Islamic economics: what it is and how it has developed over the centuries



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ISLAMIC ECONOMICS: WHAT IT IS AND HOW IT HAS DEVELOPED OVER THE CENTURIES

by
Dr. M. Umer Chapra

Research Adviser

Islamic Research and Training Institute

Jeddah

A paper written for EH. NET’s



Online Encyclopedia of Economic and Business History (http://eh.net/encyclopedia/eh.net/encyclopedia/whaples@wfu.edu)

Sponsored by the Economic History Association (US),

Economic History Society (UK), Cliometric Society, and the History of Economics Society

Edited by

Prof. Robert Whaples (whaples@wfu.edu)

Phone: (966) (2) 646-6139

E-mail: muchapra@isdb.org

Website: www.muchapra.com

Islamic economics has been having a revival over the last few decades. However, it is still in a preliminary stage of development. In contrast with this, conventional economics has become a well-developed and sophisticated discipline after going through a long and rigorous process of development over more than a century. This raises a number of questions, some of which are: Is it necessary to have a new discipline in economics? If so, what is Islamic economics, how does it differ from conventional economics, and has it made any worthwhile contributions over the centuries? This paper tries to briefly answer these questions in four parts.

I

IS IT NECESSARY TO HAVE A NEW DISCIPLINE?

A universally recognized fact is that resources are scarce compared with the claims on them. However, it is also simultaneously recognized that the well-being of all human beings needs to be ensured. Given the scarcity of resources, the well-being of all may remain an unrealized dream if the right strategy is not developed for this purpose. The strategy that any society has is conditioned by its worldview, which may be either secular and materialist or spiritual and humanitarian.

The Role of the Worldview

The secular and materialist worldviews attach maximum attention to the material aspect of human well-being and assume that such well-being can be best realized if individuals have unhindered freedom to serve their self-interest and to maximize their wealth and want satisfaction. Such worldviews rely primarily on reason and do not recognize any role for revelation or Devine Guidance in the allocation and distribution of resources. In contrast with this, religious worldviews give attention to both the material as well as the spiritual aspects of human well-being. They do not necessarily reject the role of reason in human development. They, however, recognize the limitations of reason and wish to complement it by revelation. They do not also reject the need for individual freedom or the role that the serving of self-interest can play in human development; they, however, emphasize that both freedom and the pursuit of self-interest need to be toned down by moral values so as to ensure that everyone’s well-being is realized and that social harmony and family integrity are not hurt in the process of everyone serving his/her self-interest.



Material and Spiritual Needs

Even though none of the major worldviews prevailing around the world is totally materialist and hedonist, there are, nevertheless, significant differences among them in terms of the emphasis they place on material or spiritual goals. While material goals concentrate primarily on goods and services that contribute to physical comfort and well-being, spiritual goals include nearness to God, peace of mind, inner happiness, honesty, justice, mutual care and cooperation, family and social harmony, and the absence of crime and anomie. These may not be quantifiable, but are, nevertheless, crucial for realizing human well-being. Resources being limited, excessive emphasis on the material ingredients of well-being may lead to a neglect of spiritual ingredients. The greater the difference in 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).



The Enlightenment Movement, Secularism and Conventional Economics

While there is a great deal that is common between the worldviews of most major religions, particularly those of Islam, Judaism and Christianity, it is not possible to say the same about the worldviews of Islamic and conventional economics. After the Enlightenment Movement, all intellectual disciplines in Europe started becoming secular, value-neutral, materialist and social-Darwinist, even though this has not succeeded fully because of the continued influence of religious values. All economists have not necessarily become materialist or social-Darwinist in their individual lives and many of them continue to cling to their religious worldviews. Koopmans (1969) has rightly observed that “scratch an economist and you will find a moralist underneath.” Nevertheless, conventional economics has continued to cling to its secular and value neutral worldview and failed to recognize so far the role of value judgments or moral values in the efficient and equitable allocation and distribution of resources.

