PALGRAVE STUDIES IN

ISLAMIC BANKING,
FINANCE, AND ECONOMICS

Revisiting
This is a
PalgraveEconomics
Islamic Macmillan
Series Title
The Organizing Principles
of aisNew
This Paradigm
a Palgrave
Macmillan Series
Nabil El Maghrebi Subtitle
· Abbas Mirakhor
Tarık Akın · Zamir Iqbal
·

Foreword by Seyyed Hossein Nasr

 Palgrave Studies in Islamic Banking, Finance,
and Economics

Series Editors
Mehmet Asutay, Business School, Durham University, Durham, UK
Zamir Iqbal, Islamic Development Bank, Jeddah, Saudi Arabia
Jahangir Sultan, Bentley University, Boston, MA, USA
The aim of this series is to explore the various disciplines and sub-
disciplines of Islamic banking, finance and economics through the
lens of theoretical, practical, and empirical research. Monographs and
edited collections in this series will focus on key developments in the
Islamic financial industry as well as relevant contributions made to moral
economy, innovations in instruments, regulatory and supervisory issues,
risk management, insurance, and asset management. The scope of these
books will set this series apart from the competition by offering in-depth
critical analyses of conceptual, institutional, operational, and instrumental
aspects of this emerging field. This series is expected to attract focused
theoretical studies, in-depth surveys of current practices, trends, and
standards, and cutting-edge empirical research.
 Nabil El Maghrebi · Abbas Mirakhor ·
Tarık Akın · Zamir Iqbal

Revisiting Islamic
Economics
The Organizing Principles of a New Paradigm
Nabil El Maghrebi Abbas Mirakhor
Wakayama University La Junta, CO, USA
Wakayama, Japan
Zamir Iqbal
Tarık Akın Islamic Development Bank
İstanbul, Türkiye Jeddah, Saudi Arabia

ISSN 2662-5121 ISSN 2662-513X (electronic)

Palgrave Studies in Islamic Banking, Finance, and Economics
ISBN 978-3-031-41133-5 ISBN 978-3-031-41134-2 (eBook)
https://doi.org/10.1007/978-3-031-41134-2

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 Foreword

There are few subjects of central concern to the Islamic world that need
to be thoroughly re-examined and reconsidered in light of the Islamic
revelation as what has come to be known as Islamic economics. Much
has been written on this subject by Muslim scholars themselves but rarely
with full consideration of the worldview on which modern economics is
based and which is often adopted without questioning by most of those
who write on Islamic economics and who accept the whole philosoph-
ical basis of Western economics save for the subject of interest or ribā.
As a result, putting the matter of interest aside, most of what is called
Islamic economics these days shares with Western economics belief in a
purely material basis of this dimension of human life for which the claim
of centrality is made.
Most modern Muslim economists, even when speaking of Islamic
economics, forget that Islamic civilization flourished on every level
including the economic for centuries without even having a term for
economics in the modern sense. The Greek word oikonomia was trans-
lated into Arabic quite rightly as tadbı̄r al-manzil, literally taking care of
the household, and the word iqtis.ād, that is used for economics today in
the Islamic world, meant balance or moderation as in the title of the
famous book of al-Ghazzālı̄, al-Iqtis.ād fi’l-i‘tiqād usually translated as
Moderation in Belief . Modern Muslim scholars adopted the term in its
modern Western sense like sleepwalkers even if some did try to modify
it when it came to the question of ribā. Few, however, dealt with the

v
vi FOREWORD

central truth that in traditional Islamic society what is now called iqtis.ād
was never separated from the Sharı̄‘ah, Islamic ethics, religious obliga-
tions toward God’s creation and yes, also beauty combined with utility
and the needs of the soul combined with those of the body. The case
of the traditional guilds demonstrates fully this integrated perspective on
economic production.
Fortunately during the last few years a small number of knowledge-
able Muslim scholars, deeply rooted in their own tradition and at the
same time well acquainted with modern economics and finance, have been
turning their attention to the crucial question of what “Islamic” means
when we speak of Islamic economics. The four authors of the present
book belong to this small group. Some of them have already written valu-
able books on the subject and in this work all the authors bring their
considerable knowledge and experience together to provide an in-depth
criticism of the prevailing ideas in the field and at the same time present a
new paradigm for the study and practice of economics that is authentically
Islamic and not the product of colonized minds.
What is lacking in modern economics from the Islamic point of view?
Why should what is called Islamic economics today be criticized? What
is the role of Islamic ethics in economics? What is the relation of an
authentic Islamic economics to other aspects of Islamic civilization and
the Islamic sciences and forms of knowledge? These and many other basic
questions are treated here in a masterful manner and with clarity by the
authors in this important work. Anyone concerned with the future of the
Islamic world and its civilization will benefit greatly from the message of
this book.
This work is not meant to be only read and then put in one’s library.
It is a book that delineates a plan of action based on authentic knowl-
edge. I hope, therefore, that it will not be read only by scholars of Islamic
thought, but also by those men and women of action who are engaged
in economic activity that has a bearing upon the future of our society
including especially those in positions of political and social authority
whose decisions often have dire consequences for society. I also hope that
this book becomes taught throughout the Islamic world where economics
is taught in courses in colleges and universities.
The problems with which this book deals are not confined to only one
or two Islamic countries but are widespread. It is, therefore, fortunate
that the authors hail from different Muslim nations and each has deep
knowledge of the state of affairs in his own country. In the pages that
 FOREWORD vii

follow, these different rivers of knowledge meet in an integrated manner

so that the result is of pertinence for the Islamic world as a whole. I hope
and pray that this book is disseminated widely and will reach those who
are in need of its message wherever they might be.
Wa’Llāhu a‘lamu bi’l-s.awāb

Dhu’l-h.ijjah, 1444 AH Seyyed Hossein Nasr

June 2023 AD University Professor of Islamic
Studies
The George Washington
University
Washington, DC, USA
 Introduction

There are important questions about the meaning and essence of our
earthly existence. From the origin of man and cosmic phenomena to the
meaning of life and means of livelihood, answers may depend on the
strength of belief and degree of knowledge and expertise. For Muslim
thinkers, faith and convictions are founded on the Qur’an, the foun-
tainhead of all Islamic paradigms, ideas, and conceptions of reality. That
reality is not one of a purely earthly creature in the Promethean mode
of existence, but of a theomorphic man integrating knowledge of the
Sacred with the pursuance of spiritual and material life. The reality is
that economic prosperity ensued for centuries of Islamic civilization not
because of advances in theoretical and applied economics in the modern
sense, but in the absence of an original term for economics altogether.
The reality is that as a religion based on Unity, Islam does not separate
the spiritual from the temporal and religious from profane in any domain,
including economic life. It does not seek to achieve spiritual uplifting by
repudiating worldly life. It was well understood then, but it is not clear
to be the case now, that the economic and social edifice cannot hold
on solely to science, and reason, and that it is the soul, in the words of
Malik Bennabi, that allows humanity to soar.
The decay and fall of civilization do not happen by chance, but as a
matter of necessity as the scale of values is reversed, and the sense of
justice is lost. There was a gradual long-term process of social degra-
dation, economic deterioration, and transition to intellectual wilderness

ix
x INTRODUCTION

and confusion, where economic wisdom from men of integrity, piety,

as well as spiritual and material discernment was gradually replaced by
ersatz ideas that are alien to the Islamic worldview. It is natural that
after long decades of approaching the study of economic phenomena
from strictly a materialistic point of view, a new universe of discourse
called Islamic economics emerged from pressing needs to reflect again on
the problem of economic development and renaissance from an Islamic
perspective. The paradigm of “Islamic Economics” adopted a narrow view
of the concept of “Islamization of Knowledge,” developed in the 1980s,
proposed to “Islamize” the dominant paradigm of Economics by supple-
menting it with “Islamic values and ethics.” In the sight of many Muslim
critics, however, Islamic economics has failed to gain acceptability, bring
change, and promote itself on the public agenda. It seems to suffer from
the same internal contradictions of the very discipline it was meant to
replace.
It is virtually impossible to traverse or navigate this universe of
discourse without raising difficult questions about the authenticity of
Islamic economics and the inability to build an identity for itself. To
what extent does Islamic economics deviate from its primary function of
desecularizing and resacralizing economic knowledge? Is its agenda for
economic change inherently weak and deeply flawed to the point that it
remains unheeded? Has it grown accustomed to the same assumptions of
modern economics, while invoking the Qur’an more as a jargon than truly
authentic reason and justification? Does the uncritical adoption of the
same philosophy of materialism and methodology of empiricism render
Islamic economics incapable of answering the very questions it raises? The
ultimate question is not so much whether a discipline uprooted from its
Islamic worldview has a policy agenda of its own, but whether it has still
a purpose at all.
These difficult questions have no universally acceptable answers
because the prefix “Islamic” attached to many so-called Islamic paradigms
has come to mean different things to different people, who may not like
the truth, or part of the truth that does not suit their own argument. It
may be easier to commit to established beliefs, and reject specific criti-
cism than to embrace change. Facts, however, always trump sentiments,
and impartiality is essential for scholarly research. The irrefutable fact is
that no authentically Islamic discipline can ever be separated from the
Islamic worldview and authentic knowledge. A conjunction of secular
philosophies with Islamic knowledge to serve as means to the end of
 INTRODUCTION xi

establishing an Islamic paradigm is not a necessity but a false idealism.

A sort of compromise between Islamic and secular worldviews exposes
Islamic economics to sharper and wider criticism. It may be regarded as
potential threat to religious faith by dint of its inconsistency with secular
concepts, and potential danger to scientific inquiry by dint of the latter’s
incapacity to accommodate ethics or prove revelation to be false.
To provide some answers to these important questions in a balanced
methodological manner, the opening chapter of this book considers the
polar visions of the economy, and contends that in its present form,
Islamic economics is bound to converge toward the dominant secular
paradigm of neoliberal economics that supports the predatory economic
system of capitalism. It argues that the methodology of achieving a
synthetic discipline by imbuing conventional economics with Islamic
values requires a compromise of the latter, and inevitable loss of authen-
ticity. It is reminiscent of Christianity’s compromise of the essential values
of benevolence, grace, and selflessness, inter alia, to accommodate the
ideology of neoliberalism, which redesigned capitalism into its present
form. A union of neoliberal economic and Islamic economics based on
two diametrically opposite visions of the economy, a synthesis of two
incomparable, incompatible, and hence incommensurable paradigms with
different worldviews is a logical impossibility.
To reinforce the above logical arguments, Chapter 2 provides a brief
critical history of political economy and overview of the science and
dogma of neoclassical economics, whereas Chapter 3 provides a brief crit-
ical examination of the contents and discontents of Islamic economics,
the contentious relation between religion and economics, and the secu-
larization of Islamic Law. It is argued that there are fundamental flaws in
the assumptions underlying economic theory. The notion of consumer
sovereignty is not consistent with the argument of resources scarcity,
as the acceptance of the latter should logically preclude the former.
The rationality postulate holds also a sacrosanct status in neoclassical
economics as an empirically irrefutable metaphysical proposition by virtue
of ubiquitous self-interest behaviour. Self-interest itself is taken as self-
evident by virtue of the very assumptions of economic rationality and
resources scarcity. Also, critical arguments about the usefulness of math-
ematical economics stem from fundamental flaws in connecting the
abstract world of mathematics with the reality of economic life. This
methodological monism does not admit value judgements or references
to alternative worldviews, religious beliefs, and moral convictions.
xii INTRODUCTION

Under the current conditions, Islamic economics can neither emerge

on its own nor exist within the realm of conventional economics. The
dualism of worldviews cannot be resolved into a harmonious unity
because a secular paradigm that discards the metaphysical foundations of
Islamic economics is conducive to a mere vision of “ethical capitalism”
that is bound to be shattered by strenuous relations between the open-
ended processes of secularization and Islamization. It is important for
Muslim legal scholars and economists to grasp the reality that there are
no merits in intellectual attempts to fit secular ideals and ideologies into
Islam. Secularization, as a philosophical program based on secular life and
secular destiny, can only sever the connection of Muslim’s consciousness
with the Islamic worldview. It contributes to intellectual confusion and
error in knowledge. In a secular scheme of things, there are no profound
legal maxims or economic principles that can be truly Islamized either.
Islamic jurisprudence plays an important role in shaping Islamic economic
thought, but without the three authentic pillars of Islamic Law, including
intellectual creed, spiritual worship, and justice system, it is impossible for
Islamic economics to set a policy agenda of its own for the organization
of an ideal Islamic economy.
Chapter 4 examines the role of ethics in the polar case to economics,
iqtis.ād that derives its ontology directly from the Qur’an to organize an
ideal Islamic economy. Based on the moral philosophy of Islam aimed
at promoting economic and social justice, the internalization of rules
and virtues of Islam determines all facets of an economy ranging from
the rules of market conduct, production, consumption, distribution, and
redistribution. The organizing principle of risk-sharing in financial trans-
actions and other forms of exchange has a rich ethical dimension which
fills the gaps observed in prevailing economic systems. It minimizes the
exploitation inherent to interest-based or risk-transfer systems, leads to
efficient allocation of resources, reduces typical information asymmetry
and agency problems in economic dealings, enhances cooperation and
solidarity in the societies, and promotes financial and social inclusion.
The central message of this book, with its ontological, epistemolog-
ical, philosophical, and ethical arguments, is not new. Chapter 5 reiterates
the fact that it is a response to the earlier call by a number of distin-
guished Muslim philosophers, religious scholars, and social critics that
genuine and lasting solutions to the malaise of Muslim societies, including
economic problems, are contained in the Qur’an and Hadith. The analytic
perspectives about the cycle of civilization and problem of knowledge are
 INTRODUCTION xiii

provided by eminent philosophers and social critics in the past century

and half, including Muhammad Iqbal’s treatise about economic science,
Malek Bennabi’s seminal work on the conditions of renaissance, Sa’eed
Nursi’s magnum opus Letters of Light, and al-Shaheed Muhammad Baqir
as-Sadr’s comprehensive insights about Islamic economy. Further insights
are provided by Sayyid Hossein Nasr and Sayyid Naquib al-Attas on the
problem of knowledge and the notion that the Qur’an is the fountain-
head of ideas for every generation to conceive and implement its vision for
future societies. The disorder and chaos faced by the Muslim world can
only be the result of confusion in knowledge about Islam and its world-
view. As it is impossible to accommodate Islam to the ideals of secular
minds, or to graft the Islamic worldview onto secular ideas, it is imper-
ative to reaffirm the nature of authentic knowledge and its true sources,
in order to project justice in all spheres of responsibility and rebuild the
socio-intellectual foundations of Islamic civilization and ideal economy.
Together with Chapters 1 and 5, Chapter 6 constitutes the core
message of this book. It builds on the examination of polar visions
of the economy, and earlier call by distinguished Muslim philosophers
to reaffirm the nature of authentic knowledge, to present the Impos-
sibility Theorem about the Islamization of Economics. An examination
of the historical and philosophical underpinnings of economics reveals
major issues that make impossible emergence of an Islamic Economics,
a conception that proposes to graft dimensions of Islamic belief onto
economics, that would make logical sense and can guide policy toward
solving economic problems. The impossibility is indicated by the fact
that economics is so strongly immunized against anything metaphysical,
transcendent, moral, and ethical that even such ideas coming from the
inside of economics are rejected. The chapter concludes that iqtis.ād, the
Qur’an’s vision of the economy is a theonomy that is so radically different
from Economics that there is no basis to allow grafting of Islam onto
economics or economics onto Islam. The Impossibility Theorem implies
a conception of iqtis.ād, a paradigm based on the immutable, consistent,
and sacred system of rules prescribed by The Creator, while a system with
fallible, unstable, and everchanging concepts based on human judgement
is doomed to failure.
The institutional structure and behavioural norms of the iqtis.ād-driven
economy are, thus, described in Chapter 7. The institutional framework
is based on a unique set of principles governing property rights, and
xiv INTRODUCTION

contracts, which derive directly from the Islamic worldview. The insti-
tution of markets is also built on the three pillars of property rights,
contracts, and trust. The organic relationships between these institutions
depend on compliance to behaviour norms at each level, and on incentives
systems that promote trust, information transparency, and risk-sharing.
The behavioural norms and institutional rules, which are designed to
resonate in the entire fabric of society and economic life, are asserted in
the Qur’an and demonstrated by the Noble Prophet with a level of clarity
and consistency that renders recourse to alternative paradigms necessarily
associated with a loss of authenticity. The rules for the creation, exchange,
and transfer of property rights are immutable, but the institutional struc-
ture is flexible to accommodate the shifting economic dynamics over time
and space.
It is imperative to rethink the essence of macroeconomic policies in
light of the institutional structure and behavioural norms. Chapter 8
argues that viable redistribution mechanisms based on the organization
principle of risk-sharing are needed to regulate the dynamics of an ideal
Islamic economy. In contrast to interest-based financial systems which are
inherently unstable, it is possible to design and implement asset-based
redistribution and risk-sharing universal basic assets, which provide oppor-
tunities for investment in the real economy and generation of stable
income from development projects. The argument is made that both
fiscal and monetary policies used to regulate economic activity based on
the very interest-based mechanism that promotes economic rents cannot
arguably be part of the solution to the problem of economic inequalities.
Finally, the stabilizing role of risk-sharing in an iqtis.ād-driven economy
is also examined in Chapter 9, in relation to the nature of economic
uncertainty. It is argued that there is an irreducible amount of random-
ness in economic systems, where failure to predict the future cannot
be explained solely by flaws and deficiencies inherent to human knowl-
edge. The notion that uncertainty and imperfect knowledge are part of
economic life precludes the argument that it is also possible for certain
economic agents to insulate themselves from losses through debt agree-
ments based on risk transfer. There is also evidence that interest-bearing
debt is the source of financial instability and that central bankers are losing
traction of the interest-rate transmission mechanism, and thereby, control
of monetary policy. Financial regulation does not seem to be so much
concerned about preventing the next banking crises as about increasing
 INTRODUCTION xv

the capacity of the banking system to withstand one. In contrast, risk-

sharing in an iqtis.ād-driven economy promotes financial stability, which is
the conditio sine qua non for economic development and full employment.
This organizing principle provides remedies to the central contradiction of
capitalism as it prevents capital from reproducing itself faster than output
increases, and the past from devouring the future.
Thus, this book is a humble attempt to rethink Islamic economics, the
primary causes of a long divergence from authenticity, and the need for
paradigm shift toward iqtis.ād, the Qur’an’s vision of how individuals and
collectivities must manage the resources gifted to them by their Creator.
The principal contention behind The Impossibility Theorem, explained
in the central chapters of this book, is that the current paradigm of
Islamic economics is not viable. It is not viable because it offers a secular
philosophy for the organization of the economy that is, a posse ad esse,
discernible from conventional economics only in hopium. There is no
rationale for persistence because the status quo can only retard the orga-
nization of an ideal Islamic economy that serves the whole of humanity
is that the foundational pillars of iqtis.ād are so radically different from
the foundational structure of modern economics as to render each alien
to the other. It is impossible for the Islamic worldview, which cannot be
the subject of human inference or philosophical speculation, and for the
certainty of religious knowledge to be fused with heteroclite secular ideas
without a loss of authenticity. This authenticity is the basis of legitimacy
of whatever concepts, ideas, or thoughts that bear “Islam” as prefix.
It is impossible to change economic reality with the secular mind of
corrupt leadership and scholarship that advocates confusion and error
in knowledge. It is the hope of the authors that this humble work will
induce open-minded readers to reflect on the deep psychosis of infe-
riority complex and insecurity among so many Muslims that impairs
correct thought and action, and leads to civilizational bankruptcy. It is
a call to reflect on why Islam is deemed erroneously as a source of
obscurantism while credence is uncritically given to secular ideologies that
now pose an existential threat to humanity. With a distinctive worldview,
Islam offers humanity a radically different choice of direction in all aspects
of life, and it is incumbent on Muslim thinkers and leaders to elucidate,
on the basis of authentic knowledge, the properties of an ideal Islamic
economy, draw policies, and implement plans of action accordingly. The
truth is that once humanity is presented with a concrete solution to
economic problems, that a person with spiritual, intellectual, and material
discernment is at liberty to make the right choice.
 Contents

1 Polar Visions of the Economy 1

Authenticity and Islamic Economics 2
The Western Conception of Authenticity 3
Inauthenticity and Islamic Economics 5
The Term “Islamic Economics” and the Evolution of Its
Content 6
Hopes, Aspirations, and Inspirations of This Book 8
Rethinking “Islamic Economics” 9
Economics: The Operating System of Predatory Capitalism 10
Neoliberal Economics Assumes the Mantle of “Conventional
Economics” 13
Neoliberal Capitalism Dominates World Economies 13
The Empire of Neoliberal Economics 14
The Dire Costs of Neoliberal Economics 17
A Blending of “Economic Science” and the As-Sharı̄’ah 17
Is Scarcity the Problem or Distribution? 19
Secularism and the Blending of Conventional Economic
and the Sharı̄’ah 22
Secularism as Foundational Philosophy of “Conventional
Economics” 23
The Rationality Axiom and Islamic Economics 27
Economic Rationality Is a Part, Albeit a Small Part,
of the General Concept of Rationality 27

xvii
xviii CONTENTS

Al-Qur’ān and Rationality 30

Al-Qur’ān and “Self-Interest” 32
The Logical Impossibility of the Proposed Union 35
Attasian Conception of Islamization of Knowledge 36
Sadrian Discourse on Al-Iqtis.ād 40
As-Sadr’s Discourse on Contemporary Socio-Economic System 42
As-Sadr’s Conception of Ideal Socio-Economic System 44
As-Sadr and Al-Iqtis.ād Paradigm 48
Notes 60
References 68
2 Critiques of Conventional Economics 77
A Critical History of Political Economy 78
General Equilibrium Paradigm 83
The Science and Dogma of Neoclassical Economics 89
Economics Between the Rigour of Mathematics
and Relevance of Morality 95
Rationality as the Hard Core of Economic Theory 100
Notes 106
References 108
3 Critiques of Islamic Economics 113
A Brief History of Islamic Political Economy 116
The Contents and Discontents of Islamic Economics 118
Theoretical Doctrine Between Analytical Rigour
and Practical Relevance 123
The Contentious Relationship Between Religion and Economics 125
Islamic Law and Islamic Jurisprudence 133
The Secularization of Islamic Law 136
Islamic Law of Transaction and Economic Development 137
Notes 144
References 147
4 Ethics of Iqtis.ād 151
Growing Critic of Conventional Economics’ “Moral Muteness” 152
Meta-Ethics of Iqtis.ād 155
Unity of Creation 155
Model of Man 156
Justice and Equilibrium 157
Preservation of Rights 157
 CONTENTS xix

Internalization of Virtues 158

Respecting and Protecting Environment 159
Virtue-Based Ethics of Islam 159
Truthfulness and Integrity 162
Trustworthiness 162
Honesty 162
Goodness and Excellence (Ihsān) 163
Compassion and Generosity 163
Cooperation and Solidarity 163
Mindfulness of Vices or Unethical Practices 164
Prudence and Humility 164
Ethical Dimensions of Iqtis.ād 165
Ethics of Risk-Sharing 165
Business Ethics 172
Conclusion 174
Notes 175
References 178
5 The Crisis of Civilization and the Problem of Knowledge 183
A Brief Biography of Muslim Philosophers and Social Critics
Over the Past Century 185
The Determinants of Shift in Economic Power 187
The Problem of Knowledge and Intellectual Challenges 191
Consistent Perspectives on Economic Development
and Economic Justice 197
Call for Paradigm Shift in Islamic Economic Thought 203
References 206
6 Islamization of Economics? An Impossibility Theorem 209
A Brief Note on Key Philosophical Terms 212
Economics: Its Etymology and the Evolution of Its Definition 215
Economics: Its Definition and Method 219
Etymology, Definition, and Philosophy of Iqtis.ād:
An Introduction 224
Transcendental Nature of the Ontology and Epistemology
of Iqtis.ād System 228
Summary: An Impossibility Theorem 231
Notes 234
xx CONTENTS

7 Behavioural Norms and Institutional Structure of Iqtis.ād 241

Etymology and Quranic Foundations of Iqtis.ād 244
Behavioural Rules and the Promotion of Economic Justice
and Social Welfare 248
Institutional Framework of an Organic Iqtis.ād-Driven System 258
Property and Property Rights 259
Contracts and Contractual Obligations 264
Markets and Information 270
Risk-Sharing and Shared Prosperity 272
Notes 277
References 283
8 Rethinking the Essence of Macroeconomic Policies
in the Iqtis.ād Paradigm 285
The Nature of Economic Inequalities and Redistribution
Proposals 287
The Linkage Between Wealth Residual and Interest-Based
Debt 289
The Quantity Channel 291
Collateral 291
State-Independent Payoffs 293
The Price Channel 295
Leverage 295
Asset Prices 297
Risk-Sharing and the Notion of Wealth Residual 299
Risk-Sharing Asset Redistribution 303
Risk-Sharing Universal Basic Assets (RUBA) 308
Blueprint for the RUBA: Public Basic Asset Fund (PBAF) 313
Establishment of the Public Basic Asset Fund 315
Investment in Risk-Sharing Instruments 316
Trading PBAF Shares in Secondary Markets 317
Notes 319
References 321
9 The Risk-Sharing Organizing Principle of Iqtis.ād 327
Economic Uncertainty and the Notion of Risk 329
The Pervasiveness of Risk-Transfer Relations 333
Debt and Financial Instability 335
Interest Rates and the Transmission of Monetary Policy 337
Monetary Policy as a Source of Economic Uncertainty 339
 CONTENTS xxi

Debt and the Making of Financial Crises 341

Prudential Regulation and the Procyclicality
of the Financial System 343
Risk-Sharing and Economic Stability 345
Interest Rates and Expected Rates of Return 347
Iqtis.ād and the Islamic Financial System 348
Iqtis.ād, Equity Financing and State-Contingent Claims 352
Risk-Sharing and Economic Prosperity 356
Conclusion 360
References 361

Index 367
 CHAPTER 1

Polar Visions of the Economy

This book is about visions of how societies organize the management

of their resources to serve the needs of their people. Specifically, it is
about two polar visions of the economy and the dominant foundational
paradigms that provide them theoretical support. These are: (i) capi-
talism and the currently dominant paradigm of neoliberal economics,
and (ii) the system envisioned by the supportive paradigm “Islamic
economics” presently dominating the universe of discourse about the
Islamic economy. The reason that necessitates this investigation is that
the latter paradigm—based on a narrow conception of the methodology
of “Islamization of Knowledge (IOK)” and equally narrow conception of
the “Objectives of as-Sharı̄’ah”—converges to the dominant paradigm,
neoliberal economics, that supports the economic system, capitalism,
which now dominates contemporary economies and has done so for
at least the last four decades. The economy that such paradigm would
support has yet to be designed, much less implemented. Nevertheless, it
is possible to extrapolate the paradigm to envision the resulting economic
system based on its axioms. Doing so yields the outline of a system not
much different from the form of capitalism now being practised.
The essence of the methodology of this paradigm suggests that intro-
ducing Islamic concepts and terms (including Islam’s conception of

© The Author(s), under exclusive license to Springer Nature 1

Switzerland AG 2023
N. El Maghrebi et al., Revisiting Islamic Economics,
Palgrave Studies in Islamic Banking, Finance, and Economics,
https://doi.org/10.1007/978-3-031-41134-2_1
2 N. EL MAGHREBI ET AL.

morality and ethics) into the present economic paradigm Islamizes “con-
ventional economics.” The main contention here is that this methodology
requires a compromise of Islamic values in order to achieve such a
synthesis. The resulting system will not be much different from that which
emanated from the synthesis of Protestant Christianity and capitalist
ideologies undertaken in the nineteenth and twentieth centuries.1 That
compromise unleashed a predatory economic system that has produced
severe economic and financial crises, an obscenely skewed income and
wealth distribution, and an environmentally existential threat to humanity.
Lessons from the history of Protestant Christianity’s compromise with
capitalism and its consequences2 are constructive references as researchers,
writers, and scholars attempt to develop the discipline that is to explain
the design and operations of the economy that the most authentic source
of Islam, Al-Qur’ān, envisions. These attempts should be guided by
authenticity, which is fundamental to Islamic economics and the system it
sets out to describe.

Authenticity and Islamic Economics

For the purpose of discussions here, authenticity refers to the immutability
of a source with which congruent systems of thought, phenomena, and
behaviour identify and define themselves. For adherents of Islam that
source is Al-Qur’ān; the Verbatim Word of Allah subhānahu wa taala
(swt) transmitted to the Noble Messenger, salla Allah ’alaihi wa aalih
(saa). Al-Qur’ān itself defines as authentic any thought, action, and
identity that reflects belief in and adherence to that which has been
transmitted by Allah swt to humanity through the Noble Messenger.3
For example, the primordial human nature (al-fitrah) is identified in
Al-Qur’ān as authentic because Allah swt has Created it as immutable
(Al-Qur’ān, Verse 30: Chapter 30). Its authenticity can be temporarily
covered and suppressed by cultural, ideological, or other external forces,
but it will not be fully submerged or lost; it is invincible, pervasive, and
never loses its inbuilt compass that directs it toward its Creator.
In the context of the subject matter of this book, it will be argued that
an authentic paradigm of the discipline meant to articulate and explain Al-
Qur’ān’s vision of the economy has to be one which is fully congruent
with Al-Qur’ān and presents an indisputable representation of its vision
of the economy. It will be argued also that there is a comprehensive,
 1 POLAR VISIONS OF THE ECONOMY 3

coherent, and comprehensive vision of the economy discernible from Al-

Qur’ān. The axiomatic belief, which constitutes also the premise of this
book, is that an authentic discipline should be able to discover that vision
and the rules that govern it. It will be explained how such a paradigm will
have to be an authentic, coherent, and logically consistent body of knowl-
edge whose core axioms and principles stand in sharp contrast to those
of the presently dominant paradigm, referred to in this book as “Eco-
nomics.” This mutual exclusivity negates compromise of Islamic values in
order to obtain an “Islamized” Economics.4
There is no clear evidence regarding who coined the term “Islamic
economics” or when, but it appears that not much thought had been
given to the paradox that the term presents by placing a transcendental
and sacred system of thought side-by-side with a secular, desacralized
and grossly profane, highly materialistic discipline. Similarly, there is no
clear explanation or etymological justification for the term and the legit-
imacy of combining the two terms composing it. As will be discussed,
Economics has roots that are historically, philosophically, and culturally
specific. The question arises as to the degree of compatibility of the speci-
ficity of Western experience that led to the birth of Economics with the
Islamic experience to legitimize combining the two terms. The puzzle
of the choice of the term becomes even more striking when realizing
that Islam has its own authentic term “Al-Iqtis.ād,” with roots in Al-
Qur’ān, to describe the system and the discipline dealing with behaviour
and processes involved in the operations of an economy. Within the
Islamic framework, the question of authenticity is quite crucial and relates
to the degree that the contents ideas, behaviour, or phenomena have
direct connection with Al-Qur’ān. It is this connection of Al-Iqtis.ād with
Al-Qur’ān that consitutes its authenticity, and thus legitimacy.

The Western Conception of Authenticity

In contrast to Islam, conception of authenticity is a contested subject
in Western thought. The concept first appeared in the writings of Jean-
Jacques Rousseau (1712–1778) who, in criticism of emerging modernity,
argued emerging modernity argued that authenticity is derived from the
natural self and appealed for the return to the inner self. He defined inau-
thenticity as behaviour resulting from influences of the external forces
bearing upon the natural self.5 With the expansion and strengthening
4 N. EL MAGHREBI ET AL.

of secularism, materialism, and modernity, the late nineteenth and twen-

tieth centuries witnessed growing criticism of the interiority search for the
authentic self by philosophers such as Theodor Adorno (1903–1969)6
and Michel Foucault (1926–1984).7 Adorno criticized existentialism
(especially Martin Heidedgger (1889–1976)) for (specially Heidegger)
for developing an ontology and a language (jargon) attempting to
reproduce a Christian character without the Christian belief.8
A clear example of inauthenticity is the way the nineteenth-century
Protestantism accommodated economics (Davenport, 2008). At first
glance, it appears as a puzzle how the Christian values of selfless-
ness, humility, compassion, sacrifice, and benevolence can accommodate
the capitalist ideology of possessive individualism, self-interest, self-
promotion, greed, competition, and emphasis on exclusive personal
success, by aggressively seeking the best of material world for oneself.
The way this was accomplished is articulated in Maximilian Weber (1864–
1920)’s book, The Protestant Ethic and the Spirit of Capitalism.9 Weber
argued for the Protestant “ethic” contained in the doctrine of “call-
ing”—a divinely inspired inner impulse toward a particular course of
action—summarized in the practice of worldly asceticism, particularly
hard work, extreme frugality, postponed gratification combined with
the “Spirit” of capitalism—rationality, self-interest, competition—to legit-
imize the expansion/of capitalism. The combination promised worldly
rewards by the “spirit of capitalism” and otherworldly rewards promised
by Protestantism through the practices of the ethic of worldly asceticism.
By the mid-nineteenth century, capitalism had become a pervasive way
of life so much so that Weber described the capitalist economy as an
“immense cosmos into which the individual is born, and which presents
itself to him, at least as an individual, as an unalterable order of things in
which he must live. It forces the individual, in so far as he is involved
in the system of market relationships, to conform to capitalistic rules
of action.”10 Thus, the “philosophy” of Economics provided theoretical
support, analyses, policies, and the means of indoctrination of the young
through the educational system for over a century with consequences that
are now posing an existential threat to humanity. The natural question
arises as to whether Islam’s compromise with conventional economics
would produce better results?
 1 POLAR VISIONS OF THE ECONOMY 5

Inauthenticity and Islamic Economics

A tentative look at the inauthenticity of one such compromise may be
instructive in response to the question posed above. The last few decades
have witnessed the emergence and growth of “Islamic banking” which
is, in all but the name, a replicate of interest-based, risk-transfer banking.
It usurps terms developed in Islamic Jurisprudence (Fiqh Al-Mu’āmalāt
related to Islamic Law of Transactions) as “Islamic” jargon, to camou-
flage basically a non-Islamic character as it integrates interest rate or,
at best, quasi-interest rate, charges into financial dealings. Sometimes it
even invents jargons that, to the un-initiate, sound Islamic. For example,
its practitioners invented “sukūk”—plural of sakk, an Arabized Persian
instrument called “check” (French chèque)—as a name for interest-based
“Islamic bonds.” This development has brought it into convergence with
conventional banking to the degree that it has made the former an “asset
class” in the latter. It appears that the paradigm that presently dominates
discussions of “Islamic economics” is moving in similar direction.
There is still time to initiate a course correction and return to the
authentic path of discovering the vision of Al-Qur’ān for the economy
and establish the discipline to support it. Arguably, that discipline is a
work in progress and will remain so for some time. Presently, it is passing
through the agonizing stage of its infancy and the struggle for self-
identification. While half a century may justifiably seem a long period
of time to the young researchers, it is worth remembering that, by the
reckoning of some historians of economic thought, the roots of the disci-
pline of “conventional economics” have been in the making for over
a millennium or longer.11 In that sense, even the late start of Muslim
articulation in English of thinking on the subject matter, dating to the
1960s, seems to have been hasty in labelling the discipline as “Islamic
economics” without considering the etymological, epistemological, and
doctrinal misconceptions and misunderstandings that combining the two
terms would create.
6 N. EL MAGHREBI ET AL.

The Term “Islamic Economics”

and the Evolution of Its Content
In the second half of the nineteenth and early twentieth centuries when
economics was introduced to Muslim societies, the term was translated
as “Al-Iqtis.ād” apparently without the awareness of the fact that “Al-
Iqtis.ād” as an authentic concept, with roots in Al-Qur’ān (from the root
qas.ada, see, for example, Verse 19: Chapter 31 of Al-Qur’ān), was etymo-
logically quite different from the Western conception of “economics.”
From there, it was a short step to combining Islam and “economics” in
the 1970s and 1980s while all the while the intention may well have been
to investigate the vision of Islam for the economy. In the event, major
writings on the subject in the 1980s focused on an apparent view that
Islam was summarized in “as-Sharı̄’ah,” and the latter was represented
by Islamic Jurisprudence (Fiqh) and, in the context of “conventional
economics,” that meant the Jurisprudential rules governing transactional
relationships, i.e. Fiqh Al-Mu’āmalāt. Hence, efforts were devoted to
defining the discipline of Islamic economics along the lines of Islamic
Jurisprudence.12 Other writers, judging this approach inadequate, began
exploring, in the second half of the 1980s, the writings of the classical
Muslim scholars and discovered the concept of Maqās.id as-Sharı̄’ah that
summarized the objectives of Islam in five principles: protection of reli-
gion, life, property, intellect, and lineage, articulated in the tenth through
the fourteenth centuries.
This line of inquiry proposed developing “Islamic economics” based
on this conception of the objectives of Islam. What it overlooked was
the historical circumstances, ideological and political orientations, and
purposes of the advocates of this narrow conception of the objectives
of Islam. Concurrently, a number of Muslim philosophers and educators
postulated that educational systems in Muslim countries were responsible
for the malaise of these societies. Hence, they proposed a program of
“Islamizing” the educational system in Muslim societies. Initially financed
by rich Muslim countries, Islamic universities were organized in a few
Muslim countries, such as Malaysia and Pakistan, to serve as model for
the rest of Muslim countries. Their task was to develop “Islamized”
curricula. By the end of the old millennium and the first decade of the
new, an Islamic economic paradigm emerged that integrated the idea of
“Islamization” with the narrow conception of the objectives.
 1 POLAR VISIONS OF THE ECONOMY 7

The point worth emphasizing is that focusing on five principles as

containing the objectives of as-Sharı̄’ah (usually equated to the objec-
tives of Islam) and then to suggest that a discipline of economics
should be built on this basis disserves Islam’s vision of the economy.
Continued focus on five principles is somewhat puzzling since over time
writers on the subject have continuously expanded the list based on their
understanding of Al-Qur’ān and As-Sunnah.13 The contention of the
philosophers and educators who proposed Islamization of Knowledge,
however, was that a search for authentically Islamic model of education,
as well as social science disciplines, should rely directly on Al-Qur’ān and
Sunnah of the Noble Messenger (saa).
Accordingly, it is hoped that the discussions in this book will be
helpful—in this yet early and nascent stage—in the formation, develop-
ment, and emergence of a paradigm that explains the authentic vision
of the economy as is contained in Al-Qur’ān, and explicated and oper-
ationalized by the Sunnah of the Noble Messenger (saa). The imple-
mentation of such an authentic Islamic economy will have the power
to radiate out and sanctify the actions of its participants resulting in
stable and prosperous society. However, this requires a firm belief in the
metaphysical conceptions of Al-Qur’ān that could not and would not
be possibly entertained by the Western secular foundations of “conven-
tional economics.” For example, one of the most important metaphysical
and transcendental axioms of Islam which plays a significant role in the
operations of the vision of the economy in Al-Qur’ān is the belief in al-
Ghayb, meaning a conviction that there is a metaphysical universe with
its rules and operative relations that cannot be explained in terms and
language of philosophies and discourses that deny metaphysics and tran-
scendence. Nor can the language of Al-Qur’ān referring to the universe
of al-Ghayb and its connections with humans and their behaviour be
understood or acknowledged by underlying systems of thought that gave
rise to the contemporary Western conception of economics: secularism,
materialism, and empiricism. To illustrate, one such a rule with significant
implications for material prosperity in the life of individuals and soci-
eties is that of “Barakah” which, as a metaphysical concept, cannot find
acceptability in the system of thought that produces the Western concep-
tion of economics (although, as will be remarked later in this chapter,
there are economic concepts that approximate “Barakah” in effect but
not in conception). The operations of this rule in Al-Qur’ān vision of the
8 N. EL MAGHREBI ET AL.

economy is described in Verse 96 of Chapter 7 of Al-Qur’ān which enun-

ciates the necessary and sufficient conditions for the prosperity of human
societies.

Hopes, Aspirations, and Inspirations of This Book

This book is a response to the call by a number of distinguished
Muslim philosophers, religious scholars, and social critics—such as Said
Nursi (1877–1960), Muhammad Iqbal (1877–1938), Malek Bennabi
(1905–1973), and Muhammad Baqir As-Sadr (1935–1980), as well as
Seyyed, Seyyed Hossein Nasr, and Syed Muhammad Naquib al-Attas—
that genuine and lasting solutions to the malaise of Muslim societies are
contained nowhere other than in Al-Qur’ān. It is important to note, in
this context, that the fundamental task of an authentic Islamic economic
paradigm is not to produce a theory of how an existing economic system
operates but to specify the institutional scaffolding of the system that Al-
Qur’ān envisions for human societies. The task of theorizing begins after
such a system has been defined and its institutional structure—that is the
rules governing its operations—are identified. Therefore, theorizing in
this context would mean to postulate how such a system can be imple-
mented and, from there, hypothesize empirical propositions to be tested.
In other words, unlike the Western conception of economics in which
theories aim at discovering rules that govern economic behaviour, then
predict and control such behaviour, authentic Islamic economics takes as
axiomatic the rules governing behaviour as prescribed in Al-Qur’ān and
searches for ways and means of implementation in a given society within
the context of cultural, demographic, and natural conditions.
The most important task of a Muslim economist—that is one who
has internalized the knowledge of the authentic economy as envisioned
in Al-Qur’ān—is to design and propose policies that would transform a
non-Islamic economy to the vision of Al-Qur’ān to the relevant authori-
ties for implementation. Therein lies one of many fundamental differences
between the Western conception of economics and the authentic Islamic
economics as envisioned in Al-Qur’ān. To illustrate, it is generally
understood that economics as defined by the ideology of neoliberalism
redesigned capitalism into a new form.14 This means that a discipline
defines a system which is then implemented by policymakers who are
convinced by the arguments of its advocates. It is generally acknowl-
edged that the current system was created when the President of the
 1 POLAR VISIONS OF THE ECONOMY 9

US and the Prime Minister of UK at the time (in the 1980s) imple-
mented policies designed by those who professed neoliberal economics.
In contrast, the fundamental principles of authentic Islamic economics
are immutable because they are derived from Al-Qur’ān. This and other
salient differences, to be considered later in this chapter, raise the question
of epistemological legitimacy of “Islamizing” Economics. The possibility
that such efforts may well lead to an epistemological schizophrenia should
give pause.

Rethinking “Islamic Economics”

An opportunity to rethink may be helpful to a deeper understanding
of philosophical, logical, and methodological issues involved in present
efforts to “Islamize” Economics through a union of economics and
a narrow conception of Maqās.id as-Sharı̄’ah as well as a constrained
understanding of the philosophy of the concept of “Islamization of
Knowledge,” a term first used by ‘Allamah Muhammad Iqbal of Lahore15
with its logical and philosophical bases elaborated by Syed Muhammad
Naquib al-Attas.16 Indeed, the deeper understanding makes clear that this
union represents such a narrow understanding of Islamization of Knowl-
edge, which is not even compatible with the underlying philosophy and
the proposed methodology of Ismail Al-Faruqi (1921–1986),17 Abdul-
Hamid Abu-Sulayman (1936–2021),18 Taha Jabir Al-Alwani (1935–
2016), and their colleagues19 at the International Institute of Islamic
Thought (IIIT), much less with philosophical and metaphysical argu-
ments of al-Attas. Efforts at Islamizing conventional economics via
application of the narrow conception of Maqās.id as-Sharı̄’ah (as the five
objectives popularized by the writings of classics in the tenth through
fifteenth centuries, CE) converges necessarily to the secular, neoliberal
economics out of which grew the current form of predatory capitalism
that now dominates economies across the globe. As important as the
Objectives of Islamic Law (as-Sharı̄’ah) are, for humans the priority
belongs to compliance with the rules (institutions) that govern the indi-
vidual and collective behaviour prescribed in Al-Qur’ān and which define
the vision of Allah swt for the economy that serves human societies.
Emphasis on a Fiqhi approach, through the narrow view of the Objec-
tives,20 has led to the neglect of Al-Qur’ān in this important task. There
has been a woeful lack of scholarship in extracting, articulating, and
10 N. EL MAGHREBI ET AL.

drawing policy implications from the analysis. Exception are efforts by

Darraz (1950 [1973]) and that of Al-Hakimi et al. (1992).21
In order to demonstrate the inauthenticity of the Islamic economic
paradigm that currently dominates discussions and which proposes to
“Islamize” mainstream economics through the union of the two, it is
necessary to investigate the historical, cultural, and philosophical founda-
tions of the “economics” which is to be “Islamized.” This “economics”
forms what, in the language of computers, Norgaard calls “the oper-
ating system” of today’s capitalism.22 Accordingly, attention focuses
on the historical, methodological, philosophical, and ideological devel-
opment of the reigning paradigm of economics which provides the
theoretical support and justification for global capitalism.23 Throughout
the post-Scholastic period, especially during the seventeenth and eigh-
teenth centuries, political economy’s centuries, the main task of political
economy was to explain and justify the existing economic systems, but not
to create one. However, the present form of capitalism owes its existence
to neoliberal economics formulated in the 1930s and 1940s in Europe,
came to fore in the 1960s and 1970s, and implemented as national policy
first in the US and UK in the 1980s. Thereafter, it spread to the rest of
the world attesting to the power of major capitalist economies to influence
world economies.
Over a period of four decades of operation of this system, significant
damage was done to societies around the world. It will be argued here
that the adoption of a paradigm of Islamized Economics, as is presently
formulated, to design an economic system will produce no better results.
An alternative path—offered to researchers in the second half of the
1960s but not taken—to discoverning an authentic Qur’ānic paradigm
of economics complete with its philosophical, logical, and methodological
underpinnings will be presented at the end of the chapter.

Economics: The Operating

System of Predatory Capitalism
The presently dominant paradigm of neoliberal economics evolved from
“orthodox” or “conventional” economics. The latter, in turn, evolved
from the discipline of political economy. Western thought about the
economy dates to the seventeenth century, even though concerns about
activities that are termed “economic” has always been an inseparable
part of human life. From its inception, political economy viewed the
 1 POLAR VISIONS OF THE ECONOMY 11

economy as embedded within the social system and not separate from
it. Political economy was the discipline that studied the management
of the resources of the society in provisioning material resources for its
members within the historical, cultural, and the belief frameworks existing
at the time that formed the structure of Western societies. Among these
were the class and hierarchical structure of these societies. Hence, the
management of the economy involved path-dependent, cultural values,
historical processes, institutions, and organizations which defined Western
experience in the seventeenth century. A chief characteristic of this expe-
rience was, and continues to be, unequal distribution of power, resources,
income, and wealth. The economy was the domain in which this unequal
power exercised its privileges.
It is worth noting that the discipline of political economy did not
include scarcity as an axiom, as did its offspring “economics.” As Thomas
De Gregori (1987) and Tae-Hee Jo (2011) note, resources were not
considered scarce because it was recognized that they were made avail-
able when the need for them arose in the production processes. The above
two scholars argue that (1987) and Jo (2011) argue that causal ordering
runs from production to natural resources and not the reverse. If so, then
scarcity of resources cannot serve as an index of prices. Without a scarcity
index, price mechanism cannot legitimately be considered as the coor-
dinator of market activity. Indeed, it has been argued that most prices
for goods and services are determined outside of the market. They are
administered prices determined by profit margins.24
To Adam Smith (1723–1790), the issue of purpose of political
economy was finding ways and means of empowering the people to
provide their own means of material life as well as providing revenue
for the state. Clearly, the issue of scarcity was not a primary concern of
Smith.25 Even after him, political economy’s concern was discovering laws
governing production and distribution of wealth. While economists like
David Ricardo (1772–1823) and John Stuart Mill (1806–1873) focused
on these issues, Karl Marx (1818–1883)’s concern was with the ques-
tion of accumulation of capital through exploitation of the process of
distribution and usurpation by capitalists of surplus wealth created by
labour. Again, there was no strong emphasis or an overriding concern
with scarcity.
In the last three decades of the nineteenth century with the growth
of acceptance of marginalism and utilitarianism calculus of pleasure
and pain advocated by Stanly Jevons (1871) and Carl Menger (1871),
12 N. EL MAGHREBI ET AL.

political economy shifted focus from studying the dynamics of produc-

tion, distribution, and accumulation of wealth to individual behaviour
positing humans as calculating beings in search of maximum pleasure
with minimum pain.26 Maximization of utility defined rational behaviour,
and optimization became the sole concern of economic agents allowing
the discipline that studied it to become deductive and mathematical,
abstracting from historical, cultural, and social contexts.27 In the process,
the issue of scarcity of means to satisfy unlimited wants became an axiom
that provides the basis for the rationalization of fierce competition for
resources and profits.28
The end of the nineteenth century saw economics evolving away from
the original paradigm of political economy to another in which the
notion of scarcity, defined as paucity of resources as means to satisfac-
tion of unlimited wants, is essential. Scarcity as manifestation of desire
and fear and as “the starting point of the economy” in Western thought
has been traced to Thomas Hobbes (1588–1679). But the economic
crises.29 The economic crises of the 1930s helped buttress the idea of
scarcity as a major problem of capitalist societies instead of problems of
production and distribution as envisioned by classical, Marxian and, to
a large extent, Keynesian economists. Thus, by mid-twentieth century,
problems of capitalist system defined in terms of production and distri-
bution were no longer a major concern of economics. Thus, scarcity
economics. Instead, scarcity became the focal issue of economics—
in the perspectives of economists like Lionel Robbins (1898–1984),
George Stigler (1911–1991), Paul Samuelson (1915–2009), and Milton
Friedman (1912–2006), Stigler, Samuelson, and Friedman—defined as a
study of how scarce resources with alternative uses are allocated to satisfy
unlimited wants. This perspective, which altogether skirted the prob-
lems of production and distribution in capitalism, was not the result of
scientific deliberation and careful research but, as Angus Burgin asserts,
there was an ideological purpose aimed at creating a “science” that ratio-
nalized and justified neoliberal market fundamentalism at the centre of
laisser-faire capitalism that challenged communism, Keynesianism, and
institutionalism.30 By the 1970s, neoliberal economics that had argued
this ideological position most aggressively since the late 1930s had gained
acceptability among conservative politicians and had managed to place
itself on the public agenda.
 1 POLAR VISIONS OF THE ECONOMY 13

Neoliberal Economics Assumes

the Mantle of “Conventional Economics”
At the heart of neoliberal economics is a political ideology that holds
that the primary bond between humans is not religious, cultural, soci-
etal, familial, moral, ethical, or metaphysical but purely economical. All
human relations, associations, and interactions are driven purely by self-
interest and motivated by what can be gained from these relationships.
Self-interest is the driver of human progress.31 In this ideology,32 the idea
of use of state power to enforce or even advocate civil rights was a “cor-
ruption” of the ideal of liberalism. The term “liberal” in neoliberalism
is inspired by the classical liberalism of the eighteenth and nineteenth
centuries. Its main focus was on economic liberty, meaning that all indi-
viduals have the freedom to dispose of their resources as they see fit.
Given that this ideology contends that human progress is driven primarily
by self-interest, it follows that any constraint on the economic liberty of
individuals to exercise their freedom would constitute a barrier to human
progress and must be removed.
Neoliberalism is, in effect, a relatively new philosophical thought that
makes certain claims on human conditions and uses these claims to gain
support for a new form of capitalism. Liberalism emphasizes individual
freedom exercised within the framework of the rule of law and limits
the power of state to constitutional provisions. Neoliberalism advocates
total freedom of individual behaviour within an institutional scaffolding
that includes: strong private property rights, free markets, and free trade,
state power exercised only to preserve and strengthen markets where they
exist and establish new ones where there is none. It holds individuals fully
responsible for all consequences of the choices and decisions they make.
Given these conditions, social injustices, poverty, hunger, massive inequal-
ities, and environmental degradation are acceptable since they are the
result of behaviour of free individuals in the free market. The state must
not interfere, through its redistribution policies, to correct the results,
whatever they may be, of operation of free markets and free individuals.

Neoliberal Capitalism Dominates World Economies

Neoliberal economics has been the fundamental articulation of the
specifics of the reigning capitalist system.33 It gave capitalism a new life.
Before WWII, following the economic crises of the 1920s and 1930s,
14 N. EL MAGHREBI ET AL.

capitalism was under considerable stress. Communism and socialism were

making inroads in Western Europe and in the US where capitalism and
policies to support it were being blamed for the Great Depression and
other crises. Historians have even argued that failures of capitalism were
responsible for the rise of fascism in Europe. After WWII, leading Western
intellectuals were motivated by the need to find ways and means of
sustaining peace and strengthening capitalism by stabilizing relationships
between economic classes in society as well as between nations. John
Maynard Keynes had already proposed the outline of a new economic
system that represented a compromise between capitalism and socialism a
decade before the end of WWII. Basically, this new vision would continue
to allow capitalists to maintain control over the means of production
“guided by market forces.”
This vision, however, recognized that, left to itself, capitalism creates
“disequilibrium” that leads to bouts with inflation, recession, depres-
sion, and mass unemployment as well as to frequent financial crises.
To counteract the excesses of capitalism, Keynesian solutions called for
government intervention by designing fiscal and monetary policies to
adjust the economy whenever there was fear of emergence of disequi-
librium in form of inflation or recession. As well, laws and regulations
were proposed to “leash” capitalism in order to limit its excesses. More-
over, progressive taxation would provide the needed resources to fund
social welfare and safety nets as ways and means of provisioning for the
economically disadvantaged.

The Empire of Neoliberal Economics

Between the end of the WWII and 1970s, Keynesian paradigm dominated
economies. There was economic growth with relative stability. Social
welfare programs that provided health, education, and retirement funding
allowed a reasonably tolerable income and wealth distribution. However,
a number of economic and geopolitical shocks, including the Vietnam
War (a fiscally un-provisioned war) and price shocks emanating from
monopolization of oil and other extractive industries led to slow growth
with rising prices. As a result, a new economic phenomenon emerged
in the form of “stagflation”: high unemployment combined with infla-
tion. Upper economic classes had tolerated high taxes and had reluctantly
consented to have their economic power be “leashed” through regulation
during the post-WWII so long as their share of the economic pie remained
 1 POLAR VISIONS OF THE ECONOMY 15

essentially unaltered.34 However, the economic elite found intolerable

that their economic take was eroding because of the low growth of the
1970s. In the event, they and their political allies began searching for ways
and means by which the crises of the period could be used to wrest back
control over the economy lost during the post-WWII period.
In the immediate post-WWII period, a group of European economists,
members of Mont Pelerine Society,35 had already developed a body of
philosophical and analytic research highly critical of Keynesian economics.
The Society’s most prominent member, Fredrick Von Hayek (1899–
1992) and Milton Friedman, made a philosophical case that reframed all
government interventions as restricting human freedom and, therefore,
they constituted an attack on the central values of Western civilization.
This way, the need for governments to regulate to protect the economy,
the society, and the environment against abuse and harm that individ-
uals and corporations can cause was reasserted as arbitrary attempts to
constrain human freedom.
Neoliberalism first came to public notice in the decade between the
second half of the 1960s and the first half of the 1970s. During this
period, there was discontent and agitation, particularly among the Euro-
pean and American youth. While the mass protests were spearheaded by
opposition to the war in Vietnam, it represented a deeper underlying
resentment against what the protestors considered government policies
restricting individual liberties. By the late 1960s and early years of the
1970s, these movements crystalized their position with a focus on the
“intrusive” role of the state and demanded reforms. This provided the
neoliberal intellectuals a platform which they used skillfully throughout
the 1970s to place their views on public agenda.36 As pure economic
ideology, neoliberalism had a simple message, establishing free markets
and minimizing the role of the state in regulating the market, cloaked in
the rhetoric of individual liberty, political equality, and human rights.37
With support from allies among political and economic elites, neoliber-
alism capitalized on the popular discontent to guide it toward reinventing
a much stronger form of capitalism. In this effort, neoliberalism achieved
its major success in intensifying the formulation of government policies
aimed at serving the interests of capitalism with the election of Margaret
Thatcher as the Prime Minister of UK in 1979 and Ronald Regan as
the President of the US in 1981, both strong converts to neoliber-
alism. From then on, neoliberal economics would become the doctrine
according to which domestic economic policies in Western countries
16 N. EL MAGHREBI ET AL.

and across the globe would be formulated. Internationally, implementa-

tion of the neoliberal economic policies, summarized as “the Washington
Consensus”38 were promoted through international financial institutions
as “Adjustment Programs.” Neoliberal economic policies brought deep
changes in the structure of economies across the globe. Multinational
corporations could move, with ease, financial and technical resources
and production, across borders, to where labour was the cheapest while
increasing the income and wealth gap between rich and poor. By mid-
1990s, the power of economic decision-making had begun to shift from
states to economic elites and their political allies through implementation
of neoliberal policies.
By the end of the 1990s, the neoliberal capitalism had begun weak-
ening its host governments to the degree that John McMurthy (1999)
diagnosed the period as “the cancer stage of capitalism.” The “disease”
was sapping the strength of “the resources of social immunity and the civil
commons that bear them”; resources that were “life bases of successful
response” to the disease.39 McMurtry (1999, p. 257, italics in orginal)
warned that human life is in pathological competition with neoliberal
capitalism. He explained that competition becomes pathological compe-
tition “when life is not raised to higher or more enabled levels of vital life
compasses of thought, feeling, and action, but is reduced to lower levels
and, at worst, permanently disabled or destroyed.”
Even at the time of his writing, late 1990s, McMurtry (1999, pp.
viii, 257–8, italics in original) further argued that the market paradigm
has mutated “into its recent carcinogenic eruption and metastasis” and
now it “has at this stage of social evolution become humanity’s primary
pathological competition. For it does not enable more comprehensive,
vital life for humanity or the planet, but disables the world’s species and
environmental habitats, increasing hundreds of millions of malnourished,
unemployed, homeless, insecure and money-subjugated people, and soci-
eties in general which have been variously stripped of their civil commons
across the world—all in a period of greater technical powers and rising
riches ... This competition is pathogenic not only because its calculus of
value rules out life’s requirements, but because its programme prescribes
the defunding of precisely what protects and fulfils these requirements.
Yet all of this is said to be necessary ‘to be more competitive’—which it
can only be from the standpoint of the disease invasion itself.”40 These
warnings went unheeded.
 1 POLAR VISIONS OF THE ECONOMY 17

The Dire Costs of Neoliberal Economics

Two decades later and after nearly forty years of domination of world
economy by neoliberal capitalism—under which corporations have oper-
ated without government interference and without accountability—
neoliberal reforms have stacked the deck in societies in favour of economic
elite, disempowered states, and empowered multinationals. The resulting
massive inequality and much higher concentration of wealth in the hands
of the economically powerful have allowed the economic elite to dictate
their objectives to policy and law makers. There is, regrettably, no coun-
tervailing power either in form of labour unions or states not captured by
the economic elite. The rapidity with which societal institutions collapsed
in face of the 2008/2009 financial crisis and again during the 2019/
2020 Covid-19 pandemic is evidence of the powerlessness of states and
the failure of the “free market” ideas of neoliberal economics as the
death toll from Covid pandemic across the globe approached 7 million
by May 2023 according to the World Heath Organization, though The
Economist estimated it in excess of 10 million by May 2021.
Above all else, the inability to deal effectively with the pandemic reflects
the most glaring example of market failure. As noted by Parker (2021,
pp. 28–29), nothing in the pandemic has escaped reference to economics,
as “measured by a combination of unprecedented trillions that powerful
governments and their central banks have poured into their economies;
by the exorbitant costs for crash development, production, and successful
distribution of vaccines; by the massive financial losses imposed by the
shutdowns or curtailment of businesses; by the physical shortages caused
by disruptions to what is anodynely called ‘the global supply chain;’ and
by the abrupt disappearance or curtailment of jobs worldwide—and with
those jobs, the personal income that purchased food, paid for homes
and cars and clothing, indeed supplied all the variegated necessities and
luxuries we have grown accustomed to assuming were always simply
there.”41

A Blending of “Economic
Science” and the As-Sharī’ah
The typical idea that “Islamic economics is a distinctive blend of Sharı̄’ah
principles and conventional economics” and that “as long as concepts
and principles do not contradict Islamic principles, they can be adopted
18 N. EL MAGHREBI ET AL.

in Islamic economics,”42 recognizes the secular nature of “conventional

economics,” nevertheless, it accepts, with apparently minor modifications,
the axioms of this “science.” For example, it replaces “scarcity” with “rel-
ative scarcity”43 and argues that “any disagreement” with relative scarcity
“as the prime cause of the economic problem will not only deprive us
from developing the new discipline scientifically but will also deviate us
from meanings mentioned in the Holy Book of Allah the Almighty.” This
position betrays an uncritical devotion to “conventional economics” at a
time when this discipline is facing the most serious crisis of legitimacy
within the profession itself. Aside from the fact that the claim has neither
a theoretical nor an empirical content in the sense that could claim “sci-
entific objectivity,” relativity here is used, in the sense of means-ends, to
relate resources to “peoples’ needs” unlike the “conventional” economics
which relates “scarcity” to “wants”; a broader concept than “needs.”
Invoking Al-Qur’ān—more as a jargon than truly authentic justifi-
cation as is done in this context—raises a difficult question. Precisely
within the context of the selected verses used and the peculiar meaning
attached to them, begs the question about the justice of creating a
species without providing them with sufficient resources to meet its
needs. Indeed, Al-Qur’ān insists that ontologically there is no scarcity
and that Allah swt has created everything in sufficient amounts, both
in terms of stocks and flows, to sustain all in the created order (see,
for example, Verse 30: Chapter 17; 21:15; and 8:30). However, Al-
Qur’ān, as well as As-Sunnah, also assert that serious problems such as
poverty, deprivation, and massive inequalities of income and wealth are
caused by non-compliance with rules of distribution and redistribution as
prescribed rather than by the paucity of resources. The logic of means-
ends relationship provides the reason and justification for the existence
of “conventional economics” which, in turn, necessitates the invention
of the concept of scarcity as related to “wants.” Human wants could be
assumed as “unlimited,” in terms of insatiable desires and wishes, unlike
“needs” which have a limit, at least within the constraints of what life
needs to sustain itself comfortably.
Acceptance of scarcity as an axiom as well as the adoption into “Islamic
economics” of the rest of the discipline of conventional economics, “as
long as they do not contradict Islamic principles” not only secularizes the
knowledge of how Al-Qur’ān orders the economy and thus desacralizes
it, with far-reaching implications, it has also an impact on understanding
Divine Justice as it begs the question of the justice of creating a being
 1 POLAR VISIONS OF THE ECONOMY 19

without making sufficient provisions available to carry out the respon-

sibilities assigned to it. Since the ninth–fourteenth centuries AD, there
has always been a strand of thinking among Muslims that excludes “Jus-
tice” as an attribute of the Creator because, it argues, it would impose a
constraining condition on the Divine’s Omnipotence and on His Absolute
Power to do as He pleases. Injustice however does not befit the nature of
Allah, the Just and the Judge.44

Is Scarcity the Problem or Distribution?

