslim economists to find solutions to economic problems faced by Muslims in applying Shari’a in their economic activities in the contemporary world. This is in fact throwing  the ball of Fiqh to social scientists to develop a discipline similar to what “conventional” economists have developed, a discipline that would help understand how to promote human welfare and human betterment rather than aiming at academic excellence.

 

            All the above discussion boils to one point. We need “our theory” to understand “our economic problems” in “our framework”.

 

 

 

“Our Theory” Vs Conventional Theory

 

Until we come up with a new name for what we need as alternative to conventional theory of Economics, I will be calling it as “Our Theory”.  Before elaborating in what I mean by “Our Theory”, it would be instinctive to note the following comment made in the collection of papers on What do Economists Contribute referred to earlier:

“Economists should not only provide facts and interpretations, to help every man see where his interests lie, but also by providing moral guidance about what his interest should be”.

 

Instead of depending on our inclination and attachment to the conventional  economics to explain Islamic economics, we should rather depend on the needs of Islamic economics as a science and keep out mind open to choose the methodology to  meet the need. The needs of Islamic economics as a science should be to have appropriate tools help Islamic economists to arrive at policy prescriptions and guidelines for human behavior to achieve the objectives of Islamic system of life.  I am trying to explain this point in my work on the theory of consumer behavior.  My argument is that we must recognize the difference in Theory of “Islamic Consumer” Behavior and “Islamic Theory” of Consumer Behavior.

 

This is not merely semantic. I would consider “theory of Islamic consumer behavior” as picking up various elements of Islamic teachings on consumption and incorporating them in conventional theory and conventional models to see what are the implications of these teachings on the economy or on the economic conditions of individuals.  Several papers have been written in the past, in this respect, for different seminars and conferences.  It only means treating Islamic economics as branch of Conventional Economics. But this is not what I mean by “Islamic theory of consumer behavior. I believe that there is strong basis to have our own framework to understand the consumer behavior as well as to understand the Islamic teachings relating to consumption and this framework, once developed, can be called  Islamic theory of consumer behavior.

           

I put forward two reasons for having a theory which could be called Islamic Theory of Consumer Behavior as opposed to Conventional Theory of  Consumer Behavior.

 

(i)         The conventional theory of consumer behavior, despite its robustness and amenability to mathematical manipulations covers a very limited ground as far as understanding the consumer behavior in today’s societies of the world is concerned.  It focuses on the mind set of consumer only and ignores the institutional and environmental set up with in which he is making his consumption decisions. The theory may have contributed substantially to understanding some aspects of consumer behavior in some societies of the West but it hardly proves its relevance to understand the decision-making process of consumers in majority of the societies in the contemporary world.  For example, why consumers prefer to spend on conspicuous luxury goods while their basic needs are unfulfilled?  Or what type of consumer choice it is when he prefers leisure to work, when he knows that work will contribute income, no matter how small, to the poverty stricken family?  Or how a consumer would objectively identify whether or not there is waste of resources in his consumption pattern?  Or why items like education of children and family health become low priority items compared to recreation and conspicuous consumption items in majority of the underdeveloped societies. The answers to such questions lies in customs, traditions, social environment, culture and other elements that make up the institutional set up for the consumer to make his decisions. The conventional theory is not only limited in scope with respect to taking care of the influence of such institutional factors on the consumer behavior but it is also limited in its scope to focus on understanding and explaining some of the contemporary economic problems that are directly the result of certain institutional constraints and influences on the consumer behavior.  Incidence of poverty has a lot to do with the consumer behavior but this is not a subject of existing theory of consumer behavior.  Economic development also has strong roots in the consumer behavior but the existing theory is not geared towards understanding consumer behavior as a reason for development or under-development.  The World Summit on Sustainable Development held in Johannesburg, South Africa, from August 26 to September 4, 2002 recognized that changing consumption pattern is one of the essential requirements for Sustainable Development.  But the theory of consumer behavior has yet to recognize it.  The Sustainable Development will remain a subject outside the mainstream Economics unless there is a theory that identifies endogenous elements in consumer decision-making process that can help keeping consumer behavior in line with the society’s perception of Sustainable Development.  Sustainable development is eventually a matter of observing certain ethics in economic behavior. 

All such issues relate to what is being referred to institutional framework which includes rules and regulations, ethics and moral values, customs and traditions resulting form religion or from cultural history. Theory of consumer behavior that ignores the role of such institutions in consumer’s decision making is bound to leave such pressing economic problems like alleviation of poverty or sustainable development outside the mainstream of Economics.

 

(ii)        For Muslims and Muslim economies, there are additional arguments why we may need a different theory.  Islamic scholars interested in science of Economics have several reasons to be dissatisfied with the current theory and feel they must develop an alternate theory to understand what Islam teaches them about economic behavior and economic institutions.  From Islamic sources, based on divine revelations, they get a different understanding of the nature and behavior of human being in their economic activities compared to what conventional Economics provides.  The textual sources of Islam, for example, make elaborate references to elements of human behavior relating to consumption.  The Islamic economists, when they try to analyze these elements within the framework of the conventional theory of consumer behavior, they feel lost.  The theory is very restrictive and not rich enough to allow economic understanding of these elements.  Some of the concepts mentioned in the divine text pertaining to consumer behavior are just not recognizable in the conventional theory of consumer behavior.  The Islamic economists therefore should rightly believe that they need to develop their own framework for the analysis of consumer behavior that can provide more realistic understanding of the behavior, can help understanding the divine commandments about the behavior and can lead to better economic conclusions for the benefit of the human existence in this world.

It is, however, not merely the “relevance” argument that should force us to have our theory.  The fact is that developing our own theory is a sort of obligation.  Development of an Islamic theory of consumer behavior to understand Islamic teachings on consumption is necessitated by Islam’s urge to develop human being as individuals, develop harmony in society and make the life on earth easy and comfortable for all generations to come as long as this world exists.  Alleviation of poverty in a society, meeting the needs of have-nots and less privileged members of society, restraining from corrupting the earth (land and sea) and environment are among the clear objectives of Islamic system of life and they have been embedded in the norms for  the consumer behavior too.  For example, we have specific injunctions; to avoid Israf, Tabzeer and Itraf (concepts relating to waste of resources or misallocation of resources), to be moderate in spending ; to keep watch on needs of neighbors and the have-nots; to eat Tayyibaat (concept relating to good, clean and hygienic consumption), not to use the divinely prohibited commodities; not to make consumption harmful to health, environment or fellow beings; to spend in the cause of Allah; to observe Taqwa & Iman (concepts relating to God fearing, being watched by Omnipresent, being accountable for every action) in spending, to seek Falah (concept relating to integrated success in both the worlds), to follow Ihsan (concept relating to doing things in good style) in all activities (including matters relating to consumer behavior) etc. etc.  We need to incorporate Shari’a rules , Islamic ethics and morals, and Islamic culture resulting from the Islamic beliefs in a model that can help us understand nature of such concepts as mentioned above and their relevance for consumer’s wellbeing, alleviation of poverty and sustainable development, creation of harmony in society etc.  To achieve these objectives is a religious obligation on society and a relgious duty of scholars to tell the society how to achieve them.

 

At the outset, my argument mentioned above led to the debate, should Economics (conventional or Islamic) talk about values in economic analysis?  If yes it will no more remain to be a positive science.  Most of the participants in the Round Table agreed that moral values and ethics have to be integrated in the development of Islamic Economic Theory.  Even Monzer Kahf who did not believe in Islamic economics as a science distinct from Economics conceded that moral dimensions of economic analysis is the only factor distinguishing Islamic economic thought from conventional economic thought.  Anas Zarqa too underlined the significance of moral values for the development of Islamic theory of Economics and to understand how individual behavior can contribute to achieve social goals.  Abdul Rahman Yusri, another IDB prize laureate, too associated himself to this group saying that conventional economics itself is coming back to ethics then why Islamic economists should be shy of incorporating Islamic values in the Islamic economic analysis without taking it away from the category of positive sciences. Omar Zubair also strongly advocated the role and significance of Islamic moral and ethical values as an integral part of Islamic Economic Theory.  But most of those who believed in the uniqueness of Islamic values and significance of their role in understanding man’s economic behavior still did not believe that this would make Islamic economics a distinct scientific discipline. This only reflected their obsession with the conventional economics where the methodology to incorporate values in economic analysis does not make much difference in terms of understanding the value based consumer behaviour.

 

Omar Zubair and Abdul Rahman Yusri probably were the only exception explicitly advocating Islamic economics to be a distinct scientific discipline to have its own theory distinct from the theory of conventional economics.

 

Incorporating the Islamic values was not what I recommended for the development of Our Theory of Economics behavior.   I only emphasized discovering the methodology that would take a more realsitic and more consistent approach towards understanding human life and human behavior. 

 

In the first conference on Islamic Economics, Khurshid Ahmed referred to ‘needs’ rather ‘than’ wants as a basis of consumer behavior[18].  Monzer Kahf referred to Falah (success as defined in the Islamic World view of human life as a motivating behavior of consumer behavior[19].  I believe, the concept of need as opposed to want is more realistic, more rational and more objective, as well as closer  to the value-system-of-Islam concept, to become the basis for the analysis of consumer.  I discussed in some detail why a concept like need can help us develop our own theory of consumer behavior quite distinct from the conventional theory.

 

On my presentation, one point that was repeatedly referred to was how to define ‘need’ and how to distinguish it from ‘want’.  For example,  Monzer Kahf said that “who will tell me except God — we can analyze consumer behavior of Islamic society using conventional theory”.  First of all I believe that it required a little more thinking than a spontaneous reaction to making need as a basis for consumer decision making.  I have discussed it else where that it is ‘need’ rather than ‘want’ that is in reality the basis for ‘rational’ consumer’s decision making.  The two may overlap to a considerable extent for a ‘rational’ consumer but we often do find that many wants cannot qualify as ‘need’ in the social and cultural set up in which consumer lives and many needs (determined by the value system of society) may not become wants of the consumer because of several cultural factors. It gives a lot more insight and analytical rigor to make ‘need’ rather than ‘want’ as the starting point for analysis of consumer behavior. Nejatullah Sidddiqi supported the distinction between ‘need’ and ‘want’ as he too believed that Islamic approach with its emphasis on society and care for others provides a distinct vision for the development of different theory of economics, to be called “Islamic Economics”.

 

In case of firm behavior, we know that there are so many theories.  Economists have their own more than one theories.  Management scientists have their own theories.  All explain firm behavior from the point of view of their own vision and World view on human and human behavior and come up with their own conclusions.  Similarly markets and their structures can be explained differently with different visions. In my presentation, I emphasized that developing our own theoretical perspectives on behavior of economic agents may lead us to understanding the need of developing appropriate institutions to guide the behavior of economic agents to conform to Islamic norms.  This may need empirical research relating to the study of behavior of economic agents in Muslim societies.  For example, several Muslim countries are currently conducting household-income expenditure surveys.  These surveys can be easily and conveniently redesigned to include aspects that can provide a wealth of data for Islamic economists to study the consumption patterns and consumer behavior in Muslim societies in relation to Islamic teachings on the subject and give them their own basis to develop a theory of consumer behavior, more relevant and more realistic.

 

Lack of statistics and empirical data is one of the basic hurdles in the development of Our Theory.  All the existing data explicitly or implicitly serves the interests of the conventional theory because conventional theories underlie in the collection of all the data.  The data to serve the interest of Our Theory will not be generated unless we have our own theory recognized.  This is a circle that needs to be broken down by taking an initial step.  Having a need-based theory of consumer behavior and getting the household income-expenditure surveys accordingly re-designed would be an effective step to overcome the deadlock.

