What is Islamic Economics?

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 images (4)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 the 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.

  1. rieville said:

    David Graeber has chapters detailing Islamic economics in his “Debt: The First 5000 Years”.

    It’s worth noting that the geographical area which is modern day Iraq was – based on current archaeological evidence – to both invent interest-bearing loans. And to later abolish interest and profiteering on loans as being socially unjust and destabilizing.

  2. An enlightening presentation, Asad. The pre-Reformation Christian (i.e. Catholic) position was and is much the same. The question is, why did a late-comer like Protestant Britain’s Lord Macaulay (1835) take the position he did? Let me draw your attention to the invention of printing (1454), and two subsequent books:

    Machiavelli’s publication of ‘The Prince’ (1513, on rulers using secrecy and deception to get their own way) just thirty years after Columbus discovered America and four years before Luther began the Reformation (1517) and subsequent land-grab of church (i.e. community and parish) property, which had previously provided for social services; and

    David Hume’s three-volume ‘A Treatise of Human Nature’ (1740) justified his atheism and his colleague Adam Smith’s reduction of morality to fortuitous sympathy with the solipsistic argument that we cannot know anything other that what we personally experience, his way out being agreement on shared and repeatable experience. Volume 1 transformed Bacon’s empirical scientific method (taking things to bits to see how they work “for the glory of God and the relief of Man’s estate”) into today’s positivism, with science being “what scientists agree on”. Volume 2 glossed over the Christian ethical interpretation of Mosaic law (“love God and thy neighbour as thyself”) by discounting the existence of a God to guide us and reducing atomic man’s morality to instinctive or habitual feelings. Vol 3 reduced moral law to civil law, i.e. “what democratic government agreed on”. The British government by then being a land-grabbing elite, it agreed on transforming ownership in the Catholic sense (of right to the resources one needed to perform one’s duties) into an absolute right to do what one liked with the property (at that time including slaves) one legally held.

    I find the “Events” section of Pear’s annual Cyclopaedia [mine is the 1982 edition] provides an invaluable time line for putting things in perspective. Also, I see the issue not as just one world view against another but personality differences such that individuals are predisposed as well as educationally likely to have more less narrow world-views. From my cyclopaedia I learned of a few Islamic and Christian events around the time of the Reformation I hadn’t been aware of.

    1526: Battle of Panipat: Babar begins Moslem conquest of India, founds Mogul Empire.
    1542: New Laws of the Indies: first attempt to legislate for welfare of colonial natives, by [Catholic] Spanish Government.
    1600: English [Protestant] East India Company founded. 1602: Dutch [Protestant] East India Company founded.

    Which says a lot for economist and philosopher of science John Stuart Mill’s rebuttal of Macaulay in ‘On Liberty’ [1859], and today’s Macaulayesque attitude to education by the ISIS elite.

    While writing this I’ve come across an argument for Roger Bacon (d. 1292) as the originator of the experimental aspect of Francis Bacon’s (d. 1626)” empirical” science, see http://plato.stanford.edu/entries/roger-bacon/. Also, there have been a succession of Catholic “social encyclicals” since 1892, but in my youth this one by Good Pope John particularly moved me: http://w2.vatican.va/content/john-xxiii/en/encyclicals/documents/hf_j-xxiii_enc_15051961_mater.html.

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