Mainstream Economics versus Islamic Economics

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By Asad Zaman

[Editor’s note: this article is based on extracts drawn from a much longer paper, “Islam’s Gift: An Economy of Spiritual Development”, https://www.ssrn.com/abstract=3321866]

As Edward Said has explained in Orientalism, the conquest of the globe by Europe colors all European productions of knowledge about the Orient. Because of the dominance of European educational systems, these Eurocentric views have also been absorbed and assimilated by Muslims. This has caused great difficulties in the development of Islamic Economics, because Muslim scholars have attempted to reconcile two diametrically opposite views. European views give primacy to the material dimensions, while Islamic views give primacy to the spiritual dimensions of human existence.

As many authors have documented in detail, the transition from a traditional society based on Christian values to the present day secular modern society was a revolution in ways of thinking and acting. Islamic views on economic organization would be familiar to pre-modern thinkers, but alien and strange to modern scholars.

Modern economic theory takes certain background institutional structures for granted, and is strongly shaped by Western historical experiences. Nonetheless, the theory claims for itself a universal status as a science, free of its historical, cultural and institutional context.

Modern social sciences took their current shape in the early 20th century and represent a radical break from the past, even though dominant narratives of social sciences create the appearance of continuity and links to antiquity. Islamic economics can only be understood as a response to, and a rejection of certain foundational claims of Western economics. While source materials for the subject are available from early Islamic times, the separation of the economic realm, and its treatment in isolation, packaged as “Islamic Economics”, is a modern response to the West. As detailed in Zaman (2008), the subject was created as an Islamic alternative to capitalism and communism, meant as an economic system for newly liberated colonies in the Islamic region. Modern economics is actually an economics of capitalism. It cannot be understood without studying the historical context of the emergence of this economic system and the associated ideologies. Since Islamic economics was initially framed as a competitor to capitalism and communism, understanding it requires analyzing the historical roots which led to the emergence of these economic systems.

Modern social sciences were born in early 20th century on the basis of a conscious effort to emulate the methodology of the physical sciences, as mis-understood by the logical positivists. This attempt to mathematicise, quantify and study general laws of motion in societies reflected a break from the past in which the study of social phenomena was more qualitative and historically oriented, aligned with complexities of human behaviour. Methodology is treated superficially in textbooks, with the result that most economists continue to believe in the central tenets of logical positivism.

Living in a market society conditions us to look at the world in certain ways which are incompatible with Islam; for example, market societies consider portions of human lives as objects which can be sold and purchased in a labour market. Explaining Islamic economics involves learning to see the world in a different way. When conceptualized as a purely positive field of study which excludes the normative and the unobservables, social science is an oxymoron. This is because our human lives are driven by our visions and conceptions of the good life and the ideal society. Excluding these from consideration leads to absurd caricatures of human behaviour like the homo economicus used by economists. In Zaman and Karacuka (2012), we have shown how this theory systematically blinds economists to realities of human behaviour, making them unable to understand typical human behaviours in the Prisoner’s Dilemma or the Ultimatum Game. Hirshliefer (quoted in Dawes and Thaler 1988) reveals the hollowness of game theory:

The analytically uncomfortable (though humanly gratifying) fact remains: from the most primitive to the most advanced societies, a higher degree of cooperation takes place than can be explained as a merely pragmatic strategy for egoistic man.

Humanities is the study of human beings and is inherently and deeply normative. Human beings continuously make choices, and every choice is normative; making a choice is equivalent to an assertion that this particular choice should be made over all other possibilities that were available. All human action is directed towards a goal, whether this goal is explicit and understood, or whether it is only expressed by the actions, without conscious awareness of the goals. The Quran (92:4) states that “the ends you strive for, are diverse.” Our actions are driven by a vast range of emotional as well as rational considerations. Even though these drivers, the motivations for our actions, remain hidden from external observers, and often even our own selves, and even though these motivations can change dramatically in the blink of an eye, nonetheless, human behaviour cannot be understood without trying to understand the purpose or life-goals of human beings.

Therefore, as a methodological principle, any study of human beings must take into consideration the normative dimension. The traditional questions: “What is the good life?” and “What is the good society?” serve as a convenient starting point for any inquiry into the activities of human beings. Once a goal for human activity has been specified, then human behaviour can be understood as purposive behaviour, directed towards achieving the goal. We will call this the transformative element. These are strategies used by human beings to move towards their goals. To complete the analysis, it is also essential to have a descriptive component, which describes the current state of affairs. This is the starting point to which transformative strategy must be applied, to bring it closer to the ideal state. To summarize, it is constructive to use a three-dimensional framework for comparison of modern Western economics and Islamic economics:

Normative: An articulation of the intertwined concepts of the good life and the good society, which provides a normative ideal, a target and a benchmark.

