Islamic Economics – Part 2: What is Islamic Economics?

Now that we have a general understanding of what the study of economics is (see part 1 here), we can move on to the big question: what is Islamic economic? To truly answer this question, we have to take a slight theoretical detour into the realm of moral philosophy.

All economic theories — from the classical thinkers to the institutionalists, the Keynesians to the Austrians, the Marxists to the neo-classicalists — have a philosophical under printing. The main/dominant ideology within microeconomics today is what is commonly known as the Neoclassical School, or “Welfare Economics”. From a secular approach, the neoclassical school utilizes a consequentialist moral base: the value of an action (i.e., is it “good” or “bad”) is based purely on the propriety of that action. The concepts then of whether an action is labeled “good” or “bad” are subject to cost-benefit analysis and valued by the consequences of the action. Every action has a certain level of benefit, known to economists as utility, and a certain amount of costs. If the gains in benefit outweigh the increase in costs, the action is “good”; if the gains in benefit are outweighed by the increase in costs, the action is “bad”.

Based on the influential writings of Nicholas Kaldor and John Hicks, this process of deduction is known as the Kaldor-Hicks Criterion. Often heralded as one of the main foundations of what is known as General Equilibrium Theory, the Kaldor-Hicks criterion hinges the value of an action on whether or not said action increases the social wealth fare in the long run (read: the non-immediate future). Such an approach is also the foundation of Utilitarianism, the ethical construct originating with the writings of Jeremy Bentham, James Mill and (more famously) John Stuart Mill – who is also well known for his own economic work Principles of Political Economy.

From a religious point of view, the secular/consequentialist approach has many merits and is very applicable to our decision-making process . . . yet it does not truly represent the criterion that we as Muslims employ when making a decision. Islam espouses a more deontological approach to moral philosophy where the consequences of an action are less important than the action’s adherence to a set of rules/laws. In discussing the relationship between economic morality and Jewish law, the economic theorist Aaron Levine states “the measure of the worthiness of an economic action is whether the action satisfies Jewish law’s moral code, which prohibits the infliction of harm on one’s fellow even if the harmful action would maximize society’s wealth in the long run” (Levin (2012)). This notion is equally primary from the perspective of the morality of the Muslim and Islamic law.

Most encounter deontological ethics when studying Immanuel Kant’s Foundations of the Metaphysics of Morals in an introductory philosophy class. Within the text, Kant is very explicit in his stance against consequentialism: “Nothing in the world, indeed nothing even beyond the world, can possibly be called good without qualification except a good will” (Kant 1985). Kant’s main gripe with moral consequentialism is that the intent of the action is as, if not more, important than the result.

To really understand what Kant is getting at here, let us engage in a bit of intellectual play through an example. Suppose Wasim runs into a local market and notices an elderly man suffering from some sudden ailment. Because of Wasim’s actions, the elderly man receives medical attention and the actions of Wasim could be interpreted as being “good”. Now suppose that Wasim originally runs into the store with the purpose of robbing the clerk. When the authorities come to investigate the robbery, they notice the ailed elderly man and ensure he receives the proper medical attention. Most would find it hard to interpret Wasim’s actions as being “good”, and neither would Kant. According to the Kaldor-Hicks criterion, Wasim’s actions would be considered morally straight as long as the social costs of his robbery attempt do not outweigh the benefits. Hence, the intention must be weighed with the result(s).

Therefore, what then is “economic decision-making for the Muslim”?

An even superficial overview of the current breath of literature on the subject will give the researcher a clear impression of the field’s focus: constructing economic/financial mechanisms to assistant Muslims navigate through the wild world of the conventional financial structure. While the intention is merited, it also exposes a vital problem of the field. Most mechanisms are constructed on (force) fitting medieval juristic opinions/rulings into our time and circumstances. Hence, it is not surprising that these implements continually fail both theological and theoretical audits by scholars (One can take a quick look here at the 2014 AMJA resolution on “Islamic home financing companies” to understand this point).

It is my opinion that this fundamental problem stems from a misleading understanding of what law is. Law — and, hence, a juristic system of laws — is based on two prime factors: (i) content; and, (ii) context. This is not to say that the medieval jurists were incorrect or that there needs to be a fundamental reformation of Islamic scripture. Instead, there needs to be a dissection of these juristic writings to see what was the context of their opinions and what was the theological content they employed — both scripturally and methodologically — to solve the questions of their day. Following El Ashker and Wilson (2006), a very brief description of a few core concepts of Islamic Economics can be structured as follows.

