Introduction

Introduction

• Introduction

• Islamization of Economics- The Why, What and How

• The Folly of ‘Downstream Islamization’

• Operational Challenges in IOE- Microeconomics

In developing contemporary Islamic Economics, we do not have to ‘re-invent the wheel’. We can benefit from modern economics

• In developing contemporary Islamic Economics, we do not have to ‘re-invent the wheel’. We can benefit from modern economics

• However, ‘patchwork’ efforts are also not viable

• ‘Critical Engagement’ with modern economics is necessary but must be premised on Islamic foundations

• Challenge is to develop contemporary Islamic economics through process of ‘genuine Islamization’

Before 1980s, pioneer Islamic economists like Mahmoud Abu Saud, Khurshid Ahmad, M.A. Mannan, M.N. Siddiqi, Anas Zarqa and Monzer Kahf and scholars such as M. Baqir Sadr and Mahmud Taleghani did not specifically focus on Islamization of Economics (IOE) per se but were presenting Islamic economics according to their understanding.

• Before 1980s, pioneer Islamic economists like Mahmoud Abu Saud, Khurshid Ahmad, M.A. Mannan, M.N. Siddiqi, Anas Zarqa and Monzer Kahf and scholars such as M. Baqir Sadr and Mahmud Taleghani did not specifically focus on Islamization of Economics (IOE) per se but were presenting Islamic economics according to their understanding.

• They were critically engaging with modern economics, in their own way, based on their own understanding of modern economics and the Islamic heritage.

Islamization of Economics is part of Islamization of Knowledge Agenda (propounded by scholars such as al-Attas and al-Faruqi)

• Islamization of Economics is part of Islamization of Knowledge Agenda (propounded by scholars such as al-Attas and al-Faruqi)

• 1984 3rd International Conference of Islamization of Knowledge in KL had 2 specific papers in economics:

• Islamizing Economics- M.N. Siddiqi
• Tahqiq Islamiyat ‘Ilm al-Iqtisad: al Mafhum wa al Manhaj- Anas Zarqa
• (in Towards Islamization of Disciplines, IIIT, 1989)

Modern economics is not value-free nor is it ideology-free. All modern social sciences taught in universities today were born in the last 300 years and have ‘foundations’ that represent western European history and experience (S.M.N. al-Attas, Islam and Secularism, 1978, Ch. 1)

• Modern economics is not value-free nor is it ideology-free. All modern social sciences taught in universities today were born in the last 300 years and have ‘foundations’ that represent western European history and experience (S.M.N. al-Attas, Islam and Secularism, 1978, Ch. 1)

• Aspects of these foundations (and impact on the way we see the human being and relations to other human beings and nature) may not be in line with the Islamic worldview.

• For example, the assumptions concerning rational economic man and the behavioural assumptions made in standard economics textbooks need to be critically evaluated.

• Thus, many policy tools may also be unacceptable.

IOE by definition, implies critical interaction/dialogue with modern economics. (even critics of IOK/IOE do not disengage completely)

• IOE by definition, implies critical interaction/dialogue with modern economics. (even critics of IOK/IOE do not disengage completely)

• However, genuine IOE calls for a critical evaluation of not only modern economics but its foundations too (as given by all major proponents of IOK)

• One major weakness in contemporary Islamic economics literature has been the oversight of this important need to pay attention to the ‘foundations’ of modern (mainly neoclassical) economics

• de-westernizing modern economics and then infusing it with Islamic values/principles
• Recasting modern economics by eliminating, amending, reinterpreting and adapting its components according to worldview of Islam and its values/principles
• focus of IOE is primarily an epistemological and methodological concern that requires ‘some sort of integration of knowledge’

1. ‘Mastery’ of modern economics

• 1. ‘Mastery’ of modern economics

• Substantive knowledge (theories)

• Dominant paradigm (neoclassical-keynesian) is taught in all major schools of economics.
• In developing Islamic economics, is neo-classical/keynesian economics sufficient? What about other schools of thought in western economics?
• What level of conventional theory sufficient to perform IOE?
• At the current level of Islamic economics, is it a priority to teach ‘advanced’ or Ph.D level neoclassical microeconomics or is it more relevant to teach something else?

Should developing Islamic economics take economics as an independent discipline or see it as part of political economy?

• Should developing Islamic economics take economics as an independent discipline or see it as part of political economy?
• What about other disciplines like history, sociology, political science etc?
• Should we develop our own branch of knowledge as done by Ibn Khaldun’s ‘Ilm al-umran?

Methodological knowledge

• Methodological knowledge

• - modern sciences (including economics) developed using methods and methodologies that may not be sufficient for Islamic economics due to the sources of knowledge involved and their own historical experience

• Very few, if any, Muslim economists were/are formally exposed to this type of knowledge in undergraduate and/or graduate studies.

