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Monday, 9 February 2009

Islamic Economics Thought

Islamic Economic Thinking
It is the task of the scholars to refer to the Islamic sources to obtain Islamic norms on economic issues and to find out solutions consistent with these norms. This has happened throughout Islamic history according to the need of the time and space, and has produced a rich heritage of Islamic literature covering all aspects of human life including economic issues and other matters having implications for economic behavior.
Economic issues have been addressed from different perspectives by various authors in the context of different disciplines and in response to the needs of respective times in the Islamic history. Five different dimensions of analysis may broadly be identified.
First, discussions related to economic matters in the discipline of Tafsir (exegesis), which is the explanation of the divine book Al-Qur'an. The Qur'anic verses related to economics have been explained by mufassirin (personalities doing exegesis) as an integral part of the Qur'anic code of human life. A good number of books of Tafsir is available containing discussions on relevant economic matters. For instance, discussions on the prohibition of interest,1 encouragement of economic activities for human welfare,2 and so on.
Second, discussions of economic issues in the discipline of Fiqh (Islamic jurisprudence). The legal aspects of economic problems, along with other Shari'ah matters, have been analyzed by the great jurists of Islam in the books of Fiqh. For example, the legal aspects of mudarabah and musharakah have been dealt with in this discipline in some great detail.3
Third, the great Islamic personalities discussed economic matters in the context of ethical system of Islam for moral development. This analysis is different from the juristic analysis of economic matters in that the latter presents the legal status and limits while the former emphasizes the real spirit of Islam over and above legal limits, guiding man towards the most desirable economic behavior of human beings. The works of ulama, sufis, Islamic philosophers and Islamic reformers (mujaddidin) come under this category.
Fourth, a number of good pieces of work, related to economics, was written by some great scholars of Islam in response to the needs of their time while holding important government offices. The works in this category fall mainly under public finance, in particular, public revenues including land tax, public expenditure, and so on.5
Finally, some Islamic scholars and philosophers did also provide objective analyses of their economies. For instance, Ibn Khaldun and Ibn Taimiyyah even discussed the influence of demand and supply factors on prices, which is a microeconomic problem. These analyses of economic issues fall under three broad categories:
  1. ideal economic norms and values,
  2. legal status and limits in economic issues,
  3. Historical application and analysis.

Now the question which needs addressing is the following: What is the role of these analyses in the development of the discipline of Islamic economics? Clearly the basic sources of the Islamic code of life are the Qur'an and the Sunnah, which is true in the case of economics as well. The ideal Islamic economic norms and values have been given in these basic sources which have been explained by Islamic scholars (mufassirin and other 'ulama), while the legal status and limits have been deliberated upon in fiqh al- mu'amalat. The ideal phenomenon implies what is optimum in economic as well as other problems, while the legal boundaries present the acceptable limits which cannot be exceeded in the Islamic framework of a discipline. This explains the role of the first two categories of economic analyses in the heritage of Islamic literature, namely, the ideal economic norms and values, and the legal limits laid down in fiqh al-mu'amalat.
In essence, the achievement of the ideal conditions requires optimization, subject to the constraints set by fiqh al-mu'amalat. The application of the Islamic order in the historical context may involve solutions to the peculiarities of time and space from an Islamic perspective which may not necessarily be fully applicable elsewhere. It is, therefore, more appropriate to refer to the above first two categories of analyses, instead of the historical one. The latter may be referred to for additional insight, as and when necessary.
This explains the roles of the above three categories of Islamic analyses in the development of Islamic economics. In newly emerging economic issues, needing fiqhi rulings, the following Islamic sources will have to be used: ijma' al.'ulama (consensus of the 'ulama), qiyas (analogy), followed by maslahah 'ammah (public interest) and 'urf (custom)6 which have been applied in the discipline of Fiqh. The Islamic rulings derived by the ijma' al-'ulama are those on which qualified jurists have reached consensus of opinions.7 The qiyas is to derive ruling in the Shari'ah, if the basis ('illah) of the ruling seems to be common in both. There is a large body of Islamic laws and rulings from these two secondary sources: ijma' and qiyas.