  1. Tawhid: Muslims recognize this term in its relation to the one-ness of Allah, a cornerstone of the Islamic definition of strict monotheism. Yet we can go further and state that the concept of tawhid implies the unity of Allah’s creation. All that is known (and unknown) within the physical universe is existentially connected; there is no separation. Any economic action done by one individual is never isolated to just that individual’s benefits and costs. Economists call these outward effects of one’s own actions externalities. Therefore, economic actions by one individual should not harm the interests of others or damaging sources/resources of “goodness” (as defined by Islamic jurisprudence).
  2. Al Khilafah: Allah mentions in the Qur’an (see 2:30, 35:39 and 57:7) that humanity is to be the “vice-regent” of this earth. A vice-regent or viceroy was a feudalistic title given to someone who acted out the leadership position while the true monarch (or holder of ultimate political power in the region) was away. Similarly, humanity is given the responsibility of being the deputies of the earth and everything within it; this is commonly known as dominion within many Christian theological traditions. This does NOT mean we are given the authority to use and abuse the earth and its resources for out own gains. Humanity has been deputized with given resources AND a system of laws pertaining specifically on how to utilize these resources and the ultimate maximand: to increase the pleasure of Allah.
  3. Responsibility: The notion of vice-regency naturally leads to the (very philosophically complex) issue of free will; or, as in the context of Islam, the notion of “operational freedom”: restricted/non-absolute decisional ability. Because we are given the ability to do both what is allowed and what is disallowed, humanity can utilize their resources and freedom in many ways. Yet recall that Islam is based upon a deontological framework where there are objective moral boundaries. Boundaries are a natural result of decision-making constraints: any action has, at the very least, some implicit cost associated (besides, without costs and scarcity, why would decision-making even exist?).
  4. Ia’tidal, Or Moderation: A constant buzz-phrase in Islam is “the middle path”. Allah mentions a number of times in the Qur’an (see 7:31 and 17:29) that extremes are to be avoided. This principle extends to economics as well. As an economic agent, one should be productive but it should also not purely define one’s existence; one should not use all their income for consumption purposes nor should they reserve their entire income to savings; the satisfaction of desires should be sought . . . but within reason and in the confines of Islamic law.
  5. Efficiency: By acting both responsibly and moderately, one is then seeking to make decisions in the most efficient method possible; that is, seeking to maximize one’s benefit while at the same time being constrained by limited physical resources. Allah mentions in the Qur’an two similar yet distinct concepts in reference to acting efficiently: isra ̅f and tabz ̇i ̅r. Isra ̅f is often translated as “over consumption or production”. Essentially, Allah warns us against performing any activity beyond our rational needs. This is not to say one is misusing their resources or are being wasteful. Such is the case of tabz ̇i ̅r, or “wasteful consumption or production”. As an example, a common trait within many ethnicities (both within and without of the Muslim community) is to show extreme hospitality to guests by offering an amount of food that is beyond necessary to satisfy all included parties. This practice could clearly be labeled tabz ̇i ̅r. While the intention of the act maybe sound, it is a clear waste of resources. At times, such a practice is validated by claims that “all the food was eaten”. Even so, this moves the action from being a matter of tabz ̇i ̅r to possibly isra ̅f: Was that amount of food truly necessary? Where needs satisfied beyond what was necessary? Was the all the food consumed because people needed it? Or was it only to justify its production?

The above five concepts are only a few of the many intrinsic foundations of what is known as Islamic Economics. It should be reiterated that nothing said here is meant to be interpreted as a condemnation of previous writings by the Ulema, a call for a theological reformation within Islam, nor a general reinventing of the wheel. By establishing a core theoretical economic framework, Muslims scholars can truly begin to apply the Qur’anic content to our modern financial and economic dilemmas.

About Jerry Hionis

About Jerry Hionis

Jerry holds a PhD from Temple University. His primary research is in conflict theory with an emphasis on civil conflicts and Warlord-like competition. Other research interests include game theory, economic development, Islamic economic theory and history, political theory and African economics.

Want the latest and greatest updates from Muslim Money Guide?

Subscribe to our mailing list below. You'll get:

  • Latest Articles

  • Video and Podcasts

  • Whitepapers and Research

Your Email Address: