THE NATURE AND SIGNIFICANCE OF ISLAMIC ECONOMICS By

THE NATURE AND SIGNIFICANCE OF ISLAMIC ECONOMICS By M. UMER CHAPRA RESEARCH ADVISOR ISLAMIC RESEARCH AND TRAINING INSTITUTE ISLAMIC DEVELOPMENT BANK JEDDAH, SAUDI ARABIA

1. WHY ISLAMIC ECONOMICS? DO WE REALLY NEED A NEW DISCIPLINE IN ECONOMICS? o CONVENTIONAL ECONOMICS: WELL-DEVELOPED o ISLAMIC ECONOMICS: PRELIMINARY STAGE o SUBJECT MATTER OF BOTH: ALLOCATION AND DISTRIBUTION OF SCARCE RESOURCES THE DIFFERENCE? o WORLDVIEW o VISION o STRATEGY TO REALIZE THE VISION

2. WHY ARE WORLDVIEW AND VISION IMPORTANT? THEY DEFINE: THE MEANING AND PURPOSE OF LIFE THE ULTIMATE OWNERSHIP AND OBJECTIVE OF LIMITED RESOURCES THE RIGHTS AND RESPONSIBILITIES OF INDIVIDUALS, FAMILIES, GROUPS AND ORGANIZATIONS • THEY PROVIDE THE RIGHT VALUES AND MOTIVATION TO LIVE UP TO THESE VALUES • IMPLICATIONS FOR ECONOMICS

3. NATURE OF ISLAMIC ECONOMICS (1): IS ISLAMIC ECONOMICS A SCIENCE? CAN A RELIGIOUS WORLDWVIEW ENABLE IT TO BE A SCIENCE YES, BECAUSE IN ORDER TO BE USEFUL IT HAS TO OBJECTIVELY ESTABLISH THE CAUSE AND EFFECT RELATIONSHIP BETWEEN DIFFERENT VARIABLES: IF A, THEN B: A IS THE CAUSE, AND B IS THE EFFECT, OR B=F(A), IF CERTAIN ASSUMPTIONS ARE SATISFIED. THIS IS A HYPOTHESIS THE ISLAMIC WORLDVIEW DOES NOT PREVENT IT FROM DOING SO WHEN DO WE ACCEPT A HYPOTHESIS AS A PART OF ISLAMIC ECONOMICS? METHOD?

1. HYPOTHESES OF ISLAMIC ECONOMICS: THERE MAY BE DIFFERENT SOURCES OF HYPOTHESES THE QUR’AN AND THE SUNNAH ARE ONLY TWO SOURCES OF HYPOTHESES SOME EXAMPLES OF QUR’ANIC HYPOTHESES: i. ﻭﻗﺪ ﺧﺎﺏ ﻣﻦ ﺣﻤﻞ ﻇﻠﻤﺎ WHOEVER COMMITS INJUSTICE (A) HE FACES RUIN (B) i. ﺇﻥ ﺗﻨﺼﺮﻭﺍ ﺍﻟﻠﻪ ﻳﻨﺼﺮﻛﻢ IF YOU HELP GOD (A), GOD WILL HELP YOU (B). iii. ﻭﻣﻦ ﺃﻌﺮﺽ ﻋﻦ ﺫﻛﺮﻱ ﻓﺈﻥ ﻟﻪ ﻣﻌﻴﺸﺔ ﺿﻨﻜﺎ WHOEVER TURNS AWAY FORM MY MESSAGE (A) HE WILL HAVE A DIFFICULT LIFE (B) • IMPLICATIONS OF THESE HYPOTHESES • DO WE NEED TO TEST THESE HYPOTHESES? • OTHER SOURCES OF HYPOTHESES