Focusing on scarcity rules out distribution (and redistribution) as the
main problem of economies as envisioned in Al-Qur’ān. The model of
the union of as-Sharı̄’ah and “conventional economics” focuses on “rel-
ative scarcity” as “the prime cause of the economic problem.” This is
similar to what happened to economics in the later decades of the nine-
teenth century when the Marginalist school shifted attention away from
the primary concern of classical and Marxian economists with produc-
tion and distribution to one of studying a much more limited means-ends
issue, with “scarcity” as a focal axiom. Never mind that the theoretical and
empirical validity of scarcity as an axiom has not been demonstrated, this
brand of Islamic economics argues for the concept of scarcity as if it were
an irrefutably established fact.
To reject scarcity as a fundamental axiom of Islamic economics, in
consonance with clear verses of Al-Qur’ān, is not to deny that individ-
uals, societies, and states operate under budget constraints, sometimes
very hard budget constraints. Rules governing spending and consumption
behaviour prescribed in Al-Qur’ān impose constraints, yet Al-Qur’ān
denies the existence of ontological scarcity. It attributes the existence
of problems such as poverty, hunger, and destitution to reasons stem-
ming from maldistribution and/or non-compliance with rules governing
redistribution as directed by the Creator. If anything, a major function
of Islamic economics must be de-secularization and resacralization of
economic knowledge as was the original intention of the Islamization
of Knowledge project as advanced by Al-Attas who made a compelling
argument, philosophically, metaphysically, and logically, for desecularizing
and resacralizing knowledge. Economic knowledge, relying on the teach-
ings of Al-Qur’ān would reject the axioms of conventional economics,
including that of scarcity.
20 N. EL MAGHREBI ET AL.

The absurdity of the idea of scarcity as the main reason for the “eco-
nomic problem” is becoming more and more obvious empirically. How
can the proposition of scarcity “as a prime cause of the economic prob-
lem” have any validity when Oxfam reported that in 2020, thirty billion
US dollars—only a fraction of the US $130 billion owned by the wealth-
iest individual in the world—could have eradicated world hunger. What
is a more serious “economic problem” than hunger? Similar fraction of
the wealth of the second wealthiest individual in the world could provide
education, health, and welfare for most people in the world. Is scarcity
then the “prime cause,” or obscene distribution of wealth, when a frac-
tion of the wealth of only two individuals could eradicate hunger, poverty,
and disease? Is scarcity “the prime cause,” or the absurd levels of waste,
extravagance, and opulence that have depleted natural wealth of humanity
to such a high degree that ecological crisis is now an existential threat to
its survival? Scarcity is not a “scientific” fact—it is an artifact invented
to create a specific mindset, an attitude, capitalizing on basic emotions of
fear, desire, and greed in order to distort the objective reality that humans
live in a world abundance. This view about reality was essentially held over
the history of economic thought with the exception of approximately the
last hundred and fifty years. Compliance with the rules that limit undue
consumption, on the one hand, and distribute income and wealth more
fairly would not see scarcity as a binding constraint.
Robin Kimmerer, The anthropologist, Robin Wall Kimmerer (2013,
p. 376) finds it paradoxical that: “Modern capitalist societies, however
richly endowed, dedicate themselves to the proposition of scarcity. Inad-
equacy of economic means is the first principle of world’s wealthiest
peoples.”45 As Charles Eisenstein (2011) explains: “It is an attitude of
scarcity, not of abundance, that has led to the depletion of our natural
commons. Competition and the accumulation of more than one needs
are the natural response to a perceived scarcity of resources. The obscene
overconsumption of our society arise from our poverty: the deficit of
being that afflicts the discrete and separate self, the scarcity of money
in an interest-based system, the poverty of relationship that comes from
the severance of our ties to community and to nature, the relentless
pressure to do anything, anything at all, to make a living. In contrast,
the natural response to an atmosphere of abundance is generosity and
sharing. This includes sharing within the human realm and beyond it as
well.”46 Eisenstein then asks: “Whence our frenetic race to convert nature
 1 POLAR VISIONS OF THE ECONOMY 21

into commodities that don’t even meet real needs, if not from insecu-
rity? Think about it. Is it from an attitude of scarcity or abundance that
someone buys fifty pairs of shoes? Is it the secure person or the inse-
cure person who buys a third sports car and a 10,000-square-foot house?
Whence this urge to own, to dominate, to control? It comes from a lonely,
destitute self in a hostile ungiving world.”
Al-Qur’ān addresses precisely these kinds of problems of the alienated
self and provides ways and means of resolving them. By arguing that the
Creator has and continues to provide everything in exact measure for
everyone and every generation, that humans should never worry about
their sustenance, and that they should work hard and share their income
and wealth with others, Al-Qur’ān removes fear as a motivation for
predatory behaviour. It negates the idea of scarcity as stimulant for fear,
greed, and savage competition upon which capitalism thrives. Instead,
Al-Qur’ān focuses on distributive justice, warns of severe consequences
for the society from violation of the rules of distribution and redistribu-
tion prescribed by Allah swt. By focusing on scarcity as “a prime cause of
the economic problem,” the dominant Islamic economics paradigm either
excludes consideration of distribution, redistribution, and social justice or
assigns it lower priority than could be justified. In the process of diverting
attention away from the alternative axiom of fundamental abundance,
such a convenient position absolves human responsibility in establishing
social justice contrary to the clear verses of Al-Qur’ān (see, for example,
Verses 18 and 21: Chapter 3; 135: 4; 8: 5; 60 and 103: 9; 29: 7; 90: 16;
and 25: 57). Social Justice is thus the prime directive.
Excluding distribution and redistribution and, ultimately, social justice,
as the central concerns of Islamic economics and, instead, focusing on
and reiterating scarcity as a fundamental cause of “the economic prob-
lem” cannot access the spiritual capital that an authentically structured
economy governed by the rules prescribed in Al-Qur’ān, with an organic
connection to al-Ghayb, would provide. Conventional economics with
its underlying philosophy of materialism and its methodology of empiri-
cism would reject any concept or idea whose source is metaphysical.
For example, it could never take seriously the concept of Barakah, a
very important and operational dimension and a source of expansion in
an economy whose institutional scaffolding is constituted by the rules
prescribed in Al-Qur’ān and where participants in the economy are in full
compliance with these rules (see, Verse 96 of Chapter 7 of Al-Qur’ān).
Islamic economics as a combination of sacred and profane would rob
22 N. EL MAGHREBI ET AL.

such a discipline of value as a subject matter in what Talal Asad calls an

“authorizing discourse,” even if it partakes of jargons of authenticity.
Such a paradigm becomes vacuous in terms of its ability to propose
authentically Islamic policy measures addressed to problems such as
poverty, hunger, health, education, and environmental challenges. Like
its conventional counterpart, its policy discourse has to take scarcity seri-
ously as the central cause of these problems. Focusing on scarcity obviates
the need for designing policies, based on Al-Qur’ān and As-Sunnah,
addressed to correcting maldistribution and weak, or nonexistent, redis-
tribution policies. This position necessarily converges toward that of
neoliberal economics that excludes questions of distribution, redistribu-
tion, and social justice and instead offers capitalism as the solution to
the false “economic problem” ostensibly caused by scarcity. As well, it
converges to the position of those who exclude justice as belonging
to the Five Principles of Maqās.id as-Sharı̄’ah.47 In contrast, Fazlur
Rahman holds that justice is the main principle of Al-Qur’ān and that
communicating the divine concept of justice is the main function of
Al-Qur’ān.48

Secularism and the Blending

of Conventional Economic and the Sharī’ah
The view of Islamic economics stated above holds that the science of
economics possesses a “wealth of economic knowledge, theories and
policies” which could benefit Islamic economics.49 Indeed, conventional
economics has developed concepts, terms, and ideas that can be useful in
formulating explanations for prescribed rules governing the economy and
the behaviour of its participants. However, there are very few (some will
be mentioned later) of these that do not, in a fundamental way contradict
Al-Qur’ān. As a whole, however, “conventional economics,”50 relying
heavily as it does on secularism, materialism, and possessive individualism
as its underlying philosophy has very little in terms of “principles” that
would not contradict Islamic values and principles. Consider, for example,
its conception of human as “economic man.”51 While the practitioners of
conventional economics claim that this is only an abstraction intended to
simplify a more complex conception of human beings, their policy recom-
mendations for individuals and governments behaviour in the real world
bear the mark of “economic man” as a crucial pillar of their “science.”
 1 POLAR VISIONS OF THE ECONOMY 23

Within the narrow context of conceptualization of Islamization of

Knowledge (IOK), it may be argued, as is done, that once one accepts
the fundamental axioms of the conventional economics, i.e. self-interest,
scarcity, and rationality, much of the rest of the “science” can be incor-
porated into Islamic economics. This position however contradicts the
philosophy and methodology of the broader conception of IOK as
conceived by its originator, Syed Muhammad Naquid Al-Attas who held
de-secularization of Western knowledge, especially the social sciences,
as the first condition of Islamization.52 However, secularism has been
a foundation of economics, and political economy before it, ever since
the Enlightenment.53 The focus of secularism consists of desacralizing
thought and action, and replacing metaphysical and sacred explanations
with “knowledge” based on empirical evidence discernible by senses,
rationality, and formal logic. Secularism became essential, and remains so,
to the “science” of economics which has assumed a sovereignty of its
own, sourced separately from the Divine origin. It is rather astonishing
that at a time when the legitimacy of conventional economics—as well as
its axioms and methods, and as the theoretical mother of present preda-
tory capitalism—is being challenged54 more aggressively than ever before
within the Western culture that gave birth to it and in the profession that
has been practising it, Muslim writers uncritically find in it redeeming
qualities that can help Islamic economics build an identity for itself.55

Secularism as Foundational Philosophy

of “Conventional Economics”
Economics evolved out of political economy which began as an Enlight-
enment project of moral philosophy. A salient feature of the Enlighten-
ment desacralizing the world is the process of “rationalization,” which
makes information and technical reasoning the essence of knowledge.
The intention was replacing the concept of Supreme Creator as a source
of all knowledge. Whereas political economy dealt with the subjects
of conscience, virtue, and personal liberty, economics was concerned
with secular, worldly mundane issues like production, exchange, trade,
and taxation without any connection, ontological or otherwise, with the
sacred. The only idea of “spirit” it was willing to countenance was that of
the “animal spirit” in humans that motivated investment.56 Economic
historians have argued that the emergence and expansion of political
economy was due to the decline of religion. Harold J. Laski (1936), an
24 N. EL MAGHREBI ET AL.

economic historian, argued that the birth of political economy established

an intellectual tradition which based its “foundation of social inquiry” on
human–human relations “instead of the relations of man with God.”57
Davenport (2008, pp. 23–24) suggests: “This shift in intellectual life from
the vertical to the horizontal had begun centuries earlier, but Adam Smith
was first to take this perspective into the realm of economics, an Enlight-
enment venture that was as promising as it was dangerous both for nations
and for the religiously committed.”58
Enlightenment thinkers valued highly the idea of personal freedom—
meaning not subject to rules prescribed by the Creator, in the first
place, and the state. Finding the right kind of organization of an effi-
cient social order consistent with strict individual freedom had been
a dilemma. A solution was offered by Adam Smith who synthesized
two ideas of Enlightenment, that of personal freedom and that of the
Newtonian physics and mechanics. According to the latter, the planetary
system resembled “a clockwork: a closed, autonomous system, ruled by
endogenous, mutually independent factors of a highly selective nature,
self-regulating and moving toward a determinate, predictable point of
equilibrium. The Newtonian paradigm, in line with eighteenth-century
thinking, represents economic events as a reality independent of the
observer.”59 Observer was assumed rational, meaning in possession of the
faculty of reason. While separate from the object, the observing subject
could understand the object through reasoning. The objective reality,
according to this system of thought, was subject to natural law.60 The
latter consists of the precepts, norms of the “Eternal Law” that govern
the behaviour of humans, as rational (able to use the power of reason)
beings possessing free will.
The vision of the economy Adam Smith presented in his book The
Wealth of Nations—in exclusion of his book on The Theory of Moral
Sentiment written a decade and half before The Wealth of Nations—
was what he called a “commercial society” in which the “invisible hand”
directs rational individuals possessing free will to achieve the good of the
whole by pursuing their own individual self-interests. Thus, his vision
which harmonized the two ideals of Enlightenment: freedom of indi-
vidual with the ideal of “a rational and efficient social order,” resolved
a conflict between the two that had confounded Enlightenment social
thinkers. Smith was interpreted as replacing “God” with the invisible
hand of the market which directed individuals to achieve an efficient and
rational social order while pursuing their self-interests. Thus, implying
 1 POLAR VISIONS OF THE ECONOMY 25

that the ideal of the freely acting, autonomous individuals pursuing their
own self-interests required a removal of the religious, moral, and ethical
ideas that constrained human behaviour.
This interpretation required that economic action had to be decoupled
not only from Divinely ordained rules of behaviour but even from secular
moral concerns. This, in turn, required an abstract vision of human being
as an “economic creature” or an “economic agent” who pursues only “the
end of maintaining, expanding, and enjoying his own life as a singular
individual” and who as a “practical agent” conceives of no world other
than the world of empirical facts. All values are extrinsic. Things do not
interest the “agent” because of the intrinsic values they hold but because
they serve as means to the end of singular pursuit of self-interests. Here,
the most important extrinsic value criterion the “agent” has is that of
efficiency, of getting the most out of all means that serve agent’s self-
interests. The agent may cooperate in a social project but only if it serves
as means to the end: “self-interest.”61
The economics that emerged between the time of Adam Smith and
the present gradually but surely became a conjunction of philosophies
and ideologies of empiricism, logical positivism, individualism, and mate-
rialism62 all of which require secularism as a foundational ideology.
Secularism is a foundation stone of conventional economics—the myth
system that provides theoretical and logical support for capitalism. Gener-
ally, it is understood that “secularism” is antithetical to religious values.
What is not often acknowledged is that both concepts “religion” and
“secularism” were developed in a historical context, specifically that of
Western Christianity. The term “religion” originated in the Roman law
while “secularism,” meaning rejection of religion, developed at a time
when Europeans were searching for a collective identity. While the roots
of secularism are in the Renaissance period, it came to its full fruition
during the Enlightenment and a period of de-Christianization attempts
in Europe. Hence, concepts of religion and secularism are not universal,
objective, and value-free as they are often portrayed.63 As Jakobsen and
Pellegrini (2008) argue, “secularism was linked at its origin to a particular
religion and a particular location, and it was maintained through a partic-
ular set of practices.”64 Yet, its advocates treat it as a universal concept that
encompasses modernism, freedom, and progress while holding religion
as a regressive force. All these claims are subjective and non-verifiable,
and, as Talal Asad has argued (2003), secularism serves a larger project to
establish modernity as a hegemonic political goal.65
26 N. EL MAGHREBI ET AL.

Secularism provided a fertile ground for the birth of the idea of the
“market” as is understood by contemporary economics as secular, free of
religion, and devoid of moral values. While secularism may not oppose
privatization of religion, religious values have no place in the “market.”
As Weber suggested, secularism’s separation from religion meant freedom
for the market. However, secularization also meant that economic actors
and systems became autonomous in dealing with the natural environ-
ment as its sovereign master with licence to exploit nature as they saw
fit, no longer accountable to the Creator for actions of their own that
harm nature. Conventional economics is directly responsible for the free-
market-based, consumption-led theories that appeal to greed derived
from its axiom of self-interested “rational” economic man. The resulting
economic system, capitalism, created, in turn, artificial wants and found
means to motivate the desire on the part of the consumers to fulfil them.
This way, human beings became means, as insatiate consumers, necessary
to sustain economic growth. The severe deterioration of the ecological
capital that belongs to the humanity as a whole and the consequent envi-
ronmental disasters are the direct results of the exploitive mindset created
by the secular conventional economics.
In contrast, Islam considers nature and all its components as created
by Allah swt and represent, individually and collectively, His Signs thus
deserving respect and reverence. Humans, as trustee-agents of the Divine
Reality are charged with the preservation of nature. Any exploitation
or abuse of nature by humans means shirking in performance of their
responsibility and failure as agents of Allah swt for which they are held
accountable. To exploit nature and its endowments and in the process
cause harm results in a degradation of Human-Creator relation or at
least negligence or disrespect of that relation. As Seyyed Hossein Nasr
argues, since the natural world and its components are created as signs
of Allah swt for humans (Verse 190: Chapter 3), any act of economic
exploitation that destroys any “object or phenomena of nature” is an act
of defiance against their Creator.66 The contrast between the attitudes of
secular conventional economics and Islam toward nature is so deep and
intensive to beg the question, once again, of how can one possibly enter-
tain a marriage proposal between the two as proposed by the dominant
Islamic economics paradigm?
 1 POLAR VISIONS OF THE ECONOMY 27

The Rationality Axiom and Islamic Economics

Another crucial axiom of conventional economics—along with self-
interest and scarcity—is that of “rationality” which poses a challenge
of justification for those who propose to incorporate it into Islamic
economics. Just like the concept of sucularism, that of rationality, in
its general meaning and as an ideological instrument, was developed
during the Enlightenment period. That context was meant for “rea-
son” to replace inherited religious reasoning for the individual whom the
Enlightenment glorified, as did the Renaissance, which openly declared
“the individual’s supreme worth”67 along with strong belief in human
reason. Rationality has different meanings depending on the context.
Alasdair MacIntyre (1988) suggested “rationality itself, whether theo-
retical or practical, is a concept with a history: indeed, since there is a
diversity of traditions of enquiry, with histories, there are ... rationalities
rather than rationality.”68 Irani (1986) argued for “modes of rational-
ity”69 and considered that, generally, rationality is “the search for order
and thereby for understanding.”70
The notion that the concept of rationality has a history and that there
are varieties of rationalities is confirmed by R. G. Collingwood (1946).
He traced it to the Greco-Roman humanism that considered man “as
essentially a rational animal, by which I mean the doctrine that every indi-
vidual human being is an animal capable of reason. So far as any given man
develops that capacity and becomes actually, and not potentially, reason-
able, he makes a success of his life: according to the Hellenic idea, he
becomes a force in political life; according to Hellenistic-Roman idea, he
becomes capable of living wisely, sheltered behind his own rationality, in
a wild and wicked world.”71

Economic Rationality Is a Part, Albeit a Small

Part, of the General Concept of Rationality
In economics rationality, as a postulate, has specific meaning focused on
the means-end logic. In this role, rationality is used instrumentally—in
the sense that economics focuses on how means are used to specific ends.
It is not able to judge the rationality in the choice of those ends or their
quality. Even within the profession itself, views on the role of rationality
differ. Some consider that the rationality postulate has a descriptive func-
tion meaning that it describes the behaviour of economic agents. Another
28 N. EL MAGHREBI ET AL.

view holds that the crucial function of the postulate is to emphasize the
necessity of consistency in the behaviour of economic agents. Specifically,
consistency means transitivity of preference ordering. This condition,
simply stated, requires that if, for example, a consumption basket A is
preferred to consumption basket B and B is preferred to a third basket C,
then A is preferred to C. A third view holds that the postulate is helpful
in developing theories that can make decision-making more effective even
if the behaviour of economic agents is not always and everywhere consis-
tent. Tony Cramp (1991) suggested that economics, in its attempt to “cut
loose from its earlier mooring in moral philosophy,” developed the twin
axioms of “private rationality” and “private greed.” The first means that
people behave consistently, and the latter means that people prefer more
to less; “neither can be proved.”72 Hence, in economics, rationality and
greed are correlates.
In an attempt to “find the mathematically complete principles which
define ‘rational behavior’ for the participants in a social economy, and
derive from them the general characteristics of that behavior,” John
von Neumann and Oskar Morgenstern (1944) proposed five axioms of
utility that would make economic behaviour consistent and predictable,
therefore rational. An individual who can express preferences based on
their notion of utility would be rational by definition according to these
axioms: (i) comparability, meaning that an individual can not only express
preferences but can also compare them; (ii) measurability, this axiom
means that preferences are measurable; (iii) independence axiom requires
that the original preference orderings be independent of new preference
alternatives; (iv) ranking axiom requires ordinal ranking of preferences;
and (v) consistency axiom requires that the comparisons the individual
makes among preferences remain consistent over an array of alterna-
tives. The essential axiom of economics that individuals always prefer
more to less, the greed axioms, lurks in the background as the individual
rank-orders preferences.
Even at the analytic level of von Neumann-Morgenstern’s instrumental
rationality, human behaviour’s reasoning ability is reduced to revealing
no inconsistencies in his choice behaviour, in exclusion of all else. It is
for this reason that Amartya Sen (1977) called the economic man “a
bit of rational fool.” He argued that an individual may be rational “in
the limited sense of revealing no inconsistencies in his choice behavior,”
but if the individual’s “one preference ordering” does not reflect—and
Sen intimates that it does not—the person’s self-interest nor “represent
 1 POLAR VISIONS OF THE ECONOMY 29

his welfare, summarize his idea of what should be done, and describe
his actual choices and behavior,” then “he must be a bit of a fool.” Sen
then proceeds to argue that economic theory “has been preoccupied with
this rational fool bedecked in the glory of his one all-purpose preference
ordering.”73 In response, Frank Hahn and Martin Hollis (1979) allowed
“economics probably made a mistake when it adopted the nomencla-
ture of ‘rational’ when all it meant is correct calculations and an orderly
personality.”74 This takes economics back to defining rationality as consis-
tency and requiring that a rational economic agent prefers more to less.75
This conception of means-ends rationality cannot be reconciled with ideal
human behaviour as envisaged in Al-Qur’ān.
Frank Hahn’s plea for a change in the meaning of economic ratio-
nality did not get much traction in the profession, perhaps because
it involves value judgements, even though it is closer to the idea of
“reasonableness,” as understood outside the field. Its rejection by the
profession may have been due to the fact that it did not yield itself easily
and precisely to marginal utility analysis despite the fact that the defi-
nition of utility, its measurement, and aggregation have been ambiguous
throughout the history of the concept. Tony Cramp (1991, p. 56) quotes
Kenneth Boulding as saying that economists “do not know what utility
is, but cannot do without it.” It is, however, argued that both the
concept of utility as “satisfaction” derived from consumption and the
idea that satisfaction declined with marginal consumption are verifiable
by “introspection.”
At one point in the history of the evolution of the concept (early
decades of the twentieth century), a useful policy proposal to justify redis-
tribution of income in order to reduce income inequality was argued by
Arthur Cecil Pigou (1912) and Hugh Dalton (1920a, 1920b). Pigou
proposed that since the marginal utility of an additional income is much
higher for the poor than for the rich, a redistribution of income from the
rich to the poor will increase total utility hence the total welfare of the
society, as an aggregate of total utility, measured cardinally. Dalton formal-
ized the idea which became known as Pigou-Dalton Principle. It states
that, ceteris paribus, a social welfare function should prefer allocations
that are more equitable. This means that in the face of income inequality,
the value of social welfare increases. Stated differently, a mean-preserving
transfer of income from richer to poorer people increases the sum of
30 N. EL MAGHREBI ET AL.

societal satisfaction.76 The profession rejected the idea, however, arguing

ostensibly that interpersonal comparisons of utility are not permissible.
In contrast, redistribution is a major principle as well as a mechanism for
reducing income inequality in Islam and is governed by rules prescribed
in Al-Qur’ān.

Al-Qur ’ān and Rationality

Rationality as the use of reason in guiding decision and action is
quite radically different in Islam in contrast to the rationality axiom of
economics. Whereas in the latter it is a process of reasoning ruled by
acquisitive self-interest in exclusion of all else, in the former, the process
of reasoning is one of reflective and meditative response in decision-action
situations in compliance with the rules prescribed by Allah swt. In Al-
Qur’ān, two pillars form the foundations upon which rationality is based
and which direct the reasoning process of a believer: Al-Fitrah and Al-
’Aql and al-‘Aql. The first is the primordial nature of mankind kneaded
into being by the Creator with the distinction that it bears the imprint of
the cognition of His Oneness and Uniqueness (Verse 30: Chapter 30).
Humans who are fully aware of their “self” and of their Creator are
constantly oriented and focused toward Him and Him Alone (79: 6).
In such individuals, al-fitrah commands the depth of their conscious-
ness and ensures consistency of the focus in the reasoning process due to
the active, intimate, and permanent awareness of the ever-presence of the
Creator. There is no impulsive response to stimuli calling for decisions for
immediate gratification. Individual humans may temporarily lose touch
with their primordial nature, perhaps due to forgetfulness or temporary
disharmony between the requirements of the belief and actions—what
Aristotle called “akrasia.” Nevertheless, the call to humans to return to
the primordial nature always harkens deep in their “self.” Islam articu-
lates such call to the entire humanity to return to their primordial nature
through compliance with the rules governing behaviour prescribed in Al-
Qur’ān. In this sense, it can be argued that rationality, as discernible from
Al-Qur’ān, is the process of rule-based reasoning77 fortified by its second
pillar, al-‘Aql.
Al-‘Aql, as used in Al-Qur’ān and in the sayings of the Noble
Messenger (saa), has no exact equivalent in English. The root verb
of al-’aql is ’a-qa-la, which means “to bind together,” “to restrain,”
or “to withhold” perhaps signifying that utilization of al-’aql in the
 1 POLAR VISIONS OF THE ECONOMY 31

reasoning process keeps human focused on the primordial its primordial

nature active, fully aware, and free to bind the individual to the Creator.
Hence, al-’aql can be regarded as the faculty with which the Creator has
endowed humans to employ in the process of reasoning in their decision-
action circumstances in compliance with the rules He has prescribed
in Al-Qur’ān. In practice, this concept of rationality operates through
the process involving three stages of Ta’qqul (process of intellection),
Tafakkur (thinking process), and Tadabbur (meditation and contem-
plation on the consequences of each alternative course of action) that
constitute rational decision-making. The first employs al-’aql to medi-
tate on and assess the decision-action situation, the second, the faculty to
reflect on the alternative courses of action, and the third is employed to
contemplate and consider the consequences of each alternative course of
action it terms of compliance with the prescribed rules. To summarize,
rationality, according to Al-Qur’ān is a rule-based process of meditative,
contemplative, and reflective reasoning.
As Yarmine Mermer (1996)78 argued, rationality within the context of
Al-Qur’ān means not only sound “reasoning and logic but more impor-
tantly that which is in accordance with fitrah (human nature).” This is in
sharp contrast to the independent reasoning which is the ultimate arbiter
of reasoning itself and self-sufficient onto itself and a “commitment to
reason in the name of reason.”79 Al-Qur’ān refers to independent ratio-
nality—that which is not anchored on al-fitrah and al-’aql and unheedful
of guidance of the Creator—as “hawā,” meaning whim and caprice (see,
for example, Verses 43–44: Chapter 25; and 50: Chapter 28). In the
Allah-centred rationality, every and all things have meanings pointing to
the Ultimate Source of their existence. These meanings guide the believer
facing a decision-action circumstance. Hence, by necessity, rationality
according to Al-Qur’ān has a strong metaphysical dimension. When faced
with decision-action choices, the believer’s internal compass turns toward
the rules prescribed by the Creator. He/she is, in turn, guided by these
rules in the course of intellective-deliberative-meditative-reflective process
of rationality. Hence, it is apparent that independent economic rationality
cannot accommodate the rationality discernible from Al-Qur’ān. The two
are in no way compatible.
32 N. EL MAGHREBI ET AL.

Al-Qur'ān and “Self-Interest”

Turning to self-interest as one of the trio of fundamental axioms of
conventional economics, with scarcity and rationality, it is noted that of
the three axioms, self-interest has the longest history in Western thought.
There is however a major difference between the concept as it is now an
integral part of the foundations of neoliberal economics and as it has been
considered throughout the history of the concept prior to the emergence
of neoliberal economics. While Western philosophy has always argued that
acting in the interest of oneself stems from an essential human charac-
teristic: self-love, which motivates self-preservation, it has also expressed
the concern that self-love has manifest potential of doing harm. Plato,
for example, considered selfishness the greatest of evils: “Of all evils the
greatest is one which in the souls of most men is innate, and which a
man is always excusing in himself and never correcting; I mean, what is
expressed in the saying that ‘everyman by nature is and ought to be his
own friend.’ Whereas the excessive love of self is in reality the source
to each man of all offences” and considered; “for the lover is blinded
about the beloved, so that he judges wrongly of the just, the good, and
the honorable, and thinks that he ought always to prefer himself to the
truth.”80
It has been a challenge for Western thought to find the right balance
between admitting what it considered the inevitability of pursuing self-
interest in service of self-love and mitigating its harmful manifestations.
Adam Smith believed that self-interest would be tempered by sympathy
inherent in the human nature. Economics as developed in the twentieth
century however subscribed to the “psychological egoism” theory that
argued all human behaviour is motivated exclusively by self-interest. All
behaviour that seems motivated otherwise, such as charity, is disguised
self-seeking. Albert O. Hirschman (2013, p. 196) understood that the
concept of self-interest in economics is in line with this conception.
After saying that “the construct of the self-interested, isolated individual
who chooses between alternative courses of action after computing their
prospective costs and benefits to him-or herself that is, while ignoring
costs and benefits to other people and to society at large” is central in
Economics, he proceeded to give examples of the “inefficient and harm-
ful” effects of “the unfettered pursuit of private interest.” These include
“the decision problem known as the Prisoner’s Dilemma, the obstacles to
 1 POLAR VISIONS OF THE ECONOMY 33

collective action because of free riding, and the problem of ensuring an

adequate supply of public goods in general.”81
As discussed so far, two of the three fundamental postulates or axioms
of Economics are incompatible with Islamic teachings. The self-interest
axiom can also be shown to be incompatible with the teachings of Al-
Qur’ān. For this purpose, it will be helpful to understand the meaning
of the two components of the concept: “self” and “interest” within the
context of Al-Qur’ān. It is striking that there has been very little or no
attempt (to our knowledge) in the economics literature to unpack “self-
interest.” While interest can be understood as economic interest, as is
apparent from Hirschman’s arguments quoted above, the “self” is not
defined in contemporary economics. It is however possible to compre-
hend a sense of the concept of the “self” as understood in Economics
from the writings of the intellectual ancestors of the discipline. Of these
thinkers, John Locke (1632–1704) had perhaps the greatest influence
on the formation of the philosophical foundation of economics and
specially on neoliberal economics. For example, Locke’s fundamental
conception of existence of deep antagonism between man and nature,
self and universe which underlie his philosophy helped the formation of
the view predominant in economics that humans had mastery over nature
allowing its exploitation and that of its resources as means of economic
advancement.
Locke defined the “self” as “that conscious thinking thing (whatever
substance made up of, whether spiritual or material, simple or compound,
it matters not) which is sensible, or conscious of pleasure and pain,
capable of happiness or misery, and so is concerned for itself, as far as
that consciousness extends.”82 For Locke, sense experience, in terms of
pleasure or pain, constitutes the dominant character of humans. Nature,
he said, “has put in man a desire for happiness, and an aversion to misery:
these indeed are innate practical principles, which (as practical principles
ought) do continue constantly to operate and influence all our actions
without ceasing.”83 The innate principles constitute the moral notions
of “good” and “evil” to Locke: “Things are good or evil, only in refer-
ence to pleasure or pain. That we call good, which is apt to cause or
increase pleasure, or diminish pain in us; or else to procure or preserve
us the possession of any other good, or absence of any evil. And, on the
contrary, we name that evil, which is apt to produce or increase any pain,
or diminish any pleasure in us; or else to procure us any evil, or deprive
us of any good.”84
34 N. EL MAGHREBI ET AL.

Lock’s idea that sense experience of pleasure or pain provides the axis
around which human thought rotates leads directly to his philosophy
of individualism which was also adopted enthusiastically by economics.
The reason is, Locke argued, that while everyone can agree that happi-
ness is the aim in life, general agreement on a uniform definition of
happiness is not possible. Therefore, since thoughts come from individual
sense perceptions, then actions too must come from individual experi-
ences. Individual sense experience provides the knowledge that drives and
controls individual actions. And, the more rational the more clearly will
the individuals perceive of where true happiness lies. From here, it was a
short distance to the formation of economic liberal individualism which
argued that the individual should be free to use his own resources as he
chooses. Frank Knight (1885–1972) explained that “the primary imme-
diate objective of liberalism was freedom for the individual in relationships
of exchange, of goods and services, i. e., relations of quid pro quo.”85
Accordingly, markets must be free of state interference. The state had only
one legitimate use of the power of coercion: to prevent encroachment on
the freedom of individuals by others.
It appears that economics adopted without change Locke’s defini-
tion of “self” as well as the “love” for it and incorporated it into its
own concept of self-interest without Adam Smith’s concept of “sympa-
thy” meant to mitigate the excesses of “psychological egoism.” Locke’s
definition of “self” purely as the “thing” whose world revolves around
physical sense perceptions of pleasure and pain, happiness and misery
stands in sharp contrast with the conception of self as “nafs ” encoun-
tered in Al-Qur’ān where it is identified as a being created, standing
between the body (badan) and spirit (rūh). This self is inspirationally (in
the sense of ilhām) and ontologically cognizant of “good and evil” (Verse
7: Chapter 91). It has been empowered to order its possessor—who has
been granted freedom of will—to do evil (nafs ammarah bis-sū’; 53: 12)
as it can blame and accuse its possessor when he/she wills to do evil (nafs
lawwūmah; 2:75), or achieve certitude and tranquility in its relationship
with its Creator (nafs mutma’innah; 27:89). At any moment in time the
possessor of the “self as nafs,” the human being, has a clear insight of the
stage in which his “self” is positioned even if he gives ostensible excuses
for his/her behaviour commanded by the “nafs ” (Verse 15: Chapter 75)
that knows its own “self-interest” defined by its position with respect
to the three stages of ta’aqqul, tafakkur, and tadabbur. Those interests
 1 POLAR VISIONS OF THE ECONOMY 35

change as the “self” progresses through these stages. Progression is deter-

mined by the degree of compliance with the rules governing behaviour
prescribed in Al-Qur’ān and explicated by the Noble Messenger (saa).
The interactions between this self and its possessor determine the
degree of compliance. The more the possessor of the nafs is in control,
the more compliant the behaviour, depending on the strength of the
former to dominate the latter in the process of cleansing the “self”
from its whims and caprice. If the nafs becomes dominant to the point
where it can order its possessor to rebel against its Creator by rule viola-
tion, then it converges qualitatively to the greedy, worldly, individualistic
“self” defined by John Locke and the neoliberal economics since it no
longer recognizes the Sovereignty of Allah swt. At the beginning stages
where the self is dominant, it takes on an adversarial role with respect
to its possessor and their “interests” are in conflict. As the dominance of
the self over the person declines—through the Grace and Mercy of its
Creator Who provides the human being with the needed guidance—its
role becomes one of cooperation. Hence, the interests of the “self” and
those of its possessor begin to converge as the person’s control over the
whims and caprice of the “self” increases through rule compliance.

The Logical Impossibility of the Proposed Union

Noting that the whole reason for the existence of a discipline that
deals with issues arising from the operations of an economic system
is to discover and explain the rules governing its operation that guar-
antees the results envisioned by the underlying worldview or ideology,
neoliberal economics serves well this function by explaining the rules
that guide the predatory capitalism now dominating world economies.
Considering all that has been discussed above, it is clear that a union of
neoliberal economics and Islamic economics—that is the discipline that
could discover and explain the rules governing the vision of economic
system discernible from Al-Qur’ān—is a logical impossibility. These are
two incomparable, incompatible, hence incommensurable paradigms with
different worldviews.86 Clearly, the proposed union will differ from
the paradigm discernible from Al-Qur’ān. Different worldviews provide
different perspectives and different ideologies allowing different solutions
to issues faced in the economy. The result is confusion and disagree-
ments. The solution to the conflict is a shift in perspective, a “paradigm
36 N. EL MAGHREBI ET AL.

shift” from the paradigm suggested by the proposed union to the one
discernible from Al-Qur’ān: Al-Iqtis.ād.
Many consider that the conventional economics is in an existential crisis
of legitimacy, thus in need of new paradigm. A number of proposals are
being discussed.87 Some also consider the present configuration defining
Islamic economics too is in crisis88 and in need of a paradigm shift. The
former has created significant problems which itself is now incapable of
solving. The latter, employing a narrow understanding of the project of
Islamization of Knowledge project as well as a narrow understanding of
the Objectives of as-Sharı̄’ah, proposes a naive model of Islamization
of economics89 that will replicate both the creation of problems—most
importantly, obscene levels income inequality and environmental disasters
which it now finds intractable—and the inability to solve them. Conse-
quently, this paradigm is not viable, either theoretically or from a practical
policy perspective. But what about the authentic version of the Islamiza-
tion of Knowledge? Can it provide a basis for the development of an
authentic Islamic economic paradigm?

Attasian Conception of Islamization of Knowledge

The idea of Islamization of Knowledge developed along two paths.90
The first—a broader, more comprehensive view—has a holistic vision of
knowledge that needs to be Islamized. It has a clear, unambiguous philo-
sophical foundation and a methodology developed by Syed Muhammad
Naquib Al-Attas of Malaysia. The second approach was proposed by
Ismail al-Faruqi and his colleagues at the International Institute of Islamic
Thought (IIIT) in Herndon, Virginia, U.S.A. The latter provided a
methodology for Islamization of knowledge which became ostensibly
the predominant methodology of the present paradigm of Islamization
of Knowledge present Islamization of economic paradigm.91 Within the
Faruqian methodology, Al-Qur’ān is the first source for Islamization
of knowledge—most emphatically articulated by Taha Jabir Al-’Alwani.
However, in actual practice of articulating an Islamized economics
paradigm, priority was given to fiqh and the ideas of writers of tenth–
thirteenth centuries, for example, Al-Juwayni, Al-Ghazali, Al-Shatibi, Ibn
Khaldun, and others.
The first path proposed by Al-Attas was based firmly on an onto-
logical and epistemological Islamization of Knowledge aimed at the
de-secularization and resacralization of knowledge.92 This objective is
 1 POLAR VISIONS OF THE ECONOMY 37

shared by many Western scholars who believe that secularization and

desacralization of knowledge has gone too far resulting in considerable
damage to humanity and to nature, much of it through the discipline of
economics and the predatory capitalism which it supports.93
De-secularization requires combing through the teachings of a field
of knowledge and purging it of all secularized notions and ideas. The
methodology of resacralization, according to Al-Attas, requires the rein-
troduction into Muslim societies and their educational systems the system
of “Ta’deeb,” meaning a process of acquiring “Ādāb, plural of adab,94
meaning proper conduct in compliance with the rules of behaviour
governing relationships with the Creator, other humans and nature, and
the “self”—as prescribed in Al-Qur’ān and exemplified by the Noble
Messenger (saws). Ta’deeb then is a process of educating the nafs (self)
to give recognition to and acknowledgement of its proper place in rela-
tion to its Creator, itself, its community, and society. This schooling,
and character-building of the “nafs or self” manifests in one’s behaviour
and disposition (akhlāq). Ādāb is a crucial element of Attasian discourse
of Islamization of knowledge (de-secularization and resacralization). The
loss of ādāb is identified as the principle cause of turmoil in Muslim soci-
eties. Al-Attas points to this loss as the cause internal to Muslim societies
and secularism as the external cause which in an organic combination
set a dynamic path of degradation of Muslim character, thought, and
behaviour.95 In general, the Attasian proposal is that Muslim societies
should undertake a process of counter-secularism which simultaneously
means resacralizing human societal relationships. This combined process
means that Islam reasserts its societal influence, returns to public sphere,
cultural subsystems, education, and social sciences. In doing so, all
actions, including those economic, become sacred.
Muslim philosophers and writers such as Said Nursi, ‘Muhammad
Iqbal, Seyyed Hossein Nasr, and Syed Muhammad Naquib Al-Attas have
for long emphasized that the image of humans sacralized by the Breath of
the Creator is the only one that can protect them from the terror of exis-
tence. It is the image that truly liberates humans, provides them with the
highest conceivable freedom to experience that knowing which is above
knowledge and which provides humans access to the “dynamic passage
of the universe to unending unity.”96 Their activities become correlated
with their belief as they engage in the economic creative processes, along
with the abundant resources that their Creator has provided, as an act
of communion with Him rather than one of exploitation of nature to
38 N. EL MAGHREBI ET AL.

satisfy personal greed for self-gratification and senseless accumulation.

Their existence becomes timeless, their work and their world sacred such
that every act in compliance with rules of behaviour guarantees multiple
returns leading to the flourishing of their society and its economy (see,
for example, Verse 96: Chapter 7).
Such a movement would challenge the long-standing belief of the West
that its own historical, cultural, and civilizational experience had universal
validity. Extended to Muslim societies this meant the assertion that this
civilization needed its own “Enlightenment,” “Reformation,” and “Lib-
eral Consciousness”97 to gain the benefits of “modernity.” Therefore,
Muslims needed their own Luther and-or Erasmus.98 Generations of
Muslims have responded to this call by formulating their own world-
view, including their understanding of Islam and Islamic civilization,
through the Western prism. Generations “of Muslim students and intel-
lectuals accepted passively and uncritically” the assessment made of Islam
and its civilization by Western scholarship. This meant “a deconstruction
of the corpus of thought that constitutes the worldview of Muslims.”
Through this process of deconstruction taking place in the twentieth
century, Allawi (2010) argued, the “world of Islam, indeed the compre-
hension of the world, was being disenchanted and de-sacralized right in
front of the eyes of Muslims, without their full recognition of what was
taking place.”99 Allawi considers the idea of Islamization of Knowledge
proposed by Al-Attas in the context of the current system of education
in Muslim countries representing “an uncompromising environment” in
which “Islam’s legacy of profound respect for learning had been long
abandoned.” These systems were characterized by a bifurcation composed
of anachronistic traditional schools (madāris, plural of madrasah) and
Islamic colleges, on the one hand, and the new secular schools, colleges,
and universities uninterested “in propagating the worldview of Islam
when their models and standards were firmly anchored in the West.”100
In this context, Al-Attas proposed his conception of Islamization of
Knowledge. He conceived knowledge as being composed of primary,
or first order, and secondary, or subsidiary, knowledge. The first order
knowledge is that of Allah swt which has the position of centrality in Islam
and which leads to truth and certainty. The second order knowledge,
while based on first order knowledge, “comes from observation and expe-
rience intermediated through Man’s rational faculties.” De-secularization
and re-saclarization of any field of knowledge would be accomplished
through the first order knowledge and ta’deeb.101
 1 POLAR VISIONS OF THE ECONOMY 39

Within the Attasian universe of discourse, Islamization of economics—

certainly more authentic given Al-Attas’ deep engagement with the
ontology and epistemology of Islam than the narrow vision of Islamized
paradigm of economics with its jargons of authenticity—would mean a
thorough purging of the discipline from secular and secularized ideas,
concepts, and theories. Once this is accomplished, Al-Attas’ methodology
would require resacralization of economics through ta’deeb. This would
mean accessing the primary knowledge in Al-Qur’ān—understanding,
internalizing, and applying the rules governing economic behaviour as
prescribed in Al-Qur’ān, and explicated and operationalized by the Noble
Messenger (saa). For example, participating in the market with Ādab
would mean that producers, traders, consumers must all know and inter-
nalize the prescribed rules governing the market and market behaviour
before actually engaging in transactions. Given the present conditions of
Muslim economies and their thorough immersion in neoliberal economics
where their policies are continuing to be formulated within a slightly
reformed “Washington Consensus,” desecularization of institutions of
the economy appears imperative in conjunction with resacralization of
economic policies. This process of Islamization of the economy and
economics produces an Islamic economic paradigm that converges to Al-
Iqtis.ād. Of course, it is possible to start with a clean slate and go directly
to Al-Iqtis.ād as the authentic Islamic economics paradigm. This would
avoid having to desecularize the present neoliberal economics which
would at any rate seem altogether impossible since secularism is such an
essential element of the philosophy and methodology of this discipline.
To illustrate, let us take a leaf from the philosophers’ playbook by
engaging in a thought experiment. Suppose there is a large newly formed
community of Muslims wishing to organize their society and its economy.
Assume further that they have Al-Qur’ān and the Sunnah of the Honored
Messenger (saa) but no knowledge of the evolution of fiqh and no access
to the ideas of Muslim writers, old and new. Moreover, they have no
knowledge of the history, culture, economy, and evolution of sciences in
the West. They most certainly know nothing about economics and the
evolution of thought in this field. The question is then, how will this
group organize its society and its economy? The only option available to
them would be to start by understanding the vision of the economy in
Al-Qur’ān, extracting from the fountainhead of all Islamic paradimgs the
40 N. EL MAGHREBI ET AL.

rules that govern the society and the economy as envisioned there as well
as the way in which the Noble Messenger operationalized the founda-
tions and the rules of the envisioned society and its economy. This is how
any authentic Islamic economic paradigm must begin. There is no need
for drawing the organizing principles of the society and its economy from
elsewhere. Once the society and its economy are formed, fiqh, history, the
writings of the earlier generations as well as terminologies and technical
concepts developed elsewhere would have to be considered but only if
they help in explicating the contents of the vision of the society and its
economy in Al-Qur’ān.. One such paradigm was developed by as-Sayyid
as-Shaheed Muhammad Baqir as-Sadr in the 1960s but which was mostly
ignored by Muslim economists.

Sadrian Discourse on Al-Iqtis. ād

M. B. As-Sadr was an extraordinary and unique genius whose personal
and intellectual accomplishments as a believing and practising Muslim
were those of an archetypal human that serves as example for others
striving for perfection intended for humans by their Creator. Those who
knew him well have written and spoken about his personal integrity,
disposition, akhlāq, compassion, commitment, modesty, courage, and
charisma.102 As-Sadr will continue to inspire generations as an example
of a human personality fully immersed in and completely devoted to the
high values and ideals of Islam. The way he lived his life, the sacrifices he
made, and the immensely valuable intellectual legacy he left behind will
continue to serve as a beacon of virtuous conduct, effort, and sacrifice on
behalf of human freedom and dignity, social justice, truth, and tolerance.
Aside from being a model and standard of what it means to live a life in
full compliance with the high values and ideals of Islam, he was a towering
intellect who set for himself a grand and difficult task of analytically
rejuvenating Islamic thought in accordance with the rigour of logic and
analysis demanded by his time. He did so systematically with meticulous
logic presented in a way accessible to his contemporaries—especially the
young Muslims alienated from Islam and seduced by “modern” ideolo-
gies. In the process, he challenged the philosophical, social, political, and
economic foundations of dominant ideologies of his time.
He understood well that the current compartmentalized and special-
ized approach to knowledge was inadequate in representing Islam’s
alternative solutions to the socio-political and economic problems of
 1 POLAR VISIONS OF THE ECONOMY 41

mankind. Accordingly, his approach to scientific revitalization and repre-

sentation of the teachings of Islam—based rigorously on Al-Qur’ān and
As-Sunnah—was, and still is, far deeper, broader, and more coherent than
other contemporary efforts. He envisioned Islam’s teachings as a unified
system—a network of interrelated and eminently empirical set of rules
compliance which guaranteed spiritual felicity and material prosperity for
human societies.
The depth and the breadth of the full spectrum of As-Sadr’s intellectual
legacy fills one with a sense of awe, humility, and admiration, even four
decades after his martyrdom. This impression becomes even more forceful
when one realizes the early age in which As-Sayyid As-Shaheed As-Sadr
began his study of Western schools of thought, along with the traditional
curriculum of seminaries. According to a biographer, one of his teachers
in grade school with Marxist tendencies reported that at the age of twelve,
As-Sadr asked to borrow from him books on Marxism. Upon returning
the books, as-Sadr astonished him by providing answers to a number of
questions about Marxism that had engaged his teacher’s mind for some
time.
Two of his major works, Falsafatuna (Our Philosophy) and Iqtis.āduna
(Our Economy), were published before the age of thirty. These books
display a surprising masterly grasp of the main Western ideas of his time.
Given the limited scholarly sources available in Arabic translation at the
time, one can only wonder whether his scholarly contributions would
have been much more enriched had a wider bibliography of topics of
his interest published at the time in other languages were available to
him. One would be justified in answering the query in the affirmative
given As-Sadr’s unique genius. In terms of foundational philosophical
and logical approach to the analytical explanation of problems faced
by Muslim societies and solutions provided by Al-Qur’ān, As-Sadr’s
system of thought converges to that of ‘Allamah Muhammad Iqbal and
Shaykh Said Nursi103 . It is arguably more focused on the analytics of
socio-economic system envisioned in Al-Qur’ān. In early decades of the
twentieth century, ‘Allamah Iqbal, having mastered major philosophical
groundworks of the Western socio-economic system, issued a clarion call
to Muslims to return Al-Qur’ān for solutions to their problems.
Like Nursi and As-Sadr, ‘Allamah Iqbal had a grand comprehensive
vision of ideal human society each dimension of which would be struc-
tured in consonance with the prescription of Islam. He too envisioned
42 N. EL MAGHREBI ET AL.

a coherent system composed of a network of rules. He argued that Al-

Qur’ān fostered rational and concrete (analytic) habit of thought. It was
the Muslim scholars’ preoccupation with Greek thought that constrained
their ability to cognate the empirical orientation of Al-Qur’ān which
urges humans to observe natural phenomena, meditate on their observa-
tion, validate, internalize, and appreciate the greatness of their Creator.
Al-Qur’ān, said Iqbal, emphasizes action not abstract ideation only,
analytic and critical thinking rather than pure speculation, and reliance
on facts rather than abstraction. Al-Qur’ān constantly appeals to reason
and experience laying great emphasis on the observation of nature and
study of history as source of human knowledge. In his classic book, The
Reconstruction of Religious Thought in Islam, Iqbal asserts unequivo-
cally: “The birth of Islam ... is the birth of inductive intellect.” This view
was rigorously and analytically articulated by As-Sadr some four decades
later in his book, The Foundations of Inductive logic.104

As-Sadr’s Discourse on Contemporary

Socio-Economic System
The focus of As-Sadr’s thought was on the presentation of his vision of
an economy embedded in a social system structured on the teachings of
Al-Qur’ān and As-Sunnah within the contemporary context. Before he
could do so, he had to dispense with the intellectual hegemony of the two
systems that were dominant at the time: Capitalism and Communism. He
met the two systems on their own terms logically, philosophically, and crit-
ically. He demonstrated the philosophical and logical weaknesses of their
arguments without resorting to or invoking his own religious dogma.
In his analysis, he focused on the logical and philosophical underpin-
nings of materialism which gave rise to both systems as well as the logical
implications of this philosophy for humanity.
His analysis focused on the flawed vision of human beings and their
collectivities as defined in the philosophy of materialism. He pointed out
that in this philosophy, humans were envisioned as beings whose gaze was
constantly centred on life on earth, its wealth and pleasures while ignoring
the heavens. He showed the devastating effects of the spirit of materi-
alism on human morality and ethics. He saw that the axiomatic structure
of such systems of thought leads to emergence of “one-dimensional”
human beings, materially greedy, non-empathic, acquisitive, and focused
on the immediate gratification of base drives. He stated a theorem that in
 1 POLAR VISIONS OF THE ECONOMY 43

a society composed of such humans, efforts to coordinate and harmonize

private and social interests—the grand objective of the Enlightenment
project—will fail with disastrous consequences. After managing to seri-
ously and successfully challenge the two ideologies on their own turf
and using their own “rules of the game,” he presented his vision of how
Islam provided more efficient, logical, coherent, and effective solutions to
the “economic problems” faced by societies. A review of research mate-
rials available will show that before As-Sadr, no Muslim scholar of his
calibre, background, and standing in the religious scholarly community
had managed to analyse, critique, and explain the philosophical flaws of
the materialistic foundations of communism and capitalism with as much
clarity, eloquence, fairness, and precise logic as had As-Sadr. In the process
of developing his comprehensive analysis of the two systems, he offered
a number of original insights into socio-economic-psychological prob-
lems of modern societies operating under the dominance of a materialist
philosophy.
To explain, consider a major problem facing humanity, one that has
grown with amazing speed over the last few decades to the point of
threatening life on earth: the environmental degradation. Major cause
of this problem as well as the difficulty in solving it are referred to by
a variety of terms and titles: “collective action problem”; “coordination
problem”; “tragedy of the commons”; “free-rider problem.” These terms
refer to the phenomenon of damage to public goods and natural resources
when individuals have freedom to use them but carry no responsibility
toward preserving them. The problem occurs both in materialist “com-
mand systems” where individual freedom is severely restricted and in
“market capitalism” with ostensible devotion to “individual freedom.”
A careful reading of As-Sadr’s writings will reveal that he analysed this
phenomenon and asserted the impossibility of coordination of private
and public interests in socio-economic systems founded on materialism.
This subject became the centre of attention of Western scholarship years
after As-Sadr provided philosophical, logical, and economic arguments in
support of his theorem that it is impossible to achieve effective harmony
between public and private interests in capitalism. He further provided
arguments, first in Falsafatuna and then in Iqtis.āduna, that the two mate-
rialist systems, dominant at the time, either sacrifice private interests in
favour of social interests, as does communism, or sacrifice social interests
in favour of private interests, as does market capitalism. The latter, As-Sadr
argued, focuses on materialization of private interests in its definition of
44 N. EL MAGHREBI ET AL.

a “free society.” Hence, it emphasizes unconstrained freedom of property

ownership, freedom of exploitation and sovereignty of consumption.
While a capitalist society functions through individuals, the frame
of reference of epistemological orientation of individual’s economic
behaviour is devoid of moral, ethical, and spiritual values. If it ever
includes these values, their origin will have to be external to the epis-
temological framework of the individual as defined by materialism. The
same argument was made in both of his major works regarding commu-
nism in which, at least in case of the Soviet system, even the behaviour
of ruling classes in the bureaucracy’s epistemological framework did not
include these values.
A major implication of his discussion of the philosophical and logical
flaws of the two systems meant that they were unstable and non-viable
in the long run. This penetrating insight of As-Sadr proved prescient
as the communist system failed about two decades after his works were
published. Capitalism too in the form he knew at the time of his writing
came to an end. That system was transformed into a new form of preda-
tory neoliberal capitalism through the dominance of neoliberal economics
and the promotion of ideas advanced by this paradigm by the major
political authorities in the West. Even in its new form, there are doubts
whether contemporary capitalism can survive the crisis-prone system it
has created. Many among contemporary scholars of capitalism argue that
operations of capitalism, in its various forms, have led to the destruction
of the environment, enormous inequalities of income and wealth, polar-
ization of societies, alienation of a major part of humanity, and diminished
human solidarity.