 

 

Ethics and Economics: Theory of Firm

 

            The value system of Islam is a potential source of providing distinct dimensions in the process of delineating a distinct theory about economic aspects of human life and economic behavior of mankind on earth.  Naqvi (11) provided a good example of such an exercise.  The participants of the Round Table, generally did not think so.  Imad Imam, represented their view when he said that  in (conventional) economics, we have all the models to take care of all our values.  Trying to develop a new theory to incorporate Islamic values in economic analysis will mean nothing but an attempt to re-invent the wheel.  Imad Imam is right.  If it is only a matter of making economic analysis of a behavior combined with Islamic values we do not need to re-invent wheel.  We have the conventional framework available to do it.  But my question all along this discussion was whether the conventional framework is relevant for the type of analysis we need.  Many in the Round Table discussion said, yes while I and a minority view with me said no and that is the basic issue we need to resolve.  Those who may say yes, they of course are referring to type 2 analysis discussed earlier.  For a type 3 analysis where we need to develop our own framework and theory to understand the economics of our own value system, then it is not re-inventing of wheel.  It is discovering a new path leading to new destinations not visualized by the conventional economics.  As Nejatullah Siddiqi said, if we are not where we wanted to be then we definitely took a wrong path. 

 

            In answer to, where we went wrong, Tag el-Din identified, though in a different way, the mistake in incorporating Islamic moral values and ethics in economic analysis[20].  Tag el-Din said, “The main drift was to develop a morally loaded theoretical model of economic behavior with special emphasis on replacing the pivotal postulate of self-interest in the mainstream Western positive economics by the Islamic norms of mutual caring, brotherly cooperation and altruism”.  He quotes Keynes to say that this is a confusing approach and cannot lead to any practical guidance to benefit from ethics.  “The question is not whether the positive enquiry would complete as well as form the foundation of all economic discussions, but whether it shall be systematically combined with ethical and practical inquiries, or pursued, in the first instance, separately”[21].

 

            Tag el-Din suggests adopting a, what he refers to as, Moral policy Method.  According to him, “Rather than assuming the ideal moral behavior in a purely value-loaded theoretical set-up, this method is characterized by a recognition of positive realities, and hence, the figuring out of suitable policies to help change those realities to the better and attain the desired moral goals”.  To him, “Moral policy is heedless to the ethical appeal of the basic economic assumptions (e.g. self-interested behavior, scarcity, etc) so long as the ultimate objective of the analysis is to enlighten the process towards moral goals”.  For Tag el-Din, formulation of ethical assumptions and axioms is not important in the context of Islamic economics.  What is important is the achievement of moral objectives and moral policies.  In his own words, “The real challenge of Islamic economics is to correlate perceivable Islamic economic policy with the implications of the generally acknowledged economic theory, that is, to analyze the economic jurist intents (almaqasid), rather than develop a pure Islamic theory.  What we mean by the ‘generally acknowledged economic theory’ is the ever growing and critically debated body of positive economics, to which Islamic economists must contribute, not the current state of the art.  The best means for Islamic economists to communicate with the mainstream economists is to delve more thoughtfully and rigorously into the mainstream circle of theoretical economic dialogue”.

 

            Tag el-Din extends his point to apply to the theory of firm and theory of entrepreneurial behavior.  He did not agree with approach taken so far by Islamic economists such as restating the theory of firm in terms of Islamic moral values as against the behavioral assumption of profit maximization or reclassifying the factors of production and factor remuneration with special attention to the position of capital[22].  Instead, Tag el-Din, believed that, “More illuminating insights to Islamic economics could be attained if the entrepreneurial behavior and the related issues are approached from the perspective of a general theory of profit and production organization.  Had such a theory been developed, it could have helped explain the vulnerable scope of the neoclassical theory, as well as predict and justify the present trend where major developments in financial markets and the modern investment theory have, by far, transcended the neoclassical theory of the firm”.  In the “general theory of profit and production organization” as Tag el-Din, put it, “The entrepreneur must be assumed to be capitalizing on a relative information advantage about the final product market not shared by the other factors of production. Accordingly, the neoclassical assumption of perfect information must be governed by the condition that information is only factor-specific, in the sense that every factor is content with ‘perfect information’ about its factor market price.  If this qualification is introduced, the neoclassical theory can no longer hold the claim of information efficiency, even under the ideal perfect foresight model”.    According to Tag el-Din, “The key words for the needed general theory of profit and productive organization, to which Islamic economists may take the lead, are informational efficiency and risk management”.

 

Theory on Market Structure:

Lessons from Fiqh

 

 

            Without believing that Islamic economics can be an independent discipline, Mabid Jarhi implicitly made a strong case that we need to develop our own understanding of market structures as (conventional) economists dealt with market structures with an eye (only) on gains from trade, specialization and economic efficiency and hence keeping several issues relating to market structures unresolved to the satisfaction of theoreticians and policy makers. Mabid Jarhi pointed out the need of a revolutionary approach towards understanding the development of market structures.  He gave two reasons for adopting a revolutionary approach:

1)                  “Modern theoreticians in Islamic economics would like to think that an Islamic economic system values competitive markets and their advantages.  However, due to the long period of totalitarian economics that passed over Muslim countries, several apologists for market control have arisen both from religious scholars as well as economists.  A counter revolution is therefore, needed, based on a fresh rereading of fiqh and Islamic traditions, and armed with modern tools of economic analysis”.

2)                  “Another area that requires further thinking is related to how risk-sharing influences market structure.  Both conventional and Islamic economic literature is still groping on this subject.  It is known that the Islamic economic system, properly applied, provides a higher degree of risk sharing than does a conventional economic system.  Such risk sharing would be manifested in both the relationship between fund suppliers as well as fund users from one side and financial intermediaries from the other side.  It would also by manifested by greater integration of markets among Islamic countries, if and when they the Islamic principle of free trade among Islamic countries, based on the Islamic teachings, that restricting trade among Muslim is unlawful”.

 

Mabid Jarhi gave examples from Fiqh having implications for developing the understanding of market structures from Islamic point of view.  One example relates to what is called Ihtekar.  Ihtekar, a monopoly-cum-hoarding based market activity, is prohibited in Islam.  First issue is how we define,  Ihtekar market.  Fiqh only tells us that Ihtekar in the market means:

(a)                storing goods, and

(b)               selling them at a later date, presumably when prices are higher.

 

The spirit is not to deprive the market from competitive fair play.  For some goods, Ihtekar in market places will always exist without adversely affecting the competition in the market.  For some goods even a small tendency of Ihtekar may destroy the competition.  This issue is similar to the issue of gharar.  Gharar (to be broadly referred as imperfect information) in the market exchange is prohibited in principle.  But some gharar will inevitably exist in the market otherwise market will not function.

 

How to define competitive market structures to take care of such Islamic provisions and develop policies to ensure the existence of desired market structures.  According to Mabid Jarhi, there are several Shari’ah rules relating to market structure but current Fiqh literature relating to these rules is not clear enough for the economists to understand what implications they have for market structures.  Mabid Jarhi suggests a fresh reading of Fiqh and Islamic traditions to develop Islamic understanding of contemporary economic institutions.

 

Alternatively, we may argue that it is not fresh reading of Fiqh that is required but instead fresh reading of economics underlying the contemporary laws and institutions is required in order to properly understand economic application of Shari’ah rules and accordingly develop the institutions and legal framework to achieve the desired objectives.  In either case, the bottom line is that a revolutionary approach is required to re-write economics besides re-readings Fiqh.  And this is nothing but developing a new discipline which Mabid Jarhi did not like to admit.  Mabid Jarhi’s discussion on other examples from Fiqh such as ruling against fixing prices in the market or ruling against making exchange outside the market lead to the same conclusion contradicting Mabid Jarhi’s own assertion that Islamic Economics cannot be a distinct discipline.

 

Implications of Risk-Sharing

 

            Mabid Jarhi regarded risk sharing a basic feature of the Islamic economic system and considered it an interesting proposition to study the implications, of the relative pre-dominance of risk sharing in the capital markets, for the efficiency in the economy.  It will be very naïve to assume that such a testing will be meaningful in the conventional economic paradigm.  Risk sharing is not a tool.  It is an alternate philosophy and a part of an alternate paradigm. It will be very misleading to see the implications of this philosophy on the concept of efficiency as defined by another paradigm.  No doubt the question raised by Mabid Jarhi about pre-dominance of risk-sharing in the financial and capital markets of the economy is important. We do want to understand its implications, but for our own paradigm. We may study it for another paradigm but only to show that it would not make sense[23].    We then have to come back to our own paradigm to show why it may make sense.

 

            Risk-sharing in financial markets has implication for consumer behavior,  production organization, entrepreneurial behavior and exchange in the goods and factor markets.  Risk-sharing in financial dealings is an integral part of our financial system that has a strong encouragement requiring economic agents to accommodate financial needs of others without any economic returns and strong discouragement for borrowing other than to meet needs.

 

 

Conclusion: Where are we.

 

            My own conclusion from the above discussions in Round Table is that we do have a strong case for exploring a new science that can be termed anything but what is known as Economics. 

 

            But a hard care conventional economist, attending the Round Table, probably as an exception, neither agreed nor disagreed.  He was only disappointed.  In the paper written after participating in the Round Table discussion, Ali Khan wrote;

“In two days of discussion in the Round Table, I come away with the perception of a palpable sense of disappointment in what is termed the subject of Islamic Economics”.

 

Ali Khan made a valuable review of the entire discussion from the point of view of a (conventional) economist[24].  While reviewing the discussion he made several suggestions to Islamic economists.  One of the suggestions can be summarized in the following words:

“If you want to talk to me, you first mind your language”.

 

If we want to be a school of economics then we use the economic jargon in its right context and with right connotation.  Retaining the jargon like self interest, maximizing, etc. but using them with different interpretation and connotations has not been able to gain the attraction of economist.  This perhaps may be one of the main reasons behind the slow or no progress in the recognition of the Islamic economics even as a school of economics.

To me this is however a reflection of what I have been saying above. As Islamic economists we have been playing in a wrong field. We better find a ground where we will be more comfortable to play and our terminology and language will be better understood or we develop our own framework with our own terminology and jargon in clear context and with clear connotations.  Doing this may lead us to have a discipline which may or may not be called Islamic economics but will give us a platform to have a meaningful and useful interface with Economics.

 

So what is my conclusion now with respect to the question of “To be or not to be” with respect to Islamic Economics, after the above synthesis of the discussions in the Round Table?

 

I believe that the Round Table discussion, though belated, did succeeded in making one point very clear.

 

Islamic knowledge about human nature and human behavior gives a very distinct perspective to look at the economic pursuits of human beings.  A scientific formulation of this perspective is needed on its own merit.  The outcome will be a discipline distinct in several from what is known as Economics.

 

Suppose we give Paul A. Samuelson the parameters like prohibition of interest, the injunctions of Zakah and Ushr, the injunction about Israf and Tabzeer, the Quranic statements axioms about human nature and objective of human life in this world, etc. and ask him to develop an economic theory based on these parameters, forgetting or not, what he wrote in Foundation of Economic Analysis and during more than half a century onward, then what we get from him, would it be different from what the Economic Theory that we now have?  Even if we hope that this new theory could be distinct from the Economic Theory, it does not help us because it is an impossible proposition; not because Samuelson would not do this job, but because it may be impossible to give him an agreed upon set of Islamic axioms and parameters about human behavior relevant to develop our Economic Theory. On the other hand if we give a comprehesive note on the institutional framework of Islam and ask him to explain economics as implied in these institutions, then what we will get from him may be totally different, more relevant and more realistic Economics than the conventional Economics.

The point is only this. An alternative framework has to be found to make economic analysis of the iinstitutions that Islam gave us for human life and hence develop a disticnt discipline that we would call Islamic economics. Until we develop our own framework, the the framework of NIE is probably the best alternative framework from the existing methodologies that can serve our purpose.

 

There has been a sustained serious demand in the Muslim social scientists in general and Muslim economists in particular to look for a paradigm within the Islamic system that would clearly and scientifically present solutions for the economic problem faced by world in general and Muslim societies in particular.  This demand will always remain.  I sincerely hope that this review of the Round Table discussion may provide new starting points to the economists working on this front.

