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Developing Contemporary Microeconomics from an Islamic

Perspective: The Challenge of Genuine Islamization

byMohamed Aslam Haneef

Dept. of Economics, IIUM.

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Outline

1. Introduction

2. Islamization of Economics- The Why, What and How

3. The Folly of ‘Downstream Islamization’

4. Operational Challenges in IOE- Microeconomics

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Introduction

• In developing contemporary Islamic Economics, we do not have to ‘re-invent’ the wheel.

• ‘Patchwork’ Islamic economics also not viable • ‘Critical Engagement’ with modern economics

is possible but premised on Islamic foundations• Challenge is to develop contemporary Islamic

economics through process of ‘genuine Islamization’

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Introduction - cont.

• Before 1980s, writings on Islamic economics are found but were not specifically talking about ‘Islamization’ of economics (IOE)

• 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 focus on IOE per se but were presenting Islamic economics according to their understanding.

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Introduction- cont.

• Part of Islamization of Knowledge Agenda (al-Attas and al-Faruqi)

• 1984 3rd International Conference of Islamization of Knowledge in KL had 2 specific papers: – Islamizing Economics- M.N. Siddiqi – Tahqiq Islamiyat ‘Ilm al-Iqtisad: al Mafhum wa

al Manhaj- Anas Zarqa

(in Towards Islamization of Disciplines, IIIT, 1989)

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2. Why Islamic Economics

• 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.

• Hence many policy tools may also be unacceptable.

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What is IOE (for extensive biblio, see Mohamed Aslam Haneef, 2005)

• 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

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What is IOE- cont.

– 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

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IOE- The How

In the context of IOE, the Islamizers must ‘master’ both the heritage and modern economics (critically) and then make creative synthesis/integration

For both the heritage and modern economics, there are two types of knowledge i.e. substantive and methodological/ philosophical. Focus has been mostly on the former

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IOE- Cont.

1. ‘Mastery’ of modern economics

• Substantive knowledge (theories)– Is neo-classical/keynesian economics

enough? What level of theory sufficient to perform IOE? What about other schools of thought?

– What about other disciplines like history, sociology, political science etc?

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IOE-cont.

• 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, of us were/are exposed to this type of knowledge in our undergraduate and graduate studies.

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IOE-cont.

2. ‘Mastery of the Heritage’

• Substantive knowledge– What from our heritage is relevant to develop

contemporary Islamic economics?– Current emphasis is on fiqh and to a lesser

extent usul al-fiqh? Is this sufficient?– What about kalam, falsafah, history? Ulum al-

Qur’an and ulum al-hadith? Etc.

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IOE-cont.

• 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?

– Need for usul al-Iqtisad?

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IOE- cont.

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

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Downstream ‘Islamization’ in practice

• Practical dimension almost exclusively focused on Banking and Finance

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

- Debate about what has been done- is it genuine Islamization or patchwork?

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Fails to realize that modern commercial banks and the system of modern banking has its roots in a certain history of western europe; these institutions come with certain values and foundations that rationalise their very existence

We make the mistake of trying to ‘Islamize’ instruments alone.

(For critique of Islamic Banking, see Ziauddin Sardar, Islamic Futures, 1989).

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Cont.• 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

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Operational Challenges in IOE- Microeconomics

• Microeconomics today has been reduced to mean the individual economic behaviour of ‘representative agents according to neoclassical theories’

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

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Challenges

1. 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

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Challenges-cont.

2. If Microeconomics (as a part of economics as a whole) is to be taught, should we not 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 them but must also critically evaluate these alternative foundations too

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Challenges- cont.

3. 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

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Example in Consumer behaviour

- Discussion has normative and positive/ technical aspects.

- All positive aspects must work within a normative framework

(Reference for most of this section is Tahir/Ghazali/Agil, 1992)

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Normative framework of Consumer Behaviour

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

• derived from the vision obtained from our sources of knowledge

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

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Normative- cont

• 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

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Positive/Technical Aspect

• dealing with constrained decision making within the normative framework

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

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

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Normative Framework• 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’

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Behavioural Assumptions (Taken from Zarqa in Tahir/Ghazali/Agil, 1992)

• 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)

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Behavioural Assumptions (cont.)

– 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 (36:47)

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Technical Aspect

• Maximize/optimize subject to constraints (external and internal)

– the choice is made within the framework above

Issues– need to quantify the qualitative factors– can we use conventional tools?

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Example in Production

• 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

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Production- cont.

• Issue of concern is the ‘goal of maximization’ • Using Technical Analysis, 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

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Production-cont.

• Amin and Yusof (2003) take the analysis one step further by demonstrating that profit maximization 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.

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Using an modified neoclassical framework, they show that ‘if consumers behave according to Islamic values’, the production of necessities would be higher and that of refinements would be lower, compared to that in a conventional setting.

This however, may require the state to intervene in the form of taxes on the latter and

incentives for the former.

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Conclusion

Dilemma of Islamic Economists

Modern western trained Muslim economists (or those in Islamic studies) are not able to appreciate both the philosophical and methodological issues underlying their own disciplines and having any meaningful exposure to the Islamic legacy (or to modern economics for those in Islamic studies).

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In the 250 year western economic history (from the 1750s), their scholars discussed methodology, philosophy. In developing alternative schools in the west, they have once again looked at the ‘foundations’ of neoclassical economics

See www.paecon.net

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Most economics programs in western universities today hardly discuss philosophical and methodological issues in economics.

The underlying assumptions of mainstream neoclassical-keynesian economics is accepted as ‘truth’, while most if not all attention is placed on mastering the latest quantitative techniques (now available in software packages) and applying these to ‘analyse data’

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Islamic economists, especially academics must pay more attention to methodology and philosophy of economics; must know this from our Islamic heritage as well as understand the development of methodology in western economics if we want to really produce a unique, genuine contemporary Islamic economics, banking and finance.

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References

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

• Mohamed Aslam Haneef (2005). A Critical Survey of Islamization of Knowledge. 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.

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Thank you. Comments and Questions welcome

mdaslam@iiu.edu.my