What is Islamic Economics?

Published: January 17, 2016
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The writer is vice-chancellor of the Pakistan Institute of Development Economics. He holds a PhD in Economics from Stanford University

The writer is vice-chancellor of the Pakistan Institute of Development Economics. He holds a PhD in Economics from Stanford University

The answer to this apparently simple question is surprisingly complex. This article can only provide a brief sketch. Early in the 20th century, about 90 per cent of Muslim lands were colonised. The two world wars substantially weakened the European powers, and enabled liberation movements to succeed all over the globe. At the time, there were two competing models for organising economies: capitalism and communism. Revolutions are driven by ideologies, and leading Islamic thinkers like Maududi and Baqir Al-Sadr offered a third alternative as the natural option for newly-liberated Muslim countries. They argued that Islam had its own distinct economic system, and this system was superior to both capitalism and communism. For reasons to be discussed, this idea of constructing a radical alternative to dominant economic systems was not realised in the post-colonial period.

Colonial educational systems had explicit goals to create a buffer between the rulers and the colonised, as described by Lord Macaulay in his famous Minute on Education: “We must at present do our best to form a class who may be interpreters between us and the millions whom we govern; a class of persons, Indian in blood and colour, but English in taste, in opinions, in morals, and in intellect.” These intermediaries were called ‘compradores’ in Latin America, Black Skins with White Masks (Frantz Fanon) in Africa, and Brown Skins with White Masks (Hamid Dabashi) in Asia. They ran the vast administrative and bureaucratic structures on behalf of the colonisers, and naturally came into power following independence. These compradores were trained to believe in the superiority of the colonisers, and to treat their heritage, ancestors and indigenous society with contempt. Plans for an Islamic economic system were put on the back burner as Islamic groups engaged in the struggle to wrest control from secularised and Westernised compradores. For complex sets of reasons, these struggles were unsuccessful and the compradore class succeeded in retaining power throughout the colonised lands.

Second generation pragmatists saw that the required revolution did not appear to be forthcoming. They abandoned the grand vision of the founders for a just and equitable alternative to both capitalism and communism. More limited goals were targeted. Instead of rejecting capitalist institutional structures, the new Islamic economics (nIE) attempted to tinker with capitalism in order to make it conform to Islamic principles. A popular formula for defining the subject became: nIE = Capitalism – Interest + Zakat.

Large numbers of second generation Islamic economists acquired professional training in modern economic theory. In the course of their study, they came to believe in the epistemological claims of discipline. Economic theory claims to be a positive discipline, on a par with the physical sciences. The second generation was unable to see through these claims, and came to regard economic laws as being on a par with physical laws: objective, factual, indisputable and without normative elements. The laws of supply and demand were seen as having the same validity as the law of gravity. This misconception was fatal to the project of developing a genuine Islamic economics. Whenever the second generation saw a conflict between Islamic principles and economic theories, they assumed the validity of economic theory, and sought to rationalise or modify Islamic principles so as to remove the conflict.

This attempt to harmonise Islam with economics has been abandoned only recently, after the global financial crisis revealed that economic theory, the ‘emperor’ of the social sciences, has no clothes. Nobel laureates were led to ponder why the entire field has gone astray, leading economists responsible for crafting policies which led to the crisis confessed to making huge mistakes, while the US Congress set up a committee to investigate the failure of economic theory to provide warnings about the impending crisis. The root cause of this failure is that modern economics claims to be an objective description of reality, while in fact it is a normative and prescriptive theory. Economics assumes that everyone acts selfishly to maximise lifetime consumption, without any concern for others. Furthermore, this is rational behaviour, which leads to optimal outcomes for society. For example, Nobel laureate Milton Friedman vehemently rejected the idea that businesses have social responsibilities and asserted that their only responsibility is to maximise profits, regardless of social costs.

Evidence has accumulated from many different fields of study that the economists’ description of human behaviour is not empirically accurate. Human beings are naturally inclined to be cooperative and generous, even to the extent of giving their lives to save strangers. Describing competition and greed as natural and rational actually creates these behaviours, so the economists learn to be more selfish than their classmates in other disciplines. The global financial crisis was caused by the greedy behaviour of the financial industry, which sold mortgages to unqualified people, making profits from a process that wiped out lifetime savings of their customers. Such behaviour was enabled and created by standard MBA teachings, which place the bottom line above all other considerations.

