ECONOMICS: ISLAM AND COMING BACK TO BASICS

It would be both interesting and informative to discuss the definition, concept and contour of the subject under Conventional Economics and Islamic Economics. By Conventional Economics we mean the one prevalent today, which is in the currency for more than two hundred years in general and it has swayed the world scenario for the last century at least, sweeping all other systems away like non-entities. As a result of such unchallenged application of the underlying ideas and consequent systems, we have a good amount of empirical data regarding its successes and failures. Islamic Economics, on the other hand, remained in the practice for more than one thousand years in major parts of the world before the emergence of Conventional Economics.

Economics was originally called political Economy and was understood as ‘an enquiry into the nature and causes of the wealth of nations.” This idea of the science of wealth was later considered as dismal and the next popular definition was in terms of attainment and uses of “material requisites of well being.” It was considered as the study of “mankind in the ordinary business of life.” The underlying principle was that mankind ordinarily strives for material well-being. Later a new definition became popular that described the subject in terms of the relationship between ends and scarce means, which have alternative uses. So the basic concern of economics is the optimum utilization of resources because they are both scarce and are required for multiple purposes. Had the resources been abundant, about their uses, there would be no need to study the subject. It may be noted that in all these developments of the subject wealth, material requisites of well-being and resources have primacy. The word resource is more encompassing.

Islam too is proactive about resources and describes these as necessities of human life on earth. Allah in the Qur’an describes resources as the means of life on earth:

“And we have certainly established you upon the earth and made for you therein ways of livelihood” [The Qur’an 7:10]

As the resources are necessities of life so they should not be allowed to be manhandled and consequently destroyed:

“And do not give the foolish wealth, which Allah has made a means of sustenance for you” [The Qur’an 4:5] 

Islam does not agree with the conjecture that resources are, as such, scarce. The scarcity that we observe is the result of human greed, inefficiencies and/or corruption and tyranny. The creator has created sufficient resources which can sustain all needs of human beings but are not sufficient to fulfil the greed of one single person. 

Despite being proactive about resources Islam does not approach the subject from that angle. Islamic scholars have pointed out that the moot question addressed by Islam is the various relationships which man is required to maintain – the relationship between Creator and the creatures and those between creatures. Human beings’ relationship with Allah is addressed under the head Ibadah and those with fellow human beings are addressed under the name Mua’mlaat. The latter may further be divided into those which are obligatory and those which become binding only when one exercises an option entailing any legal liability. So if a person is born into a family his parents must take care of him when he is a baby and then it will become obligatory for him to serve them when become old. The person had no option to decide where he is to get birth. His situation creates mutual and obligatory relationships. On the other hand, a person has the option of entering or not entering into any deal of purchase or sale with any particular person. But once he exercises the option he becomes liable for the completion of his part of the deal. This second type of relationship involving legal obligation relating to resources/wealth is the subject matter that can be called Islamic Economics. However, a more relevant nomenclature of the subject in Islam may be Fiqhul Mua’malaat al-Maalya.

Conventional Economics

It appears to have reached the end of the road with insurmountable roadblocks. Things are going from bad to worse. There seems to be no light (rather a ray of hope) at the end of the tunnel. It is not possible to describe, in a short paper like this, the details of the problems caused by the economic practices prevalent today.. We are touching upon in brief some of the troubling phenomena in the following lines.   

  1. The real Economy has been grossly eroded by the financial economy so much so that the size of the real economy is less than a one-tenth fraction of the latter. If, for example, the total size of actual business activities being done in the world is to the tune of 75 trillion US Dollar then the documents relating to financial obligations in circulation in the world is more than 850 Us trillion Dollars. And this size of the financial economy does not account for the black money in circulation as we are talking only about the recorded transactions. A simple result of this phenomenon is that if on any account there is a downward movement of financial obligations even by 10% that will be sufficient to erode the real economy. Financial obligations are being created without any tangible business activities. In another word the size of the economy that we notice is not representative of actual growth in the economy in terms of goods and services. 
  2. The corporate economy has taken over nation-states. Several multi-state corporations are bigger in size of their financial strength than a hoard of nations. These corporations are in a position to dictate terms suitable to them to even big and powerful nations. Governments that can resist their might are few and far between as they are powerful allies in governance too.
  3. Expenses on consumptions are being done on large scale on the strength of future expected income. This is the standard practice of individuals, families and nations. The real cause of this is that easy credit is available because providing credit itself has become a powerful and rewarding business. The net result of this is that economies have no or little credit. The idea that savings are an agent, on whose back future growth in the economy is planned, has been consigned to flames and now finds its place only in the books on economic theories. The practice is that current consumption and future growth are planned based on deficit financing. This has resulted in ever-increasing debts and the printing of currency notes out of thin air without any firm basis for the same. 

In the olden days, the concept was that wealthy persons and nations own much. Now in the changed reality, they owe much. The higher the debt level higher is the financial strength! So the ability to owe and not own is the success mantra these days. This is true for both developing and developed countries. So the USA is more indebted than others. 

The monetary market of the post-Second World War is supposed to be developed and delineated by the Britten Woods agreements. But this supposition does not hold good. The unilateral decision of the USA to delink its currency from whatever semblance of the gold standard was agreed on led to a rush for printing notes without justifiable reasons. This has simply made the world bad for the worse. 