As-Sadr’s Conception of Ideal

Socio-Economic System
While the writings of As-Shaheed As-Sadr were quite timely and impor-
tant in his own time, understanding them at the present is crucial as
the search for alternative socio-economic paradigms that can more effec-
tively respond to the problems of humanity has intensified. Importantly,
it is quite clear that over the last forty years no other comprehensive,
consistent, and internally logical presentation of Islam’s vision of a society
optimally formed and its ideal economy has emerged. Moreover, not
enough has been done to make his writings available to non-Muslim audi-
ences. Additionally, the articles or books written over the last forty years
 1 POLAR VISIONS OF THE ECONOMY 45

by Muslim researchers on the topics that As-Sadr addressed show that

while they have borrowed ideas from his writings, these are selective and
partial not reflecting the entire vision of As-Sadr, thus creating confusion
and misdirection.105
As-Sadr’s writings constitute an integrated and interrelated whole.
Singling out a specific topic in exclusion of analysis of how it is
related to his philosophy—especially ontology and epistemology which
unify in his discourses—does not do justice to him, to his writings,
or to his readers. Understanding his views on economy, for example,
requires cognition of all other parts of his writings which form a unique
Sadrian universe of discourse. This understanding transforms the “one-
dimensional” worldview of transactional human-material relationships
to the three-dimensional worldview of Creator-man-nature which, once
it finds expression in the formation of society, attains justice in all
its operations. Compelling arguments have been made that paradigms
representing the one-dimensional worldviews that leave human–human
relations as well as human-nature relationships to be governed by human
caprice have created enormous tragedies to the point that at the present,
they do threaten the survival of humans on earth. As François-Marie
Arout, better known with his nom de plume de Voltaire (1694–1778)
once said: “It would be very singular that all nature, all the planets, should
obey eternal laws, and that there should be a little animal (man), five
feet high, who, in contempt of these laws, could act as he pleased, solely
according to his caprice.”106
The three-dimensional paradigm, so clearly and effectively articulated
by As-Sadr’s, expresses the resulting justice and harmony in human socio-
economic relations analogous to that prevailing in the universe when
human behaviour complies with “eternal rules” prescribed by the Creator.
Unfortunately, there is an inertia in the “modern” secular mind that
resists expending effort in the cognition of the intricacies of this paradigm.
And rather fortunately, an important feature of the contribution of the
Sadrian universe of discourse is its simplicity and clarity of expression as
well as coherence and logical structure of its arguments which should
make understanding less cumbersome.
It will perhaps not be a mischaracterization to suggest that before all
else As-Sadr was a first-rate logician whose discourses accorded logic and
objective truth central and active roles, firmly believing that humans have
desire to know truth and can do so through the exertion of effort. His
discourses teach how to think logically, structure thoughts coherently,
46 N. EL MAGHREBI ET AL.

express them clearly, and organize narratives consistently, dispassionately,

and analytically. Such effort, however, need not diminish the creative force
of passion for what constitutes our beliefs.
In all of his discourses, As-Sadr does not lose an opportunity to display
the passion of his belief that Islam provides solutions to problems soci-
eties face. For example, in Falsafatuna he argues that it is the framework
of the deen—the way of life that is Islam—within which a harmony can be
forged between individual and social interests.107 Humans need incentives
to forsake some or all of their interests in favour of others’ interests. The
deen has the spiritual power capable of providing the incentives, in form of
material and non-material rewards, to motivate individuals to make sacri-
fices. That said, this section of the chapter is a modest attempt to provide
a brief commentary on a number of As-Sadr’s insights in presenting the
theory and practice of Al-Iqtis.ād (Islam’s vision of ideal economy). The
point bears emphasis that this chapter is not a commentary on the entirety
of the views of Al-Sadr on Al-Iqtis.ād; to do some degree of justice to
his views requires volumes. The chapter instead focuses on some of his
insights—those that economic analysis itself discovered years after him,
with the purpose of indicating that the Iqtis.ādi contributions of As-Sadr
and his genius deserve far deeper and more intensive scholarly treat-
ment than they have received so far. While the entire Sadrian universe
of discourse is derived from the authentic sources of Islam, the choice
of words, expressions, and terms as well as the underlying philosophical
and logical framework he employed to expound his understanding of Al-
Iqtis.ād (Islamic paradigm of organizing an economy) as envisioned by
Al-Qur’ān, As-Sunnah, and fiqh, are unique. This is not to suggest that
these views are the last word on Al-Iqtis.ād but to emphasize that greater
effort must be devoted to the specific elements as well as the totality of
his vision of Al-Iqtis.ād and its implications for theoretical, empirical, and
policy issues.
It is noteworthy that As-Sadr himself displayed no inertia in modifying
his views and their explanations when the need arose. A major example
is his views on governance of Islamic society. Initially, he conceptualized
governance within the framework of “Shūra”—consultative paradigm of
governance as ordained by Al-Qur’ān. He modified this view after the
Islamic Revolution of Iran. Or consider explanatory articles he published
throughout his life that expounded on major issues treated in Falsafatuna
and Iqtis.āduna with somewhat different expressions and orientations.
This is, for example, quite palpable when one considers his position on
 1 POLAR VISIONS OF THE ECONOMY 47

banking and finance in his paper on Al-Bank Alla Ribāwı̄ and his expla-
nations of Islamic methods of banking and finance after his first paper
became widely known. The latter clarified both the theory and application
of the concept of Mudharabah where there is emphasis on the necessity
of the sharing of risks between the participants in investment projects.
Iqtis.āduna asserts, supported by verses of Al-Qur’ān and Al-Hadeeth,
that the fundamental Islamic principle of fraternity requires risk-sharing.
To begin the discussions of As-Sadr’s insights on the organizing princi-
ples of socio-economic system, a digression on the concept of Al-Iqtis.ād
would seem useful. This term is often translated as “economics.” As-Sadr,
however, provides a taxonomy that uses the term Al-Iqtis.ād in the general
sense of its meaning as “the economy” while using it as a prefix, Iqtis.ād
Islāmi or Al-Iqtis.ād Al-Islāmi, to denote the discipline that deals with
the workings of that economy. As-Sadr goes to a great length to argue
that ontologically and epistemologically there are significant differences
between the nature and logic of economics and Al-Iqtis.ād. In translation,
however, the term Iqtis.ād became “economics” and “Islamic economics.”
Currently, the difference between “economics” and “Islamic economics”
is quite blurred. Some believe that the incorporation of as-Sharı̄’ah into
“conventional economics” will render it Islamic. As discussed in detail
earlier, and further explained also in the rest of the book, a union of
the two is logically impossible.109 The term “Iqtis.ād” is unique to Islam,
making its appearance both in Al-Qur’ān and As-Sunnah, which makes a
one-to-one mapping of the term to European languages questionable.110
Arguably, the term “Islamic economics” as translation of Al-Iqtis.ād
lacks accuracy and precision doing injustice to the careful and logical
arguments and the analytic method by which As-Sadr drew philosophical
and logical distinction between Al-Iqtis.ād and capitalist “economics.”111
While the term “Islamic economics” is used often by writers, it always
requires preliminary explanations regarding its major differences with
conventional “economics.” Moreover, the term Iqtis.ād serves two distinct
purposes. First, it represents Islam’s vision of an economy (including its
finance paradigm) in a society formed on the basis of prescriptions of Al-
Qur’ān and As-Sunnah. While arguably mapping Iqtis.ād into “Islamic
economy” can be justified, translating Al-Iqtis.ād to “Islamic economics”
in its second meaning—as the discipline which discovers the structure
and operation of Islamic economy, as well as study the transactional
relationships within that economy—cannot.
48 N. EL MAGHREBI ET AL.

Arguably even the oft-used term “Al-Iqtis.ād Al-Islāmi” involves

redundancy, since, as mentioned earlier, Al-Iqtis.ād is a uniquely Islamic
concept which was in existence and use extensively many centuries before
the appearance of the word “economics.” In his successful effort to lay
out a holistic, unified, coherent, and consistent vision of Al-Iqtis.ād, As-
Sadr employs, to the extent needed, ideas from philosophy, history, logic,
psychology, sociology, physics and mechanics, morality, and ethics, as well
as explanation, tafseer, of Al-Qurān. The rest of the chapter is based on
the available corpus of his vision of Al-Iqtis.ād.

As-Sadr and Al-Iqtis. ād Paradigm

Even a cursory reading of the writings of As-Sadr reveals its system-
atic, pragmatic, and practical vision of Al-Iqtis.ād. This vision begins with
the definition of the subject matter. Accordingly, in its first meaning,
Al-Iqtis.ād is defined as the economy envisioned in Al-Qur’ān and As-
Sunnah. In its second meaning, Al-Iqtis.ād is defined as the discipline
which deals with the theory and empirics of the workings of such an
economy. The initial stage involves discovering rules prescribed by Al-
Qur’ān and As-Sunnah that are to govern the transactional relationships
between humans themselves and between them and nature. The empirics
of Al-Iqtis.ād refers to the scientific study of the operations of these rules
in practice.
Al-Iqtis.ād in its second meaning is the study of life as experienced in
a society organized according to the blueprint Al-Qur’ān has provided
within which Al-Iqtis.ād is embedded. The latter would be, therefore, the
study of lived experience in the economy envisioned in Al-Qur’ān and
As-Sunnah. It becomes relevant only after Al-Iqtis.ād in its meaning as
economy comes into being. The former, As-Sadr calls the Madh’hab of
Iqtis.ād and the latter as the ‘Ilm of Iqtis.ād. The role of Madh’hab is
broader than defining the economy. It provides the organizing principle
of the society in which the economy is embedded and whose fundamental
reason for existence is Justice. The central focus of Al-Iqtis.ād of such
society too is justice. As-Sadr identifies justice as the axis around which
the madh’hab of Iqtis.ād rotates. For him the Objectives of Al-Qur’ān
(Maqās.id Al-Qur’ān) are summarized in Social Justice (Al-’Adālah Al-
Ijtimā’iyyah), General Mutual Support (At-Takāful Al-’Ām); and Social
Balance and Harmony (At-Tawāzun Al-Ijtimā’ı̄) for the society.
 1 POLAR VISIONS OF THE ECONOMY 49

As-Sadr’s definition of Al-Iqtis.ād has provoked debate and discussion

among scholars and writers on its logic and content.112 As-Sadr carefully
and analytically differentiated between the madh’hab and science of Al-
Iqtis.ād. The existence and functioning of the latter are conditional on the
operationalization of the former. Madh’hab Al-Iqtis.ād exists in a society
organized and targeted to achieving justice based on prescriptions annun-
ciated in Al-Qur’ān and As-Sunnah. An example could perhaps explain
the distinction between the Madh’hab and the “science” of Al-Iqtis.ād. In
the vision of As-Sadr, justice is the spirit and functional essence of Islam
crystalized in the society. It has an axial role in the entire socio-economic
system envisioned for humanity in Al-Qur’ān.113
Justice in Islam is a concept whose identification is possible through
its effects. Unlike other conceptions which see justice as a principle or
a virtue among others to be cultivated in individuals and the society, in
Islam justice is intricately and integrally bound with the degree of indi-
vidual and social compliance with the prescribed rules of behaviour. When
it exists in a human society, it represents a mapping of the balance and
harmony that prevails in the heavens. Whereas its existence in the heavens
reflects the full submission of all cosmic elements to their Supreme
Creator, in earthly human societies its existence and operation depend on
the volition of individuals as manifestation of the gift of freedom of will
granted by their Creator. Hence, whether justice prevails in a society and
among its members is an empirical question; therefore, subject to exam-
ination by the “science” of Al-Iqtis.ād. As-Sadr had studied the works of
the major Western philosophers of the time, for example, those of British
empiricists. While the works of such philosophers as Karl Popper (1902–
1994) as well as Emre Lakatos were not available to him, he understood
the sentiment of the time on the reliance of anything scientific on empir-
ical verification. He chose to make the dichotomy between the axiomatic
Iqtis.ād drawn from Al-Qur’ān not subject to verification and theoretical-
empirical part that dealt with hypotheses regarding how the first part of
Al-Iqtis.ād could be implemented in order to create the socio-economic
system envisioned in Al-Qur’ān and operationalized by As-Sunnah. As-
Sadr emphasized that existence of poverty and deprivation (effects) in a
society is prima facie evidence of lack or impairment of justice (cause).
It is the role of the “science” part of Al-Iqtis.ād to empirically study the
degree of rule compliance and, therefrom, the degree to which justice
prevails in the society through the empirical examination of observed
levels of poverty and deprivation. The next step for the “science” part
50 N. EL MAGHREBI ET AL.

of Al-Iqtis.ād would be to formulate solutions based on the madh’hab

part and formulate testable hypotheses.
It is the madh’hab’s role to discover the principles and rules prescribed
in Al-Qur’ān that are to govern individual and collective behaviour which
the Creator has deemed necessary for a harmonious, balanced, and fair
social life for all humans. It is this discovery that allows society to orga-
nize its social and economic life according to Islam’s conception of justice.
Supported by Al-Qur’ān and As-Sunnah, As-Sadr asserted unequivo-
cally that individual and societal problems are created by injustice and
ingratitude, both manifested ultimately by non-compliance or violation of
prescribed rules.114 While the discovery, analysis, and explanation of rules
are the function of the madh’hab part, it is the role of the “science” part
of Al-Iqtis.ād to determine the ground reality of the degree to which indi-
viduals and their collectivities are rule-compliant. Furthermore, he argued
that it is the role of “science” of Al-Iqtis.ād, as a discipline which studies
lived experience, to suggest to legitimate authority (ulu al-amr) a menu
of policy prescriptions that bring individual and collective behaviour into
compliance with prescribed rules based on its analysis of the ground reality
of actual behaviour. This is evident from As-Sadr’s argument that the
distinction between madh’hab and “science” of Al-Iqtis.ād is not to be
found in their subject matter but in their methodology and objectives.115
The distinction that As-Sadr drew between Madh’hab al-Iqtis.ād and
“science” of Al-Iqtis.ād (‘Ilm al-Iqtis.ād) has precedence in the history
of economic thought. Some decade and half before writing The Wealth
of Nations (WN), Adam Smith wrote The Theory of Moral Sentiments
(TMS) that until a few decades ago was all but ignored by economists.
Arguably, this book lays down the Philosophy and logic of the system that
became known as capitalism. For all intents and purposes, TMS explains
the Madh’hab of the economic system envisioned by Adam Smith. His
second book, The Wealth of Nation can be considered as the “science”
(‘ilm) of that system.
The dichotomy of Madh’hab and “science” (‘Ilm) provides a solu-
tion to the so-called “Adam Smith’s problem.” From about the middle
of last century until recently, scholars contended that there is such a
contradiction between the two books of Adam Smith to appear as if two
different authors wrote them. If granted consideration that TMS explains
the Madh’hab and WN its “science” (‘Ilm), then it would resolve “the
Adam Smith” problem. The vision that Smith held for the economy was
far from what developed later. As discussed earlier in this chapter, what
 1 POLAR VISIONS OF THE ECONOMY 51

Smith envisioned was a system anchored on a collection of moral/ethical

values that, he believed, should govern human behaviour in transactional
relationships within the society in which they were embedded. Smith envi-
sioned justice as the most important among these values. The source
of these values was a deist belief that asserted a doctrine of a harmo-
nious order (what As-Sadr would call “tawāzun”) in nature guided by its
Creator whom Smith called “The Author of Nature,” among others.116
Smith then applied this doctrine with precise logical consistency to the
economic order. His later book The Wealth of Nations devotes itself to
analytics and empirics of the working of this economic order.
Major difference in the conceptions of justice between Adam Smith
and As-Sadr is that the former conceived of justice as the most important
among the virtues, along the Aristotelian thought. He believed that a
virtue such as self-interest, not regulated by justice degenerates into vice.
As-Sadr, on the other hand, gives justice the axial role in the entire edifice
of the philosophical underpinning of Al-Iqtis.ād order, in consonance with
the teachings of Al-Qur’ān. Since the last decades of 1990s much research
work has been published in an attempt to bring Smith’s TMS into main-
stream economic thinking.117 Smith’s last book, published after his death
and based on his students’ notes, is Lectures on Jurisprudence whose
objective was focused on the ways and means of developing the legal
structure ( fiqh) that would institutionalize rules he had developed in his
doctrinal Theory of Moral Sentiments.
The purpose of drawing attention to the writings of Adam Smith is not
to establish an equivalence between his ideas and those of As-Sadr. Instead
the purpose is to suggest that the idea of As-Sadr—that the essence of Al-
Iqtis.ād Al-Islāmi is its madh’hab and its ‘ilm, which is the scientific study
of lived experiences in an economy designed according to the Madhhab—
has an approximate analogous precedent in the works of Adam Smith. It
is important to note that the position of As-Sadr on ‘Ilm Al-Iqtis.ād does
not mean that no scientific empirical studies using the methodology of
Al-Iqtis.ād can be done unless there is an Islamic economy already estab-
lished. His position is that no discipline of ‘Ilm Al- Iqtis.ād can exist in the
absence of an Islamic economy. To suggest that according to his position
a researcher cannot empirically test a hypothesis drawn from Madh’hab
Al-Iqtis.ād in Islam would have to meet the challenge of substantiating
the claim based on As-Sadr’s writings.
To explain, consider his discussion of his theory of knowledge (episte-
mology) masterfully presented in Falsafatuna where he points out to two
52 N. EL MAGHREBI ET AL.

ideas of conception and judgement. The role of logic in the formation of

judgement as it progresses from conception is crucial. The logic of the
argument asserts that judgements are what allow capturing the essence
of reality. It is this epistemology that allows him to make judgement
that materialism is flawed and so are economic systems that are based
upon this philosophy. While all of his arguments in this context stand
on strong logical ground and are objectively and powerfully reasoned, it
would not be realistic to assume that he did not draw on the intellectual
wealth of Madh’hab Al-Iqtis.ād in formulating hypotheses with which he
began studying the philosophical foundation of materialism. Consider also
the fact that he proposed an Islamic method of finance for non-Islamic
systems. While he drew the outline of his proposal from the Madh’hab, it
was the ‘Ilm that had to devise ways and means of implementing it.
There are many propositions and hypotheses that can be formulated
based on the content of the Madh’hab Al-Iqtis.ād and tested empirically.
Two examples may help illustrate this point. One can hypothesize that,
in a society not fully organized according to the teachings of Islam, a
believer’s behaviour in transactional relationships would be different from
a non-believer under the conditions defined by the transaction because
they would operate under different rules. Experimental methods—which
As-Sadr referred to in his writings years before the discipline of experi-
mental economics actually developed—could then provide the ways and
means of testing such hypotheses. In a recently published book, Dr. Hazik
Mohamed reports on such an experiment using game theory. He tested
a hypothesis regarding the question of whether compliance with rules
prescribed by Al-Qur’ān and As-Sunnah would elicit a different response
from a believing Muslim than from a non-believer under the same set of
circumstances.118
In a second example, Dr. Tarik Akin, interpreting Islamic finance
method as one of sharing risks and rewards of investment projects,119
designs and empirically tests a related and elaborated simulation model
positing that the major problem of inequality of income and wealth distri-
bution stems from an interest-based finance system, and that risk-sharing
Islamic finance provides an effective solution to the inequality of income
and wealth that plagues contemporary societies.120
A third example requires a brief introduction. In his explanation of
how, in an Islamic society, concepts (Mafāheem) derived from the Belief
(Al-‘Aqı̄dah) generate inclinations (‘Awātif ) and sentiments (Ahāsees )
that lead to rule-compliant actions, As-Sadr refers to the concept of
 1 POLAR VISIONS OF THE ECONOMY 53

“Taqwā,” a crucially important concept because of its organic affinity

with justice as well as its attribute that it becomes operational when a
person is always and everywhere conscious of Allah swt and acts always
with the intention of achieving the pleasure and approval of Allah swt.
This is the ground of “righteous action” (Al-‘Amal As-Sālih).121 In this
context, As-Sadr argues that the concept of taqwā is an indicator of
honour (karāmah) and deference (tafādhul ) among human beings which,
gives rise to the Islamic sentiments or inclinations, related to taqwā, of
high esteem (ijlāl ) and respect (ihtirām).
This understanding of As-Sadr can be interpreted as meaning that a
Muttaqi (the person who possesses taqwā) earns a reputational capital
implying that the person is considered as trustworthy. In a recent book,
Dr. Omid Torabi modelled how the reputation earned through behaviour
that stems from taqwā can make equity-crowdfunding successful. More
importantly he demonstrated analytically the operation of the concept of
“barakah,” a concept of nonlinear scalar leading to multiple returns, that
results from reputational behaviour governed by taqwā.122
Conventional economics is not unfamiliar with multiplicity of returns
to appropriate behaviour. The concept operative at the micro-economics
level is referred to as X-efficiency. The theory reflects the observation
that two firms operating under the same set of circumstances, with the
same quality and quantity of resources perform differently with one
doing better than the other in terms of productivity and profits. This
effect was attributed to efficiency in resource use whose source was not
known, hence, X-efficiency. Since its early appearance, analytic studies
have identified sources such as inter alia, labour-management relation-
ships, participation by labour in decision-making process, degree of job
satisfaction of labour, and programs of profit sharing with labour.
The analogous concept at the macroeconomics level is referred to as
“total factor productivity.” This idea relates to two different growth rates
in two countries with similar resource profiles, comparable resource avail-
ability, cultural similarity, and comparable geography. One country has
higher level of growth and development. Initially, it was thought that
the reason may be due to different levels of technical progress. Empirical
studies showed that even when this difference is accounted for, still one
country performed better than the other.123
As-Sadr’s view on groundwork upon which ideal Islamic society and
its economy are grounded.
54 N. EL MAGHREBI ET AL.

As noted earlier, Islamic economy is embedded in an Islamic society.

Hence, As-Sadr argued that it is not possible to study Islamic economy
without first understanding the society which Islam envisions. The latter
organizes the social life and its economy organizes the Iqtis.ādi behaviour
of the members of the society. The latter is possible only after the society
has become fully familiar with Islam’s view of life, and its members have
internalized belief in Allah swt to the point of cognition of the fact
that such a belief (Iman bi-Allah) means complying with the rules of
behaviour that Allah swt has prescribed. It is only then that appropriate
ground conducive to emergence of Islamic society is prepared. That, in
turn, requires methods of nurturing, educating, and training of individ-
uals to follow Islamic teachings to yield a society with the full Islamic
colouring (As-Sibghah Al-Islamiyyah). It is in such a society where Al-
Iqtis.ād not only orders Iqtis.ādi relationships harmoniously but provides
also the ways and means of achieving prosperity (Ar-Rakhā’ ) and felicity
(As-Sa’ādah).
As-Sadr then proceeds to focus on the ingredients required for
preparing the ground out of which Islamic society would emerge—what
Malek Bennabi called At-Turbah). He derives three elements necessary
for the emergence of Islamic society: the central principle (Al-Qā’idah
Al-Markaziyyah) of Belief (Al-‘Aqı̄dah); Concepts (Al-Mafāhı̄m) derived
from Belief reflecting the view of Islam in understanding phenomena;
and inclinations (‘Awātif ) and sentiments (Ahāsees ) that are invoked by
concepts derived from Belief. As mentioned, he used the example of the
concept of at-taqwā derived from Belief which invokes the sentiments of
deference, respect, and esteem among people for the person practising it.
The axial element of Belief around which the worldview of Islam rotate
is at-tawheed; the axiom of Unity. It means that all that was, is, and
will be has One Creator, Sustainer, and Provider Who is Omniscient,
Omnipresent, and Omnipotent. A corollary of this axiom states the unity
of all creation including human beings. This is the underlying reason for
the universality of Message of Islam that humans, in their creation, are
but one irrespective of apparent multiplicity of humanity and seeming
differences among them.
The belief in the Unity of the Creator and of humanity gives rise to
the concept of fraternity (Al-Ukhuwwah) which in turn manifests itself in
form of the sentiment of love of other humans with significant implica-
tions for social relationships, including sharing in economic and financial
transactions. Another concept derived from the belief in at-tawheed is
 1 POLAR VISIONS OF THE ECONOMY 55

that Allah swt is the ultimate Owner of all things and Has the First claim
on them. As-Sadr asserted that while everything belongs to Allah swt, He
Has permitted individual humans to claim the right of conditional posses-
sion of things they produce combining their labour with resources Allah
swt has Created for all humans. Therefore, he built a strong logical case
for his assertion that work is the fundamental basis for the creation of
conditional property-rights claims in Islam.
In this context, As-Sadr introduces a concept, derived from the Belief,
that explains the idea that all value added to a product—as it goes
through complex production and exchange network to get to its final
destination—belongs to the original producer. He called it “immutability
of property ownership” (Thabat Al-Milkiyyah). This is an important
concept that provides a logical foundation for the sentiment of sharing.
For long before As-Sadr, sharing in the form of Sadaqāt (plural of
sadaqah, including sadaqah jariyah, zakah, khumus, qardh hasan, infaq
fi sabil Allah, among others) were considered “charity” and “poor tax.”
However, the concept of the immutability of property claim provides a
crucial insight that strengthens the justification for legislation sharing as
mandated by Allah swt.
The logic of the justification for sharing is as follows: (1) Everything
belongs to Allah swt; (2) This Owner Has declared that all the resources
He Has Created belong to all humans, meaning that all have the right to
access these resources; (3) Some members of the humanity are unable,
due to a number of factors, to exercise the right of access to these
resources, hence; (4) Some, who have the opportunity, will use more of
these resources than those who are unable to do so, meaning that the
former use the right of accessing these resources that belonged to the
latter; (5) Regardless of how many hands these resources change or how
many complex processes they go through to create income and wealth
for the able group, the right of the Original Owner remains; (6) It is that
Owner Who has legislated that the second group (those who are able to
access resources) must compensate the first because it has used the right
of access that belonged to those who were unable to exercise their right
of access to resources to produce income; (6) Income and wealth of the
second group contains a share that rightly belongs to the first group; (7)
The Original Owner of the resources not only Has ordained that the latter
group be compensated by the second group, He Has legislated also the
ways and means of doing so. Hence, not only Sadaqāt are not “charity”
in any sense of the word, they are indeed the redemption of the rights of
56 N. EL MAGHREBI ET AL.

the “poor” (those who are unable to use their rights of access to resources
provided for them by their Creator) in the income and wealth of the rich.
There are important insights in As-Sadr’s explanation of the elements
of the groundwork. The three elements provide humans with the ability
to focus their internal and external dispositions intensely on Allah swt
(the Belief) and abandon servitude to any other entity. Thus, becoming
liberated from servitude to internal and external idols. Based on his
discussions of causality and motion in Falsafatuna, As-Sadr argued that
the process involved in this liberation movement is one of gradual trans-
formation of potentiality into actuality. Potentiality, existing in the essence
of the duality of materiality and spirituality within the constitution of
human beings, is actualized experientially as humans use their spiritual
capital provided by their Creator in their very essence as expressed in His
Message to humanity.124
The concept of spiritual capital (As-Sadr uses two terms for spiritual
capital, Ar-Ras.ı̄d Ar-Rūhi and At-Tamwı̄n Ar-Rūhi) is As-Sadr’s impor-
tant insight which he derived from the Belief (Al-‘Aqı̄dah). It is the
erosion and loss of spiritual capital and its replacement by the domi-
nant ideology that As-Sadr considered as the major cause of problems
of Muslims and their society. Loss of spiritual capital leads to loss of social
capital because the former is the source of the latter.125 Social capital,
according to As-Sadr, emerges when a critical mass of believing individ-
uals engage in social transactions with self-confidence borne from the
internalization of commitment to the three elements of the groundwork.
When such a critical mass of individuals comes into existence and
behaves in compliance with the rules prescribed by their Creator, the
society will have available a stock of spiritual and social capital that
promotes solidarity, stability, prosperity, and social welfare. The reason
is that social capital includes elements of mutual trust, cooperation, and
coordination that bring individual self-interests and social interests into
harmony. Once spiritual capital is eroded, and eventually lost, social
capital becomes impaired or destroyed leading to loss of social soli-
darity and cohesion. Pursuing objectives solely borne out of self-love
and self-interest becomes the ruling paradigm which, in turn, leads to
intense competition for accumulating wealth, and society becomes a
“winner-take-all” society.
The ideas of spiritual and social capital, essential insights of As-Sadr,
had to wait for their articulation by scholars of conventional economics
until the last decades of the twentieth century. Even then, social capital
 1 POLAR VISIONS OF THE ECONOMY 57

was first to make its appearance. In the last decade few researchers have
been attempting to bring spiritual capital into mainstream economic
thinking. However, this effort has yet to gain much traction. These
attempts, while acknowledging that the main source of spiritual capital
is religion, in an attempt to broaden the appeal of this concept have tried
to downplay the role of the latter.126 This is analogous to attempts by
philosophers and ethicists to develop “godless morality.”127
The three elements, the belief, concepts, and sentiments, constitute the
organizing principles of Islamic society. They are also the foundational
principles of Al-Iqtis.ād in that without them, the two most important
pillars of Islamic social justice discussed in the Sadrian discourse: “gen-
eral mutual support” (At-Takāful Al-’Ām) and “social harmony and
balance” (At-Tawāzun Al-Ijtimā’ı̄) would be undermined. Collectively,
the three principles and their specific characteristics are unique to Islam.
They distinguish Islamic society and its economy from all other systems.
Notwithstanding disagreements and debates regarding specific issues in
philosophy, logic, or other subjects treated in the Sadrian universe of
discourse, there can be no denying that the latter provides a pragmatic and
practical blueprint for organizing an Islamic society with its own unique
economy. The challenge, however, is the absolute necessity of a critical
mass of individuals who have already internalized the three elemental
organizing principles before the ideal society comes into existence. This
is the reason why As-Sadr placed such strong emphasis in his discourses
on nurturing, education, and training of individuals.
Given his penchant for pragmatism and practicality, As-Sadr argues
for a type of education and training that reflects the universality of the
Message of Islam and its ability to be articulated in terms, expressions,
and frameworks that are capable of addressing the ground reality upon
which the contemporary generation experiences life. This is the reason he
focused on the necessity of change in the outlook and methodology of Al-
Ijtihād—that is achieving expertise in religious studies. He specified the
condition for the type of Ijtihād that can articulate an up-to-date Islamic
vision to address the contemporary problems of humanity. This was to be
an Ijtihād that is not chained by a commitment to preserving the status
quo, is not influenced by any personal biases of the mujtahid—the person
exercising Ijtihād—, does not abuse the absence of rules related to specific
circumstances in the authentic sources in order to render a fiqhi decisions
that justify his/her prejudices.
58 N. EL MAGHREBI ET AL.

In short, As-Sadr argued for an Ijtihād that was not only logi-
cally rigorous but was also objectively devoid of prejudices, biases, and
ignorance but well-informed about current socio-political-scientific devel-
opments. It is this kind of Ijtihād that could educate and train human
beings worthy of the office of Khalı̄fah (trustee, agent) of Allah on earth.
As-Sadr had no doubt that Islam has optimal solutions to the current
problems of mankind. He emphasized that what gives rise to these prob-
lems are injustice (dhulm) and ingratitude (Kufrān An-Ni’mah). The two
together create internal conflicts within individuals which if not resolved
lead to external conflicts with others and conflicts with nature, leading to
destruction of social harmony, cohesion, and solidarity as well as damage
to nature. In order for viable solutions to society’s problems to emerge,
however, humans have to remake themselves into Islamic humans by
internalizing the three principles. In short, they have to become fully
compliant with the rules their Creator Has prescribed.
Long before the world became intensely concerned about environ-
mental disasters, As-Sadr, employing unique thematic interpretations of
Al-Qur’ān (At-Tafsı̄r Al-Mawdhū’ı̄), explained that the verses of Al-
Qur’ān 128 assert that the more human relationships among themselves
and with nature are based on equity and justice, the greater social soli-
darity. As a result of the internalizations of Islamic values such as fraternity,
love, and care for others, even at the cost of self-sacrifice, the society accu-
mulates social capital (trust and cooperation) that allows more efficient
use of resources, higher productivity, and hence greater prosperity.
This brief account has touched only a part of the collection of insights
of the creative genius of as-Sayyid as-Shaheed as-Sadr. In every field that
As-Sadr found essential to his grand vision, he achieved new insights.
Whether in philosophy, logic, history (in which the rigour of his analysis
is at par or superior to that of Hegel, among others), psychology, soci-
ology, and economics, he either found a new way of explaining concepts
better or created new ones that enriched his discourses.
After a comprehensive discussion of the organizing principles of a just
society based on Al-Qur’ān and As-Sunnah, As-Sadr proceeds to specify
the paradigm of Al-Iqtis.ād both as a system and discipline. He retains
social justice as the primary and principle Objective of Islam for society
and its economy. Deriving arguments from Al-Qur’ān, As-Sadr provides
justification for arguing that the system of Al-Iqtis.ād is defined and served
by the practical ways and means of achieving and serving the Objective of
Islam: social justice. This is done by discovering the rules that govern
 1 POLAR VISIONS OF THE ECONOMY 59

the system of Al-Iqtis.ād as prescribed in Al-Qur’ān and operational-

ized by the Sunnah of the Honored Messenger (SAA). This constitutes
the function of Madh’hab Al-Iqtis.ād. These rules govern: governance of
the economy; property relations and acquisition of conditional rights of
property ownership; use of natural resources and their allocation before
production; employment of human resources; production; formation of
markets and market behaviour; post-production distribution; consump-
tion; redistribution and its mechanisms; accumulation of wealth; and
financial transactions, inter alia.129
As-Sadr was quite mindful that all Iqtis.ādi relationships are derived
firmly from the three organizing principles of Islamic society: ‘Aqı̄dah,
Mafāhı̄m, and ‘Awātif which build the concept of sharing within
the fabric of socio-economic relations. As illustration, he focuses on
Mudhārabah as the ideal framework of Iqtis.ādi financial system. Having
dealt with probability theory in his work on logic (Foundations of Induc-
tive Logic), As-Sadr was fully aware that in focusing on Mudhārabah as
the archetype of financial contracts in Islamic financial system, he was
arguing—well justified by Al-Qur’ān—for a financial system whose main
engine would be risk and reward-sharing. Risk-sharing is clear from the
contract of Mudhārabah requirement that the sharing ratio be established
between the financier and the entrepreneur before the start of a given
project. Since the outcome of the venture is unknown before the start,
it makes the decision on the sharing ratio subject to uncertainty and,
therefore, risky. Thus, Mudhārabah, before becoming a profit-loss sharing
contract at the completion of the project, is a risk-sharing contract at
its beginning. From this initial proposition, the whole system of Islamic
finance can be spanned.
Once Madh’hab Al-Iqtis.ād provides the overall framework of Al-
Iqtis.ād system, the “science” of Al-Iqtis.ād (‘Ilm Al-Iqtis.ād) can develop
testable propositions regarding the implementation of the requirements
of operationalization of the system. It designs and articulates policies to
bring the actual economy in convergence with the ideal.130 For example,
developing policies to implement a fiscal system (government tax and
spending) that serves the Islamic economy in achieving social justice is
a function of the “science” of Al-Iqtis.ād; justice having been established
as the Objective of the system based on Madh’hab Al-Iqtis.ād. Similarly,
designing policies that implement an Islamic risk-sharing financial system
is the responsibility of the practitioners of the “science” part of Al-Iqtis.ād
as the discipline that studies the practical aspects of implementing the
60 N. EL MAGHREBI ET AL.

requirements of Madh’hab Al-Iqtis.ād. In summary, Al-Iqtis.ād paradigm

as envisioned by As-Sadr, is composed of two distinct parts: (i) Madh’hab
Al-Iqtis.ād whose main task is the discovery of the rules governing Islamic
economic system; and (ii) ‘Ilm Al-Iqtis.ād which studies the ground reality
of the operations of the actual economy and propose ways and means of
bringing it to convergence with the ideal.

Notes
1. See Weber (1958). For Protestant Christianity’s compromise with capi-
talism in nineteenth-century America, see Davenport (2008). Catholi-
cism has been much more reluctant to make compromises with capi-
talism. See, for example, Von Nell-Breuning (1936), Dulles, (1999),
and Donders (2005). See also, Sandelands (2010). Before America’s full
commitment to neoliberal capitalism, there were American economists
who had a different vision of the economy. See, for example, Ryan
(1916).
2. For a remarkable book that analyses this compromise, and the resulting
problems, see Goudzwaard (1979a).
3. See, for example, Verse 41: Chapter 2; 53:3; 136:4; 44–49:5; 3:7; 21:31;
2:47; and 4:97.
4. See Hamid and Mirakhor (2020).
5. Rousseau’s idea echoes a saying attributed to the Noble Messenger:
“Whoever comes to know his inner self (nafs ), knows His Creator,
Sustainer, and Nurturer (Rabb).” This search of interiority has been a
task of the body of time-honoured teachings (‘Irfān) that has provided
guidance for those who wish to know their inner self.
6. See, especially, Adorno (1973).
7. See Foucault (1983, 1994).
8. In recent times the debate about authenticity has been revived, see, for
example, Bauer (2017) and Rings (2017).
9. Translated by Parsons (1958).
10. Ibid., p. 91.
11. See, for example, Spengler and Allen (1960), Lowery and Gordon
(1998), and Samuels et al. (2007).
12. In this context, see Khan (2002).
13. See, for example, Ibn Ashur (2007). See also, Kazemi-Moussavi (2011).
14. See, for example, articles in the July 2021 issue, number 96, of the
journal Real-World Economic Review.
15. See Saiyidain (1942). See also, Khurshid (1962).
16. Al-Attas (1978, 1980).
17. Al-Faruqi (1988).
 1 POLAR VISIONS OF THE ECONOMY 61

18. Abu Sulayman (1989).

19. See, for example, Al-‘Alwani (1996).
20. See Nur (2020).
21. See Darraz (1950 [1973]) and Al-Hakimi et al. (1992). In this context,
a book that attempts to derive, from Al-Qur’ān and As-Sunnah, rules
(institutions) that govern the process of economic development and
growth is that of Al-Reyshahri and Al-Hosseini (2001).
22. See Norgaard (2021).
23. For a fuller discussion of the evolution of capitalism and the economics
that supports it, see Mirakhor and Askari (2017, Chapters 2 and 3).
24. See De Gregori (1987) and Jo (2011), see also, Jo (2016) and Lee
(2013).
25. For a view of Adam Smith’s system of thought as consisting of a
moral foundation, as depicted in The Theory of Moral Sentiments, upon
which the economy of a “commercial Society” was to be structured and
which provided the moral framework within which that economy was to
operate, see Pack (1991). See also, Schultz (2001).
26. For an excellent summary of these developments, see Katouzian (1980).
27. Henry (2009).
28. Baranzini and Scazzieri (1986), see also Roncaglia (2005).
29. Opdebeeck (2018).
30. Burgin (2012).
31. Friedman (2002).
32. While ideology is a rather ambiguous and controversial concept, based
on available consensus among writers, it can be argued that the evolution
of economics between the 1930s and now shows ideologically positive
commitment and not neutrality. That is the theories developed during
this period have been structured to serve a particular ideology. For
example, classical economics was based on a liberal ideology and neoclas-
sical was based on neoliberalism. The term “ideology” made its first
appearance during the French Revolution by the philosopher Antoine
Destutt de Tracy (1754–1836) to mean “a science of ideas.” Since then
the term has been invested with emotive contents. At times it has carried
a negative and pejorative sense specially. In the Hegelian and Marxian
thought, for example, ideology is referred to as “false consciousness.”
When a thought is not well understood or hotly debated the word is
hurled at one side or the other accusing a person as being “ideological.”
Thomas Piketty (2020, p. 3), in his new book Capital and Ideology,
defines ideology as “a set of a priori plausible ideas and discourses
describing how society should be structured. An ideology has social,
economic, and political dimensions.” Piketty then proceeds to offer a
typology of ideology (p. 9). According to Piketty’s definition, neoliber-
alism qualifies as an ideology. See also, Katouzian (1980, pp. 149–211).
62 N. EL MAGHREBI ET AL.

Katouzian traces the term ideology to Plato and discusses the concept
in general and in the context of evolution of economics. White (1973,
p. 22) in his book Metahistory: Historical Imagination in Nineteenth-
Century Europe, defines ideology as “a set of prescriptions for taking
a position in the world of social praxis and acting upon it (either to
change the world or to maintain it in its current state); such prescrip-
tions are attended by arguments that claim the authority of “science”
or “realism.”” He proposes “four basic ideological positions: Anarchism,
Conservatism, Radicalism, and Liberalism.” It is noted that while there
is no such a concept as “ideology” in Islam defined as is in the Western
scholarship, the concept to of “Millah” attributed to the stance of
Prophet Ibrahim, the True in faith called “Millat Ibrāhim Al-Hanı̄f ”
called “Millah of Ibrahim Haneef” referring to the Oneness (Tawheed)
of the Creator (see, for example, Verse 130: Chapter 2; 125: 4; 161: 6;
123: 16; and 78: 22) comes close in capturing the essence of Ideology.
33. Even at this early stage of this chapter, attention is directed at the claims
made based on the 5-principles Maqasid model to speak of “freedom of
property ownership,” “freedom of expression,” “freedom of religion,”
and so on, presumably without constraints. It should not be difficult to
draw parallels between this narrow conception of maqās.id and neoliberal
economics.
34. See Glyn (2007) and Piketty (2014).
35. For the history of the emergence of neoliberalism, the nature and
membership of the Mont Pelerin and their influential policy work, see
Mirowski and Plehwe (2015).
36. See Harvey (2006).
37. See Mirowski (2015), particularly insightful is section titled “A Neolib-
eral Primer” (pp. 433–440) in which Mirowski presents what he calls
“the tenets” of Neoliberalism.
38. The “Consensus” includes the following principles: Austerity (usually
reduction in government spending for social program and safety nets);
tax reduction for individuals, businesses, and corporations; deregula-
tion; trade liberalization; flexible exchange rates; privatization; financial,
capital, and labour market liberalization; protection of property rights;
public investment should go only to infrastructure, public health, and
education, all done through the private sector. Note that these princi-
ples exclude any accommodation with social justice. In fact, one of the
most influential members of the neoliberal intellectuals, Friedrich Hayek,
had strong disdain for social justice calling it meaningless and a mirage
(see Hayek [1980] who saw no justification for the state to redistribute
income and wealth). See also, Askari and Mirakhor (2020, pp. 145–149).
Note also that the narrow conception of the Objectives of al-Shari’ah
 1 POLAR VISIONS OF THE ECONOMY 63

with five principles does not include justice as one of the Maqās.id as-
Sharı̄’ah. It would thus appear that the narrow conception of Maqās.id
can be accommodated within the neoliberal framework.
39. See McMurtry (1999, p. x). For the diagnostic of the neoliberalism as
“cancer” and the “social immune system,” see pp. 37–189.
40. Ibid., p. viii and pp. 257–256. See also, Finn (2006).
41. See Parker (2021).
42. See, for example, Ahmed (2002, p. 11).
43. Ibid., p. 23.
44. See Fakhry (2004, p. 218), see also, Martin et al. (1997).
45. See Sahlins (1998, p. 7), also Polanyi (1947), and Dalton (1961).
46. See Eisenstein (2011, p. 247), see also Skidelsky and Skidelsky (2012).
47. For an analysis of the historical debate and controversies that arose
between the doctrines advocated by the school of thought, Mu’tazilite,
that held Divine Justice as one of five fundamental principles of belief
in Islam and the school that opposed it, Ash’arite, see Martin et al.
(1997). See also Vishonoff (2011, pp. 135–139, 248–250, 276), Reilly
(2011, pp. 78–83), Hoodbhoy (1990), and Najjar (2001, pp. 12–13,
and 115–121).
48. See Rahman (1980).
49. See Ahmad (editor) (2002, p. 23).
50. By the time the volume edited by Professor Habib Ahmad appeared,
“conventional economics” had already become the neoliberal economics
that had dominated all other economic paradigms for at least 20 years.
51. For a philosophical view on the two major conceptions of models of
human beings in Western thought, see Hollis (1977) and the series of
papers in Meeks (editor) (1991). See also, Bensusan-Butt (1978).
52. See Al-Attas (1993) and Allawi (2010).
53. In this context, it is important to note that Adam Smith, though a
product of the Enlightenment Project, wrote The Theory of Moral Senti-
ments which a number of Adam Smith scholars consider to be the moral
framework within which Smith believed his conception of a “Commercial
Society” were to operate. There are others who disagree. See Mirakhor
and Hamid (2009).
54. See, for example, various papers in the Real-World Economics Review,
issue 96 (July 2021).
55. For an exception, see Ertuna (2009). For a critique of the axioms of
“free market” and claims made on its behalf by neoliberalism, see Finn
(2006).
56. The term was coined by Keynes in his General Theory, 1936. Its contem-
porary explanation is provided by George Akerlof and Robert Shiller
(2009).
57. Laski (1936, p. 19).
64 N. EL MAGHREBI ET AL.

58. For a radically different view of Adam Smith’s contributions, see Pack
(1991).
59. Weisskopf (1979).
60. For a discussion of natural law, see Askari and Mirakhor (2020, pp. 33–
44).
61. See Mure (1958, pp. 21–23). This is an excellent book as a critique of
empiricist-positivist philosophy and its influence on economic thinking.
Seyyed Hossein Nasr labels such beings as “Promethean” humans. That
is in rejecting all things religious and all things not perceptible by physical
senses as superstitious, this being in essence rebelling against the Creator.
Promethean is anyone who like Prometheus—a Titan god in Greek
mythology who rebelled against all other gods by providing humans with
fire, an act prohibited by the gods—rejects anything sacred. See Nasr
(1968). Professor Nasr was one of the few Muslim philosophers who
issued explicit early warnings about the onset of environmental crises
that has now become an existential threat. Even at the relatively early
stage of the diagnosis of adverse effects of economic growth policies that
would create environmental crisis and when the warnings of the MIT
project on Limits to Growth was still some four years away (Meadows
et al. 1972), Professor Nasr (1968) warned that the consequences of the
damaging effects of the behaviour of the Promethean economic agent
against nature—while assuming a prerogative to “conquer nature” as
means of serving the end of self-interest—will be dire. He argued: “Few
realize that by the very fact that nature is finite its boundaries cannot be
pushed back indefinitely. Man simply cannot continue to conquer and
dominate nature endlessly without expecting a reaction on the part of
nature to re-establish the equilibrium destroyed by man” (Nasr 1968,
pp. 118–119; see also 1996). In the secular “conventional economics”
paradigm, there is no room for explicit consideration of restoration of
environmental equilibrium since it is based on exploitation of nature for
the sake of human economic prosperity. The best it can do is to relegate
the responsibility of performing this task to the price mechanism in the
“free market.”
62. For definition and explanation of these and their relation to economics,
see Katouzian (1980).
63. On the contrary, Nasr (2004) argues that “secularism is the common
enemy of all the Abrahamic traditions, and the erosion of moral authority
in secular societies that we observe today poses as many problems for
Jews and Christians as it does for Muslims.”
64. See, Asad (1993, 2003) and Jakobsen and Pellegrini (2008, p. 3).
65. Asad (2003), ibid., p. 13.
66. See Seyyed Hossein Nasr (1968).
67. Lukes (1973 [1990], p. 47).
 1 POLAR VISIONS OF THE ECONOMY 65

68. MacIntyre (1988, p. 9). See also, Audi (2001). A survey of the literature
on rationality fails to produce a comprehensive, coherent, and universal
theory of rationality.
69. Irani (1986, pp. xi–xx).
70. Irani, ibid., p. xx.
71. Collingwood (1946, p. 41).
72. Cramp (1991).
73. Sen (1977, 1991).
74. Hahn and Hollis (1979, p. 12).
75. Mirakhor and Hamid (2009).
76. See Pigou (1912) and Dalton (1920a, 1920b). See also, Atkinson and
Brandonili (2015).
77. Gwynne (2004).
78. Mermer (1996, 1999).
79. In this context, see Trigg (1973).
80. Plato (2016).
81. Hirschman (2013).
82. Locke (1975, Book II. 27. 17, p. 341, and Book II. 27. 17).
83. Locke, ibid., I. 3. 3.
84. Locke, ibid., II. 20. 14.
85. Knight (1939, pp. 8–9).
86. Kuhn (1970).
87. See papers in issue No 96 of Real-World Economic Review, July 2021.
88. Zaman (2012).
89. Javaid and Suri (2020).
90. In this context, see Stenberg (1996).
91. See Faruqi (1982). This paradigm has been discussed, used, and critiqued
far more extensively than its Attasian counterpart. See, for example,
Zarqa (2003).
92. Al-Attas’ views are expounded comprehensively in his book, Prole-
gomena to the Metaphysics of Islam: An Exposition of the Fundamental
Elements of the Worldview of Islam (1995). Elements of the World-
view of Islam are subject of a shorter treatise. See, for example, Al-Attas
(1976, 1978, 1985, 2015).
93. See, for example, Berger (1999), Opdebeeck (2018), Goudzwaard
(1979b), Sandelands (2010), Eisenstein (2011), Finn (2006), McMurtry
(1999), McCarraher (2019), and Long (2000). See also the two books of
Nelson (1991, 2001) in which he makes compelling case that economics
has many characteristics that make it a religion.
94. For more discussion of Ādāb, see its treatment and explanation in
Leaman (2001) and Daiber (2001, p. 842). It is noted that in these
sources Ādāb is understood in an ethical framework in societal rela-
tions whereas in the Attasian discourse it has a broader definition and
application covering all relations.
66 N. EL MAGHREBI ET AL.

95. See Daud (2010, pp. 37–38), Jah (2010) and Musawi (2010). Also,
Waghid (2010) restates, in the first part of this paper, Al-Attas’ views on
Islamization of education which in some crucial respects echoes insightful
remarks of Richard Parker on how Western universities across the world
are organized to indoctrinate newcomers in the ideology of neoliberal
economics (see, Parker 2021).
96. Boas (1961, p. 14). Also, Boas (1961, p. 12) suggests that “[s]hrewed
as man’s calculations have become concerning his means, his choice of
ends which was formerly correlated with belief, with absolute criteria of
conduct, has become witless.”
97. See Allawi (2010, p. 60).
98. Much admiration, respect, and rewards awaited those who were willing
to play this role. For example, in 2004, the Dutch awarded three Muslim
intellectuals: Sadik al-‘Azm, Fatema Mernissi, and AbdulKarim Soroush,
the Erasmus Prize. Erasmus was the Renaissance Dutch humanist. Signif-
icantly, according to its official announcement, the Erasmus Prize is
“awarded annually to a person or institution that has made an excep-
tionally important contribution to European culture, society, or social
science.”
99. Ibid., p. 59.
100. Ibid., p. 67.
101. Ibid., pp. 70–75.
102. See, for example, Al-Sayyid al-‘Allamah ‘Ammar Abu Ragheef (1989).
103. For a selective summary of Said Nursi’s views comprehensively covered
in his Tafseer, Risale-I Nur, in English, see Michel (2013).
104. See As-Sadr (1981 [2019]). In this book, As-Sadr shows how certainty
of belief can be reached through repeated and sequenced experiences.
The notion that one can experientially achieve certainty of belief on a
given proposition among all other alternatives increases through expe-
rience was developed by As-Sadr in his proof of the existence of the
Creator showing that this proposition is like any in natural sciences.
105. As an example, note the use, or rather the abuse, of his writings on the
theory and practice of “Islamic banking.”
106. Quoted in Klein (1985, p. 238).
107. There is close convergence between the views of As-Sadr and Al-Attas on
their understanding of religion (deen). See for example, Al-Attas (1992).
108. For a contemporary view of “Islamization” project, see Abou El Fadl
(2014, p. 345).
109. See Al-Hasani (1989).
110. Ibid., pp. 24–26.
111. See, for example, Yousefi (1980), Mir Moezzi (2006), and Sadr (2019).
112. The view of As-Sadr on justice is another testimony to his creative genius
when one considers that it was not until the 1940s that scholars, such as
 1 POLAR VISIONS OF THE ECONOMY 67

Tahir ibn Ashur, included justice in the lists (there is now a number of
them) of Maqās.id as-Sharı̄’ah.
113. Important to this discussion is the pioneering work by Al-Hakimi et al.
(1992). Particularly helpful is the painstaking effort of the authors in
collecting relevant Ahaadeeth relating to the subject matter particularly
on justice which they too consider as axial objective of Al-Iqtis.ād.
114. On the important issue of methodology, see Zia’uddeen (2006), inter
alia.
115. For more detail, see Mirakhor and Hamid (2009). In his Theory of
Moral Sentiments, Smith uses different titles other than “The Author
of Nature” to refer to the Supreme Creator as “the great Director of
Nature”; “the final cause”; “the great judge of hearts”; “Providence”;
“the divine Being”; “an invisible hand”; “Providence”; and “God.”
116. For more detail, see Askari et al. (2015, pp. 3–7; 307–312, and the
bibliography of this book).
117. See Hazik et al. (2019).
118. In Iqtis.āduna, As-Sadr focuses on the necessity of sharing based on Al-
Qur’ān and Ahādeeth, especially in investment projects that take time to
gestate. Both in his Al-Bank Alla Ribāwi and his shorter explanatory
notes on his proposal he refers to the risks and the need for sharing
them. In books on al-Bay’ and al-Makasib, particularly more contem-
porary treaties and/or commentaries, varieties of partnerships and risks
associated with them are discussed. See, for example, Moddarrisi (1993,
especially pp. 272–311 with commentaries in the footnotes). It is crucial
to note that conditions regarding the sharing of profits or losses have to
be determined ex ante at the time of the contract. However, while the
parameters of sharing are being agreed to, no participant in the contract
knows the outcome. Therefore, each participant has to make decisions
under conditions of risk and uncertainty. Hence, at the beginning of
contracts, all are sharing the risks of the project being undertaken. Once
the outcome is known (whether loss or profit), the sharing parameter
activates. That is, activation takes place only after the end of project
when profits (or losses) are shared according to the share parameter
agreed upon at the beginning of the project. Consequently, to refer to
Islamic finance as “profit-loss sharing” is inaccurate. Islamic finance is
risk-sharing ex ante and profit-loss sharing ex post.
119. See Akin and Mirakhor (2019).
120. For an understanding of the definition of righteous conduct (Al-’Amal
As-Sālih) in the Sadrian discourse, see Al-Sadr (1982 [2013]).
121. Based on Al-Qur’ān and As-Sunnah of the Messenger (saa), Barakah can
be defined as a nonlinear scalar that leads to multiple returns to righteous
actions. As-Sadr deals with the concept of Barakah while interpreting
Verse 96 of Chapter 7. See Torabi and Mirakhor (2020).
68 N. EL MAGHREBI ET AL.

122. The idea that any righteous action leads to multiple returns begs the
question: Are the rules of behaviour prescribed by Allah swt so universal
that compliance with them by agents, regardless of the degree of belief,
will invoke and trigger Barakah?
123. Sadr al-Deen al-Shirazi (Mulla Sadra) explained comprehensively the
nature and the process of this “motion-in-substance” in his book Al-Asfar
Al-Arba’ah.
124. For more detail on how Islamic belief gives rise to social capital, see Ng
et al. (2015).
125. See, for example, Rima (2013).
126. See, for example, Holloway (1999).
127. He focuses on: Verse 16: Chapter 72; 66:5; 96:7; 92:21; 52:23.
128. These rules are enumerated and explained in Askari, Iqbal, and Mirakhor
(2015).
129. For an exposition of the ideal Iqtis.ādi system based on the ideas
expounded in the Sadrian discourse, see Mirakhor and Askari (2017).

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 CHAPTER 2

Critiques of Conventional Economics

The ideology of self-interest as the driver of human progress consti-

tutes the foundations of neoliberal economics, which in turn assumes
the mantle of conventional economics. Critiques regard neoliberalism
as a spurious philosophical thought and the source of policy confu-
sion and ineptitude. Indeed, as argued in the opening chapter of this
book, sustainable economic growth and prosperity have been elusive as
conflating policies continue to exacerbate poverty, destroy nature, strain
economic livelihoods, and undermine social life. The objective of the
present chapter is to briefly review some critiques of economic doctrines,
economic laws, and economic methodologies. There is mounting criti-
cisms and intense scholarly debates about rational economic behaviour,
wertfreiheit economics, morality, ethics, the notion of invisible hand,
the theory of general equilibrium, Keynesianism, utilitarianism, mone-
tarism, inter alia. There are also concerns about measurement without
theory as well as pluralism in economic methodology, which refers to
the various approaches pursued by scholars to justify and validate, or
otherwise disprove and refute particular economic theories.
At the heart of the universe of economic discourse are issues related to
the epistemological rationalism, and ontological scarcity, among others.
In contrast to Islamic economics, conventional economics is axiomatically
regarded as a descriptive rather than normative discipline. As explained in

© The Author(s), under exclusive license to Springer Nature 77

Switzerland AG 2023
N. El Maghrebi et al., Revisiting Islamic Economics,
Palgrave Studies in Islamic Banking, Finance, and Economics,
https://doi.org/10.1007/978-3-031-41134-2_2
78 N. EL MAGHREBI ET AL.

the previous chapter with reference to the Sadrian discourse, it is clear

from its doctrine (madh’hab) and science ’ilm that Al-Iqtis.ād, which
derives its rules or behaviour from Al-Qur’ān and As-Sunnah, does not
lend itself to the positive-normative dichotomy. The organizing principles
of Al-Iqtis.ād center on how the economic system should be structured
and how economic agents should behave rather than merely how systems
are actually structured and how agents actually behave. An overview of
critiques of Islamic economics, universe of discourse clearly distinguish-
able from Al-Iqtis.ād paradigm and from conventional economics, will be
presented in the next chapter, but for the purposes of discussion in the
present one, the focus is placed on the logical consistency, or lack thereof,
of mainstream economic doctrines, and their associated methodological
principles.1
Thus, if economic thinking underlies the choices of policy-making
and regulation, and if the apparent serious flaws in economic policies
are reflective of inconsistencies inherent to economic doctrines, then
it is crucially important to consider the epistemological foundations of
economics. The focus hereafter is placed on competing definitions of
economics before addressing critical arguments related to the science
and dogma of classical and neoclassical economics. The critical review
considers issues related to the underlying assumptions of economic ratio-
nality, resource scarcity, and consumer sovereignty, as well as the role of
mathematical reasoning, morality, and ethics, and among others.