The maslahah method of deriving Islamic ruling is to make laws to protect public interest, provided it is not contrary to the spirit and objective of the Shari'ah. This method may be applied in cases where neither textual law is available nor qiyas is possible. This method was invoked by the Maliki school of jurisprudence, and endorsed by the Hanafi school.s Finally, the 'urf is a custom, generally accepted, on which there exists no textual or analogical ruling, and the custom does not contradict Shari'ah. Although the use of terminologies is different, this has been accepted as a basis of law in the four schools of Islamic jurisprudence. Some of the existing Islamic laws fall under the categories of maslahah and 'urf.
The hierarchical legal status of these sources of Islamic laws is in the following order: the Qur'an, the Sunnah, the ijma' al.'ulama, the qiyas, the maslahah, and the 'urf. That is, if the law is given directly in 'the Qur'an, one cannot sort to the Sunnah, except for the detailed explanation of the Qur'anic verse(s). Similarly, if the matter can be resolved from the Sunnah, one cannot move to sources next to it, and so on.
As indicated above, development of Islamic economics as a discipline would involve application of these sources of Islamic ruling to contemporary issues having no reference in the Qur'an and Sunnah. This calls for adequate knowledge of the usul al-fiqh (the principles of jurisprudence) and the qawa'id al-fiqhiyyah (the rules of jurisprudence) which explain the methodology of deriving Islamic ruling on any problem, economic or non-economic.
It is obvious from the above that Islamic economics is based on the revealed norms for human welfare. On the other hand, the capitalist and the socialist economic systems are founded on materialistic philosophies, the methods being directed by human reasoning, without any revealed guidance. It is often observed that human reasoning is influenced by analytical minds of the researchers concerned, which in turn, are constrained by customs, environments and social value systems. Thus, human reasoning varies in time and space, a proper thing here becomes improper there, and an unfair matter of yesterday becomes fair today. Similarly, theories based on human reasoning make about-turns, a valid theory of one period becomes invalid with the passage of time, and vice versa.
Islamic economics is founded on the revealed philosophy of life. In fact, economic philosophy of Islam is derived from the philosophy of life itself, since economic aspect is only a dimension of the composite human life in the Islamic philosophy, rather than economics being the central focus of all activities. Thus, the Islamic economic philosophy is based on several fundamentals. First, tawhid, a comprehensive concept, implying complete submission of oneself to the one and unique being, who is the creator, sustainer, owner of everything, all-knowing, all-wise, and the most powerful. Second, risalah, an institution of prophethood, which brings the revealed guidance in all dimensions of human life from Allah in the form of the Kitab, and demonstrates its application through practice which is recorded in the form of Sunnah. Third, akhirah, the hereafter for accountability, and for getting the outcome of all deeds including economic activities, in an eternal life. Fourth, economic and non-economic well-being for leading a good life and discharging socio-Islamic obligations in this world and for achieving the home of hereafter. Among these, the last provides a framework for economic achievements, and the first and the third require all economic activities to be in conformity with the Islamic norms and values, which have been revealed through the institution of the risalah. Any research in Islamic economics has to be based on these philosophical foundations.
Economic Ideas in Muslim Writings of History
As indicated earlier, some Islamic scholars of history provided objective analyses of economic problems of their time when economics had not emerged as yet as an independent discipline, while some others discussed economic matters from an Islamic perspective, having implications for modem economic thinking. As is well-known, economics emerged as a formal discipline not more than three centuries ago. A quick look at the family tree of conventional economics shows its beginning with the Merchantilists in the 17th and 18th centuries, and the Physiocrats in the 18th century (Quesnay, 1758). Economics as a formal discipline finds its origin in Adam Smith (1776), developed further by the classical economists in the late 18th and early 19th centuries (Malthus 1778, Ricardo 1817) and neoclassical economists of the mid-and-late 19th centuries (Mill 1848, Walras and Marshall 1890). It was further advanced in the 20th century by Keynes (1936) and other economists including the rational expectations and Post-Keynesian schools. This is in the tradition of mainstream conventional economics. The radical stream takes its shape in the late 19th and early 20th centuries (Marx 1867, Lenin 1914), followed by the minority of the radical school in the contemporary world.
