These lecture are meant to fulfill the need of IFC-104,Elements of Islamic Economics, Department of Business Administration, AMU Aligarh. They were delivered in June 2011.
Economics deals with the .ordinary business of life., so what has Islam to do with it? Islam tells man who he is, wherefrom and whereto. It also reminds about the nature of life as a test. In focusing on man.s relation with God, Islam highlights the relation of equality and brotherhood that being created and nurtured by God implies. It also has implications about our relations with the environment. It is a trust, to be used with care and passed on to the coming generations in good shape.
So we have two important issues: Freedom of choice with accountability; Property as a trust.
Allah says in the Quran:
..Who created death and life that He might try you as to which of you is better in deed..[67:2]
All freedoms, including freedom of enterprise, are to be seen in this perspective. There always is a purpose, there are limits, there is responsibility/accountability.
Economists regard economics to be a science of choice. The ends being many and the means being few, choice becomes necessary. Islam says there are moral dimensions to choice that need be kept in view.
Private motives/self- interest is acknowledged, but social considerations are encouraged.
[To produce the most profitable vs.to produce the most useful/needed. The case of Pharmaceutical industries]
Constraints on freedom to enterprise relate to other people.s interests and the public good.
[Pollution, Congestion, etc.]
Accountability in Hereafter and accountability here and now , the case for public regulation.
[The groceries (E-Coli in Germany affecting peoples elsewhere); the financial markets, sale of subprime mortgages leading to a global crisis . Regulation is needed everywhere]
Property rights are basic to Islamic economy due to their importance for testing ( Property rights give teeth to freedoms). Individual ownership, state ownership, and, in between, ownership by voluntary section organizations(NGOs), each have a place; the special case of waqf. Property as trust, what it means.
No harm to others; doing good to others. The problem of information; How the market functions
Why do we need the state in the economy? The Market vs. State, the story of last century.s ideologies. State has a role in ensuring minimum-necessary compliance with Islamic norms and securing minimum-necessary results in sustenance, pollution control and other social goals.
The place of morals and the crucial significance of the individual [consumer, producer, regulator,..]
A framework is provided by the rules laid down in Shariah/Islamic Law. With reference to the economy, prohibition of Riba/Interest is an important rule. Money now exchanged for more money later involves prohibited riba/interest. The rationale for this prohibition is the lender.s refusal to share the risks the borrower bears in using the money borrowed. Modern Islamic financial institutions have developed alternatives to interest-based lending. These are based on sharing, rent or sale with a markup on purchase price(murabaha),to be discussed in other courses.
Islam has also prohibited gambling. Transactions involving excessive ambiguity (gharar) also fall in this category. The essence of gambling is taking a risk of one.s own creation with a view to making a profit thereby. It is a non-productive zero-sum game. Some activities on a modern stock exchange fall in this category.
While risk shifting is discouraged, risk sharing is encouraged. Mudaraba and partnership are obvious examples.
Competition and cooperation are not mutually exclusive. There is a role for cooperation when shared goals are involved. Competition works best where information is private and costly; cooperation has a role where information is public or is collected at public cost.
The importance of stability; sources of instability.
Role of interest based lending in generating instability: Fixed and dated commitments to pay back to the lender as against revenues uncertain both in amount and date.
A risk-sharing financing arrangement will result in more stability. It will be just and look fair to all concerned. I t may be more efficient than interest-based financing arrangements.
Sovereignty of the consumer; constraints imposed by information deficit; Role of customs and traditions. Regional diversity and diversity across cultures. Limits of rationality; the consumer in an imperfectly competitive market. Rise of consumer protection agencies.
The moral consumer; the concept of moderation and avoidance of waste. Dependence of growth on accelerated consumption; impact on ecology/environment: The dilemma of our age.
Theory of the firm: Maximization hypothesis and the problem of information. The possibility of taking the social good into consideration. The possible role of governments and NGOs in collecting and disseminating information. Satisfactory profits hypothesis.
Scope of cooperative ventures.
Institutional economics and theory of production.
How to institutionalize socially responsible decision-making.
Need for regulation and importance of freedom for creativity, innovation.
The Public sector and its role in the economy.
The concept of public good.
Distribution: neoclassical view: marginal productivity and the determination of factor income. Can it be applied to wages? The rise of the welfare state and the problem of incentives.
The Socialist alternative; Why the Soviet Russian economy collapsed.
Failure of Utopias and persistence of the problem.
A three-pronged approach: Socially motivate and morally orient the economic agent (consumer, producer, public decision-maker..); Allow market forces to play out; Let the public authority ( the regulator) intervene in order to ensure fair play, need fulfillment and promotion of social good.
Economy is always in a flux, changing. Despite globalization and homogenization, lots of scope for experimentation exists.
Economics comprises economic analysis as well as economic policy. Unlike analysis which describes what is, policy focuses on what should be; this implies certain goals to be achieved. It also implies a socially oriented view on life and a moral approach to social relations.
The have-nots have a right in the wealth of the haves. Says Allah in the Quran:
And in their wealth there was a rightful share for him who would ask and for the destitute.[51:19]
Rationale: Earth with all its resources is a gift from God for sustenance of all.[The Quran,6:10]
Hence, those unable to extract their share from the God-given common pool should get sustenance from those who did extract and have a surplus.
Universal need fulfillment & strength as goals; Means flexible: Permanent provisions and discretionary arrangements, State.s right to tax. All this is to be seen in the perspective of life being a test. For the test to be fair, need fulfillment is needed; strength guarantees independence.
Zakat. Generally speaking a two and half per cent cut from the annual savings. It is applied to almost every form of wealth. It goes for need-fulfillment mostly and is spent on some public purposes partly.
Laws of inheritance: As in Surah IV of the Quran, property left by the deceased is distributed among children, spouse and, failing these, among near of kin. The fairness of the arrangement trumps over fragmentation of cultivable land that might result.( Trade- off between efficiency and fairness is a universal phenomenon)
Waqf, its origins during Prophet.s days and role in later history. Potential of Waqf in India. The current debate on Waqf Bill.
The possibility of linkage between Waqf, Charitable funds and Islamic interest-free financial institutions.[Sukuk issued to finance development of Waqf property; investment of charitable funds. surplus through IFIs]
Muslim nations, Muslims in other countries in Asia and Africa, Muslims in the West
International Islamic cooperation; The Organization of Islamic Conference ( founded 1973) and its subsidiaries, the Islamic Development Bank. IDB has 56 shareholding members [see www.isdb.org]
Role of Islamic financial institutions in fostering Islamic solidarity.
Islamic solidarity not against anybody; interaction of international Islamic institutions with other regional and international groupings.
The recent democratic assertion in the Arab world the future of Islam and Muslims.
Muslims of the world and the rest of humanity; Priority of human brotherhood over other groupings based on religion, culture, ethnicity, language, etc.,