Defining Islamic Economics

[] What is Islamic Economics? A paper by Hafas Furqani “Defining Islamic Economics: Scholars’ Approach, Clarifying The Nature, Scope and Subject-Matter of The Discipline”  lists more than 21 definitions, citing in addition several authors who state that there is no need for such a definition. Why is there such a variety of definitions, and what can be done to arrive at consensus regarding this matter? The problem is deeper and more complex than it appears on the surface. We list two major obstacles in the path of its solution:

  1. A Deep Misconception regarding the nature of Social Sciences: This problem is discussed in detail in “Method or Madness?” , which explains how the quantitative and mathematical approach to economics won over the historical and qualitative approach in the “Methodenstreit” – the battle of methodologies, in Germany in late nineteenth century. This led to “How Economics forgot History” — economics was constructed as a set of universal laws like those of physics, without any historical, social, cultural, or geographical context. This was a grave mistake — social science theories are always developed from study of human experience, and they are always only relevant to similar experiences –  which means that they must be understood within historical and temporal context, unlike the laws of physics.
  2. Acceptance of Knowledge Claims of Western Economics on Face Value: Instead of admitting that it is based on an analysis of market economies with social, political, and institutional structures of European societies, modern economics claims to be universally valid. Why this is so has been analyzed in detail in “The Thousand Snakes: Image and Reality of Western Economics”. Even though it is easy to prove that Western economic theories do not apply to different types of economies, the false claim that they do was widely accepted by Muslims, due to the shock-and-awe created by Western global domination (see The Modern Mu’tazila).  Once this was accepted, then it became necessary to create an Islamic Economics by taking for granted the central concepts of modern economic theory, and attempting to make minor modifications in peripheral matters. It was not realized that a society based on principles of generosity, cooperation, and social responsibility would have an entirely different economic theory from that of a capitalist economy based on competition, greed, and individualism. The attempt to combine fire and water — opposite views about how the economic system should work — led to “The Crisis in Islamic Economics”. In particular, it made it impossible to construct a genuine Islamic economics based on cooperation, generosity and social responsibility. Instead, Islamic Economists tackled the impossible task of  grafting Islamic ideas onto the competition, greed, and individualism that are foundational principles of Western economics.

As I have argued in my paper on “Re-Defining Islamic Economics”, creating a consensus view on what the subject is, must be considered as a central challenge. The paper argues that one way of creating consensus is to use purely Islamic sources to define Islamic Economics, instead of trying mix Islamic concepts with diametrically opposed Western concepts (see, for example, Islam Versus Economics). This by itself is not sufficient because the subject itself has evolved and changed as economic and political situation of the Muslim societies have evolved and changed with time. The trap of thinking of economics as universal science fails to recognize the historical context, and forces us to think of definitions which remain invariant across time. But this ignores the basic principle that social science theories cannot be understood outside of their historical context (for more explanation and discussion, see “The Three Methodologies”). Once we understand that economic theories evolve and change as the economy itself evolves and changes, then it becomes possible to consider Islamic Economics in the light of the historical circumstance and evolving needs of Muslim societies. For the first fourteen centuries of Islamic History, there was no separate consideration of “Economics” as a subject, because it was considered as an integrated part of social, political, personal, and moral teachings of Islam, which could not be taken in isolation. Note that this is similar to the European tradition, where economics was a branch of Moral Philosophy before the emergence of secular thought in Europe. A preliminary sketch of the birth and evolution of Islamic Economics in the twentieth century is given in the following excerpt from the Forward to a special edition on “The Challenge of Islamic Economics” in International Journal of Pluralism and Economic Education (IJPEE Vol 6 No 4) by Asad Zaman and Jack Reardon.

Section 2: What Is Islamic Economics

This apparently simple question has a rather complex answer, which we will sketch briefly in this introduction. Early in the 20th century, about 90% of Muslim lands were colonised. Partly as a result of the two world wars, most of these colonies were liberated by the middle of the 20th century. At the time there were two competing models for organising economies: capitalism and socialism. Revolutions are driven by ideologies and Islamic thinkers 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. Early writings on Islamic economics focus on comparison and evaluation of economic systems, and proving the superiority of a hypothetical economic system based on Islam. In particular, two major figures played a prominent role in promoting the vision of a just and equitable Islamic Economic system: Muhammad Baqir al-Sadr in his book Iqtisaduna (Our Economy), and Sayyid Abul-Alal-Mawdudi in numerous books and articles (e.g., Economic System of Islam). Chapra (2004) and Wilson (1998) summarise this historical background, and also remark on the courage it took to formulate an Islamic economic system and defend it against the dominant and apparently tremendously successful Western systems in the early 20th century.