These facts indicate that the seeds of conventional economic ideas do not date backwards beyond the 17th century. However, economic analyses in the writings of Islamic scholars can be traced, as mentioned above, even many centuries before this date. Still, it is surprising to note, the seeds of some modem economic analyses can be observed in these Muslim writings. The history of conventional economic thought gives credit for such ideas to the western writers who wrote centuries after their analyses by Muslim scholars. As Udovitch concluded, "Some of the institutions, practices and concepts already fully developed in the Islamic legal sources of the late 8th century did not emerge in Europe until several centuries later. A few random examples of economic discussions in the heritage of Muslim writings are presented below.
Economic System: Laissez Faire and State Intervention
Ibn al-Qayyim (1292-1350 AD) recognizes private ownership and the freedom of economic activities, but within the norms and values of Islam. Although private property is recognized, the government may intervene in it for public interest, even to take away privately owned property or asset if the public interest so demands. However, this has to be duly compensated. Similarly, Ibn Taimiyyah (1263-1328 AD) recognizes private ownership, which may be curtailed by the government, if necessary. In some circumstances, it may be allowed to intervene up to the point of suspending and abrogating ownership rights altogether.
Ibn Taimiyyah also recognizes free entry and exit, and adequate information in the operation of market. He argues for controlling monopolistic elements from the market. According to him, prices should be determined by free market forces as long as market prices are not artificially increased, which will necessitate fixation of prices by the government.
That is, Ibn Taimiyyah favors a free economy conditioned by public interest and determined by Islamic norms. Ibn Taimiyyah attaches higher importance to social interest as compared to private interest, although he chooses a middle course between total freedom and total control.
Many of the early writers have expressed the need for the state supervision of economic activities to make sure that these conform to the Shari'ah norms and do not violate public interest.12 The institution of hisbah has been suggested to carry out this function. They analyzed the rationale, nature, functions and activities of the institution. This is a unique institution for the supervision of economic activities of the economic agents including the producers and traders. In the contemporary world, some of the functions of the hisbah institution have been divided into different ministries and departments, while some others seem to be non-existent
Price Theory
The price theory in the microeconomic analysis is implicit in the writings of Ibn Taimiyyah. In his detailed discussion on price control, Ibn Taimiyyah has analyzed how prices are determined in the market by the interplay of demand and supply forces. According to him, prices could increase due to the shortage of supply of the commodity in question and also because of higher income of the people. The former gives the concept of the leftward shift in supply curve with a resulting increase in prices, while an upward shift in the demand curve due to rise in income (or the income effect) is reflected in the latter. The ideas of movement along and shift in demand and supply curves are thus implicit in the analysis of Ibn Taimiyyah.
Ibn Taimiyyah had also discussed the issue of market structure. He discussed monopoly and monopolization practices by limiting supply of goods and services. He argued strongly against monopolistic practices, which amounts to favor a competitive market structure to ensure fair prices for the people.
Ibn Taimiyyah presented a concept of "equivalent price", defined as the price determined by the market forces in a competitive market structure without coercion, fraud, monopolistic behavior, hoarding and other corrupt practices, a price which is satisfactorily acceptable to both the transacting parties. Any other price, which exists due to market imperfections, will affect human welfare, and hence calls for government intervention and, if necessary, price control.
In Ibn al-Qayyim's analysis, determination of prices should also be left to the market forces, that is the demand and supply forces, as long as imperfections, distortions and monopolistic behavior do not affect public interest. Otherwise, he recommends government intervention for fixing market prices.
Ibn al-Qayyim and Ibn Taimiyyah treat both commodity and factor markets similarly in the context of pricing
Monetary Economics
Some early Muslim thinkers addressed the issues of money and monetary economics. For example, IbnMiskawaih's (d. 1030AD) discussion of exchange incorporates the function of money as the medium of exchange. He also subscribes to gold standard.
Al-Ghazali (1058-1111 AD) discussed money and its functions. He analysed two im'portant functions of money: medium of exchange and standard of value. An important observation of his is that these functions of money get disrupted when people demand money for money's sake.
It is interesting to note that the idea contained in what is known in the contemporary literature as the Gresham's law was discussed explicitly in the work of Taqiuddin Ahmad al-Maqrizi in the 14th century. The law simply says that the bad money drives away the good money from the market, since people tend to use bad money for transactions and save the good money, and thus the good money disappears from the market. Al-Maqrizi found this happening in Egypt and analysed the phenomenon. Ibn Taimiyyah (1263-1328 AD) also discussed the same law. The credit for this contribution in the western literature goes to Thomas Gresham, an author of the nineteenth century.
