Islamic Economics: A Psycho—Ethical Paradigm

 As economics is concerned with the intricate and complex actions and motives of man, its substantial association with ethics cannot be passed over sotto voce, but placed at the heart of economic inquiry. The conventional (positive) Liberalistic economic paradigm is said to have relegated normativeness and ethical valuations to the limbo of ineffectuality on the grounds that a scientist qua scientist should concern himself with what is rather than what ought to be. This positivist aberration, the presumed fact-value dichotomy is in itself value-laden since both facts and values are neither absolute nor universal or trans-cultural. However, many leading economists, notably Myrdal⁽¹⁾, Heilbroner⁽²⁾, Katouzian⁽³⁾, Sen⁽⁴⁾, Boulding⁽⁵⁾, and Ward⁽⁶⁾, have fired heavy shells at the dehumanization of economic Theory. Albeit, “In the struggle between mechanism and moralism generally mechanism has won hands down” ⁽⁷⁾. Since the problem of value is central to economics, “and value is but a step from virtue” ⁽⁸⁾, economics cannot be dehumanized. It is somewhat fallacious to claim that positive economists dismissed ethical valuations once and for all. Any economic paradigm is in some way based on a certain value premise, and positive economics is no exception. In the words of Mckee “Neglect of ethical values in positive, liberalist economics has led to the substitution of such quasi-values as quantitative I maximization, inefficiency, egalitarianism, anti discrimination, what is normal etc..” ⁽⁹⁾ 

The positive liberalistic economic paradigm emerges in the course of the philosophy of – utilitarianism and the hedonistic associational psychology – a psychology pertaining to three principles viz, hedonism, rationalism and atomism. ⁽¹⁰⁾ Such a psychology is typical to the western culture – a culture that is compatible with a high degree of egocentricity. The predominant acceptance of egocentricity as a value premise of modern economics is reflected-in the psycho-ethical propositions of the homo economics, viz, self-sufficiency, self-judgment, ethico -solipsism universal hedonism and global rationality. Thus appears the egoistic human motivation (self-interest as an unequovocable motivation force) as a norm in economic theory. The egoistic motivation is ethically reinforced by the norm of individualism as ontologically and axiologically superior ⁽¹¹⁾. The norm of self-interest is therefore generalized so much so that “maximization” becomes the dominant approach and thereby the fictitious homo economicus becomes homo sapiens. As Rohrlich has pointed out, many dimensions of life which utility maximization may play a subordinate role, have been gauged by the utility calculus as if this were their raison d’etre, and self interest is being misrepresented as the lever that govern human conduct in respect of them^.(12) Ostensibly, the egoistic motivation together with the assertion – that the scarcity of resources is the all-pervasive economic problem, lay the foundations of a price-making society – a society perceived as polanyi⁽¹³⁾ puts it as “an agglomeration of human atoms”. In such a price-making oriented psychology only material motives are recognized as real; all other ideals thus ‘become empty and emasculated.

Economic solipsism is by no means the only form of human motivation; other-directed, non selfish behavior has long been recognized by philosophers, sociologists, anthropologists and socio-biologist (geneticists). Yet it is perceived as a mere philosophical principle not necessarily manifested in positive behavior towards others. Few economists ⁽¹⁴⁾ have dismissed altruism as a genuine motive force, however, altruism is rarely (and even misconceptually) incorporated in a form of economic theory. The economic theory remains “an egoism in action, with altruism playing the tart of more or less a “stubborn’ or a disturbing intruder” ⁽¹⁶⁾ Needless to say that economists are enamoured by ‘exchange” and “reciprocity”, and learned to think in terms of “price”. As altruistic behaviour is priceless, so to speak, economist, are forced to reinterpret it as a form of disguised self-serving behaviour. The growing concern about social economics ⁽¹⁷⁾ is a reformationist impulse – an impulse to return to the social values that have been nullified or obscured by the positivists aberrations. However, the ‘socialization” of the liberal economic paradigm will prove to be an unavailing eclecticism, an ineffective colouring of the hedonistic the mometor unless the proposed egocentricity is rejected outright paving the way for the reconstruction of the economic theory on more appropriate value premises.

In the Islamic perspective, man – the centerpiece of economic inquiry – is endowed with an ontological commitment, to material satisfaction and spiritual development. ⁽¹⁸⁾ The creation of man is purposive, ibadah (worship of God) and hence the longing for spirituality becomes man’s raison d’etre ⁽¹⁹⁾. Within this general framework of ibadah lies the divine taklif (obligation) that man must develop and protect the earth. Economic activities become a form of ibadah, an essential part of the divine taklif; thus man’s mundane pursuit becomes spiritualized. It is this integrative and holistic view of Islam that rejects outright the schism between ethics and economics. The unification of the spiritual and mundane pursuit is to be understood within the context of tawhid (unity of God). Tawhid connotes that man is in cosmic “movement” towards God and accountable for his deeds in the Hereafter^{. (20)} Thus human motives must be guided by the expected approval of God. In the words of al-Faruqi “The concept of tawhid which implies that God is the sole and ultimate value, implies that the purpose of man is the actualization of values in space and. time” ⁽²¹⁾. The psycho-ethical orientation of the tawhidic paradigm imbues the mind of the Muslim with the notion of falah (material and spiritual felicity) as the sum mum bonus of economic activities. Albeit, man is ontologically committed to material and spiritual concerns, he or she is, axiologically aware of the supremacy of his spiritual concern over mundane pursuit.

Axiomatically, the Islamic ethical imperatives epitomize the socio-economic values of the society, and through their induced psychological orientation determine the preference structure of the individuals. Thus could be argued that the core of Islamic Economics consists of the over-riding concern of the ethical considerations. As Naqvi ⁽²²⁾ puts it “What Islam asserts is that ethics, independent of the economic conditions prevailing at any time or in any society, must guide human behaviour for the attainment of social bliss as well as spiritual salvation”. One hesitates not to negate such claims as “There can be even less doubt that our values are influenced by knowledge about facts.” ⁽²³⁾ Facts and values are not of the same ontological status. Those who assign hard ontological and axiological status to “facts” are assuming a positivist paradigm whereby “values” become trivial unless they are fact-induced. In the Islamic perspective, unless facts are epistemologically divine, they enjoy no axiological status. It is true that knowledge about facts (such as living in extreme affluence or poverty) may turn the individual away from God by inducing him or her to adopt un-Islamic values However, this fact-value effect is Islamically undesirable; it connotes that man fails to realize the probationary nature of being in a certain economic condition. Thus its ontological status should enjoy no axiological significance.

The ontological commitment to material and spiritual falah (felicity) imbues  the  mind of the Muslim with al’adl (justice and equilibrium) and benevolence as all – pervasive behavioural norms ⁽²⁵⁾ and thus permeates the whole edifice of economic activities. Benevolence is Islamically perceived as an attitude of mind wherefrom springs a certain pattern of behaviour where one strives to further others’ welfare besides his own without any ulterior motive(s) or external compulsion^{. (26)} In addition to its ontological and cosmological denotation (balance and harmony) al’adl implies rendering to each what is his or her due; it is the non-injury state. Al’adl is a three – dimensional concept it encompasses the relation between the parties involved (individuals  enjoy equal power when the contract is determined), the parties- society relation (individual versus social interest) and the parties – God relation (the immutability of the ethical imperatives)⁽²⁷⁾ The inculcation and the interaction of the norms of al’adl and benevolence is neither enpassant nor merely approbrious, rather they are socio-spiritually essential and jure divino imperative. In this highly spiritualized environment, the homo Islamicus’ economic behaviour would be ab intra and ab extra consistent with and motivated by the norms of al’adl and benevolence. Egocentricity thus becomes ego-eccentricity, and egoistic human motivation a reprehensive “situation ethics”⁽²⁸⁾ Unlike the Benthamite cost-benefit calculus, Muslim economists have to premise their views of a genernlizable’ individual action on its conformity with the hadith “He has no faith who wishes not for his brother what he wishes for himself”⁽²⁹⁾. The emerging new economic paradigm necessarily epitomize the ubiquity of benevolent human motivation.