However certain characteristics of post-colonial societies prevented experimentation with implementation of idealised Islamic economic forms. The process of colonisation had created a class of intermediaries, called compradores in Latin America; Black Skins with White Masks (Frantz Fanon) in Africa; and Brown Skins with White Masks (Hamid Dabashi) in Asia. Colonial educational systems had explicit goals to create a buffer between the rulers and the colonised, as described by Lord Macaulay in his (in)-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 intermediary classes were the backbone of the pre-independence bureaucratic administrative structures. Continuity with pre-independence colonial institutional structures led this class to power in the post independence era. The compradores were trained to believe in the superiority of the colonisers, and to treat their heritage with contempt. Plans for Islamic economics 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 largely unsuccessful, and the compradore class was generally successful in retaining power. This led to the second phase of development of Islamic economics, which is often dated to the First International Conference on Islamic Economics in Mecca in 1976.

The vision of the founders of the field, like Mawdoodi and Baqir Al-Sadr, for an
Islamic Economic system which would provide a just and equitable alternative to both Capitalism and Communism were abandoned. Second generation pragmatists saw that the required revolution did not appear to be forthcoming, and 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. Due to circumstances to be discussed in detail shortly, second generation authors in nIE sought to reconcile the differences between Capitalism and Islam that had been seen clearly by the first generation. While acknowledging its debt to the founders of Islamic economics, the second generation buried first generation expressions of conflict, and the grand vision of an alternative system, under the carpet.
They asserted that these were mistakes made by founders, who did not have sufficient understanding of modern economics. This fundamental mistake of the second generation led the entire field of Islamic economics astray. To understand contemporary Islamic economics, it is important to analyse the reasons for this error, and its consequences.

(end of excerpt)

The paper goes on to discuss how the emergence of Logical Positivism led to a deeply distorted theory of knowledge, and this in turn caused Social Science in the West to be constructed on the wrong foundations, as a set of universal laws, invariant across time and space, and across culture, geography, and socio-economic and political institutional structures. This deeply mistaken approach was imitated by Islamic Economists in attempting to construct foundations for the subject, which led to massive confusions displayed in the proliferation of un-satisfactory definitions. The complete Forward from which the excerpt above is taken can be downloaded from Forward to IJPEE Vol 6 No 4


This entry was posted in Historical Context of Economics, islamic economics by Asad Zaman. Bookmark the permalink.

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.

4 thoughts on “Defining Islamic Economics

  1. What is your view on a 100% tax on unimproved value of land (land value tax), not including buildings and improvements to the site, “location, location, location” value could replace many taxes and be used to fund a basic income. Location value is created by the community via infrastructure spending, schools and hospitals etc. Bearing all this in mind, can it really be right that land owners (from the largest to the smallest, and including indirect landowners, i.e. the banks who collect land rents via mortgage lending) are allowed to enjoy or collect all this rental value for little or no payment, even though it is clearly the whole of society which creates rental values – whether directly or indirectly, whether through their own presence, the work they do or the taxes they have deducted from their earnings?

    j) Even if you put “dead weight costs” to one side, taxing incomes is clearly immoral as it is taking away personal property for nothing in return. A tax on land values is merely a user charge and largely voluntary – if you want to live in a nice house, you pay more, and in return for that payment you get a direct tangible benefit in return, which you would have to pay for anyway, with or without LVT.

    So if it is acceptable for private landowners to collect land rents, it is more than acceptable for “society as a whole” to collect those rents. The current tax system just boils down to welfare for the wealthy, paid for by taxes on the middle (who also have to pay for welfare for those at the bottom).

    Why would you think that taxing other people incomes, wages, profits and spending to fund benefits for land owners is fair? It’s a screaming unfairness.

    • Islamic teachings have a lot in common with Henry George’s proposal — I have written about this in the paper on “Islam’s Gift: An Economy of Spiritual Development”. This particular post addresses an entirely different topic, but Islamic teachings are also against taxation, and also favor the idea that natural resources like land, oil, rivers, etc are gifts of God to humanity and benefits cannot be privatized, but must be shared with public

  2. Have you read Islamic economic system in islam by shaykh taqi ul deen an nabhani who was an azhari scholar and founded the group hizb ut tahrir? Baqr as Sadr was someone who studied his works and joined as a student of hizb ut tahrir before writing his own book our economics. He left due to the inability to reconcile between hizb belief and that of Shi’aism.

    There was also the book funds in the khilafah state by Abdul qadeem zalloom who was also a graduate from al azhar

  3. Pingback: Objections and Responses: Islam Vs West | An Islamic WorldView

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