The Problems in Economics

How should the Muslim economist attempt a fresh understanding of the economic phenomena?  First of all there is the individual and his wants – the starting point of all economic analysis. There has been a tendency to take individual wants as something given, as far as economic analysis is concerned. This is because of certain assumptions regarding motivation and outlook on life. Otherwise human wants are the most vicissitudinous phenomena. They are always changing with change in outlook on life, value system of the individual, his specific motives in any particular situation, and a host of other external factors, e.g. cultural traits, customs and traditions and the physical environment. For a correct and comprehensive understanding these variables must be discussed and the consequences of such variations upon individual wants fully analyzed. Special significance is attached to a study of individual wants on the assumption of the Islamic outlook on life, Islamic ethics and characteristically Islamic motives. What are the likely qualitative and quantitative impacts of Islamic culture upon individual wants? Islam lays down certain norms for man's behavior as a consumer. Assuming the individual’s loyalty to these norms, what pattern of individual demand is likely to emerge?

The same method of analyzing human behavior under the assumption of Islamic norms, and in the context of an Islamic society, can also be applied to other types of economic behavior. How should the truly Muslim individual behave in his productive activities in an Islamic Society? What should be his outlook towards economic work? Should he aim at earning the greatest amount of wealth that is physically possible, or should he be considering the earning of wealth as a means to some other ends which do not always call for an unsatiable urge for wealth. What are the consequences of our findings in this respect upon the supply of labor and entrepreneurship in an Islamic society? What is the place of economic activities in the general scheme of life as conceived by Islam?

Then there is the problem of entrepreneurial behavior and entrepreneurial motivation. What do the entrepreneurs aim at in contemporary capitalist societies? What would they aim at, assuming they acted according to Islamic norms? What are the objectives of entrepreneurial policy in the light of an Islamic outlook on life? And, if Islam allows the profit motive within certain limits, what are those limits? What are the higher claims of justice and benevolence, and the consideration of social good, which the entrepreneur must keep above the profit motive?

In the light of our findings regarding the above mentioned questions can it easily be determined what is the place of economic rationality in the Islamic attitude to life? What type of rationality is consistent with this attitude and what types are not?

Rigorous scientific definitions of economics regard this 'science’ as essentially indifferent towards the ‘content’ of man's behavior. Economics is concerned only with the form of human behavior as it is a study of ‘human behavior as a relationship between ends and scarce means, which have alternative uses’.

But a study of form without content is not possible. Hence, economics assumes a particular substance or content before it studies the formal aspect of human behavior. Thereafter economics becomes ‘the study of the formal aspects of the relationship of ends and means on various assumptions concerning the ultimate nature of the data. The assumptions of modern economics are generally drawn from contemporary ways of life. But, for scientific and analytical purposes, any set of assumptions regarding the nature of ends would be as good as the present ones. Maximization of satisfaction by the consumer and maximization of profit by the producer, or, in short, economic rationality on the part of units in the economy, are assumptions alleged to be drawn from the contemporary historical situation. But the Islamic way of life refers to a situation entirely different from the present one.  The Qur’an and the Sunnah give us an idea of what the Islamic way of life is, and what this situation would be. What are the assumptions relevant to that situation? Given these assumptions, it would be possible to give an analysis of human behavior as a relationship between ends and scarce means that have alternative uses. This would be the positive science of economics, relevant to an Islamic Society. The function of science lies in explanation and prediction. This science would explain the functioning of a (hypothetical) Islamic economy and predict human behavior as it would be if the assumed norms are actually pursued. A social science helps man understand the working of relevant human institutions, even before they have actually worked themselves out. The science of Islamic Economics would serve this purpose and help man in making a choice between the Islamic way of economic life and other ways, with which he is already familiar.

Economics, as indeed all social sciences, also perform another function. It sets up an ideal pattern of behavior with which man should strive to conform. The ideals relevant to this ideal pattern are hidden in the assumptions regarding the norms. Thus modem economic theory describes the ideal behavior in conformity with the maximization principle. Those who cherish these ideals can derive from it the pattern of their behavior. This aspect of science is emphasized by calling it a ‘normative science'. There is, however, only one difference between a positive and a normative social science. Positive science necessarily implies a claim that its assumptions are ‘realistic’, i.e. in a crude conformity with actual ways of life; while normative science does not. A perfect applicability of the assumed norms never obtains in reality; social sciences are also normative in nature. Islamic economics, seen from this angle, would be a normative science.

But it would be a science. The basic economic value, the chief characteristic of the formal aspect of economic behavior, irrespective of the end, is rationality. ‘Rationality in choice is nothing more and nothing less than choice with complete awareness of the alternatives rejected.’ It is ‘the orientation of action toward maximal conformity with a norm’. The science of economics, based on Islamic assumptions, would give a picture of human action oriented toward maximal conformity with Islamic norms.