Al-Maqrizi also argued for gold standard, more specifically the gold and the silver bullion, although he perceived the eventual. need for the use of other money. He also related money supply with inflation rate (rise in prices), an idea which was refined later and explained by a theory known as the Quantity Theory of Money. The history of conventional economic thought relates these ideas on the monetary economics to the classical economists, centuries after al-Maqrizi.
As it has been analysed even in some of the contemporary conventional literature, interest is the root of many evils including economic fluctuations leading to inflation and depression, income inequality and so on. The Islamic economics is unique in its total prohibition from the monetary system. Besides its prohibition in the basic Islamic sources, many Islamic scholars analysed various kinds of interest, explicit and disguised (see, for example, Ibn al-Qayyim), and their prohibitions, although serious analysis of its socio-economic implications is a more recent phenomenon.
Public Finance
It has two major dimensions: public revenues and public expenditure. The early Muslim writers dealt with both of them. Some of them analysed the taxation source of public revenue and its related issues. For example, Abu Yusuf(731-798 AD) argued for a proportional tax in agriculture, instead of a fixed levy on land, on the ground that the former was likely to yield larger revenue and facilitate expansion of land area under cultivation. He argued for following the principles of justice and equity in taxation.
In public expenditure, Abu Yusuf provided guidelines for developmental expenditure including irrigation projects, transport system (bridges) and so on. In this context, he emphasised the Islamic moral code of behaviour of the government while dealing with public money. According to him, this is a trust from Allah which will be accounted for, and hence the government should behave accordingly.
Abu 'Ubaid (d. 838 AD), Mawardi (d. 1058 AD) and many others discussed the sources of government revenues, norms of their collection and the Islamic values in their expenditure.
Abu Bakr al-Tartusi (450- -AH) provided the concept of the abilityto pay in the principle of taxation, that tax should be imposed only on the surplus income after meeting all the basic needs, since those who do not have surplus are not able to pay taxes. Explicit in this is the idea of minimum taxable income such that any income below this is exempted from tax; and implicit in this is the seed of the ability to pay approach in the principle of taxation. Abu Bakr al-Tartusi also emphasised the need for justice and benevolence in the collection of taxes, without resort to oppression, injustice and injury to the taxpayers. In public borrowing, al-Ghazali (1058--1111 AD) saw its permissibility when other regular sources of revenues of the state are not adequate to meet expenditure on defence, etcetera.
Ibn Khaldun (1332-1404 AD) provided positive analysis of the effect of tax on work efforts. According to him, work efforts will be affected by high taxes resulting in a decrease in production and population (due to emigration), which will eventually decrease tax revenue by decreasing the tax base. He argued for demand management policy in the form of 10weI: taxes and higher government expenditure during recession, which idea is conventionally believed to come out of Keynes' General Theory in about mid-20th century.
Al-Maqrizi (1364-1442 AD) analysed the problem of tax burden. If tax is not efficiently handled, tax burden may be shifted to consumers, whereas it is supposed to be borne by the producers and businessmen from the profit income. A consequence is the fall in demand for. the goods concerned because of their higher tax adjusted prices, which in turn affects the suppliers and the economy as a whole.
In public expenditure, al- Tartusi emphasised development and provision of physical infrastructure and public goods (and also subsidising the basic needs for human welfare). Al-Maqrizi analysed budget, budget preparation including the collection of necessary background data and discussion on other budget matters, which pertain to the functions of diwan (council). He also discussed the issues related to its implementation, supervision and control by the institutions like Diwan al-Muhasabah and diwan for investigation
Economic Development
As against the sufis, most of the Islamic writers emphasised the economic achievements, within the Islamic norms, for human welfare in this world and in the hereafter. The advantage of wealth (or economic development) is that it enables one to lead a good Islamic life performing all Islamic obligations including hajj, jihad, zakah (Ibn al-Qayyim), and it leads to national strength, stability and national defence (al-Tartusi). Al-Tartusi indicated to a phenomenon which the contemporary world has been facing; economic backwardness leads to political instability, poor national defence, politico-economic dominance of the super power; and, on the other hand, economic power leads to political strength, control, dominance and external security of a nation. The intellectual mind of al- Tartusi could clearly perceive this phenomenon and hence advised the Muslims to achieve economic progress within the Islamic values.