The inculcation and the interaction of the norms of al’adl and benevolence permeate the whole edifice of economic activities. With the predominance, and the internalizaton of these norms there emerges, paco a paco, a “benevolence market’ ⁽³⁰⁾ wherein unilateral transfers of wealth from the haves to the have nots, integrated with the adherence to the norm of a’adl and fair valuations in the ordinary market exchange – the reciprocal transfers. Unilateral transfers are uninhibited by the traditional problems facing the western ‘charity’ market’; the free-rider problem and the so-called inefficiency of non-compensated transfers. There would be less (or even no) temptation to avoid unilateral transfers so long as the latter are bonds to the summum bonum of human activities – the approval of God. Free-riding is associated with egoistic motivation; negatively related to taqwa (God-consciousness) and commitment and, therefore antithetical to the Islamic ethical system. In principle the Muslim is not unaware that failure to meet the divine imperative of benevolence would have a negative effect on his or her spiritual falah (felicity) – the dictum that ‘there is no free-riding to heaven’. Thus the principle of self-interest and the principle of collective optimization are inseparable and. therefore, the free-rider problem is unlikely to exist should the Islamic normal imperatives are being observed. Buchanan’s ⁽³¹⁾ thesis that non-compensated transfers are likely to motivate the rent-seeking behaviour which would eventually dissipate economic values is invalid in the Islamic perspective. Such a thesis is based on the suppositions that all recipients are ipso facto gamblers, and donors usually launch a pre-gift publicity. These liberal suppositions are incompatible with the Islamic norms of benevolence, thus Islamic non-compensated transfers are unlikely to motivate the rent-seeking behaviour nor are they socio-economically ineffective.

With the internalization of the norms of al’adl and benevolence, the resulted all-encompassing, non-injurious behaviour will ensure the establishment of fair market valuation. Presumably, without fair market valuation the society is likely to experience moral anarchy where each individual deceives in anticipation of being deceived. Thus each individual is likely to act fraudulently in an attempt to compensate the loss incurred; ultimately, greed will be the creed. However, the needy will be victimized in as much as they can hardly find equal opportunities to compensate. The social cost of this moral anarchy is indeed deleterious; wealth will be pathetically redistributed from bottom to top, from the poor to the rich. The concentration of wealth in the hand of a few would be inevitable – a concentration whose adverse socio-political consequences can not be monitored. ⁽³²⁾ The non-injurious market relation necessitates the removal of all possible impediments to the establishment of al’adl. Presumably this will explain the rejection of riba (interest), maysir (gambling and hazardous business dealing), rushwah (bribery), iktinaz and ihtikar (speculative holding of money and goods) and all forms of market imperfection and artificial manipulation of the market. ⁽³³⁾ In addition to their drastic infringement upon al’adl (as they ensure asymmetric relations), these practices share a common feature, they exhibit an egoistic motivation leading to rent-seeking behaviour where individuals fraudulently accrue parasitic gains without creating or adding economic value. In contrast to the norms of individualism and egoistic motivation which generate the devil-takes-the-hindmost type of economy, the Islamic ethico-economic imperatives are likely to create a ‘chivalry’ economy where each individual is behaving as fair and benevolent.

Having placed the norm of benevolence at the heart of economic inquiry, both consumer and entrepreneurial behaviour have to be reconstructed. The concept of rationality – the maximization in pursuit of self interest, becomes vacuous in the Islamic ethical value system. Traditional economic theory conceptualizes rationality as a consistent maximization of a well-ordered preference function. ⁽³⁴⁾ Thus the principle of maximization is one of the mast fundamental assumptions of economic theory so much so that it has almost come to be regarded as an equivalent to rational behaviour. It is indeed, as Weber ⁽³⁵⁾ puts it, one of the most fundamental characteristics of an individualistic capitalistic economy that it is rationalized on the basis of rigorous calculation directed with foresight and caution towards economic success. Maximization is technically unattainable due to the unrealistic assumptions of omniscience and perfect competition; ⁽³⁶⁾ it is also Islamically undesirable in as much as it exhibits economic solipsism where the egoistically-motivated individual is the best judge upon his action. In the Islamic perspective, both the means and the objectives of any economic choice are subjected to the constraint of convictional rationality; they are neither logically distinct nor morally-neutral. Rationality is, by and large, determined by its conformity with the pursuit of falah. The falah-determined rationality advocates the concept of maslahah ⁽³⁶⁾ as a basis for the consumer theory; it also suggests satisfying ⁽³⁷⁾ as a basis for the Islamic theory of the firm. The determination of maslahah, unlike that of utility, is not left for the individual’s subjective whims; it is determined by the interaction of the individualistic and non-individualistic (divine) judgments. The spirituality-laden concept of maslahah together with the ubiquity of benevolent motivation exhibit the inter-dependence of social welfare functions; they also determine the preference structure of the homo Islamicus, both as a consumer and a producer.

The homo Islamicus’ consumption is not structure less; ⁽³⁸⁾ he or she faces an ethical allowability constraint besides the traditional feasibility constraint. At the core of the ethically-oriented consumer behaviour lies al-wasatiyah (the balance doctrine); that is the middle course between asceticism and hedonistic materialism; between niggardliness and spendthrift. All possible impediments which might deflect the consumer’s behaviour from the balance doctrine are declared void; the consumption of khabaith (vicious), israf (extravagance), tabzir (squander), greed, envy and conspicuous consumption are frowned upon by Islam. ⁽³⁹⁾ Ultimately the homo Islamicus is facing a contracted commodity subspace.

The assumption of benevolence affects the consumer choice. Firstly, the allocation of income between worldly needs and the spending in the way of God is no longer a choice. Since the homo Islamicus can not trade off after-life reward for worldly pleasure, the equi-marginal (indifference curve) analysis would be vacuous; the consumer choice exhibits a lexicographic ordering. Secondly, since neither present nor future consumption is spiritually-neutral and both are subjected to the balance doctrine it follows that their choice is also lexicographically ordered each combination of saving and present consumption is indifferent only to itself. Given the contracted commodity sub-space, the choice of possible bundles of commodities is governed by the needs fulfillment rather than wants satisfaction. Needs can be satisfied at three levels; the essentials, followed by the complementaries and the amehoratories. The homo Islamicus would not move to the complementaries unless the essentials of others are satisfied. The ethico-economic implication of this constraint is that the society as a whole moves from one standard of living to a better one in a semi-egalitarian norm. Social division, greed, envy, vast income inequality, socio-political exploitation, poverty trap and hunger in the midst of affluence – the maladies of an individualistic society would cease to appear in a fully-fledged Islamic society.

The application of the norm of benevolence to the producer theory reveals the following points. Unlike the solipsist (egoistic) homo economicus who might, ironically, occasionally reveal some philanthropic impulses towards his victims (consumers and/or workers); the behaviour of the benevolent homo Islamicus is all-pervasive and consistent from within and without. He or she would forgo profitable alternatives which are less conducive to social good. This behaviour of the benevolent homo Islamicus exhibits the following vital implications. Firstly, due to the ethical allowability constraint, the social production menu is ‘contracted’ (bounded). Secondly, all forms of selfishness and unfair practices are effectively eliminated. Given the interrelationship of social welfare functions, production activities which involve deleterious third-party effects are curbed. Note that unless the individual’s (entrepreneur’s) initiative is efficacious, all measures of controlling the deleterious third-party effects will prove to be abortive. Fourthly, production is symmetrical to the basic needs fulfillment. There is no sovereignty for either consumers or producers: sovereignty is for the social good as expounded by the concept of faith.

Muslim economists must be warned that the emphasis on the ethically-neutral e (firms) will obscure the Islamic imperatives and thereby lead to some catastrophic conclusions. Instead, one suggests the benevolent homo is entrepreneur as the nucleus for the Islamic theory of the firm. Profit maximization – the standard textbook assumption of the theory of the firm – is incompatible with the all-pervasive norm of benevolence. However, profit is not repugnant to the Islamic ethical system nor production is devoid of profit. Profit is essential for the material and spiritual progress of the homo islamicus entrepreneur, beside its traditional, (technical) function of maintaining & business growth and stability. Being guided by the over-riding concern for social good, the entrepreneur is assumed to satisfied (rather than maximize) profit. The satisfactory profit, is presumed downright fair (non-injurious); thus it demands fair factor compensation and fair commodity pricing, besides the absence of artificial manipulation of the market and all forms of market imperfection and improprieties. Since production is socially oriented and profit is no longer the only guidance for resource allocation, the role of the government is vital in coordinating and initiating the multiple objectives of the firm and thus ensuring a sat level of social production. However, this governmental role is limited and ineffective unless the entrepreneurs are benevolent and cooperative. Eventually, the Islamic rationality and the entrepreneurs’, psycho-ethical orientation weaken the competitive process and, therefore, the model of competitive equilibrium might not be of much use in stimulating market behaviour in an Islamic economy.

The ubiquity of a and benevolence effectively moulds the Islamic perspective of factor compensation. This perspective epitomizes the supremacy of justice and fairness, neither the supremacy of efficiency nor the supremacy of a factor(s) of production. Two appropriate, though distinct, forms of factor compensation exist, in the Islamic ethical system; fixed and sharing compensation. However, each is applied under those circumstances where it satisfactorily conforms to the rules of al’adl and benevolence. ⁽⁴¹⁾ Recall that the benevolent homo economic strives to promote his and others’ welfare. Both employers and employees are assumed to behave in accordance to the following injuctions “weigh with the true balance and do not undervalue other people’s things”.⁽⁴²⁾ “Woe betide the skimpers, who exact, full measure from other people, but give short measures and weight theselvesh.”.⁽⁴³⁾ Thus it could be argued that the worker’s welfare function exhibits a positive weight for both the employer’s and the society’s welfare. Morally-unjustifiable strikes, worker’s turn-over and absenteeism would be eventually minimized. Likewise, the employer’s welfare function will exhibits a positive weight for the worker’s and the society’s welfare. The employer’s behaviour will thus be free from exploitation of workers arbitrary firing of workers and artificial manipulation of the market. By and large, the norms of al’adl and benevolence are likely to ensure a congenial employer-employee relation-a relation that is cooperative rather than antagonistic, asymmetric, competitive and hostile. Muslim economists are invited to scrutinize the cooperative nature of the Islamic philosophy of factor compensation- the high tendency towards share contracts; it is a basis for a new economic paradigm- the share economy where self-managed firms gradually supersede the conventional neo-classical theory of the firm.

Footnotes           –

1 – Myrdal G. “the making and validity of institutional economics, in Dopfer K. (ed) — Economics in the Future, 1976 pp. 82-89.

2 – Heilbroner R. “Economics as a value-free Science” Social Research. 40 (129-43).

3 – Katouzian H. “Ideology and Method in Economics” Macmillan 1980.

4 – Sen A. “Rational fools: A Critique of the Behavioral Foundation of Economic Theory” Philosophy and Public Affairs 6:4 (317-344).

5 – Boulding K. “Economics as a Social Science” McGraw-Hill (1970) and”Beyond Economics” University of Michigan 1970.

6 – Ward B. (1972) “What is wrong with Economics” Landau PP. 24-25.

7 – Boulding K. “Economics as a Social Science” P. 118.

8 – Boulding K. “Beyond Economics” P. 12.

9 – Mckee A. “Social Economics and Values” International journal of Social Economics. 9:6-7(5-19).

10- Ward (1972) PP. 24-25.

11- With the idealization of egoistic and individualistic paradigm, the whole edifice of economic theory becomes thematized on what Jevons labelled ‘the mechanics of utility and self interest’ See Jevons “The Theory of Political Economy” New York 1871/1975 P.50.

12- Rohrlich G. “Beyond Self Interest. Review of Social Economics” 35:3 (331-43) P.334.

13 – Polanyi K. “The Livelihood of Man” New York 1977, P. 17.

14 – Notably among then, Musgrave, “Theory of Public Finance”. 1959.