  1. The increasing level of debt at times creates the position of institutional debt crisis where they are not paying their commitments and this leads to catastrophic effects. The world witnessed giant organizations falling like packs of cards during the financial tsunami a few years ago. Similarly, the situation of the Sovereign Debt Crisis may come to the fore. The current crisis of the failure of Greece to meet its commitments is a classic case.
  2. Human society under the influence of Conventional Economics could not witness smooth growth. The Trade cycle is an ingrained characteristic feature of this system of economy. The economy witnesses, with almost clock-like regularity, contraction/recession sliding down from peak/crest to the trough which then starts to recover and expand, going through recovery and prosperity phases. All these are caused by any real economic reasoning but are the result of psychological needs. Economists like John Meynard Keynes explained that recession in the economy is caused by an account loss of “Animal Spirit” when “people do not want to make the capital expenditure or hire people. By Animal Spirit the economists mean the spontaneous and aggressive decision-making of the consumers for the action of purchasing and making an expense, which is the result of their confidence. So in this sense economic activity under Conventional Economics is ignited by man’s animal spirit, instead of his needs!

Several other malaises may be described and empirical data in support of all the above submissions may be submitted. However, in this paper, we would say this much too suffices. A moot question is about the beneficiaries of Conventional Economics as in practice today. Yes! There are certain beneficiaries but they are not more than 1% of the total world populace. One may remember and agree with the banners raised by American youths a few years ago with the inscription 99% vs 1%. It is a win-win situation for these individuals and families. 

Islamic Way Out

Islam, along with addressing the method of achieving success in life after death, provides a solution to the issues of the world too. These two are not different streams of teaching. Success in life hereafter is directly linked to the well-being of life here on this earth. A single straight path links both ends. The solutions are basic and pertinent in all situations at all times for all people. Islam provides the basics and invites the world to apply the same and live in peace and tranquillity The Islamic methodology of solving problems of the world may be described under the following heads.

World View which has a bearing upon all walks of life

Specific teachings, particularly things that are forbidden

Relevant moral teachings

Application of human intellect to address problems

World View  

The worldview of Islam is guided by the principle of Tauheed (Monotheism), khilafat (Vicegerancy of man), adl(justice) and ihsan (equity). The net result of all these is that all human beings are in unity and they are not basic owners' resources made available to them severally and collectively. They should consider the resources as trust reposed on them to be utilized in the manner the Creator has wished so that justice and equity may be ensured.

Specific Teachings

Islam has provided basic and universal teachings on all subjects, including economics. These teachings are specific to the subject and general like forbidding some activities. Islam does not provide any long list of things that man should do. Instead, a small list of things that are not permitted is provided leaving everything else in the list of the permitted area. The underlying principle of Islamic law (shari’ah) is that everything is permitted which has not been specifically debarred is. The approach may be described in other words that alert regarding red areas have been issued placing everything else in the green belt. Now if anyone finds anything in the grey area he is free to decide based on his reasoning and attitude. 

Islamic s scholars have identified a list of fifteen specific negative items in economics that man should keep at bay. He is then free to go ahead in all other areas. We are describing items here and shall refer briefly to others under the next head of discussion. One is Riba (Interest) and the other is Maysir/Qimar (Gambling). These two items have been forbidden by the Qur’an.

Islamic scholars have defined Riba (Interest) means any increase over and above the principal amount payable in any contractual transaction which is not covered by any corresponding counter value. Counter value refers to the justification for any increase over and above the principal amount. Experts have delineated such justifiable counter value as labour, expertise, risk or commodity. Hence any increase on the agreed amount payable in the deal not covered by these is not permitted.  

Gambling is a zero-sum game where no economic value is added and resources are transferred merely based on speculative deals.

Relevant moral teachings

These teachings are universally accepted in all laws and religions. This is part of human nature. In Islamic parlance, these may be described as under.

Gharar - Misleading the other party; Dharar - Causing harm or getting harmed; Jihl mufdhi ilan-niza - Lack of material information leading to dispute; Tadlees - Misrepresentation and causing the wrong impression about the product; Taghreer - False description of goods; Ghaban – Check on excessive profiteering; Khulaba - Impressing buyers by gestures and sales talk/ art of deceit; Ihtikar - Hoarding of food grains and essential items; Baiatain fil bai - Two-in-one transaction / Conditional deal; Kharaj without dhaman – Earning profit without corresponding risk/authority/possession; and Bai madoom – Dealing in the non-existing product ; Malikil ghair – Transaction in products that are in the possession of any other person; La khilabah wa Khayarat (haqqo raddil bai) – No fraud and the right (option) of revisiting transactions 

Application of human intellect to address problems

Islam’s approach is very basic. Despite providing general principles relevant in all cases and specific teachings relevant to the problem at hand, it has total faith in the intellect of man. Man himself has to design a system suitable for him and he has the option of revisiting his earlier decisions and going on adjusting the systems in search of the best method for his well-being in this world and peace and eternal success hereafter. Such application of the human mind without trespassing the specific teachings provided is called, in Islamic parlance, ijtihad (an effort to find solutions to new problems) based on qiyas (deductive analogy) and maqasid al-shari’ah (higher objectives of Islamic law). This is a challenging task for human beings. And it is worth trying and rewarding too!