 

M. Fahim Khan

 

Chairman, Riphah Centre for Islamic Business

Ripha International University, Islamabad

mfahimkhan@gmail.com

 


 

 
 

References

 

1.         Khurshid Ahmed (ed.), Studies in Islamic Economics, The Islamic Foundation, Leicester, UK, 1980.

2.         Khurshid Ahmed, “Nature and Significance of Islamic Economics” in Ahmed and Awan (ed.) Lectures in Islamic Economics, Islamic Research and Training Institute, Islamic Development Bank, Jeddah, 1992.

3.         M.A. Chaudhary, Contributions to Islamic Economic Theory, McMillan, London, 1986.

4.         G.A. Fel’dman, “On the Theory of Growth Rates of National Income”, Planovoc Khoziaistvo, No. 11, 12 (1928), translated in N. Spulber (ed.) Foundations of Soviet Strategy for Economic Growth, Bloomington, Indiana, 1964.

5.         Monzer Kahf, “A Contribution to the Theory of Consumer Behaviour in an Islamic Society”,  in Khurshid Ahmed (1).

6.         M. Fahim Khan, “Factors of Production and Factor Markets in Islamic Framework”, Journal of Research in Islamic Economics, King Abdulaziz University, Jeddah, 1985.

7.         Howard Klein et al (ed.)  What Do Economists Contribute, Macmillan and New York University Press, 1999.

8.         Timur Kuran, “Islamic Economics and the Islamic Sub-economy”, Journal of Economic Perspectives, 9 (fall 1955), pp. 155-173.

9.         P.C. Mahalanobis, “Some Observations on the Process of Growth of National Income”, Sankhhya, September 1953, pp. 307-312.

10.       D. Moggridge (ed.) The Collected Writings of John Maynard Keynes, Vol. XIV, MacMillan, London, 1973..

11.       S.N.H. Naqvi, Ethics and Economics.

12.       Amartya Sen, On Ethics and Economics, Oxford Basil Blackwell, 1987.

13.       G.J. Stiglitz, “Economics or Ethics”, in S. Memurrin (ed.) ­Tanner Lecture in Human Values, Vol. II, Cambridge University Press, 1982.

14.       Anas Zarqa, “Islamic Economics: An Approach to Human Welfare” in Khurshid Ahmed (1).

 

 

 

 

 

 


 

[1] The complete address can be seen in the proceedings of the Round Table when it is published by Islamic Research and Training Institute of Islamic Development Bank, Jeddah.

[2] There exists presently a sort of central body called OIC Fiqh Academy that makes Ijtehad on issues on application of sharia faced in the contemporary world. But this Ijtehad is made based on the classical Fiqh literature. This is not the Ijtehad that Siddiqi is proposing. 

[3] This applies equally, if not more to (conventional) Economists and economists too are critical of this absence of touch with reality. See, for example, Klein (7).

[4] Klein, Howard with, Basingstoke and Hampshire (5)

[5] See his paper included in this volume.

[6] Monzer Kahf in his presentation referred to “[Institutions} are manifested in the organizational setting that enables the human element to implement its developmental ideas and plans.  These institutions include the role of law, the right of private ownership and private growth, role of women, the setting of the third sector, the charity that covers the organization of non-exchange transfers including the role of Zakah and Awqaf”.  Monzer Kahf also makes reference to Umer Chapra’s concept of filters as “within” institutions as necessary condition for development.

[7] Zarqa (8), pp. 3.

[8] Zarqa (8), pp. 4.

[9] Zarqa (8), pp. 4-5, 17.

[10] Kahf (9), pp. 19.

[11] Kahf (9), pp. 20.

[12] El-Gari presentation is included in this volume.

[13] His brief presentation made in the Round Table is included in this volume.

[14] Zarqa did not give specific references in his presentation but following may be relevant:

(1)     P.A. Samuelson, “Bergsonian Welfare Economics” in S. Rosefielde, ed., Economic Welfare and Economics of Soviet Socialism: Essays in Honour of Abram Bergson, Cambridge, Mass., Harvard University Press, 1981, pp. 223-266.

(2)     P.A. Samuelson, “Re-affirming the Existence of “Reasonable” Bergson-Samuelson Social Welfare Functions”, Economica, London School of Economics and Political Science, (1971), vol. 44 (127), pp. 81-88.

[15] According to Anas Zarqa, not withstanding an opposing minority view, the majority of jurists conclude that good or bad can not be decided without the guidance from Divine revelation.

[16] ________Zarqa (       ) pp. 3.

[17] ________Zarqa (       ) pp.4.

                     “                  “

[18] Khurshid Ahmed (1), pp.——-

  

[19] Monzer Kahf (9), pp. 23.

[20] His presentation is included in this volume.

[21] Keynes (       ), pp. 47.

[22] With respect to factor remuneration, Tag el-Din was probably referring to my paper (14) on factors of production where factors of production could be utilized by the entrepreneur in two forms; one, they could be hired (this will exclude hiring the fungible capital, as it would involve payment of interest) and the other, they could be hired on profit-loss sharing basis.  The idea was to recognize that income-sharing arrangement was a valid productive organization.  Tag el-Din himself recognized the significance of this.  According to him, “For no obvious reason the income or profit sharing option is assumed away by the neoclassical theory.  The Islamic economist should be in a unique position to perceive significant flaws in the theory of the firm, given the empirical relevance of sharing options in the Islamic legacy”.

[23] Strangely enough.  Mabid Jarhi himself wrote in the paper that he presented in the Round Table that “It is rather difficult in a debt based market economy to test for the relationship between risk-sharing and efficiency”.

[24] The review is included in this volume

Source : Islamic society of INs   website. www.i-sie.org


Source for the Social and Economic History of the Hijaz

 

It has been the practice among modern Islamic and Western historians to depend upon the traditional historical and biographical works in writing the history of pre-Islamic and early Islamic centuries. The general history of al-Tabari (d. 310 A.H.) figures prominently in this endeavor, and so do later historians who followed his method of recording history. Earlier histories, like that of Ya’qubi (d. 277 A.H.), as well as earlier topical works of biographies and military campaigns, like the biography of the Prophet by Ibn Ishaq (d. 151 A.H.) — preserved in its later recession by Ibn Hisham (d. 218 A.H.)— and the monumental biographical dictionary of Ibn Sa’d (d. 230 A.H.), and the works on campaigns and conquests by al-Waqidi (d. 207 A.H.) and al-Baladhuri (d. 279 A.H.) are also cited. Sometimes one might encounter a reference to one of the main compendiums of hadith, or traditions of the Prophet, for the methodologies of both sciences are similar — if not identical — and one, history, can be said to have emanated from the other. One might also find a reference to one of the administrative or fiscal manuals that were intended, for the most part, for the edification of governmental secretaries. Even one might find a reference to a work of literature — horror of horrors to a historian — like that of al-Aghani. But he would look in vain for any reference to an early and authentically-attributed work like that of al-Muwatta’ by Malik ibn Anas (d. 179 A.H.).

 

 

Several reasons car be advanced for this neglect. One is that historians have, in the main, been interested in political history, and works of law, like al-Muwatta’, admittedly do not quench the thirst of the political historian. Another is the notion that most works of Islamic law are casuistic by nature, that they seem to picture an ideal law for an ideal Islamic state divorced from the practical considerations of daily life, and, therefore, that they do not reflect historical reality. A third is that the methodology of law is different from that of history in that it does not entirely depend upon the verification of accounts through isnad, and therefore a historian might not know what to do with law, or how to handle it! Finally, books on law are admittedly difficult to understand by the average historian, particularly in the West, and therefore their meager fare of points of historical interest, arrived at after much effort, was overlooked in the scurry toward much greener pastures.

 

 

The late Professor H.A. R. Gibb used to lament the fact that works on Islamic law, and particularly works on fatawa, were not being utilized for reconstructing the social and economic history of the Islamic era. A work, like al-Muwafta’ which is the earliest extant work on Islamic law, should logically be among the first works to be so utilized. But aside from modern works on Islamic law and legal doctrine which often refer to al-Muwatta’, this important and early work, as far as I know, has not been touched by social and economic historians, save for the treatment of qirad (commenda) in a work by A.L. Udovitch.1

 

 

The question might well be asked — Why should a historian use al-Muwaita’ as a source if it be true that all legal works reflect an ideal state of affairs, removed from historical reality? Here we enter upon a controversial subject that might require several papers to elucidate. Scholars are agreed, however, that not all subjects of the law were theoretical, and that certain subjects, particularly those concerned with personal status, and possibly civil and some dements of commercial law, have been applied throughout the Islamic centuries. Besides, any reader of al-Muwatta’ cannot but be impressed by its practical character — unlike later works which casuistic thinking and religious zeal propelled into the idealistic realm. It is obvious that Malik set about to codify and systematize the customary law of Medina and to give an account of law and jurisprudence according to the consensus (ijma’) and traditional practice (sunnah) of Medina.2 His use of the word “sunnah” seems to have been different from its later use as the model sayings or behaviour of the Prophet. Professor Amin al-Khawli rightly observes about sunnah:

 

 

“We see him using it in al-Muwatta’ for a meaning very near to its linguistic meaning, i.e., “the method,” “the way,” as when he says: ‘the sunnah with us concerning musaqat (a contract of partnership involving trees and labour) is that it applies to date palms, grape vines, olive trees, etc’… or he might mean by sunnah the “method” and “way” of the ‘ulama’ as when he says: ‘our generally agreed practice (al-amr al-mujtama’ ‘alayh ‘indana) and the sunnah on which people do not differ (al-sunnah allati la ikhtilaf fiha) and that which I attained from the ‘ulamd’ in our city (alladhi adrakt ‘alayh ahl ai-‘ilm bi-baladina) that the Muslim does not inherit from the non-Muslim.””3. Actually, al-Muwatta’ abounds in expressions just quoted and in others like the “practice” (al-‘amal), “our practice” (al-amr ‘indana) which point to an actual practice that is both practical and accepted.4

 

 

Al-Muwatta’, then, can be depended upon to reflect an actual state of affair in most instances. It can also, through allusions to pre-Islamic practices, reflect certain aspects of life of the pre-Islamic period as well. Its cautious use by a historian as a historical source can therefore be warranted. What I shall do in the following pages is to present the results of soundings I made while reading this work for pieces of information that might be of significance to the social and economic historian as well as to those interested in historical anthropology.

 

 

Economic Information: As can be expected economic life should figure prominently in a law manual that is primarily concerned with transactions between individuals, with an eye to having them adhere to religious norms, particularly those against usury, and with questions of taxation. In dealing with legal questions, al-Muwatta’ presents — as it were — a lot of economic information as a by-product. We shall take up some soundings in the law of taxation first before going on to the more complicated matters of contract law and commercial dealings.

 

 

In truth all the sections on alms giving (zakat) are important because they give us a fairly clear picture as to the agricultural activity and animal husbandry at the time. We can know, for instance, what kind of cereals and legumes were being planted: Malik said, “Cereals (and legumes) subject to zakat are: wheat, barley, thin-husked barley (suit), millet (dhurah), another millet (dukhn), rice, lentils, peas (julubdn), beans (lubiya) and sesame (juljulan).5 Also we can know the fruit trees grown, as these are mentioned in connection with taxable or nontaxable products. Aside from well-known fruits like dates, grapes, figs, etc., we encounter pome-granites and peaches (firsik)6.

