Radio Islam Interview: Islamic Economics

[bit.do/azint] Introductory Remarks (0:00 to 0:50) “Understanding Global Economics & the Islamic Alternative” Interview of Dr. Asad Zaman  by Mufti Yusuf Moosagie, Radio Islam, South Africa on Tuesday, Oct 1, 2019, 9:20am South Africa time, and 12:20 Islamabad. Shortlink for Original Audio: http://bit.do/risa1oct19 . Video below has identical audio file, but is accompanied by slides with explanation. A writeup, with the addition of links to related materials, is given below the video:

 

Q: Perhaps You Could Inform Us About Your Journey Through Economics 0:50:1.50

This is a good place to start. I finished my Ph.D. in Economics from Stanford University in Sep 1977. We can summarize the essence of an Economics education in two points:

  1. The Invisible Hand: This says that if everyone acts selfishly, in their own best interest, this leads to the best possible outcomes for the society as a whole.
  2. Scarcity: The foundations of economics are based on scarcity. There are not enough goods to go around, to satisfy the needs and wants of all human beings.

As I went through life, experience and examination of the empirical evidence led me to the conclusion that both of these fundamental principles of economic theory are wrong. (Ref: Education of an Economist)

Q: What is Islamic Economics? 1:50 to 2:53,

Conventional Economics says that the fundamental principle of Economics is scarcity. Islamic teachings dispute this strong. In a nutshell, Islamic economics is based on the Quran: Eat, Drink, but do not Waste. That is, Islam asks us to  Fulfill Needs, and enjoy the Comforts, BUT DO NOT pursue Idle Desires (HAWA). This brief statement not only explains the Islamic position, but also explains the dramatic difference between Islam and modern economics, as we discuss further below.

Needs/Wants Distinction: 2:53 to 3:26

The key difference between Islam and conventional economics arises in the context of the Needs and Wants distinction. Islam strongly encourages us to fulfill our needs – eat, drink, wear beautiful clothes – and just as strongly prohibits us from following our idle desires. This is in direct contrast to Economics, which teaches that rational behavior involves attempting to fulfill all desires, without distinguishing between needs and wants.   See “The Illusion of Scarcity

Modern Economics = Religion of Worship of Desires: 3:26 to 4:40

According to modern economic theory, there is no distinction between needs and wants. This means that the desire of a billionare for luxury yachts, private airplanes, a private island, etc. are just as important as the desire of a hungry man for food, or the desire of a baby for milk. In fact, economic theory considers a demand as effective only if it is backed by money, so the demands of the millionaires receive far more weight than the demands of the poor. This is in direct conflict with principles of Islamic Economics, which stress the feeding of the poor. These ideas (of utility maximization, fulfilling all desires) originated with Jeremy Bentham, who thought of himself as the prophet a new religion. His religion was based on rejection of Christianity. Instead, Bentham argued that an action was good and moral if it brought pleasure, and it was bad and immoral if it caused pain. Thus, the utility maximization doctrine of economics theory is exactly the religion of worship of the Nafs, which is explicitly condemned in the Quran.  See: Economic Theory & the Purpose of Life.

Main economic problem is NOT scarcity It is over-consumption, waste, and excess: 4:40 to 5:10

In a nutshell, we can say that today the money being spent on problems caused by Obesity – Millions of books being sold on dieting, and diet products, and diet exercise programs PLUS all of medical treatments for health problems created by over-consumption of food – is MORE THAN ENOUGH to feed everyone on the planet. So the problem of feeding the hungry does not come from SCARCITY of FOOD. It comes from EXCESS consumption. People who take more than they need, harm themselves, and deprive others. The cure is to acquire self-control, to tame our desires/nafs, as we are required to do. Also, we are taught to be generous, to give the excess we have to those who are in need.  This diagnosis, and this cure, is central to Islamic Economics, and has NO CONNECTION to modern economics. In fact, modern economics rejects the possibility of over-consumption, and argues in favor of trying to fulfill insatiable desires. See “L02: Review and Scarcity