A Critical History of Political Economy

Human sustenance and subsistence have been the persistent challenge
of societies throughout history. The “economic problem” regards the
satisfaction of unlimited wants with limited resources as indemonstrable
axioms. The scarcity of resources and insatiable wants are, however, at
odds with the Islamic worldview derived from sacred knowledge, which
regards economic issues as the consequence of the condition of mate-
rial existence that cannot be separated from cosmic reality. The Islamic
worldview, which challenges the rationalistic secular philosophies under-
lying the economic doctrines, is introduced in the opening chapter and
further explained in other parts of the book. The critical history of polit-
ical economy, presented here, focuses on scholarly efforts to formulate the
economic problem. It is of singular interest to note that it is a fragmented
discipline that fails to provide a coherent account of the economy or
 2 CRITIQUES OF CONVENTIONAL ECONOMICS 79

provide consistent remedies to its ailments. Instead, the economic debates

seem to harden the hearts of men absorbed in the mechanistic worldview
of mass and motion in the direction of nothingness, and make it impos-
sible to reflect beyond the limited self to discover the inner being and the
nature of reality.
The term “economics” has its roots in the Greek Oikonomia, which
refers to the management of household affairs. As argued by Fred D.
Miller (1998), the word oikonomikê in Aristotle (384–322 BC)’s vocab-
ulary did not mean “economics” in the modern sense, but “the art
of household management.”2 An extension from the wealth of house-
holds to the wealth of nations is mostly apparent in classical economic
thought. Adam Smith (1723–1790) in his seminal work on The Wealth
of Nations defined economics as an inquiry into the nature and causes of
the wealth of nations. However, interpretations of the Smithian work as
purely wealth-centric inquiry into human interpretations based solely on
competition opened the door to criticism about the founder of modern
economics as a Social Darwinist. Perhaps a lack of consistent reading of
his collective work may better explain the observed variations in economic
thought over time. In his equally important, albeit relatively overlooked,
work The Theory of Moral Sentiments, Adam Smith presents arguments
about moral psychology, including sympathy, fellow feelings, and the
virtue of propriety, which are consistent with Aristotle’s thesis on justice.3
Adam Smith (1776, p. 453) in The Wealth of Nations argued that
“the great object of the political economy of every country, is to increase
the riches and power of that country.” More precisely, he defined polit-
ical economy as a branch of the science of a statesman or legislator,
with “two distinct objects: first, to provide a plentiful revenue or subsis-
tence for the people, or more properly to enable them to provide such a
revenue or subsistence for themselves; and secondly, to supply the state
or commonwealth with a revenue sufficient for the public services.” It
is, thus, a discipline that proposes to enrich both the people and the
sovereign. Notwithstanding the diverging views about the methodology
of economics, many scholars have in a similar vein, developed alterna-
tive definitions that revolve around the central concept of wealth. In The
Principles of Political Economy and Taxation, David Ricardo (1772–1823)
argued that the principal problem in Political Economy is to determine
the laws which regulate the distribution of the whole produce of the earth
as rents for landownership, profits for capital, and wages for labour. The
objective of his work was to demonstrate that “the rate of profits can
80 N. EL MAGHREBI ET AL.

never be increased but by a fall in wages, and that there can be no perma-
nent fall of wages but in consequence of a fall of the necessaries on which
wages are expended.” Thus, the analysis of the “natural” rate of profit
is constrained by the price dynamics of necessities, and demographics of
active population.
Earlier arguments about economic constraints were made by by
Thomas Robert Malthus (1766–1834) who suggested, first, that the
question of productive labour cannot be addressed without an appropriate
definition of wealth as “material objects, necessary, useful, or agreeable
to man, which are voluntarily appropriated by individuals or nations.” He
proceeded, then, to claim that a nation “will therefore be rich or poor,
according to the abundance or scarcity with which these material objects
are supplied, compared with the extent of territory; and the people will be
rich or poor, according to the abundance with which they are supplied,
compared with the population” (Malthus 1798, pp. 28–29). The Prin-
ciple of Population proposed by Malthus indicates that overpopulation
is bound to exert pressure on available resources if it grows faster than
food supplies. The argument is that a rapid growth in population, if left
unchecked, is also regarded as the cause of not only economic hardship
and misery but environmental damage as well. Thus, the remedy, it is
argued, should lie in the adoption of control measures such as wage ceil-
ings at bare subsistence levels in order to restrain population growth. As
noted by Todd G. Buchholz (2021 [1989], p. 63), Malthus’ fatalistic
pessimism implies that if wages are allowed to rise beyond their upper
limits, “workers would have more children, leading to food shortages and
inescapable decline in the standard of living.”
A departure from philosophical radicalism about population growth
was marked by a shift in focus from man’s reproductive functions to
man’s desire to accumulate wealth. John Stuart Mill (1806–1873) argues
in Essays on Some Unsettled Questions of Political Economy (1884,
p. 111), that “[w]hat is now commonly understood by the term ‘Political
Economy’ is not the science of speculative politics, but a branch of that
science. It does not treat of the whole of man’s nature as modified by the
social state, nor of the whole conduct of man in society. It is concerned
with him solely as a being who desires to possess wealth, and who is
capable of judging of the comparative efficacy of means for obtaining
that end.” It is noted that he also regarded the desire to possess wealth
as a means to happiness. Indeed, the essence of the utilitarianism doctrine
“is, that happiness is desirable, and the only thing desirable, as an end;
 2 CRITIQUES OF CONVENTIONAL ECONOMICS 81

all other things being only desirable as a means to that end.” However,
he warranted new insights on self-interest and utilitarianism as he noted
that since all selfish interests must be confined by the certainty of death,
it is important to cultivate fellow relationships with the collective inter-
ests of mankind. Thus, utilitarianism should not be confounded with, nor
detached from, the concept of self-interest as individuals acting on utilitar-
ianism should behave with the required moral virtues of trustworthiness,
integrity, and fairness to promote overall well-being. There are important
applications of utilitarianism and morality in economic thought in order
to address issues related to the ethics of global poverty, philanthropy, and
altruism.4
Part as a reaction to Mill’s definition of Political Economy and views of
a society where the interests of all members should be regarded as equally
important, Walter Bagehot (1826–1877) suggested, in Economic Studies,
that John Stuart Mill “is open to the charge of having widened the old
Political Economy either too much or not enough.” Bagehot (1880, p. 5)
argued that Political Economy “may be defined as the science of business,
such as business is in large productive and trading communities… And it
deals too with the men who carry on that commerce, and who make it
possible. It assumes a sort of human nature such as we see everywhere
around us, and again it simplifies that human nature; it looks at one part
of it only. Dealing with matters of ‘business,’ it assumes that man is actu-
ated only by motives of business. It assumes that every man who makes
anything, makes it for money.” Thus, the science of business, theory of
commerce, desire for money, and accumulation of wealth remain as the
central issues of Political Economy.
It is clear from the brief historical review that few centuries after Adam
Smith’s seminal contributions to the definition of Political Economy and
important essays on its scope, methodology, and fundamental principles,
there are diverging views about the genuine achievements of these intel-
lectual debates. For instance, Gavin Kennedy (2008, pp. 1–2) argues
that “by the new millennium, the original conflict of ‘free trade versus
protection’ was back in contention; markets versus state management
remained as divisive as ever, and competing solutions to problems of
poverty, domestic and global, were stuck, intellectually, practically where
Adam Smith had left them. The dominant feature of economics today is
the divisive non-agreement on basic practical policies and, for all its hard-
science pretensions, it remains in an unsettled state.” The above argument
that economics has not come of age in the ensuing centuries is founded
82 N. EL MAGHREBI ET AL.

on a lack of consensus on economic policies, a perpetuation of financial

crises and economic depression, and exacerbating economic inequalities.
Arguably, economists of many persuasions may agree on the enhanced
theoretical understanding of the importance of exchange relationships in
pushing the agenda for free trade, but the discipline has contributed only
a modicum of economic policies addressing the plight of large segments
of humanity living in desperate poverty.
Joseph Stiglitz (1991) presents an account of the achievements of
economic science over the past century and argues that despite its
methodological triumphs, there is no basic model to describe the
economy. The development of the neoclassical Walrasian paradigm intro-
duced by Kenneth Arrow (1921–2017) and Gérard Debreu (1921–2004)
presented a theoretical framework for a formal demonstration of Adam
Smith’s invisible hand theory with unintended social benefits deriving
from individual actions based on self-interest. This analytical approach
offered also important insights into market equilibrium and the funda-
mental theorems of welfare economics. Another major contribution to
the development of new economic thinking is associated with The General
Theory of Employment, Interest and Money by John Maynard Keynes
(1883–1946). Keynesian economics challenged the prevailing wisdom
that market equilibrium is conducive to full employment and demon-
strated the existence of unemployment equilibria, which can be caused
by inadequate aggregate demand and the absence of short-term market
adjustment to reduce the amplitude of the business cycle.
The countercyclical fiscal policies advocated by Keynesian economics
should, thus, rely on government spending on labour-intensive projects
during periods of economic recessions and mass unemployment. The
demand-driven measures were met with counterarguments from the
Austrian School of Economics led by Ludwig Von Mises (1888–1973)
and Friedrich Hayek (1899–1992), inter alia, that economic suffering
subsequent to economic excess is both necessary and inevitable. Govern-
ment spending, therefore, would only inhibit the necessary process of
adjustment and aggravate the economic conditions. Whereas interest in
Keynesian economics grew with the Great Depression, belief faded with
the onset of stagflationary conditions characterized by high inflation
coupled with anaemic growth. An alternative school of thought based
on monetarism contends that Keynesian economics does not provide a
sound response to stagflation and that it is money supply that consti-
tutes the main determinant of economic output and price levels. The
 2 CRITIQUES OF CONVENTIONAL ECONOMICS 83

monetarist school founded on the Quantity Theory of Money and led by

Milton Friedman (1912–2006), suggests that high inflation rates are due
to rapidly rising money supply. As fiscal policies are ineffective in regu-
lating the business cycle with aggregate demand, recourse should be made
to monetary policies to adjust the level of money supply and alter interest
rates in the economy. The New Classical School argues that both Keyne-
sian and Monetarist policies can be ineffective when market participants
are able to anticipate changes in fiscal and monetary policies and offset
their effects.
Thus, economic theory, which is defined by Paul Krugman (1994,
p. 6) as “essentially a collection of models,” has expanded along countless
lines of thought. Some economic models are more cited than read. Others
have successfully pushed the neoclassical model to its logical conclu-
sions, which warrant new economic thought. On aggregate, however,
the general impression is that the discipline lacks coherence and that
intellectual progress has rarely been convincing enough to ignore the
seminal work of earlier thinkers. Part of the reason is that the split of
the broad subject of Political Economy into politics and economics has
yielded little intellectual insights. Indeed, John Kenneth Galbraith (1987,
p. 299) argues that “[t]he separation of economics, politics and political
motivation is a sterile thing. It is also a cover for the reality of economic
power and motivation. And it is a prime source of misjudgement and error
in economic policy.” He expressed also the hope that economics “will
be reunited with politics to form again the larger discipline of political
economy.” With the proliferation of economic models and the miscel-
lany of analytical methods, new insights may have ensued. As noted by
The Economist (2011), “Economics is producing a torrent of research,
coursing in all directions. The rivers have overflowed their banks.”5 Thus,
scepticism remains about the future of a fragmented and disoriented disci-
pline that fails to provide a basic model to describe the economy and
provide remedies to its structural problems.

General Equilibrium Paradigm

Understanding the general equilibrium theory developed by Léon Walras
(1834–1910) is important because it may provide some useful insights
into the role of market prices in the economy, and it establishes the
equilibrium relationship between the important decisions about produc-
tion and consumption. John Hicks (1939, pp. 60–61) argues that the
84 N. EL MAGHREBI ET AL.

reason for the sterility of the Walrasian equilibrium theory is that it

did not address the laws of change, and states “Walras does give one a
picture of the whole system; but it is a very distant picture, and hardly
amounts to more than an assurance that things will work themselves
out somehow, though it is not very clear how they will work themselves
out.” In the Walrasian equilibrium theory, prices adjust through a tatôn-
nement process described by Rothschild (1994, p. 322) among others,
as “(blind) groping in the dark.” As noted by Ackerman (2002), the
process of tatônnement may be mathematically tractable but it is rather
unrealistic in the sense that it implies that the rate of change in the price
for any commodity is proportional to excess demand, and that no trades
are permitted until equilibrium prices have been achieved. Indeed, the
Sonnencheim-Mantel-Debreu theorem suggests that the excess demand
function can take any shape under the assumption of rational utility-
maximizing agents, precluding thereby the uniqueness and stability of
general equilibrium. Also, if the dynamics of price adjustment are such
that the addition of a new commodity may destabilize an otherwise stable
system, then there are legitimate concerns that the model results arrived
at with small economies may not necessarily be valid for larger scales.6
Following the development of the Walrasian abstract theory of
exchange, Arrow and Debreu (1954) demonstrated the existence of
general equilibrium for a competitive economy under the conditions
of state-contingent commodities, perfect competition, and an integrated
system of production and consumption that accounts for a circular flow
of income. As noted by Maurice Salles (2017), Arrow and Debreu
used the mathematical fixed-point theorem proposed by Shizuo Kaku-
tani (1911–2004) to develop analytical concepts that provide the basis
for the present-day microeconomic theory.7 The Arrow–Debreu model of
competitive general equilibrium, as argued by Kenneth J. Arrow (1994,
p. 451), “the only coherent account of the entire economy.” However,
the question arises, as noted by Frank Ackerman (2002), as to whether
after a few decades of its development, the general equilibrium reached
a “mathematical dead end.” The reasons for the failure of the general
equilibrium theory do not lie so much with esoteric model features as
with internal design issues directly related to the neoclassical economic
theory. In order to address the underlying problems, a modification of
the economic theory is needed with new modelling of consumer choice,
nonlinear analysis of social exchanges, and revision of institutional and
social constraints.
 2 CRITIQUES OF CONVENTIONAL ECONOMICS 85

It is important to note that the equilibrium model provides the basis

for the development of welfare economics and social choice theory. The
two fundamental theorems of welfare economics stipulate that compet-
itive markets are conducive to Pareto efficient outcomes and that any
efficient equilibrium is achievable through competitive markets with the
required redistribution of income and wealth. Thus, whereas the first
theorem remains silent as to whether the allocation is fair or just, the
second implies that market failures provide the most important economic
argument for government intervention. Market failures are the manifesta-
tion of inefficiencies stemming from many sources including information
asymmetry, monopolies, transaction costs, and externalities where indi-
vidual actions affect the utility of others. Market failures are intrinsically
related to conditions of imperfect information. For instance, high infor-
mation costs can inhibit arbitrage activities, which are needed to ensure
the law of the single price. The economics of information, proposed by
Joseph Stiglitz, has evolved over the past half-century into an integral
branch of economics aimed at explaining the implications of informa-
tion asymmetries on economic policy. In this regard, Joseph Stiglitz
(2017) notes that “information failures are associated with numerous
other market failures, including incomplete risk markets, imperfect capital
markets, and imperfections in competition, enhancing opportunities for
rent seeking and exploitation.” Because of the important role of govern-
ments in addressing market failures, the economics of information has
raised interest in institutional economics, as another branch of economics
concerned with institutional arrangements for economic behaviour. But
as noted by Eric Crampton (2007), the same informational problems that
explain the occurrence of market failures in the first place may also hinder
the necessary government intervention to improve economic outcomes.
Arguably, it is the failure of governments to mitigate market fail-
ures that results in inefficient economic outcomes, unrealized potential
growth, and unfair income distribution. In particular, government policy
failures to correct the distortive incentives for rent seeking and exploita-
tion are inevitably conducive to economic injustice and macroeconomic
instability. For instance, it is obvious that insofar as labour markets are
governed by the iron law of wages, workers cannot afford consumption
above the subsistence levels sufficient to cover the bare necessaries of life.
The Ricardian notion of a “natural” price of labour converging toward
long-term levels of minimum wages needed to preserve the physiolog-
ical capacity to work and breed a sufficient number of children to sustain
86 N. EL MAGHREBI ET AL.

active population may be predicated on the Malthusian theory of popula-

tion. But it is difficult to argue that the iron law no longer casts a shadow
on labour markets, collective bargaining agreements, and constitutes, in
turn, a primary source of poverty trap and economic inequality.8
The imperfect wage adjustments and the existence of a “natural” rate
of unemployment constitute significant market failures, but they do not
seem to warrant serious government intervention. Part of the reason may
have to do with the intricacies of political and technocratic calculus. The
Economist (2022) argues that an “overreliance on boffins lulls politicians
into the idea that there is a correct answer to every problem. Rather than
accepting that there are competing interests, whether based on economics
or class or place, technocrats turn politics into an impossible search
for nirvana. Clever-clever solutions beat simple ones. Puritans fear that
someone, somewhere, may be happy; technocrats worry that a middle-
class family may enjoy a free lunch.” Thus, even when market failures
are evident and fortitude is needed, government inertia is often justified
based on economic theory as a rational choice.
There is, however, no for government intervention, as argued by John
Kenneth Galbraith (1987, pp. 84–85) because even an injection of capital
and technology cannot elevate the market price of labour indefinitely. He
adds that it is difficult to defend Ricardo’s reputation from the serious
implications of his fundamental conclusions, and his commitment to the
inevitable misery of those who live under capitalism. He condemned the
arguments about the futility and error of government intervention, which
derive from Ricardo’s principle: “Like all other contracts, wages should be
left to the fair and free competition of the market, and should never be
controlled by the interference of the legislature.” The iron law of wages is
not consistent either with Adam Smith’s arguments about social harmony
and the notion of Pareto optimality developed later as part of welfare
economics. As expressed in The Wealth of Nations, “[w]hat improves the
circumstances of the greater part can never be regarded as an inconve-
niency to the whole. No society can surely be flourishing and happy, of
which the far greater part of the members are poor and miserable. It
is but equity, besides, that they who feed, clothe, and lodge the whole
body of the people, should have such a share of the produce of their
own labour as to be themselves tolerably well fed, clothed, and lodged.”
In this sense, fairness demands that wages should not be dictated by the
“natural” rate of profit but be commensurate with the level of welfare
and standards of living in the whole society. Poverty and neglect can
 2 CRITIQUES OF CONVENTIONAL ECONOMICS 87

be, indeed, the result of income inequalities caused by market failures in

terms of unfair labour remunerations and inefficient government regu-
lations. Thus, it can be argued that the government’s failure to exert
corrective actions to mitigate market failures is conducive to a maldistribu-
tion of income and wealth, which precludes convergence toward efficient
economic equilibrium.
There remain deep concerns that the Arrow–Debreu general equi-
librium model suffers also from serious conceptual limitations. The
restrictive model assumptions that market participants are price-takers
preclude the existence of an overriding cause-and-effect mechanism that
explains departure from equilibrium and ensures convergence. In this
regard, Mark Blang (1980, pp. 166–167) points to the “curious anomaly
that perfect competition is possible only when a market is in equilib-
rium. It is impossible when a market is out of equilibrium for the simple
reason that perfectly competitive producers are price-takers, not price-
makers. But if no one can make the price, how do prices ever change to
produce convergence on equilibrium? This problem is perhaps a minor
blemish in an apparatus which has no role for money, for stock markets,
for bankruptcies, or for true entrepreneurship.” There are attempts, as in
Peter H. Friesen (1979), to extend the model to include financial markets,
but the essential features and implications of macroeconomic equilibrium
models are likely to remain unperturbed.
There is arguably, an inevitable trade-off in economics between rigour
and relevance. Indeed, as noted by Mark Blang (1980, p. 167), “The-
ories that are truly rigorous are rarely practically relevant and theories
that are eminently relevant are rarely analytically rigorous. If we argue in
favour of a market economy compared to a command economy because
of the dynamic characteristics of a competitive regime in fostering tech-
nical dynamism and cost-cutting innovations, and perhaps even political
freedom to match economic freedom, our argument is anything but
rigorous; it is, however, extremely relevant. On the other hand, if we
prove that multimarket equilibrium is possible no matter how large the
number of markets, our demonstration is rigorous but has no relevance
whatsoever.” The existence of multiple solutions to the mathematical
equations describing the economic equilibrium results in locally unique
points of dynamic attraction, which can be finite or infinite.
Macroeconomic equilibrium may be unique when market clearance
takes place with a unique set of prices, but the non-uniqueness of
dynamic equilibrium occurs when the laws of motion are conducive to
88 N. EL MAGHREBI ET AL.

several asymptotic states. The conditions of multiple equilibria can be

described by several factors including irrational exuberance, a phrase first
used by former Chairman of the Federal Reserve Board Alan Greenspan,
and subsequently defined by Robert J. Shiller (2000) as the psycho-
logical basis for speculative bubbles. Asset bubbles can be conducive to
multiple equilibria because, as argued by Costas Azariadis (2008), they
are indeterminate in their initial states and laws of motion, with essen-
tially unpredictable deflation pressures depending on shifts in investor
sentiment.
However, some critics hold that economics has already developed
beyond the old Arrow–Debreu framework of general equilibrium. Alter-
native theoretical frameworks include new models of endogenous prefer-
ences, asymmetric information, chaos and complexity theory, and appli-
cations of game theory. Broadly defined as the mathematical modelling
of certain conditions of human conflict and cooperation, game theory
may have enjoyed several decades of contributions to both normative and
descriptive research. It is the seminal contributions of John von Neumann
(1903–1957) and Oskar Morgenstern (1902–1977) and their joint work
on Theory of Games and Economic Behavior (1944) that provide the
theoretical foundations of game theory.9 As noted by Oskar Morgen-
stern (1964), “the theory is and was designed to give meaning to what
common sense vaguely calls ‘rational behaviour.’ What does it mean to
be rational in a situation where the outcome does not depend on you
alone, nor on chance alone, but on others also who have opposite aims
but likewise lack the ability to achieve them because they depend on your
actions too?”
Notwithstanding the clarity of its theoretical objectives, game theory
became the subject of strong criticism on the grounds of unimpres-
sive results. Anthony Kelly (2003) suggests that part of the criticism
is based on the main issues of rationality, inconsistency, and indetermi-
nacy. Serious criticism is levied against the indeterminacy of economic
outcomes which do not necessarily represent a social optimum. As argued
by Frank Ackerman and Alejandro Nadal (2004, pp. 3–4), “In the pris-
oner’s dilemma, the ubiquitous introductory example of game theory,
the optimum (short sentences if neither prisoner confesses) is unstable,
while the worst outcome (long sentences if both confess) is stable. More
generally, the ‘folk theorem’ of game theory -a result that was appar-
ently so damning that no one wanted to claim credit for it- shows that
essentially anything can happen in an infinitely repeated game. In such
 2 CRITIQUES OF CONVENTIONAL ECONOMICS 89

a game, multiple equilibria are the norm, while theory in general places
very few restrictions on the possible outcomes of the game.” Thus, while
game theory is presented as a promising development beyond the old
Arrow–Debreu framework of general equilibrium, it is associated with
the same concerns about the existence of multiple equilibria and unstable
outcomes.

The Science and Dogma of Neoclassical Economics

Economics can be regarded as presenting either dogmatic assertions about
fundamental principles accepted at face value and unchallenged as true or
scientific propositions susceptible of falsification and verification. Under-
standing the methodology of neoclassical economics is important because
testing the validity of economic theories depends on setting the appro-
priate standards of proof and methods of logical thinking. As argued by
Thomas Edward Cliffe Leslie (1825–1882), “no branch of science, no
scientific body, confines itself to the observation of phenomena without
seeking to interpret them or to ascertain their laws” (Leslie 1879, p. 376).
In order to understand the essence of economic phenomena, such as
recurrent financial crises and economic recessions, an examination of the
nature of underlying causes not just their periodicity is essential. Statis-
tical science should be concerned with the laws of social phenomena, as
well as the phenomena themselves, as further argued by Thomas Leslie
(1879, pp. 376–377) “A theory of a decennial recurrency of commercial
crises, for example, was based on the occurrence of crises in 1837, 1847,
and 1857. Had the cause of commercial crises been examined, it would
have been discovered that they are extremely various and uncertain in
their occurrence; that a war, a bad harvest, a drain of the precious metals,
anything, in short, which produces a panic, may cause a crisis; and as there
is no decennial periodicity in the causes, there can be none in the effects.”
Thus, economic inquiry requires that economic phenomena should be
the subject of not only measurement but also sagacious observation,
measurement, and rigorous logic.
The recurrence of financial crises in more recent times is not just
a matter of statistical analysis, but the subject of profound thought
about the inherent instability of interest-based financial systems barely
connected with investment risk and investor sentiment in the real
economy. In a quest to achieve the level of respectability enjoyed by
natural sciences, it is tempting to dispense with inquiry into psychology,
90 N. EL MAGHREBI ET AL.

theology, sentiment, and mental forces at work in order to establish the

natural laws that govern economic phenomena. Bold attempts to recog-
nize as natural laws the assumed associations between, for instance, wages
and food and between desire for wealth and aversion to work can be
used to justify the Ricardian notion of reducing the “natural” price of
labour to the price of labour subsistence. Such attempts can be useful
also in dismissing policies aimed at full employment, and advocating
instead, a “natural” rate of unemployment and a “natural” rate of interest
that neither stimulates nor depresses the real economy. The term “nat-
ural” may be the source of confusion in Political Economy as well as
in the philosophy of law. In his treatise about the reign of natural law,
Pierre Samuel Dupont de Nemours (1739–1817) proposed the notion
of “Physiocratie,” where he defined natural law and the role of govern-
ment in the organization of human society. Natural law is thus defined
as inclusive of physical and moral laws, arguing that “natural laws can
be either physical laws or moral laws. We mean here by physical law the
regulated course of any physical event or the natural order evidently most
advantageous to humankind. We mean here by moral law the rule of all
human action of the moral order that is in conformity with the physical
order and most advantageous to humankind” (de Nemours 1879, p. 32;
authors’ translation).10
Thus, it may be argued that the laisser faire economic doctrine is
derived from the system of natural liberty, in compliance with the ideal
code of nature, including the “natural” rights of liberty, and “natu-
ral” rights of property. However, John Kells Ingram (1823–1907) in A
History of Political Economy argues that the laisser-faire doctrine, long
considered as the watchword of economic orthodoxy extending from the
system of natural liberty, “is a result not so much of scientific thought as of
the pressure of practical needs – a cause which has modified the successive
forms of economic opinion more than theorists are willing to acknowl-
edge. Social exigencies will force the hands of statesmen, whatever their
attachment to abstract formulas; and politicians have practically turned
their backs on laisser faire” (Ingram 1888, p. 243) (italics in original).
The issue remains, however, as to whether positive legislation that
should be an extension of natural laws, is conducive to positive outcomes
and a “natural” organization of society to achieve economic prosperity
for all humankind. Any natural-law system, as argued by O’Brien (2004,
p. 27), involves a set of fundamental propositions, including the existence
of an underlying order in natural phenomena, which are discoverable by
 2 CRITIQUES OF CONVENTIONAL ECONOMICS 91

reasoning through observation and innate moral sense. The discovery of

the natural order results in the formulation of natural laws, which should
be reflected in positive legislation. He further argues that “a natural-law
system may also involve the following further propositions: that natural
laws are productive of immutable forces which man cannot deflect or
impede -this will be called determinism; that if freedom is accorded, then
society will progress harmoniously to a better state -this will be called
harmony theory; and that therefore the operation of natural laws requires
a great degree of freedom to achieve their ends -this will be called the
doctrine of natural liberty” (italics in original). Thus, the application
of natural laws to economic phenomena is predicated on compelling
evidence of the existence of an underlying order in economic phenomena.
It is conditional on the notion that the economic order is discoverable
through reasoning. It is based on the notion that the discovery of the
economic order allows for the formulation of economic laws, which in
turn, pave the way for the establishment of positive legislation.
Given the above proposition of the natural law system, it is noted that
at the heart of scientific discovery lies the problem of induction, which
poses the question of whether, and under what conditions, inductive
inferences are justified. In this respect, Lee Loevinger (1993, p. 151)
argues that the validity of any conclusion is a matter of the standard
of proof that depends on the validity of the process leading to that
conclusion. Whereas the process in mathematics relies on compliance
to rigid formal rules internally consistent within the logical system, it is
rather intuitive and does not necessarily follow rigorous rules in law and
most other disciplines. In contrast, “[s]cience frequently uses mathemat-
ical reasoning, but its application to data necessarily involves reasoning
or assumptions that are less than mathematically rigorous. Syllogistic
reasoning, Bayes’ theorem, Boolean algebra and other forms of logic are
particular methods of attempting to prescribe formally rigorous rules that
will guarantee valid reasoning.”
Whether the formal rigorous rules guarantee valid reasoning is rather
a controversial issue in scientific endeavours. In the Logic of Scientific
Discovery, Karl Popper (1902–1994) argued that an attempt to derive
the principle of induction (or principle of universal causation suggested
by Immanuel Kant (1724–1804)) from experience would break down
because it leads to infinite regression. There is no justification either
for inferring universal statements from singular ones because it does not
matter how many times a singular or basic statement is found to be valid,
92 N. EL MAGHREBI ET AL.

a conclusion about its universality remains false. The widely used example
is that it does not matter how many white swans we may have observed, it
suffices to observe one single black swan to prove that the conclusion that
all swans are white is wrong. It is also argued that statements decided by
agreement are not universal but singular, and if scientific statements are
required to be objective, and the basic empirical statements are required
to be inter-subjectively testable, then “there can be no ultimate statements
in science” (Popper 1935 [2002], p. 25, italics in original) Since theories
are tested through the deduction of statements of a lesser level of univer-
sality, these inter-subjectively testable statements must be tested, and the
deduction and testing process would be repeated ad infinitum.
Most importantly, Popper (1935 [2002], p. 91) argues that from a
logical perspective, “the testing of a theory depends upon basic statements
whose acceptance or rejection, in its turn, depends upon our decisions.
Thus it is decisions which settle the fate of theories” (italics in original).
A recourse to probability in evaluating the validity of statements based
on inductive inference should be justified on a new principle of induc-
tion, which itself should be justified, and so ad infinitum.11 Perhaps it
is because the decisions themselves depend in part on choices guided
by utility that Popper reached the conclusion that the various difficul-
ties associated with inductive logic are “insurmountable” (Popper 1935
[2002], p. 6). With respect to the difficulties associated with inductive
logic, further insights about the probabilistic nature of theoretical predic-
tions are provided by Mark Blang (1980, p. 22), who suggests that
“Whenever the predictions of a theory are probabilistic in nature (and
what predictions are not -any laboratory experiment designed to confirm
even so simple a relationship as Boyle’s law will never find the product of
pressure and volume an exact constant), the notion of assessing evidence
without invoking normative methodological principles is an absurdity.”
The central argument is that there is still a need for normative prin-
ciples in the validation or refutation of competing theories, including
sociological factors such as hierarchy, and reference groups. The ultimate
decisions to refute or validate theories may be also reflective of episte-
mological rationalism including a priori methodological rules based on
scepticism against new ideas. As argued by Mark Blang (1980, p. 22)
“scientists typically have a greater fear of accepting a falsehood than of
failing to acknowledge a truth; that is, they behave as if the cost of Type
II errors were greater than that of Type I errors. We may deplore this atti-
tude as stodgy conservatism, a typical manifestation of the unwillingness
 2 CRITIQUES OF CONVENTIONAL ECONOMICS 93

of those with vested interests in received doctrines to welcome new ideas,

or we may fail it as a manifestation of healthy scepticism, the hallmark
of all that is salutary in the scientific attitude. But whatever our point
of view, we must perforce conclude that in this way what are considered
methodological rules enter into the very question of whether a statistical
fact is accepted as a fact.”
This brings the discussion about economics as a science back full circle,
as the initial recourse of the discipline to scientific methods to estab-
lish natural laws for economic theory is met with the reality that it is
rather human decisions that ultimately settle the fate of scientific theo-
ries. Attempts to meet the rigorous rules of exact science should confront
the reality that there are no canons of scientific methodology. Economics
it may be argued is not a science of precise laws, but its basic state-
ments may only be expressed as economic tendencies. Indeed, as argued
by Todd G. Buchholz (2021 [1989], p. 383), “higher output usually
means lower prices, except when Weblenesque goods enter the scene.
A higher money supply usually means lower interest rates, except when
fears of inflation push interest rates higher. Stock prices usually repre-
sent rational predictions of future cash flows, except when ‘animal spirits’
panic or excite investors into dramatic swings. Investors usually take risks
until the marginal benefits equal the marginal costs, except for Schum-
peterian Übermensch entrepreneurs, who perceive values better than the
market.” Thus, in every aspect of economic exchange from production
to money supply, finance, and real investment, each basic statement is
expressed in terms of rules and exceptions. It is arguably difficult to
build a general equilibrium theory with imprecise principles. It is noted,
however, that “[t]hese imprecise forces that disrupt the scientific approach
are not necessarily irrational (that is, crazy). They may be non-rational and
unpredictable, as in quantum physics, where electrons do not act crazily –
they simply defy our current methods of modelling. As economists, we
haven’t figured out everything.”
Thus, part of the reason for the difficulties of objective inquiry into
economic phenomena following the methodology of natural phenomena,
is that the principle of determinism is constantly violated. Indeed,
economic laws are not based on immutable forces that human action
can neither deflect nor impede. Human actions are rather the essence
of economic phenomena, and any discoverable economic order and
economic laws are reflective of human action not independent from it.
94 N. EL MAGHREBI ET AL.

With respect to the harmony theory, it is noted that economic investiga-

tion should be aimed at promoting economic prosperity for the whole
society. As argued by John Kells Ingram (1888, p. 241), “if we over-
look this, our economics will become a play of logic or a manual for
the market, rather than a contribution to social science; whilst wearing
an air of completeness, they will be in truth one-sided and superficial.
Economic science is something far larger than the Catallactics to which
some have wished to reduce it.” Thus, given the difficulties in establishing
the existence of an underlying order in economic phenomena through
observation and inductive reasoning, it is left for reasoning based on the
innate moral sense to provide relevant evidence. Without recourse to the
innate moral sense to make decisions on basic statements about the exis-
tence of economic order, it is difficult, in turn, to formulate economic
laws and consistent positive legislation.
The difficulties in understanding the direction of causality and the exis-
tence of confounding variables leading to spurious associations between
economic variables affect the ability of economic models to reflect the
complex structure of the economy, capture its dynamic workings, and
provide reliable predictions. If theories are to be judged solely on the basis
of predictive power, then economic theories including the general equi-
librium theory may not be taken seriously. Reuven Brenner (1994, p. 19)
argues that “there cannot be such a thing as a “general theory” about any
of the following questions: How does the general level of a government’s
expenditures, in particular, its debts and deficits, affect either the total
production of goods and services or the national income earned from
production? How do the debt and deficits affect employment? How do
the debt and deficits affect the allocation of resources between current
consumption and investment?”
The argument is that it is not possible to determine the net effects of
government expenditures, debt, and deficit because they may or may not
raise consumption or decrease investment. Likewise, near-zero interest
rates intended to provide incentives for borrowing and spending, can
be also a source of speculative bubbles and financial instability. Ambi-
guity about the long-term impact of changes in interest rates on the
behaviour of savers and investors, adds to difficulties in isolating the
factors that affect national income, employment, and economic growth.
As the direction of causality between the economic variables embedded in
any theory remains indeterminate, it is difficult to draw strong conclusions
 2 CRITIQUES OF CONVENTIONAL ECONOMICS 95

from weak premises. Thus, part of the reason for difficulties in articu-
lating a consistent theory of economic equilibrium is that the theoretical
arguments about convergence toward equilibrium remain inconsistent,
and that corrective policies following the second theorem of welfare
economics are, in turn, bound to be erratic and ineffective.
It is difficult to ignore the criticism levied against the pursuance of an
elusive status of exact science for a discipline whose intellectual construct
can hardly be contained in an abstract theory with precise logical state-
ments. John Neville Keynes (1852–1949) argued in The Scope and Method
of Political Economy (1890, p. 145) that not all science is of the demon-
strative type, and that “it would be a great mistake to narrow our
conception of political economy to the pure theory alone, simply in order
to attain perfection of logical form.” Descriptive economics, as argued
by Hollis and Nell (1975) also, can dispense with optimizing models.
However, “no science of any kind can be divorced from ethical consider-
ations, as suggested by Kenneth E. Boulding (1969, p. 2). No science can
be freed from the high values placed not only on exact measurement and
careful experiment but also on veracity and objectivity. “The question as
to exactly what values and ethical propositions are essential to the scien-
tific subculture may be in some dispute. The fact that there are such values
cannot be disputed.” Thus, as the debate about the science and dogma
of neoclassical economics continues, and the longing for exact science
remains irresistible, the temptation to lay down economic principles as
undeniably true should be equally resisted. Perhaps, if the difference
between natural and economic phenomena is only of one degree, that
degree is a huge one. And if the difference between economic theories
and economic realities is only of one degree, that degree is an even eager
one.

Economics Between the Rigour

of Mathematics and Relevance of Morality
As explained above, economic theory has expanded with extensive efforts
in theoretical and empirical modelling, but the question remains as to
whether the rigours of mathematics have shifted economics away from
the restraints of moral philosophy into the realm of science. Readers may
be excused for thinking that economists who do not always concur on
the essence of the discipline may be less likely to agree on its method-
ology. Disagreements about both the theoretical and methodological
96 N. EL MAGHREBI ET AL.

foundations abound. The historical fact is that for Aristotle and early
philosophers including Saint Thomas Aquinas, economics was not consid-
ered as a theoretical science but a practical one.12 Also, the economic
thinking of Adam Smith and other classical economists deeply versed in
moral philosophy reflects a cognition of the natural law tradition. Individ-
uals should be free to pursue their objectives insofar that such freedom
does not abridge the rights of others to do the same. The harmony
theory is consistent with the doctrine of natural liberty and the corol-
lary of harmonious social progress, but it stands in contrast to Herbert
Spencer (1820–1903)’s theory of Social Statics, which favours a version
of economic and social laisser-faire. It is also at odds with his argu-
ments about the evolution of society driven by the mechanism of natural
selection and survival of the fittest.
Thus, as argued by O’Brien (2004, p. 29), “The physical scientists were
trying to find a harmony in nature through empiricism and the experi-
mental method; and the natural-law philosophers tried to find the same
in society. The economists who followed the philosophers were however
much less convinced of the inherent harmony. But economics grew out
of the natural-law systems; it was long treated as part of a comprehensive
social science, moral philosophy.” Nevertheless, Wesley Phoa et al. (2007)
argue that economics is in a “phase of transition from a ‘dismal science’
whose conclusions can hardly be proved to a ‘hard science’ firmly rooted
in empirical facts so that its conclusions and its theoretical foundations
can be empirically proven as is the case with the physical sciences.” As
noted also by Thomas Edward Cliffe Leslie (1879, p. 404), no science
can reach perfection and it should be judged on the appropriateness of its
methods of investigation rather than the extent of its progress. However,
given the disagreements about the essence of economics and its strained
relationship with mathematics, a smooth transition from dismal to exact
science may prove to be rather difficult.13
To illustrate this point, it is noted for instance that the principle of
ergodicity proposed by Paul Samuelson (1915–2009) was regarded as
a necessary mathematical axiom to advance economics from history to
science. Indeed, Samuelson (1969, p. 184) argued that “economics as
a science assumes the ergodic axiom.” The notion that, conditional on
the set of available information, the expected value of a random vari-
able must be a fair game, is shown to be useful in the examination of
market efficiency. But the ergodic axiom invited also criticism centred
 2 CRITIQUES OF CONVENTIONAL ECONOMICS 97

on the significance of its implications for economic analysis. It is essen-

tially argued that what ergodicity means in the context of economics
is not clear. Sheila Dow (2005) contends that the economic system is
rather non-ergodic as there is no reason to assume that structures will
remain stable. The individual behaviour of economic agents is likely to be
stochastic, and thus unpredictable, because it is driven by sentiments and
complex motivations. As argued by Donald W. Katzner (2003, p. 566),
“[t]he unidirectional movement of time in individuals’ lives means that
tomorrow is not, and in many respects cannot be, the same as today or
yesterday. Thus, mathematics based on assumptions of ergodicity, or the
idea that the forces determining economic environments, endowments,
preferences, and objectives will establish and repeat fixed patterns, can sit
oddly with the actual facts of human experience.”
Indeed, human beings are not inanimate objects, and their behaviour
may obey complex motivation systems. This implies that in the absence
of ergodicity, future patterns of behaviour may not be predictable with
the precision required by mathematical systems. As a result, “when the
bridges break down for these or other reasons, the fault is not with the
mathematics, but with the economics to which that mathematics relates”
(Katzner 2003, p. 566). Also, Miguel Carrión Alvarez and Dirk Ehnts
(2016) argue that it is not possible to provide empirical evidence as math-
ematical systems can be ergodic or non-ergodic, but the economic reality
cannot, simply because the economic system is not a mathematical system.
They concur with Paul Davidson (2015, p. 7)’s argument that axioms
used as the basis for the development of a given theory must be accepted
as true, necessitate no proof, and they add that no proof, in fact, can be
given. The natural question arises, then, as to how an “axiomatic” state-
ment that needs no proof, and no proof can ever be established, can be
in fact accepted as a universal truth.
It was William Stanley Jevons (1835–1882) who set the agenda for
the adoption of mathematical methods in economic analysis. Indeed,
Jevons argued in The Theory of Political Economy (1871, p. 3) that “Eco-
nomics, if it is to be a science at all, must be a mathematical science,”
He argued that the simple elements, including wealth, utility, value,
commodity, labour, land, and capital, upon which the science of Political
Economy depends should be treated with the most care and precision.
As “value depends entirely upon utility,” an examination of the nature
of the laws of thought, philosophy of mathematics, and logical empiri-
cism is important in understanding the philosophy of economics. He is
98 N. EL MAGHREBI ET AL.

widely credited for the transformation of economic thought from clas-

sical to neoclassical economics. The recourse to mathematical methods
in the analysis of economic equilibrium resulted in the development by
Léon Walras of the marginal theory of value and the general equilibrium
theory. There are competing views as to whether the Walrasian theory of
exchange through tâtonnement has benefited or suffered from seminal
contributions by several economists including Vilfredo Pareto (1848–
1923) and Knut Wicksell (1851–1926), among others. The derivation of
the conditions for Pareto optimal allocation is both regarded as a signif-
icant attempt to consolidate the relation between economic theory and
the real economy. It is also regarded as instrumental in the demise of the
Walrasian model of equilibrium, as argued by Alan Kirman (2021), among
others.14 Mathematical economics, which was expected to advance the
discipline and reconcile economists about controversial issues in economic
theory, became itself, paradoxically enough, the subject of controversy.
A desire to gain scientific respectability may explain in part, as
suggested by Donald Katzner (2003, the increasing role of mathematics
in economic analysis.15 However, Thomas Edward Cliffe Leslie (1879,
p. 241) argued that “[t]he bane of political economy has been the haste of
its students to possess themselves of a complete and symmetrical system,
solving all the problems before it with mathematical certainty and exact-
ness. The very attempt shows an entire misconception of the nature of
those problems, and of the means available for their solution.” At the
same time, the desire to view economics as a science can be also regarded
as one of the reasons for resistance to change in the discipline.
Also, John Kenneth Galbraith (1987, p. 284) noted that “in the
academic world, where economics is taught, the standard of intellectual
precision is set by the hard sciences. To the intellectual reputation of
chemists, physicists, biologists and microbiologists, economists and other
social scientists, perhaps inevitably, aspire. This requires that the ultimately
valid propositions of economics be essentially given, like the structure of
neutrons, protons, atoms, and molecules. Once fully discovered, they are
known forever.” Thus, it is perhaps a sense of security that mathematics
projects in an uncertain world that some economists prefer to maintain
and enjoy the established orderliness in the theoretical modelling of the
real economy. The sense of comfort and confidence in regulating the
economic reality with mathematical equations may be also the source of
resistance to change of paradigm in economic thinking.
 2 CRITIQUES OF CONVENTIONAL ECONOMICS 99

Critical arguments about the usefulness of mathematical economics

stem from the perceived fundamental flaws in connecting the abstract
world of mathematics with the reality of economic life. In this respect,
Subroto Roy (1989, pp. 161–162) argues that “[n]either mathematical
economists nor their critics seem to have asked whether modern mathe-
matical economics can be made to say all that has been claimed for it. It is
true that mathematics by itself is silent even about the great questions of
physics such as whether or not actual space is euclidean or non-euclidean
or euclidean in the small and non-euclidean in the large (as Hilbert and
probably Frege and Russel and Wittgenstein would have maintained) then
is it logically possible for it to be made to answer such momentous ques-
tions in political economy as to what happens to be the optimum scope
of civil government everywhere or anywhere?” (italics in original). Thus,
the projection of economic phenomena on abstract mathematical domains
coupled with the apparent independence of mathematics from empirical
analysis raises some philosophical difficulties about the practical bearing of
mathematical concepts and theorems upon economic life. In particular,
it is not clear whether mathematical propositions in economics can be
construed as basic statements that are true or universal statements known
to be true.
An “amoral economic theory,” in the words of Gunnar Myrdal (1987,
p. 274), is pursued with a complete neglect of the fact that the original
foundations of economics lie in moral philosophy. For instance, argu-
ments about welfare economics are advanced in terms of individual or
social utility. “But if the approach is not entirely meaningless, it has a
meaning only in terms of a forlorn hedonistic psychology, and a utilitarian
moral philosophy built upon that psychology.” It is hardly surprising as
argued again by Gunnar Myrdal (1987, p. 274), that “the psychologists
and philosophers have left the economists alone and undisturbed in their
futile exercise.” Part of the reason for the lack of interdisciplinary interest
in economic theory is that it is developed on peculiar utilitarian elements
of moral philosophy that have no basis in human nature. For instance, it is
difficult to discern the moral philosophy behind David Ricardo’s concep-
tion of the “natural” price of labour as that which allows labourers to
subsist and perpetuate their race. In this respect, Thomas Edward Cliffe
Leslie (1879, pp. 384–385) argued that Ricardo “disposed altogether
with psychology, and with all inquiry into the mental forces at work…
Had he been an English Lasalle or Karl Marx, and his main subject to sow
100 N. EL MAGHREBI ET AL.

enmity between capital and labour, he could not have devised a doctrine
better adapted to the purpose.”
With respect also to the absence of morality and ethics in the welfare
theory, Kenneth E. Boulding (1910–1993) noted in Economics as a Moral
Science (1969, pp. 5–6) that Pareto optimality is often assumed to be
self-evident, when in fact it relies on implausible ethical propositions.
The conditions of Pareto optimality imply that “there is no malevolence
anywhere in the system. It implies, likewise, that there is no benevolence,
the niceness of economists not quite extending as far as good will. It
assumes selfishness, that is, the independence of individual preference
functions, such that it makes no difference to me whether I perceive
you as either better off or worse off. Anything less descriptive of the
human condition could hardly be imagined.” However, the abstraction
of economic theory from values and sentiments may be explained by
the reliance on exchange relations as a tacit social organizer. Exchange,
however, is not the only facilitator of human and economics relationships.
Trust and learning process play also an important role in the functioning
of markets, division of labour and allocation of resources. Exchange rela-
tions are, indeed, more likely to be repeated among those who have a
positive exchange history. Thus, exchange relations are not merely the
outcome of the maximization of utility, which may or may not be driven
by sentiment, but certainly governed by trust.

Rationality as the Hard Core of Economic Theory

An exodus from moral philosophy may be explained in part by the belief
that mathematical economics cannot be developed on the foundations of
moral sentiments. As a substitute for the aggregate system of complex
human motivations and feelings, economic rationality is believed to be
more amenable to analytical modelling using the mathematical methods
of optimization.16 As noted by Blaug (1992, p. 230), there is a strong
perception that the rationality postulate is so pervasive in neoclassical
economics that it is virtually impossible to develop any economic theory
without utility maximization. Thus, the utility maximization paradigm
provides the basis for the examination of the consumers’ choice problem
or the firm’s profit maximization in a competitive economy. Katzner
(2003, p. 571) argues that economic rationality has its foundations in
cultural conditions, and it should not be surprising that rationality repre-
sented by constrained utility maximization is held as a methodological
 2 CRITIQUES OF CONVENTIONAL ECONOMICS 101

necessity in societies where self-interest is dominant. Consumer behaviour

may not be necessarily “rational” in societies where optimization based
on the logic of self-interest is not dominant. This implies that the rational
behaviour of economic agents may be driven by various factors including
moral values, altruism and benevolence, inter alia.
Invariably, however, economic theory defines rationality as the pursuit
of self-interest associated with an internal consistency of choice. A text-
book definition, following Gregory Mankiw (2016), suggests that given
the available opportunities, rational people systematically and purposefully
attempt to achieve their objectives. They are assumed to make deci-
sions, not just often but systematically, in consideration of the relationship
between marginal benefits and marginal costs. Rationality dictates that
action is undertaken only under the condition that its marginal benefit is
higher than its marginal cost. Walter Bagehot (1880, p. 5) who placed
business and commerce at the heart of political economy, argued that
man seeks to achieve the most benefits with the least costs, and added
that as a matter of course, “we know that this is not so, that men are
not like this; but we assume it for simplicity’s sake, as an [sic] hypothesis.
And this deceives many excellent people, for from deficient education they
have very indistinct ideas what an abstract science is.”
This definition of economic rationality fails, however, to recognize that
internal consistency of choice may be also conducive to persistence in
error. Gao and Schmidt (2005) suggest that there is sufficient empirical
evidence that economic agents are not necessarily utility maximizers as
they often make sub-optimal choices and remain nevertheless satisfied.
Amartya Sen (1987, pp. 13–14) notes that “[i]f a person does exactly
the opposite of what would help achieving what he or she would want to
achieve, and does this with flawless internal consistency (always choosing
exactly the opposite of what will enhance the occurrence of things he or
she wants and values), the person can scarcely be seen as rational, even if
that dogged consistency inspires some kind of an astonished admiration
on the part of the observer.”
Systematic patterns of irrational behaviour introduce another level
of complexity in the definition of economic rationality. Indeed, Joseph
Stiglitz (1991, p. 138) argues that “advances in sociology and psychology
(see, for example, the work of Tversky) have shown that there may be
systematic patterns to individual behaviour, even when they are irrational.
Economic science is concerned with exploring predictable behaviour; the
fact that behaviour is not rational, in some sense, does not mean that is
102 N. EL MAGHREBI ET AL.

not predictable.” Thus, internal consistency may not suffice in the defini-
tion of rational choice. It may be argued that rational behaviour demands
consistency, but rationality does not derive from self-interest alone as it
can be justified also with reference to individual codes of behaviour that
may appear to be, at times, in conflict with the exclusive pursuance of
self-interest. This implies that rationality cannot be defined exclusively in
terms of persistent pursuance of self-interest.
Given the difficulties in defining rationality on the basis of self-interest
alone, the notion of bounded rationality acknowledges the reality that
economic decisions depend on limited cognitive faculties that constrain
problem-solving abilities, and on the nature of information that may
be incomplete and unavailable on timely basis. Thus, economic ratio-
nality does not necessarily imply “rational” choices, but “reasonable” ones
defined by finite intelligence and incomplete information. There are many
interpretations of rationality and bounded rationality. Herbert Simon
(1984 [1963]) refers to “limited rationality” and “approximate ratio-
nality.” As argued by Esther-Mirjam Sent (2018), bounded self-interest
can be defined as the propensity of human beings to sacrifice their own
interest to help others.
The principle of economic rationality paves the way to the corol-
lary of consumer sovereignty. Indeed, insofar as individual behaviour is
driven by self-interest, both the consumer decisions and producer deci-
sions are bound to be governed by utility maximization. Consumer
sovereignty derives from the fact that it is consumer choices that define
producer choices, not vice versa. The direction of causality implies that
it is consumer satisfaction that rules over producer interests. In this
respect, John Kenneth Galbraith 1971, p. 73) argued that consumer
sovereignty does not allow for socially desirable upper boundaries for
individual consumption. As there are no consumption thresholds, there
are no binding conditions and constraints on producers either to satisfy
unlimited wants. Thus, he noted that “the instruction of the neoclassical
model to the economist on this is strikingly clear. The consumer wants
more. Theirs not to reason why, theirs but to satisfy.” It is further argued
that the assumption of consumer sovereignty obscures questions about
cultural factors that have an important bearing on consumer behaviour.
The question also arises as to how the assumptions of consumer
sovereignty with the principle of scarce resources can be reconciled. The
orthodox definition of economics rests also on the notion of scarcity,
 2 CRITIQUES OF CONVENTIONAL ECONOMICS 103

which is part of the legacy of Friedrich Hayek’s arguments against Keyne-

sian economics. Regarding scarcity as a universal law, Lionel Robbins
(1889–1984) defined the entire discipline of economics in terms of scarce
means, describing it as “the science which studies human behaviour as a
relationship between ends and scarce means which have alternative uses”
(Robbins 1932, p. 16). Thus, economic decisions that involve a devo-
tion of time and scarce resources to achieve one end result in abandoning
the satisfaction of another. The assumption of resource scarcity may also
serve the broader interest of producers. In his critique of self-regulating
markets, Karl Polanyi (1886–1964) suggested that in market-oriented
economies, goods are assumed to be scarce in order to be valuable as
commodities.
The assumption of scarcity represents also a marked shift from tradi-
tional patterns of thought. As alternative cultures and worldviews imply
alternative economic assumptions and theories, it is the notion of natural
abundance that dominated the debate among ancient Greek writers about
oikonomia. From their perspective, argued Dotan Leshem (2016, p. 226),
“the main task of economic rationality is to advance the good life as
they understood it, which means support for philosophy, for involve-
ment in public life, and also for not giving in to what they viewed as
the unnatural urge to pursue economic goals or luxuries for their own
sake.” Thus, given the competing notions of scarcity and abundance, the
elevation of the scarcity postulate to the status of an irrefutable universal
principle required an illogical leap in thinking. It may be argued that a
shortage of space, usually construed as scarcity of arable land, is respon-
sible for food scarcity. The counter-argument is that hunger, starvation,
destitution, poverty, and famine are not the inevitable result of a shortage
economy, but the natural outcome, as suggested by Amartya Sen among
others, of political instability, and inconsistent social and economic poli-
cies. The shortage economy should not be confounded with an economy
of scarcity, which shapes the thinking of governments to avoid measures
that address market failures, and absolve policymakers from the respon-
sibility to design and implement economic policies that ensure the basic
needs of the poor are fully and unconditionally met under all internal and
external contingencies.
Rational choice under scarcity reinforces individual bias toward risk
aversion and shapes the government policies of austerity. Alain Parguez
(2013) argues that austerity is “a permanent regime devoid of any sound
foundations,” and that it is irrelevant to anticyclical or stabilizing policies.
104 N. EL MAGHREBI ET AL.

Indeed, the Malthusian prophesy of impending food scarcity in the face

of a burgeoning population constitutes an untestable empirical prediction
about a potentially capital-scarce, labour-abundant economy that did not
come to pass. Dismal prophecies are testament to the fallibility of frag-
mented human knowledge about important aspect of nature and human
existence, including scarcity and abundance. A distinction is usually made
in economic theory between absolute scarcity and relative scarcity. It is
argued that the former results from the inability to increase, renew, or
substitute resources, whereas the latter results from an inability to satisfy
all the desires and needs of consumers. It is clear that absolute scarcity
does not invariably apply to physical and non-physical resources since
trust and knowledge are not scarce in absolute terms. Most importantly,
the principle of scarcity does not hold in knowledge-based economies,
and as noted by Geoffrey Martin Hodgson (2001), neither biology nor
anthropology lend support to assumptions of universal competition under
conditions of scarcity. The real scarcity in the world today, argued Joseph
Stiglitz (2017), “is related to our planetary boundaries: if we ‘ruin’ this
planet through an excessive emission of greenhouse gases, we cannot
move to another.”
There are fundamental flaws in the assumptions underlying economic
theory. The notion of consumer sovereignty is not consistent with the
argument of resources scarcity. It may be argued that acceptance of the
latter should preclude the former. The assumptions of limited resources
and unlimited wants seem to be rather contradictory as rationality
demands that if resources are, indeed, of limited supply, then consumer
wants should be constrained rather than unbounded. Given limited
resources, consumer demand should be moderated rather than permitted
to grow ad infinitum. If it can be plausibly argued that resources are
limited, then it should be inevitably admitted that moderating rules and
harmonizing limits to individual consumption should be formulated in
the stead of promoting the sanctity of consumer sovereignty. As argued by
William Redmond (2000), to the extent that consumer behaviour based
on self-interest leads to overspending and low saving rates, consumer
sovereignty is conducive to deviations from economic rationality. Indeed,
unlimited wants lead to excessive consumption and borrowing, which
are conducive, in turn, to the formation of asset bubbles, and financial
crises that threaten economic stability and human development. Despite
 2 CRITIQUES OF CONVENTIONAL ECONOMICS 105

the inherent logical inconsistencies, there are no indications that neoclas-

sical economics is ready to abandon the postulates of self-interest, wealth
insatiability, resource scarcity, and consumer sovereignty.
Thus, the rationality postulate holds a sacrosanct status in neoclassical
economics as an empirically irrefutable metaphysical proposition by virtue
of ubiquitous self-interest. Economic theory has created perfectly suitable
sacred language where self-interest is regarded as a self-evident truth. It
is self-evident by virtue of the assumptions of economic rationality and
resources scarcity, which are, in turn, ascertained as true by virtue of
human experience. Methodological monism does not admit value judge-
ments and references to alternative worldviews, religious beliefs, or moral
convictions. However, suppressing inconvenient worldviews and ethical
beliefs does not promote real progress in a subject that is of importance
not just to human existence but to the cosmological order as well.
Indeed, Amartya Sen (1987, p. 15) argues that a definition of ratio-
nality in terms of self-interest implies “inter alia a firm rejection of the
‘ethics-related’ view of motivation.” This argument implies that individual
codes of behaviour based on self-interest are exclusive of ethical values.
It is possible, however, to regard the rules-based behaviour founded on
moral beliefs that transcend individual motivations as rational as well
insofar that such a behaviour ensures systematic departure from self-
centred decisions. It is difficult to reduce human nature to instincts and
motivations based solely on self-interest. In this regard, Adam Smith
(1759 [2006], p. 3) argued in The Theory of Moral Sentiments, that “how
selfish soever man may be supposed, there are evidently some principles
in his nature, which interest him in the fortune of others, and render
their happiness necessary to him, though he derives nothing from it
except the pleasure of seeing it.” Thus, it is ironical that in its inces-
sant quest for wholeness and respectability, conventional economics, a
discipline traditionally regarded as an integral branch of ethics and moral
science, shuns and brushes aside alternative worldviews about resource
abundance, altruism, morality, ethics, and religious beliefs.
A crisis of confidence besets economics with the onset of every single
financial crisis, which alone should suffice as empirical evidence to warrant
a restructuring of the axiomatic foundations of economic theory. There
is instead a state of denial about the inevitability of systemic failures and
the impotence of macroprudential policies. Financial crises are swiftly
dismissed as unpredictable events due to sunspot equilibria rather than by-
products of predictable boom-bust credit cycles. In any case, it is difficult
106 N. EL MAGHREBI ET AL.

for a discipline that sanctifies human rationality and ontological scarcity

to justify, on the basis of the economic principle of optimal allocation
of resources, the devotion of intellectual capital to the rationalization of
speculative asset bubbles and elusive steady-state growth.
There is studious scepticism that further theorizing in terms of refining
model assumptions and mathematical modelling of imaginary shadows of
the real economy can generate substantive insights that would enhance
our ability to understand the implications of economic policies. If
economic theory must proceed only by neglecting the real impact of
uncertainty on economic behaviour, rent seeking, and the central contra-
dictions of capitalism, among other serious flaws, then it is difficult to
resist the conclusion that economic crises are events that economic theory
is not designed to predict or prevent in the first place. Thus, in view of
the conceptual and methodological difficulties discussed in this chapter,
the real question remains as to whether the intellectual discourse about
the past and future of Political Economy can be useful in deriving the
fundamental principles for the organization of an ideal economy. In the
absence of a proper understanding of human nature, human existence,
cosmological order, and economic uncertainty, it is clear that economy
theory would have nothing to offer in terms of economic principles to
promote economic justice and prosperity, except for an arid laisser-faire,
do-nothing economic policy.

Notes
1. The crisis of modern economics is perhaps best illustrated by the critical
notes made by Prof. Charles P. Kindelberger in 1982 prior to the publica-
tion in 1983 of a study by Ben Bernanke about the nonmonetary impact
of the financial crisis on the economic depression. The work that provided
the basis for the Nobel Prize for Bernanke in 2022 was regarded as “a
most ingenious solution to a non-problem… If one believes in rational
expectations, a natural rate of unemployment, efficient markets, exchange
rates continuously at purchasing power parities, there is not much that
can be explained about business cycles or financial crises.” The comments
highlight the fact that there was and there still is a strong denial that
real problems exist about major assumptions in modern economics. In
particular, there is a clear criticism about the paper’s rejection of money
illusion on the ground of rationality, and about the adoption of rational
assumptions, ignoring thereby the fallacy of composition, where individual
participants may be rational but the market as a whole may not.
 2 CRITIQUES OF CONVENTIONAL ECONOMICS 107

2. See for instance, Fred D. Miller (1998) for a discussion of Aristotle’s

economic thinking.
3. Regarding the importance of justice in both Aristotle and Adam Smith’s
arguments, see for instance, the comparative analyses by Laurence Berns
(1994), and Alexander Broadie (2010), among others.
4. See for instance, Jeffrey Sachs (2005) and Peter Singer (2009) who argue
that it is a moral obligation to end extreme poverty, which is often accom-
panied with conditions of powerlessness, by identifying practical ways of
providing assistance to the poor to escape the poverty trap.
5. Also, The Economist (The Canon of Economics, February 24, 2011) notes
that “[e]conomics has fragmented in the past 15–20 years, both in subject
and technique. No aspect of human behaviour is off-limits and a miscel-
lany of methods are in vogue, adding laboratory experiments, randomized
trials and computer simulations to the traditionalist’s blackboard and
chalk.”
6. It is noted that Walras law implies that the sum of excess demand values
should be zero irrespective of the conditions of general equilibrium.
7. Kakutani (1941) provided a generalization of Brouwer’s fixed point
theorem, which is useful in mathematical derivations in general topology
as well as in game theory. Indeed, Kakutani fixed-point theorem was
also used by John F. Nash (1928–2015) to demonstrate the existence
of equilibrium in randomized strategies for finite formal-form games.
8. David Ricardo (1821 [2006], p. 85) argued that “labour, like all other
things which are purchased and sold, and which may be increased or
diminished in quantity, has its natural and its market price. The natural
price of labour is that price which is necessary to enable the labourers,
one with another, to subsist and to perpetuate their race, without either
increase nor diminution.”
9. John von Neumann and Oskar Morgenstern (1944) developed also the
foundations of expected utility theory, where rationality is modelled as
the maximization of the expected value.
10. The original excerpts in de Nemours (1879, p. 32) are as follows: “les
hommes réunis en societe doivent être assujettis á des lois naturelles & á des
lois positives. Les lois naturelles sont ou physiques or morales. On entend ici
par loi physique le cours réglé de tout évenement physique de l’ordre naturel
évidemment le plus avantageux au genre humain. On entend ici par loi
morale la régle de toute action humaine de l’ordre moral conforme a l’ordre
physique évidemment le plus avantageux au genre humain.”
11. Popper (1935 [2002], p. 6) thus argues that “Nothing is gained, more-
over, if the principle of induction, in its turn, is taken not as ‘true’ but
only as ‘probable’. In short, like every other form of inductive logic, the
logic of probable inference, or ‘probability logic’, leads either to an infinite
regress, or to the doctrine of apriorism.”
108 N. EL MAGHREBI ET AL.