 

 

In the field of animal husbandry al-Muwatfa’ documents the practice of sheep or goat owners grouping their flocks under the supervision of a single shepherd. Malik says, “If the shepherd be one, the stud one, the pasturage one, and the water-bucket one, then the women (owners of the flocks) arc associates (khalif) even though each one of them differentiates his property from that of the other.”7 This becomes important for purposes of taxation, for such a combined flock is treated as one flock and not as separate flocks.      Likewise separate flocks should not be grouped together if it becomes advantageous to their owners — for tax purposes — to do so. Regarding this human failing of evasion of taxation the Caliph ‘Umar said “What is separate should not be grouped together, and what is grouped together should not be separated.” In commenting on this saying Malik says, “This refers to the owners of livestock… (For instance) three owners, each owning forty goats, are legally obligated to pay zakat. (An owner of a flock consisting of at last 40 sheep but not more than 120 sheep delivers one sheep as zakat). But when the tax collector shows up they group them together so as to deliver only one goat….Or the two associates (khalit) each owning 101 goats, and thus liable to deliver together 3 goats, separate their flocks when the tax collector approaches so as to make each liable for only one goal.    Such practice was prohibited.”8

 

 

Another bit of information regarding taxation is that Christians from Iraq (Nabat), and possibly from Syria, were in the habit of trading in the market-place of Medina from pre-Islamic times until at least the time of ‘Umar, and paid taxes there. Malik reports on the authority of Ibn Shihab on the authority of al-Sa’ib ibn Yazid that the latter said, “I was a young man assisting “Abd Allah ibn’Utbah ibn Mas’ud (overseeing) the market-place of Medina in the time of ‘Umar ibn al-Khattab. We used to take from the Mabat one tenth”…Malik asked ibn Shihab as to the justification for that practice and he answered, “That used to be taken from them in pre-Islamic times, and so ‘Umar charged them with it”.9

 

 

The laws of sale and commerce, however, yield most of the information on economic matters; and here the regulatory force seems to be the doctrine against usury. The Prophet, for instance, prohibited a practice that had been prevalent previously, known as earnest-money sale (bay’ al-‘urban). Malik describes it thus: “When a man buys a slave or rents a mount and then says to the person he bought or rented from: I give you one dinar or one dirham, or more or less, on the condition that if I take delivery of the thing or ride what I rented, then what I advanced to you becomes part of the sale price or the rent of the mount, but if I go back on the sale or rent, then what I advanced becomes yours without anything in return.”10 As can be seen, this is a kind of option known to other societies, but it was prohibited in Islam because of an “unjustifiable increase” (riba), since something was gained without a consideration. The fact that some people were willing to pay for an option reflects a fairly advanced stage of commercial dealings.

 

 

An account about the prohibition of usury in another instance yields information on a still more interesting economic institution, namely that of dealing with “futures,”   similar to that of the Chicago Commodities Market. It seems that when Marwan ibn  al-Hakam was the governor of Medina during the caliphate of the first Umayyad caliph,    Mu’awiyah (41-60 A.H.) certain documents (sukuk) were assigned to the people of the city entitling them to  food-stuffs that were being brought to the Hijaz (doubtless as kharaj and  probably from Egypt) and collected at a place called al-Ja’r at the seashore.   The people of Medina started trading with these documents before they actually received their entitlements of foodstuffs — a practice smacking of risk or even riba if the exchange involved unequal amounts. So Zayd ibn Thabit and another Companion of the Prophet called on Marwan and said, “Do you, O Marwan, consider riba sales as legitimate?” “I take refuge in God (from that)”   he said, “and what is that?”    They said, “These sukuk are being bought and sold before the receipt of their equivalence.” Whereupon Marwan sent his guards to track down these documents, to remove them from the hands of their holders and to return them to their original owners.11

 

 

As is well-known, risk (gharar), no less than riba, might vitiate a contract. The Prophet is reported to have prohibited the practices of mulamasah and munabadhah. Malik defines them thus: Mulamasah is when a man touches or feels (yalmas) a garment, but does not unfold it nor ascertain (its character), and munabadhah is when a man throws to another (yanbidh) a garment (in exchange for) a garment that the other throws to him without both of them examining them. He therefore says that it is not permissible to sell a Persian mantle (saj or taylasan) which is inside its cover or a Coptic garment in its fold unless they are unfolded and their inside is seen, because their sale (in their folded state) is a sale of risk.12 Malik could not, however, disallow the well-established practice of selling whole bales of goods on the basis of their description in an accompanying catalogue or list of contents (barnamaj), without actually unfolding them, for then it would become impossible to conduct wholesale trade. He, therefore, says, “The sale of bales according to the bamamaj is different from the sale of a Persian mantle in its cover or a garment in its fold… The difference between them is (based on) the actual practice and the knowledge of that in the hearts of men… and that it continues to be among the allowable sales; among the people… because the sale of bales according to the barnamaj, without unfolding, is not intended as a risk and has no similarity to mulamasah”.13 .Thus the legal provision against risk in al-Muwatta was able to inform us about the extensive whole sale trade in the Hijaz at the time.

 

 

Similarly the legal provision about the permissibility of exchanging goods for goods without violating the doctrine against risk yields much information about the typ.;s of garments, waist-wrappers, and pieces of cloth being imported into Hijaz at the time. We read of garments from the villages of Shata, Itrib. and Qis in Egypt as well as those from Herat in Khurasan (Afghanistan) and Merv in Central Asia. Likewise we read of waist-wrappers (malahif) and pieces of cloth (shaqa’iq) from Yemen14.

 

 

A seemingly simple account about the conduct of trade by means of a partnership of capital and labour (qirad) or commenda might yield information about a variety of other topics. Malik relates that ‘Abd Allah and ‘Ubayd Allah, the sons of Caliph ‘Umar set out with an army to Iraq. On their way back they passed by Abn Musa al-Ash’ari, the “emir of Basrah,” who welcomed them and asked if he could be of benefit to them in any way. Then he said, “Yes, indeed. I have here funds of God’s property (kharaj or jizyah) that I want to send to the Commander of the Faithful. I shall lend these funds to you, then you buy with them goods from Iraq that you will sell in Medina. Whereupon you deliver the capital to the Commander of the Faithful and you keep the profit.” They agreed to this arrangement, and Abu Musa wrote to ‘Umar to take the capital from them. Upon arrival in Medina they sold the goods and made profit. When they came to pay the capital to ‘Umar he asked, “Did (Abu Musa) lend money to the entire army as he lent to you?”    They said, “No. ‘Umar then said “He lent it to you because you are the sons of the Commander of the Faithful. Hand over the capital and the profit!”…Then some arguments ensued between ‘Ubayd Allah and his father about the proper course of action, whereupon a man sitting by suggested that the transaction be considered a qirad.    ‘Umar agreed; he took the capital and half of the profits, while the other half was left to his sons.15

 

 

Now, the foregoing account undoubtedly proves that the contract of qirad had been well-known by the time of ‘Umar, and presumably must have figured prominently in the Meccan trade before Islam.16 In the second place, the account supports the view that Abu Musa was a governor (amir) and not a judge (qadi) to whom ‘Umar was said to have addressed his famous instructions, and that in all probability the institution of the judiciary appeared later during the Umayyad administration — unless of course one is to understand that at that early date the function of a governor and that of a judge were indistinguishable.17 In the third place, it is apparent from the account that the processes of administration were at the time still unsettled and in a rather primitive and chaotic form, whereby a governor would allow himself to lend public money to be used in a commercial venture!

 

 

Social and Anthropological Information

 

 

Here again al-Muwatta’ can be of immense value to the social historian. Information on slavery, on preemption (shuf’ah), on witchcraft, and on funeral and burial practices can be gleaned from its legal contents.

 

 

It has been assumed that slaves in Arabia were employed only in-domestic service — including chores in attending animals — or in commercial enterprises. But in Medina, where date plantations were plentiful, slaves were employed in cultivation as well. In fact these slaves seem to have been attached to the plantations in the same way that slaves were an integral part of the plantations in the American South prior to the Civil War.    This is evident from a legal provision concerning slaves in a contract of trees and labour (mitsaqat). Malik says, “The best that has been heard concerning slave labourers in a contract of musaqat where the labour contractor makes them a condition binding  on    the owner of the capiial (asl, meaning plantation) is that it is perfectly legal, because they are the labourers of the capital, and therefore, are on the same footing as the capital …    If a slave should die, absent himself, or fall sick, it is the duty of the owner of the capital to replace him.”18

 

 

When slaves are manumitted a special relationship called wala’ continues to exist between the previous master and the freed slave. Apart from the sentiments of loyalty and support that the term implies, and that are so important in a society that is organized on kinship groups, whether actual or fictional, wala’ can be financially important in that by virtue of his act of manumission the master acquires the right to inherit from his freedman if the latter dies without any heirs by blood.19 Still, this right to wala’ was not a proprietary right to be bought or sold or given as a gift; it was akin to a family relationship that was inalienable. The Prophet was reported to have said that wala’ belonged to the manumitter, and he prohibited the sale of wala’ or giving it as a gift.20 But what becomes of wala’ when the manumitter dies? Does it devolve upon the heirs in the same way that his estate does? It is indicative of the personal relationship that this institution suggests — as opposed to a proprietary relationship — that the devolution of wala’ was held to be different from that of the general estate of the deceased, and that it devolved not to the heirs at law but to the people who were held nearest to the ex-slaves in a personal way. Malik illustrates I his from an actual case.      Several people from the tribe of Juhaynah, near Medina, and several others from the clan of Bani al-Harith of al-Khazraj tribe of Medina submitted a dispute to Aban ibn ‘Uthman.21 A woman from Juhaynah was married to one Ibrahim ibn Kuiayb of Bani al-Harith. When she died she left property and ex-slaves (mawali). Her son inherited her estate. But the son soon died, and his heirs at law said, “the wala’ of the ex-slaves belongs   to us; her son had acquired it,” and the people from Juhayuah said, “Not so; they were the ex-slaves of our “daughter” (sahibatuna); when her son died we acquired their wala, and we (therefore) will be their heirs.” Aban gave judgment in favor of the people of Juhaynah22, presumably because there was no personal relationship or “kinship” between the son’s heirs, who must have been collaterals, and the ex-slaves, whereas such a relationship existed between the ex-slaves and the blood relatives of the women.

 

 

An institution which has had a chequered history in Islam and which still holds sway in some Islamic countries is that of preemption (shuf’ah) whereby a person would substitute himself for the buyer in a completed sale of real property. As fully developed this institution would give the right of substitution to the following persons in order: the co-owner, the owner of a servitude in the property, and the owner of an adjoining properly.21 Doubtless, the basic reason for this institution is the natural desire to keep an outsider or a stranger out of a family property or a tightly-knit neighborhood. This desire must have become gradually stronger with the passage of time, the spread of Islam, and the development of cosmopolitan centres with an admixture of populations of many races. Later Hanafi works devote large sections to the legal incidents of this institution and to the strict procedure to be followed if a claimant is to be successful. But al-Muwaffa’ devotes only four pages to it, and what is more, it limits the right of preemption to the co-owner.24 There is no mention of a khalit — or owner of a servitude in the property — or of a neighbor. A social historian should not be surprised at this. Medina’s milieu is mostly Arab — except for traders, singers, slaves and ex-slaves etc., and the owners of real property are still the old families of Medina. The need for a well-developed doctrine of preemption to keep strangers out had not arisen as it had in Iraq, with its cosmopolitan population, where Hanafi law was being expounded.

 

 

Other questions of anthropological interest that illuminate the Hijazi scene for the social historian deal with funeral and burial practices. Malik reports that Abu Hurayrah, a well-known Companion of the Prophet, “forbade that he be followed by fire after his death,”   and Malik himself censures this practice.15 Now, what is this fire? Was it a pre-Islamic heathen practice that was continued for a brief time during Islam, or was it a Zoroastrian practice that left its traces in Arabia? Other sources have no explanation for iris    enigmatic reference. In burial practices there seems to have been a difference between those of Mecca and those of Medina going back into pre-Islamic times. This is apparent in the report given by Malik — and doubtless by many hadith and sirah works — about the interment of the Prophet. According to this report there were in Medina two men   who buried the dead, one of whom prepared burial niches (yalhad), while the other did not so prepare. They (the Muslims) said. “Whoever comes first will be allowed to follow   his own practice.” The man who prepared niches came first, so he prepared a niche for the Messenger of God.26 In commenting on this text, al-Suyufi says that one man was from Mecca where the practice was to dig a ditch (shaqq), and the other, who prepared the tomb for the Prophet, was from Medina where the practice was to build niches.27    Why the difference between the two Hijazi cities? One can speculate that Medina, being an oasis, had a more settled existence going hack in time; its tombs, therefore, reflected this permanence and settlement. Mecca, on the other hand, even though engaged in commerce, was very close to Bedouin life where the more austere nomadic, existence would permit only  a ditch in the ground for burying the dead.

