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«A Political Economy Approach to Islamic Economics Kyoto Bulletin of Islamic Area Studies, 1-2 (2007), pp. 3-18 A Political Economy Approach to Islamic ...»

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A Political Economy Approach to Islamic Economics

Kyoto Bulletin of Islamic Area Studies, 1-2 (2007), pp. 3-18

A Political Economy Approach to Islamic Economics:

Systemic Understanding for an Alternative Economic System


1. Introduction: The Essentialisation of Islamic Economics Beyond Islamic Finance

Islamic finance, which emerged as part of Islamic economics thinking, has gained roots

in the global financial system in recent years. In this novel and alternative financing method, Shari’ah compliance, as a mandatory aspect in terms of legal and mechanical terms, is essential and important. It is also important in a consequential manner that Islamic financing must fulfil the foundational principles and aspirations of Islamic economics. In this particular point, recent developments indicate that Islamic finance is moving in a ‘capitalist’ direction away from an Islamic economic value system. Therefore, the essentialisation of an Islamic economic system is necessary to asses whether Islamic finance is merely an alternative mode of capitalist production or a unique and egalitarian alternative economic order, which aims to be a ‘moral economy’, as coined by Tripp [2006].

This paper, thus, is an attempt to discuss the systemic nature of Islamic economics, in which it argues that the modern variant of Islamic economics is a development that began in the 1970s with an alternative system understanding to the existing capitalist modes of production. In this new discourse, Islamic economics held that the capitalist economic order was responsible for the failure of economic development and environmental issues in developing countries. Therefore, it claimed to be an alternative economic system, that, also, owed its development to the emergence of identity politics in the 1970s.

With the rapid development of Islamic finance, research focusing on the foundational base, namely Islamic economics, has been largely ignored. However, without establishing the foundational norms, which is the ethical system of this new paradigm, it is not possible to have a robust financial system, as in Islamic finance. This paper, therefore, explores the original wisdom in revealing the systemic and alternative system discourse of Islamic economics regardless whether such a system is a possible or not.

2. Islamic Economics as a System Before delving into discussion on the systemic nature of Islamic economics, it is important to define what a ‘system’ is. A ‘system’ is defined as the “functional components that together make certain sectors of the ethico-economic order work” [Choudhury and Malik 1992: 15], which, therefore, refers to an integrated whole as part of an order. Islam, in this respect, represents the overall order, and within that larger framework Islamic economics, as well as other systems related to everyday day life, is possible. “An ‘order’ is thus a totality of several systems integrated together through the bond of ethical relationships” [Choudhury and Malik 1992: 15]. Various systems, therefore, in the Islamic order are linked through the ethical propositions of Islam. Consequently, Lecturer in Political Economy, School of Government and International Affairs, Durham University, UK “the Islamic economy is defined within the parameters of its own ethical system, which fact, incidentally, demonstrates its originality and relativity” [Naqvi 1994: 80]. In other words, the ethical norms of Islam are fully integrated with its economic motives, as these are not voluntary actions but, ontologically, part of the revealed knowledge; and therefore its dogmatic nature makes it necessary for them to be followed.

This ‘system’ understanding also relates to the structural nature of an economic worldview regardless whether “theoretically articulated and recorded or traditionally practised over years” [Nomani and Rahnema 1994: 41]. This, then, rejects criticism of an Islamic economic worldview, which is premised on the principles of revealed knowledge. Becasue, a lack of modern theoreticising does not negate Islamic economics, ‘systemic’ claim, since an economic system is a “static registration of how society organises itself to address the basic economic problems of what is to be produced, how many, how and for whom” [Nomani and Rahnema 1994: 41]. Such decisionmaking has existed in Muslim societies albeit it may not have been practised or understood in a manner paralleling European notions of economics or Eurocentric expectations. In other words, since the Islamic economic system has a particular moral economic understanding which governs the production, consumption, exchange and distribution patterns and norms in a society through the principles derived and rules and laws established by that system [Nomani and Rahnema 1994: 41], it is normal that Islamic economics must be perceived as a system.