In addition, different schools of thought may differ in their approaches to economics and even in the purpose of economic theory/models

• In addition, different schools of thought may differ in their approaches to economics and even in the purpose of economic theory/models

• While neoclassical economics adopts methodological individualism and builds models with mainly prediction in mind, institutionalists for example are more interested in understanding behavioural patterns within institutional settings (Dugger, 1979).

• Why should we not adopt a pluralist approach?

2. ‘Mastery of the Heritage’

• 2. ‘Mastery of the Heritage’

• Substantive knowledge

• What inputs from our heritage are relevant to develop contemporary Islamic economics?
• Current emphasis is on fiqh muamalat? Is this sufficient?
• What about kalam, falsafah, akhlaq, history? Ulum al-Qur’an and ulum al-hadith? Etc.

Methodological knowledge

• Methodological knowledge

• Very little, If anything is available and is being taught
• Is knowledge of Usul al-Fiqh sufficient to develop contemporary Islamic economics?
• Do we need to develop a new discipline that caters to developing a social science like Islamic economics?
• Can we develop a new methodology called usul al-Iqtisad or an usul for Islamic political economy?

3. Interaction with modern economics and integrating the heritage with modern economics must involve knowing what to eliminate, reject etc. and why we do so.

• 3. Interaction with modern economics and integrating the heritage with modern economics must involve knowing what to eliminate, reject etc. and why we do so.

• The lack of (1) and (2) (especially the methodological parts) has not enabled us to do (3)

• Created ‘patchwork’ Islamization

Practical dimension exclusively focused on Banking and Finance (but one also finds studies in consumer theory, producer theory etc)

• Practical dimension exclusively focused on Banking and Finance (but one also finds studies in consumer theory, producer theory etc)

• -Islamic banks have mainly replicated practice of conventional commercial banks, trying to ‘Islamize’ the practices

• - Consumer and producer theory are usually modified versions of neoclassical theory

• Is it genuine Islamization or patchwork?

While banking and finance have received most of the attention in the last decade, early writers were aware of the importance of dealing with the micro foundations of the discipline.

• While banking and finance have received most of the attention in the last decade, early writers were aware of the importance of dealing with the micro foundations of the discipline.

• To do genuine Islamization, we need to examine some fundamental assumptions that underlie modern economics with inputs from both our heritage and modern economics

Microeconomics today has been reduced to mean the individual economic behaviour of ‘representative agents according to neoclassical theories’ (Asad Zaman, 2005)

• Microeconomics today has been reduced to mean the individual economic behaviour of ‘representative agents according to neoclassical theories’ (Asad Zaman, 2005)

• Focus is on the ‘rational behaviour’ of these representative agents

In the context of IOE, focus should also be to critically evaluate the assumptions of the models/theories from Islamic perspectives.

• In the context of IOE, focus should also be to critically evaluate the assumptions of the models/theories from Islamic perspectives.

• - Can we use the representative agent model for Islamic economics AS IT IS (are the assumptions relevant)

• - IF NO, can we use the model if we modify/relax the assumptions,
• - maybe we can even modify/improve the mathematics

If Microeconomics (as a part of economics as a whole) is to be taught, we should teach other schools of economics such as classical, keynesian, institutionalist etc.

• If Microeconomics (as a part of economics as a whole) is to be taught, we should teach other schools of economics such as classical, keynesian, institutionalist etc.

• - Many critical works on the neoclassical foundations of economics have been undertaken by scholars who consider themselves as being part of ‘alternative’ schools of economics.

• - Islamic economics can benefit from these views

• - However, these alternatives must also be critically evaluated at the substantive and foundational levels too

Focus of economics must be to deal with real world economic problems rather than fictitious inventions of neoclassical economists.

• Focus of economics must be to deal with real world economic problems rather than fictitious inventions of neoclassical economists.

• - any attempt at developing Islamic alternatives must address the problems of the individual, ummah and humanity at large

• - e.g. has Islamic economics and finance helped solve problems of the ummah? In the example above, the problem of poverty was given attention.

• deals with the Islamic ‘rules of the game’ or framework within which technical decisions are made

• derived from the Islamic vision obtained from sources of knowledge

• sets the boundaries/parameters that will guide/limit our decision making process

includes concepts/values/norms/laws that explain

• includes concepts/values/norms/laws that explain

• - man and nature

• - scarcity and rationality

• - consumption (and the rules governing it) as well as criteria that will influence choices made

• Need to compare Islamic normative framework with that found in neoclassical economics (and others schools?)

Man

• Man

• - man is both greedy and caring; physical and spiritual; can be guided or otherwise; individual but living in society

• Other Concepts

• - rizq meaning Godly sustenance, halal, tayyibat meaning good and pure, heirarchy of needs (daruriyyat, hajiyat, tahsiniyyat, tarafiyyat), moderation, israf, tabthir

• Challenge is to translate these concepts into ‘measurable variables’

consumption as a means to achieve falah

• consumption as a means to achieve falah

• consume enough goods to lead a good and healthy life (2:35, 168)

• enough basic needs
• enough not to depend on others (for family as well)

• (these are not fixed for everyone and every place)

consume wider basket of goods (to satisfy both physical and spiritual needs)

• consume wider basket of goods (to satisfy both physical and spiritual needs)
• certain goods prohibited
• no extravagance or spending on wrongful items
• give zakat (and sadaqah)

dealing with constrained decision making within the normative framework (in neoclassical economics)

• dealing with constrained decision making within the normative framework (in neoclassical economics)

• includes tools/methods to seek precise solutions to constrained optimization

• Can we use the tools of neoclassical economics if our framework is different?