 

 

Finally, matters of witchcraft, and popular beliefs might be of interest to the social historian. Abhorrence of witchcraft must have been just as strong in early Islam as it was in Salem, Massachusetts, in Colonial America, with similar results. Malik reports that Hafsah, the wife of the Prophet, ordered the killing of a slave girl she had tentatively freed (with freedom to take effect after Hafsah’s death) because the slave girl had practiced witchcraft against her. He defines a witch or sorcerer as a person who himself practices witchcraft and not a person who procures another so to do. He further opines that a witch or sorcerer should be killed.28 It is obvious that the motive of the supposed witch in Hafsah’s case was to cause the death of Hafsah so that she would hasten her freedom after such death, but is every practice of witchcraft, short of causing death, to be punished by death? The Commentators do not enlighten us on that, nor do we know of other instances where witches were killed.

 

 

As can be seen, these soundings in al-Muwatta’ can produce some substantial information and some information which is tantalizing because of its brevity. But in either case such information, added sometimes to information from other sources, might be very valuable and might nil some gaps in our understanding of the social and economic history of the Hijaz.

 

 

NOTES

 

1. Partnership and Profit in Medieval Islam. Princeton, 1970, pp. 16, 142-143, 175 et passim. For his summary in English of the “Book of Qirad” of al-Muwatta’ see Speculum 37 (1962), pp. 204-207.

 

2. Joseph Schacht, E.I.,. 1st ed. III, pp. 206-207.

 

3. Amin al-Khawli, Malik, Tarjamah Muharrarah. Cairo 1951, Vol. III, p. 705.

 

4. See Joseph Schacht, Origins of Muhammadan Jurisprudence, Oxford, 1950. pp. 62-63.

 

5. Malik ibn Anas, al-Muwatta’ with commentary entitled Tanwir al-Hawalik by ‘Abd al-Rahman al-Suyuti Cairo, 1951, Vol. I, p. 203.

 

6. Ibid., p. 206.

 

7. Ibid., p. 198.

 

8. Ibid., pp. 198-199.

 

9. Ibid., p. 208.

 

10. Ibid., Vol. II, p. 46.

 

11. Ibid., Vol. II, p. 63, and Muhammad al-Zurqani, Sharb M. al-Imam Malik Cairo, 1961, Vol. IV, p. 239.

 

12. Zurqani, Vol. IV, p. 276.

 

13. Ibid.

 

14. Malik ibn Anas, op. cit., Vol. II, p. 72, and Zurqani, op. cit Vol. IV, p.263

 

15. Malik ibn Anas, op. cit., Vol. II, p. 88.

 

16. See Udovitch, op. cif., pp. 172-173 for other instances where murad was employed.

 

17. On these points, see D.S. Margoliouth, “Omar’s Institutions to the Qadi.” J.R.A.S.   Vol. 42 (1910) pp. 307-326, and E. Tyan, H. de L’Organisation Judiciaire en Pays d’ Islam, Paris, 1938, Vol. I, pp. 104-11. For an instance Marwan, the Umayyad governor of Medina acted also as , see Malik ibn Anas, op. cit., Vol. II, p. 112.

 

18. Ibid., pp. 101-102.

 

19. See N. J. Coulson, Succession in the Muslim Family, Cam, 1971, p.10 n.1

 

20. Malik ibn Anas., op cit., Vol. 2, p. 143.

 

21. He had been appointed governor of Medina by the Uma Caliph  Abdul Malik ibn Marwan. He died in 105 A.H.

 

22. Malik ibn Anas, op. cit., Vol. II, p. 145.

 

23. See Joseph Schacht, An Introduction to Islamic Law, Oxford 1964, p.142.

 

24. Malik ibn Anas, op. cit.. Vol. II, pp. 103-106, especially

 

25. Ibid., Vol. I, p. 176.

 

26. Ibid., Vol. I, p. 180.

 

27. Ibid.

 

28. Ibid., Vol. II, p. 193.

Al-Muwatta’ as a Source for the Social and Economic History of the Hijaz
Islamic Studies, Vol. 18, 1979, 299-309
– By Farhat J. Ziadeh
Source : www.financeinislam.com

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Is it necessory to have economics

1. Introduction

Conventional economics, which dominates modern economic thinking, has become a well-developed and sophisticated discipline after going through a long and rigorous process of development over more than a century. The development continues uninterrupted, as reflected in the publication of innumerable journals, books, and research reports throughout the world. Individuals, universities, research organizations, and governments are all participating actively in this development. As a result of accelerated development in Western industrial countries over a long period, substantial resources are available to scholars to pursue their research. It goes to the credit of the West that there is a great quest for knowledge; researchers are willing to work rigorously, and creative work gets richly rewarded in terms of both prestige and material benefits.

Islamic economics has, however, had its resurgence only over the last three to four decades. The number of individuals, universities, governments, and research organizations participating in its development is relatively very small. Since most Muslim countries are poor and in the initial stage of development, the resources they have available at their disposal for financing research activities are also relatively meager. Moreover, some of the governments in Muslim countries consider the resurgence of Islam, with its unmistakable call for political accountability and socio-economic justice, to be a threat to their survival. They are, therefore, reluctant to render any moral or material support for the development of Islamic social sciences.

An unavoidable question, therefore, is whether it is really necessary to have Islamic economics when conventional economics is already there in a highly developed form. This question acquires particular significance because the subject matter of both disciplines is nearly the same: allocation and distribution of scarce resources among their infinite uses. The justification would be there only if the effort to develop Islamic economics is directed toward the realization of a purpose that cannot be realized by the analysis developed by conventional economics. The need would be all the more acute if the set of variables employed for the analysis is broader, and the mechanisms and method to be used for the allocation and distribution of resources are also different.

2. The vision

Every activity of rational human beings generally has a purpose, and it is usually the purpose that determines its nature, differentiates it from other activities, and also helps evaluate its performance. The first question that one may, therefore, wish to ask is about the purpose behind studying the allocation and distribution of resources. Such a study may not have been necessary if resources were unlimited. However, resources are limited and not sufficient to satisfy all the claims on them by all individuals and groups in society. We are, therefore, posed with the perplexing question of which uses and whose claims to choose and how to make the choice. A simple answer may perhaps be to use them in a way that would help the society realize its vision. A vision essentially incorporates the dream of a society about what it would like to be in the future. It may consist of a number of goals, which the society aspires to achieve. All of these goals may together serve as a guiding star and indicate the direction in which the society wishes to proceed. This may help channel the society’s efforts and energies in the desired direction and thereby minimize waste. The vision may never be fully realized. It may, nevertheless, continue to inspire the society to persist in the struggle for its realization by keeping the faith in the future perennially kindled.

Different societies may have different visions. Nevertheless, there is one dimension that seems to be common among the visions of most societies. This is the goal of realizing human well-being. However, the term well-being, even though used by a number of economists (Oswald et al., 1997) is itself a controversial term and may be defined in a number of ways. It may be defined in a purely material sense, totally ignoring its spiritual content, or in a way that also takes into account the spiritual aspect. Depending on which definition of well-being one adopts, there may arise the need for an entirely different configuration of goods and services to be produced by the society with the scarce resources at its disposal. This may lead to different mechanisms for allocation and distribution.

If well-being were to be defined in a purely material and hedonist sense, then it would be perfectly rational for economics to give prominence to the serving of self-interest and the maximization of wealth, bodily pleasures, and sensual satisfactions. Because pleasures and sensual satisfactions depend primarily on individual tastes and preferences, value judgments may have to be kept out to allow individuals total freedom to decide for themselves what they wish. All goods and services that provide bodily pleasures and sensual satisfactions to individuals in accordance with their own tastes and preferences may become acceptable. The impartial market forces may then be considered sufficient to bring about such an allocation and distribution of resources. Redistribution1 of the wealth produced may be important, but only to the extent to which it does not interfere with the freedom of the individual to pursue his or her self-interest. The government’s role may also have to be kept at a minimum, except to the extent to which it is necessary to enable the individual and the market to perform effectively.

However, if well-being were to be defined in a way that rises above the materialist and hedonist sense and incorporates humanitarian and spiritual goals, then economics may not be able to avoid a discussion of what these goals are and how they may be realized. These goals may include not only economic well-being, but also human brotherhood and socio-economic justice, mental peace and happiness, and family as well as social harmony. One of the tests for the realization of these goals may be the extent to which social equality, need-fulfillment of all, full employment, equitable distribution of income and wealth, and economic stability have been attained without heavy debt-servicing burden, high rates of inflation, undue depletion of nonrenewable resources, or damage to the ecosystem in a way that endangers life on earth. Another test may be the realization of family and social solidarity, which would become reflected in the mutual care of members of the society for each other, particularly the children, the aged, the sick, and the vulnerable, and absence, or at least minimization, of broken families, juvenile delinquency, crime, and social unrest.

Once economics gets into a discussion of human well-being in this comprehensive sense, then the task of economics may become wider and more difficult and complex. It may not be able to confine itself to just economic variables. It may have to take into account all those factors, including moral, psychological, social, political, demographic and historical, that determine well-being in this comprehensive sense. It may also have to answer a number of questions that may not need an answer if its goal were only to help maximize wealth and consumption. One of these questions may be about whether the serving of self-interest would be sufficient as a motivating force to realize comprehensive well-being, or would it also be necessary to have some other motivating force. Could such well-being be realized more effectively if all the agents operating in the market observed certain rules of behavior and had certain desirable qualities? If so, then it may be necessary to impose certain constraints on individual behavior. The individual may not then remain totally free to do what he or she pleases in accordance with his or her tastes and preferences. The question that would then arise is about who will determine these constraints, and how would it be ensured that the individual’s freedom is not unduly restricted. This is because individual freedom is also essential for human well-being and cannot be compromised except to a certain agreed extent.

In addition, there are a number of institutions in human society that influence individual and social outcomes. The market is only one of them. Some others are family, society, and the state. Family may perhaps be the most important of these because it provides the human input for the market, the society, and the state. It is the primary breeding place and training ground for all individuals. It is here that a substantial part of individual tastes and preferences, personalities, and behavior pattern get formed. The family’s health and solidarity would hence be of crucial importance. If the family disintegrates, would it be possible to provide the future generation with the kind of upbringing that it needs? If the quality of upbringing goes down, then it may not be possible for a society to sustain its development and supremacy for long in the economic, technological, or military fields. Because economics is also concerned with the rise and fall of a society, then would it be realistic on its part to ignore the integrity and stability of the family?

If the market, the family, the society, and the state all have a role to play in human well-being, then the question is how to make them play their roles in a manner that complements and does not hinder the effective performance of their role by others? Although the market may operate efficiently if every individual tries to serve his or her self-interest, would it also be possible for families, the society, and the state to operate effectively and harmoniously if everyone were to behave in the same self-interested manner?

These are not new questions. They have been addressed by social philosophers for centuries. The majority seems to hold the view that the serving of self-interest is only one of the motivating forces in human society, and maximization of wealth and consumption is only one of the goals. The spiritual and humanitarian goals stated above are of equal, if not greater, importance. Some of these goals may in fact be in conflict with each other, and a compromise may need to be struck. Would it be possible for a society to arrive at such a compromise if it sets maximization of wealth and consumption as its primary goal, and its members are not willing to sacrifice their self-interest for realizing the society’s humanitarian goals?

Sacrifice is of particularly great importance in the case of the family and the society. Experience shows that the more the parents are attached to each other and adopt an attitude of mutual sacrifice and cooperation, the greater harmony and stability is likely to be there in the family. The upbringing of children also requires a substantial degree of mutual cooperation and sacrifice of self-interest on the part of parents. Similarly social harmony may also require members to cooperate with each other and to sacrifice for the common good and to take care of the poor and the vulnerable. Even in the case of the market and the state, sacrifice may not be avoidable. In spite of competition, which helps safeguard social interest, it may be possible for operators in the market to make unjustified gains by cheating and obstructing competition in a manner that may be difficult to detect. Similarly, although democracy, public accountability, and a free press do help in protecting the public interest, it may nevertheless be possible for government officials to use their authority for personal benefit at the expense of the taxpayer.