Secularism has led conventional economics to a neglect of spiritual needs and to an excessive emphasis on individual freedom to serve self-interest and to maximize wealth and want satisfaction in accordance with individual tastes and preferences. This has also led to the belief that competition can itself help safeguard social interest and lead to an efficient and equitable allocation and distribution of resources without any role for value judgments in conformity with the society’s moral values. The role of the government is primarily to ensure that competition prevails and that market imperfections and market failures are removed. This does not seem to have worked well. In spite of an enormous increase in wealth and the supply of goods and services, the basic needs of a large number of people remain unfulfilled and inequalities of income and wealth have continued to rise. In addition, there is also a rise in the disintegration of the family, crime and anomie, and a decline in peace of mind and inner happiness of human beings. (Easterlin 2001, 1995 and 1974; Oswald, 1997; Blanchflower and Oswald, 2000; Diener and Oshi, 2000; and Kenny, 1999.

II

WHAT IS ISLAMIC ECONOMICS AND HOW DOES IT DIFFER FROM CONVENTIONAL ECONOMICS?

This clearly justifies the rise of Islamic economics, which is based on a religious worldview that recognizes the role of both reason and revelation in human affairs and strikes at the roots of secularism and value neutrality. While Islamic economics does not prevent individuals from serving their self-interest, it wishes to ensure that social interest is not jeopardized. This is because of the great emphasis in Islam on human brotherhood and socio-economic justice. It recognizes the role of the market in the efficient allocation of resources, but does not find competition to be sufficient to safeguard social interest. It rather relies on an integrated role of moral values, market mechanism, families, society, and ‘good governance’ to ensure the well-being of all.



The Integrated Role of the Market, the Families, the Society, and the Government

The market is not the only institution where people interact in human society. They also interact in the family, the society and the government and their interaction in all these institutions is closely interrelated. There is no doubt that the serving or self-interest does help raise efficiency in the market place. However, if self-interest is overemphasized and there are no moral restraints on individual behaviour, other institutions may not work effectively -families may disintegrate, the society may be uncaring, and the government may adopt a totally laissez-faire approach. Mutual sacrifice is necessary for keeping the families glued together. Since the human being is the most important input of not only the market, but also of the family, the society and the government, and the family is the source of this input, nothing may work if the families disintegrate and are unable to provide loving care to children. This is likely to happen if both the husband and wife try to serve just their own self-interest and are not attuned to the making of sacrifices that the proper care and upbringing of children demands. Lack of willingness to make such sacrifice can, therefore, lead to a decline in the quality of the human input of all other institutions, including the market, the society and the government.



The Role of Moral Values

While conventional economics considers the behaviour and the tastes and preferences of individuals as given, Islamic economics does not do so. It places great emphasis on individual and social reform through moral uplift. What moral uplift can do is to change human behaviour, tastes and preferences and, thereby, complement the price mechanism in promoting general well-being. Before even entering the market place and being exposed to the price filter, the consumers are expected to pass their claims through the moral filter. This will help filter out conspicuous consumption and all wasteful and unnecessary claims on resources. The price mechanism can then take over and reduce the claims on resources even further to create market equilibrium. The two filters will together make it possible to have optimum economy in the use of resources, which is necessary to satisfy the material as well as spiritual needs of all human beings, to reduce the concentration of wealth in a few hands, and to raise savings, which are needed to promote greater investment and employment. Without complementing the market system with morally based value judgments, we may end up perpetuating inequities in spite of our good intentions through what Solo calls inaction, non-choice and drifting (Solo, 1981, p. 38)

The need for the injection of a moral dimension in economics is now being recognized even by a number of conventional economists. Prof. Sen, a Nobel Laureate, argues that “the distancing of economics from ethics has impoverished welfare economics and also weakened the basis of a good deal of descriptive and predictive economics” and that economics “can be made more productive by paying greater and more explicit attention to ethical considerations that shaped human behaviour and judgment” (1981, pp. 78 and 79). Hausman and McPherson also conclude in their survey article in the Journal of Economic Literature on “Economics and Contemporary Moral Philosophy” that “An economy that is engaged actively and self-critically with the moral aspects of its subject matter cannot help but be more interacting, more illuminating and ultimately more useful than the one that tries not to be” (1993, p. 723).

