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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’. 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’

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Introduction - cont.

• 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.

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Introduction- cont.

• 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)

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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.

• 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.

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What is IOE (for extensive biblio, see Mohamed Aslam Haneef, 2009)

• 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 developing Islamic economics in the context of IOE, one 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. Substantive (theories) ii. methodological/ philosophical.

While focus has been mostly on the former, how can we develop theories without proper methodology/foundations?

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IOE- Cont.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?

Scope of Substantive Knowledge in Economics- cont.

• 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?

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

Methodological Knowledge- cont.

• 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?

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IOE-cont.

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.

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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?

– Can we develop a new methodology called usul al-Iqtisad or an usul for Islamic political economy?

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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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Adding salt to the wound-‘Islamization’ in practice-

• 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?

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These attempts must realize that modern commercial banks and the system of modern banking as well as modern economic theory has its roots in a certain history of western europe; these institutions and theories come with certain values and foundations that rationalise their very existence

We make the mistake of -trying to ‘Islamize’ instruments -Islamizing one set of theories 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’ (Asad Zaman, 2005)

• 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, 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

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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

- e.g. has Islamic economics and finance helped solve problems of the ummah? In

the example above, the problem of poverty was given attention.

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Operational Challenges in Islamic Economics - Example in Consumer behaviour (Reference for most of this section is Tahir/Ghazali/Agil, 1992)

- Discussion has normative and positive/ technical aspects. - All positive aspects must work within a normative framework

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A. Normative framework of Consumer Behaviour

• 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

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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 (and others schools?)

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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

• 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)

B. Positive/Technical Aspect

• 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?

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Operational ChallengesExample 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’ • 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

Operational ChallengesDealing with Neoclassical Economics

• 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)

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Dealing With Neoclassical- cont.

• 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?

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Responses to Zaman- cont.

• 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!

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Responses to zaman- cont.

• 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

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Rejoinder by Zaman

• 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

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Example 2Using Modified Neoclassical Models

• 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.

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Using a modified neoclassical framework, they show that ‘if firms incorporate Islamic ethical norms’ into their decision making,

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).

To develop contemporary Islamic economics requires ‘mastery’ of both modern economics/heritage and Islamic heritage.

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In the 250 years of western economic thought (from the 1750s), their scholars discussed methodology, philosophy. Our Islamic economists have not done sufficient work in these areas.

Again in the west today, in developing alternative schools, they have once again looked at the ‘foundations’ of neoclassical economics and have provided relatively advanced critiques of neoclassical economics. Islamic economists have not done enough save a couple of scholars.

See www.paecon.net and www.hetecon.com

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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 are 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’ for primarily predictive purposes.

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One way to develop Islamic economics is to ensure that academics/researchers must:

1. pay more attention to methodology and philosophy of economics

2. have exposure to Islamic heritage to enable them to evaluate substantive and methodological knowledge from Islamic perspective

3. be exposed to the whole spectrum of western economics and to critically evaluate this from Islamic perspective.

4. utilize the above to creatively synthesize Islamic and western scholarship

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References

• 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.