Positive: A description of the institutional structures – political, economic, social, and environmental – that shape individuals and societies. This is the positive component of social science.

Transformative: Strategies for moving from the actual (positive) description towards the normative ideal.

According to the projected self-image of Western economics, it only contains the positive component—a purely objective description of human behaviour in the economic realm. The normative and transformative components are left up to the policy makers, while the economist merely provides scientific factual description of ground realities.

The fact that conventional modern economics is normative is indisputable, and yet, economists are very strongly attached to the opposite view. This conflict is hard to understand because the level of cognitive dissonance required to defend the view that economics is a positive science is similar to what would be required to defend the idea that the universe was created 6000 years ago. How apparently sane and rational humans can adhere to theories so violently in conflict with observations is itself a puzzle that many have pondered and attempted to explain. To document that this is not an exaggeration on my part, I offer here some summarized paraphrases of quotes from leading economists as evidence:

Keynes: Economists are unmoved by lack of correspondence between their theories and facts.

Solow: DSGE models are so crazy that their founders are like lunatics, and, policy making using these models could only be suitable for some alien planet, not Earth.

Stiglitz: Economists frequently make claims in conflict with easily observable facts, because economics is a religion, not a science.

Olivier Blanchard: DSGE models make assumptions profoundly at odds with what we know about consumers and firms.

Paul Romer: Macroeconomic theorists ignore mere facts by feigning an obtuse ignorance.

Paul Krugman: The Economics profession went astray because they mistook the beauty of mathematics for truth.

The full quotations from these and many other economists can be found at Zaman (2018), where I have compiled many more examples.

By assuming that human purpose is maximization of pleasure in this earthly life, the framework of modern economics excludes the spiritual concerns that are central to an understanding of the purpose of life for Muslims and for many Christians as well. This normative exclusion of beliefs different from modern secular views regarding after-life and God is described by economists as a positive and objective description of rational human behaviour. Typical economics textbooks start by arguing that human beings are purposive, and conclude that they maximize utilities, without mentioning the numerous strong assumptions required for this leap of faith. In fact, utility maximization reflects its origins in the secular modern philosophy that emerged after the defeat of Christianity in Europe. Having rejected the idea of paradise in the afterlife, secular philosophers sought to build paradise in this life, by making the goal of life the maximization of pleasure. Jeremy Bentham, one of the founders of this philosophy, explicitly aimed at banishing religion and the spiritual, and replacing it by a morality based on the pleasure-pain principle or utilitarianism.

While economists claim that the theory of utility maximization is descriptive and positive, studies of actual human behaviour show strong conflict with this theory. A massive amount of empirical evidence for violation of this theory is collected in a survey by Zaman and Karacuka (2012). The idea that neoclassical theory of utility maximization is a purely positive description of reality is a non-starter. An alternative view is to consider this theory to be normative. This is how human beings should behave, once they lose faith in God and religion. On normative grounds, this theory is disastrously wrong. Indeed, it is this failure of utility maximization as a normative principle which explains why the theory fails as a descriptive theory. It is not sensible to behave like homo economicus, even if one aims at maximizing pleasure in this earthly life, without any concern for afterlife. This is because the deepest pleasures that we derive from life come from our social connections—loving and being loved. Selfish behaviour of the type suggested as rational by irrational economists demeans human beings, damages their hearts and souls, and deprives them of the sources of greater happiness (Grant 2013, Nelson 2012).

For individuals, conventional economics prescribes the norm of pursuit of selfish pleasure, packaged as “rationality”. The ideal society is viewed as based on perfect competition (between individuals, between firms, and between nations), where survival of the fittest leads to increasing efficiency. The ideals of self-interest and competition stand in stark contrast to Islamic ideals of generosity and cooperation. At the individual level, ideal behaviour is based on compassion, concern, and caring for others, which leads to generosity and self-sacrifice. At the social level, cooperation and unity, based on equality and fraternity of all mankind, are strongly encouraged.

Conventional economics is consequentialist, and evaluates welfare by looking at the final consumption levels of all individuals in a society. In contrast, doing the right deed is what matters in Islam, whether it leads to success or failure in terms of current outcomes. Doing good deeds is not a matter of collecting brownie points; rather, this is the path to spiritual growth, which allows us to develop our human potential. In this way, the Islamic approach is closely aligned with the capabilities approach of Mahbubul Haq and Amartya Sen. Thus, Islamic economics is not restricted to analyzing a non-existent society composed entirely of Muslims who always behave in the ideal manner prescribed by Islamic laws.¹

Economists propose the normative ideal of homo economicus, who is completely selfish, has no social concerns, calculates his advantage to the last penny, and acts according to these calculations. As behavioural economists have discovered, human beings are boundedly selfish, have bounded willpower, and bounded computational abilities. The normative ideal of Islam has been termed homo islamicus, and is at the opposite extreme—generous, compassionate, socially responsible, and not concerned with worldly gains or losses. Neither extreme is achieved, nor even achievable, by real human beings. Nonetheless, both serve as targets that guide actions. As a result, being taught economics leads students to act more selfishly than those in other disciplines (Grant, 2013). It is similarly true that teaching normative ideals of generosity and compassion creates and reinforces these tendencies of behaviour.

Unlike the pleasure-seeking and pleasure-maximizing robotic homo economicus of conventional economics, the Quran paints a rich and complex picture of human behaviour. On the one hand, humans have been created in the best of forms, with potential to reach excellence even beyond the angels. On the other hand, all of us also have the potential to be worse than beasts, and even the prophets are subject to temptations of the nafs (psyche/soul). We have been shown the two highways (of good and evil) and have been left free to choose between them. Behavioural economists, who discovered some of the complexities of human behaviour, have asked whether people are selfish or cooperative. Islam answers that all humans have both tendencies built into us, and we can choose between them. Because of this freedom, no mathematical formulae can define human behaviour, and patterns of past behaviour may not correctly predict the future, since humans are free to choose and to change their path.

In the long run, if a person continuously makes choices in accordance with his desires, exactly as prescribed by the “rational behaviour” theory of economists, he or she eventually become the slave of desires, or homo economicus. Repeated pursuit of desires damages the heart, and eventually the moral sense becomes extremely dim and unable to perceive all except the grossest of differences between moral and immoral behaviour. This is exactly the type of behaviour recommended by Jeremy Bentham, who explicitly rejected religion as a source of morality, and recommended using the pleasure-pain principle as an alternative. In opposition to the utilitarian construction of morality on the basis of pleasure and pain, the Quran (45: 23) says people who take their own desires as their god lose the ability to use all three organs: the hearing and the heart and the sight.

Have you seen he who has taken as his god his [own] desire, and Allah has sent him astray due to knowledge and has set a seal upon his hearing and his heart and put over his vision a veil?

That is, the pursuit of instant gratification blinds human beings to their own long run welfare. It is worth noting that this idea, that we must control our desires, instead of being controlled by them, is common across all religious traditions. In the Bhagavad Gita, the desires are described as the horses, which drive the chariot. They are extremely powerful when harnessed to the goals of the charioteer. However, if the task of choosing the goal is left up to the horses, they will go off the desired path, and turn to grazing at random in the forest. Similar metaphors occur in many different traditions of wisdom. We can reconsider neoclassical theory in the light of this traditional wisdom as a formula to ensure perpetual stagnation in the most primitive and infantile stage of spiritual progress, where one is enslaved by one’s desires.

It is worth emphasizing this dramatic opposition between Islamic economics and Western theories. In Islam, the spiritual is primary, and the material is subordinate to it. The use of material means and efforts to achieve spiritual progress is central to Islamic economics. It is also highly unfamiliar to a Western audience.

On the one hand, we have the ascetics who renounce the world, and consider its flavours a trap.² On the other extreme, we have the gluttons and the gourmands who live to eat. The latter is the extremist position taken by economic theory which considers the purpose of life to be consumption. According to this theory, all our (rational) efforts are directed towards this solitary goal, unflavoured by any social considerations. Both of these extreme positions are forbidden by Islam. Islam offers a middle path of moderation. It strongly urges the fulfilment of legitimate desires and just as strongly discourages our following illegitimate desires.

These teachings of Islam offer a very simple solution to scarcity, supposedly the central problem of economics. Islam strongly discourages pursuit of idle desires. The Quran (45:23) explains that those who make their desires their gods are blind to the realities of human existence.