12. Donald Boland (2016, p. 25) also argues that “[f]or St. Thomas and all
before him back to Aristotle, Economics is not a theoretical science, but a
decidedly practical one. The very language used in economic theory, such
as value, signifying some good or utility, as the object of human action or
behaviour, plainly indicates that the discussion is within a practical science.
Yet, the discussion has been treated as if Economics were of a natural or
purely theoretical kind.”
13. With respect to mathematics, Kenneth E. Boulding (1983, p. 7) notes that
“[i]t is customary to divide the world of scholarship into the sciences and
the humanities, but this distinction is rather arbitrary. Acquiring scholarly
knowledge follows essentially the same processes as acquiring folk knowl-
edge, but in more refined forms. Thus the use of language may be more
important and languages used more specialized – the most specialized of
all, of course, being mathematics.”
14. See for instance, Donald Walker (1987) and Roberto Marchionatti (2007)
on the intense debate about the mathematical derivation of Walrasian equi-
librium theory, involving Léon Walras, Francis Edgeworth, and Ladislaus
von Bortkievicz, among others.
15. Donald Katzner (2003, p. 561) suggests that “mathematics may have
become so important in economics for four reasons: (1) to make use
of existing human capital, (ii) [sic] to attain scientific respectability, (3)
to help assure security with respect to claims of truth, and (4) because
economics was created primarily by Western economists to understand
Western economic behavior.”
16. See for instance, Katzner (2003, p. 573) who argues that “the use of
mathematics in economics flows naturally from the subject matter of
economics because (Western) economists consider the primary propel-
lant of economic behavior to be culturally determined rationality. And
the obvious way to represent that rationality in economic explanation is
with the mathematical notion of optimization.”

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 CHAPTER 3

Critiques of Islamic Economics

As with conventional economics, Islamic economics invites criticism on

many grounds. There are fundamental ontological and epistemological
questions about a discipline devoted to the study of the organizing prin-
ciples of an Islamic economy, including the important issues of whether
such an economy is warranted or it can possibly exist. Part of the criticism
of a normative discipline focuses not so much on what it has achieved
as what it has not. The principal failure to emerge as an independent
discipline is manifested in the paucity of consistent textbooks to influence
patterns of critical thinking in new generations and absence of coherent
policies to substantiate real change in the economy. Muslim scholars,
it is argued, frequently preach value-laden innocuous policies that are
rarely put into practice. The economic ideology, it is argued again, is
so vague and antiquated as to be of little significance for prediction and
policy-making purposes in modern economies.
Another critical view regards the development of a novel discipline
unwarranted when it is possible to incorporate Islamic values and design
new policies within the realm of conventional economics. The argument
is based on the premise that Islamic economics shares with conventional
economics the latter’s hard-core principles of economic rationality and
optimal allocation of scarce resources, inter alia. As argued in the opening
chapter however, these are polar visions of the economy, which are, as

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Switzerland AG 2023
N. El Maghrebi et al., Revisiting Islamic Economics,
Palgrave Studies in Islamic Banking, Finance, and Economics,
https://doi.org/10.1007/978-3-031-41134-2_3
114 N. EL MAGHREBI ET AL.

explained in another central chapter of this book, fundamentally irrecon-

cilable given the ontological, axiological, epistemological and teleological
differences. As shown in the previous chapter as well, the very princi-
ples of conventional economics are regarded as maxims only by dint
of repetition as they have no basis in the primary sources of Islamic
knowledge. It is argued also that to imbue economic models with assump-
tions about Islamic values and test their empirical implications does not
amount to the development of a genuine discipline of Islamic economics.
As Islamic economics ventures into the well-trodden path of neoclassical
economics, its enthusiasm for compromise may lead to entanglement with
a secular paradigm where the historical tensions and potential conflicts
between Islamic worldview, moral philosophy and philosophy of science
can hardly be contained. A fatal compromise is inevitable as manifested by
the promotion of sukūk products as interest-based “Islamic” bonds into a
new asset class. A convergence toward conventional banking seems to be
impossible without a secularization of Islamic jurisprudence to circumvent
the maxim of interest prohibition.
Thus, it is tempting at this point to reflect upon the current state of
Islamic economics and conclude that it can neither emerge on its own
nor exist within the realm of conventional economics. In the absence of
a deeper understanding of the raison d’être of the homo economicus and
how economic life is anthropologically shaped, it is difficult to develop
a coherent discipline of Islamic economics with an ostensibly distinctive
future agenda. A secular paradigm that discards the metaphysical foun-
dations of Islamic economics leads to a merely “ethical” but skewed
version of capitalism that would be inevitably shattered, at some point, by
the serious tensions and conflicts between the open-ended processes of
secularization and Islamization. Indeed, a dualism of worldviews cannot
be resolved into a harmonious unity. Attempts at developing Islamic
economics on the foundations of mainstream economics are stalled at the
same impasse.
It is tempting also to reconcile the different paths taken in the devel-
opment of Islamic economics as an academic discipline entrusted with the
task of elucidating the organizing principles of an ideal Islamic economy.
It should be understood, however, that if all approaches are deemed
to be equally valid and important, it is not clear which path can be a
priori excluded. The principal contention of this book is that the differ-
ences in metaphysical and methodological foundations of conventional
 3 CRITIQUES OF ISLAMIC ECONOMICS 115

economics and Al-Iqtis.ād, a paradigm for an ideal economy derived from

the authentic sources of Islamic knowledge, are so stark that a path of
reconciliation with the grafting of one polar case onto the other is rather
impossible. The reality is that a path of reconciliation is inconceivable
because, as demonstrated in the previous chapter, there are inherent flaws
in the dogma and science of conventional economics. The critical anal-
ysis provided in the present chapter reinforces the argument that a path
of convergence can only compound the problems of divergence of the
current universe of discourse called Islamic economics from the paradigm
of Al-Iqtis.ād, which is based on the authentic sources of knowledge,
Al-Qur’ān and As-Sunnah.
Thus, the focus in this chapter is placed on critiques of the philosoph-
ical foundations of the current paradigm of Islamic economics, its scope
and methodology. The primary concern is about departures from what
Muhammad Baqir As-Sadr called Madh’hab Al-Iqtis.ād, rather than its
science or ‘Ilm Al-Iqtis.ād, which are explained in the opening chapter.
Indeed, the existence of a science of Islamic economics is conditional
upon the operationalization of its madh’hab, since no science can be
more secure than the metaphysics that it tacitly presupposes, as argued
by Alfred North Whitehead (1861–1947). The chapter provides, first,
a brief historical account of Islamic political economy. As with conven-
tional economics, various definitions of Islamic economics are, then,
presented in order to understand the scope, contents, and discontents of
the discipline. There is also concerns about the lack of theoretical doctrine
in Islamic economics, and the traditional trade-off that arises between
analytical rigour and practical relevance.
The chapter offers also a critical discussion of the relationship between
religion and economics, and the cardinal doctrine of the unity of Being,
which should form the metaphysical foundations of a discipline of Islamic
economics firmly grounded on the Islamic worldview. The focus is placed
also on the process of desacralization of knowledge, and replacement of
the theocentric worldview with secular ones. Finally, some perspectives
are provided about the role of Islamic jurisprudence in shaping Islamic
economic thought, and in particular, the secularization of Islamic law
as one of the principal sources of departure of Islamic economics from
the authentic paradigm of Al-Iqtis.ād, the Qur’anic vision of an ideal
economy.
116 N. EL MAGHREBI ET AL.

A Brief History of Islamic Political Economy

The influence of Islamic ideas on the development of economic thought
and institutions does not date back to a number of notable contribu-
tions by leading Muslim economists some decades ago. Any attempt to
promote the notion that Muslim scholars made no significant contribu-
tions to economic thought over many centuries is can be rather easily
refuted on the historical grounds of scholarly contributions. It is possible
indeed to dismiss the idea of The Great Gap, which refers to Joseph
Schumpeter’s leap in his History of Economic Analysis from the Greco-
Roman economics to Saint Thomas Aquinas. The unfounded proposition
implies that for as many as five centuries, the role of Muslim scholars
who preceded the Scholastics was to merely transmit Greek thought. It
is not possible however, as argued by Abbas Mirakhor (1987, p. 248),
to “extract the economic thought of Saint Thomas through a search of
his work including Opra Omni, Summa Theologica, and Summa Contra
Gentiles, among others… without seeing some references to Muslim
scholars particularly in areas where these scholars are taken to task for their
ideas which were contrary to the Christian dogma.” Indeed, the extensive
corpus of intellectual work by Abu Nasr Muhammad Al-Farabi (Alfara-
bius, 870–950), Abu Ali Al-Husayn ibn Abdallah ibn Sina (Avicenna,
980–1037), and Abu Hamid Muhammad ibn Muhammad Al-Tusi Al-
Ghazali (Algazelus, 1058–1111), and Abu Al-Walid Muhammad ibn
Ahmad ibn Rushd (Averroes, 1126–1198), inter alia, can hardly be
overlooked given their significant contributions to the development of
thought in political philosophy, natural philosophy, science, and social
psychology, among others.
Major contributions to the development of the broader field of social
studies were also made by other Muslim scholars, including the Fore-
runner of Social Sciences Abdur Rahman Ibn Khaldun (1332–1406)
whose treatise on universal history, Al Muqadimah, was described by the
world historian Arnold Toynbee (1889–1975) as “undeniably the greatest
work of its kind that has ever been created by any mind in any time or
place.” The pioneering historical treatise is the result of a keen interest in
understanding major events and their social dynamics rather than merely
narrating history. New insights are provided about the nature of economic
power, social changes, and political regimes, as well as human geography,
economic justice, taxation, production, commerce, and industry, among
others. The scholarly work provides original insights into the rise and
 3 CRITIQUES OF ISLAMIC ECONOMICS 117

fall of civilizations, economic prosperity, and political leadership. It offers

as such an intellectual account of reflections on the subject of political
economy, which precede by nearly four centuries, the inquiry into the
nature and causes of the wealth of nations as expressed by Adam Smith
(1723–1790), widely recognized as the father of modern economics.
Abdul Azim Islahi (2014) provides further evidence about the missing
link in the history of economic thought of Muslim economists on issues
related to the theories of value, market pricing, production, distribution,
money, finance, the role of the state, and economic development.
Also, Seyed Kazim Sadr (2016) presents, in the words of Mirakhor
(2016), a comprehensive economic hermeneutic of policies implemented
by the Messenger (saas) in Medinah, drawing from early insights by
Muhammad Abdul Malik Ibn Hisham (n.d–833) based on the original
biography of the Prophet (saas) by Abu Yusuf Yaqub Ibn Ishaq AlKindi
(805–873), and later contributions by Hakim Naishaburi (933–1012),
Abul Hasan Ali Ibn Muhammad Al-Mawardi (972–1058), Ibn Qudamah
AlMaqdisi (1147–1223), and Ibn Hajar Al-Asqalani (1372–1449), inter
alia. Thus, it is important to consider the intellectual heritage of Muslim
scholars in the history of Islamic economic thought and its impact on the
European Renaissance. Insofar as Muslim contributions are concerned, it
may be argued that Schumpeter’s unwarranted leap leading to misconcep-
tion of The Great Gap was not a period of drought in economic thought,
but one of valuable insights.1
The significant contributions of Muslim scholars to economic thought
may be regarded as precursor to the formal development of Islamic
economics as the study of the organizing principles of an ideal economy
extracted from the Islamic sources of knowledge. It is often argued,
however, that definitions of Islamic economics tend to be vague and
hopelessly abstract. Ziaul Haque (1992) noted that there is no consensus
on the definition of Islamic economics, with research spanning multi-
disciplinary subjects related to history, law, philosophy, and religion.
He argued that “Islamic economists appear to be more interested in
medieval socio-religious and ethical concepts and institutions, laws and
rituals than the real economic problems of their present-day societies”
(Ziaul Haque 1992, p. 1069). The literature, it is argued, portrays the
image of a nascent discipline anchored in medieval scholarship. In this
respect, Muhammad Akram Khan (2013, p. 40) also argues that despite
several attempts, “there is no standard and generally accepted definition
of Islamic economics.”
118 N. EL MAGHREBI ET AL.

The Contents and Discontents

of Islamic Economics
There is an abundance of definitions of Islamic economics. For instance,
Muhammad Abdul Mannan (1970, p. 3) defines the discipline as “a social
science which studies the economic problems of a people imbued with the
values of Islam.” According to Hasanuz Zaman (1984, p. 50), “Islamic
economics is the knowledge and application of injunctions and rules of
the Shari’ah that prevent injustice in the acquisition and disposal of mate-
rial resources in order to provide satisfaction to human beings and enable
them to perform their obligations to Allah and the society.” An alterna-
tive definition that emphasizes the importance of the Islamic worldview
is suggested by Mohamed A. M. Haneef (1997, p. 50), who states that
Islamic economics can be broadly defined as “an approach to interpreting
and solving man’s economic problems based on the values, norms, laws
and institutions found in, and derived from, the sources of knowledge in
Islam.”
With reference to the Islamization of human knowledge in the field
of economics, Zubair Hasan (1998, p. 21) argues that Islamic economics
may be defined as “that part of Islam’s social doctrine that deals with
the problems of choice in the face of uncertainty and resource scarcity
so as to promote falah in a holistic framework.” Alternatively, Umer
Chapra (1990, p. 33) argues that “Islamic economics may be defined
as that branch of knowledge which helps realize human well-being
through an allocation and distribution of resources that is in confor-
mity with Islamic teachings without unduly curbing individual freedom
or creating continued macroeconomic and ecological imbalances.” Alter-
natively, Ahmad Yusri (2002, p. 28) defines Islamic economics as “the
science that studies the best possible use of all available economic
resources, endowed by God, for the production of maximum possible
output of Halal goods and services that are needed by the commu-
nity now and in future and just distribution of the output within the
framework of the Shari’ah and its intents.”
The failure to reach consensus even on a benchmark definition of
Islamic economics is reflective of diverging views about its vision, scope,
and methodology. Muhammad Akram Khan (2013) argues that most of
what has been proposed in the name of Islamic economics amounts to
nothing more than Islamic teachings, which can be regarded as theology,
not economic theory. This criticism is consistent with the argument
 3 CRITIQUES OF ISLAMIC ECONOMICS 119

advanced by Timur Kuran (1989, p. 170) that support for prescriptive

Islamic economics rests on “selective quotations from scripture, leaving
it open to the charge that an Islamic justification may be found for
a wide variety of mutually inconsistent policies.” It is a discipline that
proposes only sterile and inconsistent policies that do not amount to a
genuine blueprint for the organization of the economic system in ways
that promote justice.
Part of the reason for these policy failures has to do with misguided
attempts at defining Islamic economics in relation to conventional
economics, which embraces a positive science concerned with the actual
behaviour of economic agents. Islamic economics, in contrast, should
aspire for a normative discipline where normative rules are consistently
and continuously embedded in behavioural systems. It is often argued
that theoretical propositions in Islamic economics are value judgements
based on the Islamic sources of knowledge, which are not amenable to
scientific analysis. The empirical methods, used for verification and falsi-
fication purposes, may provide however, useful insights on systematic
deviations from ideal economic behaviour. The evidence can be used,
in turn, in the design of corrective measures that adjust individual code
of conduct and institutional behaviour in order to converge toward an
ideal economic system. The validity and reliability of a particular Islamic
economic theory can, thus, be scientifically assessed in or to formulate
sound economic policies. In the realm of economic methodology, these
arguments reflect the classical distinction between positive and norma-
tive economics and about the role of the discipline in describing and
explaining behaviour or in shaping it. It is an important distinction given
the existing arguments by Weisskopf (1971, p. 183), inter alia, about the
“necessity for economics to include normative elements in its universe of
discourse.” Thus, if the intellectual efforts of Muslim scholars are meant
to merely describe, explain and assimilate what economic agents do rather
than advocate what they should do, then it is inevitable to ask what
marginal contributions can Islamic economics can possibly bring to the
universal discourse about economic problems without promoting ethical
behaviour and economic justice. If the overriding objective of theorising
and testing does not lie in the derivation of the organizing principles of
an ideal economy and formulation of sound policies based on norma-
tive behavioural rules, then it is legitimate to ask what exactly Islamic
economics is all about.
120 N. EL MAGHREBI ET AL.

Central to criticism about the scope and methodology of Islamic

economics is the notion that by virtue of its epistemological foundations,
rational thinking should be guided by revelation, not reason separated
from faith. It may be argued, as suggested by Muhammad Akram Khan
(2013, p. 70), that it is still possible to develop the discipline by distin-
guishing the human from the divine, which is not part of economics but
theology because it is “eternal, immutable and given.” This distinction
implies that “Islamic economics does not reject rationality in decision
making. It only extends the meaning of rationality to include human well-
being both in this life and in the hereafter. It does not reject maximization
of utility as normal behaviour but redefines the meaning of ‘utility’. Utility
in Islamic parlance encompasses gain in the hereafter as well. It does
not contradict the fact that human beings behave in self-interest, but it
extends the meanings of self-interest, which could also include spiritual
uplift, philanthropic spending, work for the well-being of one’s family,
neighbours and society at large, and so on. Economic analysis should
integrate these wider meanings of self-interest.”
Thus, the argument is that the conventional meanings of rationality,
utility maximization, and self-interest can be semantically redefined or
technically augmented in order to allow for model building consistent
with metaphysical beliefs and moral convictions. Semantically however, it
is difficult to extend the meaning of “self-interest” ad infinitum without
conflating it with “social interest.” It is possible to dispense with semantic
exercises through the imposition of normative rules that constrain self-
interest, such as the mandatory charity zakat, which is not just an act
of self-interest in the purification of individual wealth, but a religious
obligation toward society that lies beyond the boundaries of self-interest.
Technically also, as noted by Kenneth Boulding (1969, p. 6) in Economics
as a Moral Science, “There are no mathematical or conceptual difficul-
ties involved in inter-relating utility functions, provided that we note that
it is the perceptions that matter.” The question remains as to whether
semantic amendments to model assumptions that allow for bounded
self-interest or utility function, for instance, can solve the problems of
economic theory without abandoning its secular construct. The approach
lends itself to criticism on the grounds that the mere integration of Islamic
values does not render a secular paradigm Islamic. In this respect, Timur
Kuran (1989, p. 170) argues that Islamic economics fails to provide a
well-defined and operational analytical method, and “where efforts are
made to give it analytical power, it loses much of its Islamic character.”
 3 CRITIQUES OF ISLAMIC ECONOMICS 121

It is not clear, indeed, how to proceed when the overriding principles of

conventional economics stand in sharp conflict with the maxims of Islamic
economics.
It is difficult, in light of these conceptual contradictions, to evade
capture into a secular paradigm where positive economics takes prece-
dence over the normative approach mandated by the Islamic worldview.
It is not clear how to accommodate the economic postulates of resource
scarcity and unlimited wants in the realm of Islamic economics, which
regards relative scarcity as result of maldistribution, and the pursuit of self-
interest only as subservient to social interest. It is noted in this respect that
Hossein Askari et al. (2015, p. 36) consider the notion of scarcity in Islam
from three complementary levels. First, the evidence from Al-Qur’ān
implies that in absolute terms, there is no scarcity at the macro-global level
because all creation is made in “exact measures.”2 The second dimen-
sion refers to relative scarcity caused by inequalities in the distribution
of resources and income. The third dimension is represented by “exis-
tential scarcity” due to the finite conditions of human beings, which
implies that, in the words of Walter Weisskopf (1971, p. 23, italics in
original), the resources that “are ultimately scarce are life, time and
energy because human finitude, aging and mortality.” Thus, scarcity is
an economic phenomenon that can be encountered at the micro-level
because of unlimited wants, greed, selfishness, and economic injustice
leading to unfair distribution of resources. Poverty as such, is the result
of inequities in the distribution of resources, and wasteful consumption,
rather than absolute scarcity or shocks to the production and distribu-
tion functions. Corrosion of trust in public policies may, thus, be the
outcome of a reticence and unwillingness to wear one’s heart on one’s
sleeve and openly discuss beliefs, sentiments, and perceptions about social
and economic problems, including normative behaviour.
No amount of semantic engineering, theorizing, and empirical testing
in Islamic economics can solve the problems of poverty, hunger, and
destitution, when it embraces the conventional paradigm where poverty
is regarded as the outcome of resource scarcity and individual choice.
According to Masudul Alam Choudhury (1998, p. 133), a word of
caution is warranted as Muslims economists’ affinity for prediction and
falsification within the received wisdom of neoclassical economics may
culminate in unintended consequences. He argues that “In such a mould
of thinking, no new contributions can be made respecting the substan-
tively epistemological praxis of Islamic scientific order. The consequence
122 N. EL MAGHREBI ET AL.

will then be a pitiful methodological nicety without meaningful content;

or it will be a defective scientific, empirical and institutional development
in the framework of ‘Islamic economics’.” It is further argued that a
petrified scientific pursuit cannot offer genuine solutions within its own
distinctive model to the human predicament. Conventional economics is,
according to Friedrich Hayek (1940), the subject of criticism for a slavish
imitation of the methods and language of physical or natural sciences.
And it may be argued that the very charges of scientism and abuse of
reason apply with equal force to the development of Islamic economics.
The difficulties of formulating scientific statements and the dearth of
empirical literature in Islamic economics should not lead to the conclu-
sion that an ideal economic system cannot exist in Islam. Likewise, it is
not possible to dismiss the early work on Islamic economic thought for
fear, as noted by Muhammad Baqir As-Sadr (1982 [1994], p. 8), that
the discipline “would be exposed to the charge of claiming that Islam
was ahead of western thinkers in the scientific creation of the political
economy.”
The notion that the relationship between Islamic economics and
conventional economics is one of rivalry or rebellion is a false problem.
Independent of universal wisdom, it is a duty on Muslims to seek evidence
from the authentic sources of knowledge in order to extract the orga-
nizing principles of an ideal economy. The fears and misconceptions
are irrelevant to the more serious debate about the optimal path for
the development of Islamic economic thought. There is no doubt that
the organizing principles for an ideal economy derived from Al-Qur’an
and As-Sunnah will benefit humanity, but the question of whether
Islamic economics, with its present dependencies on human knowledge
again, can enrich conventional economics is another issue. The benefits
of integrating economic theories to examine the behaviour of a homo
economicus disinclined to sacrifice self-interest, and a khalifah economicus,
economicus are not obvious since the latter is an agent empowered by
the Creator both economically and spiritually to perform responsibilities
toward humankind, earth and the rest of creation, which can only be
assumed through the process of self-purification rather than self-interested
behaviour. It is not clear why a distinction between self-interest and
bounded self-interest should be made either if the descriptive method-
ology has little bearing on theoretical predictions, and policy implications
for the operation of economic institutions and behaviour of economic
 3 CRITIQUES OF ISLAMIC ECONOMICS 123

agents in an ideal economy. Thus, if in the conduct of economic anal-

ysis, Muslim economists should discern the divine from the human on
the grounds that the former is part of theology, not economics, and
the teleological character of economic behaviour should not be explained
by the theomorphic nature of man, then attempts at developing Islamic
economics based on an altered worldview of Islam are meaningless.
The dilemma faced by Muslim economists in integrating two conflicting
visions of reality cannot be resolved within the paradigm of conventional
economics because descriptive and prescriptive methodologies belong to
different realms of discourse.

Theoretical Doctrine Between Analytical

Rigour and Practical Relevance
It is also argued that despite the growing literature, Islamic economics
does not offer a body of doctrinal arguments. For instance, Muhammad
Akram Khan (1991, p. 260) argues that “[m]ost of what is written
consists of general principles, and that too within the framework of an
ideal Islamic economy which does not exist anywhere. Only some of its
ideas have found a place in the real world partly because its potential is
not widely known.” There is, indeed, a clear lack of theoretical models in
Islamic economics, and a genuine risk that new economic ideas with insuf-
ficient theoretical modelling may fade away. But the argument applies to
conventional economics as well. Paul Krugman (1995, p. 6), argues that
it is possible, indeed, for broad economic insights that are not assimilated
in models to draw the attention of scholars, but their impact is bound
to be temporary if they are not “codified in a reproducible –and teach-
able –form.” Given the tendency for economists to dismiss what has not
been formalized, “the influence of ideas that have not been embalmed in
models soon decays.”
There is no doubt that general principles constitute the foundations of
economic theory, and that efforts to define the maxims should precede
the development of a theoretical doctrine in Islamic economics. The
natural question arises as to whether it is the absence of consensus about
the general principles themselves that is hindering the formalization of
Islamic economic thought into a consistent theoretical doctrine. It is
difficult to build a robust theoretical doctrine when Muslim scholars are
consumed with intellectual disputes about the meanings and extended
meanings of self-interest and rationality, and about the postulate of
124 N. EL MAGHREBI ET AL.

scarcity or abundance. However important these issues are, they can

be resolved with reference to authentic sources of knowledge rather
than fallible human “wisdom.” It is not clear, either, whether theoret-
ical doctrines should judged by the level of analytical rigour or relevance
to the real economy. In this respect, Blaug (1992, p. 167) recognizes the
trade-off between rigour and relevance, and notes that “if we argue in
favor of a market economy compared to a command economy because
of the dynamic characteristics of a competitive regime in fostering tech-
nical dynamism and cost-cutting innovations, and perhaps even political
freedom to match economic freedom, our argument is anything but
rigorous; it is, however, extremely relevant.”
Thus, when Muslim economist argue against predatory capitalism
and command economy, and in favour of an ideal exchange economy
based on the organizing principle of risk-sharing, which ensures financial
stability and shared prosperity, the arguments are anything but rigorous,
however they are certainly relevant in addressing the chronic ailments of
the economy. Intellectual efforts to conceive an ideal Islamic economy
be subjected to the same standards of academic judgement applied to
Adam Smith’s arguments about a competitive economy with an invisible
hand, which are anything but rigorous. In fact, the general principles of
conventional economics were derived for a similarly imaginary compet-
itive economy that evolved over several centuries but did not exist at
the time Adam Smith wrote his seminal treatise. Thus, the principal
failure of Muslim countries to develop vibrant economic systems based
on economic justice and risk sharing should not be laid at the door of
Muslim scholars alone. It is clear that not everything practiced in the
Islamic world is Islamic, and particularly in relation to economic issues.
Departure from Islamic practice in many aspects of social, economic and
political life reflects a collective failure, not just of Muslim economists,
to recognize the truth about the divine, truth that is evident from clear
gnostic signs written in the horizons (āfāq, the heavens and earth), and
in all human souls (anfus ). It is a failure to recognize that sacred knowl-
edge is not meant to be superseded by human knowledge. Whether
the neglect is deliberate or accidental is not our concern here, but the
reality is that there is no possibility of developing a genuine discipline of
Islamic economics without recognizing the hierarchy of existence and the
superiority of the sacred over the profane.
Thus, Islamic economics lends itself to wide criticism ranging from
inconsistent doctrinal arguments to inexistent scientific statements. In its
 3 CRITIQUES OF ISLAMIC ECONOMICS 125

current form, Islamic economics is a disjointed and incoherent discipline,

and it is not so sacrosanct as to be protected from candid criticism.
It would certainly benefit from genuine efforts to take stock of past
achievements, or lack thereof, and correct its course of action. Attempts
at arranging and sorting out the arguments of an intrinsically norma-
tive discipline into a descriptive one, are bound to fail because they are
epistemologically inconsistent and therefore meaningless.
While conceding to the fact that an ideal Islamic economy does
not currently exist anywhere, protracted efforts to define the maxims
of Islamic economics should not be regarded as attempts to construct
abstract make-believe worlds. As argued by Muhammad Baqir As-Sadr
(1982 [1994], pp. 8–9), the conviction of some scholars that the “Islamic
economy is nothing but a myth and a mere figment of the imagination”
may be the result of a failure to distinguish between economic science
and economic doctrine. It is the latter that provides the overall framework
for an ideal economic system, upon which the science of Al-Iqtis.ād can
develop testable propositions. Thus, while recognizing the laborious task
of Muslim economists in rethinking Islamic economics, a belief that the
development of a coherent discipline of Al-Iqtis.ād based on the authentic
sources of knowledge is unwarranted because no such a thing as an ideal
Islamic economy is possible, would be an intellectually disabling belief.

The Contentious Relationship

Between Religion and Economics
The question of whether human thought should be governed by
faith or reason is a false dichotomy because, arguably, both are
necessary and complementary. Historically however, the relationship
between economics and religion has been unnecessarily antagonistic and
contentious. John Kells Ingram (1888, p. 241) concurs with the views
of physiocrats, in relating economics to natural sciences including physics
and biology, but he also insists that “the science must be cleared of all
the theologico-metaphysical elements or tendencies which still encumber
and deform it. Teleology and optimism on the one hand, and the jargon
of ‘natural liberty’ and ‘indefeasible rights’ on the other, must be finally
abandoned.” Thus, religion, which provides answers to metaphysical
issues related to the fundamental nature of reality, is often regarded as
the source of fallacies and misconceptions. But it might be useful to note
also that religious belief has played a significant role in the development of
126 N. EL MAGHREBI ET AL.

modern economic thought. In its “Statement of Principles,” the American

Economic Association, which was founded in 1885, explicitly recognizes
the complementary roles of the Church, state, and science in addressing
social problems.3
Given this contentious relationship, it is important to understand the
contents and discontents of religion in order to consider arguments about
the usefulness or futility of bringing it into the universe of discourse about
economic life. Western philosophers and anthropologists consider religion
as a set of empirically irrefutable “beliefs,” “convictions,” and “ideas,”
with positive and negative heuristics of do’s and do not’s that should be
either eliminated or allowed to evolve over time. Religio can refer to piety
and life according to God’s will, though the term “novas religiones ” or
new religions and alternative spirituality is used also in reference to fresh
superstitious dreads. The word religion is derived from the Latin term
religio, whose root meaning is to bind.4 As argued by Seyyed Hossein
Nasr (2000, p. 1), religion stands for “that which binds man to the truth.”
Islam is referred to as the religion of truth in Al-Qur’ān (48:28), “It is He
Who has sent His Messenger with Guidance and the Religion of Truth.”
The Arabic term “dı̄n” or “deen” oft-used with reference to religion is
also stated in Al-Qur’ān (3:19) “Verily, the religion [din] of God [Allah]
is Islam.” Its root meanings are acknowledgement, natural inclination,
submission, and judgement. The true religion of Islam, ad-din al-haq, is
the perennial religion, religio perennis, as noted by Seyyed Hossein Nasr
(2000, p. 20), who argues that “[t]here is only one doctrine of Unity
which every religion has asserted and Islam came only to reaffirm what
has always existed and thus to return to the primordial religion which
was at the beginning and will always be, the eternal sophia, the religio
perennis.” Because human beings are endowed with the qualities of will,
intelligence, and speech, and because they are by nature forgetful and
thus imperfect, divine guidance with a primordial religion or “ad-din al-
hanif ” is an absolute necessity.
The cardinal doctrine about the ultimate nature of Reality is the unity
of Being or “Wihdat Al-Wujūd,” which precludes the existence of two
completely independent orders of reality or being. In this respect, Syed
Muhammad Naquib Al-Attas (2005, p. 11) argues that from the perspec-
tive of Islam, a worldview cannot be reduced to the mind’s view of the
physical world, nor can it be confined either to man’s world of sense or
sensible experience in this world based on social, political, and cultural
exposures. He notes that it is incorrect to confine the meaning of Islamic
 3 CRITIQUES OF ISLAMIC ECONOMICS 127

worldview to the view of Islam about the universe, as conferred by

the Arabic phrase Nadhrat Al-Islam lil-Kawn “because, unlike what is
conveyed by nazrat, the worldview of Islam is not based upon philosoph-
ical speculation formulated mainly from observation of the data of sensible
experience, of what is visible to the eye; nor is it restricted to kawn, which
is the world of sensible experience, the world of created things.” The basic
argument is that “Islam does not concede to the dichotomy of the sacred
and the profane; the worldview of Islam encompasses both al-dunyā and
al-ākhirah, in which the dunyā-aspect must be related in a profound and
inseparable way to the ākhirah-aspect, and in which the ākhirah-aspect
has ultimate and final significance”5 (italics in original). Thus, given the
clarity with which the inseparable concepts of al-dunyā and al-ākhira are
explained in divine texts and Prophetic tradition, the concept of world-
view in Islam is anchored in authentic knowledge that cannot be the
subject of philosophical conjecture, inference, or speculation.
To cast doubt over the cardinal doctrine of the unity of being and
forget the theomorphic nature of man is to forget both the grandeur and
pettiness, the significance and triviality of what he can be. Man is given
the liberty to lead a life of illusion as a purely earthly creature in the
Promethean mode of existence, pursuing the dominance of nature, which
would ultimately lead to the destruction of the ecological balance and
natural order. Alternatively, he has also liberty to bear the inner reality of
a theomorphic man following religious laws to fulfil his cosmic and social
responsibilities by preserving harmony in this world. It is the rebellion of
the Promethean against the theomorphic during the Renaissance period
and forgetfulness of the original nature “fitrah” that prevents man from
attaining higher states of consciousness and from pursuing objectives in
life that lie beyond those confined to a rational animal.
The rationalistic worldview and substitution of the theomorphic with
promethean are the result of the process of secularization, which as argued
by Syed Muhammad Naquib Al-Attas (1993, p. 20), does not have its
roots in the Christian doctrine, but in the Western interpretation of Chris-
tian faith. Thus, “it is not the fruit of the Gospel, but it is the fruit of the
long history of philosophical and metaphysical conflict in the religions
and purely rationalistic worldview of Western man” (italics in original).
Indeed, Western thought conceives modern man as prisoner of his own
senses, focused solely on the unsatiated gratification of bodily senses. It is
noted that secularization, which promotes a Promothean mode of exis-
tence, is at odds with seminal philosophical arguments. The father of
128 N. EL MAGHREBI ET AL.

modern philosophy René Descartes (1596–1650) argued in Les Principes

de la Philosphie (1644 [2009]), that there is an organic unity in the prin-
ciples of philosophy, which is likened to a tree with metaphysics as the
root, physics as the trunk, and all other sciences as branches, including
the principal ones of medicine, mechanics, and morality. Thus, Descartes
acknowledged the importance of metaphysics in the tree of knowledge
and of morality as the culmination fo wisdom, notions that are alien to
secularism. He also regarded as principles of philosophy the notions that
“we are not the cause of ourselves, but that it is God, and therefore there
is God,” and that “we must believe all that God has revealed, even that
which is beyond the reach of our mind.”6 Thus, it is difficult to develop
solid philosophical foundations for secularism without undermining the
validity of Descartes principles about the existence of reality and divine
revelation.
Historically however, secularism is associated with the development
of rationalism in the thirteenth century as well as the movements of
experimental science and humanism over the Renaissance period in the
sixteenth century. The Renaissance humanism, in particular, emphasizes
the predominant role of science and reason over all sources of knowl-
edge including divine revelation. It has its roots in the word humanitas,
which reflects the human virtues of benevolence, fortitude, mercy, and
compassion, among others. Secularism, however, manifested itself in
the gradual departure from philosophical questions about the nature of
reality and being to issues related to human conscience and freedom of
thought. The emphasis on individual judgement and experience usurps
the place of sacred knowledge and metaphysics. It is the philosophy of
agnostic humanism, which is based on the centrality of human experience,
that constitutes the principal force driving secularisation throughout the
nineteenth century, and to this date.
In this respect, Seyyed Hossein Nasr (2007, p. 143) notes that histori-
cism, defined as the secularization of Christian doctrine about the march
of time, “played an important role in creating a consciousness, within
the new man, of his position in history considered as the secular flow of
time rather than his position in the face of eternity.” By emphasizing the
notion that man can riddle himself of the burden of divine doctrines and
rediscover himself in each encounter with a changing reality, secularism
epitomizes a rupture between the sacred and the profane, between the
metaphysics and sciences, and between the root and trunk in Descartes’
tree of knowledge. Thus, a rationalistic worldview of the Western man,
 3 CRITIQUES OF ISLAMIC ECONOMICS 129

as noted above by Al-Attas, is a de facto desacralization of knowledge

and substitution of a theocentric worldview with multiple anthropocentric
ones. The end product of secularization is historical relativism.
Secularization is about the release of man from religious and meta-
physical control over reason. It may be argued that the French notion
of laïcité, which is the outcome of a conflict with the Catholic church,
is a form of secularism that does not outlaw religion, but it does
exclude religion from public affairs. In this respect, René Viviani (1863–
1925) insisted that neutrality is not appropriate, the laïcité movement is
firmly committed to a world of irreligion. The movement succeeded in
extracting human conscience from faith, and “with a magnificent gesture,
has turned off in heavens lights that will never be turned on again.”7 The
separation of faith and reason resulted in the secularization of virtually all
branches of scientific knowledge as well as the cultural, political and social
aspects of life. Secularization became the undisputed paradigm based on
the marginalization of religion into the “private sphere.” But there remain
complex issues related to political secularization, which precludes private
beliefs in public life, and social secularization, which seeks irreligiosity in
everyday aspect of social life, including how people relate to and interact
with each other socially, and how society shapes its own value system.
The complexity of the secularization process emanates from the unsur-
mountable difficulties in defining and maintaining a neat demarcation line
between private life and public life. The resulting loss of the sense of the
sacred is also conducive to a loss of the sense of permanence.
Given the difficulties in sustaining a dichotomy between the profane
and the sacred, and given the transformation of the metaphysical question
of “being” into one of “becoming” with reality reduced to a temporal
process of evolution, there may be expectations about serious attempts
to preserve the primacy of divine knowledge, and reconcile faith with
reason. However, the depletion of sacred knowledge was not confined to
modern interpretations of Judaism and Christianity as it eventually spilled
to Islamic doctrine in an intellectually defeated and corrupted Muslim
world. As noted by Abdur Rahman Ibn Khaldun (1332–1406) in his
seminal work Al Muqaddimah, or Prolegomenon, Introduction to History
(1377 [2005], p. 116) “the vanquished always want to imitate the victor
in his distinctive characteristics.” Part of the reason is that the soul always
recognizes perfection in superior beings to whom it becomes subservient,
either out of respect or for the erroneous assumption that subservience
is not due to the weakness of the vanquished but the perfection of the
130 N. EL MAGHREBI ET AL.

victor. It is concluded that “if that erroneous assumption fixes itself in the
soul, it becomes a firm belief.”8
A belated call by some Muslim critics for the Islamization of Knowl-
edge, as an anti-thesis of secularization, is not meant to enforce a
non-rational form of wisdom, but to restore the primacy of sacred knowl-
edge, reinstate the metaphysical order and consolidate the harmony
between faith and reason. Taha Jabir Al-Alwani (1990) suggests that
the Islamization of Knowledge may be regarded as a cultural and intel-
lectual project aimed at restructuring the Muslim mind to generate
knowledge consistent with the primary sources of knowledge about the
truth, namely divine revelation wah’y and existence wujūd. Taha Jabir
Al-Alwani (1995) further argues that Islamizing knowledge should be
understood as “an intellectual and methodological outlook rather than
as an academic field, a specialization, an ideology, or a new sect.” In
this respect, Syed Muhammad Naquib Al-Attas provide different perspec-
tives about the notion of Islamization of Contemporary Knowledge
aslamat al-ma’rifah as he argues that al-ma’rifah defined as the a priori
knowledge acquired from innate experience cannot and need not be
Islamized. Syed Muhammad Naquib Al-Attas (1993, pp. 44–45) defines
Islamization as “the liberation of man first from magical, mythological,
animistic, national-cultural tradition opposed to Islam, and then from
secular control over his reason and his language. The man of Islām is he
whose reason and language are no longer controlled by magic, mythology,
animism, his own national and cultural traditions opposed to Islām, and
secularism. He is liberated from both the magical and the secular world
views.” It is the liberation of the spirit or soul, which ultimately leads to
physical and spiritual life in harmony with nature and all other beings. It
is the liberation from subservience to physical desires and needs, and from
the concept of man, defined according to Emile Durkheim (1858–1917),
not as a spiritual but physical being driven only by material needs, leading
to injustice, and conflict with nature and other beings.9 Since reason is
a projection of the Intellect (intellectus ), Islamization is the liberation of
reason from secular constraints to function in harmony with the Intellect.
The Attasian definition of Islamization implies that it is a process driven
not so much by evolution as by devolution to the original and primor-
dial nature al-fitrah, which is a higher timeless ahistorical state of being
independent of environmental conditions.
 3 CRITIQUES OF ISLAMIC ECONOMICS 131

Thus, answers to the question of whether man needs religion in the

organization and conduct of economic life depend on whether metaphys-
ical questions are given primacy over secular ideas in understanding the
nature of reality and the meaning of life. Certainly, the secularization of
political and social life, including economic activities is inconsistent with
the Islamic worldview. As argued by Abbas Mirakhor (1987, p. 251), it is
in Al-Qur’ān, which provides the primary documentary source to search
for Islamic economic ideas, and it is therein that lies the evidence that “the
teleological character of economic behaviour is the result of the theomor-
phic nature of man.” This is where Islamic economic doctrine parts way
with inconsistent advocacy for religious-based solutions to global envi-
ronmental problems and secular remedies to global poverty and financial
instability. From the Islamic perspective, it is not possible to accept an
economic system where the prosperity of some depends on the poverty
of others and destruction of nature. As vicegerents on earth, the wholistic
mandate of true believers in Islamic faith is to diligently serve justice
in every single aspect of life, including a harmonious relationship with
nature, and the promotion of economic and social justice.
Despite its wholistic and consistent worldview, there are unfounded
claims that, as with democracy, Islam and economics cannot and should
not be mixed. The alleged toxicity, it is often asserted by secular Muslim
minds as well, derives from the potential damage that medieval reli-
gious thought can inflict on modern socio-economic systems and inhibit
economic growth. In his analysis of the reasons why the Western world
grew rich and the Middle East did not, Jared Rubin (2017, pp. 2–3)
argues that there is no evidence that Islam per se is anti-growth, anti-
Western, and anti-democratic. It is tempting, indeed, to ask the question
of whether the burden of blame for the relative poverty, decadence, and
poor governance in the Muslim world should be laid at the door of
Islam. He notes that “it is impossible to avoid this question, even if it
may be offensive to some; it is simply bad science to reject a hypothesis
because it is offensive.” He develops the objective argument, however,
that “even if one accepts the idea that religious doctrine matters for
economic performance, the facts simply do not line up. The histories of
these regions in the millennium prior to industrialization do not align
with the idea that Islam is antithetical to economic growth. The most
important fact to account for in any theory of why the modern economy
was born in Western Europe and not in the Middle East is that the Middle
East was ahead of Europe economically, technologically, and culturally
132 N. EL MAGHREBI ET AL.

for centuries following the spread of Islam. From the seventh through
twelfth centuries, Islamic empires dominated Western Eurasia. For its
first four or five centuries, Islam was associated with positive economic
growth” (italics in original ). These historical insights are consistent with
the central arguments advanced also by Murat Ҫizakҫa (2011) in his
seminal work on Islamic Capitalism and Finance that, it is not Islam
per se, but the cumulative effects of path dependency caused by persis-
tent deviations from Islamic economic system that explain the dismal
economic performance of Muslim countries. There is ample historical
evidence, indeed, that the economic system in place from the seventh
to thirteenth centuries advanced the closely related notions of protection
of property rights, contract enforcement, and governance that have yet to
be universally accepted in modern economic discourse.
Since Islam, per se, is neither anti-growth nor anti-development, the
burden of blame for the lack of economic development should be laid,
logically and for the sake of good science, elsewhere. As argued earlier,
the answer lies in complete or partial neglect of the very economic prin-
ciples that generated positive growth for many centuries. It lies with a
complete or partial devotion to a secularization process that brought
neither balanced economic growth, nor economic stability, but financial
instability, poverty, and destitution. It is a blind secular approach based on
a conflated espousal of religious sentiments without religion. An attempt
to develop Islamic economics on secular foundations by adopting Islamic
values without Islam is, indeed, an exercise in futility. If Islam is deemed to
be irrelevant to the organization of an ideal economy, then Islamic values
should have no bearing on the explanation of economic phenomena or
the development of economic doctrine.
As with other branches of knowledge, Islamic economics is often
portrayed as a project in progress. But as it does not wear an air of
completeness, it may have very well grown into a pseudo-discipline that
is not so much wrong as meaningless. In its current form, it is a universe
of discourse that may intermittently stimulate curiosity and debate, but
without being firmly rejected or wholeheartedly accepted, it would be
swiftly dismissed as irrelevant to the serious problems of economic life.
Thus, the most important challenge for Muslim economists is to recog-
nize the optimal path for the development of Islamic economics as a
coherent discipline firmly anchored in its unique Islamic worldview. The
choices are patently clear. It is either that it remains firmly rooted in
a secular framework that separates faith from reason and deconsecrates
 3 CRITIQUES OF ISLAMIC ECONOMICS 133

Islamic values, or that it reclaims its place within the authentic paradigm
of an Islamic worldview where it can embrace both the sacred and the
profane and find its ethical compass and coherence with the truth.

Islamic Law and Islamic Jurisprudence

Islamic economics is a discipline that serves, essentially the conscience of
Muslims, by promoting an ideal economic system, the general principles
of which are premised upon the maxims of Islamic law.10 Islamic law,
as defined by Mustafa Ahmad Al-Zarqa (2014, p. 9), “is a compilation of
commands, rules of the creed and practical deeds that Islam obligates their
implementation to achieve its reformative goals in the society.” Consistent
with Al-Attasian definition of Islamization, the primary reformative goal
is to liberate the human mind from the slavery of imitation and super-
stitions. The primary purpose is to transform also the individual both
morally and psychologically in order to prevent the prevalence of desires
and greed over mind and duty. These intellectual efforts are consistent
with the purposes of Islamic law, which aims at the transformation of
society as a whole in order to ensure justice, order, public security. Thus,
the intellectual creed, spiritual worship, and judicial legal system consti-
tute the three pillars of Islamic law, which in turn, provides the basis for
Islamic economics.
As such, Islamic jurisprudence, or Al-Fiqh which represents knowl-
edge about As-Shari’ah or the immutable rulings of Islamic law ordained
in Al-Qur’ān and As-Sunnah, is not an end in itself but a means to
an end. Variations in Usul Al-Fiqh, the methodological principles and
pre-requisites for the extraction of rules based on As-Shari’ah such as
consensus (ijma’ ), analogical deduction (qiyas ), and Arabic grammatical
rules in understanding the meaning of the primary sources of Al-Qur’ān
and As-Sunnah, may result in different rulings. A proper understanding
of the immutable rulings by Muslim jurists, whose judgement depends
also on expertise in Usul-Al-Fiqh, is essential for the extraction of rules
and regulations that guide human beings in the conduct of spiritual life
and social activities in constantly changing environments. Thus, though
the terms Islamic law and Islamic jurisprudence tend to be used inter-
changeably, As-Shariah should not be confused with Al-Fiqh. However
important the role of Islamic jurisprudence can be, it remains a means to
an end, and as such, it cannot guide Islamic law, because fallible corpus
juris cannot guide infallible divine text. It is the latter that should, under
134 N. EL MAGHREBI ET AL.

all conditions, take precedence and exert authoritative control over the
former.
Insofar as Islamic economics is concerned, Muslims believe that the
end has always been the realization of an ideal Islamic economic system
governed by justice. The objective of Islamic law is not to burden people
with strict rules and behavioural norms but to organize the economy
in ways that achieve balance between rights with responsibilities and
promote harmony between private pursuits and social interest. It is impor-
tant for Islamic law to accommodate changes in the society, and it is thus,
inconceivable that Islamic jurisprudence or fiqh remains an immutable
body of legal rulings. As noted above, only Islamic law is immutable,
Islamic jurisprudence is not. And as argued by Mohammad Hashim
Kamali (2000, p. 82), “when a particular ruling no longer attains its
underlying purpose and rationale, it should be changed and substituted
with a suitable alternative. To do otherwise would mean neglecting the
objective of the Lawgiver (maqāsid al-shārı̃ c ) and the purpose of His
law. To make fiqh accommodate with the realities of society is at once
the essence and principal task of ijtihād. It is a collective duty ( fard
kafā’i), on all of those qualified to make a contribution, to initiate the
necessary changes to fiqh and thereby help to keep the Shari’ah a rele-
vant and viable force for the Muslim community.” Thus, ijtihād or the
intellectual effort to arrive at new rulings in Islamic jurisprudence necessi-
tated by the emergence of unprecedented issues in the society should rest
on the fundamental postulates of As-Sharı̄’āh contained in the primary
sources of Al-Qur’ān and As-Sunnah.11 Given the primacy of divine law,
no ruling with established roots in As-Shari’āh requires consistency with
the conventional wisdom of secular legal systems because certitude can
only be gained from sacred knowledge.
The main schools of Islamic jurisprudence, including the Maliki,
Hanbali, Hanafi, and Shafii, among others, have derived corpus juris
with legal maxims and accommodative rules that has no parallel in the
history of the law. However, as argued by Jonathan Ercanbrack (2015,
p. 5), “Islamic law, in particular rules concerning commerce, has not been
a functioning legal system for over 150 years.” Part of the reason has to
do with the imposition of state law on Muslim populations during the
European colonial era, but attempts to reintroduce Islamic law after inde-
pendence have been resisted in the name of modernity. The fact that many
 3 CRITIQUES OF ISLAMIC ECONOMICS 135

Muslim countries have discarded Islamic law at the end of the nineteenth
century and continue to do so to this date, does not mean that Islamic
economics should grow outside the realm of Islam and independently
from Islamic law and Islamic jurisprudence.
Given the universality of the message of Islam, the notion that Islamic
economics must serve the needs of humanity at large should not be a
matter of concern. The raison d’être of Islamic economics, which should
not be overlooked, is to establish the organizing principles and policies
regulating an ideal economy that serves the conscience of Muslims. It
does not exclude others, however, from sharing economic prosperity on
the basis of the risk-sharing principle. Islamic economics sets the agenda
for the organization of a just economic system for the well-being of all
humanity. Indeed, as noted by Abbas Mirakhor (2016), both Muslim
and non-Muslim residents are active elements of the same Ummah or
society according to the preamble of the Constitution of Medinah, which
constitutes the first written social contract in the history of humanity. It
is a declaration of rights for all citizens, independent of religious beliefs,
ethnic backgrounds or skin colours. It is a constitution that preserves
the rights of minorities and protects them against discriminatory treat-
ment, oppression, prosecution, and structural economic disadvantage. It
is a social contract that stands in sharp contrast with the present-day
dehumanizing treatment of economic migrants and crisis in inter-faith
relations.
Thus, Islam is not an ethno-centric, time-dependent, and geographic-
bounded religion. Given the universality of its message and recognition
of universal rights, there is no reason to bend Islamic law or swing
its pendulum toward extremes in directionless agitation to give undue
prominence to new secular ideas about diversity, equality, globalism, and
liberalism, inter alia. The Islamic corpus juris of rulings on standard
contracts to facilitate production and exchange that accommodate social
change and economic uncertainty is a testimony to the fact that the
immutable Islamic law provides solutions to all humanity at all times.
Accommodative Islamic jurisprudence is arrived at through reasoning
by analogy or syllogism qiyas, assessment of public interest maslahah
‘ammah and conditions of necessity, but the canons of Islamic law resist
combination with secular norms.
136 N. EL MAGHREBI ET AL.

The Secularization of Islamic Law

The principal objectives of Islamic law, it is usually argued, is the protec-
tion of human welfare, including faith, life, intellect, lineage, and prop-
erty. According to Abu Hamid Muhammad Al-Ghazali (1058–1111), it
is the protection of these five elements through the pursuance of benefit
maslahah and prevention of harm mafsadah that constitutes Allah (swt)’s
purpose in revealing the divine law Shari’ah. Since the purpose of divine
law lies primarily in the promotion of justice, there are legitimate concerns
about attempts to alter Islamic jurisprudence to serve vested interests in
the name of legal modernism and the globalization of ideas and knowl-
edge. For Muslim scholars aware of the dangers of pitting modern fiqh
against classical fiqh, the answer is obvious. Mustafa Ahmad Al-Zarqa
(2014, p. xxxiii) argues that the substitution of classical fiqh developed
by successive generations of devoted and diligent scholarship with foreign
jurisprudence and legislation that detaches Muslims from their beliefs, is
“a declaration of bankruptcy rather than borrowing.”
A corollary question arises as to whether the secularization of the Shar-
i’ah was in fact facilitated by concerted efforts to undermine classical
fiqh with the establishment of public welfare maslahah ’ammah not as
a means to base legal rulings but as the source of Islamic law. Aharon
Layish (1978, p. 263) argues that the modernist movement in Islam
has failed to reshape Islamic doctrine, but the creation of new legal
devices, such as the eclectic mechanism takhayyur or combination of legal
elements from different schools of thought and patching talfiq, has been
instrumental in undermining the classical fiqh, and paving the way to
“intensive parliamentary secular legislation.” The aim of legal modernism
is to construct, particularly with issues of mu’amalat or interractions
between people, waqf and personal endowments, a new jurisprudential
edifice by borrowing different elements from various schools of Islamic
jurisprudence to produce legal rulings that promote maslahah ’ammah
or socially desirable outcomes.12 It is, thus, argued that many statutory
laws disguised as rulings firmly rooted in the Shari’ah, are in fact purely
secular.
The secularisation of Islamic law is also driven by the transformation of
the Shari’ah role in the legal system from the jurist’s law to the statutory
law, which is valid only within defined jurisdictions. A turning point is
represented by the departure from fiqh through the enactment of codified
legislation, where the codification of commercial law, for instance, allowed
 3 CRITIQUES OF ISLAMIC ECONOMICS 137

for interest-based transactions. The introduction of the judicial practice of

the Supreme Constitutional Court underscored these significant transfor-
mations, as judicial decisions handed down by Shari’ah courts ceased to
be binding. Indeed, decisions by lower courts confirming the prohibi-
tion of interest are more likely to be overturned by the Supreme Court,
asserting thereby the primacy of commercial practice and customs as the
most important source of law. The incremental decline in the role of
Islamic law is evident in the reduction of as-Shari’ah to the status of
customary law, and the transformation of Islam as a religion into personal
belief system. Part of the reason behind the nationalization of endowment
waqf properties is the control of financial resources in order to deprive
Muslim legal scholars from their independent status and undermine their
authoritative role in the Shari’ah discourse, paving thereby the way to the
emergence of new elites of malleable secular legal experts.
Without any of the three pillars of Islamic law, including the intel-
lectual creed, spiritual worship, and judicial legal system, it is impossible
for Islamic economics to set the agenda for the organization of an ideal
Islamic economy. It is impossible for such an agenda to be implemented
and for the Islamic economy to radiate out with secular minds, weak
spirits, and secularized legal systems.13 Given its roots in the worldview of
Islam, Islamic economics is not meant to grow in every direction, driven
by unwarranted alterations of Islamic law in alignment with secular legal
systems. It is difficult to confess ignorance to the truth that ends cannot
justify the means, and that Muslim economists should extract economic
principles and implement economic policies with reference to Islamic law
as “the” not simply “a” source of Islamic economic thought. The distinc-
tion is important because if Islamic economics is to accommodate hybrid
legal systems, it should be more appropriately referred to as hybrid Islamic
economics. Similarly, if Islamic economics is based indeed on secular
law, it would be nothing more than an oxymoron of “Secular” Islamic
Economics.