There is, however, an important difference in the nature of the norms assumed by modern economics and those recommended by Islam. The latter involve the realization of certain moral and spiritual values. Values cannot be defined, or even conceived, as precisely and as exactly as, for example, the profit maximization norm can be defined or conceived. In such cases, correct conception and precise definition of these norms themselves become a problem for the actor and the analyst, respectively. This affects the formal aspect of human behavior. The question arises: What is the meaning of ‘rational behavior' in the process of value-realization? Obviously the possibility and extent of rational behavior in this respect depends upon precise formulation of the given values and their appreciation by the actor. To the extent it is impossible to do so, it is impossible to have a science explaining human conduct aimed at the realization of these values. Paramount importance is, therefore, attached to the definition and formulation of the norms and values given by Islam. It is true with respect to both the practical realization of the ‘Islamic Economy, and the construction of the science of Islamic economics. It also follows that in so far as ‘rational behavior is not possible in the process of value realization, the formal aspect of human behavior in this process should be considered afresh. One need not get tied to the dictum that the assumption of rationality is essential for the study of economic behavior.

Besides the motivation of the units in the economy, the Islamic researcher will have to underline the broader economic objectives of the Islamic society as a whole, the target of Islam's economic order. They are objectives, which the society would strive to achieve. How would it do so? Does Islam assume that these objectives would automatically be achieved provided that the units in the economy, acting independently, conform to the norms laid down for their actions? If there is no such assumption, what sort of social arrangements are recommended for the realization of these objectives? What is the role assigned to the State in this respect? What role are other social institutions likely to play? What are the implications of these social objectives as regards individual behavior?

This aspect of our problem raises many new questions. The first requirement is a statement of those social goals that an Islamic society must aim at. Secondly, we must know whether Islam gives any particular relationship between the units in the economy with a view to achieving these social goals. Is economic competition consistent with the attainment of these goals? Can the Islamic spirit co-exist with the spirit of competition?

How far do the Islamic principles oblige the units in the economy to cooperate for the attainment of the cherished goals? What is the place of cooperation in the entrepreneurial relationship? And what are the likely impacts of a cooperative attitude upon entrepreneurial behavior? How far does it affect the formal aspect of the process of decision making?

Then it should be asked how far the units of the economy, actively cooperating with one another can attain the desired goals without the participation of the state in the economic life of the community? Does the concept of active cooperation necessarily bring the state into the field? What are primary economic functions of the state? How far and under what circumstances can the state extend its economic activities?    

Islamic sources are eloquent regarding the duties of the state with respect to the economic betterment of its people. Muslim economists will have to work out the economic role of the Islamic state in modern conditions. The problem of economic planning is very important in this respect. The extent of state initiative in economic development and the powers and prerogatives which the state exercises over individual property rights and the right to economic enterprise must clearly be determined with reference to the actual circumstances of the day.

It is well known that Islam has its own objective regarding the distribution of wealth in society. What policies are to be adopted for the realization of these objectives? Does Islam rely upon market forces and the entrepreneur's sense of justice and benevolence regarding the rewards of the various factors of production, especially that of labor participating in the productive process? Are there any specific norms regarding the wages policy of firms? Is there any lower limit set for wages, beyond which they must not fall, and if so, how to qualify this lower limit? Then what are the likely consequences upon the level of prices, of these norms of distributive policy; how far do such norms hamper the free working of market forces as far as the determination of prices are concerned?

The process of price determination in an Islamic society also deserves special attention. Does Islam attach any ethical approbation to the price determined by the interplay of market forces, assuming Islamic behavior on the part of actors in the market? Is there anything like the concept of 'just' or 'reasonable’ prices, beside the market price determined by the interplay of supply and demand?

Islam's economic norms are closely related to its political and spiritual norms. The realization of these norms implies a harmonized and integrated approach. Islam has certain norms regarding the moral conduct of its people, as well as concerning their inner life, the life of the spirit. It conceives of a particular type of ‘character’. A study of the harmony between these norms and those of economic activity would be very revealing as regards the nature of economic norms. To give an instance, man's economic activities affect his behavior in general – his character – to a very great extent. The effects of the competitive spirit concerning character formation are quite dissimilar to those of the cooperative attitude in economic life. The inner life of an individual always involved in rigorous competition with his fellow beings cannot be similar to the inner life of one who looks upon life as a cooperative affair and is always helping and being helped by others. Thus a study of economic norms with reference to ethical and spiritual norms would throw much light upon the nature and implications of economic norms. It would also help predict the modification, which such economic institutions as competition and property are likely to undergo in the Islamic society. The inter-relationship of economy and polity in Islam is also an important subject. How do these two subsystems supplement each other in Islamic society, with reference to the attainment of the broader objectives of the society? What are the essential values of the Islamic polity, and in what way are they consistent and co-existent with the essential values of an Islamic economy? The consistency and co-existence of democracy and economic security, of freedom and order in society is the key problem in this respect. To afford a correct understanding of security and order in the economy it is necessary to relate them to freedom and democracy in political life and then determine the nature and extent of the respective value-objectives.

Ultimately it is the entire value system of Islam, the economic, political, spiritual and ethical values taken together which form the real context in which economic value objectives should be placed and studied. Nothing accounts for the maladies of modern civilization as well as the chaos in modern social thought as study of the various value-systems in isolation with the other value-systems, by specialists, who know little about the other aspects of life and exhibit hardly any regard for human well-being in those spheres of life.

These are some of the fundamental problems, which the Muslim researcher will have to attend to. Then there are some special problems arising from the specific laws laid down in the Qur’an and the Sunnah. For instance, Islam has prohibited interest. An Islamic economy will have to function without the institution of interest. Is it possible for it to do so? How would it do so? Interest plays an important role in the economic process. In so far as these roles are essential to a modern economy the need for an alternative mechanism inevitably arises. What is the new basis upon which the banking system will be re-organized? It has been suggested that it should be reorganized on a profit-sharing basis. Is it a practical proposition? To be understandable, this hypothesis must be worked out in the fullest detail. It will have to be shown how far it is possible to make the banking system perform its economic functions in its new form. The entire problem of industrial finance and that of economic growth has to be dealt with in the new perspective. Some valuable work has already been done on the subject but it is of a very preliminary nature. To our knowledge, no writer has touched upon the problem of growth and development without the institution of interest. The normative science of Islamic economics will not deserve the name until these important gaps are filled.

Prohibition of interest and gambling and certain positive conditions imposed by Islam on all monetary transactions call for a thorough discussion of problems related to money and credit. Do Islamic injunctions call for subjecting the creation of credit to any limits and restrictive conditions?  Should the Islamic state allow private banks, and if so, shall it allow them to create credit as well? And if it does allow this, what condition must it impose upon the exercise of this power? Then, what structural changes in the money-credit mechanism would be likely to follow the Islamic remolding of this mechanism?

Closely associated with these, is the problem of speculative dealings in stocks and shares. Does Islam prohibit such speculative practices? What are the economic consequences of such a prohibition? Is there any likelihood of the emergence of any alternative institution, or, of an Islamic reorganization of the institution of stock exchange, to perform the function of maintaining mobility in this particular market? Muslim jurists have elaborately discussed partnership, and joint enterprise in the context of the conditions prevailing in their own time. How far the modern organization of joint stock companies and public corporations fit in with the principles underlying the Islamic code? What modification in the bases of modern business organization is necessary to make them consistent with Islamic principles?

Important questions also arise with respect to the agricultural sector of the economy. Private ownership of agricultural land has become a disputed question. A historical study in the evolution of the zamindaries in Islamic countries would be very helpful in resolving this controversy, as the lands of different countries have been treated differently in Islam, due to political reasons. Where private ownership is proper the question of the principles governing the behavior of the owner and terms of the contract of muzarabah (sharecropping) are of great importance.

This does not exhaust the list of specific problems deserving our attention. There is the whole group of problems related to industrial relations, unemployment, social security and the institution of insurance, etc., which deserves specialized research. Then there is a host of problems related to economic crises and business cycles. Seen in the perspective of an interest-free economy, these problems acquire a new importance for the Islamic researcher. Besides the theoretical task of analyzing human behavior aimed at Islamic ends, these issues concerning an Islamic economy also call for immediate effort on the part of Muslim economists.

The question naturally arises as to how to begin the task? We maintain that the highest priority attaches to a correct understanding of Islamic norms in the light of the Qur’an and the Sunnah. A search for economic norms in these sources would not, however, bear much fruit. Islam conceives of life as a unity, and the norms recommended by Islam are the norms of human life as a whole. It is the economic aspects and implications of these norms that are really important for the economist. Besides these there are specific economic norms and laws as well. A thorough study of these norms and guiding principles is, therefore, the first step.

These principles, of course, were fully put into practice in the early Islamic society. In spite of the world of difference in technique and other relevant conditions, a study of the working of that Islamic economy will be very illuminating for a correct understanding of these principles. Islam's fundamental approach to the basic economic institutions of property, contract, and occupation is better understood in the light of the actual functioning of these institutions in an Islamic society. In this respect, we shall have to study the Sunnah, and early Islamic history, as well as Islamic jurisprudence. Economic thought of the Muslim scholars and thinkers over the past fourteen centuries is also an important subject. It is our belief that much valuable material can be found in the works of these scholars.

However, our first task must be to gain a deep insight into modern economic conditions, contemporary economic institutions and, broadly speaking, the working of modem economies. It requires a thorough study of modern economics, a study that must not be confined to traditional economic theory. A study of almost all the important schools of thought is necessary. Then, the various assumptions of modern economic theory should be scrutinized both as regards their applicability to life today, and with respect to the Islamic way of life as it would be.

It is not possible to understand the economic behavior of man, or the working of the economy, with the help of 'Economics’ only. Study of other social sciences, especially of Sociology, Psychology and Politics is also necessary for that purpose. A broad-based study would give us a deeper and fuller understanding of the contemporary situation, and of the economic problems of the day.

The study of Islamic sources should be synchronized with modern studies in a suitable manner. A problem-conscious economics student will derive far greater benefits from the study of the Qur’an and the Sunnah than the uninitiated.

Source: Dr. Muhammad Nejatullah Siddiqi, Economics An Islamic Approach. Republished with permission.