Q: “Attempts to create Islamic Economics by Combining Western Economics with Islam have failed” – please explain 5:10 to 6:50

The biggest problem the Ummah faces is that we have lost confidence in the message of Islam. Today, if we ask the Ummah about how we can solve our modern economic problems, the vast majority will tell us to consult experts from Harvard, and to study for a Ph.D. in Economics. They will NOT tell us to consult the Quran and Hadeeth. Even though the Quran changed the course of history, transforming ignorant and backwards Bedouin into World Leaders, Muslims no longer believe (BY THEIR ACTIONS, NOT BY THEIR WORDS) in the power of the Quran to launch a revolution today. THIS IS THE GREATEST PROBLEM of the Ummah today.

By our actions, the Ummah as a whole is engaged in training our children in the Uloom of the West for years and years, and spends very little time on our traditional Uloom – there is implicit agreement that these Uloom are irrelevant to solving the problems of today. See “Crisis in Islamic Economics

Q: How Does Islam Apply to Modern Economics? 6:50 to 8:05

Islam applies all domains of knowledge relevant to human existence. A Western education is built on the concept of secular knowledge – it teaches us (by demonstration) that religion DOES NOT apply to any field of human knowledge. All “Science” and “Social Science” subjects taught in modern universities make no mention of religion. Indeed, the common impression is created that “science” and “religion” are opposites of each other. This comes out of long a complex history of intellectual developments in Europe, initiated by bitter and bloody warfare between Protestants and Catholics. To enable them to live together in peace, it was necessary to create “secular” knowledge, which would be acceptable to all, regardless of religious background. See “The Illusion of Objective Knowledge”.

In fact, Social Science concerns human lives – how we live as individuals, families, neighborhoods, communities and nations. In all these realms, Islam offers us deep and valuable insights. The creation of social science on a secular basis in the West, due to historical accidents, led to deeply distorted understanding of human affairs, because it was built on a concept of man that removed the heart and soul of man from the picture. See “The Heart and Soul of Islamic Economics

Doing Modern Finance according to Islamic Laws would have prevented the GFC 2007 8:05 to 8:20 – Western approaches to Social Science in general, and Economics in particular, make no mention of religion and ethics. This creates the impression that religion has nothing to do with these subjects. To show how relevant and valuable teachings of Islam are to modern economics, it is sufficient to look at the recent Global Financial Crisis (GFC 2007). On the one hand, the GFC took the entire profession by surprise, showing us how little economists know about how the modern economy works. On the other hand, Islam offers us THREE RULES, Laws of the Shari’ah, any ONE of which would have been sufficient to prevent the GFC. It is amazing – indeed, miraculous – that rules formulated fourteen centuries ago, are of vital important and relevance to modern financial economies which are built around institutions like banks and electronic credit completely new and completely unknown in those earlier times. See “On Islamic Economics”.

Three Rules of Islamic Finance – Any ONE of them would SUFFICE to prevent GFC 8:20 to 10:20

Rule 1: Finance Mortgages using Musharka instead of Interest based loans – Musharka creates joint interest of bank and individual in the value of homes. As opposed to this, interest is an adversarial transaction, where the bank benefits from failure of individuals to repay their loans by possessing the house. Atif Mian and Amir Sufi have shown that use of Musharka Finance would have prevented the GFC

Rule 2: No trading of debt – The banks were able to make fraudulent mortgages to weak borrowers, knowing that they would fail to make repayments. However, by selling these loans to others, they were able to avoid the consequences of failure. Thus, sales of debt obligations was a key enabler of the GFC.

Rule 3: No Gharar (uncertainty about product, deception, high risks). Islam forbids sales of products where there is substantial uncertainty about the nature of the product. The entire industry of MBS – Mortgage Based Securities – was based on packaging mortgages into extremely complex bundles, built using artificial rules of payments, which made them incomprehensible, and succeeded in deceiving buyers that these were safe investments – rated AAA as securities – even though they were highly risky.