Islamic Law of Transaction

and Economic Development
Unlike the divine sources of knowledge including Al-Qur’ān and As-
Sunnah, it is not possible to regard Islamic jurisprudence to be quite
so sacrosanct as to remain immune to criticism for reasons related to the
secularization of legal minds. It is imperative to rethink the important role
138 N. EL MAGHREBI ET AL.

of Islamic jurisprudence in the development of Islamic economic thought

and the organization of an ideal economy. In this respect, Mohammad
Hashim Kamali (2000, p. 2) argues that Islamic commercial law consti-
tutes one of the most important fields of Islamic studies. Research on
legal issues related to commercial transaction or fiqh mu c āmalāt is essen-
tial for the generation of wealth and economic development in Muslim
countries. There is evidence that Arab societies were pioneers in the
history of commerce in terms of forward trading and use of commer-
cial papers, preceding other parts of the world by several centuries.14
The issuance of commodity coupons (sukūk al-badhā’i c ) by the govern-
ment to its employees instead of the pay during the early Umayyad rule
can thus be regarded as government debt. The sale of sukuk al-badhā’i c
or warehouse receipts before maturity is also akin to the contemporary
concept of futures contracts. Thus, it is noted that the “reason that this
kind of commercial practice –and certain other related ones such as the
letter of credit (hawālah), bills of exchange (safātij ) and promissory notes
(ruq c al-sayārifah)– found acceptance so early in the history of commerce
is due to Qur’anic approval of deferred liability transactions, that is the
concept of mudāyanah (see Al-Qur’ān 2:282) and the explicit validation
of forward sale (salam) in the Sunnah of the Prophet Mohammed (saa).
Despite these pioneering practices, Islam still stands on the receiving
end of criticism that as a source of backwardness and ignorance, it merely
makes promises of economic prosperity that it does not live up to. It is
often argued that Islamic law and its administration cannot promote the
development of modern capitalism. Tony Huff (1999, p. 15) argues that
by eliminating risk in business, Islamic law does not facilitate modern
capitalist entrepreneurship. He further contends that Muslim countries
cannot follow the economic development path to fulfil the expectations
for shared prosperity and better life without jettisoning “virtually all
aspects of Islamic law that relate to business and commercial activities.” It
is rather fashionable to claim without hard evidence that a secularization
of Islamic law is a prerequisite for capitalism and economic development
in the Muslim world, as suggested by Timur Kuran (2011, pp. x–xi),
who argues that Islamic law was by no means a static construct, but
“in certain areas critical to economic modernization, change was mini-
mal” at a time when the West made transition from medieval to modern
economic institutions. Unfounded claims that Islamic law are the source
of economic retardation are, to say the least, misguided and inaccurate.
There is a failure to distinguish between Islam as a religion, and Islam
 3 CRITIQUES OF ISLAMIC ECONOMICS 139

as a civilization, between sacred knowledge and secularized reason, and

between Islamic law (As-Shari’ah) and Islamic jurisprudence (Al-Fiqh).
Also, Murat Çizakça (2011, p. xiv) makes the strong argument about
Islamic capitalism of the classical age, which some sincere Muslims may
find irksome “was an economic system derived basically from the Al-
Qur’ān and Prophetic traditions.” The bulk of Islamic jurisprudence,
which is deemed now the source of economic retardness, was laid down,
in fact, by merchants who firmly believed in free markets, and refuted
interference in the price discovery process. The Islamic legal principles
and guidelines in matters related to exchange and commerce were defined
earlier by the tradition of the Prophet (saa), a merchant who went about
in market-places for a living, and the righteous Caliphs, Abu Bakr As-
Siddiq and Uthman ibn ‘Affan, businessmen who traded in cloth and
cereals, respectively.15 Thus, if as suggested by Bagehot (1880, p. 5),
Political Economy can be defined as the science of business, then it is a
historical truism to suggest that the legal foundations of political economy
and the science of business were established through the development of
commercial law and business practices in early Muslim societies.
Thus, while objective scholarly criticism of Islamic law and commer-
cial practices is acceptable, a meandering of historical truth is not. Islamic
law is not just the translation of the needs of society but a reflection of
its ideals as well. It is unthinkable that a corpus juris of Islamic rulings,
which covers all aspects of life in every detail, and has no precedent in
the history of law, is deemed to be irrelevant to the regulation of modern
life, including commercial transactions and economic activities. Nicholas
Forster (2006) notes that there is neither a Christian law of contract nor a
Christian law of property but “unlike Christianity in which law is secular,”
there does exist a body of laws in As-Shari’ah dealing with commercial
matters. The French Code de Commerce, which exercised a strong influ-
ence on the promulgation of commercial law in several parts of the world
has no religious roots. As suggested by Joël Monéger (2004), neither
the philosophy of Enlightenment nor the spirit of the French Revolu-
tion made noticeable contributions to its development. “This code of
merchants owes more to the Ancien Régime, and in particular Colbert,
the great minister of King Louis XIV in the 17th century, to the need
for order and to the anger of the emperor after the repeated bankrupt-
cies of suppliers to the army, than to a vision of the business world that
would emerge under the effects of the Civil Code and social mutations.”
It is further argued that the three French codification of commercial law,
140 N. EL MAGHREBI ET AL.

including the Code Savary in 1673, Napoleonic Code de Commerce in

1807, and Commercial Code in 2000, suffer from fundamental flaws, in
that they either merely recognize the law of yesterday and ignore the
reality of present times, or do not capture the course of commercial devel-
opment in the future.16 As such, French legislators tend to enact new
rules in the field of commercial law without integrating them into the
existing code. It is noted also that the current efforts to promote a Euro-
pean Business Code as a vector of economic, fiscal, and social convergence
are opposed by several Member States on the grounds that “codification
is a ‘French specificity’ that should not be brought at the level of the
Union.”17
Thus, the adoption or rejection of secular law by secular societies
remains a sovereign decision. While Muslim leaders with secular minds
may be inclined to succumb to external pressure, resistance by faithful
Muslims to the secularization of Islamic law is not a matter of choice.
The fact that Islamic jurisprudence developed, centuries ahead of others,
a rich body of forward-looking commercial law recognizing the impact
of economic uncertainty and risk, and dealing with the sources of infor-
mational asymmetry and ambiguity, should be a matter of pride, not
shame. The Al-Qur’ān includes many verses of legal content and exem-
plary behaviour of the Prophet (saa) as trader is beyond doubt. Islamic
law retained some Pre-Islamic Arabian customs that do not contravene
the maxims of As-Shari’ah, others were abrogated or modified. Given
the principle of permissibility as the norm, the objective of the Islamic
legal system does not lie in the dissolution of cultures and fragmentation
of cultural identities but in the reform of customary practices in order to
serve an ideal economy that would benefit a stable and prosperous society.
As argued by Richard Potz (2011), the influence of Islamic law on the
European legal system is both territorial given the history of Muslim rule
in parts of Europe, and factual, particularly in commercial law given the
existence of common economic interests. As the debate continues also
on the European adoption of theoretic-methodological concepts, there
is also new evidence about the origins of the common law. For instance,
John A. Makdisi (1999) argues that “the legal institutions of the common
law fit within a structural and functional pattern that is unique among
western legal systems and certainly different from that of the civil law.
The coherence of this pattern strongly suggests the dominating influence
of a single preexisting legal tradition rather than a patchwork of influ-
ences from multiple legal systems overlaid on a Roman fabric. The only
 3 CRITIQUES OF ISLAMIC ECONOMICS 141

problem is that no one preexisting legal tradition has yet been found to
fit the picture.” It can be, thus, argued that the single coherent “pre-
existing legal tradition” is none but Islamic law. Indeed, the principal
institutions that helped create the common law in the twelfth century
for the first time in English history, including the contract law regulating
the transfer of property ownership, property law protecting possession as
a form of property ownership, and the trial by jury in the settlement of
disputes, have their common roots nowhere but in Islamic legal tradition.
The parallel “preexisting” Islamic institutions of ‘aqd, istihqaq, and lafif
constitute the precursors for English contract, assize of novel disseisin,
and trial by jury, respectively.
There is also earlier evidence from Abraham Udovitch (1962) who
suggests that the European partnership agreement of commenda, which
was instrumental in the expansion of Mediterranean trade in the tenth
and eleventh centuries, has its origins in Islam law. Further evidence
is provided by Ron Harris (2020) who notes that the sophisticated
commenda has its origins in the Arabian Peninsula, known in Islamic
jurisprudence as mudhārabah, qirādh, or muqāradhah. It is neither a
loan agreement nor an employment contract as it combines several
functions within a single legal-economic institution with payoffs deter-
mined ex post depending on the realization of profits or losses. The
profit-loss-sharing agreement predated the Italian commenda, which was
emulated through commercial connections into other Mediterranean
cities including Marseille and Barcelona. There is also scattered cred-
ible evidence pointing to the use of qirādh contracts by Indian maritime
merchants, including Muslim Gujarati merchants trading with Persia and
Arabia. There are also historical links between qirādh and the commer-
cial institution of ortag which extends from Persia to China. The singular
term ortoy, which means “merchant partner,” appears in the ninth-to-
eleventh-century Uyghur sources related to Turkic trade networks. The
evidence lends support to the argument that it is Muslim Turkish or
Persian merchants who introduced the partnership model to Mongolia
and China in the twelfth or thirteenth century, with further extension into
Central Asia through the expansion of the Mongolian empire. As histor-
ical facts speak for themselves, Islamic legal rulings and practices were
passed on through the ages with wide acceptance by diverse societies and
cultures because of their innovative properties and ability to accommodate
risk, which is inherent to all commercial transactions and economic activ-
ities that span time and space. The fiqhi process of ijtihād, which reflects
142 N. EL MAGHREBI ET AL.

intellectual efforts by qualified Muslim jurists to understand Islamic law,

Al-Shari’ah, ensures that new rulings are necessitated by the observed
or anticipated alterations and modifications in the space-contingent and
time-dependent means caused by social and technological change. Islamic
law does not discourage production, commerce, industry, entrepreneur-
ship, and investment but it upholds the sanctity of private ownership,
risk sharing, and freedom of contract with mutual consent and forbids
deception, duress, fraud, impediments to trade, and other forms of injus-
tice. Thus, of corrupt reputation, Islamic law has none to repair, and of
borrowed legislation, there is none to redeem.
Despite the historical evidence of significant contributions to legal
systems around the world, the dramatic change in current thinking from
innovation to imitation through allegedly innocuous borrowing of secular
ideas from secular legal systems under the banner of the secularization of
Islamic law or Islamization of financial practices is fatally compromised.
It is vain, indeed, to seek an Islamic counterpart for every species of
commercial and financial contracts used in conventional finance. Driven
by a desire to portray a modern image of the discipline, attempts to
advance Islamic finance by reconciling Islamic law with secular practices
are equally misguided. Murat Ҫizakҫa (2011, p. 4) argues that, even
from the perspective of pure cost-benefit analysis, the Shari’ah-compliant
approach to Islamic finance suffers from a dilemma pertaining to the
inherent contradiction of improving efficiency at higher costs. If the
objective of emulating conventional instruments is to derive efficiency
gains, he argues, then the current emphasis of the Islamic finance industry
on Arabic nomenclature and certification by Shari’ah experts are bound
to increase rather than decrease costs. More serious criticism is levied by
Timur Kuran (1989, p. 162) about the use of financing methods equiv-
alent to interest-based transactions in the Islamic finance industry. Part
of the reason for the conflated practice may have to do with a lack of
expertise in assessing investment opportunities, and aversion toward risk-
sharing finance which may ultimately lead to more losses than profits.
There is also fear that less risky but more profitable customers might find
better financing opportunities for borrowing at lower costs, and parallel
fear that only more risky customers with higher likelihood of losses might
be interested in profit-loss-sharing financing modes.
A recognition of public welfare maslahah ’ammah as the de facto
source of Islamic law rather than a means to arrive at new legal rulings
 3 CRITIQUES OF ISLAMIC ECONOMICS 143

may have influenced the issuance of legal rulings that permit Shar-
i’ah arbitrage and recalibration of the modus operandi of conventional
finance and banking. Mahmoud El-Gamal (2006, p. 44), notes that legal
stratagems and ruses hiyal, which merely involve the formal adherence
to classical contract conditions, such as in the contract of same-item
sale-repurchase bay’ al-’ayyinah represent a clear violation of Islamic law.
The mere adherence to form in the design of repurchase agreements
is regarded as an elaborate and disguised attempt to circumvent the
prohibition of interest or riba. Classical Islamic jurisprudence is clear on
the impermissibility of such practices. As argued by Ibrahim Ibn Musa
Abu Ishaq Al-Shatibi (1320–1388), compliance to the law is not about
adhering to the form while squandering its substance. Also, Ibn Qayyim
al-Jawziyyah (1292–1350) defined hiyal as the subtle management of
aspects of a legal transaction in ways for which they were not intended. As
the established principle in Islamic law is that (a’māl ) based upon inten-
tions (niyyāt ), it is important to recognize the sale-repurchase contract
as a means toward an end, and that the end can hardly be the transfer
of ownership of the underlying asset. Given these clear classical Islamic
rulings, innovation in Islamic finance should not be confused with blind
imitation, adding the prefix “Islamic” to impermissible interest-loaded
practices. As noted by Muhammad Ayub (2007), there is no obliga-
tion that financial innovation must engineer an Islamic finance product
for each and every conventional instrument. The free-riding on conven-
tional finance is in fact facilitated by an addictive reliance on borrowing
from secular legal systems and secular institutions. It is incumbent on fiqh
scholars, Islamic finance practitioners, and Shari’ah boards to ensure that
Islamic financial services remain in conformity with the tenets of Islamic
law, not merely in resemblance to its form.
As Shari’ah arbitrage is allowed to take various forms through the
apparent use of nominate agreements and selective compliance with the
requirements of classical contracts, there are growing concerns that the
essence of the “Islamic jurisprudence” which provided innovative solu-
tions to complex commercial needs in the past, is being altered beyond
recognition to serve the narrow interests of the modern Islamic finance
industry. There are diverging views on the future relationship between
Islamic jurisprudence and Islamic finance. Mahmoud El-Gamal (2006,
p. 45) expresses the hope that, at least in the short term, the “focus on
form does not exclude consideration of economic substance entirely.”
It is further hoped that modest increments in substance may serve as
144 N. EL MAGHREBI ET AL.

catalysts for the long-term development of a “viable modern Islamic

jurisprudence.” With strong hopes, however, there are also real fears.
Murat Ҫizakҫa (2011) argues, in contrast, that unless it develops its own
genuine Islamic financial instruments, “Islamic finance will continue being
an imitation of conventional finance, always one step behind it, with the
result that the clients of the industry will lose hope that it will ever provide
a hope of a bona fide alternative to conventional finance.” The fear,
indeed, is that the unwarranted and repeated recourse to legal stratagems
and concealed forms of agreements would become an established trait,
akin to the pursuance of individual desires, whims, and self-interest. It is
irrational to adopt Islamic rulings meant to legitimize behavioural traits,
which can only undermine the credibility of Islamic institutions and the
stability of Islamic financial systems that are crucial in the organization of
an ideal Islamic economy.
Thus, it is difficult to argue that Islamic jurisprudence and Islamic
economics have evolved over the past centuries on the basis of authentic
Islamic teachings and philosophy. There is, indeed, little evidence that
the former has genuinely evolved and stronger evidence that the latter
has been seriously compromised. It is important for Muslim legal scholars
and economists to grasp the reality that there is no merit in intellectual
attempts to fit secular ideals and ideologies into Islam. Secularization, as
a philosophical program concerned with secular life and secular destiny,
can only sever the connection of the consciousness of Muslims with the
Islamic worldview. It contributes to intellectual confusion and error in
knowledge. In a secular scheme of things, it is impossible to identify legal
maxims or economic principles that can be truly Islamized either. The
Impossibility Theorem, introduced in another chapter of this book, implies
that given the radical differences in metaphysical, philosophical, and epis-
temological foundations, attempts at grafting secular ideas and Islamic
principles one onto the other are bound to fail. Thus, it seems that for
now, Islamic jurisprudence and Islamic economic thought, which used to
go hand in hand, are both leaning against the wind.

Notes
1. For further evidence on the significant contributions of Muslim scholars
in refutation of the Schumpeterian Great Gap, reference can be made for
instance to Hamid S. Hosseini (2003), among others.
 3 CRITIQUES OF ISLAMIC ECONOMICS 145

2. Reference is made to Al-Qur’ān (54:49), which reads “Verily, all things

have We created in proportion and measure.” Thus, the notion of absolute
scarcity is rather inconceivable from the Islamic perspective of the unity of
creation.
3. Reference can be made to the Statement of Principles of the American
Economic Association (1887), which reads “Article III. 3. We hold that
the conflict of labor and capital has brought into prominence a vast
number of social problems, whose solution requires the united efforts,
each in its own sphere, of the church, of the state, and of science.” In a
statement by its secretary, Richard T. Ely argued that “we wish to accom-
plish certain practical results in the social and financial world, and believing
that our work lies in the direction of practical Christianity, we appeal to
the church, the chief of the social forces in this country, to help us, to
support us, and to make our work a complete success, which it can by no
possibility be without her assistance” (American Economic Association,
1887, p. 18). See also Richard T. Ely (1910) for further insights on the
history of the foundation and earlier days.
4. See for instance, Benson Saler (1987)’s examination of the etymology and
definition of religion, where he notes that there are “two candidates from
which religio may have derived: legere, ‘to gather together’, ‘to arrange’,
a proposed derivation that we associate with Cicero, and ligare, ‘to tie
together’, ‘to bind’, a possibility entertained by Lucretius and favored by
the Christian writers, Lactantius and Tertullian.”
5. It is also noted that Syed Muhammad Naquib Al-Attas (2005, p. 11)
further argues that the perverse use of the Arabic phrase nazrat al-islam li
al-kawn in contemporary Muslim thought is indicative of the unwarranted
reference and undue influence of the modern, secular Western scientific
conception of the worldview as confined to the world of sense and sensible
experience.
6. Reference is made to Descartes (1644 [2009], p. 266 and p. 100), “nos
non a nobis ipsis, sed a Deo factos, eumque proinde existere” [Part 1, art.
20], and “credenda esse omnia quœ a Deo revelata sunt, quamvis captum
nostrum excedant ” [Part 1, art. 25], respectively.
7. It is noted, however, that opponents to secularism à la française argue
that the maxim of laïcité, which rests on the separation of religion from
real life, is restrictive of the freedom of belief.
8. Al Muqaddimah constitutes a multidisciplinary approach to several fields
of study including sociology, philosophy of history, ethnography, and
political economy.
9. See for instance, Jamil Farooqui (1998, p. 199) argues that “Durkheim’s
concept of man as a being differs from that of Islam in the sense that he
ignores the human urge and search for truth. When he explains individual
146 N. EL MAGHREBI ET AL.

conscience, he highlights those individuality traits that emerge from phys-

ical craving and organic structure. He completely ignores the human’s
psychic, intellectual and spiritual needs, which are just as important as the
former.”
10. It is noted that in English, the phrase Islamic law is used to refer invari-
ably to the Shari’ah and Fiqh. The distinction should be made however,
between the former which is based on divine revelation, and the latter
which represents its understanding by legal experts. The primary sources
of Shari’ah are Al-Qur’ān and As-Sunnah, defined as the tradition of the
Prophet Muhammad (saws ) including his sayings and conduct. Islamic
jurisprudence or fiqh is the result of intellectual legal insights corpus juris
by various schools of thought (Madhāhib), scholars and judges through
independent reasoning ijtihād and issuance of legal opinions fatawa to
accommodate specific rulings ahkam to the changing needs of the society.
11. With respect to the principles of judgment, reference can be made to
Mustafa Ahmad Al-Zarqa (2014, p. 41), who noted that “In the letter of
Caliph ‘Umar ibn Khattab to Abu Musa al Ash’ari (may Allah be pleased
with them) while guiding him to the principles of judgment and its ideal
method, the Caliph wrote: ‘Use your brain on matters that perplex you
and to which neither the Qur’an nor the Sunnah seem to apply. Know the
similitude and weigh the issues accordingly. Follow that which is the closest
to Allah and most resembling to the truth’” (italics in original).
12. Reference can be made to previous efforts toward legal modernism driven
by Muhammad ‘Abduh, and Muhammad Rashid Rida, among others.
13. Reference is made, for instance, to Al-Qur’ān (2:256) “let there be no
compulsion in religion: truth stands out clear from error.”
14. Mohammad Hashim Kamali (2000, p. 2) notes that “[i]t is particularly
interesting to note that soldiers and government officials during the early
Umayyad rule (late seventh century/first century Hijra –when many of
the leading Companions were still alive) were issued commodity coupons
(sukūk al-badā’i c ) in lieu of the pay. Imam Malik has thus stated in his
Muwatta’ that sukūk al-badā’i c found currency among people and they
were brought and sold prior to maturity.”
15. See Al-Qur’ān (25:7) which addresses the disdainful remarks of the disbe-
lievers about the mundane life of the Prophet Muhammad (saws ) “And
they say ‘mockingly’, “What kind of messenger is this who eats food and
goes about in marketplaces ‘for a living’?”
16. The three codes referred to in Joël Monéger (2004) are the Colbert Ordi-
nance introduced in 1673, the Napoleon Code of Commerce enacted in
1807, and the current Code de Commerce in application since 2000.
He argues that “none of these codes met its objectives. As a result, their
usefulness for practitioners remains in question. Legislators themselves do
 3 CRITIQUES OF ISLAMIC ECONOMICS 147

not pay attention to them, passing new bills in the field of commercial law
but not incorporating them into the existing code.”
17. Reference can be made to the article by Philippe Dupichot (2021) on the
efforts to craft a common European business law for Member States of
the European Union.

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 CHAPTER 4

Ethics of Iqtis.ād

Ethics seek to develop moral conduct based on a set of values that deter-
mines what is intrinsically right or wrong for a given society.1 How these
ethics are derived from the values is subject to diverse sources and theo-
ries. Ethical behaviour is also subject to factors such as religious beliefs,
the stage of moral development of the society, personal morals and values,
family influences, peer influences, and life experiences of individuals or
societies.2 Every system of thought, ancient or contemporary, religious or
secular, contains moral norms prohibiting their violation. In one form or
another, in one degree or another, their sanctity is affirmed by all cultures
and societies. One such example is the universality of the Golden Rule.
For a long while, economists have resisted linking economic theories
to ethics, but as economic activities and financial markets advance and
the complexity of economic choices increases, it is becoming necessary
to incorporate ethical concepts such as honesty, fairness, integrity, trust,
and cooperation into mainstream financial economics in more explicit
form. Because economic activity involves a complex nexus of interactions
economic processes such as production, exchange, and consumption,
economic choices have an essential ethical dimension.3 Aragon (2014,
p. 17) calls the phenomenon of ignoring the ethical dimension “moral
muteness” and observes that some ethical issues “are transmuted into
less morally charged terminology, for example, by referring to financial

© The Author(s), under exclusive license to Springer Nature 151

Switzerland AG 2023
N. El Maghrebi et al., Revisiting Islamic Economics,
Palgrave Studies in Islamic Banking, Finance, and Economics,
https://doi.org/10.1007/978-3-031-41134-2_4
152 N. EL MAGHREBI ET AL.

manipulation as ‘income smoothing,’ lying as ‘cheap talk,’ or theft as ‘rent

seeking.’”
Vast research in financial economics on the economic consequences of
imperfect information is actually dealing with ethical issues underneath
expected behaviour and, therefore, has an ethical dimension embedded
in the relevant theories. Two major concepts, moral hazard and adverse
selection, are the foundation of several advanced economic and financial
theories such as agency costs theory and signalling theory. The classic
example of unethical behaviour such as dishonesty and information asym-
metries in economics is that of Akerlof’s (1970) “lemons” model, in
which information asymmetries would lead to market failure when agents
are expected to be dishonest. The dual conditions for market failure (that
is, information asymmetries and dishonesty) suggested by Akerlof’s model
reflect the key link between economic value and ethics. This necessitates
that the assumptions about the moral character of economic agents
could provide a deeper analysis of their economic behaviour.4

Growing Critic of Conventional

Economics’ “Moral Muteness”
The gaping inequality, stagnant incomes, large unemployment, string of
crippling crises, huge growth of government and consumer debts, and a
host of other ills consequent to the operation of present form of capitalism
have seriously challenged faith in the system. The widely held perception
of selfish, greedy, and harmful business has created a regime uncertainty
where, as many argue, there is doubt if the system can be saved from
itself or is even worth saving. There can be little doubt that the repeated
financial and economic crises and their aftermath demonstrated a funda-
mentally massive moral failure that has, in turn, caused a moral panic
that there is a systemic assault upon human dignity, trust, contracts, and
property, all of which constitute fundamental elements of the institutional
structure of societies.
The question pertinent to the debate is whether it is the system that
has morally failed or the people who operate in the system who have
lost their moral and ethical moorings. Compelling arguments have been
made that it is the system’s moral failure when it creates incentive struc-
tures that unleash greed, selfishness, and self-centeredness by removing
legal and regulatory restraints on behaviour of finance and business. In
 4 ETHICS OF IQTIS.ĀD 153

these circumstances, conditions are created for Gresham effect to allow

bad ethics to drive good ethics out of the market.
The early social thinkers of the seventeenth and eighteenth centuries
were fully aware of the very close ties between economics and ethics as
many of them actually studied both ethics and political economy. This list
includes Jeremy Bentham, David Hume, John Locke, John Stuart Mill,
and Adam Smith. These thinkers were concerned about the key ques-
tion of how one should live and what actions and conduct will be good
for society. It is worth noting that Adam Smith, considered the father
of Western economics, wrote his book The Theory of Moral Sentiments
some decade and a half before his other treatise The Wealth of Nations.
An argument has been made that the proposition discernible from The
Wealth of Nations regarding the workings of market capitalism must be
placed within the institutional framework of The Theory of Moral Senti-
ments, which provides the mooring for them. The decoupling of the two
books, in effect, cuts off economics and finance from the ethics of the
system envisioned by Smith.5
Many leading modern-era economists and thinkers have also voiced
serious concerns about the ethical void in prevailing economic thinking.
One proponent, Amartya Sen, argues that the distancing of economics
from ethics has impoverished Welfare Economics and also weakened the
basis of a good deal of descriptive and predictive economics and that
economics can be made more productive by paying greater and more
explicit attention to ethical considerations that shape human behaviour
and judgement. In other words, greater morality can lead to greater
efficiency and productivity.6
Sen (1987) further raises a very valid concern by questioning why
economics gradually shook off its early interest in ethical issues to
follow the problem-solving approach of engineering. Williamson (1993)
observes that traditional economic theory has developed an analyt-
ical framework or methodology that focuses on analytical thinking,
formalism, measurement, etc. which is considered unsuited to the analysis
of economic choices driven by personal feelings or emotions since such
decisions cannot be easily transposed to the straitjacket of quantitative
goals. One plausible explanation for such a phenomenon is that during
its early stages of development of economics as a social science, it could
not be left behind in formulating behavioural issues through quantita-
tive models. The intellectual appeal of physics and engineering during the
industrial revolution was too strong to be ignored. In addition, the idea
154 N. EL MAGHREBI ET AL.

that the limits on resources could be overcome by advanced production

means gave priority to tackling poverty over other considerations.7
Several important questions have been raised which need addressing
to understand the complex relationship between the spheres of ethics and
economics. First, does capitalism as a system need ethical conduct to over-
come its deficiencies? As pointed out by several prominent social scientists,
positive social externalities like trust, loyalty, justice in future dealings, and
truthfulness, which define the broad concept of “ethical behaviour,” are
very much needed to tighten the loopholes in the prevailing practice of
the market-based economic system.8
In practice, economists carrying out analyses of trust, honesty, fairness,
and altruism have worked within the framework of the standard model
for decision-making under uncertainty which is dominated by the quanti-
tative model with the objective of maximizing utility. Hence, economists
have used quantitative measures of satisfaction for the subject to assess the
benefits of concepts of being truthful, helping others, or comparing with
a reference group. This approach has been criticized for its many flaws,
e.g. in the expected utility framework, prudence may be interpreted as
risk aversion and thus not reflecting the reality.9
The capitalist system’s ability to spontaneously deliver the optimal
amount of ethical behaviour is questioned by many such as Arrow (1974)
who argues that nothing guarantees this. Given that ethical behaviour
has all the characteristics of a positive externality, basic economic theory
would suggest that the amount privately supplied will not be optimal.
Although everybody prefers to deal with honest, trustful, and compas-
sionate partners, under certain circumstances, there will be incentives for
individuals to create private benefits. Therefore, capitalism creates the
conditions for the emergence of ethical behaviour but does not guarantee
to reach the optimal level.10
In short, the view held by many inside and outside the profession
is that the problem with economics is its model of man; the Max U
approach robs the discipline of its “grand vision.” A number of Adam
Smith scholars see in the totality of his work a unified grand design.
The Theory of Moral Sentiments and Lectures on Jurisprudence provides
the moral rules, the institutional scaffolding11 within which the economy
described by The Wealth of Nations is embedded. It is compliance with
the rules prescribed by the “Author of Nature” that assures balance in the
economy. Recoupling the economy with the ideas in The Theory of Moral
Sentiments could help cure conventional economics of its flatness.12
 4 ETHICS OF IQTIS.ĀD 155

Research in various areas such as experimental, behavioural, cognitive,

and evolutionary economics, as well as neuroeconomics, has produced
evidence of the need to reform the concept of “economic man.” It is
also heartening that the inclusion of social capital, alongside labour, phys-
ical capital, and human capital, is no longer questioned. One wonders
how long it will take before “moral capital” is also introduced as another
element of the production function.13

Meta-Ethics of Iqtis. ād

It is essential that the epistemological roots of moral thoughts, rules,
beliefs, and motivation to act right or wrong defining meta-ethics of
a system are understood before any framework of ethics for a disci-
pline within that system is developed. In Islamic civilization, economics
was never divorced from religious ethics having roots in the Noble
Qur’an itself in which discussion of what is now known as Iqtis.ād or
economics is almost always combined with ethics. The most famous clas-
sical Islamic work with this term in its title, that is, al-Iqtis.ād fi’l-i ‘tiqād
by al-Ghazzālı, deals with faith and theology and not with what we call
economics today. From the point of view of traditional Islamic thought,
Iqtis.ād or economics as an independent science is not even considered a
legitimate intellectual discipline and is inseparable from ethics.14
Before any discussion on the ethics of Islamic economics or Iqtis.ād is
undertaken, it is necessary to develop an understanding of the Islamic
conception of the nature of man and his relationship with the Creator
seeking answers to questions such as who man is, what the purpose of
his life on earth is, what is his role in the society, and where he is going?
The foundation of ethics in Islam is based on core tenets such as oneness
of creation, role of man, upholding justice, preserving rights, and others
which are briefly discussed below.

Unity of Creation
One of the core and fundamental axioms of Islamic ideology is the belief
in the Unity and Oneness of the Creator (Tawhid), a corollary of which is
the unity of the creation, particularly the unity of mankind. The axiom of
Unity and Oneness of the Creator requires one to believe that all creation
has only one omniscient and omnipresent Creator—Allah (swt)—who
has placed man on this earth to pursue his own felicity and perfection.
156 N. EL MAGHREBI ET AL.

Further, it becomes incumbent upon each believer to believe that the

orbit of man’s life is much longer, broader, and deeper than the material
dimension of life in this world.
The axiom of the Unity is not only that the Creator is One, but that all
His creation constitutes a unity as well. The Qur’an calls attention to the
fact that despite all apparent multiplicity, human beings are fundamentally
of one kind; they were created as one being (nafs ) and will ultimately
return to Allah (swt) as one (nafs ) as well. The Qur’an says:

Neither your creation nor your resurrection is possible other than as one
united nafs. (31:28)

In a series of verses, the Qur’an exhorts man to take collective and unified
social action as well as to preserve and protect the collectivity from all
elements of disunity.15 These and many other verses order human beings
to work hard toward social unity and cohesion, construct their societies,
and preserve and defend that unity. Unity and social cohesion are so
central among the objectives of the Qur’an for mankind, that it can be
argued that all conducts prohibited by Islam are those that ultimately
will lead to disunity and social disintegration. Conversely, all righteous
conducts prescribed by Islam are those that lead to social integration,
cohesiveness, and unity. As a result, Islam is a call to collectivity and has
given collectivity an independent personality and identity, which will be
judged on its own merits or demerits separately from the individuals that
constitute the collectivity. The final judgement on individual actions will
have two dimensions, one as the individual and the other as a member of
the collectivity.

Model of Man16
The concept of “man” in Islam is different from the typical concept of
man assumed by the conventional economics. In Islam “man” is at once
the servant of God—Allah (al- ⊂abd) and His vicegerent on earth (khalı̄fat
Allāh fi’l-ard.) He is not an animal that happens to speak and think but
a being who possesses a soul and spirit created by God as the crown of
creation (ashraf al-makhlūqāt ).
The unique position of man among all created order stems from the
fact that he has been designated as Allah’s vicegerent on earth. This desig-
nation is a Divine trust which bestows on man particular responsibilities
 4 ETHICS OF IQTIS.ĀD 157

and accountability which are composed of developing his own potential-

ities and, concomitantly, struggling for the creation of a just and moral
social order on earth. To discharge the responsibilities with which he is
charged, man is provided with the material and extra-material means to
assist him in discharging his duties. First, he has been endowed with a
theomorphic nature composed of the powers of cognition, intellect voli-
tion, and speech to recognize and accept Allah (swt) as the Supreme
Creator. Through his intelligence and will, man can discern and then
choose between right and wrong, between just and unjust, between true
and false, and between the real and the illusory. Although this power of
discernment has been imprinted on his soul, to help man remember his
purpose and his responsibilities, he is provided with guidance and remem-
brance in the form of the Qur’an and with reminders in the persons of the
prophets as well as other human beings, to show him the “right path.”
Such a model of man incorporates a spiritual and moral framework
that values human relations above material possessions. In this way, man
is concerned about not only the material needs but also about establishing
a balance between its material and spiritual fulfillment as a human being.

Justice and Equilibrium

The concept of justice in Islam is the aggregation of moral and social
values, which denotes fairness, balance, equilibrium, and temperance. Its
implication for individual behaviour is, first of all, that the individual
should not transgress his bounds and, secondly, that one should give
others, as well as oneself, what is due. Such a concept of ⊂adl (balance
and justice) calls for overall harmony throughout the universe. The central
Islamic values are the welfare of society and socio-economic justice. Any
injustice perpetrated by individuals against other humans and against the
rest of creation is ultimately an injustice to the self. Allah (swt) Loves
justice; it is a central part of His Universal Love. Humans must live a life
that is just and must stand up to and eradicate injustice wherever they
find it.17

Preservation of Rights
Ethics in Islam can be best understood in light of principles governing
the rights of the individual, society, and state; the laws governing prop-
erty ownership; and the framework of contracts. Islam’s recognition and
158 N. EL MAGHREBI ET AL.

protection of rights are not limited to human beings only but encompass
all forms of life as well as the environment. Each element of Allah’s (swt)
creation has been endowed with certain rights and each is obligated to
respect and honour the rights of others. These rights are bundled with
the responsibilities for which humans are held accountable. The Shar-
i’ah offers a comprehensive framework to identify, recognize, respect, and
protect the rights of every individual, community, society, and the state.
Islamic scholars and jurists have defined and codified detailed principles
identifying these rights.18
The importance of being conscious and mindful of the rights of others,
human or nonhuman, and the significance of discharging the responsibil-
ities associated with such rights is reflected by the following saying of the
Prophet (pbuh):

So, give to everyone who possesses a right (kull dhi haqq) his right.

The term “right” (haq) denotes something that can be justly claimed or
the interests and claims that people may have been granted by Islamic law
or the Shari’ah. The majority of Shari’ah scholars and jurists hold that
similar to physical property, rights are also property (al mal ) because,
like physical property, which has beneficial uses and can be possessed,
rights also have beneficial uses and can be possessed. Rules defining prop-
erty rights in Islam deal with the rights of ownership, acquisition, usage
and disposal of the property. Any violation of these rules is considered a
transgression and leads to disruption in the social order.

Internalization of Virtues
A virtue is a good trait of character, so well-entrenched in an individual
that it influences which actions he or she wishes to take. In a deeper sense,
cultivation and internalization of any virtue has spiritual significance. It is
considered a meeting point between divine perfection and human life and
therefore stands midway between the Creator and moral imperatives. It
is virtue, as the ideal prototype, which gives men their scale of moral
values and their standards of behaviour, and virtue must take precedence
over morality, defining and determining it.19 Virtue has a twofold aspect,
relating to man himself and to man as a member of society. Like a tree,
virtue has a root and a trunk from which, however, there grows a branch
where the fruit ripens. The tree is now and always one and the same,
 4 ETHICS OF IQTIS.ĀD 159

but the branch and the fruit are to the tree what virtue is to the human
collectivity.20
The attitude of soul that would actualize virtues must needs trans-
form itself, on a lower, earthly plane, into norms and rules, and become
a set of standards serving as the functional aspect of morality. Virtue is
immutable, universal, absolute, and beyond space and time. On the other
hand, morality which is subordinate to virtue is the link binding earth
to heaven. If this link is lost, morality and law become a collation of
expedient rules with no underlying authority.21
Virtues-based ethical theory of Islam can be summarized simply as
internalizing virtues and set of rules specified by the Creator for the well-
being and welfare of humans.22 This set of rules and virtues applies to all
aspects of human life without any exception. The adoption and internal-
ization of these virtues ensure justice. Once the virtues are internalized
and behaviour becomes compliant with the rules, then morality, ethics,
and justice all are obtained. This is why Allah (swt) points to the role
of the Messengers and Prophets as to read His book of rules to people,
cleanse them, then teach them the wisdom behind the rules in the book
and then induce them to establish interpersonal justice (qist ).

Respecting and Protecting Environment

Axioms such as the unity of creation and preservation of rights humans
have the responsibility toward actions that could degrade or destroy the
environment. Gross ignorance as a leading cause of the ongoing envi-
ronment crisis, which scholars believe can be alleviated if the global
community begins to recognize the multiple states of being that are
possible within the environment.23

Virtue-Based Ethics of Islam

Virtue ethics theory—the study of moral character—has been an impor-
tant strand in moral philosophy for literally thousands of years but has
received little attention from contemporary economists.24 The ethicists
who rely upon a theory of virtue ethics have a rich history of philosophical
thought from which to draw, though theories of virtue with specifically
commercial applications are fairly recent.
The importance of virtues is recognized in almost all religions,
traditions, and writings of philosophers. For example, in his Summa
160 N. EL MAGHREBI ET AL.

Theologica, St. Thomas Aquinas (1225–1274), praised the intellectual

virtues of wisdom, justice, temperance, and fortitude. In the early years
of capitalism, Adam Smith (1759) recommended prudence, i.e. “wise
and judicious conduct,” as the “most ennobling of virtues.”25 Several
other modern thinkers—David Hume, Samuel Smiles, Robert Solomon,
and Deirdre McCloskey—base their writings on application of virtue to
economic activities.26 Discussion on ethics in Islam was dealt with exten-
sively since the early history of Islam and the discussion surrounded
around cultivating and internalizing virtues which would lead to ethical
actions.27
Throughout Islamic history, different scholars have compiled sets of
virtues based on various verses of the Qur’an and have identified virtues
that would constitute an ethical act.28 Emphasis was laid on internalizing
virtues individually or collectively such that the person or the collectivity
is a living manifestation of the virtues as opposed to doing them out of
necessity. One important early work is by Abu Ali ibn Mohammad ibn
Ya’qub Miskawayh (born 320 AH, died 421). His work is considered to
have influenced the thinking of leading thinkers such as Al-Ghazali and
Nasiruddin Tusi on this topic. Subsequently, the discussion mainly took
place while developing principles underlying legal axioms. For example,
scholars such as Al-Ghazālı̄ (2005) dealt with the ethics of earning and
living as he dedicated one full chapter in his classical work Ih.yā’ ‘Ulūm
al-Dın (Revival of Islamic Sciences).29 He identifies the virtues of justice,
truthfulness, and benevolence as the main ethical values that must be
internalized by agents in any economic activity.
Within an Islamic context, the term most closely related to ethics in
al-Qur’an is khuluq ( ) Arabic for moral character and trait, plural
akhlāq ( ) but there are other terms to describe the concepts of
morals or positive values such as khayr (goodness), birr (righteousness),
qist (equity), ‘adl (balance and justice), haqq (truth and righteousness),
ma’ruf (known, approved), and taqwa (piety). Allah (swt)30 uses the
same word khuluq in describing the Prophet’s (saas)31 behaviour and
character (al-Qur’an, 68:4). These virtues were fully manifested through
the character of the Prophet (saas), who is the role model to follow for
the believers. The Prophet (saas) is reported to have said that he was sent
for the purpose of perfecting the noblest of morals ( ).32 The
Qur’an (3:104) lays the broad foundation of the preferred character of
humans to (a) do what is good; (b) be righteous; and (c) forbid and
 4 ETHICS OF IQTIS.ĀD 161

refrain from what is wrong.33 After a broad classification of desirable

behaviour is prescribed, the Qur’an (49:13) states, “The noblest of you
in the sight of God are the best of you in conduct.”
Recognizing the importance of good character traits or virtues alone
is not sufficient unless one understands a subtle and strong relationship
between the intentions, actions, and outcomes. In the Islamic concept of
ethics, there is an emphasis on virtue, intention, action, and the outcome
as a basis for judging whether an act is ethical or not. Although inten-
tion or niyya of an action plays a critical role in determining the legal
aspect of the action, Islam recognizes the moral significance of inten-
tion in advocating sincerity of intent (ihlās.). Each virtue is judged in
light of the intention behind the practice ˘ of the virtue. The distinction
between having the intention to serve humanity and the betterment of
society as opposed to achieve personal gain could make an action ethical
or unethical.
The nexus of virtues, intention, action, and outcome defines a frame-
work of ethics that goes beyond legal or juridical ethics that focus
exclusively on actions. For this reason, Kamali (2011) emphasizes that a
jurist needs to go beyond the mere legal requirement of the validity of a
contract to include discussion on the higher objectives (maqāsid) of Shar-
i’ah to deem the contract ethical. This means going beyond the form and
including the substance in evaluating the validity of any contract. Zilio-
Grandi (2015) articulates that the Islamic conception of ethics dependent
on virtues covers a much broader discipline than the restricted juridical
understanding of the practice and, therefore, finds virtues behind every
example of good conduct and not merely behind behaviour answerable
to the Islamic law.
To summarize, Islam’s framework of ethics is chiefly concerned with
internalizing “good character traits,” which must be exemplified in
actions. Being is preferred over doing. The relationship between virtues,
intentions, and actions lays the foundation of ethical behaviour such that
virtue-based ethics have a logical priority over juridical ethics. Actions
driven by good intentions and in the spirit of the practice of virtues
would become ordinary behaviour that is not only ethical but is inter-
nally consistent in terms of intent, means, and outcomes. The result is
ethical outcome of actions in the best interest of the individuals, society,
and the whole creation. Islam’s conception of virtue-based ethics differs
from the conventional virtue ethic theory such that the axioms defining
meta-ethics provide all necessary ingredients with a complete incentive
162 N. EL MAGHREBI ET AL.

system and associated rules which ensure social and economic justice for
all.
Here is a brief discussion of key virtues worthy of possession by a
believer as advocated by Islam.

Truthfulness and Integrity

Being truthful and keeping one’s word are the core traits of a true human
being. This is further emphasized particularly in reference to an economic
agent who is truthful in his/her dealings.34 A true believer or Mu’min is
expected to be honest in dealings, have a strong commitment to his or her
word and speak truth. The ultimate case of commitment to truthfulness
is that one is expected to be truthful while giving evidence, even if it is
against himself or herself. An honest and truthful trader is given tidings
of blessings from the Creator while in the absence of these traits, any
economic activity would be devoid of any blessings.

Trustworthiness
Islam places a strong emphasis on trust and considers being trustworthy
as an obligatory personality trait.35 At a philosophical level, the role of
man on earth is to act as vicegerent or trustee of the Creator. The root of
the word for “trust” (amānah) is the same as that for “belief” (ῑmān), for
Qur’an insists that a strong signal of true belief is faithfulness to contracts
and promises. It makes clear that performing contractual obligations or
promises is an important and mandatory characteristic of a true believer.36

Honesty
The virtue of being honest in any economic or social transaction is the
very basic character trait of a believer. The Qur’an binds faith and action
through righteous deeds as inseparable. The Prophet (saas) explicitly
declared honesty an article of faith as he said that there is no faith for one
who lacks honesty.37 Honesty does not only come from being truthful
but requires avoidance of vices for worldly gains. There are several vices
that are discouraged greatly when one is engaged in business transac-
tions. Examples of such vices are purposefully deceiving others, engaging
in cheating and fraud, and willfully holding or manipulating information
 4 ETHICS OF IQTIS.ĀD 163

pertaining to the transaction. One full chapter of the Qur’an is dedi-

cated to manipulating weights and measures and giving short measures
such as the act of giving short measures while demanding full measures
from others. The chapter emphasizes the grave consequences of such
behaviour.38 The Qur’an also makes reference to the community of the
Prophet Shu‘ayb (sws), which was known for engaging in deceitful busi-
ness practices, especially the manipulation of weights. Consequently, the
community was destroyed for its persistence in deceit.

Goodness and Excellence ( Ihsān)

The virtue of Ihsān, meaning benevolence, goodness, and excellence, is
recognized in the Qur’an as well as in the sayings of the Prophet.39 The
concept of Ihsān is the embodiment of goodness and excellence in inter-
action and conduct at the personal, organizational, and societal levels. As
a projection of goodness, it practically and spiritually encompasses mercy,
justice, forgiveness, tolerance, and attentiveness. The concept of Ihsān is
much broader than simply being good to others but includes striving for
excellence in goodness so much so that one is willing to go beyond what
may be expected under norms to achieve the welfare of fellow humans,
the community, or the society.

Compassion and Generosity

Compassion (rahma) is a virtue that is greatly desired and admired.
Compassion is stressed in the Qur’an as the basic attribute of God and
all humans are expected to practise and exhibit it. Compassion calls for
showing mercy, kindness, and passion toward others in all economic and
social matters. One application of compassion is leniency in economic
transactions in case of hardship and feeling the pain and suffering of
others.40 Leniency is especially encouraged with respect to debtors who
are in difficult conditions provided that they made sincere efforts to meet
their obligations.41

Cooperation and Solidarity

Islam seeks to guide man to direct individual action and responsible
participation in economic affairs in a manner that commits him to soli-
darity and cooperation, resulting in a dynamic and growing economy.
164 N. EL MAGHREBI ET AL.

Thus, the individual is made accountable for the moral effects of his
social actions, including those in economic affairs, so that his own inner
personal-spiritual transformation and growth is bound to the progress of
the community.

Mindfulness of Vices or Unethical Practices

Virtues and vices are two faces of the same coin. Each virtue has implicit
an opposite in the form of a vice that is a negative character trait to
be avoided as it would lead to unethical behavior. For example, whereas
truthfulness is a virtue, deceitfulness would be a vice. Whereas internal-
ization of virtues is to be admired, the act of avoiding vices itself would
become a virtuous act.

Prudence and Humility42

The role of man as vicegerent (khilāfah) of the Creator carries a very
heavy responsibility to act with prudence because any violation of this
trust itself would be unethical. Prudence calls for restoring balance in
managing and utilizing resources to optimize the benefit and welfare
of all. Prudence is an essential virtue for those who are in the position
of leadership or management. Utilization of resources whether scarce
or abundant, requires careful management keeping in mind the well-
being of the community and the society. Wasting of resources is strongly
condemned in Islam and no one is authorized to destroy or waste God-
given resources.43 Several externalities including sustainable development
could follow if the vice of wasting resources is overcome. Whereas wasting
resources is condemned, having excessive control on resources and not
spending or utilizing for good causes is equally condemned.44
Humility is a valuable virtue considering that a person should be fully
conscious of the state of humans with respect to the Creator. Being
humble is appreciated and arrogance is considered the worst of vices.
Arrogance is particularly disliked due to it being the root cause of many
other evils. Spiritually, arrogance signifies man’s claim of having better
knowledge than the Creator and therefore, developing a sense of over-
confidence and superiority with respect to other humans. History is
witness to the destruction of civilizations or leaders due to arrogance.
 4 ETHICS OF IQTIS.ĀD 165

Ethical Dimensions of Iqtis.ād

Ethics are embedded in the core principles of Islam and each rule
prescribed has explicit or implicit ethical dimensions reflecting its adher-
ence to core values and virtues. The philosophical foundation underlying
the development of legal rules as well as its objectives (maqasid) is based
on Islam’s core virtues and values ensuring ethical outcomes. Following
the rules will set the standards of an overall ethical behaviour for individ-
uals, firms, communities, the state, and society. This defines a perimeter by
sanctioning immoral and harmful activities with the objective to achieve
the overall welfare of the society as a whole. The perimeter defined by the
rules becomes the limit beyond which ethics would be compromised. As
long as one is rule-compliant, there would not arise any question of any
unethical behaviour.
Whereas discussion of ethical dimensions of Iqtis.ād or Islamic
economics45 is a very wide topic and is covered by earlier discussion
in this volume in the contexts such as economic and social justice,
redistributive justice, production, exchange, distribution, consumption,
market rules, etc., in this section we limit the discussion to financial trans-
actions and impact on the financial system with the objective of avoiding
repetitiveness.

Ethics of Risk-Sharing
Two fundamental features of any financial transaction in Islam are the
prohibition of interest in any form and the prohibition of excessive
risk-taking (gharar). Each prohibition has embedded values and virtues
defining its ethical dimensions. For example, prohibition of interest
is characterized by the virtues of preservation of property rights and
condemnation of economic and social exploitation. In the case of prohi-
bition of excessive uncertainty and risk (gharar), a transaction can be
declared null and void in considerations of fairness and justice, as gharar
in a transaction may cause injustice and loss of property to one or both of
the parties.46 Prohibition of Riba (interest) and gharar (excessive risk due
to information asymmetry) leads to risk-sharing instead of risk transfer
in financial transactions which has system wide implications making the
system standing on sounder ethical grounds.47
Islam endorses risk-sharing as the preferred organizational structure for
all economic activities, and in fact the most comprehensive application of
166 N. EL MAGHREBI ET AL.

risk-sharing that goes beyond anything put forward by modern economic

theories. In addition to the prohibition of interest-based contracts, Islam
requires mandatory risk-sharing with the poor, the deprived, and the
handicapped based on its principles of property rights. Risk-sharing in
economic and financial transactions as advocated by Islam is embedded
with several virtues such as justice, fairness, inclusion, solidarity, protec-
tion of rights, etc., and is void of vices such as deceit, expropriation,
exploitation, and repression. The most meaningful human progress is
achieved when all distinctions on the basis of race, colour, income, wealth,
and social-political status are obliterated to the point where humanity, in
convergence with the Qur’anic declaration (Qur’an, 31:28), truly views
itself as one and united. It can be argued that implementation of Islamic
finance will promote maximum risk-sharing, thus creating the potential
for enhanced social solidarity.48
Here we provide select features of risk-sharing finance and argue that
risk-sharing in economic and financial transactions when practised with
other virtues would lead to an ethical and responsible financial system.

Risk-Sharing Prevents Exploitation

Interest-rate-based debt contracts are instruments of risk-shifting, risk
shedding, and risk transfer, which are considered exploitative when
compared to risk-sharing finance. Different rationales have been given for
the prohibition of interest but each reaches the same conclusion. Property
rights rationale of prohibition argues that in interest-based debt contracts,
the creditor acquires property rights claim on the debtor, equivalent
to the principal plus interest and whatever collateral may be involved,
without losing the property rights claim to the money lent, which violates
the property rights principles of Islam.49 Other rationales for the prohi-
bition of interest (ribā) include the prevention of economic exploitation
among the transaction parties, which is contrary to the core values of
economic and social justice. Since in Islam, money could only be a
medium of exchange or measure of account rather than a commodity,
paying rent for the use of money is not recognized unless money is
converted to capital subject to a return. Therefore, money-renting is
forbidden as it opens the door to potential exploitation and violates the
spirit of social justice because it shifts all the risk from the financier to the
borrowers and leads to imbalances in wealth and income distribution in
society.
 4 ETHICS OF IQTIS.ĀD 167

Efficient Allocation of Resources by Discouraging

Over-Financialization of the Economy
When risk transfer is combined with high leverage, the growth of interest-
based debt contracts and their pure financial derivatives—those with little
or no connection to real assets—outpace the growth of the real sector,
leaving the liabilities in the economy a large multiple of real assets needed
to validate them. This phenomenon is called “financial decoupling” or
“financialization” whereby finance is no longer anchored in the real
sector. The result is financial instability leading to frequent crises.50 Rein-
hart and Rogoff (2009) have cataloged the high frequency of historical
occurrences of crises in the conventional interest-based system and have
clearly shown that all crises, whether classified as currency or banking
crises, have been at their core a debt crises.
An interest-based or risk-shifting financial system invariably creates
a divergence between the real sector and the financial sector of the
economy. The conventional fractional banking system allows multiple
amounts of money to be created out of a given amount of bank deposits
received, facilitating and enhancing the process of debt creation. The
development of complex financial derivatives has resulted in credit expan-
sion outpacing the growth of the real sector of the economy. As layer
upon layer of securitization decouples the connection between the finan-
cial and real sectors, an inverted credit pyramid is created to the extent
that the liabilities of the economy become a large multiple of real assets
needed to validate them.51 Additionally, such a system is characterized by
mismatched maturity and values of the asset and liability structure of the
balance sheets of banks. These institutions borrow short and lend long.
When subjected to asset price shocks, the liability side of the balance sheet
is very slow to adjust, while the asset side adjusts rapidly. Both mismatches
create a potential for instability that can spread rapidly through contagion.
The result can be an increase in the frequency, contagion, and severity of
financial and economic crises.52
By prohibiting renting of money and encouraging trade financing,
financial instruments facilitate direct financing of the real economy and
therefore promote the allocation of resources to the real sector. Although
debt obligations are created in the financial system, such obligations are
the results of the sale or lease of real assets through the sale and lease-
based modes of financing. The objective is to impose a fiscal discipline
on individuals and firms to allocate financial resources to the real sector
according to their capacity to pay back. In this process, any financial
168 N. EL MAGHREBI ET AL.

transaction which has no social value and is speculative is removed from

the system so that the society as whole benefits from economic growth,
stable banking, and financial system, and preserves the loss of GDP due
to repeated crises.

Reduced Information and Agency Problems

An important performance dimension of risk-sharing finance, in general,
and of Islamic finance in particular, is whether it is more or less vulner-
able than conventional finance (which relies heavily on debt finance) to
principal–agent and informational issues. Agency issues arise because of
asymmetric information between agents (entrepreneurs) and principals
(investors) and the possibility that the agent’s utility maximization may
not maximize the utility of the principal. The question is whether Islamic
contracting (with risk-sharing) is better suited to solving this contractual
dilemma through its reliance on risk/reward sharing under conditions
where interest-based debt financing is prohibited. In the presence of infor-
mational problems such as asymmetric information (where only one side
of the contract, usually the agent, has information not available to the
other parties) there is a transaction cost as well as a cost of monitoring
the agent’s activities and the project(s) to be taken into account.
It could be plausibly argued that in Islamic contracts, asymmetric
information issues would be minimized. This assertion is supported by
the strict rules governing contracts, exchange, and trade. Such rules
with the exercise of virtues such as justice, truthfulness, and trust by
economic agents would reduce information asymmetry to a minimum.
These include the need for written contracts that stipulate terms and
conditions fully and transparently, the direct and unequivocal admoni-
tion that commitments to the terms and conditions of contracts must be
faithfully carried out, and the strong emphasis on trust, cooperation, and
consultation. Ethics governing market behaviour also create incentives—
both positive and negative—to enforce honest, transparent, and compliant
behaviour on the part of participants. Hence, risk-sharing contracts
designed under Islamic rules would mitigate informational problems
and could be better structured than interest-based debt contracts with
incentives to maximize both parties’ expected joint rewards.53
 4 ETHICS OF IQTIS.ĀD 169

Preserving Sustainable Growth and Welfare Through the Stability

of the Financial System
While, in our opinion, Islamic finance would be inherently stable because
it is structured on a foundation of equity and asset-based financing and
risk-sharing, conventional finance, a debt-and-interest-based system, has
proven to be unstable. Recent historical analysis has demonstrated that
all financial, banking, and currency crises are, at their core, a crisis arising
from debt.54 The main reason for the stability of risk-sharing system is
the fact that when production is financed entirely by risk–return sharing
or asset-based or equity finance, in the case of rapid changes in the price,
assets, and liabilities both move in the same direction simultaneously—
thus the financial structure adjusts in tandem on both sides of the ledger.
A number of analytic models have investigated the adjustment process and
have demonstrated the stability of Islamic finance in response to shocks
as well as the growth implication of such a system in closed and open
economy situations.55
An important feature of these models was the assumption of 100%
reserve banking based on the understanding of bank deposits as a
safekeeping operation firewalled from the risks involved in investment
operations, i.e. the so-called two-window model. This feature of requiring
banking depository institutions to hold 100% reserves against demand
deposits removes two sources of instability associated with conventional
interest-based, fractional reserve banking. The nonavailability of interest-
based financial transactions and 100% reserve banking eliminate the ability
of the financial system to create money out of thin air and impairs the
ability to leverage an asset base into much larger liabilities.56

Encourages Anti-fragility of Financial System for Sustainable

Economic Development
Because of four important characteristics: mutuality, commitment, hori-
zontal governance, and common good objective, a risk-sharing financial
system will be anti-fragile and less prone to frequent shocks. A risk-sharing
contract mutually commits the participants to share resources, risks, and
rewards. Because everyone has “skin-in-the-game,” the governance struc-
ture will, most likely, be horizontal rather than vertical providing agility,
flexibility, and greater accountability in the management and operations
of the venture subject of the contract. Moreover, all participants work to
gain the most out of the operations of the contract since they all stand
to gain from effective, efficient, and productive outcomes. Due to these
170 N. EL MAGHREBI ET AL.

characteristics, risk-sharing resolves the issues of moral hazard associated

with the principal–agent problem since the parties to the contract are
functioning as both. As well, in a risk-sharing system where financing
is being provided by shareholders, there is no incentive to withdraw
financing when there may be a potential downturn as there would be
in a risk-transfer system. Similarly, during the upside, financing would be
available commensurate with increased productive activities only, unlike
the risk-transfer system that provides greater credit during the boom and
withdraws credit during the bust phases of the business cycle.57 Hence,
risk-sharing reduces or eliminates the procyclicality of finance. Also impor-
tant is the fact that in the absence of a rentier class, risk-sharing finance
improves income and wealth distribution thus reducing inequality.

Fight Against Financial Repression

It is clear that the nexus of fractional reserve banking, credit creation,
debt creation, and leverage leading to financial crises is the cause of finan-
cial instability and fragility. The evidence for this process is the massive
debt build-up in the world economy estimated to be US$50 trillion
during the period of run-up to the 2007–2008 crisis. After the finan-
cial crisis of 2007–2008, many books and articles appeared focusing on
the dangers of “excessive debt”58 without realizing that the culprit is the
mispricing of financial resources attributable to the interest rate mecha-
nism. If there is an eternal proposition of economics, it is that mispricing
of any resource gives rise to disequilibrium and misallocation of that
resource. Excess debt is a clear indication that financial resources are not
priced to reflect their opportunity costs. Financial repression, the devia-
tion of the “administered” interest rate from the “market” interest rate,
leads to market distortions, thus discouraging saving, investment, and
economic growth. To the extent that neither the financial sector nor the
governments are paying the true opportunity cost of financial resources,
there is financial repression. It has existed and will continue to exist until
and unless reforms force true “liberalization” of markets where prices all
reflect opportunity costs.
Islamic finance addresses this mispricing and its consequent misallo-
cation of financial resources through its requirement of materiality that
financial resources must be used directly in production, a one-to-one
correspondence between the financial sector and the real sector of the
economy. This means that the rate of return to finance is determined
by its productivity in the production sector rather than predetermined
 4 ETHICS OF IQTIS.ĀD 171

by policy or the monopoly power of rentiers. Islamic finance rules out

maturity, value, and balance sheet asset–liability mismatches that create
the dynamics of volatility. The result would be an anti-fragile and robust
financial system by requiring risk-sharing among participants in transac-
tions each of which will have to have “skin-in-the-game.” Consequently,
financial resources receive their true opportunity cost in a market-
determined process where these resources are priced according to their
most productive use. This process puts an end to financialization, financial
repression, and excessive reliance on financial activities on speculation.

Enhances Cooperation Among Economic Agents

There is an important moral dimension to risk-sharing in Islam as
it strengthens social solidarity by enhancing cooperation among all
economic agents, which would also go some way in easing the coor-
dination problem in the economy.59 When the risk is spread by means
of risk-/reward-sharing contracts, closer coordination is forged between
the real and financial sectors of the economy. Risk transfer by means of
interest-based debt contracts, in contrast, weakens that linkage. Nobel
laureate Professor Robert Shiller, an advocate of risk-sharing, argues that
risk-sharing has much to contribute to the growth of economies and
to social solidarity. As an instrument for social integration, risk-sharing
enhances human interaction and brings humanity closer to unity by
requiring humans to share the risks of life with one another. In his words,
“Massive risk sharing can carry with it benefits far beyond that of reducing
poverty and diminishing income inequality. The reduction of risk on a
greater scale would provide substantial impetus to human and economic
progress.”60

Enhances Financial and Social Inclusion

Risk-sharing is a contractual or societal arrangement whereby the
outcome of a random event is born collectively by a group of individ-
uals or entities involved in a contract, or by individuals or entities in
a community. In a company, all shareholders share in the risk inherent
in the operations of the company. At the community level, a family or
a nation shares in the risks affecting the well-being of the family or the
nation. Therefore, Islam’s conception of risk-sharing is in part so designed
to promote social solidarity by encouraging finance to play an integrating
role in humankind. This form of finance would be inclusive of all members
of society and all entities, especially the poor, in enjoying the benefits of
172 N. EL MAGHREBI ET AL.

economic growth, and to bring humankind closer together through the

sharing of risk.

Business Ethics
The topic of business ethics is vast and has been dealt with throughout the
history of Islam. Discussion ranges from the ethics of work, ethical treat-
ment of workers, maintaining the ethical relationship between employees
and employers, business and customers, business and stakeholders, and
finally business and society at large including the environment. An exhaus-
tive discussion is available in the literature on this topic but here, we
would like to touch upon select aspects of the topic.61
Based on the set of virtues that are to be internalized by individuals,
businesses, and corporations, a framework of business ethics in Islam is
drawn. Whereas the character traits of individuals are easy to understand
and explain, the application of similar traits to businesses or legal entities
such as corporations is not straightforward. Businesses and corporates are
the sum of the character traits of the individuals managing and running
the businesses. There is a need to develop a character of business entities
that emulates the desirable moral character of individuals. Therefore, a
business entity should also strive for internalizing virtues of justice, preser-
vations of rights, commitment to contracts, transparency, and fairness.
Once businesses adopt such core virtues and avoid associated vices, their
practices and actions would be considered ethical.
The virtue of truthfulness is the cornerstone of conducting ethical busi-
ness where decisions are made in a transparent fashion and full disclosure
is made to internal and external stakeholders. A business transaction void
of transparency or willful misinformation may give the business monetary
benefits, but such a transaction will not only be considered void of any
blessings but also subject to accountability on the Day of Judgement. The
virtue of trustfulness would require both parties to a business transaction
to be transparent and have full disclosure on all aspects of the transaction
including the terms of the contract, quality of the product or services
subject to exchange, and the terms and the modes of payment. Truth-
fulness or transparency also enhances trust between the parties and in
the market and in all fairness, each party expects full transparency and
disclosure regarding the transaction.
Business ethics in Islam provide recognition and protection of the
rights of stakeholders to the business under the virtues of preservation
 4 ETHICS OF IQTIS.ĀD 173

of rights, honouring of explicit and implicit contracts, mutual trust, and

just treatment. These virtues define the ethical framework of acknowl-
edging stakeholders’ due rights and granting a voice in the governance
framework of businesses.62 A firm in the Islamic economic system can
be viewed as “nexus-of-contracts” whose objective is to minimize trans-
action costs to maximize profits and returns to investors subject to the
constraints that these objectives do not violate the property rights of any
party whether it interacts with the firm directly or indirectly. In pursuit
of these goals, the firm honours its obligations to explicit and implicit
contracts without impinging on the social order. This perspective incor-
porates the stakeholders’ role in its view of the firm and supports the
recognition and protection of their rights.63
Business leaders or managers carry significant responsibility on their
shoulders. First and foremost, a manager is expected to carry the best
of character or virtues in conducting business and be accountable to
superiors, subordinates, and stakeholders. Deteriorating values and ethics
of top business leaders witnessed during the financial crisis are testi-
mony to the importance of business leaders internalizing ethical behaviour
rather than focusing on personal interest and greed. A good business
leader ought to possess virtues of truthfulness, trustworthiness, striving
for excellence, being conscious of the rights of all stakeholders, and acting
in prudence.
A business leader should be truthful about financial statements, prod-
ucts being sold, and business practices. A business leader is expected
to reflect the virtue of trustfulness in his/her conduct. Such trust has
different dimensions. Whereas at one level, he/she is entrusted with the
responsibility of managing the wealth of shareholders, at another level,
internal stakeholders such as employees have put their trust in the expec-
tation of fair treatment. Thus, it becomes the responsibility of the leader
to maintain a fair balance and be conscious of the responsibility and
accountability of this trust.
Leaders who are fully conscious of their responsibilities, limitations,
and obligations as expected in Islam could never fall into a behaviour
that would promote arrogance, ignorance, greed, deceitfulness, non-
transparency, and delinquency. Islam governs the behaviour of leaders at
least no less stringently than those of individuals. Although each member
of society is expected to exhibit high moral values in the observance of
contracts and covenants, many scholars are of the view that these require-
ments apply with even greater force to the actions of leaders. Therefore,
174 N. EL MAGHREBI ET AL.

a breach of faith on the part of a leader is more heinous in its nature and
more serious in its consequence than a similar breach by an ordinary indi-
vidual. A business leader is to exhibit the virtue of humility rather than
arrogance.64 Arrogance is considered a vice to be avoided because arro-
gance could lead to impairment of judgement to the point that one could
violate the virtues of justice and preserving the rights of others. Arrogance
has been known to be the cause of downfall not only of businesses but
even of civilizations.
Finally, Islamic scholars have maintained that humans have the respon-
sibility toward actions that could degrade or destroy the environment.
As “regents,” or trustees, humans are ordered to act preemptively and
reactively to natural resource-related environmental events. Indisputably,
enjoining environmental protection and discouraging its degradation are
covered by this capstone rule of Islamic teachings. Therefore, it is incum-
bent on businesses in the Islamic perspective to ensure that their actions
do not lead to degradation of the environment and all efforts are made
to protect the environment either through individual business or collec-
tively through collaboration across the industry. Business leaders and
stakeholders including shareholders or owners should be proactive in the
preservation of the environment as expected by Islamic virtues.