Therefore, there has to be some motivating force that prevents individuals from wrongdoing even when it is possible for them to get away unscathed. Government coercive power has proved to be an effective motivating force. However, if this were the only force in human society to prevent wrongdoing, the costs of enforcement may tend to be very high. Is it possible to supplement competition, public accountability, and government coercive power by some other motivating force that might induce members of society to abide willingly to agreed values or rules of behavior and to fulfil their contracts and social obligations faithfully even when this involves a sacrifice of self-interest?

This brings us to the question of why should any person sacrifice his or her self-interest to serve social interest in the market place, the family, the society, or the government. If economics concentrates only on self-interest and has no place for a motivating force other than self-interest, then it may not be able to answer this question. If maximizing wealth and consumption is the only goal in the life of an individual, then there is no need to make any sacrifice for others. Serving self-interest may be the best policy. The family may then suffer; the quality of the future generation may decline, and even the performance of the market and the government may ultimately be adversely affected. The question, therefore, is how to motivate individuals to fulfil their contracts and other commitments honestly and not to undermine competition or to resort to unfair means of earning, even when it is possible for them to get away with it? This is a question that religions have tried to address by providing rules of behavior in the form of moral obligations of individuals towards other human beings, animals, and environment, and trying to motivate their followers to abide by these rules even when doing so hurts their self-interest in this world. Whether or not they have succeeded in this task is a different matter. However, economics may not be able to ignore religious values and the associated motivating force if its goal is the realization of comprehensive well-being.

A society may have attained the pinnacle of glory in the material sense, but it may not be able to sustain it for long if the moral fiber of individuals and society is weakening, the family is disintegrating, the new generation is unable to get the kind of attention and upbringing that are necessary for an achieving civilization, and social tensions and anomie are rising. The material and the spiritual aspects of well-being are not, therefore, independent of each other. They are closely interrelated. Greater family harmony may help raise better individuals to operate in the market, and better social harmony may create a more conducive environment for effective government and accelerated development. If this is true, then the emphasis on serving self-interest and maximizing wealth and consumption may have to be toned down to some extent to serve social interest and optimize human well-being. Some uses of resources that serve self-interest and fit well into the hedonist framework may have to be reduced to fulfil the needs of all individuals in society and thereby promote family and social harmony.

Available evidence supports the contention that material advance is not by itself sufficient to increase happiness and social harmony. “Rich countries are not typically happier than poor countries,” concludes Richard Easterlin after 30 surveys conducted in 19 developed and developing countries (Easterlin 1973; Easterlin 1995 and Oswald 1997). There is something else that is also needed to create happiness and harmony and to remove tensions and anomie. Therefore, if economics concerns itself with well-being in its comprehensive sense, then it may not be able to confine its discussion to just material prosperity.

3. The mechanisms

How human well-being is defined is, therefore, an extremely crucial factor in the allocation and distribution of resources. If there is a difference in the concept of well-being, then there will also be a difference in the mechanisms and method for realizing it. There are three important mechanisms that determine the use of resources in any society or economic system. These are filtering, motivation, and socio-economic and political restructuring (Chapra, 1992, pp. 213-233). Just as it is possible to define well-being in a number of ways, it is also possible to have different mechanisms for filtering, motivation, and socio-economic restructuring.

Firstly, all the different claims on limited resources need to be passed through a filter, in a way that realization of spiritual or humanitarian goals is not jeopardized, to create an equilibrium between all the claims on these resources and their supply. There may be different ways of filtering. Three of these are central planning, market mechanism, and moral values (Chapra, 1992, pp. 71-112). Experience of socialist countries has shown that central planning is not an effective mechanism for filtering, even in the material sense, and almost all of them have abandoned it by now, except perhaps Cuba. However, market mechanism has performed extremely well. Prices determined through the interaction of supply and demand in perfectly competitive markets help filter out the various uses of resources in a way that an equilibrium gets established. But the problem with the use of market mechanism for filtering is that it is possible to have several market equilibria depending on which tastes and preferences of individuals and firms interact with each other in the market place. Any and every market equilibrium may not lead to the realization of humanitarian goals. It may, therefore, be desirable to complement the market system by some other mechanism that would help change individual tastes and preferences in a way that would lead to the desired kind of equilibrium. Could moral values help bring about such a change?

Secondly, if coercion is ruled out, then the desired kind of filtering may have to be brought about by motivating all individuals sufficiently to put in their best performance and to abstain from the use of resources in a way that frustrates the realization of the desired kind of well-being. Motivation acquires a great significance in economics as compared to, say physics, because economics deals with human beings who may or may not always behave in a standard manner that would be conducive to goal realization. The serving of self-interest has proved to be an effective motivating mechanism for increasing efficiency, whereas competition, public accountability, and government intervention have helped safeguard social interest. Would it be possible to safeguard social interest even more effectively if both market mechanism and government intervention are complemented by a sense of moral obligation?

Thirdly, the physical, social, and political environments also influence human behavior and the use of scarce resources. It may hence be necessary to supplement the filter mechanism and the motivating system by creating an enabling environment of economic, social, and political values and institutions that influence individuals positively, in a manner that would be conducive to the realization of well-being in its comprehensive sense. This would bring into focus the need for socio-economic and political reform.

For example, if the need-fulfillment of all is accepted as a goal, and the operation of market forces does not automatically lead to this, then some arrangement may need to be made to realize this goal. If budgetary constraints prevent the state from playing an important role, then is it possible for the family and the society to share the burden? However, if the values or the structure of the families and the society have changed over time, making them unwilling or unable to share the burden, then is it possible for economics to not discuss the kind of socio-economic change that is necessary to realize its humanitarian goals. Its refusal to do so may be tantamount to giving blessings to the prevailing inequities. These might accentuate social unrest and tensions, which may lead ultimately to a decline of the society even in the material sense. Similarly, even if a society has values, but individuals are able to get away with dishonesty, bribery, and other unfair means of earning, there being no effective system for detecting and punishing the culprits, then such practices may become locked-in through the long-run operation of path dependence and self-reinforcing mechanisms. Everyone may then condemn the practice, but may not be able to eliminate it single-handedly by himself or herself being honest and fair. Is it possible to eliminate the undesired practices by just giving sermons and not undertaking comprehensive reform through socio-economic and political restructuring? If such restructuring is needed, could it be brought about without the state also playing a supportive role? Would it be possible for economics to abstain from discussing the kind of change that is needed and the role of the state in it?

If the mechanisms chosen by economics are not in conformity with the desired concept of well-being, or if the desired restructuring is not, or cannot be, brought about, then that kind of well-being may fail to be realized. Within this perspective, anything that prevents the kind of filtering, motivation, and restructuring that the desired well-being requires may be termed as distortion, and any use of resources that does not directly or indirectly contribute to, or that is in conflict with, goal realization may be considered unproductive, inessential, or wasteful. The role that the state plays in the economy may also be determined by the kind of filtering, motivation, and restructuring that are necessary for realizing its vision.

4. Role of the worldview

The concept of well-being selected by economics as well as the filtering, motivation, and restructuring mechanisms adopted by it are determined essentially by its worldview. Some of the questions that the worldview tries to answer are about how the universe has come into existence, the meaning and purpose of human life, the ultimate ownership and objective of the limited resources at the disposal of human beings, and the rights and responsibilities of individuals and families toward each other and their physical and social environment.

The answers to these questions have a far-reaching influence on human thought and behavior and lead to different theoretical frameworks and policy prescriptions. For example, if the universe is believed to have come into existence by itself, and human beings are not accountable to anyone, then they would be free to live as they please. Their purpose in life would be to serve their self-interest through the realization of maximum wealth and consumption. The measure of their well-being would, in this case, be the extent to which they attain bodily pleasures and sensual satisfactions. Survival of the fittest may perhaps be the most logical behavior pattern. Value judgments may be unwarranted, and all the three mechanisms of filtering, motivation, and restructuring may be developed by human beings alone through reliance on their own reason and experience.

However, if all human beings have been created by the Supreme Being and the resources they have at their disposal are a trust from Him, then they would automatically become related to each other by a natural bond of brotherhood and also be accountable to Him. They would then not be absolutely free to do what they please, but would rather be expected to use the scarce resources and behave with each other and their environment in a way that would help realize the well-being of all individuals, irrespective of whether they are rich or poor, white or black, male or female, and children or adults. They would also be expected to ensure not only the realization of the material goals but also spiritual and humanitarian goals, particularly social harmony and absence of anomie. Revelation and reason would both in this case play an important role in filtering, motivation, and restructuring, and value judgments would not be out-of-bounds.

5. The method

The method of economics is also determined by its worldview. Linguistically, the term method refers to the rules and procedures of a discipline followed in a certain logical order to achieve a desired end (Blaug, 1980, p. xi; Caws, 1967, p. 339). Essentially, what the method does is to provide criteria for the acceptance or rejection of certain propositions as a part of the discipline ( Blaug, 1980, p. 264; Machlup, 1978, p. 54). The steps taken and the criteria for acceptance or rejection thus depend, as Caws (1967, p. 339) has rightly indicated, on the end sought.

If survival of the fittest is an acceptable behavior pattern, and if individuals are free to do what they wish in accordance with their preferences and their wealth, then the allocation and distribution brought about by market forces could not be questioned. There would be no point in talking about humanitarian goals. Economics would accept the status quo, pass no judgment on it, and make no policy recommendations to change it. Its method would then be just to describe (make positive statements about) how resources are actually allocated and distributed by the operation of market forces and to analyze, theoretically as well as empirically, the relationship among the different variables involved in such allocation and distribution, with a view to help make predictions about what may happen in the future. Economics would then be strictly a positive science with no normative role to play.

If, however, the purpose of economics is also to help realize the humanitarian goals, then the method may not be just to describe, analyze, and predict, but also to compare the actual results with the desired goals, to analyze the reasons for the gap between the two, and to show how the gap may be removed without unduly sacrificing individual freedom. Value judgments may not then be out-of-bounds. Because the purpose of revelation is to help in making such value judgments, it may also be welcome, and economics may then be based on both revelation and reason and experience. There may then be no justification for creating a watertight distinction between its positive and normative functions because both may be closely integrated and together constitute an indispensable part of its raison d’être.

6. The relevance of Islamic economics

The vision, the mechanisms, and the method of economics are all, therefore, the logical outcome of its worldview. Even though none of the prevailing major worldviews is either totally materialist and hedonist nor totally humanitarian and spiritual, there are, nevertheless, significant differences among them in terms of the emphasis they put on the material or the spiritual goals. The greater the difference in the emphasis, the greater may be the difference in the economic disciplines of these societies. Feyerabend (1993) has frankly recognized this in the introduction to the Chinese edition of his thought-provoking book Against Method, by stating that “First world science is only one science among many; by claiming to be more it ceases to be an instrument of research and turns into a (political) pressure group” (p. 3, parentheses are in the original). Even if the worldviews are the same, as is the case with institutional and conventional economics (Blaug, 1985, pp. 708-711), which are believed by a number of economists to be complementary, the Nobel Laureate, Professor Douglass North, clearly stated: “Introducing institutional analysis into static neoclassical theory entails modifying the existing body of theory. But devising a model of economic change requires the construction of an entire theoretical framework, because no such model exists” ( North, 1990, p. 112).

However, if there is a substantial difference even in the worldviews and the visions, there is no reason why there cannot be greater differences in the disciplines. One discipline may just try to explain what exists, refuse to make value judgments, and not concern itself with socio-political change for realizing a certain vision of life. Another discipline may not find what is to be acceptable and aim at helping realize the desired social vision. It may not then be able to avoid a discussion of how, and through what process, the vision may be realized. This need not make the disciplines mutually exclusive. The rational and amicable discussion of different worldviews and disciplines may in fact promote greater depth and breadth in the analysis of both disciplines through cross-pollination, thus making the world richer and better off. Feyerabend (1993) is hence right in asserting that “proliferation of theories is beneficial for science while conformity impairs its critical power. Uniformity also impairs the free development of the individual” (, p. 5).