1. NATURE OF ISLAMIC ECONOMICS (2): IS IT ALSO AN ART? YES. THERE MUST A PURPOSE BEHIND THE ESTABLISHMENT OF CAUSE AND EFFECT RELATIONSHIP – WHAT IS THE PURPOSE? CONVENTIONAL ECONOMICS SAMUELSON: DESCRIPTION AND ANALYSIS FRIEDMAN: PREDICTION ISLAMIC ECONOMICS: ANALYSIS AND PREDICTION ARE BOTH NECESSARY, BUT THERE IS SOMETHING WHICH IS EVEN MORE IMPORTANT: REALIZATION OF THE VISION THE ULTIMATE GOAL OF SCIENCE HAS TO BE THE SOLUTION OF PROBLEMS AND THE PROMOTION OF HUMAN WELLBEING – THE PROPHET, MAY THE PEACE AND BLESSINGS OF GOD BE ON HIM, SAID: ﻻ ﻳﻨﻔﻊ ﺍﻟﻠﻬﻢ ﺇﻧﻲ ﺃﻌﻮﺫ ﺑﻚ ﻣﻦ ﻋﻠﻢ (O GOD! I SEEK YOUR REFUGE FROM KNOWLEDGE THAT IS OF NO BENEFIT)

6. WELL-BEING: WHAT IT IS AND HOW CAN IT BE ATTAINED? WELL-BEING DEMANDS FULFILMENT OF ALL THE BASIC NEEDS OF ALL PEOPLE WITHOUT ANY DISCRIMINATION (i) MARERIAL NEEDS (ii) NON-MATERIAL NEEDS – PEACE OF MIND, INNER HAPPINESS, SOCIO-ECONOMIC JUSTICE, FAMILY AND SOCIAL SOLIDARITY, ABSENCE OF CRIME AND ANOMIE ISLAMIC ECONOMICS RECOGNIZES BOTH THE NEEDS CONVENTIONAL ECONOMICS DOES NOT DISCUSS NONMATERIAL NEEDS BECAUSE THESE ARE NOT MEASURABLE AND INVOLVE VALUE JUDGMENTS - IT THEREFORE EMPHASIZES ‘MAXIMIZATION’ OF WEALTH AND ‘WANT’ SATISFACTION: ALL THE RESOURCES GET DIVERTED TO THE REALIZATION OF THIS OBJECTIVE COMPROMISE OR ‘TRADE IN’ : TO CREATE A BALANCE BETWEEN THE MATERIAL AND THE NON-MATERIAL NEEDS ‘OPTIMIZATION’ INSTEAD OF ‘MAXIMIZATION’, AND ‘NEEDS’ INSTEAD OF ‘WANTS’ i. e. A BALANCE.

1. HOW TO CREATE A BALANCE: IT IS ONE OF THE OBJECTIVES OF ISLAMIC WORLDVIEW AND ALSO OF ISLAMIC ECONOMICS TO HELP CREATE THIS BALANCE THE THREE QUR’ANIC HYPOTHESES MENTIONED EARLIER AIM AT THE CREATION OF THIS BALANCE INJECT A MORAL DIMENSION INTO ECONOMICS PASS THE CLAIMS ON RESOURCES THORUGH BOTH THE MORAL AND PRICE FILTERS

PASS THE CLAIMS ON RESOURCES THROUGH BOTH THE MORAL AND THE PRICE FITTERS Moral Filter Price Filter THE TWO CAN TOGETHER HELP: • CREATE AN EQUILIBRIUM BETWEEN DEMAND SUPPLY, AND • REALIZE HUMANITARIAN GOALS S 1 P S P 1 P P 1 S 2 P 2 D 1 D 2 D P 2

1. THE ATTITUDE OF CONVENTIONAL AND ISLAMIC ECONOMICS TOWARDS SACRIFICE? CONVENTIONAL ECONOMICS DOES NOT HAVE A MOTIVATING FORCE OTHER THAN THE SERVING OF SELF-INTEREST – PARETO OPTIMUM LEAVES NO ROOM FOR SACRIFICE, WHICH IS NECESSARY TO SERVE SOCIAL INTEREST AND TO PROMOTE THE WELL-BEING OF ALL ISLAMIC ECONOMICS: RECOGNIZES THE CRUCIAL IMPORTANCE OF BOTH (THE SERVING OF SELF-INTEREST AS WELL AS THE MAKING OF SACRIFICE) INJECTION OF THE MORAL DIMENSION DOES NOT PREVENT THE SERVING OF SELFINTEREST, IT MOTIVATES PEOPLE TO SACRIFICE FOR SERVING THE SOCIAL INTEREST

