Islamic Economics: What’s In A Name?
“Islamic finance” and “Islamic economics” have recently become buzzwords amongst both the Muslim Intelligentsia and blogosphere. In fact, the terms get used interchangeably more often than not. Is there a distinction? Yes. Are they related? Well, yes. To understand more clearly, we have to take a couple steps back.
Part 1: What is Economics?
Economics is a fascinating study not just because of the field itself, but because how many view it. Everyone loves to talk about “the economy”. Further, everyone seems to have an opinion (or two) on specific policies/theories pertaining to economics. Yet, very few know exactly what it is. When I casually inquire as to what one believes economics is, the answers tend to fluctuate:
- “Economics is the study of money”: Well, kind of. Some economists do focus on money, but most do not. Since the creation/discovery by Arrow and Debreu of what is known as general equilibrium theory, many microeconomists do not concern themselves with it; that is, goods/services are exchanges for other goods/services and money is just a social technology serving as an intermediary mechanism to speed things along. While macroeconomists are a bit more sensitive to the effect(s) money can have on the economy, it still takes a back-seat role.
- “Economics is the study of the stock market”: Not really. While I can understand (most of) Wall Street, Trading Places and Boiler Room, my knowledge of the stock market is very primitive (buy low, sell high, right?). Stock, bond, commodity and asset markets are important and are studied. Yet the mechanisms in which these markets operate were and are created by financial engineers . . . not economists. That’s right, credit-default swaps, speculation markets, options, asset backed securities and other such controversial financial instruments were not created by economists, although we (generally) take the blame for giving many of these methods theoretical legitimacy.
- “Economics is about balancing budgets”: Because we colloquially use the adjective economy or the phrase being economic to indicate a frugal use of one’s resources, some come to believe that economics is about keeping good books and being financially prudent. In fact, I have been asked on a number of occasions to present a seminar of budgeting (in other words, “personal finance”). Here is the problem: I am horrible with money . . . and so are many economists that I know. We are not accountants. I am reminded of a famous statement (akin to apocrypha or legend, really) made by Karl Marx’s mother-in-law that she wished he would start to “accumulate capital instead of just writing about it”. This pretty much sums up theoretical economists, like myself.
- “Economics is all about business”: It is true that much of economic theory is extremely applicable to business studies such as management, marketing and finance. It is also true that some universities have the economics department located within the business school, although just as many (if not more) are located in arts and sciences. While economics and business studies have mutual areas of study, economics is much greater in scope.
So, what is economics? As a standard definition, economics is the social science that studies how individuals, groups, firms, governments and entire societies deal with scarcity, or the inability to satisfy all wants, needs and desires. This definition has a few interesting points to notice.
Moving recursively, economics is concerned with the problem of scarcity. Given the physical (removing metaphysical and theological beliefs for the moment) reality that no resource is truly infinite, not every single need or want of an individual, let along all of humanity, can be satisfied. Beyond physical resources, the greatest resource human beings have is time . . . and that is surely limited and in unpredictable supply. Therefore, this scarcity brings about the problem of decision-making. But decision-making by whom? Economics analyzes the decision-making processes done by the variety of human social institutions: individuals; individuals within a group; individuals within a group within a group; individuals that produce goods and/or services (also known as firms); individuals within a group that produce goods and/or services; consumers and produces in a market (another type of social grouping); social, class and ethnic groups; nations; governments; governments within an organized group of governments; and, of course, entire societies. This is why economics is labeled as a social science; that is, it is located within the same grouping as sociology, anthropology, political science, history, philosophy and, according to some, law. Besides, many of the original economic thinkers were philosophers (Smith, Mill, Marx, Locke), sociologists (Ibn Khaldun, Weber, Malthus) and/or theologians (Aquinas, Abu Yusuf, Maimonides, Ibn Taymiyah, Shatibi) to begin with.
To put it even more simply, economics is the study of human decision-making. Finance, to present a crude definition, is specifically concern with capital — that is, the means of producing goods and/or services — in monetary form (such as assets and liabilities) over time and factoring varying levels of uncertainty. An even cruder definition of finance would be the study of securing funds to undertake expenditure/investment. The example I often use is the act of buying a house: financiers will seek the optimal method of purchasing the house; economists will seek which house one should buy and why. It is a small distinction albeit an important one. Some even infer that finance is just a sub-field of macroeconomic theory. Either way, the similarities between the two studies have failed to unite them in both academia and the private sector.
 The question I am most often asked during social conversations is “Is the economy doing good”? My answer is usually in a retort: “What aspect of ‘the economy’ are you referring to? And what do you mean by ‘good’? Good for whom”? There are always winners and losers. After the financial and economic collapse in 2007-2008, most took a serious hit in regards to income, savings and employment. Yet a few (very few) did quite well.
 This is not to say that this view is widely accepted as being correct. Martin Felix is highly critical of the apparent disinterest in money by economists in his book Money. An even harsher critique can be found in Economics: The User’s Guide by the Cambridge economist Ha-Joon Chang.
 In fact, the economics department at Temple University was located in the Fox School of Business when I first began my graduate studies. It between my initial studies and the point of graduation, the department moved to the College of Arts and Sciences. The move had nothing to do with pedagogical philosophy or economic theory and had everything to do with university politics.
 Some of the early, as well as modern day, economists have always resented this label and have pushed for a more positive approach to the field. One must keep in mind that economics as a field was developed during the enlightenment/post-enlightenment period in Western Europe where physical scientists were developing natural law. If such thinkers could derive the laws of nature, why not derive the laws of human behavior? As a result, economists (not economics as a study) have been accused of “physics envy” or “mathematics envy” and creating a religious atmosphere to economics; hence, the title of Nelson’s now classic Economics as a Religion: From Samuelson to Chicago and Beyond.
 The lines do get blurred when one enters into the high levels of macroeconomic theory where fields such as “Financial Engineering” and “Financial Economic Theory” can be found in either the economics or finance department (or sometimes both!).