Instead of a jungle, with survival-of-the-fittest as the ideal form of social organisation, Islamic economics prescribes generosity and cooperation as the behavioral bases for an ideal world. The Holy Quran is full of encouragement to spend generously on others. Just like economic theory prescriptions of selfishness and competition create such behaviours, ideals of generosity and cooperation also create such behaviours. Throughout the thousand-plus years of dominance of the Islamic civilisation, basic needs of the population were recognised to be a social responsibility. Education and health needs were not commodities to be sold in the marketplace to those who could afford them. Rather, society arranged to take care of these needs for all members. Everybody can see the outcome of the competitive jungle of modern economics in the form of stark inequality, misery for billions, combined with luxury for a select few. At the core of Islamic economics is the idea of social responsibility — as a society, we are collectively responsible for the needs of all members, and not just for those who can earn enough money to purchase these needs in the marketplace. Is this not an ideal worth striving for? 

Published in The Express Tribune, January 18th, 2016.

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Reader Comments (19)

  • Jan 17, 2016 - 11:13PM

    Now Islamic world is moving back towards their best ruling time. We just need a great leader who can guide our people. Otherwise we own everything.
    Furthermore, Islamic economics eliminate poverty entirely. Recommend

  • Abdullah
    Jan 17, 2016 - 11:45PM

    Great article. This field needs to develope more. Recommend

  • Jan 18, 2016 - 1:17AM

    Global financial institutions sold mortgages to unqualified people which was generosity and cooperation. according to the author these two elements actually form Islamic economics. now what actually the worthy professor wants to say?Recommend

  • Muhammad Zubair
    Jan 18, 2016 - 2:40AM

    I appreciate your thoughts and the way of articulating your ideas on the specific topic of Islamic Economics. We know that in the field of social sciences, one needs to understand the behavior of the individuals and then try to lead those individuals to achieve common interest of the society. But, we see, most of the time that scholars become stuck by the old theories and influenced so much by the dominant actors of the system that they could not produce a new scholarly thoughts. Your article, definitely, lead the people’s thinking in a better direction to understand the actual situation. Recommend

  • Ruby
    Jan 18, 2016 - 2:47AM

    Islamic banking is normal banking masquerading as a new phenomenon. The writer is trying to ascribe meaningless philosophical reasons to the ‘failure of the economic theory’ whereas he himself admits that ineligible people were given loans. The failure is in the blindness to the obvious not in the interest based economics. There is nothing acutely wrong with interest based economics as against Islamic banking. If only Islamic banking is convoluted and aims to skirt through some reasonable practices just because a religion thought so. The world today is not as usurious as it was in medieval times. People who get loans from banks get them at a reasonable rate. And those who borrow from moneylenders still suffer from high interest rates. The Islamic banks will not help these borrowers anyway. So what is the point?Recommend

  • Chaudhry Z. Ahmad
    Jan 18, 2016 - 5:45AM

    “At the core of Islamic economics is the idea of social responsibility — as a society, we are collectively responsible for the needs of all members, and not just for those who can earn enough money to purchase these needs in the marketplace. Is this not an ideal worth striving for?”

    There’re no two opinions toward achieving this goal. In fact the end goal of the capitalistic system remains the same. That’s why they’re researching and improving upon their economic theories. They ponder on their existing theories to determine the causes of their failures.

    The authors of the article have miserably failed to suggest any better solution toward achieving their stated Ideal!Recommend

  • Salman
    Jan 18, 2016 - 6:52AM

    Really good read! Thanks for writing thisRecommend

  • Talha
    Jan 18, 2016 - 8:10AM

    Dr Asad being the erudite person blessed with the audacity of having a creativity in his thought, again writes a good one. The challenge is to fathom ways and means, in tandem, to develop a comprehensive paradigm for Islamic Economics with the objectives outlined at the end of this article.Recommend

  • Imad Uddin
    Jan 18, 2016 - 12:42PM

    Sir, I think you tried to put forth the following argument:.
    Once you presume a specific set of behavior, you design your system around that, which promotes and strengthens the presumed set of behavior. While doing this you totally forget that if the system had been designed differently, the actual behavior would be very different.

    And to pave way for this claim, you explained how paradigms are built by the education system.

    You said that beautifully.

    But you tried to pose those paradigms as indoctrination and scheme, which went a bit far. Thats how paradigms work, the force you to think a specific way, unless you are able to see through. They work like indoctrination but most of them are just meant to be paradigms.

    The lack of relevance of supply and demand curve to the real world, the barriers to full employment results from several factors which can also be modeled to form better more realistic estimates at the macro level.

    Sir, you clearly focused on behavorial aspect of economics, and thats how you define economics as a normative subject. I do heavily respect the behavorial aspect, but Economics is science! Not physics but biology. Although, this is true that we need to have a systemic view of econimics not a deterministic one.