WHY SELF-INTEREST AND SACRIFICE ARE BOTH NEEDED TO REALIZE HUMAN WELL -BEING 1. FOUR IMPORTANT INSTITUTIONS IN HUMAN SOCIETY: A) B) C) D) MARKET FAMILY SOCIETY GOVERNMENT ALL OF THESE FOUR ARE INTERLINKED YOU CANNOT RUN ALL FOUR ON THE BASIS OF SELFINTEREST: SACRIFICE IS INDISPENSABLE INJECTION OF MORAL VALUES OR RULES OF BEHAVIOUR IS UNAVOIDABLE FOR REALIZING THE VISION

10. HOW TO MOTIVATE PEOPLE TO ABIDE BY THERULES OF BEHAVOUR WHEN THESE DEMAND SACRIFICE OF SELF-INTEREST • GOODNESS OF HUMAN NATURE • INCENTIVES AND DETERRENTS o MARKET FORCES o SOCIAL PRESSURES: PRESTIGE AND OSTRACIZATION o GOVERNMENT INTERVENTION: AWARDS, FINES AND IMPRISONMENT o ACCOUTABILITY BEFORE GOD: REWARD AND PUNISHMENT IN THE HEREAFTER • SOCIO-ECONOMIC AND POLITICAL RESTRUCTURING

11. IBN KHALDUN’S SOCIO-ECONOMIC AND POLITICAL DYNAMICS WHEN WE TALK OF: THE WELL-BEING OF ALL, AND • THE INTERRRELATIONSHIP OF MORAL, SOCIAL, ECONOMIC , POLITICAL AND HISTORICAL FACTORS, • THEN WE CANNOT CONCENTRATE ONLY ON THE MARKET: OTHER FACTORS MUST ALSO BE INTRODUCED INT 0 THE ANALYSIS IBN KHALDUN DEVELOPED A MODEL WHICH TAKES ALL THESE FACTORS INTO ACCOUNT • THE MODEL DID NOT GET DEVELOPED FURTHER AFTER IBN KHALDUN – ONLY A FEW LUMINARIES: AL-MAQRIZI (d. 845/1142), AL-ASADI (d. 854/1452), SHAH WALIYULLAH (d. 1178/1762).

12. THE RECENT REVIVAL OF ISLAMIC ECONOMICS: REJECTION OF THE THREE PILLARS OF CONVENTIONAL ECONOMICS: • RATIONAL ECONOMIC MAN: SELF-INTEREST • POSITIVISM: UNRESTRAINED FREEDOM – PARETO OPTIMUM • LAISSEZ FAIRE ALL THESE THREE PILLARS ARE IN CONFLICT WITH THE HUMANITARIAN GOALS OF SOCIETY

13. METHOD OF ISLAMIC ECONOMICS • HYPOTHESIS MUST BE IN HARMONY WITH THE LOGICAL STRUCTURE OF THE ISLAMIC PARADIGM – EVEN IN CONVENTIONAL ECONOMICS, HARD CORE OR PROTECTIVE BELT IS ACCEPTED WITHOUT QUESTION. • EXPLAINING RATIONALLY – ‘ILM AL-KALAM – GOD DOES NOT OPERATE IN AN ARBITRARY MANNER • TESTING – AL-KINDI: A SCHOLAR SHOULD NOT MAKE UNPROVEN STATEMENTS • ASSUMPTIONS – MUST BE REALISTIC

14. PROGRESS IN DIFFERENT AREAS • MONEY AND BANKING • MACROECONOMICS AND MICROECONOMICS • PUBLIC FINANCE • ECONOMIC DEVELOPMENT • INTERNATIONAL ECONOMICS AND GLOBALIZATION • OTHER AREAS

15. CONCLUDING REMARKS • MICROECONOMICS NEEDS TO BE DEVELOPED WITHIN • • THE FRAMEWORK OF ISLAMIC VALUES TO SERVE AS A BASIS FOR MACROECONOMICS AND ALL OTHER AREAS OF ECONOMICS IBN KHALDUN’S SOCIO-ECONOMIC AND POLITICAL DYNAMICS HAS NOT YET BECOME INCORPORATED INTO ISLAMIC ECONOMICS EMPIRICAL TESTING HAS RECEIVED LITTLE ATTENTION ISLAMIC ECONOMICS IS MORE DIFFICULT BUT NOT IMPOSSIBLE WORK THAT HAS ALREADY BEEN DONE BY CONVENTIONAL ECONOMICS AND OTHER SOCIAL SCIENCES CAN BE VERY HELPFUL – WE WILL NOT BE STARTING FROM SCRATCH.