Ibn al-Qayyim put a lot of emphasis on agricultural development. In view of the fact that there exist people who own land but do not or cannot cultivate it, and there are others who are able and willing to cultivate land but .do not have it. Ibn al-Qayyim supports the arrangement of sharecropping in the agricultural sector. According to him, it is fair that some provide land and others cultivate it, and they share in output on an agreed basis. There is, however, a debate among the jurists whether sharecropping is allowed or not. According to the recent economists of the third world, sharecropping is not a good arrangement of land use in the agricultural sector.
Ibn Taimiyyah (1263-1328 AD) emphasised that everybody must be guaranteed a minimum standard of living in order to be able to perform his obligations to his family, fellow people as well as duties to the Creator. He assigned a religious status to economic activities leading to economic development by stating that agricultural, industrial and commercial activities that are necessary for satisfying basic needs of the people are fard kifayah.14 One of his most important economic contributions is to emphasise the government's responsibility to guarantee fulfilment of basic needs to everybody.
In economic development, the basic needs approach is a recent development. Ibn Hazm, however, raised the issue of basic needs in the 11th century (994-1064 AD). According to him, basic needs consist of food, drink, clothing and shelter. Ibn Hazm assigns to the government the responsibility to guarantee basic needs of the poor. He also emphasized the role of the rich in this matter.
Shah Wali Allah (1703-1762 AD) analyses the adverse effect of high inequality in the distribution of income. To him, income concentration leads to production of luxuries in the society which causes a socially undesirable product mix, increasing sufferings of the poor.
Social Security System
The social security system is built in the Islamic economic system to help the poor, needy, unemployed, orphans, handicapped, and so on. The fund is developed by both involuntary (zakah) and voluntary contributions of the better-off members of the society. This has been provided in the basic IsIamic sources, the Qur'an and the Sunnah. In addition to detailed juristic discussion in Kitab al-Fiqh (book on jurisprudence), some Islamic scholars have also analysed the institution of zakah, its rationale, and so on, which is a system unique to Islam.
Besides, some Islamic thinkers categorically emphasised use of public funds for this purpose (al-Tartusi). It should be noted here that this emphasis is not limited to the use of zakah fund, but rather it is for using government treasury to provide financial assistance in an organised way to those who need it. This may be considered as the basic concept of the social security system whereby the zakah is a sub-set of this system, such that the size of this fund will be higher than, or at least equal to, the zakah revenues.
Some of the contemporary countries have introduced different degrees: of social security system, based on the ideological orientation of the political leadership, which does not have any floor concept from macro perspective as is implicit in al-Tartusi's writings. Except for this difference, the idea of contemporary social security system is explicitly noticeable in al-Tartusi's contributions
Division of Labour
In the contemporary literature on the history of economic thought credit for the analysis of the importance of division of labour goes to Adam Smith, an 18th century economist. The matter was discussed by al-Ghazali (1058-1111 AD) and others. According to them, the multiplicity and diversity of human beings necessitates co-operation and division of labour. In a more objective way, al-Ghazali discussed the need for division of labour using the example of a needle factory, analogous to Adam Smith's example of a pin factory about seven centuries later. Similarly, Ibn Khaldun, (1332-1404 AD) analyses that an individual can hardly produce even his i own food alone, which, according to him, requires six to ten different kinds of services, needing their division among different people and eventual exchange in the society -to him, the division of labour will lead to specialisation, a concept later attributed to Adam Smith.
These are only some random examples of economic ideas in early Muslim writings. This perhaps makes it clear that the more one refers to these writings, the more one will be able to appreciate the contributions of Muslims in the field of economics. This seems to be evident from Charles Issawi's appreciation of Ibn Khaldun (1332-1404 AD). "Unlike some Mercantilists, he (Ibn Khaldun) realises that production, rather than trade, is the source of wealth. He realises, too, that gold and silver, far from constituting wealth, as was widely believed in Europe and elsewhere until the seventeenth and eighteenth centuries, are mere metals, like iron, prized because the relative stability of their prices makes of them good media of exchange and stores of value. Before Locke and Hume, he sees that each country gets the gold it needs through foreign trade and that gold-producing countries are not necessarily the wealthiest. ..He understands, though not very clearly, the influence of supply and demand factors on prices, including wages; he states that the value of a commodity is mainly derived from the labour embodied in it; he realises that prices are interdependent, so that a rise or fall in the price of one commodity tends to communicate itself to others. ..He clearly understands the function of trade and declares it and most other services, such as medicine, teaching, and even singing, as productive, in this showing himself more clear sighted than Adam Smith. ..Before Durkheim, Ibn Khaldun hinted that division of labour reinforces social solidarity. Like Marx, he understood the enormous influence exerted by economic factors on political and social life. ..Even his views on Public Finance remind one of those of contemporary advocates of state expenditure designed to promote economic activity.
But if Ibn Khaldun's views on "pure economics" fully earn him the title of "Pioneer Economist", his views on "social economics" are even more advanced. More clearly than many modem economists, he saw the interrelation of political, social, economic and demographic factors".15
Contemporary Phenomenon of Islamic Economics
Knowledge in all its branches has been enriched by the contributions of Muslim scholarship all through the heyday of Islamic history so much so that their Islamic centers used to be the focal points of knowledge seekers even from the West. As is expected, however, research efforts like many other things have been seriously 9isturbed by the colonialization effects with the downfall of Islamic era a few centuries ago, when the West took over the engine of research and knowledge. Economics as a formal discipline is a child of this colonial era and the West continued from where the Muslims left, and developed the field known as Economics. Muslims lagged naturally behind in the formal development of the field of economics in this period.--With the end of the colonial era, the Muslim scholarship is gaining its lost momentum as is evidenced in the production of well-researched works by Muslims in almost all disciplines. Economics has not been left aside.
One can see the wealth of growing literature in Islamic economics, with more initial emphasis on the Islamic economic system, as compared to the capitalist and socialist systems, and on Islamic banking in order to save the humanity from one of the most damaging evils, the interest (riba). Many considered the concept of Islamic banking to be a utopian idea. The contemporary Islamic economists and Islamic bankers have, however, demonstrated its viability in both theory and application. Islamic banks are presently functioning successfully in Muslim and some non-Muslim countries alike. Besides, the institution of zakah has partially been introduced in some of the Muslim countries. These institutions could not yet, however, produce all the beneficial effects as expected and desired, because these are operating in the interest-polluted alien environment. How fast can a bicycle run if the spare part of a car is fixed into it? There is a need to throw the broken bike and to get a powerful car, which used to be once ours. Then one can see how fast it can run.
Research in Islamic economics has now been extended to other areas as well, for example, microeconomics, macroeconomics, fiscal economics, monetary economics, and economic development and so on. This research is not, however, free from problems. First, there is a lack of "integrated" background preparation for research: the Shari'ah experts lack in the knowledge of economics, while the economists lack in Shari'ah.16 Second, there is a need to go ahead with a clear-cut Islamic economic worldview, rather than a partial view, which is yet to come through. Third, there is a lack of support for research activities. Finally, the centers of learning geared towards Islamic economics are limited, which are conducive for its development. Development of Islamic economics would need co-operation from all concerned including educationists, researchers, policy makers, and political leaders of the Muslim world.
It should be emphasized here that an adequate amount of background preparation is important to be able to conduct Islamic scientific research in the field of economics. The background preparation includes analytical skill of economics, and the knowledge of relevant Islamic sources and the methodology of deriving Islamic rulings from the Islamic sources. The latter will help set the Islamic constraints in the optimization functions, or the basic framework of analysis, while the former will provide analytical skill in the contemporary context.
It is encouraging to note that efforts are being made at different levels, although often not as effectively and adequately, to address the issues and. problems that deserve attention. The success in this matter at a desirable speed will depend on all-out efforts by and all sorts of supports from all concerned.
(Iqtisad Al Islami)
Alfalah Consulting - KL: 
Islamic finance consultant: 
Islamic Investment Malaysia:

1 comment:

Unknown said...

Blogs are so informative where we get lots of information on any topic. Nice job keep it up!!

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