Tuesday, July 20, 2010

The Real Islamic Economics: A Radical Alternative

Dr. Asad Zaman

The creation, progress, and continued growth of numerous Islamic Financial Institutions is clearly the most important way in which the nascent discipline of Islamic Economics has influenced the real world. Nonetheless, the author shares with numerous other researchers and practitioners the impression that these institutions represent the impact of modernity on Islam, rather than conversely.

That is Islamic principles have been (and are in process of) being modified to accommodate modem institutions.  To the extent that Islamic Financial Institutions represent the reshaping of Islamic Laws in accordance with the demands of modernity, these represent the failure rather than the success of Islamic Economics. I propose to discuss below only the developments in Islamic Economic Theory.

Among contributors to the literature, it is widely agreed upon that Islamic Economics, with its concern for justice, equity, poverty, and its multidimensional conception of human development (not confined to income & material wealth) represents a paradigm shift and a radical alternative to conventional neoclassical views.

The existing literature in Islamic Economics does not reflect this radical perspectiveNumerous papers introduce Islamic concepts entirely within a neoclassical framework, or else make minor adjustments to it, and therefore cannot from a basis for a paradigm shift. Another set of papers discusses the radical concepts offered by Islam in a general philosophical way, without offering any means of operationalizing these concepts. 

This is where I believe our biggest failure lies. Even though Islam offers us critical insights in the domain, we have failed to make these insights operational. Islam urges the feeding of the poor, and condemns those who do not do this. Even issues central to Islamic economics,  such as the effects of Zakat on poverty, have been addressed in a general theoretical and argumentative way, with little attention to empirical effects, and operational method of efficient utilization of Zakat funds for poverty alleviation.

According to the Quran, wealth should not become concentrated in a few hands - rather it should circulate freely.  Islamic teachings place a lot of emphasis on spending in the path of Allah. Muslims have not made any systematic study of charity behavior of Muslims, nor have they made any comparative studies of Muslim and non-Muslim societies with regard to charity contributions Muslim economics put forth the concept of Homo Is/amicus and suggested that actual human behavior is guided by motives other than pure self interest.
However no empirical evidence on this issue was offered. Behavioral and Experimental economists demonstrated that in many situations, human beings" will accept personal loss for achieving broader goals such as justice, equity etc., contrary to neoclassical teachings.

From the beginning, Islam has been substantially more concerned with spiritual and moral development of human beings, and not so much with material development. While these ideals were duly espoused in the literature, no operational or empirical aspects were developed. Other researchers developed the Human Development Index, as well as the Capacities approach to development to bring in these multidimensional components of development. The areas listed above represent failures in the following precise sense. 

Over the same period of time that we were engaged in the development of Islamic Economicsothers developed, launched and established active research programs, which have had substantial influence, in many of the fields listed above. In each case, the research programs ran counter to established orthodoxy and faced resistance from conventional economists. In each case, Muslim Economists were there first with the ideas, but failed to make them operational, and did not participate in or influence the secular research programs that did translate these ideas into workable concept.

When it comes to theory, it seems clear that there has been no real progress in the area. We have no consensus as to what the field is, what its guiding principles are, what the methodology should be, what Islamic Economists are trying to achieve. Numerous people have written on these subjects and expressed their views with varying degrees of eloquence and conviction, but no consensus has emerged. The words of Umer Chapra, a leading luminary in the field, succinctly summarize the ills that plague Islamic Economics. It has been unable to suggest a balanced package of policy proposals in the light of Islamic teachings to enable Muslim countries to perform the difficult task of reducing their imbalances and simultaneously actualizing the Islamic vision. Moreover, its theoretical core has also thus far been unable to come out of the straitjacket of conventional economics, which takes into account primarily the economic variables that are measurable and generally avoids a discussion of the complex historical interplay of moral, psychological. economic, social. and political factors.

Islamic economics has thus "failed to escape the centripetal pull of Western economic thought, and has in many regards been caught in the intellectual web of the very system it set out to replace (Nasr, 1991, p. 388). It is thus unable to explain the difference in the performance of various societies with respect to overall human well-being.

The vast majority of current literature on Islamic economics is in fact structured around a critique of neoclassical theories, and the development of some alternatives which are mostly grounded in neoclassical assumptions and methodology. To escape the "centripetal pull" of neoclassical thought, we must build our camp in a distant location, and work together to achieve "escape velocity." This means radically modifying the existing methodology for the development Islamic economics. Proposals in this direction are put forth in the next section.