7. The Islamic worldview

This brings us to the very pertinent question of whether the worldview of Islamic economics is significantly different from that of conventional economics. Although there is a great deal that is common among the worldviews of most major religions of the world, particularly those of Islam, Christianity, and Judaism, it may not be possible to say the same about the worldviews of Islamic and conventional economics. The worldviews of both disciplines are radically different. The Islamic worldview is not secularist, value-neutral, materialist, or social-Darwinist. It is rather based on a number of concepts that strike at the root of these doctrines. It gives primary importance to moral values, human brotherhood, and socio-economic justice and does not rely primarily on either the state or the market for realizing its vision. It relies rather on the integrated roles of values and institutions, market, families, society, and the state, to ensure the realization of its vision of ensuring the well-being of all. It puts great emphasis on social change through a reform of the individual and his or her society, without which the market and the state could both perpetuate inequities.

The fundamental Islamic belief is that this universe and everything in it, including human beings, has been created by the One and the Only God. All human beings are His vicegerents and brothers unto each other. There is no superiority of one over the other because of race, sex, nationality, wealth, or power. Their sojourn in this world is temporary. Their ultimate destination is the Hereafter where they will be accountable before God. Their well-being in the Hereafter depends on whether or not they live in this world, and fulfill their obligations towards others, in a way that helps ensure the well-being of all.

One of the things that seriously affects the well-being of all is the way the scarce resources, which are a trust from God, are used. God, the Creator and Owner of these resources, has provided certain values, rules of behavior, or institutions, within the framework of which human beings are expected to use these resources and to interact with each other. These values have been given not just to any one specific group of human beings, but rather to all people at different times in history through a chain of His messengers (who were all human beings), including Abraham; Moses; Jesus; and, the last of them, Muhammad.4 Thus, according to Islam, there is a continuity and similarity in the value systems of all revealed religions to the extent to which the message has not been lost or distorted over the ages.

The prophets did not, however, bring just the values. They also struggled to reform their societies. Socio-economic and political reform is, therefore, the major thrust of the Islamic message. To accept what is and not to struggle for the realization of the vision or what ought to be is a vote in favor of prevailing inequities and doing nothing to remove them. Such an attitude cannot be justifiable within the Islamic worldview. The mission of human beings is not just to abide themselves by the Islamic values, but also to struggle for the reform of their societies in accordance with these. This is what is meant by righteous living.

Righteous living would, it is believed, help promote a balance between individual and social interest and help actualize the maqasid al-Shari`ah (the goals of the Shari`ah), or what may be referred to as the vision of Islam, two of the most important constituents of which are socio-economic justice and the well-being of all God’s creatures.5 Injustice cannot but thwart the realization of true well-being, accentuate tensions and social unrest, discourage individuals from putting in their best, and thus retard development. However, whereas conventional economics assumes the prevalence of self-interested behavior on the part of individuals, Islam does not assume the prevalence of ideal behavior. It believes that, although some people may normally act in an ideal manner, the behavior of most people may tend to be anywhere between the two extremes of selfishness and altruism and hence a constant effort (jihad) needs to be made on the part of both individuals and society for moral uplift.

Islam, however, rules out the use of force for moral uplift: “There shall be no compulsion in religion” (al-Qur’an, 2:256), and “Say that the Truth has come from your Lord: Whoever wishes may either believe in it or reject it” (al-Qur’an, 18:29).6 It rather lays stress on proper upbringing, creating conviction through logical reasoning and friendly dialogue (al-Qur’an, 16:125), and creating an enabling environment for motivating individuals to do what is right and to abstain from doing what is wrong. This is, however, not sufficient. It is also necessary to provide both material and spiritual incentives and deterrents to motivate individuals to do their best for their own good as well as that of others and to prevent them from causing harm to others. Smoothly functioning competitive markets, where people interact with each other in their self-interest, are necessary for ensuring maximum efficiency. However, although competition does help safeguard social interest to a certain extent, total reliance cannot be placed on it because some people may use unfair means to enrich themselves. Hence governments have tried to pass and enforce regulations. But regulations may not be possible without having a perception of what is the right thing to do. Therefore, once we regulate, we do not remain value-neutral. Moreover, it may not be realistic to depend primarily on regulations because regulations may be circumvented and need to be effectively enforced. The cost of enforcing them may be lower if there is some effective mechanism for self-enforcement.

This self-enforcement is believed to come from two sources. One of these is the innate goodness of the human being himself or herself. Within the framework of Islamic beliefs, people are good by nature because God has created them in His own image (al-Qur’an, 30:30). The individual does not necessarily always act in his self-interest. He or she also acts in the interest of others and even makes sacrifices for them under a feeling of moral obligation. However, because the individual is also free and his or her behavior is not determined, he or she may or may not preserve his or her innate goodness and may act in ways that are against his or her nature. This may hurt him or her and his or her society. Therefore, it is necessary to provide incentives and deterrents as well as an enabling environment. The problem with a number of this-worldly incentives and deterrents is that they may be insufficient and may not even be justly implemented.

Therefore, the second source of self-enforcement is belief in the reward and punishment in the Hereafter. If I abstain from doing anything wrong and also sacrifice my material self-interest for the sake of others, I will improve my well-being in the Hereafter. The concept of Hereafter thus gives a long-term perspective to self-interest by extending it beyond a person’s life span in this world. It is not possible for competition and government intervention to always motivate a person to do what is morally right and to abstain from what is morally wrong, to cooperate with others and to make sacrifices for them. Governments can try to ensure competition and to pass laws to safeguard social interest. However, there are so many clandestine ways of restraining competition and of cheating and exploiting others without being caught that it may be difficult for governments to succeed unless there is an inner urge on the part of operators in the market themselves to do what is right, to fulfil their contracts and other commitments faithfully, and not to try to undermine competition or resort to unfair means of earning. In the last analysis, therefore, it may not be possible to safeguard social interest effectively without the help of moral values and without creating an effective motivating force and a proper environment for their enforcement. This may reduce the burden on the government of safeguarding social interest.

8. The historical link

Islamic economics had been developing gradually as an interdisciplinary subject in keeping with the Islamic worldview in the writings of Qur’an commentators, jurists, historians, and social, political, and moral philosophers. A large number of scholars, including Abu Yusuf (d. 798), al-Mas`udi (d. 957), al-Mawardi (d. 1058), Ibn Hazm (d. 1064), al-Sarakhsi (d.1090), al-Tusi (d. 1093), al-Ghazali (d. 1111), al-Dimashqi (d. after 1175), Ibn Rushd (d. 1198), Ibn Taymiyyah (d. 1328), Ibn al-Ukhuwwah (d. 1329), Ibn al-Qayyim (d. 1350), al-Shatibi (d. 1388), Ibn Khaldun (d. 1406), al-Maqrizi (d. 1442), al-Dawwani (d. 1501), and Shah Waliyullah (d. 1762), made valuable contributions over the centuries.7 These scholars were, however, not specialists in economics. Strict compartmentalization of disciplines had not developed by then. They were masters of a number of different intellectual disciplines, and their contributions are, therefore, spread over a vast literature, some of which has been lost because of the vicissitudes of time and a wave of invasions particularly by the Mongols ( Rosenthal, 1947, p. 19; Sarton, 1927, Vol. 1, p. 662). It was perhaps because of this multidisciplinary nature of their contributions that human well-being never got conceived as an isolated phenomenon dependent primarily on economic variables. It was seen as the end-product of a number of economic as well as moral, psychological, social, demographic, and political factors in such an integrated manner that it was not possible to realize overall human well-being without an optimum contribution from all. Justice occupied a pivotal place in this whole framework. This was to be expected because of its crucial importance within the Islamic worldview.

These diverse contributions over the centuries seem to have reached their consummation in Ibn Khaldun’s (n.d.) Muqaddimah, or Introduction to History, where he tried to analyze the closely interrelated roles of moral, psychological, political, economic, social, demographic, and historical factors over a period of three generations, or a 120 years, in the rise and fall of a dynasty (dawlah) or civilization (`umran). His analysis was thus not static and was not based on only economic variables. It was, rather, dynamic and multidisciplinary. The need for such an analysis was felt by him because he lived at a time (1332-1406) when the Muslim civilization was already in a process of decline and, as a conscientious Muslim, he was keen to see a reversal of the tide. However, this is not all that he did. The Muqaddimah also contains a considerable discussion of economic principles, a significant part of which is undoubtedly Ibn Khaldun’s original contribution to economic thought.

His contributions did not, unfortunately, get fertilized and developed further in the Muslim world. As he rightly theorized himself, sciences progress only when a society is itself progressing (Ibn Khaldun, n.d., p. 434). This theory has become clearly upheld by Muslim history. Sciences progressed rapidly in the Muslim world from the middle of the 8th to the middle of 12th centuries. The development continued at a decelerated pace for two more centuries ( Sarton and Sezgin 1983 and ff). Thereafter, there appeared a brilliant star only once in a while on an otherwise unexciting firmament. Economics was no exception. It also continued to be in a state of limbo in the Muslim world. No major contributions were made after Ibn Khaldun, except by a few isolated luminaries such as al-Maqrizi (d. 1442), al-Dawwani (d. 1501), and Shah Waliyullah (d. 1762).

Consequently, whereas conventional economics became a separate scientific discipline in the West in the 1890s after the publication in 1890 of Alfred Marshall’s great treatise, Principles of Economics, (Schumpeter, 1954, p. 21) 9 and has continued to develop since then, Islamic economics remained primarily an integral part of the unified social and moral philosophy of Islam until the Second World War. The independence of most Muslim countries after the War and the need to develop their economies in a way that would help realize the Islamic vision has given boost to the reemergence of Islamic economics. This need not give anyone the impression that the attempt is to bypass the good and valuable analytical work done by conventional economics and its offshoots. It would be difficult not to agree with Blaug (1980) when he said that “any methodological prescription that amounts to wiping clean the entire slate of received economics and to starting all over again from scratch may be dismissed out of hand as self-defeating” (p. 121).

9. Achievements, shortcomings, and future prospects

Islamic economics has so far, however, been able to scratch only the surface of what Ibn Khaldun’s (1950) multidisciplinary dynamics entails. Greater emphasis has been laid so far on explaining what the ideal Islamic economic system is, how it differs from socialism and capitalism, and why the operation of markets within the framework of the Islamic worldview would help minimize some of the glaring inequities of the market system and exert a positive impact on the realization of overall human well-being without excessive reliance on the state. Most of the discussion is, however, of a normative nature–how all economic agents (individuals and households, firms, altruistic organizations, markets and governments) are expected to behave in the light of Islamic norms. This has been accompanied by some sporadic historical data to show that the system has actually been in existence for at least short periods at different times in Muslim history and that this has produced positive results. This was natural and in fact necessary. Economics is so closely related to the worldview and the economic system of a society that without clarity about these Islamic economics may have groped in the dark for the direction in which to proceed.

The other area where substantial, although still far from adequate, literature has become available is Islamic finance. An effort has been made to show why an economy that relies less on credit and more on equity may be superior in its overall performance to the one that relies substantially on credit, particularly on short-term credit (Mills and Presley, 1999, pp. 58-72 and 114-120; Chapra, 1985, pp. 107-145; 1992, pp. 327-334). Some progress has also been made in macroeconomics. There has been a considerable discussion of the Islamic vision (Ahmad and Khan 1994). There is, however, no theoretical macroeconomic model that would show how the Islamic values and institutions, and different sectors of the economy, society and polity would interact to help realize the vision. An appropriate macroeconomic policy package has hence not developed. The field where very little progress has been made is microeconomics. It has not been possible to establish the relationship among the macroeconomic goals and the behavior of different economic agents and the kind of socio-economic and political reform that the realization of goals may require. Yalcintas (1986) is perhaps right in stating that “Construction of microeconomic theory under the Islamic constraints might be the most challenging task before Islamic economics” (p. 38).