    That is how I see the difference in the scientific aspect:
    Capitalist world is like an inclined plane, with the rich people at the top, which keeps getting more steeper as it reaches the poverty line and further below. The rich people may throw as many pieces of bread to the poor people they will keep slipping to starvation, desease and misery.
    Islamic Economic System makes the plane flat and horizontal.

    As for your last question: It is worth serving your entire life on!Recommend

  • Mian
    Jan 18, 2016 - 3:00PM

    The CSR embedded in corporate’s policies is indirectly following up Islamic Economics. Capitalism has accomplished nothing but polarised the society at the expense of greed for profitability. Social inequalities, for instance, are the outcome of capitalism-where you earn and make better life if you prove to be money making machine for capitalist and fired if not.

    Islamic Economics in contrast to Capitalism believes in justice ‘for all’- be it social or in any other form and shape. Zakat, for instance, is meant to be spent on social welfare which ultimately give rise to equal society- a society where poor enjoys same perks and dividends as richer and the richest in that same society. Recommend

  • SH
    Jan 18, 2016 - 3:25PM

    “Is this not an ideal worth striving for?”…………………But the question is HOW?……..Is there any way?………………Most of us don’t see anyRecommend

  • Amin Jan Naim
    Jan 18, 2016 - 4:24PM

    Except for castigating what he calls the compradors – indigenous post colonial administrators – the writer does not al all explain what is Islamic economics. It is a simplification to assert, as he does, that the laws of modern economic theory are considered by western economists to be the same as physical laws. There has been very great economic progress and achievements in modern times despite cyclical fluctuations as a result of theoretical macro-economic understandings of economic phenomena. Fitting complex phenomena into an Islamic mould on what he terms “generosity and social responsibility” encounters enormous impracticalities. Ascribing generalities to existing behavioural patterns as well as to the vague alternatives proposed by the writer, does not induce, clarify or lead to sound policy-making.Recommend

  • John B
    Jan 18, 2016 - 7:38PM

    KSA, Iran and Until recently Libya all had practiced islamic economic model. So, how is it going there.

    Islamic economy assigns social responsibilities to individuals -feed the poor, give zakat and so on. Modern economy assigns the social responsibility to the state.

    A state is far more effective than individuals in steering a economy. Until the arrival of modern economic theory and practices, the entire world was wallowing in poverty and major part of that time the world was ruled by islamic economy by the Islamic rulers around the world.

    Islamic economy is an another misleading notion like jihad of modern times. Recommend

  • Rex Minor
    Jan 18, 2016 - 11:34PM

    I do not mean to be rude but there are a number of mis-statements in the article written by the economist from Stanford University. Not capitalism or communism but capitalism and socialism, privately controlled economie or those planned by the State.. The alternative to the two being the most successful social- market economies which is privately organised without State intervention and is based on and regulated through competition. The Islamic Economics is a myth, a label which every zealot muslim is ready to franchise any project if one or other of its elements were somehow to correlate with ancient traditions of the middle eastern people.

    Rex MinorRecommend

  • Kashmir Student
    Jan 19, 2016 - 12:15AM

    a very enlightening read as usual from Dr Asad ZamanRecommend

  • Uzair
    Jan 19, 2016 - 1:51AM

    I am amazed to see that people still support speculative financial markets, corrupt financial institutions and interest-based financial transactions. Interest is the inherent problem with the current financial system that has perpetuated a widening gap between the real (asset backed) and financial side of economy. There is a reason why toxic CDOs (now called bespoke tranche opportunities) destroyed the masses in US. When a piece of paper (like dollars) becomes more than a medium of exchange, the problems in the financial markets exacerbate. Intrinsic value cannot be assigned to pieces of paper that are vulnerable to speculation by the financial engineers. People need to question the validity of interest-based economy, if they really want to emancipate themselves from the top 1%. Recommend

  • rex minor
    Jan 19, 2016 - 2:45PM

    [email protected]:
    Interest is nothing more than a reflection of the speculative profit on business calculated to reflect the rise and fall of the currencies and economic development. They do not teach this in stanford university.
    Rex minorRecommend

  • Fateh Mohammed
    Jan 19, 2016 - 4:48PM

    Interest can not be eliminated from bank lending or any lending reason being inability to eliminate time . Interest free banking is not possible . Recommend

  • x
    Jan 20, 2016 - 6:50PM

    @zafar:
    Mortgages mean charging interest rates and islam is against interest.Recommend

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