Developing Contemporary
Microeconomics from an Islamic
Perspective:
The Challenge of Genuine Islamization
by
Mohamed Aslam Haneef
Dept. of Economics, IIUM.
3/11/2016
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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 IOEMicroeconomics
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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 ideologyfree. 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 neoclassical/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?
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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.
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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 IOEMicroeconomics
• 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.)
–
–
–
–
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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)
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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 Challenges
Example in Production
• Normative framework derived from
Islamic sources of knowledge.
• discusses man, the firm, concept of halalharam, 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
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Operational Challenges
Dealing 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 2
Using 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.
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