III

HOW DOES ISLAMIC ECONOMICS DIFFER FROM CONVENTIONAL ECONOMICS

From the above discussion, one may easily figure out the similarities and differences between the two disciplines. While the subject matter of both is the allocation and distribution of resources and both emphasize the fulfillment of material needs, there is an equal emphasis in Islamic economics on the fulfillment of spiritual needs. While both recognize the important role of market mechanism in the allocation and distribution of resources, Islamic economics argues that the market may not by itself be able to fulfill even the material needs of all human beings. This is because it can promote excessive use of scarce resources by the rich at the expense of the poor if there is undue emphasis on the serving of self-interest. Sacrifice is involved in fulfilling our obligations towards others and excessive emphasis on the serving of self-interest does not have the potential of motivating people to make the needed sacrifice. This, however, raises the crucial question of why would a rational person sacrifice his self-interest for the sake of others?

This is where the concepts of the innate goodness of human beings and of the Hereafter come in - concepts which conventional economics ignores totally. Because of their innate goodness, human beings do not necessarily always try to serve their self-interest. They are also altruistic and are willing to make scarifies for the well-being of others. In addition, the concept of the Hereafter does not confine self-interest to just this world. It rather also extends it beyond this world to the Hereafter. We may be able to serve our self-interest in this world by being selfish, dishonest, uncaring, and negligent of our obligations towards our families, other human beings, animals, and the environment. However, we cannot serve our self-interest in the Hereafter except by fulfilling all these obligations. Thus, the serving of self-interest receives a long-run perspective in Islam and other religions by taking into account both this world as well as the next. This serves to provide a motivating mechanism for sacrifice for the well-being of others that conventional economics fails to provide. The innate goodness of human beings along with the long-run perspective given to self-interest has the potential of inducing a person to be not only efficient but also equitable and caring. Consequently, the three crucial concepts of conventional economics - rational economic man, positivism, and laissez faire - have not been able to gain intellectual blessing in their conventional economics sense from any of the outstanding scholars who represent the mainstream of Islamic thought.

Rational Economic Man

The concept of ‘rational economic man’ in the social-Darwinist, utilitarian, and material sense of serving self–interest and maximizing wealth and want satisfaction could not find a foothold in Islamic economics. ‘Rationality’ in Islamic economics does not get confined to the serving of one’s self-interest in this world alone; it also gets extended it to the Hereafter by placing moral constraints on individuals that rein their self-interest to promote social interest. Al-Mawardi (d. 1058) considered it necessary, like all other Muslim scholars, to rein individual tastes and preferences through moral values (1955, pp. 118-20). Ibn Khaldun (d.1406) emphasized that moral orientation helps remove mutual rivalry and envy, strengthens social solidarity, and creates an inclination towards righteousness (p.158).



Positivism

Similarly, positivism in the conventional economics sense of being “entirely neutral between ends” (Robbins, 1935, p. 240) or “independent of any particular ethical position or normative judgment” (Friedman, 1953) did not find a place in Muslim intellectual thinking. Since all resources at the disposal of human beings are a trust from God, and human beings are accountable before Him, then there is no other option but to use them in keeping with the terms of trust. These terms are defined by moral values. Human brotherhood, one of the central objectives of Islam, would be a meaningless jargon if it were not reinforced by justice in the allocation and distribution of resources.



Pareto Optimum

Without justice, it would be difficult to realize even development. Muslim scholars have throughout history emphasized this, something that Development Economics has now recognized after a long flirtation with injustice.1 Abu Yusuf (d. 798) argued that : “Rendering justice to those wronged and eradicating injustice, raises tax revenue, accelerates development of the country, and brings blessings in addition to reward in the Hereafter” (1352 AH, p. 111: see also pp. 3-17). Al-Mawardi argued that comprehensive justice “inculcates mutual love and affection, obedience to the law, development of the country, expansion of wealth, growth of progeny, and security of the sovereign”(1955, p. 27). Ibn Taymiyyah (d. 1328) emphasized that “justice towards everything and everyone is an imperative for everyone, and injustice is prohibited to everything and everyone. Injustice is absolutely not permissible irrespective of whether it is to a Muslim or a non-Muslim or even to an unjust person” (1961-63, Vol. 18, p. 166).