Scarcity is created because economists refuse to distinguish between needs and wants, and consider the fulfilment of both to be their professional goal. For example, Samuelson and Nordhaus (1989: 26) state that economists “must reckon with consumer wants and needs whether they are genuine or contrived.” This sets economists up for failure, since “wants” expand when they are fulfilled. According to Islamic teachings, “Give a man a valley of gold, and he will desire another.” Islam accepts and encourages fulfilment of needs, but rejects and discourages the fulfilment of wants. This single principle is sufficient to solve the problem of scarcity; as Gandhi said, there is enough for everyone’s need, but not enough for everyone’s greed.

As a matter of principle (consumer sovereignty), economists refrain from studying how desires are shaped. They take the utility function as exogenous: desires are formed outside the economic system. However, Islam teaches us that our desires can be shaped by our conscious efforts. There are several strategies we can use to overcome our inclination to follow our desires. For example, the Quran (3:92) states: Ye will not attain unto piety until ye spend of that which ye love. By giving away what we love most, we will weaken the hold of desires on our behaviour. Similarly, fasting, staying away from food and water, teaches us control of our appetites, and leads to the purification of the heart from the love of material comforts.

As Galbraith has explained quite clearly, capitalism works in the opposite way. At the heart of capitalism is massive over-production. In order to sustain the system, it is necessary to persuade consumers to increase their desires. This is achieved by advertisements, which create desires for unnecessary objects, required to create growth. There are many ways to show that advertisers create artificial wants. For instance, Hamilton et al. (2005) found that over $10 billion worth of goods were purchased but never used by consumers in Australia alone.

Islam teaches us that the root cause of the catastrophes facing us on all fronts of human existence is our primitive and immature spiritual state—labelled nafs-e-ammara. Modern economic theory contributes to this disaster by encouraging us all to maximally pursue our desires, ensuring that spiritual progress does not take place. The only path to transformation lies in internal change and spiritual progress, which occurs when we suppress personal desires and strive for higher causes.

References

Dawes, Robyn M., and Richard H. Thaler. (1988). “Anomalies: Cooperation.” Journal of Economic Perspectives 2(3): 187-197.

Grant, Adam. (2013). “Does Studying Economics Breed Greed?” Psychology Today blog. https://www.psychologytoday.com/us/blog/give-and-take/201310/does-studying-economics-breedgreed.

Hamilton, Clive, Richard Denniss and David Baker. (2005). Wasteful Consumption in Australia. Adelaide: Australia Institute. http://www.tai.org.au/node/940 or http://www.tai.org.au/sites/default/files/DP77_8.pdf.

Nelson, Julie A. (2012). “Poisoning the Well, or How Economic Theory Damages Moral Imagination.” In The Oxford Handbook of Professional Economic Ethics. Eds. George DeMartino and Deirdre McCloskey. New York: Oxford University Press

Samuelson, Paul A. and William Nordhaus. (1989). Economics, 13th edition. Berkshire, UK: McGraw-Hill.

Zaman, Asad. (2008). Islamic Economics: A Survey of the Literature. Working Paper 22. University of Birmingham, UK: Religions and Development Research Programme. https://ssrn.com/abstract=1282786 or http://dx.doi.org/10.2139/ssrn.1282786.

Zaman, Asad. (2018). “Quotes Critical of Economics.” WEA Pedagogy Blog. https://weapedagogy.wordpress.com/2018/07/26/quotes-critical-of-economics/

Zaman, Asad, and Mehmet Karacuka. (2012). “The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature.” International Journal for Pluralism and Economics Education 3(4): 366-414. https://sites.google.com/site/eeauasadzaman/utility.

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¹ Interestingly, modern economics is restricted to the analysis of a monstrous world in which all people are cold, callous and calculating robots who behave like homo economicus. All the complex and sophisticated mathematical theories of economics apply only to this imaginary horror-story world.

² Perhaps paradoxically, one the strongest barriers to understanding Islam is prior knowledge of Christianity. This is because of the preponderance of “faux amis”; concepts which appear superficially similar, but are actually radically different. Those already familiar with the Christian concepts are lulled into complacency created by instant recognition, and fail to see the deep differences. Since it would distract from our main topic, we have not focused on highlighting these differences. We mention this here as a warning to readers from Christian cultural backgrounds.

From: pp.2-5 of WEA Commentaries 9(2), June 2019
https://www.worldeconomicsassociation.org/files/Issue9-2.pdf

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