Although there is undoubtedly some merit in showing how the injection of a moral dimension into economics might help realize the Islamic vision without excessive dependence on the state, such a discussion does not take us very far. Because of centuries of decline, disintegration, and lack of proper education, Islamic values are not reflected either in individual or social behavior or in the prevailing legal, social, political, and economic institutions of Muslim countries. There is a great deal of deviation from Islamic norms. A number of morally wrong practices, such as dishonesty, corruption, extravagance, wastefulness, and lack of punctuality and conscientiousness have become securely locked-in through the long-run operation of path dependence and self-reinforcing mechanisms. The deviation is taking a heavy toll of justice, development, and general well-being (see Chapra, 1992, pp. 251-338). The task of Islamic economics does not, therefore, get fully accomplished if it does not show the causes of this deviation.

Other societies have translated their values into formal institutions in spite of an external secularist and value-neutral stance (Organization for Economic Cooperation and Development, 1996). They have formulated a legal framework and a proper code of conduct for government officials and put in place mechanisms for transparency, rule of law, public accountability, and protection of whistle blowers. They have also created sufficient checks and balances and adopted measures that would make it difficult for violators to get away unscathed. Muslim countries have generally lagged behind here. The question is why. It may not be possible to answer this question without also injecting psychological, social, political, and historical dimensions into the analysis. One of the major reasons for the Muslim malaise may be the failure of the political system. There is hardly any Muslim country where there is a truly democratic government, accountable to the people, where the press is really free, where the courts are independent of political interference, and where the law of the land gets applied fairly and impartially to all, irrespective of their wealth and power. This is in clear violation of the Islamic norms related to the polity. The result is that senior government functionaries are able to get away with corruption, inequities, and incompetence. This frustrates the effective and impartial operation of incentives and deterrents and creates a favorable climate for the general violation of Islamic norms. The country’s resources do not, therefore, get used efficiently and equitably for the well-being of the people. In addition, there is a glaring omission in Islamic economics of a scientific analysis of some of the crucial problems of Muslim countries, including budgetary and balance of payments deficits, high debt-servicing burden, low levels of saving, investment and real growth, high rates of inflation and unemployment, extreme inequalities of income and wealth, and miserable socio-economic condition of the poor.

There could be no escape from what Ibn Khaldun (1950) did for his society–adopting a multidisciplinary approach to find out the causes of the various problems and suggesting, in the light of such analysis, a comprehensive, well-integrated, and practical reform program. Within the framework of his multidisciplinary dynamic model, concentrating only on moral or economic variables may not be able to take the Muslim world very far on the path of development with justice.

Islamic economics also needs to collect reliable data on a number of important economic variables. Without knowing the actual position and the reasons for it, it may not be possible to prepare a well-conceived program for social, economic, and political change. Data create transparency and reveal the true picture, which some governments do not welcome. Hence one of the essential prerequisites for reform is the collection and publication of necessary data and their scientific analysis. Missing in particular are data on distribution of income and wealth, extent of need-fulfillment, and nature and quality of life, particularly of the downtrodden people. Without such data, it is not possible to know the degree of equity prevailing in the allocation and distribution of resources, which is the most crucial criterion for judging the Islamization of a Muslim economy. There are also inadequate data about government revenues and expenditures, consumption, saving and investment behavior of individuals and different sectors of the population, employment and unemployment, bonded, female and child labor, wages and salaries, working conditions, work habits, and productivity, along with a rational explanation for the deviation from Islamic norms. Once this is done, it may be possible for Islamic economics to do a more meaningful job of analyzing the impact that the introduction of Islamic values and institutions may have on aggregate consumption, saving and investment, economic growth and stability, and distribution of income.

The practical wisdom of Islamic economics has thus been unable to come to grips with the task of explaining the rise and fall of Muslim economies in the past, the lag between Islamic norms and the actual behavior of economic agents, and the causes of problems faced by Muslim countries. It has been unable to suggest a balanced package of policy proposals in the light of Islamic teachings to enable Muslim countries to perform the difficult task of reducing their imbalances and simultaneously actualizing the Islamic vision. Moreover, its theoretical core has also thus far been unable to come out of the straitjacket of conventional economics, which takes into account primarily the economic variables that are measurable and generally avoids a discussion of the complex historical interplay of moral, psychological, economic, social, and political factors. Islamic economics has thus “failed to escape the centripetal pull of Western economic thought, and has in many regards been caught in the intellectual web of the very system it set out to replace (Nasr, 1991, p. 388). It is thus unable to explain the difference in the performance of various societies with respect to overall human well-being.

The potential is, however, great but the expectations for the near future should not be pitched at a very high level. It may not be possible to raise Muslim societies, at least in the near future, to the high spiritual level that Islam demands and that Muslim economists assume in their analysis. Moreover, the performance of all the functions that are expected from Islamic economics may not be immediately feasible because of the lack of resources and political support, the nonavailability of data, and the difficulty of measuring a number of the socio-economic and political variables that need to be incorporated into the models. It is possible that even after a great effort, the achievements may not be significantly great. The discipline will mature over time after passing through an evolutionary process. It has, fortunately, the advantage of benefiting from the tools of analysis developed by conventional, social, humanistic, and institutional economics as well as other social sciences. Islamic Research 1986 and Chapra

by : Umar Chapra

Source : islamic-world.net

A Good Company

sps0168What have Islamic economics, animal rights protesters, social justice activists and ethical investors got in common? M Iqbal Asaria highlights the links.

 

The social justice protesters who disrupted gatherings of leaders of the industrial world in Seattle, Genoa and Quebec have highlighted on the international stage a growing unease with the operations of unfettered markets. For protesters the present arrangement perpetuates gross global inequity, made worse by rampant globalization.

In Britain, and on a somewhat smaller scale, the drama of Huntingdon Life Sciences was unfolding. As a leading user of live animals for experiments, this scientific research company fell foul of animal rights activists. During a sustained campaign, protesters were able to cut off all sources of bank finance to the company. Huntingdon Life Sciences had to move its operational headquarters from Britain to the US and rely on funding from non-banking sources.

This was a dramatic illustration of banks bowing to pressure from the providers of their funds — the general public. Similarly, the Bank of Scotland was forced to withdraw from a deal with the US televangelist Pat Robertson because of his extreme right-wing views. The embarrassing about-turn was forced on the bank by its shareholders and depositors.

These developments, illustrating shifts in public perception about how economies and businesses operate, provide parallels with the ideals of Islamic economics and finance. Like the social justice protesters, Muslim economists see the dominant economic structure as intrinsically unjust and biased towards the industrialized countries of the North. Islamic economics challenges the prevailing dogma of free markets and seeks to introduce regulatory regimes to safeguard public interest. Moreover, it questions the absolute freedom of financial intermediaries to provide funding for operations with no regard for moral and ethical criteria and without taking into account the wishes of the providers of the funds.

The basic ideas of Islamic economics have emerged since its academic and intellectual foundations were developed in the 1970s and 1980s. Today, it is a global movement aiming to provide Muslims with alternative banking and financial arrangements where ethical considerations are paramount.

Economic teachings of Islam are simple but profound. Islam regards usury of all kind as anathema and thus forbids all transactions involving interest payments. Making money out of money is prohibited; as are monopoly and raising prices by artificial means such as hoarding. While ownership of private property is allowed, the accumulation of wealth in fewer and fewer hands is strictly forbidden. This is why the Islamic inheritance laws are designed to redistribute wealth; and ownership of land beyond an individual’s or family’s capacity to handle is discouraged.

In Muslim societies the injunction of Zakat provides a vital mechanism for addressing social welfare issues. Zakat is normally translated as ‘poor tax’ — but it is not charity that the rich give to the poor. It is the right of the poor and a duty of the rich. Thus, all Muslims are required to give away at least 2.5 per cent of their total annual income to the poor and the needy as Zakat. As the principle is well established, contemporary Muslim economists have argued for it to be institutionalized, with even higher rates of giving. A social welfare state is therefore not alien to Muslim economic thinking.

So Muslim societies should have a much more equitable ethos than they actually do. There are a number of reasons why they fall short. One reason is that Islamic economic injunctions have only existed in theory and have never actually been put into practice. Instead, Muslim countries have tended to embrace Western development policies uncritically. However, there are signs that the Islamic ethos is slowly gaining ground. We can see that most clearly in the area of banking and finance.

Ways of lending

 

Islamic banks can be compared with ethical investments which incorporate the desire of the providers of the funds to have a say in how their money is used. Some funds do not invest in companies which deal in tobacco or military hardware or which exploit their workforce. Others only invest in corporations that meet certain environmental criteria. Islamic finance has a similar rationale. Indeed, in some respects it goes further, being concerned not just with what kind of activities are being financed but also with the way in which they are funded. Muslims are encouraged to invest in ‘permissible’ (Halal) activities via ‘permissible’ means. This means that not only will they avoid corporations connected with, say, alcohol or gambling or exploitation, but they also will not deal with those involved in usury — which obviously includes conventional banks.

In practice this is less dramatic than it sounds. Muslims still make everyday transactions like investing their surplus funds, house-buying, and taking out loans and working capital for their businesses. And for investment purposes Islamic financial institutions employ criteria similar to those used by the ethical investment funds. The big difference comes in the way they lend, both for personal finance and business purposes. In simple terms, lenders enter into risk-sharing contracts with borrowers; return is based on the outcome of the venture or investment, rather than a predetermined rate.

The principle of risk sharing can have far-reaching implications. For risks to be shared borrowers have to be willing to provide much more information about their situation than conventional banks would normally seek. It will include confirmation that the funds are to be deployed in permissible activities, as well as transparency in reporting financial information about the progress of the business or project for which the money has been borrowed.

Equity and inequity

 

To ensure that their principles are not compromised many Islamic financial institutions have a Shari’ah (Islamic Law) Supervisory Board of Advisors. This is usually a body of qualified Muslim jurists well versed in commerce who vet all new transactions and structuring of deals. Over the last three decades Islamic banking and finance has grown manifold in Muslim communities. In Malaysia, for example, about five per cent of all banking transactions are conducted by Islamic Financial Institutions. This is set to rise to 10 per cent by 2005. A full range of banking products are available to customers from Bank Islam Malaysia or the ‘Islamic Banking’ counters of all the major banks. The set-up is fully regulated by the Central Bank of Malaysia and Islamic financial products seem to exist side by side with more conventional ones, without problems. Similar moves are afoot in countries such as Pakistan, Egypt and the Gulf States. Malaysian and Middle Eastern corporations have also begun to raise long- and medium-term finance by issuing shari’ah-compliant bonds.

In other parts of the Muslim world, Islamic equity investment funds have mushroomed. Very much like ethical funds, these restrict their portfolios to approved corporations, based on criteria devised by their Shari’ah Supervisory Boards. An increasing number of Muslim investors are channelling their savings through these funds. There is even a Dow Jones Islamic Index measuring their performance.

In Britain and the US, Muslim communities have started to experiment with saving and mortgage products which meet the stipulations of the shari’ah. In the US, the Islamic housing finance company Lariba has had its funding augmented by Freddy Mac, the leading mainstream provider of housing funds. In Britain, I-Hilal and Parsoli have started to market shari’ah-compliant Individual Savings Accounts or ISAs.

Indeed, as a recent survey by business information company Datamonitor concludes: ‘The market for Islamic (shari’ah-compliant) finance in Britain is set to grow hugely. A huge gap exists for shari’ah-compliant equity and mortgage products. Muslims have historically been underserved by financial institutions, but this is set to change.’

Like the ethical investment movement, Islamic economics will in time help ‘persuade’ the big financial players to pay far more heed to their customers’ views and it will become easier to incorporate social and ethical criteria.

Admittedly, there are a host of external and internal realities which impinge upon the way Islamic financial bodies are organized. But as the move towards more representative societies gathers pace, principles and instruments of Islamic economics will spread far and wide.

In this endeavour Muslims will be in good company. The escalation of protest against global inequity and the growth of the ethical investment movement will provide platforms for like-minded players from across faith and ideological boundaries to come together.

 

Source :

M Iqbal Asaria

is an economist, writer and internet service providerrwint.org