Principles of Islamic banking and finance/PIBF201/Islamic economic environment/Definition and Objectives of an Islamic Economy

What is an Islamic Economy?
A free market or capitalist economy of today stands on the theoretical framework provided largely by a synthesis of neo-classical and Keynesian economics. Adam Smith provided the foundation of this economy in his famous 1877 book " An Inquiry into the Nature and Causes of Wealth of Nations"Wealth of Nations". He emphasized that in a free economic environment when individuals are allowed to pursue their self interest (in generating income for their material needs), they not only benefit themselves but also unwittingly help the society and the overall economy. Smith did not celebrate the notion of self interest but only pointed out its positive contribution; he did not equate it with selfishness, a regrettable connotation.

However, Islamic economists, like some economists of western lineage, believe that many followers of Smith took his free market idea too far and finally created the science of economics (to replace 'political economy' the name of the subject used by Smith and other classical economists which included issues of distribution).



The most widely accepted definition of economics was given by Lionel Robbins who defined economics as “the science which describes human behaviour as a relationship between (given) ends and scarce means which have alternative uses”. Robbins’ definition of economics has survived all kinds of objections and remains the most referred definition in the textbooks. Those who give their own definitions are generally not far away from the essence of his definition. For example, Samuelson and Nordhaus define Economics as " ..the science of choice. It studies how people choose to use scarce or limited production resources (land, labor, equipment, technical knowledge), to produce various commodities (such as wheat, beef, overcoats, concerts, roads and missiles), and to distribute these goods to various members of society for their consumption."

Under this free market environment production and distribution is largely determined by the market forces, the governments are not supposed to intervene as it could lead to inefficient outcomes. However, it must be admitted that countries following the capitalist or free market systems have developed non-market mechanisms to address the issue of distribution of income largely through incomes policies such as minimum wage, unemployment benefits and the use of taxes and transfers.

As you have learnt in section 1, Islam is more than a traditional religion; it encompasses all aspects of human life including his endeavor for earning a livelihood. Muslims are supposed to apply relevant Islamic ethics in economic and business dealings with each other. Similarly, those in power are required to implement the commands, guidance and teachings provided by Islamic sources. According to M.R. Nabulsi, "... if the craft of a Muslim, through which he makes living, is legitimate itself, is earned by legal ways, is meant to be a living for him and his family and to serve people, doesn’t refrain him form his religious duties, and doesn’t stop him from a good deed through which he sublimes, thereupon it turns into an act of worship. Hence, a believer habits are considered as acts of worship. Therefore, the financial motive in Islamic economy is not the only purpose, as it is related to pleasing Allah and strive for the hereafter."

==Definition of Islamic Economics==

According to one Islamic economist, "Economics is the study of how people in a society, individually and collectively, organize (or could organize) different aspects of production and distribution of goods and services for current and future well being of its people. The views held by key segments of the society on different aspects of human life influences the structure of this organization. Islamic economics is to study economics from an Islamic perspective.’

With this definition, Islamic economics is a study of how different sectors of an economy could be organized based on the interpretations of the guidelines given by Islamic sources of knowledge. While there may be a sort of consensus on the basic principles of Islamic economics in different Muslim countries and societies, it is very likely that there would remain some variances in the details. One should also be ready to accept the fact that some fundamental axioms of an Islamic economics could be similar to those of the prevailing capitalist systems.

== Objectives of an Islamic Economy==

According to Monzer Kahf, an Islamic economist, "(Any economic system should be founded on an ideology which provides the economic system with its basis and objectives on one hand and its axioms and principles on other". He further adds that, "(T)he validity of an economic system can be tested by its internal consistency, its compatibility with the systems organizing the other aspects of life, and its provision for improvement and growth".

There are two interrelated basic objectives of different systems organizing economic, social and other aspects of life in an Islamic economy. First, is to implement the commandments of the Creator. The second objective is to help its people in leading their individual and collective life according to the teachings of Islam. As mentioned earlier, the underlying ideology is that man has been put to test during his earthly life. He has been endowed with instincts for both good and the bad deeds, which is true for all human beings. The only difference when a man happens to be a Muslim is that he knows and believes what is a correct and desired behavior for him. However, just because he is a Muslim and he knows what is a preferred Islamic behavior, is no guaranty that he will actually behave accordingly. On the other hand, one should also recognize the fact that a person can behave differently under different organizational set up and rules of the game.

Similarly, it would be incorrect to assume that in a Muslim society people will behave in a desired way only through moral persuasion and education. That it would help is also undeniable. But the major part of the efforts should be centered around devising appropriate rules of the economic game and a structure of material and other social incentives which may help and influence people to act in a desirable way.