Principles of Economics in the Qur’an

NOTES FROM THE IIIT CONFERENCE ON APPROACHING THE QUR’AN AND SUNNAH #9

[This is the ninth in a series of my notes on the International Institute of Islamic Thought conference on approaching the Qur’an and Sunnah held in Herndon, VA. These notes are raw material for an edited report I will write on the conference later and represent my perception of the discussion. The proceedings will be published by IIIT at a later time. The Minaret of Freedom Institute thanks IIIT for the grant that makes the publication of these notes possible. Responsibility for any errors in the notes is mine alone.]

Session 9, Moderator: Yaqub Mirza
Reflections by Muhammad Fahim Khan
“Principles of Economics in the Qur’an”

I will reflect on two sets of ayât, 2:261-280 and 17:21-40. The first set mentions the economic system of the Islamic society and the second refers to social aspects of human life on earth.

Economics alone is nothing without also considering social considerations. For 300 years economics developed on the false premise that economic aspects of human behavior can be discussed in isolation from other aspects of human behavior.  Earlier Muslim scholars did not operate on this fallacy, but Westerners ignored this period. For example, Schumpeter called the years when Muslim scholars dominated the field of economics as a “Great Gap” in which nothing was done. Yet, the “Laffer Curve” was originally discovered by Ibn Khaldun. Alfred Marshall sought to change the focus of economics from material wealth to “well-being,” but well-being was never defined.

Our first question must be “What is the objective of human economic activity?” Adam Smith defined it as to satisfy wants, which are subjective desires. When you go to the market to fulfill a want, it becomes a demand. The economists presume that a person is rational and that for a rational person more is always better than less, so wants are unlimited.

Well-being consists of improving five aspects of life: nafs, dîn, aql, ahl, and mâl. These are the objectives of the sound-minded man. Qur’an wants to give man rushd or right-mindedness, which I understand to mean sound-mindedness under divine guidance.

Discussant 1: Jasser Auda

I appreciate the replacement of the term “Islamic economics” by the concept of “principles of economics in the Qur’an,” since economics is economics, as mathematics is mathematics.  I also appreciate that we cannot isolate disciplines from one another and that the holistic view is an Islamic view. I also appreciate the mention of well-being, which is maslaha. Masala al-`âm of Imam Juwayni is, I think, even more advanced than his student al-Ghazali in his divisions of the muqâsid. Ibn Ashur added masalah al-fard and masalah al-ummah, to add a collective aspect to individual interests. In addition to the preservation of self, religion, mind, family, and wealth, there are other dimensions not clearly covered by these five like `adl (justice). Muqasis al `âma would add insight to the paper.

Discussant 2: Ahmad Kazemi Mousavi

I have only questions. Explain the relationship of rationality to economics.

Discussant 3: Jamal Barzinji

A rational person wants to maximize his utility function. The rational Muslim wants to maximize good in this life and the next. You want to maximize good in the next life without neglecting the permissible good in this life.  I will say the main problem is that the Islamic economists have been unable to develop something that would be clear to the outside world.

Kenneth Honercamp: Does the sûk reflect something different from the Western model of market?

Khan: There is no way to increase wealth but through markets. The question is how markets should function. Qur’an wants markets to be competitive. Don’t restrict entry or exit from the market. Don’t deal outside the market. Maximize information about the quantity and quality of the product. No discrimination in prices. These ideals are not met. Nobel prize winning economist George Ackerlof raised the issue of asymmetry of information that prevents markets from working properly.

Mirza: The Vatican has said Islamic principles offer a way to avoid financial crises.

Barzinji: The Muslims believe everyone will get his rizk without depriving others.

Mahmoud Ayoub: I believe the Western system is based on speculation. For example, the dollar is a piece of paper without value as compared to the gold dinar valued by the weight of its gold content.

Khan: When markets are perfectly competitive the only way to compete is to improve the product or lower the price. Carly Fiorina delivered an unexpected lecture recently in which she spoke of the successful medieval Islamic economy. The modern system is promoting gamblers and speculators rather than producers and traders. Consider the futures market. This is 99.9% speculation. Islam also has a concept of bay`a salam, but it is justified on the presence of a swing season.

Sami Catovic: Are wants being portrayed as needs for marketing purposes? There is a claim that Islam could not support itself internally without its imperial expansion.

Khan: Smokers claim they need to smoke, but smoking is destructive while the drugs that treat cancer are constructive.

Ayoub: The Islamic economy did benefit from booty.

Ahmad: Ibn Khaldun answers the question of booty and imperial expansion. The imperial phase of civilization is the beginning of the end. I have some problems with your analysis of needs and wants. Needs aim at survival, not at well-being. Smoking is a want until you become addicted and then you perceive it as need, but from the view of survival it is a disgood. A rational person always wants more goods only in the presence of an efficient market where surplus may be sold. Otherwise, excess of goods become disgoods, or trash, that we will pay others to haul away and dispose. I think justice is an overriding objective of which the other objectives are articulations. I think that what is missing in a meaningful analysis is an inclusion of the work of the Austrian economists. We must take into account the subjective nature of value, which explains things like marginal utility. As to the distinction between the sûk and Western markets, I think we must consider the difference in the Islamic and capitalistic views of corporatism. The limitations of liability on corporations, which was part of the colonial agenda in the developmental phase of Western capitalism has reached absurd levels in, for example, the BP oil spill with the limit of $75 million on damages other than the clean-up. Finally, how do you reconcile the tradition of haggling in the sûk with single market price?

Khan: I took the needs concept from Shatabi and Ghazali who give three levels of need: protection of the needed things, the things needed and the enhancement or beautification of the needed things. Only human resources can add value. Haggling in the market is an imperfection in the market. In fiqh al buyu you will see how this is handled. Once the markets are competitive I don’t know how you will have haggling.

Ayoub: How important is takâful in Islamic economics?

Hisham Altalib: If you had time you could mention problems of unnecessary government intervention, wastefulness, and how advertising convinces us to borrow to spend money we don’t have on things we don’t need.

Auda: There are arguments for rationality beyond utility. They are not equivalent.

Khan: Fiqh mainly deals with microeconomic issues. There is little on the macro issues.

Abubaker Al-Shingieti: To what extent can a policy framework deal with surplus with a reserve for the state so long as social needs are not met?

Ahmed Rafiq: In Indonesia we say we don’t have copyright, but we have the right to copy.

Mirza: Because of the superior returns of the Sharia-compliant investments in recent years, the financial press has been touting, “If you want to make money become a Muslim.”

Ahmad: Rather than speak of Islamic economics, perhaps we should speak of the “Islamic school of economics.” Macroeconomics as a separate discipline from microeconomics is an example of the reductionism that you otherwise correctly challenge. Capital and labor are factors of COST not of value. Value is subjective. Merely increasing the costs of production doesn’t increase the value of the final product. Remember the role of marginal utility. The more pairs of shoes a rational person has, the less an additional pair is worth, Imelda Marcos notwithstanding. Also, I would like to know why Islamic investors don’t make use of the gold dinar.

Mirza: SEC may not permit this.

Auda: It is not permitted to leave funds unused.

Imad-ad-Dean Ahmad, Ph.D.
Minaret of Freedom Institute
www.minaret.org


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