The ethical base of the Islamic economic system provides the value system through which it governs all forms of economic interaction in society. The Islamic order, in other words, through its ethical economic principles provides “the economic system with its basis and objectives on one hand, and with its axioms and principles on the other” [Kahf 1989: 43]. The working mechanism of this process is managed by a set of axioms and principles derived from the Islamic order with the objective of bringing “the economy closer to the objectives of the system [which] represents the testable ground of the system” [Kahf 1989: 43].

The components expected from an economic system, thus, can be located within the Islamic

economic understanding. However, in order to justify this statement Gregory and Stuart [1985:

12] rightly argue that “in order to distinguish one economic system from another, we need to focus on and compare their fundamental elements”. For this purpose, through a systematic and methodological manner, they provided a number of characteristics that should be sought in a system. By following their systemisation, the Islamic economic systemic construct should consist of the following pivotal characteristics for it to be considered as a system: the organisation of decision-making arrangements; mechanisms for the provision of information and co-ordination;

property rights; and incentive mechanism. This paper, however, further elaborates on the characteristics, which can make a viable Islamic economic system.

Therefore, in order to talk about ‘systems’ in the economic realm the following is necessary:

( ) Framework paradigm (with ontological and epistemological sources) in terms of point of reference;

( ) Value system;

A Political Economy Approach to Islamic Economics ( ) Foundational axioms;

( ) Operational principles/mechanism;

( ) Specific Methodology;

( ) Functional institutions.

In searching whether Islamic economics proposes an alternative system, these characteristics have to be located among the components of the Islamic economic paradigm. The following sections, hence, attempt to deconstruct the Islamic economic understanding by revealing the existence of these components in arguing for its systemic nature.

2.1. Islamic Economics: Emergence of Framework Paradigm In the opinion of the founding fathers of an Islamic economics paradigm, the failure of economic development in the post-independent states of Asia and Africa in 1960s and 1970s was attributed to flawed capitalist economic development strategies, which ignored the importance and centrality of human beings and their well-being. Their objective was, therefore, to develop an economic system understanding as part of the Islamic world order [El-Ghazali 1994]. That would, then, ultimately develop into a human-centric developmental strategy. The Islamic economics paradigm, hence, aimed at the creation of an Islamic system of economics with its distinct values, norms, rules and institutions with a politically oriented systemic understanding as ordained in Islamic order. In other words, Islamic economics aims at a world order, where its ontological and epistemological sources, namely the Qur’an and Sunnah, determine the framework of the economic value system, the operational dimension of the economy and the economic and financial behavioural norms of the individual Muslims.

The axioms and foundational principles of Islamic economics define the framework in which which economic activity takes place within intra-and inter-generational social justice, that, in turn, reveals itself in the methodological framework of the Islamic economic system. Therefore it is based on a constructivist ideology, with the aim of forming an authentic Muslim identity as opposed to the global dominance of capitalism, which has in reality failed in the economic development process.

In searching rationale for a distinct discipline and system of Islamic economics, the values and the sources of Islam provides the rationale. It is, indeed, a fact that no human endeavour is value-free, which implies that reality including economic reality is socially constructed. Despite the modernist projection of universal values, in the everyday life of an ordinary individual, each action is produced and acted through a socially constructed manner which explains the differences in each realm of life. In a similar manner, “economic systems … do not function within a vacuum [either]. They are significantly affected and shaped by a set of ‘influential factors’: the level of economic development; social and cultural factors; and the environment” [Bornstein 1979: 7]. This hence implies that “religion, ideology or any strongly held set of values, ideals and mores have an impact and influence which have to be taken into serious consideration” [Nomani and Rahnema 1994: 43].

This is in accordance with the philosophical foundation of modern social sciences. Therefore, J. S. Mill, the founder of political economy, referred to different constructions of economic understandings when he argued as back as in 1836: “… in whatever science there are systematic differences of opinion … the cause will be found to be, a difference in their conceptions of the philosophic method of the science, the parties who differ are guided, knowingly or unconsciously, by different views concerning the nature of the evidence appropriate to the subject. They differ not solely in what they believe themselves to see, but in the quarter whence they obtained the light by which they think they see it” [Mill 1836 (1995): 55].