Q: What do you think about how Islamic Banks are functioning today? 10:20 to 10:53 – This institution represents an aspect of the defeated mentality of Muslims today, which results from the global colonization and conquest by the West. This has led us to the belief that Western societies, and their political, financial, and social institutions, are superior to ours. Thus, we can improve Islamic societies by imitating and following the West.

In particular, since banking is a key financial institution of the West, we must adopt and incorporate banks into our Islamic societies. Since banks are based on interest, the problem emerges about how we can repackage banking transactions so as to make them Shari’ah compliant.  This is the WRONG question.

Confidence in our Islamic laws would have led to the belief that since banks are interest based, the institution itself must be bad. In fact, banks enrich and empower the wealthy, create inequity and inequality, and lead to concentration of wealth in the hands of a few. A look at Islamic history shows that no institution similar to modern banks existed for a thousand years. Instead of attempting to replicate banks within a framework of Islamic Laws, the task we SHOULD have been doing is the attempt to CREATE an alternative financial framework, where banks are eliminated. Many such proposals exist. See The Iceland Plan for Monetary Reform, and “Islamic Chicago Plan”.

Banks: accumulation and hoarding VERSUS Islam: generosity and spending 10:53 to 11:50 –

Instead of asking how we can create Islamic banks, we should ask: What do banks do? If we look at the history, we find that banks were created for the purpose of accumulation of wealth. This became possible only after the European transition to secular thought – which led to rejection of Christian ideas that accumulation of wealth was wrong, and that the love of wealth was the root of all evil. If someone goes to a bank with a million dollars, the bank will teach him how to turn it into two million. But is this what our Prophet Mohammad SAW would have advised? When people went to him with surplus wealth, he advised them to put it into a WAQF, which would bring them the benefits of charity for eternity.

Islam teaches us to spend excess wealth on others, instead of hoarding and accumulating it. The key institution for this purpose is the WAQF, which represents the spirit of generosity and spending on others that is at the heart of Islamic teachings. In Islamic societies for a thousand years, the main financial institution was the WAQF, which was used by the wealthy as means for spending on others. Unfortunately, these institutions were destroyed in the process of global conquest and colonization by the West. See “The British Educated and Civilized Us?

Common Confusion: Islam allows us to accumulate wealth! 11:50 to 12:40 –

A common response to this is to say that Islam allows us to accumulate wealth, so there is no harm in creating institutions for this purpose. Certainly, it is true that Islam does not prohibit us from accumulating wealth. But it does prohibit us from making this activity the PURPOSE of life.

Now a capitalist system works by making wealth the central goal of life for everyone. In market societies, one needs money to survive, to buy food, education, healthcare. This is the characteristic of a market society – that your only friend is money. Everyone else is selfishly concerned with their own money, and there is no concept of social responsibility, spending on others, and generosity. In such a society, the goal of life become the pursuit of wealth. This is not permissible in Islamic teachings. See “The Pursuit of Wealth”.

Waqf represents Islamic Spirit of Spending on Others. 12:40 to 13:30 – The driving forces of Capitalism are competition, greed, and hedonism – these are taught in modern economics textbooks as being the central principles of economics. In contrast, the driving principles of an Islamic society are cooperation, generosity, and social responsibility – taking care of the needs of others, instead of pursuing our own idle desires.

The institution which represents the spirit of spending on others is the WAQF. This was the central financial institution of Islamic societies for a thousand years. The Waqf ensure that everyone would be provided with all needed social services, which is the collective responsibility of an Islamic society. Food, education, healthcare, were all freely available to anyone who needed these services – there was no concept of CHARGING money for these essential services. The wealthy of the society recognized the right of others in their wealth. In contrast, today’s capitalism is based on the philosophy of Qaroon – since I have earned the wealth, I have the right to do whatever I want with, and I have no obligation to help the poor.  See “Building Genuine Islamic Financial Institutions”.

Q: “Economic Growth is the solution to all problems”? Comments?  13:30 to 15:14 –

This is the greatest illusion created by the confusion between wants and needs discussed earlier. Wants are unlimited and increase when you satisfy them. But increasing standards of living do not bring happiness – this is an illusion (see Can Money Buy Happiness?). In fact, if we look at needs, there is more than enough to satisfy them. We do not need growth to solve our problems, we need to ensure that the goods which are already there, reach the hand of the poor. In other word, we need to URGE the feeding of the poor.

Today, to feed the poor, we do not need growth. HUGE amounts of money are spent on completely unnecessary things – and this is what prevents the solution of human problems. 29 Trillion dollars was spent to bailout the rich and powerful after the GFC 2007. This would have been enough to feed, house, education, and provide healthcare to all of the planet comfortable. Amounts beings spent on weapons and warfare today are more than enough to take care of the needs of everyone living. Even the beauty industry generates enough money to take care of basic needs of everyone. If we just enforce the Hijab, and use the money spent on beautification for basic needs, we can take care of all human needs. What is needed is not economic growth but Economic JUSTICE, which is what Islam teaches. See “Hunger as the Primary Economic Problem”.

LINKS to Related Materials

Original Audio Recording on Radio Islam: http://bit.do/risa1oct19. For more information about me, see asadzaman.net/about-me. Because Western conceptions of human beings remove the heart and soul of man from the picture, it is possible to launch “An Islamic Revolution in the Social Sciences” by building of the foundations of a corrected conception of the nature of human beings, and the sources of human welfare.

 

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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.

5 thoughts on “Radio Islam Interview: Islamic Economics

  1. Assalamo Alaikom Sir,

    It’s such a great privilege Everytime to read your Islamic WorldView. Inspiring, thoughtful and amazingly important ideas you have been sharing with us. By the way, it would be extremely useful if you come up with publishing your thoughts on Islamic Worldview in the form of a Book (just a suggestion!). With regard to the text on your interview, I got many important questions as I read the text, but as always, my questions got answered as I finished it (Thanks to your experienced style of writing). Here are my few reflections on your interview:

    1. Doesn’t Islam believe on the scarcity of resources? Referring to the saying of Quran e.g Eat, Drink but not waste. If I understand it right, we can imply from the saying “Don’t waste” that since resources are scarce, therefore, we shouldn’t waste. Then, the theory of scarcity is not different than what the Holy Quran suggests. 2. Can we say that the saying in islam “Wear Beautiful Cloth” is used by many of our Muslim Brothers for justifying luxury???Very importantly you referred to “our idle desires”. That means we should wear beautiful clothes as much as we want? If Islam says so, then how can we set a threshold for a cloth to be sufficiently beautiful than a “non-beautiful”?. I think it’s a relative matter. For one person, an expensive brand will be a potential beautiful cloth he pursues, yet for many of others (including me), it is a wastage of resource given that the need can be fulfilled by any other cloth. ——Can we say that the saying in islam “Wear Beautiful Cloth” is used by many of our Muslim Brothers for justifying luxury???

    Looking forward to your precious thoughts.

    Regards,

    Inayat Ullah (PhD, Public Policy)

    COMSATS-Attock Campus, ᐧ

    On Wed, Oct 2, 2019 at 10:28 AM An Islamic WorldView wrote:

    > Asad Zaman posted: “[bit.do/azint] Introductory Remarks (0:00 to 0:50) > “Understanding Global Economics & the Islamic Alternative” Interview of Dr. > Asad Zaman by Mufti Yusuf Moosagie, Radio Islam, South Africa on Tuesday, > Oct 1, 2019, 9:20am South Africa time, and 12:20 ” >

  2. 1. There are more than enough resources to take care of the needs of the entire planet easily == We spend trillions of dollars on completely unnecessary bombs, trips to moon, cosmetics, etc. A very small fraction of this amount (less than 1% of GDP of the rich countries) would be enough to take care of the needs of the planet. Thus there is no scarcity.
    2. Islam has a very careful and exact delineation of Needs, Comforts, and Excess Expenditure, which has been explained in detail by Ulema — Anyone who examines his own heart will be able to find the TRUTH if he searches for it, and he will also be able come up with EXCUSES for excess, waste, and useless display of vanity, if he is deceived by his Nafs.

  3. Pingback: History of Money | An Islamic WorldView

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