WHAT IS ISLAMIC ECONOMICS? By M. UMER CHAPRA Research Advisor Islamic Research and Training Institute Islamic Development Bank Jeddah, Saudi Arabia

Economics? Science? – to establish cause and effect relationship between different variables - if A then B or B = f (A), if certain assumptions are satisfied Hypothesis – superstition, magic and witchcraft are also based on hypotheses When do we accept a hypothesis as a part of science? – method

Islamic Economics has a moral basis and starts with the Qur’an and the Sunnah a) Some Qur’anic hypothesis: 1. ان تنصروا 1لله ينصركم If you help God (A), God will help you (B) 2.وقد خاب من حمل ظلما Whoever commits injustice (A) He face ruin (B) 3. ومن اعرض عن ذكرى فان له معيشة ضنكا Whoever turns away from my message (A) he will have a difficult life (B) b) The implication of these hypotheses: Well-being of all

3. The Purpose : Why do we establish hypotheses? a) Conventional economics Samuelson: description and analysis Friedman: prediction b) Islamic economics – both are important, but there is something which is even more important : To help in the realization of human well-being in spite of the limited resources The Prophet, may the peace and blessings of God be on him, said: اللهم انئ اعو ذبك من علم لا ينفع (O God! I seek your refuge from knowledge that is of no benefit)

4. Well-being? Material – satisfaction of the needs of all Spiritual – nearness to God, moral uplift: these are necessary for peace of mind, inner happiness, family and social solidarity, absence of crime and anomie. Socialist and conventional economics Socialist economics did not recognize (b) Conventional economics also does not recognize (b) Consequently they ignore the role of moral values in the allocation and distribution of resources. In the absence of moral values there is sole dependence on the market or the government for allocation and distribution of scarce resources. Can the market or the government promote the balanced well-being of both the individual as well as the society without the help of moral values?

5. Some important Institutions involved in the allocation and distribution of resources: 1. Market ) 2. Government ) all interlinked 3. Family ) 4. Society ) What is it that can motivate all of these to serve the interest of the individuals as well as the society. Serving individual as well as social interest in a balanced manner requires the sacrifice of self-interest – But why should a person sacrifice his or her self-interest? Moral values can be helpful – why? Accountability before God – Reward and punishment in the Hereafter – Long-run perspective of self-interest – this world as well as the Hereafter

a) Rejection of the three pillars of conventional economics 6. The recent revival of Islamic economics – Independence - Islamic Economics Conference in Makkah in 1978 a) Rejection of the three pillars of conventional economics Rational economic man : ) self-interest ) Pareto Positivism: ) optimum unrestrained freedom ) Laissez faire ) Pareto optimum and humanitarian goals are in conflict b) Rejection of totalitarianism

7. Method of Islamic economics? hypothesis must be in harmony with the logical structure of the Islamic paradigm – even in conventional economics, hard core or protective belt is accepted without question explaining rationally – Ilm al-Kalam – God does not operate in an arbitrary manner testing – al-Kindi : a scholar should not make unproven statements assumptions – must be realistic

8. Progress of Islamic economics so far a) Macroeconomics b) Microeconomics c) Public finance d) Money and banking e) Other areas of economics