Justice and the well-being of all may be difficult to realize without a sacrifice on the part of the well-to-do. The concept of Pareto optimum does not, therefore, fit into the paradigm of Islamic economics. This is because Pareto optimum does not recognize any solution as optimum if it requires a sacrifice on the part of a few (rich) for raising the well-being of the many (poor). It is the concept of Pareto optimum which has prompted John Rawls to state that one must never act solely to increase general happiness, if in doing so one makes any person unhappy (Rawls, 1958). Such a position is in clear conflict with moral values, the raison d’être of which is the well-being of all. Hence, this concept did not arise in Islamic economics.

The Role of the State

Moral values may not be effective if they are not observed by all. They need to be enforced. That is why the Prophet said: “God restrains through the sovereign more than what he restrains through the Qur’an.” (Cited by al-Mawardi, 1955, p. 121). It is the duty of the state to restrain all socially harmful behavior2 including injustice, fraud, cheating, and the non-fulfillment of contracts and other obligations through proper upbringing, incentives and deterrents, appropriate regulations, and an effective and impartial judiciary. The Qur’an can only provide norms. It cannot by itself enforce them. The state has to ensure this. This emphasis on the role of the state has been reflected in the writings of all leading Muslim scholars throughout history3. Al-Mawardi emphasized that an effective government (Sultan Qahir) is indispensable for preventing injustice and wrongdoing (1960, p. 5). Say’s Law could not, therefore, become a meaningful proposition in Islamic economics.

How far is the state expected to go in the fulfillment of its role? What is it that the state is expected to do? A number of scholars tried to answer this question.4 None of them, however, visualized regimentation or the owning and operating of a substantial part of the economy by the state. Several classical Muslim scholars, including al-Dimashqi (d. after 1175) and Ibn Khaldun, clearly expressed their disapproval of the state becoming directly involved in the economy (Al-Dimashqi, 1977, pp. 12 and 61; Ibn Khaldun, pp. 281-3). According to Ibn Khaldun, the state should not acquire the character of a monolithic or despotic state resorting to a high degree of regimentation (Ibid., p. 188). It should not feel that, because it has authority, it can do anything it likes (ibid, p. 306). It should be welfare oriented, moderate in its spending, respect the property rights of the people, and avoid onerous taxation (ibid, p. 296). This implies that what these scholars visualized as the role of government is what has now been generally referred to as ‘good governance’.

IV

SOME OF THE CONTRIBUTIONS MADE BY ISLAMIC ECONOMICS

The above discussion need not lead one to an impression that the two disciplines are entirely different. One of the reasons for is that this the subject matter of both disciplines is the same, allocation and distribution of scarce resources. Another reason is that all conventional economists have never been value neutral. They have made value judgments in conformity with their beliefs. In fact, even the paradigm of conventional economics has been changing - the role of good governance has now become well recognized and the injection of a moral dimension is also being emphasized by a number of prominent economists.



The Fallacy of the ‘Great Gap’ Theory

A number of economic concepts developed in Islamic economics long before they did in conventional economics. These cover a number of areas including interdisciplinary approach; property rights; division of labor and specialization; the importance of saving and investment for development; the role that both demand and supply play in the determination of prices and the factors that influence demand and supply; role of money, exchange, and market mechanism; characteristics of money, counterfeiting, currency debasement, and Gresham’s law; the development of cheques, letters of credit and banking; labour supply and population; the role of the state, justice, peace, and stability in development; and principles of taxation.It is not possible to provide a comprehensive coverage of all the contributions Muslim scholars made to economics. Only some of their contributions will be highlighted below to remove the concept of the “Great Gap” of “over 500 years” that exists in the history of conventional economic thought as a result of the false assumption by Joseph Schumpeter in his book, History of Economic Analysis (1954), that the intervening period between the Greeks and the Scholastics was sterile and unproductive. This concept has become well embedded in the conventional economics literature as may be seen from the reference to this even by the Nobel Laureate, Douglas North, in his December 1993 Nobel lecture (1994, p. 365).

The reality, however, is that the Muslim civilization made rich contributions to intellectual activity, including socio-economic thought, and thereby played a part in kindling the flame of the European Enlightment Movement. Even the Scholastics themselves had been greatly influenced by the contributions made by Muslim scholars. The names of Ibn Sina (Avicenna, d. 1037), Ibn Rushd (Averroes, d. 1198) and Maimonides (d.1204) (a Jewish philosopher, scientist, and physician who flourished in Muslim Spain), appear on almost every page of the thirteenth century summa (treatises written by scholastic philosophers) (Pifer, 1978, p. 356).

Multidisciplinary Approach for Development

One of the most important contributions of Islamic economics, in addition to the above paradigm discussion, was the adoption of multidisciplinary dynamic approach. Muslim scholars did not focus their attention primarily on economic variables. They considered overall human well-being to be the end product of interaction over a long period of time between a number of economic as well as moral, social, political, demographic and historical factors in such a way that none of them is able to make an optimum contribution without the support of the others. Justice occupied a pivotal place in this whole framework because of its crucial importance in the Islamic worldview There was an acute realization that justice is indispensable for development and that, in the absence of justice, there will be decline and disintegration.

The contributions made by different scholars over the centuries seem to have reached their consummation in Ibn Khaldun’s Maquddimah, which literally means ‘introduction’, and constitutes the first volume of a seven-volume history, briefly called Kitab al-‘Ibar or the Book of Lessons [of History].5 Ibn Khaldun lived at a time (1332-1406) when the Muslim civilization was already in the process of decline. He wished to see a reversal of this tide, and, as a social scientist, he was well aware that such a reversal could not be envisaged without first drawing lessons (‘ibar) from history to determine the factors that had led the Muslim civilization to bloom out of humble beginnings and to decline thereafter. He was, therefore, not interested in knowing just what happened. He wanted to know the how and why of what happened. He wanted to introduce a cause and effect relationship into the discussion of historical phenomena. The Muqaddimah is the result of this desire. It tries to derive the principles that govern the rise and fall of a ruling dynasty, state (dawlah) or civilization (‘umran).

Since the centre of Ibn Khaldun’s analysis is the human being, he sees the rise and fall of dynasties or civilizations to be closely dependent on the well-being or misery of the people. The well-being of the people is in turn not dependent just on economic variables, as conventional economics kept on emphasizing until recently, but also on the closely interrelated role of moral, psychological, social, economic, political, demographic and historical factors. One of these factors acts as the trigger mechanism. The others may, or may not, react in the same way. If the others do not react in the same direction, then the decay in one sector may not spread to the others and either the decaying sector may be reformed or the decline of the civilization may be much slower. If, however, the other sectors react in the same direction as the trigger mechanism, the decay will gain momentum through an interrelated chain reaction such that it becomes difficult over time to identify the cause from the effect. He, thus, seems to have had a clear vision of how all the different factors operate in an interrelated and dynamic manner over a long period to promote the development or decline of a society.

He did not, thus commit the neoclassical economists’ mistake of confining himself to primarily short-term static analysis of only the markets by assuming unrealistically that all other factors remain constant. Even in the short-run, everything may be in a state of flux through a chain reaction to the various changes constantly taking place in human society, even though these may be so small as to be imperceptible. Therefore, even though economists may adopt the ceteris paribus assumption for ease of analysis, Ibn Khaldun’s multidisciplinary dynamics can be more helpful in formulating socio-economic policies that help improve the overall performance of a society. Neoclassical economics is unable to do this because, as North has rightly asked, “How can one prescribe policies when one does not understand how economies develop?” He, therefore, considers neoclassical economics to be “an inappropriate tool to analyze and prescribe policies that will induce development” (North, 1994, p. 549).

However, this is not all that Islamic economics has done. Muslim scholars, including Abu Yusuf (d. 798), 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.1187), 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 a number of valuable contributions to economic theory. Their insight into some economic concepts was so deep that a number of the theories propounded by them could undoubtedly be considered the forerunners of some more sophisticated modern formulations of these theories.





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