• Would an institutional approach be more appropriate for Islamic economics?

Normative framework derived from Islamic sources of knowledge.

• Normative framework derived from Islamic sources of knowledge.

• discusses man, the firm, concept of halal-haram, tayyibat, no wastage or extravagence, justice to yourself, your workers/employers and to society etc.

• Many items would be similar to consumption

Issue of concern is the ‘goal of maximization’

• Issue of concern is the ‘goal of maximization’

• Scholars have differed on this

• - some like Siddiqi say maximization is not the preferred goal

• - others like Abu Saud (later developed by Hasan), say maximization per se is ok. Issue is what you are maximizing and the constraints you have

• Example 1- Zaman (2005)

• Consumer sovereignty assumption does question preferences, how they are formed or attempt to make comparisons between needs and wants
• NC focus on wealth rather than poverty (does not serve Muslims)
• By taking a lexicographic structure of utility functions, it will allow us to use the neoclassical tools but now make an important change, i.e. allowing inter-personal comparisons (between people living below and above the poverty line)

In response to this article, 3 scholars made the following comments (JKAU, Vol 20, 2007):

• In response to this article, 3 scholars made the following comments (JKAU, Vol 20, 2007):

• Siddiqi –

• splitting utility function for consumer needs to have counterpart in production to enable more realistic study of producer behaviour;
• however, earlier notion of satisfactory profits or having a multiple maximand did not make many dents into a theory that refuses to accommodate non-egoistic goals
• Possibility to have ‘gradation’ of goals; initially profit, then after certain level, focus on social goals?
• Will this change be recognised? Where next?

Fahim Khan

• Fahim Khan

• Adding ethical dimension to NC economics not enough to call it a new paradigm, since still stuck in NC economics paradigm
• Have to learn from heterodox schools in west so that our own analytical tools can gain from all schools in modern economics
• Our analytical tools should also allow us to study our own normative positions like dealing with israf, tabthir, tayyibat etc.
• Why alternatives have succeeded?- surviving in the profession!

Tag el-Din

• Tag el-Din

• paradigmatic shift in economics cannot be achieved through Zaman’s proposed discontinuity in individual utility functions
• the paradigmatic shift should be based on continuous utility functions, suitably modeled through moral policy, which we refer to as the generalized utility function
• GUFs can show that individual’s state of satisfaction depends also on external socio-economic factors
• cannot deny law of scarcity, even for poverty level choices

Model was addressed to secular audience/NC trained economists

• Model was addressed to secular audience/NC trained economists

• Model tries to differentiate between wants and needs; there is scarcity at the level of wants but not at the level of needs

• Solving scarcity at the level of wants is by limiting desires (79:41-42)

• Model did not try to represent Islamic normative positions

• Model is a paradigmatic shift since separating needs and wants will lead to priorities in need satisfaction first, hence tackling poverty

• Model open to incorporating heterodox views

Amin and Yusof (2003), using modified NC approach, demonstrated that profit maximization for the firm can still be applied in an Islamic framework by incorporating Islamic ethical values into the valuation of opportunity cost as part of total costs to ensure allocative efficiency, according to Islamic normative criteria.

• Amin and Yusof (2003), using modified NC approach, demonstrated that profit maximization for the firm can still be applied in an Islamic framework by incorporating Islamic ethical values into the valuation of opportunity cost as part of total costs to ensure allocative efficiency, according to Islamic normative criteria.

• Asad Zaman (2005), Towards A New Paradigm for Economics, J.KAU: Islamic Econ., Vol. 18, No. 2, pp. 49-59 (2005 A.D/1426 A.H)

• Also Comments and rejoinder in JKAU, Vol. 20 No. 1, 2007.

• Sayyid Tahir, Aidit Ghazali and Syed Omar Syed Agil (1992). Readings in Microeconomics- An Islamic Perspective. Kuala Lumpur: Longman Publishers.

• Mohamed Aslam Haneef (2009). A Critical Survey of Islamization of Knowledge, 2nd Edition. Kuala Lumpur: International Islamic University Malaysia.

• Ruzita Mohd. Amin and Selamah Abdullah Yusof (2003). ‘Allocative Efficiency of Profit Maximization: An Islamic Perspective’. Review of Islamic Economics, No. 13.

• William Dugger (1979), Methodological Differences Between Institutional and Neoclassical Economics, Journal of Economic Issues, VolXIII No. 4, December 1979.