Economics and finance, thus, is value-loaded, at its most elementary levell and shaped by individual values derived from individual worldview, as part of individual social construct. This hence, provides the rationale for a distinct economic system. Since factors affecting worldviews differ, different worldviews exist leading to different ‘systems’ for different peoples. Consequently,

an Islamic economic system differs from the prevailing economic systems due to the following:

( ) Foundations, operational principles, goals differ;

( ) Concepts and theories differ;

( ) Epistemological sources differ, as Islamic worldview based on the Qur’an, namely revealed knowledge;

( ) Fundamental concepts in the Qur’an are not open for changes in meaning.

Islamic economics, hence, aims at creating a new system, the features of which, as a system,

can be defined as:

( ) It is part of din (religion), Islam;

( ) It deals with production, consumption and distribution activities of human beings according to Islamic worldview;

( ) It makes economic and financial choices according to Islamic norms;

( ) It describes, analyses, and prescribes, as in the case of other economic systems.

Such philosophical and operational distinguishing characteristics make Islamic economics a system as defined above. Thus, it is an “approach to, and process of, interpreting and solving the economic problems of human beings based on the values, norms, laws and institutions found in, and derived from the sources of Islam” [Haneef 2005: 5]. Regarding the place of Islamic finance within this system, it is only the institutional aspect of Islamic economics, which regulates the financing of economic activity in an Islamic framework. As part of systemic understanding, hence, there is a need to have financial institutions using financial instruments according to rules and regulations of Islam, which are bound by the Shari’ah.

2.2. Foundational Axioms and Philosophical Foundations Having established that Islamic economics is a systemic political economy in nature, in which epistemology, institutions and functions are all interlinked through revealed knowledge. Yet, in order to assess its systemic nature, it is also important to search for the foundational axioms or the philosophical foundations, without which it is not possible to consider an economic system. “It is these foundations which generate the behaviour of the economic agents as well as the institutions in the system; and hence effectively determine the micro-foundations of that economy” [Arif 1989: 84].

A Political Economy Approach to Islamic Economics Leading Islamic economists such as Ahmad [1980; 1994; 2003], Chapra [1992; 2000], El-Ghazali [1994], Naqvi [1981; 1994], Siddiqi [1981], and Sirageldin [2002] have developed an axiomatic approach that forms the conceptual foundations of Islamic economics. These conceptual foundations define an Islamic moral economy and its corresponding ethics as an ideal through which economic and social policies dealing with every aspect of human life are assessed.

It should be noted that the philosophical foundations of Islamic economics is entirely different than that of the other systems, such as capitalism and socialism, as in this approach Islam is seen as a system of ethics. This indeed provides an important pillar through which its systemic nature is established. The philosophical and conceptual foundations or the axioms of the Islamic economic

system are as follows:

First, the axiom of Tawhid (God’s unity and sovereignty): The Islamic worldview is based on tawhid, or the Oneness of God. This “particularly denotes vertical dimension of Islam – linking the imperfect and finite social institutions with a Perfect and Infinite Being” [Naqvi 1994: 26].

This vertical dimension and equality of the Islamic ethical system manifests itself by the inherent equality of each individual as represented by their paralleling proximity to God. Tawhid, as the essential part of this economic system, provides for freedom of action whereby each individual is viewed as an integral part of the whole. This principle, also, implies a continuous and sustained system through “risalah (God’s Prophets as the source of divine guidance); akhirah (life-after death, that is the continuity of life beyond death and a system of accountability based on divine law) [Ahmad 2003: 193]. These idoms provide the framework for economic activity to take place within Islamic norms.

Secondly, the axiom of Al-’adl wa’l-ihsan (Equilibrium and Beneficence or Socio-Economic Justice): Individuals are expected to establish justice (’adl) and promote beneficence (ihsan), which, consequently “denote a state of social equilibrium” [Naqvi 1994: 267]. While this axiom implies “giving everyone their due”, together with tawhid it “results in attaining high levels of good life (hayat al-tayyebah), both individual and collective” [Ahmad 2003: 193]. This axiom, thus, provides for the horizontal dimension of equality “of all the virtues of the basic set of social institutions – legal, political and economic” [Naqvi 1994: 27]. In this intra-and inter-generational equality, human beings and societies are expected to establish a balance between the needs of present and future generations, develop policies to fulfil the needs of individuals, enable them to earn a respectable source of living, develop policies for an equitable distribution of wealth and provide for growth and stability-oriented policies.

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