Islamic Economics Norm setting environment Welfare of the society at large Constraints for the economic function of the state Unity and entitlement to equality

The “third way”? Dissociation with either socialism or capitalism Religion embeds a broader social/cultural framework

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Confucianism OW/east/01/28/confucius.revival/i ndex.html

Islam and economics Zakat Fair deals and hard working Gharar(riba):capitalizing on uncertainty Qirad (profit sharing and risk sharing) Capital formation and economic growth

Ethical practices and institutions The Islamic doctrine of economics permits degrees of individual freedom and state intervention, but leaves the determination of these degrees to the wisdom and consciousness of those involved. This flexibility has made Islamic economics open to alternative options within its framework.

Economic rights and duties of the individual Avoidance of ribã: there is quite a bit of controversy about inclusions and exclusions from this rule (government debt interest payments, for instance) Payments of zakat (poor dues): sometimes appears as income tax (10% on irrigated lands and 5% on non-irrigated ones) or wealth tax (various rates?)

(continued) Working hard at one’s profession:” A man has not earned better income than that which is from his own labor”. Obeying various behavioral injunctions: not wasting resources, fraudulent business, consuming in moderation, performing good works for the community, etc.

(continued) Avoidance of aleatory contracts and other enterprises of chance(gharar). When buyer and seller are in no position to predict full financial consequences of a transaction, e.g. buying fruit on a tree before it ripens. Gambling, forward trading, lotteries, etc would be examples. Insurance policies sales are on the borderline.

Economic institutions Property: “ To him along belongs everything in the galaxies and everything between them.” Individuals are holding property in trust, receiving the profits but are accountable to Him regarding its use. No direct objection to private property but some ambiguity in language and enforcement.

Economic institutions Interest is explicitly forbidden, profit is not. Profit in in an accounting sense contains a number of different elements like implicit interest payment on capital “accounting profit”

Economic institutions Rental incomes are more complicated. Land rents have existed from times immemorial. Predominant form is sharecropping. Fixed rents with absentee landlords (Egypt). The sharecropping rent is close to qirad, fixed rents are ribã.

Inequality Acceptance of profits and to a certain degree rents will result in inequalities: “Allah decreed some of you to have more wealth than others. Do the people who have more wealth share it equally with their dependents and slaves?”

Financial institutions Profit sharing (qirad): deposits to be channeled into ownership shares in a particular investment effectively making a depositor a partner in a business. A bank becomes a proto-mutual fund.

Macroeconomics of Islamonomics Attenuation of speculative demand for capital Demand for cash and inflationary expectations Supply of money is government fiat only? (100% reserves according to some, no bank creation of money)

Capital-cash economy Disequilibrium of cash balance Constant price level and savings rate If cashD<S then prices of land, stock etc are bid up and their nominal returns are lowered so that the supply and demand for cash balances is equalized. If prices and savings were flexible than equalization would result in inflation.

Aggregate saving Income and substitution effects between current and future consumption Long-termism of consumers Increased risk factor of saving The discounting is discouraged