An important aspect of the lackluster past performance of Islamic economics is the failure to develop consensus and teamwork. Nearly all of the leaders in the field have their own unique approach to the subject while sharing a broad general approach based on Islam, they differ substantially on the details of how it should be implemented. A research program, like a building, requires teamwork with large numbers of participants working together on a common vision. In contrast, researchers in Islamic economics have all been placing bricks in different locations, with no two bricks being placed one on top of the other.

To achieve synergy, we need to have consensus. I believe it is essential for us to work from problems to theory instead of the other way around. We should look for a real world problem to solve, and then develop theory as part of a solution to this problem. Muslims economists must get involved in the problems of their communities as well as the larger problems faced by their nation and the Ummah as a whole. Each university should have-detailed knowledge of poverty in the neighborhood, and Muslim students should be actively involved in attempts to solve these problems. Theories about poverty should be assessed in order of their relevance to the solution of the problems.

In implementing the goal described above, it is crucial not to fall into the trap of defining our problems to be those that Western economists and policy makers see as our problems. For Western economists, the issues are "privatization", "Gender Equality & Female Education," "Democratization" and transition to modernity in general. We must set our own agenda. Our problems must be those that the Quran and Sunnah define as problems. For example, consider the "role of government" which continues to be a highly contested area between liberals and conservatives in the West. In Islamic teachings there is substantial consensus on the roles and responsibilities of the government (provision of justice, basic needs, and well defined roles in terms of taxation, provisions of services, defense, market regulation, etc.). There is a well developed theory of market regulation (Hisbah) which has no parallel in Western theory.

As spiritual development is at the heart of Islamic teachings, the core of Islamic Economics should be the efforts to strengthen faith, with resultant impacts on reduction/removal of corruption, development of an attitude of service and fellow feeling, all of which would substantially impact on economic prospects.

Western methodology suggests that theoreticians  should not get their hands dirty some perspective is needed for neutrality and emotion tree evaluation. As Muslims, we must reject this methodological principle. We should require translation of all theories into practical recipes. Our Prophet s.a.w. demonstrated the applied orientation of his teaching on many occasions.

Another common problem of Muslim countries is the post-colonial bureaucratic structure. In the colonized world, administrative structures were designed mainly for generation and collection of revenue trom the people, and its transport to the imperialist powers. They were not meant to serve the people in any real way. Post colonial governments typically continue in this tradition, exploiting the people to serve material interests of the people in power. Muslims are praised in the Quran as those who decide their affairs by "Shoora" or consultation - that is, decision making processes must be responsive to the needs of the people. How can we transition trom present oppressive and exploitative structures to Islamic ones? When students are motivated to solve problems, they will get a much better grasp of the strengths and weaknesses of economic theories as instruments which help solve these problems. 

The most urgent problem that we face as economists is the existence of massive resources, the phenomenal concentration of wealth into a few hands, together with large scale hunger and poverty. We should join hands with efforts to solve these global problems of inequity. We should strive to work for practical solutions, along the lines recommended by Quran and Sunnah. We should work on implementing the orders of Allah in the economic domain in Muslim societies.. In the course of solving practical problems we face, we will develop (and if necessary borrow) tools, techniques, and theories that we need. 

To develop Islamic economics, we need teamwork. This can only be built around the Quran and Sunnah. To establish Islamic economics as a viable discipline, we need to show a successful example. We have to show the world what Islam can do in the economic domain, rather than talk about it. This involves showing (for example) how Zakat can play a role in eliminating poverty instead of discussing the theory of this, Muslim economists must get involved in the nitty gritty of it - practical problems faced in identifying the poor, political problems in getting the money to the target population, etc. We must involve our students in this as well. We can borrow Western theories when they are useful to solve the practical economic problems being faced by our societies.

Asad Zaman is a Professor at International Institute of Islamic Economics, at the International Islamic University of Islamabad.

He has previously taught at University of Pennsylvania, Columbia University, Johns Hopkins and Cal. Tech, as well as at Bilkent University in Turkey and at LUMS, Lahore. He was elected to the Council of the Econometric Society in 2004.

He is the author of an advanced graduate econometrics textbook, Statistical Foundations for Econometric Techniques, published by Academic Press in 1996. He is the managing editor of International Econometrics Review. His current research interests include foundational issues for
probability, econometrics and economic theory. He is also working on developing new approaches to Islamic economics, based on cooperation and generosity, as an alternative to conventional economics, which is based on competition and greed.

No comments: