The Methodology of Islamic Economics

My ten minute welcome address on this topic at the 6th Workshop on Islamic Economics, arranged by IKAM in Istanbul, 5-7 Apr 2018. A video of the entire session — in Turkish — is available from links below.

We must start by understanding that Western methodology for economics is seriously flawed. For reasons too complex to explain here (see “Deification of Science”), Europeans rejected religion, and came to believe that science is the only valid source of knowledge. However, scientific method is seriously handicapped when it comes to the study of human beings and societies. For a deeper discussion, see “Method or Madness?”; briefly, we can mention two major defects:

  1. Human beings are free to choose (between good and evil). Their future behavior is not predictable from the past.
  2. Mathematical formulae cannot be used to describe behavior, since humans change unpredictably. Formulas require robots, and indeed, this is what economic theory assumes.

The rejection of religion which took place as a result of the corrupt behavior of Popes led to deep religious trauma in Europe, and this led to the serious distortions in European theories of knowledge. Since religion advocates belief in the unseen, Europeans rejected this as a principle, and resolved to trust only in that which they could touch or see. The philosophy of logical positivism emerged, which argued that our only source of knowledge is our senses, and we cannot say anything about the unseen causes which create the observables. This rejection of unobservables, based on rejection of God, also led to rejection of unseen motivations, or the heart and soul of human beings. So the third serious defect which resulted from the adoption of a positivist understanding of scientific method was the following:

  1. A seriously mistaken understanding of human behavior and sources of human welfare due to failure to recognize the relevance of heart and soul of human beings.

With this as background, we turn to a more concrete and specific explanation of how economic theory is based on seriously mistaken methodological ideas.

Even though economic theory claims to be positive – that is purely a factual and objective description of human behavior – it has all three elements: positive, normative, and transformative. That is, it describes actual state of affairs, it describes an ideal state of affairs, and it explains how we can make changes to get from the observed imperfect state to the desirable ideal state. However, the positive and normative elements are seriously mistaken. That is, the description of human beings as homo economicus misses the mark completely; human beings rarely behave in this way. Furthermore, the normative idea that this is rational behavior is seriously wrong; Amartya Sen in his essay on “Rational Fools” explain why it would be extremely foolish to behave in ways that economists consider as rational. In particular, the normative idea that the purpose of our lives is to maximize the pleasure that we obtain from a lifetime of consumption is deeply mistaken about the nature of human welfare, which is not tied to consumption. Recent research has confirmed the Easterlin Paradox, which shows that rising levels of consumption have zero correlation with human happiness and welfare. In fact, happiness depends on character – compassion, generosity, trust, contentment – and on social relationships, family, friends, community; loving, and being loved. As per Hadeeth, a Mo’min loves and is loved.

Conventional economics claims to be positive, but conceals poisonous normative messages within its framework (for details of these poisons, see Julie Nelson: Poisoning the Well: How Economic Theory Damages Our Moral Imagination). In contrast, the methodology of Islamic Economics is based on three distinct and explicit components. One is a positive element, which describes actual human behavior. The second is the normative element, which describes ideal human behavior; for this, we have been sent the perfect model, which is the behavior of Prophet Mohammad SAW. The third element is transformative. It explains the steps we need to take to create the changes required to realize the potential for excellence within each human being.

On the positive front, Islam provides us with a far more complex and accurate picture of the realities of human behavior, relative to the hopelessly primitive model of homo economicus of economic theory. According to Islam, every human being has a Nafs-e-Ammara which is motivated purely by pleasure and has no moral component. As a result, it frequently invites towards evil. At the same time, every human being has a Nafs-e-Mutmai’nnah which informs him of the good, and is attracted towards the good. As the Quran states, every human being is created in the best of forms and reduced to the lowest of the low. This means that every human being is built with the capability of rising higher than the angels, and also has the potential to become lower than the beasts. The human heart is a constant battleground between the forces of good and evil. The goal of our life on this earth is not the maximization of the pleasure obtained from consumption, but rather it is Tazkiya  — cleansing and purifying our hearts, so that the  love of Allah, and His Prophet Mohammad SAW, and the struggle for the Deen become the most beloved. To achieve this goal, we must obey the orders  of Allah in the manner shown by the most excellent model for all human beings, our prophet Mohammad SAW. Thus, Islam provides a positive theory which describes actual behavior, a normative theory which shows us the ideal behavior, and a transformative theory which explains how we can change and purify our own hearts, and also how we can invite others towards the good.

When this knowledge was given to man via our Prophet Mohammad SAW, it created the greatest revolution ever seen in the history of mankind. It took ignorant and backwards Arabs from the bottom, and made them the leaders of the world. The teachings of Islam launched a civilization which dominated the planet for a 1000 years. The question of the greatest importance for the Muslims is: Does this message have the same power today? Can it create the revolution today that it did 1400 years ago? Unfortunately, as prophesied, Islam has become a stranger to the Muslims. Today, in economic theory as well as in all realms of knowledge, the Muslims believe that it is Western education which is required to change the condition of the Ummah from its current sad state. They no longer believe that the message of Allah is perfect and complete, and sufficient for our guidance today (see the Modern Mu’tazila). Islam as a way of life has become a stranger because in all domains of our life – political, social, economic, educational, etc. – we are following the ways of the Christians and Jews, even to the extent of crawling into lizard holes after them. The main message of my talk is that Islam itself provides us with the methodology required to implement the teachings of Allah in our personal, social and collective lives, which is needed to re-awaken the Ummah from its sleep. The message of Allah has the same power today to revolutionize our internal lives, and to create a revolution in the world, as it did 1400 years ago.

Video Recording of ENTIRE Welcome Session (in Turkish)

Slides for the main talk, on Third Generation Islamic Economics — A New Methodology for Islamic Economics:

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About Asad Zaman

BS Math MIT (1974), Ph.D. Econ Stanford (1978)] has taught at leading universities like Columbia, U. Penn., Johns Hopkins and Cal. Tech. Currently he is Vice Chancellor of Pakistan Institute of Development Economics. His textbook Statistical Foundations of Econometric Techniques (Academic Press, NY, 1996) is widely used in advanced graduate courses. His research on Islamic economics is widely cited, and has been highly influential in shaping the field. His publications in top ranked journals like Annals of Statistics, Journal of Econometrics, Econometric Theory, Journal of Labor Economics, etc. have more than a thousand citations as per Google Scholar.

3 thoughts on “The Methodology of Islamic Economics

  1. Pingback: A Syllabus for Islamic Economics | An Islamic WorldView

  2. Pingback: Is Islamic Knowledge relevant for Modern Business? | An Islamic WorldView

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