The Principles of Islamic Political Economy

THE PRINCIPLES OF ISLAMIC POLITICAL ECONOMY – Book Sample

Contents – THE PRINCIPLES OF ISLAMIC POLITICAL ECONOMY

• PART I THE THEORETICAL FOUNDATIONS
• Islamic Economic Thought in Comparative Perspectives: Towards an Islamic Theory of Value 9
• Explanation of focal concepts 9
• A review of the literature on comparative theory of value and price 11
• The Islamic economic alternative to the theory of value and price 23
• A comparative view of Islamic economics and Christian economics 37
• Conclusion 40
• The Ethico-Economic Social Welfare Function of the Islamic Economy 41
• Some Quranic injunctions on consumption, production
• and distribution 41
• Islamic social choice theory 42
• Formalising the interrelationships among state and
• policy variables 46
• Relevance of additive social welfare indices in the
• Islamic economy 52
• The idea of ‘independence of irrelevant preferences’ in
• Islamic social choice theory 53
• A mathematical form of the Islamic social welfare
• model 54
• The concept of the time dimension in the Islamic social
• welfare function 57
• Constrained optimisation of the Islamic social welfare function 61
• Conclusion 64
• A Theory of Cost-Benefit Analysis in Islamic Economics 66
• Views on the opportunity cost of capital among lslamic economists 66
• A rapprochement among contending Islamic views on
• the opportunity cost concept 68
• The idea of opportunity cost in lslamic economics
• developed in this work 69
• Interpretation of contingency, goal/priority and time in
• Islamic cost-benefit methodology 73
• An extended definition of the time dimension in Islamic
• cost-benefit and welfare analysis 75
• Treating the index of capital market variables as a
• social index in the Islamic cost-benefit model 79
• The relationship between zakah and discount rate in
• the Islamic cost-benefit model 85
• Conclusion 89
• A Theory of Mudarabah, the Islamic Profit-Sharing System of Economic Cooperation 92
• The idea of cooperatives in Christian and other economic traditions 92
• The Islamic system of economic cooperation 94
• Mudarabah and external financing of enterprises 96
• Demand and supply of share capital in mudarabahs 98
• Expression for the profit-sharing ratio 101
• Objective criterion of mudarabah 104
• A mathematical formalisation of productive
• transformation in the mudarabah 106
• Cooperatives under lslamic and Christian economic
• thought: a comparative look 111
• Generalised relationships between critical state and policy variables in mudarabah 116
• Comparative profitability view on Islamic and other cooperatives 116
• Use of the Islamic cost-benefit model in the theory of
• mudarabah 120
• Con nu il
• Generalised dynamic optimal resource allocation and distribution problem in the Islamic economy 123
• S Resolution of the Great Economic Problems in Contemporary Times in lslamic Economic Perspectives 127
• Humanistic institutionalism in lslamic economics 127
• An example of Islamic policy-theoretic priorities: basic needs 131
• The integrated approach to great economic problems
• from Islamic perspectives 134
• The equity-efficiency question in Islamic economics 138
• Transformation of ethical questions into policies in the
• Islamic economic system 138
• Examination of lslamic economic theory in the light of
• scientific methodology 141
• Economic methodology and scientific inquiry 143
• lşlamic economic methodology and scientific inquiry 150
• Conclusion 153
• PART il THE APPLIED PERSPECTIVE
• 6 The Analytics of the Islamic Macroeconomic System 157
• Deriving principal macroeconomics relations from the principles and instruments of Islamic economics 158
• The important goal of productive use of zakah 162
• A complete picture of the relationship between
• principles and instruments in the Islamic economy 165
• Extending Islamic economic principles and instruments
• to the capital market 167
• Consumption financing in the Islamic capital market 171
• The problem of price indexation in Islamic economics 172
• Valuation of financial assets using real profit rates 173
• The relevance of Keynesian analysis in lslamic
• economics 175
• General equilibrium analysis 177
• Developmental impact of the Islamic capital market institutions 185
• Technical appendll: the zakah rate and zakah revenue compared to the income tax rate and tax revenue 187
• X Contents
• Macroeconomic Relations in the Islamic Economy:
• Experimental Case Study of Malaysia, 1970-85 191
• The Islamic macroeconomic system of equations 191
• General equilibrium in the Islamic macroeconomy 198
• Product market relations in the Islamic economy 201
• Empirical estimation of the Islamic macroeconomic
• system for Malaysia 203
• Statistical analysis of estimates in the Islamic
• macroeconomic model 211
• Conclusion: summary of empirical results 233
• Islamic Policy Conclusions on the Malaysian Macroeconomy 236
• Summary of this work: policy outlook 236
• Summary of the main features of the Malaysian Fifth
• Plan from Islamic perspectives 239
• Use of mudarabah and zakah to attain equity and
• efficiency in the Malaysian economy 248
• Mudarabah and the price stabilisation programme:
• policy perspectives 251
• Establishing an Islamic statistical information system:
• policy perspectives 259
• Conclusion 261

The Ethico-Economic Social W elf are Function  of the Islamic Economy

SOME QURANIC INJUNCTIONS ON CONSUMPTION, PRODUCTION AND DISTRIBUTION

The general theory of social choice and social welfare function in ethico-economics will be particularised for the case of Islamic econ­omics. The starting point is to define the set of state and policy variables and constnıct the social welfare index on the basis of this.

In the shari’ a the guiding principle of the economy is to prefer distributive equity to maximisation of economic efficiency per se as a conflicting economic goal. In this regard the Quran says, ‘Let not your wealth become confined to the rich among you.’1 At the same time, the Quran invokes exploration of resources in the universe, as well as participation in production and consumption, in the following verses:

Behold! In the creation of the heavens and the earth; in the alteration of the Night and Day; in the sailing of the ships through . the ocean for the profit of mankind; in the rain which God sends down from the skies, and the life which He gives therewith to an earth that is dead; in the beasts of all kinds that He scatters through the earth; in the change of the winds, and the clouds which they trail like their slaves between the sky and the earth; here indeed are Signs for a people that are wise. ((Sura II, v. 164))

ISLAMIC SOCIAL CHOICE THEORY

Consumption, Production and Distribuüon in the Light of lslamic Economic Principles

These Islamic perspectives in consumption, production and distri­bution can now be viewed with respect to the main assumptions (principles) and instruments of the Islamic economy. The Quran considers the Islamically requisite acts of consumption, production and distribution in relation to the felicity people attain from them, first in this life through acts of righteousness and then, through this, the attainment of supreme felicity in the hereafter. 2 They are there­fore treated as acts of worship. On the other hand, Islamically non-requisite acts in these areas are treated as disbelief, and are equated with the habits of the devil. 3 Thus, in the relationships between the main principles of the Islamic economy, felicity is attained production. Distributive equity is established by the mandatory lslamic wealth tax (zakah).

The lslamic theory of social choice must necessarily centre around the above-mentioned principles and establish social ordering in terms of them. We now turn to a formalisation of this area. The tenets of the Quran, the traditions and sayings of Prophet Muhammad (sun­nah), and the periodic consensus of the lslamic community or of religious scholars (mujtahid) in authoritative lslamic research, using the process known as ijma or ijtehad, are the tenets that govern individual preference formation in the lslamic economy.

Consumer sovereignty is relegated to these tenets in the lslamic social order. The implementation of the rules and conduct of the shari’ a are left to an extensive consultative decision-making process under a body known as the shura. The consultative body exists at various levels of institutions and societies, and is structured and integrated ali the way up to the highest echelons. in the ideal case this highest echelon is the world nation of lslam ( ummah). in this way the process of implementation of the shari’ a becomes a democratic and decentralised process, but the agenda of implementation is derived from the Quran and its exegesis, and not by the coercive will of the state to serve other interests. The state cannot legislate new laws. it only implements and secures the lslamic laws, together with the findings of ijtehad, surrounding the interpretation of the lslamic laws by the shura.

Now, since consumer sovereignty is ruled out in the lslamic econ­omic system, lslamic social choice would not be based on interper­sonal comparison of utility. in fact, the idea of utility is now replaced by the idea of felicity, in the sense of intertwining individual welfare with social welfare. The lslamic democratic voter does not decide on the hasis of individual preferences, but decides rather on the hasis of shuratic deliberations which finally emerge out of mutual consulta­tions in strict compliance with the shari’a. it is therefore the shuratic social preference that reflects the social choice of the nation.

Social consensus formation through the shuratic process of decision­making is thus a reflection of the collective weal of a populace in accordance with the lslamic laws, which now raises the question as to how non-compliance is treated in this system. Take as an example the case of the non-Muslim minority in the lslamic state. The idea of ‘independence of irrelevant preferences’ is applicable here. This means that if we take three social states, A (avoidance of drinking through acts of labour and production and distributive equity. The compliance with the shari’ a in these areas establishes the principle of the unity of God as the creator and sustainer of the universe (the principle of Tawheed and brotherhood). The environ­ment of Islamically-requisite production is established under the institution of cooperation and mudarabah. Moderation and Islamic­ally-requisite consumption are established by the instrument of avoid­ance of waste israf. The instrument is equally applicable to