Developing Contemporary

Microeconomics from an Islamic

Perspective:
The Challenge of Genuine Islamization

by
Mohamed Aslam Haneef
Dept. of Economics, IIUM.

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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 IOE-
Microeconomics

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 Introduction
• In developing contemporary Islamic
Economics, we do not have to ‘re-invent’ the
wheel.
• ‘Patchwork’ Islamic economics also not viable
• ‘Critical Engagement’ with modern economics
is possible but premised on Islamic foundations
• Challenge is to develop contemporary Islamic
economics through process of ‘genuine
Islamization’

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 Introduction - cont.

• Before 1980s, writings on Islamic economics are

found but were not specifically talking about
‘Islamization’ of economics (IOE)

• 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 focus on IOE per se but were
presenting Islamic economics according to their
understanding.
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 Introduction- cont.

• Part of Islamization of Knowledge Agenda (al-

Attas and al-Faruqi)
• 1984 3rd International Conference of Islamization
of Knowledge in KL had 2 specific papers:
– 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 ideology-
free. 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.

• Hence many policy tools may also be unacceptable.

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 What is IOE (for extensive biblio, see
Mohamed Aslam Haneef, 2005)
• 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 the context of IOE, the Islamizers 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.e.
substantive and methodological/ philosophical.
Focus has been mostly on the former
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 IOE- Cont.
1. ‘Mastery’ of modern economics
• Substantive knowledge (theories)
– Is neo-classical/keynesian economics
enough? What level of theory sufficient to
perform IOE? What about other schools of
thought?
– What about other disciplines like history,
sociology, political science etc?
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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, of us were/are exposed to

this type of knowledge in our undergraduate
and graduate studies.

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 IOE-cont.

2. ‘Mastery of the Heritage’

• Substantive knowledge
– What from our heritage is relevant to develop
contemporary Islamic economics?
– Current emphasis is on fiqh and to a lesser
extent usul al-fiqh? Is this sufficient?
– What about kalam, falsafah, 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?

– Need for usul al-Iqtisad?

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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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 Downstream ‘Islamization’ in practice

• Practical dimension almost exclusively

focused on Banking and Finance

-Islamic banks have mainly replicated

practice of conventional commercial
banks, trying to ‘Islamize’ the practices

- Debate about what has been done- is it

genuine Islamization or patchwork?

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Fails to realize that modern commercial banks and the
system of modern banking has its roots in a certain
history of western europe; these institutions come
with certain values and foundations that rationalise
their very existence

We make the mistake of trying to ‘Islamize’

instruments 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 IOE-
Microeconomics

• Microeconomics today has been reduced to

mean the individual economic behaviour of
‘representative agents according to
neoclassical theories’
• 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, should we not 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 them but
must also critically evaluate these alternative
foundations 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

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Example in Consumer behaviour

- Discussion has normative and positive/

technical aspects.

- All positive aspects must work within a

normative framework

(Reference for most of this section is

Tahir/Ghazali/Agil, 1992)

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 Normative framework of Consumer
Behaviour

• deals with the ‘rules of the game’ or

framework within which technical
decisions are made
• derived from the vision obtained from
our 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

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 Positive/Technical Aspect

• dealing with constrained decision making

within the normative framework
• includes tools/methods to seek precise
solutions to constrained optimization
• Can we use the tools of neoclassical economics
if our framework is different?

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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 (Taken from Zarqa
in Tahir/Ghazali/Agil, 1992)
• 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.)
– 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 (36:47)

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 Technical Aspect
• Maximize/optimize subject to constraints
(external and internal)
– the choice is made within the framework
above
Issues
– need to quantify the qualitative factors
– can we use conventional tools?

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 Example in Production
• Normative framework derived from
Islamic sources of knowledge.
• discusses man, the firm, concept of halal-
haram, 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’
• Using Technical Analysis, 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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 Production-cont.

• Amin and Yusof (2003) take the analysis one

step further by demonstrating that profit
maximization 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.

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Using an modified neoclassical framework,
they show that ‘if consumers behave
according to Islamic values’, 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).

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In the 250 year western economic
history (from the 1750s), their scholars
discussed methodology, philosophy.
In developing alternative schools in the
west, they have once again looked at
the ‘foundations’ of neoclassical
economics

See www.paecon.net

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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 is 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’

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Islamic economists, especially academics
must pay more attention to methodology
and philosophy of economics; must know
this from our Islamic heritage as well as
understand the development of
methodology in western economics if we
want to really produce a unique, genuine
contemporary Islamic economics, banking
and finance.

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 References

• Sayyid Tahir, Aidit Ghazali and Syed Omar Syed

Agil (1992). Readings in Microeconomics- An
Islamic Perspective. Kuala Lumpur: Longman
Publishers.
• Mohamed Aslam Haneef (2005). A Critical Survey
of Islamization of Knowledge. 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.
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 Thank you.
Comments and Questions welcome

mdaslam@iiu.edu.my

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