15 – An attempt has been made by Edgeworth in his “Mathemational Psychics” 1881. Boulding in “The Economy of Love and Fear” 1973 and Collard in “Altruism and Economy” 1976, to integrate partially the norm of altruism into the economic theory. Yet they allow for altruism when the agent experiences a disutility in the commodity bundle(s). Moreover, they treat altruism and exchange as distinct bodies and attempt not to incorporate the norm of altruism into the theory of exchange itself.

16 – Stuart H. “Egoism and ‘Altruism” Encyclopedia, of the Social Science. Vol. 2 PP. 14-16.

17- Social economics is an economic paradigm centered on values reflecting both individual and social welfare. It is argued that values are inseparable part of human behaviour; attention to them renders economic inquiry authentic; neglect of them generates false values. Mckee, op. cit. p. 6.

18 – This is derived from the dual nature of man as being composed of body and spirit (see Quran 15:29). The harmoniuos progress and balanced evolution towards perfection require that attention should be paid to both aspects.

19 – Cf. Quran 51:56

20 – Cf. Quran 84:6.

21 – Al-Faruqi I. “Tawhid; Its implications for thought and life” 1982, P. 193.

22 – Naqvi S. “Ethics and Economics, 1981, P. 18.”

23 – Gordon S. “Social Science and Value Judgment Canadian Journal of Economics 10 (529-46) P. 544.

24 – Cf. Quran 89:15-6; 96:6-7.

25 – Cf. Quran 16:90.

26 – For more details about this concept see Abbas, A. “The Economics of Benevolence: An Islamic Paradigm” Unpublished PhD thesis, University of Wales 1990. PP. 76-77.

27 – Ibid P. 137-38.

28 – There is a “situation ethics” when a moral act is considered as good or justifiable though it is consciously in opposition to the revealed will of God. For more details see Molinski, W. “Situation Ethics” in Sacrarnentum Mundi, Vol. 6, 1968, P. 94.

29 – Sahih Muslim, Kitab al-iman.

30 – The Benevolence market is defined as a third voluntary market where the unilateral transfers (to uplift the least privileged) interact with the norms of al’adl (to ensure symmetric and fair relation in the market place). Its Westren counterpart the “charity market” is confined only to unilateral transfers in the form of charity.

31 – Buchanam J. “Rent-Seeking, Non-Compensation transfers and Laws of Succession”, Journal of Law and Economics, 26 – (71-85).

32 – Quran 59:7 The concentration of wealth in the hands of a few simply implies that the majority are socially marginalized. The deleterious economic, socio-political and psychological outcome is self-evident.

33 – For a detailed analysis see Abbas, A. 1990 (op. nit) pp. 136-149.

34 – Cf. Arrow, K. “Economic Theory and the’ Hypothesis of Rationality” in Eatwell et al (ed) A Dictionary of Economics, Vol.2, PP. 69-74.

35 – For more discussion see Simon H. “Rationality as Process and Product of Thought”, American Economic Review, 68, (1-16), 1979.

36 – All forms of behaviour generate maslahah if and only if they enhance and safeguard the objectives of shari’ah and the individual falah. The opposite is mafasdah (mischief), a characteristic of all Isliamically banned activities.

37 – Satisfacing is a concept coined by Simon, H. op. cit. Since rationality is bounded, maximization is technically unattainable. Instead, firms may aspire to satisfactory levels of profit, market share, ect. without thought of maximizing any objective function at all.

38 – The term was introduced by Smelser N. in his “The Sociology of Economic Live” 1963. It denotes that consumers are essentially free to choose the consumption bundles, and their demand is constrained only by their income and the prices of the commodities.

39 – See Abbas, A. (1990) (op. cit) pp. 168-171.

40 – Measures such as taxes, compensations and moral directives are subject to avoidance and evasion in the absence of individual’s benevolent initiatives. Should individuals internalize the norms of benevolence third party effects will be minimized and easily monitored.

41 – Share contracts are applied to entrepreneurial inputs while fixed contracts are applied to contractual non-entrepreneurial input. The distinction between contractual and entrepreneurial inputs is based on risk, uncertainty and risk bearing.

42 -Quran 26: 182-3.

43 – Quran 33:1.