Conclusion
Religions have much to contribute to righting the wrongs of conven-
tional economics by making available coherent and logically consistent
alternative postulates and models ensuring ethical outcomes.65 Based on
the moral philosophy of Islam aimed at promoting economic and social
justice and enhancing solidarity among communities, internalization of
rules and virtues of Islam determine all facets of an economy ranging
from the rules of market conduct, production, consumption, distribution,
and redistribution. Ethics embedded in the prescribed rules and principles
guarantee ethical outcomes in economic activities.
Risk-sharing in financial transactions and other forms of risk-sharing
in Islam have a rich ethical dimension that fills the gaps observed in
the prevailing economic system. Risk-sharing minimizes the exploitation
inherent in an interest-based or risk-transfer system, leads to efficient allo-
cation of limited resources, reduces typical information asymmetry and
agency problems in economic dealings, enhances cooperation and soli-
darity in the societies, and promotes financial and social inclusion. A rich
 4 ETHICS OF IQTIS.ĀD 175

framework of business ethics leads to strong governance, transparency,

and prudent leadership.

Notes
1. Morals, values, and ethics are related and are interlocking concepts.
Whereas morals refer to specific, articulated rules, values refer to the
underlying aesthetic valuation or determination of those rules, and ethics
refer to the practice of determining which rules should or should not be
adopted. For example, the moral “you should feed the hungry” could be
accompanied by the value “relieving suffering is good” and underpinned
by an ethics that suggests that “those who have more than enough should
share with those that do not have enough.” The three have something of
a symbiotic relationship, which can lead to confusing results if the purpose
of one is obfuscated.
2. Rizk (2008).
3. Vranceanu (2005).
4. Aragon (2014).
5. Mirakhor and Alaabed (2013).
6. Chapra (2008).
7. Vranceanu (2005).
8. Vranceanu (2005).
9. Vranceanu (2005).
10. Vranceanu (2005).
11. “Scaffolding” is used by Douglass North (1990) to signify the institutional
infrastructure (rules of behavior and their enforcement characteristics) of
an economy.
12. Mirakhor (2014).
13. Mirakhor (2014).
14. Nasr (2017).
15. The verses emphasizing the principle of unity include: “And indeed this
is my straight path therefore follow it—and do not follow other ways
because that will lead to disunity amongst you” (6:153) “Grab hold of
the rope of Allah collectively and do not disunite” (3:103) “Cooperate
with one another unto righteousness and piety and do not cooperate with
one another unto unrighteousness and enmity” (5:2).
16. See Nasr (1968). Available online at http://www.studiesincomparati
vereligion.com/public/articles/Who_is_Man-The_Perennial_Answer_of_
Islam-by_Seyyed_Hossein_Nasr.aspx.
17. Iqbal and Mirakhor (2017).
18. Imam Zayn al-Abidin’s treatise on rights, “Risalat Al-Huquq,” covers a
full spectrum of rights in Islam. For example, the right to one’s property
176 N. EL MAGHREBI ET AL.

(al-mal ) means that one takes it only from what is lawful and spends it
only on what is proper. The right of the associate (khalit ) is that one
neither misleads him, nor acts dishonestly toward him, nor deceives him.
The right of the adversary (khasm) who has a claim against one is that, if
his claim is valid, one gives witness to it against oneself. Ali Ibn al-Hussein
(1990).
19. Lindbom (1975).
20. Lindbom (1975).
21. Lindbom (1975).
22. Iqbal and Mirakhor (2017).
23. Nasr (1968) was one of the earliest modern-day scholars to warn about
the environmental crisis. His seminal work The Encounter of Man and
Nature: The Spiritual Crisis of Modern Man published in 1968 remains
one of the earliest writings on the environmental crisis by any conventional
or Muslim writers.
24. Bruni and Sugden (2013).
25. Vranceanu (2005).
26. Heath (2013).
27. Significant discussion and analysis of the positions of the Qur’an and the
Sunnah on morality and ethics were provided by the 4th Caliph Imam Ali
(AS) in his book, Nahjul Balaghah, and by his grandson, Imam Zayn al-
’Abedin (AS) in his book, Risalah al-Huquq (Treatise on Rights), which
also included the Risalah Al Huquq (Treaties on Rights) covering moral
and ethical behavior toward others according to the Qur’an and Sunnah.
See Ali Ibn Abu Talib (1973 [1988]) and Ali Ibn al-Hussein (1988).
28. For example, Ali (2014) quotes Al-Mawardi’s list of 10 virtues,
which included capacity to reason, sound faith, knowledge, forbear-
ance, generosity, adherence to accepted custom, righteousness, patience,
thankfulness, and flexibility as virtues that could deem an act ethical.
29. This classical work dedicated a full chapter on the ethics of earning and
living (Kitāb al-Ādāb al-Kasb wa al-Ma ‘āsh). Musa (2011).
30. Use of the term (swt) with Allah denotes “Subhanahu wa ta’ala” meaning
“Glory to Him, the Exalted” as a sign of reverence.
31. Use of the term (saas) with the mention of the Prophet denotes “Sal-
laAllah o ‘Alayhi wa Aalihi wa Salaam” meaning the graces of Allah (swt)
be upon him, and peace as sign of reverence.
32. Musnad Ahmad Ibn Hanbal, No: 8595.
33. Qur’an (3:104), “Let there arise out of you a band of people inviting to
all what is good, enjoining what is right, and forbidding what is wrong:
they are the ones to attain felicity.”
34. A well-known saying of the Prophet is that “the truthful merchant [is
rewarded by being ranked] on the Day of Resurrection with prophets,
veracious souls, martyrs and pious people” (Tirmidhi, No: 1130).
 4 ETHICS OF IQTIS.ĀD 177

35. Prophet (sws) was called a trustworthy ( ) person even before he was
chosen to be a Prophet by Allah (swt).
36. There are various verses on the virtue of being trustful. For example,
al-Qur’an (8:27) states “O you believers! Do not betray Allah and the
Messenger, nor knowingly, betray your trusts.” Also, see, al-Qur’an (2:58;
2:283; 12: 52; 23:1–8; and 42:107, 125, 143, 162, 178, 193).
37. Badawi (2013).
38. Qur’an (83:1–3) “Woe to those that deal in fraud. Those who, when they
have to receive by measure from men, exact full measure, but when they
have to give by measure or weight to men, give less than due.”
39. In a famous saying of the Prophet also known as hadith of Ihsān, when
asked “what is goodness?”, He replied: “that you worship God as if you
see Him, for if you see Him not, surely He sees you” (Rahman 1996).
40. The Prophet is reported as saying, “May Allah’s (swt) mercy be on him
who is lenient in his buying, selling, and in demanding back his money
[or debts]” (Bukhari, No: 1934).
41. Kamali (2011). The Prophet (saas) said, “Truly the best of people are
those who are best and most courteous in their demand for repayment.”
He takes a strong position that for those who take unfair advantage
and procrastinate in their repayment of obligations, their conduct is
tantamount to oppression (z.ulm) that falls outside the scope of lenient
treatment.
42. Qur’an (4:36–37) “God loves not the arrogant, the vainglorious (nor)
who are niggardly, enjoin niggardliness on others…”
43. Rice (1999). She gives the example of the 1st Caliph after the Prophet,
Abu Bakr, who instructed not to kill indiscriminately or to destroy vege-
tation or animal life, even in war and on enemy territory, as an example
of high ethical standards and the virtue of protecting the environment.
She argued that if these were the standards in wartime, there would be
no question of any waster or destruction during the time of peace.
44. Qur’an (6:141) “…and do not waste [God’s bounties]: verily, He does
not love the wasteful.”
45. For in depth analysis of ethical issues in Islamic economics see Iqbal and
Mirakhor (2017) and Mirakhor et al. (2020). For discussions of ethics
and Islamic economics during early emergence of Islamic economics in
modern times, see Naqvi (1981, 1993, 2003).
46. Kamali (2011). Gharar refers to elements of uncertainty in contracts that
expose one or both of the contracting parties to risk. Gharar can also
be caused by doubt or ignorance of one or both of the parties over the
existence, quality, deliverability, or other material attributes of the subject
matter of contract. The question whether risk taking in transactions
amounts to gharar often depends on its scale and magnitude.
178 N. EL MAGHREBI ET AL.

47. For in-depth discussion on risk-sharing aspect of Islamic economics and

finance, see Askari et al. (2010).
48. Mirakhor (2007), Iqbal and Mirakhor (2011), and Askari et al. (2009).
49. Mirakhor (1989).
50. Menkoff and Tolksorf (2001), Epstein (2006), and Palley (2007).
51. Mirakhor (2011).
52. Askari et al. (2012).
53. Khan and Mirakhor (1987), Haque and Mirakhor (1987), and Presley and
Sessions (1994).
54. See Reinhart and Rogoff (2009).
55. Khan (1987), Mirakhor and Zaidi (1988), Khan and Mirakhor (1987),
Mirakhor (1990).
56. Krichene and Mirakhor (2008) and Mirakhor and Krichene (2009).
57. See, Stiglitz (1988).
58. See for example, Turner (2015).
59. See Mirakhor and Askari (2010, pp. 158–170), and Mirakhor (2010,
pp. 8–19).
60. Shiller (2003).
61. For an in-depth discussion on business ethics, see Iqbal and Mirakhor
(2017).
62. Iqbal and Mirakhor (2004).
63. Iqbal and Mirakhor (2004).
64. See Qur’an (17: 36–37) “Do not be arrogant in one’s claims or beliefs:
And pursue not that of which thou hast no knowledge; for every act of
hearing, or of seeing or of (feeling in) the heart will be enquired into (on
the Day of Reckoning). Nor walk on the earth with insolence: for thou
canst not rend the earth asunder, nor reach the mountains in height.”
65. Mirakhor (2014).

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 CHAPTER 5

The Crisis of Civilization and the Problem of

Knowledge

Centuries of steady loss in economic power, social decadence, and polit-

ical instability have left the Muslim world in a pathetic state of misery,
anguish, and despair. The projection of the golden age of the world
of Islam in the Muslim mind is nothing more than a bit of memory.
For reasons not fully understood in the midst of intellectual wilder-
ness and confusion, it is perhaps easier to attribute the monumental
demise to external forces of suppression than to seek explanation from
internal weaknesses inhibiting coherent thought and action. From Malek
Bennabi’s perspective, colonization is a logical consequence of weak,
inept, and thus, colonizable societies. As a precondition to the alienating
process of colonization, colonizability is a state of affairs of a despiritu-
alized society in which knowledge is driven by confusion and scepticism
rather than wisdom aligned with the Islamic worldview.
It is irrational to overlook Muslims’ shortcomings in the rush to
attribute blame for the loss of economic power that made the colonial
years a reality. It is even easier to impart criticism, out of intellectual lazi-
ness, at Islam as a religion that embraces tradition, backwardness, and
anti-modernism. There is, however, more complexity to the truth that
needs to be addressed. There is no truth in the conclusion drawn from
the two premises that, first, the Muslim world is economically weak, and
second, that Islam is the prevalent creed, that therefore Islam represents

© The Author(s), under exclusive license to Springer Nature 183

Switzerland AG 2023
N. El Maghrebi et al., Revisiting Islamic Economics,
Palgrave Studies in Islamic Banking, Finance, and Economics,
https://doi.org/10.1007/978-3-031-41134-2_5
184 N. EL MAGHREBI ET AL.

an obstacle to economic development. There is no substance to this line

of argument, which ignores the fact that secularized Muslim minds are
disoriented minds incapable of organizing an ideal Islamic economy. It
is difficult, indeed, to hold Islam responsible for the outcome of secular
ideas and secular economic policies.
If the economic success in more distant history is attributed to strong
allegiance of Muslims to Islam, it is only fair to consider economic failure
as the result of weaker allegiance to the same truth. The response to a
crisis of civilization may, however, follow different modes of thinking. As
argued by Seyyed Hossein Nasr (1993, p. 119), there may be a reversion
to the authentic sources of knowledge, Al-Qur’ān and As-Sunnah. Alter-
natively, there may be attempts at reforming and reconstructing Islam to
accommodate change or to wait for the end of life on earth. In a sense,
it is a clear choice for Muslims between reverting to truth, eclipsing that
very truth, and subscribing to a conspiracy of silence. It is inconceivable
that Islam, a religion established in perfection by Allah swt, is deemed, by
secular minds devoid of basic Islamic knowledge, to be a creed of obscu-
rantism, preventing inquiry and reform and carrying the seeds of its own
destruction. It is impossible to provide viable solutions to the economic
problems in Muslim societies when the Islamic worldview is suppressed
or eliminated from Islamic economic thought. A secular mind is more
concerned about filling empty niches in an inherently unstable economic
system than in organizing an ideal economy.
The impossibility theorem proposed in the next chapter implies that
grafting secular ideas onto Islamic economic thought or Islamic values
onto conventional economics is not viable. The argument that an effec-
tive response to the crisis of civilization can only be achieved through
a sincere reversion to the truth with a paradigm shift toward Al-Iqtis.ād
principles drawn from Al-Qur’ān and the tradition of the Prophet (saa)
is not a narrative created in a vacuum. It is imperative that the founda-
tions of economic thought be shifted away from “scientific materialism,”
which dominates conventional economics, as well as the present universe
of discourse called Islamic economics. A sincere reversion to the spiritual,
intellectual, and social capital, which derives from the unique worldview
of Islam, is a pre-requisite to economic revival in Muslim societies. It is
possible to extract the principles for the organization of an ideal economy
and explain its institutional structure from Al-Qur’ān and As-Sunnah
using terminology that is familiar to minds versed in present economic
and legal systems in order to navigate the social pressures and maze
 5 THE CRISIS OF CIVILIZATION AND THE PROBLEM OF … 185

of rules and regulations. The use of conventional terminology together

with Arabic terminology for the sake of clarity in the explanation of the
Qur’anic vision of the economy should not be construed as an embrace
of conventional economics.

A Brief Biography of Muslim Philosophers

and Social Critics Over the Past Century
It is impossible, indeed, to avoid the problem of knowledge in any serious
attempt to understand the crisis of civilization. Reference is made in this
chapter to a group of philosophers and social critics who provided over
the past century and a half, articulate and analytic criticism of the Western
philosophical foundations of Economics. Dr Muhammad Iqbal has a trea-
tise specifically addressed to Economic Science (‘Ilm aI-Iqtis.ād), as does
Malek Bennabi in his work on the Conditions of Renaissance (Shurūt.
Annahdha) and Muslim in the World of Economics, among others.
This collection of seminal works summarizes the philosophical, analytic,
logical, and critical views of their authors as they address how Muslims
should return to Al-Qur’ān to find solutions to their economic problems.
Economic issues are also dealt with in detail in Sa’eed Nursi’s Magnum
Opus interpretation (tafseer) of Al-Qur’ān in Letters of Light (Risalat
Annur). Al-Shaheed Sayyid Muhammad Baqir as-Sadr provided the most
comprehensive view of the structure of the economy as envisioned in
Al-Qur’ān in Our Economy (Iqtis.āduna). Also, Dr Syed Muhammad
Naquib Al-Attas and Dr Seyyed Hossein Nasr provide further insights
with a collective emphasis on the notion that Al-Qur’ān is the fountain-
head of ideas for every generation to conceive and implement its vision
for future societies and economies. The consistent insights from these
scholars reinforce the notion that it is impossible to graft the Islamic and
secular worldviews one onto the other. In light of the critiques of conven-
tional economics and Islamic economics provided in previous chapters, it
is impossible to construct a consistent body of Islamic economic thought
with either the inadequate processes of secularization or Islamization.
In the greater scheme of an Islamic worldview, these approaches to the
development of Islamic economic thought are not sustainable.
Muhammad Iqbāl (1877–1938) whose poetry in Urdu, Arabic, and
Persian is rich in literary and intellectual content, is considered to be
among the greatest of the modern era. He is often referred to as Allama
Iqbāl with reference to his scholarship and status of poet par excellence,
186 N. EL MAGHREBI ET AL.

philosopher, social commentator, and politician, and to his revolutionary

intellectual work on the history of Islamic thought, economics, science,
philosophy of religion, and public policy. He used poetry as the main
medium to express his various insights and participated in philosoph-
ical and political discourse through letters to political figures of his
era. Another contemporaneous scholar Sa’eed Nursi (1877–1960), also
known as Wonder of the Age (Bediuzzaman), is considered as one of
the most influential scholars of Islam in modern Türkiye. Apart from his
deep knowledge of religious sciences, he also mastered positive sciences by
acquiring proficiency in mathematics, physics, chemistry, and astronomy.
Having lived through an age of successive geopolitical crises in Türkiye
and the world in recent history, and the rest of the world, Nursi articu-
lated an intellectual response to the transformative events of world war,
the disintegration of the Ottoman Caliphate, the birth of the Republic
of Türkiye, Western colonization of the Muslim world, bifurcation of
the world into communist and capitalist camps, and rise of the move-
ments of materialism and atheism. Such a unique period in human history
had a consequential effect on Nursi’s thought, writings, and approach to
education.
Malek Bennabi (1905–1973) is a social philosopher who is consid-
ered perhaps the first social scientist the Muslim world has produced
since Abdurrahman Ibn Khladun (1332–1406). His logical approach to
the study of human civilization focuses on the identification of universal
principles that govern the rise and fall of civilization. He is the first
to distinguish the concept of “colonizability,” which distinguishes the
internal factors of the Muslim world’s dilemma of backwardness from
the external factors related to colonization. His work written in Arabic
and French has not received the scholarly attention it merits until the
1980s, and more recent English translations of his treatise on civilization
have contributed to a better understanding of his significant intellectual
insights. Also, As-Shaheed Sayyid Muhammad Baqir as-Sadr (1935–1980)
is regarded as one of the most prominent writers on Islamic Philosophy
and Economics. The seminal treatises on Our Philosophy (Falsafatuna)
and Our Economics (Iqtis.āduna) and Lessons in Islamic Jurisprudence
extensive insights on the tradition and historical development of Islamic
literature as well as valuable original insights on these interrelated fields
of knowledge from one of the leading thinkers in the Muslim world over
the past century.
 5 THE CRISIS OF CIVILIZATION AND THE PROBLEM OF … 187

Finally, reference is made to the seminal work on Islam and Secu-

larism by Syed Muhammad Naquib Al-Attas, who introduced and defined
the concept of Islamization of knowledge as the liberation of man from
secular control over his reason to attain the original state of fitrah in
harmony with the state of being and existence. There are also insights
from Seyyed Hossein Nasr, another proliferate scholar in the history of
Islamic philosophy, science and civilizations. His collection of work on
Knowledge and the Sacred, Islamic Cosmological Doctrines, Islamic Art
and Spirituality, A Muslim’s Guide to the Modern World, and Ideals and
Realities of Islam, among others, is inclusive of deep insights that address
the intellectual challenges faced by Muslims in the modern world. It is not
difficult to identify the problem of knowledge as the common thread that
permeates across the seminal work of the above eminent scholars. From
the history of Islamic thought, theory of civilization, and Islamization
of knowledge, the central argument is that knowledge cannot be sepa-
rated from faith and true belief, and that Islam does not subscribe to the
secular dichotomy between the religious and profane, and between the
spiritual and temporal in its philosophy of life. Thus, from the perspective
of these earlier scholars and social critics, the disorder and chaos faced
by the Muslim world can only be the result of confusion in knowledge
about Islam and its worldview. As it is impossible to accommodate Islam
within the ideals of secular minds, or to graft the Islamic worldview onto
secular ideas, it is imperative to reaffirm the nature of knowledge and its
true sources, in order to project justice in all spheres of responsibility and
rebuild the socio-intellectual foundations of Islamic civilization.

The Determinants of Shift in Economic Power

Malek Bennabi (1903–1973) argues that Ibn Khaldun’s theory of the rise
and fall of civilization is inspired by the psychological factor of solidarity
or group feeling (“asabiyyah”). Even as the dimension of civilization
seems to be reduced to the scale of dynasty and royal authority, the
transitory aspect of civilization reflects the inner workings of organic
phenomena. The cyclical aspect of civilization is the result of the shifting
dynamics based on the determinants of economic and the opposite factors
of regression and decadence, which represent the force of inertia of
any civilization. In his arguments about the notion of cycle, Bennabi
(1954, [2006], p. 7) defines civilization as a “whole whose phases are
not independent: in a biological process these are the causes of life and
188 N. EL MAGHREBI ET AL.

death—internal contradictions—that lead the being to its full develop-

ment and then to its final disintegration. In the social order this fatality
is limited or rather conditioned, because the direction and the term of
evolution depend on the psycho-temporal factors on which an organized
society could, in a certain measure, act by regulating its life and pursuing
certain ends in a coherent manner.”
Thus, as noted also by Ibn Khaldun (pp. 112–113), the evolution
toward the making of royal authority and power depends on leadership
based not only on solidarity or group feeling, but also on strong commit-
ment to moral values such as faithfulness to obligations, and respect of
religious law. In contrast, movement in the opposite direction toward
loss of power, influence and decadence depends on moral weakness and
commitment of sins and acts of transgression. The complete loss of polit-
ical virtues is conducive to the destruction of royal authority, providing
thereby an opportunity for others to cultivate new group feelings based
on respect for religious law and the promotion of justice. It is, therefore,
the emergence of true or false leadership and moral values that determines
the direction of movement toward the establishment or demise of a polit-
ical order. Similarly, with respect to the social and economic order, it is the
virtues and vices that leadership reflects in the exercise of authority and
promotion of justice or injustice that regulate social and economic life
and determine the paths toward social harmony and economic prosperity
or social instability and economic decadence.
During the critical phase of disintegration and decadence, the scale of
values is, according to Bennabi (1954 [2006], p. 9) “reversed, and frivoli-
ties, then, appear as great things. And when such reversal takes place,
the social edifice not being able to hold out solely on props of tech-
nique, science and reason must collapse, because the soul alone allows
humanity to soar. When the soul makes default, it is the fall and the deca-
dence, for all that loses its ascending force, could not but descend, pulled
down by an irresistible force.” As a means of material development rather
than a finality, science does not constitute a substitute for conscience. It
is the soul that determines the direction of movement, and the forces
of economic power, regression, and decadence should be understood in
terms of their relationship with “this unique source of human energy, that
is the faith.” The decay and fall of civilization become inevitable when
the inner workings of the soul are weakened. Bennabi (1954 [2006],
p. 92) further argues that as soon as the necessary equilibrium between
spiritual and material forces and between finality and causality is lost in
 5 THE CRISIS OF CIVILIZATION AND THE PROBLEM OF … 189

one direction or another, vertical fall becomes a certainty. These equilib-

rium conditions imply that the “Muslim civilisation lost its equilibrium
the moment it ceased to observe the just relation between science and
conscience, between the material factors and the spiritual order, thus,
foundering in pure metaphysical anarchy and maraboutic chaos that have
formed its decadence.” The relics of Muslim civilization attested by the
remains of villages, monuments, and architectural sculptures are, indeed,
reflective of stregnth of faith followed by weakness. It is not possible for
Muslim societies therfore, to aspire for civilizational renaissance without
a reversion to the unique source of knowledge and strength.
Faith is the catalyser of human action, but when it loses its significance
and is rendered irrelevant to the determination of individual action and
to the promotion of justice, it ceases also to promote civilization. It is the
end of a cycle of bio-historical synthesis. Faith, as argued again by Bennabi
(1954 [2006], p. 10), “becomes the faith of the devotees who withdraw
themselves from life, fleeing from their duties and responsibilities like all
those who, since Ibn Khaldun, have taken refuge in marabutism.” Social
escapism, it is argued, cannot solve the civilizational problems of Muslim
societies because it renders all social forms of interaction static. If faith
is regarded as a means to achieve individualistic spiritual uplifting only
by repudiating worldly life, it ceases to serve as the catalyser of social
values, and human interaction. The conditions for renaissance a renais-
sance, thus, become increasingly difficult to achieve when the necessary
equilibrium between spiritual and material forces is lost, and the linkage
between finality and causality is severed. As argued by Seyyed Hossein
Nasr (2000, p. 17), “Islam, in fact, being the religion of Unity, has never
distinguished between the spiritual and temporal or religious and profane
in any domain.” Secularism is incompatible with Islam, a belief system
based on Unity which does not recognize the dichotomy between the
religious and the profane, and consitutes an ideal way of conduct in all
spheres of life without exception.
It can be also argued that faith has been also at the foundation of
Western civilization, which developed as a cycle of bio-historical synthesis
based on sociological heredity similar to biological inheritance. It is apt
to quote here the arguments by Al-Attas (1993, p. 134), who writes that
Western civilization is a “civilization that has evolved out of the historical
fusion of cultures, philosophies, values and aspirations of ancient Greece
and Rome; their amalgamation with Judaism and Christianity, and their
further development and formation by the Latin, Germanic, Celtic and
190 N. EL MAGHREBI ET AL.

Nordic peoples. From ancient Greece are derived the philosophical and
epistemological elements and the foundations of education and of ethics
and aesthetics; from Rome the elements of law and statecraft and govern-
ment; from Judaism and Christianity the elements of religious faith; and
from Latin, Germanic, Celtic, and Nordic peoples their independent and
national spirit and traditional values, and the development and advance-
ment of the natural and physical sciences and technology which they,
together with the Slavic peoples, have pushed to such pinnacles of power.”
Thus, the importance of faith, based on Judaism and Christianity, in
the rise of Western civilization is undeniable. It is further argued that
Islam also has contributed significantly to Western civilization in the
fields of knowledge, rational thinking, and scientific inquiry. At present
however, the foundations of knowledge and faith that define the equilib-
rium conditions of civilization are inherently unstable. Under the present
conditions, it is impossible for the certainty of religious knowledge and
faith to be fused with the speculative nature of secular philosophies. It
is impossible to conflate evolutionary and conflicting doctrines without
creating a dualism in worldview that obscures the finality and purpose of
Islamic and secular civilizations. It is also noted that the element of faith,
which played a role in the emergence of Western civilization, started to
fade away during the period of the European Renaissance in the fifteenth
and sixteenth centuries. It was a period that marked a growing disinterest
in Christianity as a revealed religion, and it was followed by three centuries
of Enlightenment, where religious faith was eventually suppressed by posi-
tivist faith, scientism, and a blend of secular philosophies that replaced
faith with reason.
Given the insatiable quest for economic power and nostalgic desire
to revive old civilizations, it is the moulding of faith and sociology of
knowledge that determine the fate of such endeavours. From the purely
sociological perspective, civilization can thus be regarded, with refer-
ence to Bennabi (1954 [2006], p. 7), “as a numerical series following
its course in similar but non-identical terms. Thus appears an essential
notion of history: the cycle of civilisation. Each cycle is defined by certain
psycho-temporal conditions proper to a social group: it is a ‘civilization’
in these conditions. Then the civilisation migrates, shifts its abode, trans-
fers its values in another area. It thus perpetuates itself in an indefinite
exodus, through successive metamorphoses: each metamorphosis being a
particular synthesis of man, soil and time” (italics in original). Civiliza-
tion is conceived as a numerical series in the sense that it follows certain
 5 THE CRISIS OF CIVILIZATION AND THE PROBLEM OF … 191

patterns of evolution in transitory stages. It may collapse in certain places

over a certain period of time only to migrate toward alternative spaces
with different psycho-temporal conditions and historical fusions of faith,
philosophies, values, and cultures. Thus, the problem of each society is
intrinsically that of its own civilization, which cannot be advanced by
simply imitating or borrowing ideas from the cultural milieu of another
civilization. As noted by Sherif (2018, p. xx), Bennabi’s theory of civiliza-
tion is not about the accumulation of things but about the construction
of an edifice and architecture with the temporal interaction of material
resources and ideas. The idea that serves as a catalyst to the civilizing
process is the product of the creation by the society of its own means to
meet its own ends, and achieve its own civilisational aspirations. Given
these conceptual constraints, it is impossible for a civilization to shift
abode across societies that share the same ideas, same psycho-temporal
conditions, and same worldviews.
Thus, the forces responsible for the rise and fall of states and dynas-
ties, and for the emergence, regression, and decadence of civilizations
are not limited to sociology and politics alone. The cyclical phases are
the product of spiritual, philosophical, and material conditions. Since the
metamorphosis can be regarded as a synthesis of man, soil, and time, the
problem of civilization poses the problems of man, soil, and time, respec-
tively. It is, however, the fundamental problem of man that determines
the commencement and end of the civilizing process. It is man’s thought
and action that determine the migration of civilization and its shift in
abode from soil to soil as well as its historical movement through time.
It is impossible to understand the cycle of civilization, and patterns in the
numerical series without considering the problem of man, which is intrin-
sically the problem of knowledge because man’s thoughts and actions
emanate from the authoritative worldview that projects the vision of ideal
civilization.

The Problem of Knowledge

and Intellectual Challenges
The problem of man is a problem of knowledge because it is the knowl-
edge that shapes thought, which in turn drives both individual and
collective action across time and space. The danger is that thought, which
has the power to inspire action, can also inhibit and paralyze it. The infu-
sion of alien concepts into the Muslim mind, which result in confusion
192 N. EL MAGHREBI ET AL.

and error in knowledge, imply also the severance of the relation between
faith in the realm of the heart and its outward confirmation and mani-
festation in the action of the body. As argued by Malek Bennabi (1954
[2006], p. 45), “the absence of a direct relation between thought and
action implies blind, incoherent action and results in a subjective apprecia-
tion of facts—in their over-estimation or under-estimation. In the modern
Muslim world, it has given birth, on the one hand, to a psychosis of the
‘easy thing’ that leads to blind action, and on the other, to a psychosis
of the ‘impossible thing’ that paralyses action.” Thus, part of the reason
for the decadence of Muslim societies is the dangerous thought that it
is impossible to do anything because of ignorance, that it is impossible
to become aware of the state of ignorance because of poverty, and that
it is impossible to overcome this dilemma because of colonialism. It is
the internal psychosis of colonizability that renders the external forces of
colonialism and the state of colonization inevitable.
A consistent argument is also presented by Sa’eed Nursi, whose
primary concern, as noted by Yucel (2017), by Voll (1999) and Yucel
(2017), among others, was with the conditions for renewal and reform
based on the analysis of the internal causes the decline of the Muslim
world rather than external factors such as colonialism. Also, according
to Al-Attas (1993, pp. 104–105), it is the “internal elements whose
germs were evident in the early periods of Islam,” that constituted the
principal causes of the gradual decadence of the Muslim world, which
rendered Western colonization possible. It is the status of colonizability
that allowed the colonization of a significant part of the Muslim world
since the seventeenth century, and continues to prevail with the projection
of Western worldview and ideologies in the Muslim mind. The prevailing
confusion of knowledge in the Muslim mind is the natural outcome of
educational systems that perpetuate the loss of adab, the discipline of
mind, body, and soul, and inculcate secular ideas that suppress Islamic
thought and action.
The Muslim world is indeed, according to Malek Bennabi (1954
[2006], p. 40), a mixture of inherited residues from the post-al-
Muwahhid epoch, Reformist and Modernist currents. Life, he argues,
“does not analyse; it integrates. When the elements available are compat-
ible and assimilable, it makes a synthesis of them; if they are heteroclite
and disparate, it makes of them a syncretism, an accumulation, a chaos.”
Similar arguments about the impossible synthesis of conflicting world-
views are presented by other eminent scholars, such as Seyyed Hossein
 5 THE CRISIS OF CIVILIZATION AND THE PROBLEM OF … 193

Nasr (1993, p. 125), who notes that virtually all Western schools of
thought, philosophies, and ideologies of the past centuries, including
egalitarianism, existentialism, evolutionism, positivism, progressivism, and
socialism, were endorsed to one extent or another, by scholars and
followers in the Islamic world. There were even attempts at synthesizing
some elements of Western thought with the Islamic worldview. “Many
elements drawn from leftist ideologies have penetrated into the Islamic
world in the garb of expressions taken from the language of the Quran
and Hadith as well as of classical Islamic thought. Some have even tried
to transform Islam as a religion into a leftist ideology.” It is clear that
given the inorganic nature of these currents of secular ideologies, it is
impossible to project them onto the unique worldview of Islam.
The problem of knowledge is further complicated by the wrong belief
held by some reformists and modernists that Islam and modern sciences
are incompatible. It was mostly the rise of positivism, materialism, and
secularism in the nineteenth century in the Ottoman Era that drove some
Muslim scholars to interpret Islamic disciplines from the perspective of
Western rationalism. Cognizant of the importance of the philosophical
challenges, Sa’eed Nursi demonstrated that Islam and modern sciences
can be indeed consistent with each other through a coherent under-
standing of the foundations of belief. As argued also by Al-Attas (1993,
p. 120), it is imperative to discern the Qur’anic meaning from the Western
concept of rationalism. As the rationalism derived from the Western
concept of ratio, is different from the Qur’anic concept of the intellect
al-‘aql, which functions in accordance with the spiritual organ of cogni-
tion al-qalb, it is obvious that the attempt by modernists to “‘rationalize’
Verses of the Holy Al-Qur’ān they find convenient to their purpose in
line with the theories and findings of modern science,” is an exercise in
futility.
From the Islamic perspective, modern movements aimed at reforming
the divine law rather than human society constitute also an anomaly,
according to Seyyed Hossein Nasr (2000, p. 89). Also, Al-Attas (1993,
p. 112) contends that “not a single one of the so-called Modernists
and Reformers of our times, including those who masquerade as ’ulama’
barely reaches the lowest level of the great ’ulama’ of the past and men
of spiritual discernment who contributed so much to the knowledge of
Islam and the Islamic world view.” Indeed, a secular mind unable to
comprehend the essence of the Islamic worldview and the immutable laws
that bind thought to action cannot be expected to “reform” individual
194 N. EL MAGHREBI ET AL.

thought based on the sincerity of purpose and conscious action. As argued

by As-Sadr (1982 [1994], p. xxvii), it is rather the firm belief that “Islam
is the expression of its very self, the sign of its historical personality and
the key to its former glory” that provides the basis for intellectual efforts
to fight backwardness and promote development. These efforts can only
be successful “if the method is adopted from Islam and if a framework for
the starting point is taken from the Islamic system.”
Thus, the advocacy of early Muslim philosophers and social critics for
the modernization of Islam should not be confused with the attempts
by some modernists at the modernization of Islam. The manifest failure
to draw a clear line of distinction between these inherently contradic-
tory processes is indicative of the severity of the crisis of knowledge in
the Muslim world. As noted by El-Mesawi (2008, p. 250), “Bennabi
ascertains, ersatz ideas, whether advocated in the name of authenticity
or borrowed from the cultural world of another civilization in the name
of modernization, are no more than carriers of a specific genre of viruses
that ultimately erode the very moral, cultural, and material foundations
of a society.” Indeed, Islam rejects secular ideas because they are alien
to its worldview in every respect, but the Muslim world has succumbed
to a secularization process that produced, over many centuries, a state of
confusion and error in knowledge. In the aftermath of the demise of the
Muslim North-African Berber Caliphate of Al-Muwahhidun, it is a post-
Almohad mind that emerged, a mind that suppresses the Islamic world-
view and cannot grasp “anything except what is futile, absurd and even
deadly.” It is a mind where dead ideas attract deadly ones that poison the
true faith, and inhibit purposeful thought and action.
A belief that knowledge is essential to the formation of thought
implies also belief in sacred knowledge from the authentic sources of Al-
Qur’ān and Prophetic tradition and in the immutability of the principles
contained therein. It is important to guard against the desacralization
and demeaning of Islamic teachings through the agency of semantic
gymnastics, fickle principles, and mutable concepts from volatile secular
ideologies. As argued again by Bennabi (1954 [2006], p. 41), the
meaning of things can be either the one we attribute to them, or that
given to us by themselves, or that others might want to give us. And the
danger is that the meaning of Qur’anic concepts conveyed to us through
divine revelation and demonstrated through Prophetic tradition lose their
significance. It is difficult to develop Islamic economic thought, which
defines the guiding principles for the organization of an ideal economy,
 5 THE CRISIS OF CIVILIZATION AND THE PROBLEM OF … 195

on sound basis if it becomes captive to the meaning of things given to us

by others rather than that derived directly from Islamic sources of knowl-
edge. When historical and relativist interpretations of the meanings of
truth and justice take precedence over their meaning in Al-Qur’ān, the
fountainhead of true knowledge, then it is falsehood and injustice driven
by inconsistent thought and action that are bound to prevail in all aspects
of social and economic life.
Earlier insights from Muhammad Iqbāl reflect similar concerns about
the assimilation of heteroclite elements resulting in syncretism and chaos.
He argued that the movement toward rationalism in Europe had become
the greatest hindrance to man’s ethics because its idealistic systems were
built on pure reason, devoid of the “fire of living conviction which
personal revelation alone can bring.” For Muslims, on the other hand,
the “spiritual basis of life is a matter of conviction for which even the
least enlightened man… can lay down his life.” Thus, man’s ignorance of
his role in the universe and the potentialities within lead to certain fears
which hinder his spiritual and ethical progression. He firmly believed in
making man conscious of his self and channeling this realization into a
source of power free of fear. The highest stage of man’s ethical progress is
reached when he becomes absolutely free from fear and grief. The object
of Islam is to free man from fear and instead transform him into a unit
of force with the will to struggle through ethical progress to attain the
highest spiritual levels. Ultimately, this must be the object of all human
activity.
The problem of knowledge, as argued by Al-Attas (1993, p. 107), is a
problem of loss of adab toward Allah swt because knowledge should be
approached, like all other acts of worship ‘Ibādāt, with complete humility,
caution, and reverence. Thus, adab is a precondition of knowledge, and
the loss of adab is conducive to confusion and error in knowledge.
Indeed, as a result of the residues of incoherent secular currents and
state of syncretism and chaos in knowledge, “many important concepts
pertaining to Islam and the Islamic world view have lost their transparency
and have become opaque” (Al-Attas 1993, p. 127). The corruption of
knowledge results also in loss of justice, which is the cause of the social
decadence and demise of Muslim civilization. It is the emergence of false
leaders who lack the basic understanding of the nature and purpose of
knowledge, and who subscribe to secular conceptions of justice, that is
conducive to the perpetuation of ignorance and injustice, and thus, the
crisis of civilization.
196 N. EL MAGHREBI ET AL.

Given the nexus between knowledge and adab, it is difficult to address

the problem of knowledge without structured educational systems that
inculcate adab and correct knowledge to future generations. Kenneth E.
Boulding (1983, pp. 9–10) argues that it is important to understand the
dynamics of the “noosphere,” which reflects the quantity and quality of
human knowledge. Since human knowledge is confined primarily in the
minds of human beings subject to death or “final denouement” as biolog-
ical organisms, it is imperative that education facilitates the transfer of
knowledge “from decaying older minds into decaying younger ones. This
means that the noosphere itself, as a total body of knowledge, does not
have to decay.” The inevitable question arises as to whether the imparting
of knowledge should be based on secular ideologies or on a hierarchy of
knowledge that gives primacy to sacred knowledge, which considers both
the spiritual and material life, and to adab, which in the words of Al-
Attas (1993, p. 150) represents “the spectacle (mashhad) of justice as it
is reflected by wisdom; and it is the recognition and acknowledgement of
the various hierarchies ( mariitib) in the order of being and existence and
knowledge, and concomitant action in accord with the recognition and
acknowledgement.”
The purpose of education, thus, is not to inculcate any form of knowl-
edge, but to inculcate adab because “the purpose of seeking knowledge is
to inculcate goodness or justice in man as man and individual self.” In this
respect, Iqbāl also questioned the value and effectiveness of conventional
approaches to education and prevailing systems which he considered to
be not conducive the required character building or transformation to
achieve goodness and progress. He cast serious doubts on the role of
education in shaping the ethics of man and collectivity. He concluded that
“the ethical training of humanity is really the work of great personalities,
who appear time to time during the course of human history. Unfortu-
nately, our present social environment is not favorable to the birth and
growth of such personalities of ethical magnetism.” Jalal (2009) notes
that consistent with later arguments by Amartya Sen about the Capability
Approach, Iqbāl focused on the notion that an education system that
has no bearing on capacity building and the inculcation of Islamic moral
values, is absolutely worthless. It is further argued that an educational
approach oriented toward capability-building should seek the develop-
ment of good character and avoid the treatment of human beings as
machines.
 5 THE CRISIS OF CIVILIZATION AND THE PROBLEM OF … 197

Since the principal objective of education in Islam is to nurture a man

of intellectual and spiritual discernment, Sa’eed Nursi developed also his
own methods of teaching by combining positive sciences with Islamic
disciplines. According to Nursi, wisdom stems from the combination of
the conscience, which is illuminated by the religious sciences, and the
mind, which is illuminated by positive sciences. Ayub (2020) notes that
Nursi “believes that knowledge, education and faith form not only the
prime ingredients for renewal of civilization but the integration of the
three provide the platform for development and perfection. This linking
of knowledge (ilm) with faith (iman) forms the core of Nursian model of
education system.” Thus, Nursi’s methodology of teaching reflects a firm
belief that educational reform is the principal remedy for the ongoing
ignorance and backwardness of the Muslim community, and the viable
solution to the economic social, and political problems faced by the
Muslim world over the past centuries.

Consistent Perspectives on Economic

Development and Economic Justice
Since the problem of civilization is not so much the problem of soil or the
problem of time, as the problem of man, it is important to comprehend
the nature of man’s knowledge, which drives thought, and ultimately
defines action. The three essential resources and factors of civilization
are available in all societies in the world, but it is the conception and
methodological approaches to solving these interrelated problems that
differ. Man’s action on soil and organization of time, whether on an indi-
vidual or collective basis, provides the foundations for social and economic
activities. As noted by Benlahcene (2011, p. 43), Malek Bennabi regards
man as the primary device of society among the three structural elements
of civilization. He writes that for Bennabi, “Man is the central force in
any civilizing process and without him the other two ingredients are of
no value. Man is the driving force behind development and progress or
backwardness and decline.” Thus, economic action can only be driven by
economic thought, which is itself the product of knowledge. Since knowl-
edge is not neutral, as argued by Al-Attas (1993, p. 133), it is imperative
to derive the guiding principles for the organization of an ideal Islamic
economy from the true sources of knowledge rather than from Muslim
minds dominated by secular worldviews.
198 N. EL MAGHREBI ET AL.

Thus, a paradigm shift toward Al-Iqtis.ād, a discipline concerned with

the derivation of the organizing principles of an ideal economy, derived
from authentic sources of Islamic knowledge, Al-Qur’an and As-Sunnah,
is warranted. A shift is imperative because alternative approaches to the
development of Islamic economic thought suffer from the confusion and
error in knowledge derived from secular worldviews. As with conven-
tional economics, there are several strands of methodological approaches
within the universe of discourse called Islamic economics. The ques-
tion inevitably arises as to whether the Islamization of Economics, which
involves a synthetization of Islamic Maqasid or Islamic Morality with
Economics, offers a serious path to sustainable economic development.
There is compelling evidence from earlier scholars that the vision for an
ideal economy is not the product of imagination but certainty in the
authentic sources of knowledge. There are, however, residues of inco-
herent secular currents, partly reflected in the universe of discourse known
as Islamic economics that slip into syncretism and chaos. As it is impos-
sible for heteroclite and disparate parts to produce a consistent body
of knowledge, Muslim societies with a genuine desire to reorganize the
economic system and sow the seeds of lasting renaissance, should seek
knowledge within an unperturbed universe of Islamic knowledge to redis-
cover the guiding principles of Al-Iqtis.ād paradigm of Islamic economic
thought.
The rich intellectual legacy of earlier Muslim scholars includes insights
about the organization of an ideal economic system based on the Islamic
worldview, which is distinct from variants founded partially or entirely
on secular beliefs. Baqir As-Sadr (1982 [1994]) argues in Our Economy
(Iqtis.āduna) that although Islam does not address economic phenomena
from a scientific perspective, it does influence economic events and their
ramifications for social organization by defining the responsibilities and
functions of man, who constitutes the generator and pivot of economic
events. It recognizes man as the principal actor who should be moulded
with the spiritual and intellectual perceptions of Islam and its world-
view. As-Sadr regards the process of economic development not merely as
development programs legislated and implemented by governments but
as a process in which all members of the community believe and partici-
pate. Thus, the economic doctrine of the society, or its political economy,
is a view of the direction and course that society decides to follow in orga-
nizing economic life and solving practical problems. A collective doctrine,
 5 THE CRISIS OF CIVILIZATION AND THE PROBLEM OF … 199

it is further argued, is one that nurtures in the individual a deep conscious-

ness about the responsibilities toward society. It is a doctrine that does not
deprive man of the consciousness about the ultimate destiny in Islam and
remembrance of the soul’s Covenant with its Creator.
Al-Iqtis.ād can thus be defined as an economic doctrine concerned
with the organization of an ideal economy based on principles derived
from Islamic sources of knowledge. A distinction is clearly made between
conventional economics and the universe of discourse called Islamic
economics, as Baqir As-Sadr (1982 [1994], pp. xliii–xliv) further argues
that “when we use the words ‘the Islamic economics,’ we do not mean
by that directly ‘economics’ because economics is a relatively new science
and because Islam is a missionary religion and a way of life, its real job
is not the pursuit of scientific studies… Rather, we mean by ‘the Islamic
economics’: the economic doctrine of Islam which embodies the Islamic
system in the organization of economic life.”
Hence, while science and doctrine differ with respect to the method
and objective of inquiry, their subject matter and spheres of inquiry
remain the same. The subject matter of Islamic economics is the orga-
nization of an ideal Islamic economy where justice prevails in all aspects
of economic life. The social order of Islam, as argued by Al-Attas (1993,
p. 66) is one that promotes justice (‘adl ) to the individual as spirit and
physical being as well as to the society. The individual contributes to the
community in the same way that other members strive, according to their
own capabilities, to fulfil their responsibilities with sincerity of purpose.
The notion that justice by itself is not a scientific idea constitutes an
important insight from Baqir As-Sadr (1982 [1994], pp. 9–10), who
argues that when justice combines with an idea, it profoundly marks it
with a doctrinal pattern that discerns it from scientific thinking. It may
be argued that part of the reason is that justice means a harmonious state
of affairs where everything is situated in its proper place. To do wrong is
injustice not just to others but to one’s own soul as well. Since the condi-
tions of harmony are not limited to the equilibrium relations of man with
others but with the condition of man in relation to his self as well, the
elements of human conduct and behaviour are hardly amenable to formal
scientific inquiry.
Thus for instance, the iron law of labour, he further contends, is a
proposition that does not determine whether bare sustenance wages coin-
cide with justice or not. As argued by Thomas Leslie (1879, p. 36), the
two questions of what is right and what motivates man to do right are not
200 N. EL MAGHREBI ET AL.

philosophically distinct, “according to the theory of an innate sense of

right and wrong which assumes that every man’s conscience informs him
of his duty.” It is, thus, for the man of spiritual and intellectual discern-
ment to prevent injustice according to the Qur’anic concept of intellect
al-‘aql and spiritual organ of cognition al-qalb.
The related issues of freedom and equality are also addressed by
Muhammad Iqbāl, who was an untiring advocate for a revitalization of
Islam’s ethical ideals in society. From the Islamic perspective, freedom
is conducive to ethical and virtuous behaviour, which ultimately bene-
fits society. Iqbal (1908) argues that the main ethical ideal in Islam,
therefore, is to empower man with the correct knowledge to overcome
fear and insecurity. It is the ceaseless effort towards the realization of
ethical norms that instils in man a sense of responsibility and increases
his awareness about the duty to do good and promote justice. Once fear
is substituted with a sense of human personality, virtuous behaviour and
respect for others will ensue. Whereas virtues are the source of empow-
erment and strength, evil acts weaken society. Thus, rule compliance can
be achieved through righteousness (birr), which represents the highest
virtue, as defined in Al-Qur’ān (2:177).
Also, Muhammad Iqbāl examined the notion of self-interest and the
rights of individuals versus society. It is thus argued that the interests of
the individual as a unit remain subordinate to the interests of society,
which represents an integrated body that should project to the outside
world a firm belief in the worldview of Islam and its moral principles.
Social interest is a logical principle that regulates and limits the liberty
of the individual to pursue self-interest. The dignity of individuals and
the equality of humanity entail egalitarian social, political, and economic
governance. There is in Islam, absolute equality of all members of the
society. As piety is the only benchmark to differentiate among people,
social distinction should be determined only on the basis of good char-
acter and virtue, not privileged class, colour, or caste systems. Man can,
thus, be liberated to pursue his spiritual and material life according to the
teachings of Al-Qur’ān and tradition of the Prophet (pbuh).
The emerging imbalance in social order is also a matter of concern
because it undermines the conditions of real economic and social devel-
opment of mankind. Social justice cannot be achieved unless the primary
sources of social injustice are addressed such as human deprivation and
impediments to economic freedom, which have multidimensional effects
on human life social injustice. These impediments are not only conducive
 5 THE CRISIS OF CIVILIZATION AND THE PROBLEM OF … 201

to reduced productivity but they affect also the individual level of self-
esteem the levels of self-esteem leading to the destruction of spiritual
values. For the sake of social justice, it is imperative to promote economic
prosperity, but individual wealth creation should not be pursued at the
cost of social welfare, resulting in pervasive social injustice. Uncontrolled
greed and lust for wealth can undermine the conditions for harmo-
nious and sustainable societies. Therefore, just economic development
and wealth creation sould not be divorced from social, cultural, and
political considerations.
In The Treatise on Iqtis.ād in Risale-i Nur collection, Sa’eed Nursi
(1995) addresses economic issues from the Islamic perspective with direct
reference to Al-Qur’ān. The focus is placed on consumer behaviour in
relation to wastefulness and prodigality. It is argued that Allah’s (swt )
creation is for a purpose, and the fulfillment of these duties should be
pursued without wasting resources. Man is entrusted with resources,
which ultimately belong to the Creator of all things, and since the
transfer of the right of ownership is temporary, the endowment cannot be
construed as conferring absolute freedom and right to waste resources.
The root verb qasada of the term Iqtis.ād confers also the meaning
of harnessing resources for meaningful purposes without wasting. As
noted by Aydin (2016), Nursi admonishes the behaviour of consumers
in modern economies for not acting in compliance with the Iqtis.ād-
driven rules of behaviour in the following terms: “O wasteful, prodigal,
wrongful, unjust, dirty, unclean, wretched man! You have not acted in
accordance with the Iqtis.ād, cleanliness, and justice that are the principles
by which the whole universe and all beings act, and are therefore in effect
the object of their anger and disgust.”
Nursi proposes also a six-dimensional framework for human well-being
and development including hope, truthfulness, love, solidarity, freedom,
and generosity. It is, thus, argued that the demise of Muslim societies
can be explained by six ailments, including despair and hopelessness in
social life, lack of truthfulness in social and political life, predominance of
enmity over love, lack of awareness about spiritual bonds among believers,
widespread despotism, and pursuit of self-interest. It is important to
provide proper remedies through educational systems that impart correct
knowledge to prevent the sense of doubt and insecurity. It is also imper-
ative to promote individual freedom and ensure social order in both the
spiritual and material spheres in order to alleviate poverty and prevent the
decline of moral values.
202 N. EL MAGHREBI ET AL.

These views are consistent with the arguments advanced by

Muhammad Iqbal (1904 [2004]) in his work on ‘Ilm al-Iqtis.ād and
addressed in further work by Chaudhri (2002) and Saeed (2002) among
others, that the study of economics is required to alleviate poverty, and
that nations that fail to improve social and economic conditions are desti-
nated to decay, decadence, and destruction. The views of Iqbal on poverty
are discussed in related work by Tahir (2002), inter alia, where it is noted
that Iqbal argued that the eradication of poverty and deprivation is essen-
tial for the flourishing of collective morality and moral consciousness in
society. As the precarious conditions of poverty are deemed to be asso-
ciated with problems related to feudalism and growing populations, he
advocated land reform to free peasants from oppressive feudal landlords,
and the effective use of human resources to eliminate poverty. A failure
in the optimal use of resources would, thus, exacerbatethe problem of
poverty. He further argues that from the Islamic perspective, it is a funda-
mental human right to be free from poverty. Thus, he writes that “after a
long and careful study of Islamic Law I have come to the conclusion that
if this system of Law is properly understood and applied, at least the right
to subsistence is secured to everybody.”
The problem of poverty is also addressed by Sa’eed Nursi, who advo-
cates the adoption of measures to balance the needs of society based on
the available resources. It is important to provide a correct definition of
the needs and wants, because mainstream economic thought is driven
by the maxim of infinite needs and scarce resources. A clear distinc-
tion is, thus, made between actual needs, which can be met through
the economic use of resources according to the Iqtis.ād-based principles,
and desires, which are rather endless. Further insights about the relation-
ship between the sources of sustenance, and individual needs and desires
are also provided. There is no assumption about resource scarcity as it
is clearly argued that the means to sustain life on earth and meet the
physiological needs of human beings are provided by Allah swt. As noted
by Bakkal (2017), Nursi regards the legitimate sources of livelihood to
be inclusive of industry, agriculture, and trade, whereas an imbalanced
reliance on civil and military services for sustenance purposes would be
detrimental to society because of a decrease in the capacity to generate
wealth. Also, the wasteful use of resources to meet desires is conducive to
substantial harm to the society.
 5 THE CRISIS OF CIVILIZATION AND THE PROBLEM OF … 203

Call for Paradigm Shift

in Islamic Economic Thought
The economic insights provided by the eminent Muslim thinkers may
overlap with certain economic principles espoused by contemporary
scholars in conventional economics. They project, however, a unique spir-
itual dimension and sense of justice that are immutable because they
derive from a distinctively wholistic Islamic worldview. It is on this Islamic
worldview that Islamic economic thought should rest its foundations. It
is clear from this collection of work by eminent Muslim social critics
over the past century that a shift from the current dominant thinking
to Al-Iqtis.ād is a matter of necessity not choice.
In the universe of discourse of conventional economics, economic
doctrines change and the threat to the dominant paradigm, as noted
by Robert Skidelski (2020, p. 144), “comes not from empirical anoma-
lies, which can usually be insulated as ‘puzzles’ to be worked on, but
from changes in world-view, which make the puzzles seem intolerable. A
mismatch develops between the institutional map of the science and the
problem which needs to be solved. A crisis develops when more and more
practitioners occupy themselves with the solution of the anomaly, which
resists solution by means of the paradigm. Ultimately a new paradigm
is suggested. This is resisted by other members of the community but
slowly wins them over. The revolution is completed when a younger
generation takes over.” It is not clear, however, whether a new paradigm
can necessarily be embraced by younger minds because, as noted by Jack
Wiseman (1991, p. 150), the dominant paradigm may sustain the status
quo through various means of resistance, including the control of estab-
lished outlets of publication, mutual citations, and other instruments to
control power structures. Thus, criticism of well-established theories can
be dismissed as irrelevant or trivial if the arguments for a new paradigm
are not well articulated and persistently sustained over a sufficient period
of time.
In this respect, John Kenneth Galbraith (1987, p. 283) argues that
vested intellectual commitment to established belief constitutes also a
powerful constraint since those who stand to benefit from the status quo,
indeed, resist change. It is difficult for economists to relinquish beliefs
assimilated during long hours of education, advocated through years of
research, and imparted to generations of students to admit error and
confusion in knowledge. Thus, as noted by Pencavel (1991, p. 153),
204 N. EL MAGHREBI ET AL.

there are two separate but closely related classes of issues in the discus-
sion about the state of economics, including the state of the profession,
and the state of ideas. However, the social context, which includes the
state of the profession, and in which the discussion among economists
takes place is bound to influence the assessment of the state of ideas, and
thus the emergence of new paradigms. The argument about the impor-
tance of the social context is also manifest in the argument by Thomas
Leslie (1879, p. 227) that the structure of the economy is the result of a
long evolution marked by continuity and change, which is governed not
just by economic factors, but also by the “history and the general laws of
society and social evolution.” It is the social, political, industrial, moral,
and intellectual forces that shape also the structure of the economy, and
in turn, the emergence, acceptance or rejection of new ideas.
Again, Galbraith (1987, pp. 1–2) argues that economic ideas are neces-
sarily the product of their own time and place. The same line of argument
is present in John Kells Ingram’s (1888, pp. 3–4) contention that the
emergence of economic doctrines and their contents are the product of
the prevailing practical conditions, needs, and tendencies of the corre-
sponding epochs. It is argued that every thinker is a child of his time,
whose thinking is necessarily influenced by the social milieu in which he
lives and interacts with others. While the influence of practice on theo-
retic inquiry imprints the latter with positive character, it tends also “to
produce exaggerations in doctrine, to lend undue prominence to partic-
ular sides of the truth, and to make transitory situations or temporary
expedients to be regarded as universally normal conditions.” Thus, the
danger is that economic doctrines that echo man’s physical and material
experience are made with complete neglect of man’s spiritual existence.
The real danger, in the words of Malek Bennabi (1955 [2021], p. 25)
is for Muslim scholars to lose the ideological struggle. He argues that
in the same way that respiration regulates life in the individual body, it
is ideology that regulates life in the social body, the ambitions of which
can only be realized through the satisfaction of three necessary conditions
related to the states of tension, integration, and orientation. It is impos-
sible for a disintegrated society with a poor level of efficacity to achieve
its aspirations. The ideological struggle lies in the recognition that even
when the conditions of tension and integration are fulfilled, it is crucial
that orientation is set in the right direction. Therefore, it is imperative
to understand the modus operandi of internal and external forces that
may influence the capacity of society to achieve its vision, economic or
 5 THE CRISIS OF CIVILIZATION AND THE PROBLEM OF … 205

otherwise, by suppressing its tension, undermining its integration, and

annulling its orientation. The objective of the ideological struggle is to
correct the orientation because however high the tension and solid the
integration can be, nothing sensible can be achieved when the direction
of travel is wrong. This is, precisely, the overriding message of this book,
which calls for rethinking Islamic economics and reorienting it away from
secular ideas towards its authentic sources of knowledge.
Thus, when the vision and orientation are correctly set, the optimal
method for the organization of economic life, as argued by Baqir As-Sadr
(1982 [1994], p. xli), cannot be left for arbitrary choice. It is a decision
that is necessarily defined by a balance of ideas and concepts based on
spiritual and material factors. Hence, a paradigm shift in the universe of
discourse called Islamic economics is only necessary if the emergence and
choice of ideas take place in disconnection with the Islamic worldview. A
paradigm shift is warranted when there is a continued preoccupation with
secular ideas that distort the vision of an ideal Islamic economy. There is
indeed, something seriously wrong with Islamic economics when it finds
itself plagued with the very problems of conventional economics. As with
the latter, the possibility of a paradigm shift in Islamic economics depends
also on whether the dominant paradigm has the capacity to resist change
and sustain the status quo. It may be argued that given the loss of adab
and humility in the acquisition of true knowledge, which constitutes a
serious obstacle to the admission of errors, a status quo is more likely
than a paradigm shift.
However, as suggested also by the Impossibility Theorem, which is
explained in more detail in the next chapter, it is now clear that the
current paradigm of Islamic economics is not viable. It is not viable
because it offers a secular philosophy for the organization of the economy
that is, in esse and in posse, discernible from conventional economics only
by a number of innuendos. There is no rationale for resistance because a
status quo can only retard the organization of an ideal Islamic economy
that serves the whole humanity. Relative to conventional economics,
Islamic economics should be cut from a different cloth, driven by a
different worldview, governed by different rules of behaviour, and aspiring
for a different economic system. This is precisely the vision of Al-Iqtis.ād,
advocated for by the eminent Muslim philosophers and social critics
referred to in this chapter and the principal message of the present book.
Thus, the consistency of the profound insights presented in the intel-
lectual work of the above eminent scholars over the past one-and-a-half
206 N. EL MAGHREBI ET AL.

centuries is reflective of a shared concern for the demise of the Muslim

world, a shared belief in the Islamic worldview, and a shared recourse to
the true sources of knowledge. It should not be surprising, hence, that
these influential scholars were capable of discerning the internal causes
of weakness and decadence from the external factors of colonization.
It is not surprising that at critical crossroads of history, they issued the
same call to awaken, abandan secular ideas, and revert to the authentic
sources of knowledge. It is impossible to solve the chronic problems of
fragile economies and fragmented societies without solving the problem
of knowledge. It is impossible to change economic reality with the secular
mind of corrupt leadership and scholarship that advocate confusion and
error in knowledge. It is impossible to organize an ideal economy without
the adab of knowledge that nurtures man of integrity, piety, and spir-
itual and material discernment that can promote justice. It is the same
awakening call that is issued in this humble work, for a paradigm shift in
Islamic economics that can pave the way for the renaissance of Muslim
societies.

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 CHAPTER 6

Islamization of Economics? An Impossibility

Theorem

In the run-up to the twenty-first century, there were calls from outside
and inside the economics profession for fundamental changes in the
underlying philosophy of the discipline. This call intensified as the
concern for environmental degradation for which economics and its
existence (ontology), its value system (axiology), its knowledge claim
(epistemology), its purpose (teleology), and its methodology were held
responsible for worsening environmental and human conditions. Thomas
Berry characterized such conditions: “In the twentieth century, the glory
of the human has become the desolation of the Earth. And now, the deso-
lation of the Earth is becoming the destiny of the human. From here on,
the primary judgement of all human institutions, professions, programs,
and activities will be determined by the extent to which they inhibit,
ignore or foster a mutually enhancing human-Earth relationship.”1
Calls for “the rapid implementation of new systems of economics,
finance and governance”2 that go “beyond the calculating, self-interested,
individual to take account of community, compassion, and cosmos,” and
for the reform or complete abandonment of Economics became vocif-
erous after the 2007/2008 Global Financial and Economic Crisis. Since
then, proposals have emerged focusing on the need for a paradigm
that includes a new human–earth relationship, based on trusteeship, as
well as a new philosophical/ethical foundation. Our contention in this

© The Author(s), under exclusive license to Springer Nature 209

Switzerland AG 2023
N. El Maghrebi et al., Revisiting Islamic Economics,
Palgrave Studies in Islamic Banking, Finance, and Economics,
https://doi.org/10.1007/978-3-031-41134-2_6
210 N. EL MAGHREBI ET AL.

book is that Iqtis.ād—Al-Qur’ān’s vision of how the economy is to be

arranged—provides such a paradigm with a radically different philosoph-
ical foundation from that of Economics to the point that makes grafting of
one onto the other Impossible. As is well-known, the latter emerged out
of a historical experience peculiar to the European civilization yet claimed
universality due to the powerful global hegemony of the Western scien-
tific, cultural, intellectual, military, political, and economic dominance. As
a result of this development, an attitude, a habit of thought, took shape in
much of the non-industrial part of the world that the Western thought,
seen as the engine of modernity, had all the answers to the problems
facing these societies. Regarding the slow pace of economic growth and
development as a serious challenge, these societies looked to the West
for solutions. The period witnessed a widespread movement toward the
adoption and implementation by these societies of Economic models and
policies designed by Western and Western-dominated institutions.
Scholars, philosophers, and social critics in these regions warned of the
follies and adverse consequences of indiscriminate and uncritical adop-
tion and implementation of models and policy recommendations designed
and developed based on a system of thought with philosophical and
historical foundations radically different from those of host societies. The
period also witnessed the beginning of the age of Muslim awakening
out of which emerged brilliant and influential philosophers, scholars, and
social critics deeply concerned with the plight of Muslim societies who
issued clarion calls to awaken and return to the sacred sources of knowl-
edge, primarily Al-Qur’ān in search for genuine solutions to the chronic
problems they were facing. They argued that Al-Qur’ān offered more
appropriate and, often, more efficient solutions to contemporary chal-
lenges of Muslim societies, including economic problems. While they had
different styles of presentation, each framed their views relying primarily
on Al-Qur’ān and the Sunnah of the Honoured Messenger (saa), and
each, to different degrees, focused on challenges facing Muslim societies
including issues of social justice, poverty, income distribution, and condi-
tions of economic prosperity. Each scholar believed that it is possible to
order a spiritually rich, materially comfortable, and socially stable collec-
tivity that satisfies the necessary and sufficient conditions specified in the
Qur’an. They also believed that the Noble Messenger (saa) had opera-
tionalized the vision of such a society provided by the Qur’an during
his lifetime in Medinah society, functioning as its temporal authority
(Waliyul-Amr, as in Verse 55: Chapter 5).
 6 ISLAMIZATION OF ECONOMICS? AN IMPOSSIBILITY … 211

During the last 100 years or so, scholars who wrote in Arabic, Turkish,
Persian, Urdu, and other languages of the Muslim world, referred to
the way resources were managed in accordance with the guidance of Al-
Qur’ān on Iqtis.ād which translators rendered as “Islamic economics” in
English. In the 1960s, for example, as-Sayyid as-Shaheed as-Sadr called
his famous book “Iqtis.āduna” or “Our Iqtis.ād,” by which he meant to
present the authentic system of management of resources of a Muslim
society according to the rules specified by Al-Qur’ān and distinguished
it from the then two dominant systems of socialism and capitalism.
He presented also the philosophical underpinning of the system in his
other famous book “Falsafatuna,” translated as “Our Philosophy” which
he then compared with the philosophical foundation of the other two
dominant systems. Whereas this latter translation was straight forward,
and the title of the book easily mapped into its English translation
without causing ambiguity and confusion, the former title’s translation
into “Our Economics” did not. When in the late 1970s, Muslim scholars
trained in Economics began to discuss Islam’s approach to the manage-
ment of resources and write about the subject in English, they used
the term “Islamic economics.” By the early 1990s, a paradigm emerged
called “Islamic economics,” with its own distinguishing characteristics
that differentiated it, in substance, from Iqtis.ād. One of the ambigui-
ties of the term “Islamic economics” is that it is not quite clear from the
title which “economics” is to be “Islamized.” There is a wide spectrum
of types of “economics” within the universe of discourse called “eco-
nomics.” Even within the Islamic economics universe of discourse, there
is a spectrum of proposals. Some argue for “Islamization” of economics
by incorporating Islamic maqās.id into “economics” while others suggest
“Islamization” via incorporating “Islamic morality” into economics.
There are also those who use “Islamic economics” as translation
of “Iqtis.ād,” the authentic notion of a discipline that deals with the
management of resources within Muslim societies according to the
rules prescribed in Al-Qur’ān. Excluding the latter notion, the ques-
tion remains which “economics” is meant in the Islamization project?
In the opening chapter, reference was made to a thoughtful presentation
of “Islamic economics” which argued for Islamization by modification of
some of the axioms of “economics” and incorporation of Islamic morality
into that body of knowledge. From the content of the discussion of that
proposal, it appears that the body of knowledge which is to be Islamized
212 N. EL MAGHREBI ET AL.

is that of the dominant paradigm referred to as “Orthodox” or “Neo-

classical” economics. In the hope for clarity of the discussion here, this
latter proposal will be identified with the capital letter “E,” as “Eco-
nomics,” and “Islamic Economics” to differentiate it from “Unorthodox
economics,” on the one hand, and “Iqtis.ād,” on the other. References
were also made in that chapter to these three distinct paradigms together
with a discussion of some of their distinguishing features. This Chapter
attempts to briefly discuss the two polar cases of Iqtis.ād and Economics
hoping thereby to clarify whether there is any basis upon which an
intermediate paradigm between these polar cases can be envisioned legit-
imately. To avoid repetition of the philosophical terms in the rest of the
Chapter, it is helpful to provide brief definitions for the terms at the outset
of the discussion hoping that the reader will be able to relate the contents
of discussion to the meanings of terms.

A Brief Note on Key Philosophical Terms

Metaphysics deals with the ultimate nature of reality as it is and not as
it appears. It asks what Reality is and by what criteria will the Real be
known? Reality is defined as immutable, permanent, and uncaused. Meta-
physics studies the belief about some fundamental concepts such as the
existence of phenomena and their properties, causality, space, time, life
and its purpose, and others. Causality is an important topic in Economics,
particularly in Econometrics. According to metaphysics, the universe is
constituted by material, immaterial, seen, unseen, things that exist and
things that potentially exist, space, time; all referred to as “events,” or
things that have existence and are subject to change. Alternatively, it may
be said that the universe is composed of all events that were, are, and will
be in the future, but how and why? Metaphysics suggests that events exist
because they have causes. These causes existed before the events and are
themselves effects of precedent causes that brought them into existence.
There is therefore a chain of causation employed in “causal reasoning,” a
crucial element in the structure of modelling in Econometrics.
A question metaphysics asks is whether every event in the universe has
a cause? Determinism answers that there is cause or a chain of causation
that precedes any event in the universe; there are no uncaused events.
An implication of this position raises the question whether determinism
can accommodate human free will since, according to determinism, every
event has a cause that also includes the exercise of human free will. If so,
 6 ISLAMIZATION OF ECONOMICS? AN IMPOSSIBILITY … 213

then determinism negates the latter with serious implications for human
moral responsibility. Indeterminism alternatively holds that some events
have no causes and are not subject of a chain of causation, including
human free choice such as choosing among preferences corresponding
to the rational choice theory of Economics. Indeterminism however leads
to a question that has implications in Economics, if the choice is uncaused
and simply follows the precepts of rational choice theory, in what sense
is the choice free? And in what sense can individuals be responsible for
their choices. Neither of these methods provides an effective answer to
the questions and their implications.
Ontology focuses on the nature of “being,” the origin of phenomena,
and the question of existence of things. It addresses arguments relating
to the meaning of existence, of “beingness,” and the question of what
do things that exist have in common? Do they share one substance that
differentiates between what exists and what does not? Materialism argues
that what has existed, all that exists and will exist share one substance:
Matter. Idealism, on the other hand, holds that the one essential element
events share is “mind.” That is, the substance that constitutes reality is
“mental” not physical. However, the question of whether there is only
one cosmological “Mind” or multiple individual “minds” is contested
among ontological idealists. A third type of ontological position is that
of the dualists who argue that everything in existence is either physical
or mental. The body is physical and can be perceived as such having all
the relational properties that are possessed by material things. But there
are also conceivable mental entities free of physical properties. They are
not limited by physical constraints. Both the physical and mental entities
exist in the universe. A third alternative, pluralism, holds that there are
more than two substances that things that exist share. Over the past three
decades, the question of the ontological foundation of Economics has
become a hotly contested subject in which some economists have argued
that Economics has failed to live up to its own standards of scientific
respectability. It has insisted on “mathematical-deductivist” methodology
that has reduced the explanatory and predictive ability; two characteristics
that define science and scientific method. It is an ontology that falls far
from that which relates social science to social realities.3
Epistemology concerns the nature of knowledge and claims about
knowledge. It investigates questions of what is knowledge? how is it
acquired? how is it validated and justified? There is a close relation-
ship between ontology and epistemology. For example, questions of the
214 N. EL MAGHREBI ET AL.

origins of Economic theories, their relations to reality, the origin of the

assumptions of theories and their explanations and justifications, their
application to socio-economic reality, laws derived from these theories,
and many other questions that relate to both the ontology and episte-
mology of Economics. Often Economic theories do not state explicitly
their ontological, epistemological, or other philosophical dimensions in
their presentations. Nevertheless, these philosophical issues lurk in the
background of these theories.
Philosophy itself defines knowledge as true, justified belief. A belief can
be held “a priori,” meaning that it is held without the need of sensory
experience, or “a posteriori,” a belief held after experience. Among “a
priori” ideas, some may be “innate.” These are ideas inborn in humans
rather than experienced or received, whose origin cannot be demonstrated
experientially. They are implicit in the self or in the psyche of individual
humans, such as the belief in a Creator. While in the Western tradi-
tion the origin of the concept of innate ideas or beliefs is traced to the
seventeenth century and Rene Descartes, Al-Qur’ān refers to Fitrah, the
innate, primordial nature which Allah swt has endowed to humans upon
which the idea of Supreme Creator, Sustainer, and Nurturer is imprinted.
Belief is the essential aspect of knowledge, but it cannot become
knowledge unless it is true, and the truth is supported by justification.
Justification is the process by which the relationship between a belief
and the external world is demonstrated. When a belief is justified, to be
true, it is considered knowledge. While Economics, by and large, seems
to have acquiesced to this proposition, in philosophy its acceptability
is contested. Some philosophers, called the dogmatists, argue that it is
possible for a belief to become knowledge through sensory experience.
These philosophers, Empiricists, argue that humans attain knowledge
through experience while others, the Sceptics, argue that human sensory
and cognitive abilities are too limited to justify belief as true and elevate
to knowledge. Among the empiricists, there is a group of philosophers,
the Foundationalists, who argue that it is possible to acquire knowledge
by inference from a basic true, justified belief. According to these philoso-
phers, the inferential and basic beliefs—those that are justified by direct
experiential evidence—provide the “foundation” of knowledge acquisi-
tion. Axiology investigates the value structure of phenomena, beliefs,
and systems of thought. It is also noted that the axiology of Economics
includes, inter alia, values such as efficiency, profitability, self-interest,
and others. Each economic system of thought has its own axiology.
 6 ISLAMIZATION OF ECONOMICS? AN IMPOSSIBILITY … 215

Also, methodology investigates the procedures, principles, rules, ways,

and means by which researchers and scholars validate knowledge about
phenomena. Finally, teleology investigates knowledge about phenomena
by reference to their purpose.

Economics: Its Etymology

and the Evolution of Its Definition
Etymologically, economics is said to be from Greek “Oikos” and
“nomos.” The former means household and the latter means
“managing;” Oikonomia meant the management of household and
its resources. Xenophon is said to have named one of his treatises,
Oikonomikos, in which he discussed the frugal and judicious ways the
resources of a household, a family, a tribe was managed. Xenophon was,
according to Leshem,4 the first to define “oikonomia” as the prudent
management of the household frugally, maintaining a balance between
too much and too little effort to generate a surplus. Generally, it appears,
Greek philosophers, like Plato and Aristotle, had a teleological view of
economic activities as instrumental in generating happiness and well-
being for members of the society. They saw the economy as embedded
in the entire societal structure, much as Karl Polanyi5 had observed in
the twentieth century. Greeks’ teleological view of economic activities
as the frugal mangement of household resources prevailed in the Euro-
pean societies and found a new articulation by Christian scholars during
the Middle Ages through the intermediation of Muslim scholars whose
books were by then brought from Spain and countries of the Middle East
to the rest of Europe and translated into Latin.6 The teleological view
of economic activities expressed by Plato and Aristotle was restated by
Scholastics as purposeful activities aimed at gaining felicity in the Here-
after. Scholastic thought is characterized by a close relationship between
ethics, theology, and economics. Epistemologically, philosophers in the
tradition of scholasticism believed there was an organic unity of knowl-
edge with a strong reliance on metaphysics and transcendence.7 Aided
by the availability to the Scholastics of Latin translation of the works of
Aristotle and other Greeks along with commentaries of Muslim scholars,
the thirteen and fourteenth centuries marked a great leap in scientific
knowledge without decoupling from metaphysical and transcendental
orientation of the time.
216 N. EL MAGHREBI ET AL.

New ideas regarding the role of money, as a medium and as a standard

measure, exchange, value, markets, prices, and economic justice emerged
in these two centuries. Joel Kaye asserts that the scientific advances of
Scholastics—particularly their vision of nature and its dynamic work-
ings using mathematics, geometry, and logic in the analysis of nature
based on their observation of monetized society—provided the basis for
scholars and researchers from Copernicus to Galileo to further science.8
The fourteenth and fifteenth centuries were times of catastrophes, disas-
ters, and crises. The period was marked, inter alia, by the great famine
of 1315; Black Death of 1348; collapse of Italian banking; long lasting,
large-scale, and highly costly wars; fall of Constantinople; and the weak-
ening of Papacy and the Holy Roman Empire, all of which brought
about sweeping changes represented by the emergence of the Renaissance
(meaning rebirth) in fifteenth–seventeenth centuries. The traumas of the
period lead to the emergence of an axiology that reoriented the value
system in Europe away from metaphysical and transcendent and toward
physical and worldly teleology.
In reaction to these traumas, it is the pursuit of wealth during this
period that defined economic activities, an expected outcome of the crip-
pling influence of stresses consequent of previous adverse developments.
Major dimensions of the philosophical foundation of Economics—mate-
rialism, individualism, and secularism—had their birth in this period as
did Mercantilism, the idea that nations should pursue wealth accumula-
tion (preferably gold) through trade policies and colonization. The seeds
that were sown during the Renaissance were nurtured and supplemented
by ideas during the Enlightenment period, seventeenth and eighteenth
centuries, following the Renaissance and the Protestant Reformation
in which the roots of Economics strengthened. The period witnessed
the birth of scientific method, empiricism, aggressive anti-religion senti-
ments—thought to have been prompted by reactions to religious wars,
inquisition, and heresy trials—scepticism, rationalistic vigour (which
insisted on replacement of inherited religious authority by “reason”9 ).
The anti-religion sentiments of the period, the growth of scientific ratio-
nality resulting from the scientific revolution that took place10 between
the time of Copernicus’ theory of heliocentrism11 (1543) and Newton’s
Principia Mathematica (1687), and the prestige bestowed upon physical
sciences led to the rejection of metaphysics and any idea of transcendence.
Peter Gay (1973) argues that the thinkers of this age were aggressive
 6 ISLAMIZATION OF ECONOMICS? AN IMPOSSIBILITY … 217

in their criticisms against religion in general and Christianity in partic-

ular. They were intent on destroying all things religious and metaphysical.
“The world that religion had shaped for so long was—in the philosophes’
language—prey to the wild beasts of fanaticism and enfeebled by the
poisonous fruits of the tree of superstitious.”12 The thinkers of the age
were “intent on improving, and, if necessary, even inventing, science of
man. Their work in psychology, sociology, and political economy, had this
practical aim: These were disciplines that, once mastered, would help to
make humanity freer, richer, more civilized than before.”13
To the extent that Economics emerged from the historical, cultural,
religious, socio-political experience of the Renaissance and the Enlighten-
ment peculiar to Europe, it could not claim the global acceptability and
applicability of its model achievements. Above all, the historical account
of the evolution of Economics indicates no commonality with Islam
to justify the eclectic understanding that “Islamic Economics” wishes
to create. Be that as it may, during the Enlightenment period, crucial
building blocks of Economics developed including, inter alia, the concepts
of self-interest,14 utility and its measurement and its influence on human
economic behaviour, the notion of equilibrium, the operations of markets,
the abandonment of the moral foundation of political economy, and the
emergence of the idea of science of Economics independent of political
economy. The teleology, however, remained the pursuit of wealth until
Jeremy Bentham (1748–1832) discovered the concept of utility in the
writings of David Hume (1711–1776) who in his: A Treatise of Human
Nature refers to the concept of “utility” as a source of pleasure.15 Hume
claims that: “The chief spring or actuating principle of the human mind is
pleasure or pain… moral distinctions depend entirely on certain peculiar
sentiments of pain and pleasure… whatever mental quality in ourselves or
others give us a satisfaction… is of course virtuous; as everything of this
nature, that gives uneasiness, is vicious.”16
Having borrowed the concepts of pleasure-pain and utility, Bentham
proceeded to advocate for Utilitarianism and Hedonism philosophies. In
hindsight, it appears this was a momentous development in the evolu-
tion of Economics. The influence of utilitarianism and hedonism on
Economics continues, in one form or another, in this discipline. It was
a watershed in changing the teleology of Economics from preoccupa-
tion with wealth to maximization of utility and minimization of disutility.
Hedonism claims that pleasure and pain are the prime motivators of
218 N. EL MAGHREBI ET AL.

humans who seek to maximize the former and minimize the latter. Plea-
sure and pain, Bentham asserted, were humans “Sovereign masters.”
Bentham defined utility as the property of objects that produce pleasure,
benefit, or happiness; disutility produces pain, evil, and unhappiness. Util-
itarianism argues that society must implement policies according to the
principle of greatest happiness for the greatest number of members to
ensure the widest possible distribution of pleasure while minimizing pain
for the society.17 Bentham went further to argue that utility is measur-
able and suggested that this can be done either cardinally, through direct
quantitative measurement, or ordinally, through rank-ordering of bundles
of goods by consumers through introspection.
The year 1871 represents another important watershed in the history
of Economics as William Stanley Jevons (1835–1882)18 and Carl Menger
(1840–1921)19 independently advanced Bentham’s contributions. This
was the beginning of what became known as the Neoclassical Economics
later to be named as Orthodox Economics. Menger appears to be the
first author who changed the name political economy as he titled his
book “Principles of Economics.” He accepted Bentham’s position that
utility motivated human economic activity and argued that utility drives
the demand for products and hence its value contrary to the classical
economists who believed that cost of production determines value of
products. Further, Menger argued that consumers behave in the market
to maximize their utility. Jevons too accepted Bentham’s ideas that
humans behave to maximize their pleasure (utility) and minimize pain
(disutility) and therefore their behaviour in the market is purposeful in
that it is aimed at maximizing utility. These authors made explicit the
idea of diminishing marginal utility which was hinted at without much
discussion by Bentham.
Leon Walras (1834–1910) and Alfred Marshall (1842–1910) produced
works that provided the capstone to the Neoclassical Economics. The
teleology of Economics changed in the hands of these two thinkers
who gave the markets—populated by self-interested participants and in
which the forces of supply and demand interact freely—the crucial role
of allocating resources. Marshall’s contribution showed how equilibrium
is achieved in individual markets, hence, the name “partial equilibrium
analysis,” while Walras’ contribution focused on the overall market equi-
librium, therefore, “general equilibrium.” Influenced by his mentor,
Leon Walras, Vilfredo Pareto (1848–1923) focused on the operations
of the market, its equilibrium, and its function as resource allocation
 6 ISLAMIZATION OF ECONOMICS? AN IMPOSSIBILITY … 219

mechanism. He showed that optimal allocation of resources is achieved

when it is no longer possible to make someone better off in allocating
resources without making someone else worse off. This principle became
known as Pareto-optimal allocation and formed the foundation of welfare
economics. These five thinkers—Jevons, Menger, Walras, Pareto, and
Marshall—are considered the architects of the Neoclassical Economics. In
their hands, the axiology of Economics was constituted by utility, wealth,
prices, demand, supply, and equilibrium. Thereafter, intellectual activities
in Economics became theorizing about various dimensions of economic
activities based on the works of these thinkers. Collectively, their works
became the bulwark of intellectual support for capitalism in the twentieth
century.

Economics: Its Definition and Method

It is helpful to remember that among the wide spectrum of a field of
study or a universe of discourse, called economics, the concern here is
with the dominant paradigm that is given the label of “mainstream,”
or “orthodox,” or “Neoclassical,” or simply “Economics.” Books on
the history of economic thought suggest that the origin of Economics
traces back to the 1870s and the “marginal revolution.” The definition of
economics went through several transformations. During the eighteenth
century, the focus of the discipline was on wealth. John Stewart Mill
(1806–1873) considered that economics was a science that dealt with the
generation and distribution of wealth. Marshall, in his textbook, Princi-
ples of Economics, published in 1890, defined the subject as the study
of mankind in in the ordinary business of life. It examined, according
to Marshall, the individual and social behaviour connected to the ways
and means of acquiring and using the material need of well-being. In
the closing decades of the nineteenth century and concurrently with the
mathematical works of the marginalists, especially Marshall, Walras, and
Pareto, serious attempts were made to present and structure economics
as a science. Prior to these attempts, the word “science” used by some
thinkers like Mill in attachment with political economy, included an
underlying philosophy that related social sciences to physical sciences.
Later attempts to use the label “economic science” focused on method-
ology to argue that economics is as much a science as physics or other
natural sciences because it too uses the “scientific method” supported by
the philosophy of positivism.
220 N. EL MAGHREBI ET AL.

In continuation of the discussion of the basic point that “economic

science” was the result of the peculiar socio-economic-cultural and
religious experience of Europe, it is noted that the philosophy of posi-
tivism that granted economics its scientific pretensions began with David
Hume (1711–1776). His aggressively antireligious attitude and rejection
of metaphysics, that led to his empiricist-positivist philosophy, is best
reflected in a set of questions he posed to readers of his book. He tells his
readers to visit libraries and look at books on religious and metaphysics
and ask themselves “Does it contain any abstract reasoning concerning
quantity or number? No. Does it contain any experimental reasoning
concerning matter of fact and existence? No. Commit it then to the
flames: For it can contain nothing but sophistry and illusion.”20 Hume,
having been influenced by the writings of John Locke and others before
him, initiated the beginning of epistemological systems that were to come
which influenced the evolution of economics. His work hints at the fact-
value, positive–normative dichotomy which is still with “Economics,”
although within the universe of economic discourse, it is challenged.21
Hume’s work provided the basis for August Comte (1798–1857) who
developed the epistemology of positivism in its contemporary form.
Perhaps the most important philosophy that cemented the episte-
mology of Economics was that of logical positivism developed by the
Vienna Circle (1924–1936)22 extending the ideas of positivism requiring
verifiability through direct observation or logical proof for meaning-
fulness. Epistemologies such as those of theology, metaphysics, ethics,
introspection, or intuition violate the verifiability criterion of meaning.
They are therefore meaningless. A major problem of logical positivism is
its confusion between epistemology and ontology since a lack of empir-
ical evidence cannot be regarded as proof of non-existence. It confuses its
model of reality with reality itself, as the absence of proof of existence of
a phenomenon cannot be construed as proof of non-existence. 23
Logical positivism too emerged out of another set of circumstances
peculiar to Europe, specifically Vienna in the interwar period (Hands,
2001). Members of The Vienna Circle were philosophers and scientists
united by their atheism and rejection of religiously based ethics. John
B. Davis (p. 4) suggests that the Circle developed logical positivism “at a
time in Europe when racist and nationalist ideas were regularly claimed to
be scientific, and members of the Vienna Circle were among those person-
ally exposed to violence and abuse in the name of such views.” After
their leader, Moritz Schlick was murdered in 1936, remaining members
 6 ISLAMIZATION OF ECONOMICS? AN IMPOSSIBILITY … 221

sought refuge and ended up in the UK and the US where they spread
logical positivism.24 In a few decades, this philosophy became dominant,
influencing the emergence of the Austrian school of Economics (partic-
ularly the notion of spontaneous order). Most importantly, it influenced
Lionel Robbins in developing the definition of Economics as the “science
which studies human behaviour as a relationship between ends and scarce
means which have alternative uses.”25 Robbins, with an emphatic insis-
tence on the ontological argument of the “scientific nature” of the
“science of Economics,” relied on a concept coined by Schumpeter as
“methodological individualism,”26 with roots in the nineteenth-century
discussions of individualistic theories of social formation in response
to anti-individualistic, collectivist, philosophies that had gained promi-
nence.27 Methodological individualism holds the preferences, beliefs, and
desires of individual human beings as the fundamental explanatory prin-
ciple. The idea is premised on the rationality of human beings in that
explanation of an individual’s preference justifies her/his choice and that
explanatory principle constitutes the principle of rational choice. During
the period spanning the second half of the nineteenth and the twentieth
centuries, Economics became an elaborate deductive system relying on
formal logical-mathematical method.
Influence of logical positivism philosophy is quite evident in Robbins’
strident opposition to inclusion of consideration of metaphysics, ethics,
value statements or judgements, and, generally any non-positive epis-
temologies in Economics, thus, severely adhering to the fact-value,
positive-normative dichotomy. In particular, he took a harsh stance
against those, like Pareto, or Arthur Cecil Pigou (1877–1959), who,
relying on marginal analysis, especially the law of diminishing marginal
utility, argued for income redistribution that would result in increased
total utility (or social welfare) for the whole society. Robbins argued that
in Economic Science, interpersonal comparison of utility is a value judge-
ment and therefore impermissible. 28 Defining Economics as a value-free
science of how individual humans make decisions on allocating their
scarce resources toward achieving some ends soon earned it the label of
science of rational choice.29 Moreover, Robbins insisted that Economics
is not concerned with ends, implying that this “science” had no tele-
ology. Economics, he says, “is entirely neutral between ends... it... should
be clear therefore, that to speak of any end as being itself ‘economic’ is
entirely misleading.” The never-in-dispute, or even questioned, anchor
of this definition is clearly the notion of scarcity, meaning there not
222 N. EL MAGHREBI ET AL.

being enough resources to satisfy unlimited wants. Thus, the axioms of

scarcity30 and unlimited wants are at the heart of Robbins’ definition of
Economics. While various textbook writers have different formulations
of the definition, the fundamental ingredients of Robbins’ definition are
preserved. Logically, these axioms by themselves make Economics incom-
patible with Al-Qur’ān’s vision of scarcity and the fact that humans are
empowered not to respond to external impulses generated by whims
(Hawā) or wants. There is even clear guidance from the Al-Qur’ān and
Tradition of the Noble Messenger (saa) that when society is suffering
massive poverty and destitution, needs too have to be carefully scrutinized
to ensure surpluses are available to the needy.
Many consider Robbins’ definition of Economics crisp and clear.
However, some two decades earlier an Italian philosopher—seeped in
the turbulent times of the last decades of the nineteenth and the early
decades of the twentieth centuries, including encounter with fascism31 —
Benedetto Croce (1866–1952), articulated a pure vision of Economic
science as a deductive system firmly grounded in human conscious
(rational) action. He argued that as required from a science, all economic
theorems are a priori. He rejected metaphysical, ethical, and transconti-
nental epistemologies. This also meant that Croce considered all instinc-
tive, emotional, or other impulses that influence human behaviour as
being outside the scope of Economics. Human conscious (rational)
behaviour is “amoral,” neither moral nor immoral, but based on legiti-
mate utilitarian desire and hedonistic calculus on hedonistic calculus that
what is economically useful is also pleasurable.32 Geoffrey Mure (1893-
1979) explains in Retreat from Truth (1958) that “Economic activity” is
utilitarian, according to Croce, and the actions of the “Economic Agent”
are that of an “egoist” who is “directed to the end of maintaining,
expanding, and enjoying his own life as a singular individual ... who aims
at getting ... something such that more there is for him the less there is for
anyone else.” He follows his own private individual end; “there is nothing
moral or immoral in what he does.” Axiologically, his actions or things
he pursues are means only not ends and, as such, have no intrinsic value.
Mure, commenting on the Economics’ conception of an Economic agent,
suggests an Economic Agent, suggests: “The only criterion of value which
can be applied to his action is extrinsic: it is efficiency.”33 Croce, however,
argues that utility is a value in Economics and indeed it is utility that forms
the fundamental axiom of conscious human action. It is “an original and
 6 ISLAMIZATION OF ECONOMICS? AN IMPOSSIBILITY … 223

irreducible … axiom according to which all men seek the greatest satisfac-
tion with the least possible effort ... The economic axiom is a very general
and purely a formal principle of conduct.” Croce calls this axiom as the
“Economic Principle,” the logical foundation of Economics.34
While predating Robbins by three decades, Croce’s definition of
Economics is more crisp, unequivocal, clear, and, from a philosophical
point of view, better grounded to allow for unambiguous characterization
of Economics as the orthodox and dominant epistemology different from
others within the spectrum of the economic universe of discourse. Croce
defines Economics as grounded on the “Economic Principle”: Economic
man or “Economic Agent,” in Croce’s vocabulary, “seeks the maximum
of satisfaction with minimum effort.” Economics deals with conscious
action of the Economic Agent in the here and now and is devoid of tele-
ology, history, and any consideration of metaphysical, moral, ethical, or
transcendental epistemology. As mentioned earlier, there is now consid-
erable discussion on the need for clarity and reorientation of its ontology
away from a mathematico-deductive to a more social-reality-oriented
ontology. As Economics stands at the present, it is a deductive system
in which—apart from some empirical content for its elementary axioms—
its theorems, theories, and laws are all deductively derived. Croce asserts
that its theorems and laws are like those of geometry; they have practical
applications but do not rely on empirical verification for their validity.
Economics, therefore, is pure science. Croce’s contribution is immensely
important and contains essentials of Robbins’ definition and discussions
long before Robbins published his contributions, yet Croce and his works
in defining the pure science of Economics have been widely ignored.35
An important lesson of Croce for those who advocate Islamization of
Economics through the introduction of Islamic morality is that, as he
argues, Economic action is a condition of moral action but introducing
moral action into Economics creates confusion, inconsistency, and break-
down of the fundamental Economic principle.36 The clarity of Croce’s
definition and discussions of Economics allows a basis for comparison
with Iqtis.ād to determine whether there is any justification for eclectic
combinations that seem to be indicated by attempts at the Islamiza-
tion Economics. Thus far, it is clear that Economics is a tree that grew
out of a particular soil contaminated with its own peculiar and painful
historical experiences not shared by the majority of the world’s popula-
tion. Economics is a response to that peculiar centuries-old experience,
224 N. EL MAGHREBI ET AL.

its only claim to universality is the hegemony and projection of mili-

tary and economic power of countries that made its appearance and
growth possible principally because it provided synergistically the intel-
lectual justification for the ruling economic system, Capitalism. Not only
the intellectual history of Economics but its philosophy contradicts major
tenants and axioms of Islam from metaphysics through teleology. The
radically different histories and philosophies seem to point toward the
impossibility of grafting of these two polar cases one onto another.

Etymology,37 Definition, and Philosophy

of Iqtis. ād: An Introduction
Islam is a covenantal system of thought and action, meaning that all rela-
tions and behaviour are governed by a Primordial, formal, solemn, and
abiding agreement between Allah swt and humanity at large. There are
also mentions in Al-Qur’ān of other covenants between Allah and His
Messengers, between Messengers themselves, and between and among
humans. All covenants are entered into abiding by the terms and condi-
tions of the original Primordial Covenant.38 Such agreements specify each
party’s obligations relating to what is to be done and how, and what is
to be avoided. Therefore, by acknowledging Allah swt as the Supreme
Creator and Nurturer of all, humans have become signatories to that
Primordial Covenant with clear provisions that govern human thought
and action. The Principal of the Covenant specified these provisions in the
form of rules that are prescribed in the Al-Qur’ān. These include rules
that govern the management of the resources provided by The Creator to
humans to facilitate the performance of duties and obligations resulting
from the Primordial Agreement. Messengers have been appointed and
given books of guidance throughout history to remind humans of these
obligations. Al-Qur’ān is the Last and complete of these Messages sent
along with the perfect human Messenger of The Creator to His Creation:
Mohammad Ibn ‘Abd Allah SallaAllah ‘alayh wa aalih (saa).
As the Supreme Creator, Allah is the owner of all He has Created,
including humans. The use of resources He has Created for humans are
subject to rules that govern their distribution and uses for humans to
enable them to attend to the ultimate teleology designated for them by
Allah swt.39 Collectivity of these rules constitutes the substance of the
system of thought and action called Iqtis.ād whose etymology is derived
from its natural habitat: Al-Qur’ān. Those who are faithful to the terms
 6 ISLAMIZATION OF ECONOMICS? AN IMPOSSIBILITY … 225

and conditions of the Covenant and are therefore rule-compliant, at

least most of the time, are labelled as Mu’minūn (or Mu’minı̄n plural
of Mu’min) whose root word is “a-m-n,” security, meaning they have
achieved a state of safety and security which trust in Allah swt affords
them. That is, they have found a place within Allah’s sanctuary of safety
and security. This status grants them tranquillity and stability in their
personal and social relationships. Al-Qur’ān indicates that, at times, a
Mu’min slips in compliance with the rules.40 Allah urges the faithful
to repent and return to the path of full compliance. Those among the
Mu’minı̄n who are, always and without exception, rule-compliant are
those who are always conscious of the ever-presence of Allah. They are
called Muttaqūn, those who are so intensely aware of the presence of
Allah that always protect themselves against forgetfulness or unawareness
by constant remembrance of Allah swt.41 A society with a critical mass of
these kinds of believers will achieve prosperity on earth and felicity in the
hereafter.42 From Al-Qur’ān, it becomes clear that Iqtis.ād is a collection
of rules prescribed along with the ways and means of their implementation
explicated by the Honoured Messenger (saa) as instructed by Allah swt.43
The collection of rules themselves is referred to as The Book (Kitāb).
When Allah swt ordains a rule to be followed, He refers to it as: “it is
ordained upon you” (kutiba ‘alaykum). Therefore, the Kitāb, Al-Qur’ān,
is the collected presentation of all that has been ordained by Allah swt.
Whoever complies with the rules prescribed by Allah swt is referred to in
Al-Qur’an as Muqtas.id, that is, one who abides by Iqtis.ād. Arabic dictio-
naries define a Muqtas.id as someone who does what is prescribed and
avoids that which is not permissible, meaning a rule-compliant believer.
The root of Iqtis.ād is “q-s-d,” and five derivatives of it appear in Al-
Qur’ān: (1) Qas.d which means perseverance, determination, devotion
aimed at staying the course one has chosen, for example, Al-Qur’ān refers
to Qas.d as-Sabı̄l,44 meaning staying the course, remaining steady on the
path, insisting on compliance with rules prescribed by Allah swt. Verse 9:
Chapter 16, juxtaposes Qas.d as-Sabı̄l to Qas.d al-Jā’ir meaning the path
of non-compliance, a path of injustice, path of instability, and unrelia-
bility. (2) (1) Iqs.id, an imperative to persevere, focus on the objective,
or, alternatively, avoid extreme positions, rely on the golden mean.45 (3)
Qās.id, an easy, straight, and trouble-free passage.46 (4) Muqtas.id (mascu-
line) and (5) Muqtas.idah (feminine) refer to rule-compliant individuals
(male and female) or to a collectivity of people, Ummah, that share a
common objective and follow a legitimate leader, an Imam.47 Hence,
226 N. EL MAGHREBI ET AL.

Islam envisions a close connection between an Ummah and its Imam

so much so that an Ummah without an Imam is inconceivable. The
Noble Messenger was the Imam of the Ummah Muslimah for whom
he organized an Iqtis.ād based on the rules prescribed by Al-Qur’ān. To
summarize, Iqtis.ād refers to the organization or management of resources
provided by Allah swt in steadfast compliance with the rules prescribed by
Him in pursuit of a balanced and blissful life here and hereafter. Iqtis.ād
refers to a system of rules governing the use and disposition of resources
as prescribed in Al-Qur’ān. As well, it refers to the discipline whose
scholars and experts extract these rules, interpret their technical under-
standing, as temporally and spatially appropriate, determine policies to be
implemented by legitimate authorities, and, finally, assess the results.
The initial model of Iqtis.ād was implemented by the Noble Messenger
(saa) in Medı̄nah in accordance with the instructions of His Creator. Al-
Qur’ān’s Verse 2 of Chapter 62 explains the most important functions
of the mission of the Messenger as: 1. Reciting48 the Signs of Allah,
introducing the hearers to the rules prescribed (the reference is to the
Verses of the Book of Rules) along with underlining the fact of the neces-
sity of compliance; 2. Cleansing the cognitive-perceptive-active abilities
of the hearers in order to understand correctly the rules prescribed; 3.
Teaching them how to comply with the rules; and 4. Explaining the
wisdom, Hikmah, behind the rules ordained. The Blessed Messenger
had performed these functions so perfectly that when he established the
Iqtis.ād system, it had full popular support.49 Once the Iqtis.ād system is
set in place, the mission of the Beloved Messenger became one of encour-
aging the Muslims to establish social equity (Qis.t ) as ordained by Allah
swt.50
Contemporary Muslim philosophers like Seyyed Hossein Nasr and
Sayyid Naquib al-Attas and those of the older generation in the twen-
tieth century, such as Said Nursi, Allamah Muhammad Iqbal, As-Shaheed
Muhammad Baqir As-Sadr, and Mālek Bennabi, have thought deeply
about the nature of metaphysical, ontological, epistemological, axiolog-
ical, and teleological dimensions of relations of Allah and His Creation,
including humans. They have explained the intricacies of these relation-
ships in understandable philosophical terms.51 Being fully familiar with
the philosophy underlying Western economic thought, their advice was
for the Muslim scholars to return to Al-Qur’ān, as explained in further
detail in another chapter of this book, to structure a system that would
manage resource uses according to the rules prescribed by Allah swt.
 6 ISLAMIZATION OF ECONOMICS? AN IMPOSSIBILITY … 227

In its fundamental nature, Iqtis.ād derives its ontology directly from

Al-Qur’ān. Once Iqtis.ād comes into being it has a sacred, not profane,
presence. In concrete terms, it means that the collectivity adopting the
system of Iqtis.ād will experience Barakah, multiple returns, whose oper-
ations have an unseen source. Phenomena like barakah point to a crucial
difference, an unbridgeable difference between Iqtis.ād and Economics,
their metaphysical underpinnings. Nasr explains that “metaphysic ... is the
science of the Real, of the origin and end of things, of the Absolute and, in
its light, the relative.” As such, he suggests that metaphysics should be in
the singular (Nasr, 1968, p. 81). Islam, Nasr asserts, has a wholistic, fully
integrated view of the cosmos and “sees in the arteries of the cosmos and
natural order the flow of divine grace or barakah.” Humans are them-
selves channels of barakah. Nasr masterfully combines the metaphysics,
ontology, epistemology, and teleology of Islam in a few short sentences.
He explains that human purpose on earth is to gain knowledge to become
The Universal and Perfect Human (al-Insān al-Kāmil ), the perfect ‘abd,
perfect adorer of The Creator. Such a perfect human becomes “the mirror
reflecting all the Divine Names and Qualities.”
Nasr explains that humans are the crowning achievement of the process
of Creation, and Allah’s purpose in Creating humans is to have intimate
knowledge of “Himself through His perfect instrument of knowledge
that is the Universal Man.” (Nasr, 1968, pp. 95 and 96). Allah swt
has provided resources, the ways, and means to empower humans to
remove all constraints, physical or otherwise, and barriers on their path
of completion of this transcendental journey of becoming a perfect ‘abd,
perfect adorer of Allah swt as exemplified by the Noble Messenger (saa).
The ontology of the science of Iqtis.ād is its designation in Al-Qur’ān
as a system of rules compliance which facilitates humans’ epic journey
toward achieving the perfect state as intended by The Creator. Iqtis.ād’s
purpose, its teleology, as a system is to aid humanity in its march toward
the Absolute by demonstrating, through its epistemology, how they can
liberate themselves and others from the bondage to the chains of base
emotions and attachment to the world of matter. This liberation is crucial
to the removal of distributional constraints and chokepoints that lead
to maldistribution, poverty, and destitution that, in turn, slow or stop
human celestial journey. Poverty, said the Beloved Messenger, is on the
borderline of unbelief. Hence, achieving qis.t (equity) becomes the most
important objective of Iqtis.ād. The rules of Al-Qur’ān governing the use
of resources give primacy to distributional issues; an acknowledgement
228 N. EL MAGHREBI ET AL.

that the chronic problems of inequity and injustice that lead to poverty
and destitution are caused by maldistribution rather than the paucity of
resources.

Transcendental Nature of the Ontology

and Epistemology of Iqtis.ād System
Iqtis.ād comes into existence when members of the society decide to
manage the resources Allah swt has placed at their disposal according
to the rules He has prescribed in Al-Qur’ān. It is incumbent on prac-
titioners of Iqtis.ād, researchers, students, and scholars to extract the rules
that govern the behaviour of each element of Iqtis.ād. And, based on
this effort, it is possible to recommend policy actions that guide oper-
ations of the system of Iqtis.ād. The ontological underpinnings of Iqtis.ād
as collections of rules governing behaviour of individuals and collectiv-
ities of humans in the use of resources originate in the fundamental
axioms of Islam itself, all of which are metaphysical and transcendental
in nature. Epistemology of Iqtis.ād accesses the teachings of Al-Qur’ān
and the Beloved Messenger. As mentioned, an element of his appoint-
ment was to teach52 the rules governing actions and behaviour as well as
the wisdom (Hikmah) behind the rules. He (saa) taught that all rules and
values in Islam rotate around the axis of Tawheed, the Unity, Singularity,
and Uniqueness of Allah swt. Axiology of this system of thought teaches
that actions and things have value if and only if they are pleasing to Allah
swt. And teleology of an action of an individual is targeted at winning the
approbation of The Creator.
As important and central Tawheed is to Islam’s belief system, it is an
abstract, cosmic, and purely transcendental expression that needs a vehicle
to project onto the human plain of existence. Al-Qur’ān explains that
Allah accomplishes this through the instrumentality of Walāyah,53 a prac-
tical and widely familiar concept and process among humans. Its root
is “w-l-y” (‫ ی‬،‫ ل‬،‫)و‬. The word Waliy and its derivatives appear in Al-
Qur’ān some 233 times indicating its importance. The semantic field of
Walāyah indicates that it encompasses love,54 help, assistance, protection,
caregiving, and nurturing. The word Waliy applies bilaterally and recip-
rocally to relations between two things or two persons. It means that the
two are so close that there is no space between them. Allah’s Walāyah
relationship with humans is unilateral. He swt is The Creator, Sustainer,
Nourisher, Guide, and Lover of His Creation, including humans, and He
 6 ISLAMIZATION OF ECONOMICS? AN IMPOSSIBILITY … 229

is closer to humans than their jugular vein.55 Fathers and mothers have
unilateral walāyah relationship with their young children; reciprocity is
not expected in this walāyah relationship. Humans have bilateral walāyah
relationship with one another.56 Walāyah of Allah is general and special.
The former applies to the entire creation57 while the latter applies to the
rule−compliant.58 This group is guided out of the darkness of bondage
to anything non-Allah to a state of enlightenment where they perceive
phenomena with the light of Allah swt. A crucial characteristic of this
group is that they have no fear (khawf) of the future and no regret (huzn)
about the past. (huzn) and have no fear of the future (khawf ). They are
granted a place of certainty, safety, and security in the sanctuary which
is the walāyah of Allah swt.59 There is also a differentiation in terms of
positive or negative walāyah. The former is the Walāyah of Allah and His
Beloved Messenger, and those who are rule-compliant. The latter is the
walāyah of al-Shaytan and his followers including, inter alia, those who
reject Allah and His Beloved Messenger; the unjust and the iniquitous.60
Enjoying the special Walayah of Allah swt is not possible without the
walāyah of His beloved Messenger, achieved for those who follow the
Messenger (saa).61 That is those who are rule-compliant.
Walāyah of Allah swt is the manifestation, and theophany of the
Tawheed on the human plane of existence as reflected best in Verses 32–
44: Chapter 18, in a narrative which reveals the nature, meaning, and
Iqtis.ādi implications of walāyah. The set of Verses tells the story of two
neighbouring farmers with gardens of grapes, dates, and field of grains
in conversation with one another about their gardens and fields. One is
boastful about how he has made his two gardens and field productive
and beautiful. He displays his pride in himself, his children, family, and
tribe. He rejects Allah swt, and as a rule-violator, he boastfully claims
that the riches he possesses will neither deplete nor perish. He also does
not believe in the Day of Accountability. The other is humble, attributes
everything to Allah swt, and admonishes the other that he must not reject
his Creator. He warns his neighbour that he must acknowledge Allah swt
as the One who created him from dust, the One who is responsible for
his riches, his family, his tribe, and his garden and fields. Otherwise, he
may find that someday, some natural but unexpected event will destroy his
garden and his possessions. In the event, the neighbour rejects the advice,
and entering his garden one day, he discovered all the fruits and grains
which he was about to harvest destroyed. “Then he began to wring his
hands for all that he had invested in his garden when all was now ruined.
230 N. EL MAGHREBI ET AL.

He said to himself wish I had not associated partners with my Lord. He

had no one to help him other than Allah, nor could he help himself.
That is where the Walāyah rests with Allah, the True God.“Walayah
of Allah.” (Verses 42–44: 18). Being fully conscious of Allah swt and
expressing gratitude for His Blessing has Iqtis.ādi implications as this
narrative clearly demonstrates. As well, it demonstrates the phenomenon
of testing that is repeatedly mentioned in various forms and formats in
Al-Qur’ān as an epistemological instrument through which one gains
knowledge of oneself as well as knowledge of the serious consequences
of rule compliance and rule violation.
Iqtis.ād’s ontology relates to the operations of different subsystems
composed of institutions mentioned in Al-Qur’ān organized under the
temporal authority of the Beloved Prophet in Arabia according to the
walāyah system and prescribed rules in Al-Qur’ān. Walayah . These
subsystems constitute a connected network, their unity and synchronized
operations are governed by the energy of walāyah itself. This fully inte-
grated network includes, inter alia: (1) Subsystem of reciprocity through
walāyah relationships between and among members of the society62 ; (2)
S.adaqah, a redistributive subsystem of transfer payments from the wealthy
to those economically weak as a way to redeem the rights of the latter
in the wealth of the former; (3) Ukhuwwah, fraternity, this subsystem
reflects the imperative that those who believe in Allah swt and are rule-
compliant are each other’s brothers and sisters with the same mutual and
reciprocal rights and responsibilities as between biological brothers and
sisters63 ; (4) Mawaddah,64 a subsytem of mutual support between those
connected to one another through the Love of Allah swt; (5) Dhil-Qurbā,
a subsystem of family members and network of close relatives for whom
Allah swt Ordained love and support65 ; (6) Takāful; a subsystem of rights
to mutual support among members of the society. An obligation arising
from the tripartite walāyah of Allah swt, the mutual walāyah of those
who are rule-compliant66 ; (7) Hisbah, an accountability and supervision
subsystem including the hisbah of markets, the ontology of which origi-
nates in the all-important capstone rule of encouraging rule compliance
and discouraging rule violation; (8) Administration of justice; (9) Defence
and border protection; (10) Bayt al-maal, public treasury; (11) Markets;
(12) Education; (13) Protection of orphans, poor, and destitute; (14)
Provision of medical-health services; (15) Governance, the subsystem of
Uli al-Amr; the office and functioning of legitimate authority in Muslim
societies67 ; (16) the subsystem of work that includes rules governing
 6 ISLAMIZATION OF ECONOMICS? AN IMPOSSIBILITY … 231

the necessity of work for all able-bodied persons, employer–employee

relations, fidelity, and reciprocity in the work place; (17) Social capital
including trust, a subsystem which constitutes the glue that holds the
entire system together. 68 (18) subsystem of production and consump-
tion; and (20) the financial subsystem; savings, investment, and financial
institutions. Space limitation does not permit coverage and discussion of
the history of these subsystems. There are, however, numerous books
covering the history of Muslim societies of Arabia, the Middle East, North
Africa, Spain, and elsewhere from the eighth to twelfth centuries illustrate
the organization and operation of these subsystems.69 As well, coverage
here of the network of rules that govern the operations of the Iqtis.ād
system is constrained by space limitation, but interested readers can refer
to relevant sources and discussion in other chapters of this book.70

Summary: An Impossibility Theorem

In line with the purpose of the book to make a case for a shift away from
the thought system that argues for some grafting of Islamic ideas onto
the discipline of Economics to “Islamize” it, this chapter considered some
fundamental differences between the historical experiences and philosoph-
ical structures and methods of Economics and Al-Qur’ān’s vision of how
an economy is to be organized. Literature on Islamization suggests two
major ways of grafting Islamic ideas onto Economics. First, it is proposed
to modify the axioms of Economics to include moral/ethical teachings
of Islam while the second argues for tagging onto Economics some
Fiqhi principles, called the Objectives of As-Shari’āh designed by some
Fiqh Scholars or Fuqaha centuries ago, to develop Islamic Economics.
Interpreting these attempts as efforts to establish a discipline combining
Islam and Economics, this chapter argued that Al-Qur’ān’s vision of the
economy is so radically different from Economics that there is no basis
to allow grafting of Islam onto Economics or Economics onto Islam.
To make the argument, the chapter attempted to reach as deeply as
possible into the historical and philosophical underpinnings of Economics
to flesh out the major issues that make impossible the emergence of an
Islamic Economics—a conception that proposes to graft dimensions of
Islamic belief onto Economics—that would make logical sense and can
guide policy toward solving the serious problems currently facing Muslim
societies. The chapter also looked at Iqtis.ād, a paradigm derived from
Al-Qur’ān and implemented by the Noble Messenger, that constitutes a
232 N. EL MAGHREBI ET AL.

polar case to Economics. The chapter attempted to show that metaphys-

ically, ontologically, epistemologically, axiologically, and teleologically,
the two polar cases are so radically different to rule out any grafting
of one onto the other to structure a synthetic discipline called “Islamic
Economics”—a term organically different from the case of translation of
Iqtis.ād as “Islamic Economics.”
The impossibility is also indicated by the fact that Economics is so
strongly immunized against anything metaphysical, transcendent, moral,
and ethical that even ideas coming from the inside of Economics are
rejected without consideration. A case in point is the ideas on policies
that would reduce income inequality through redistribution. The case
was made by the leading Marginalists that provided a strong Economic
case for policies that would have reduced poverty and income and wealth
inequality, and, in doing so, would have increased social welfare. This
was the idea coming from scholars such as Vilfredo Pareto (1848–1923)
and Arthur Cecil Pigou (1877–1959) both committed to proclaiming the
scientific character of Economics and its mathematico-deductive method,
proposed, based on the concept of diminishing marginal utility, that
income transfer from the rich to the poor would improve aggregate social
welfare.71 The proposal was soundly rejected. It was argued that this idea
involved value judgement and interpersonal comparison of utility. That
is, argued people like Robbins and later Economists, impermissible in the
science of Economics. Clearly, any notion of introducing Islamic moral-
ethical concepts into Economics would not seem logically permissible or
acceptable either.
Islamic Economics implicitly assumes that Islamic morality-ethics can
be grafted onto Economics because of their intrinsic values. But why
should anyone who adheres to Economics and its Economic Prin-
ciple (à la Croce-Robbins) have a compelling reason to accept Muslim
economists’ proposition when even the ideas initiated by “insiders” to
enhance the welfare of the entire society are outright rejected. Even if
one dismisses the idea of acceptability by Economists, the advocates of
various “Islamization” proposals have yet to present a logically coherent
and consistent case that adding ethics and morality into Economics would
result in a solid foundation for arguing that this is how people should live.
A case needs to be made by the advocates of Islamization by “moraliza-
tion” of Economics or by those who argue for the adoption of Fiqhi
positions to combine the “Objectives of Shari’ah” with Economics that
it is possible to design and implement practical policies based on such
 6 ISLAMIZATION OF ECONOMICS? AN IMPOSSIBILITY … 233

proposals. An answer needs to be provided by advocates of these unten-

able arguments to the question of why should Islamization proposals that
artificially graft Islamic ideas onto Economics be preferred to Iqtis.ād,
a paradigm based on the immutable, consistent, sacred system of rules
prescribed by Allah swt in favour of fallible, ever−changing, Fiqhi percep-
tions of the “Objectives of as-Sharı̄’āh” as demonstrated throughout the
history of the concept from Juwayni to Al-Ghazali, to Al-Shatibi all the
way to Ibn Ashur and to Taha Jabir Al-Alwani?72 The list of Objec-
tives has been expanded or contracted depending on the views of the
scholar of Islamic Law, Faqı̄h, involved. It was expanded from 5 to 20 and
contracted again to 5 then, to 3. Incredibly, the original list of the five (5)
maqās.id did not include the all-important Objective of “justice,” which
is explicitly emphasized in Al-Qur’ān, until the twentieth century when
Ibn Ashur explicitly included it. Fiqh represents human fallible opinions
as evidenced by the ever-changing menu of Objectives enunciated by
Fuqahāh throughout history. By contrast, the rule-based system that is
Iqtis.ād relies on immutable rules explicitly stated in Al-Qur’ān, the ulti-
mate source of knowledge, and not on fallible human judgement. These
rules are not purely abstract and theoretical but eminently practical and
forcefully logical as they provide solid bases to design practical policies to
address contemporary social problems.
Iqtis.ād is a theonomy that is structured—both as a system and as a
guide for individuals—by rules prescribed intended to facilitate human
celestial journey. Indeed, in consideration of the proliferation of papers,
books, and articles on maqās.id, Islamization, and Islamic moralization of
Economics, a major concern is whether this preoccupation and obsession
with proposals for paradigms that avoid dealing directly with Al-Qur’ān
represents a phase of emergence of what Malek Bennabi called “infan-
tile economics,” paralleling the development of contemporary “Islamic
finance.” Malek Bennabi considered the development of such artifacts as
resulting from Muslim infatuation with the economic achievements of
the West and their desire to emulate the science and policies that made
these achievements possible. The objective would be, as it has occurred
in case of “Islamic finance,” to divert the gaze of Muslims from looking
at their celestial objectives toward looking at earthly maslahah-driven,
profit and utility maximizing ends as indeed has happened to “Islamic
finance” as a result of close cooperation of Muslim financiers, bankers,
and Fuqahāh. There is a sense that the unwritten and unspoken infatu-
ation permeates writings on “Islamic Economics,” as it has in “Islamic
234 N. EL MAGHREBI ET AL.

finance,” thus representing a regressive move after what appeared to have

been Muslim awakening progressing over the last hundred years or so. To
see this regressive move, consider that the turn of the twentieth century
witnessed the publication of the first book in Arabic on Economics, by the
Algerian Faqih Al-Shaikh ‘AbdulQadir Al-Majawi Al-Tilmisani: Al-Mirsad
Fi Masa’il al-Iqtis.ād, published in 1904 in Algeria. The author attempts
to combine Islamic Fiqh with principles of Western Economics. The book
displays the author’s familiarity with Western economic writings as well as
the economies of leading capitalist economies of the time. Confirming the
point made by Malek Bennabi regarding Muslim “infatuation,” the book
explicitly expresses admiration for the economies and economic policies
of Western countries. There is of course no reason not to acknowledge
these economies and their economic policies provided one also takes
seriously and critically the source of much of the Western wealth: colo-
nialism and imperialism, especially considering that the book was written
at the height of implementation of French Colonial policies.73 Concerns
expressed by Malek Bennabi and many Muslim philosophers, and social
critics over the past many decades are in regard to using Islamic fiqh,
ethics, and selective verses of Al-Qur’ān to justify Economics, and poli-
cies based on it, precisely because they are seen uncritically as the reason
for the Economic progress of the West. This may well be the whole under-
lying and implicit justification for insistence on Islamization of Economics
rather than adopting Iqtis.ād as a genuine and authentic Islamic paradigm
to address issues related to the management of resources in Muslim soci-
eties and eradicate poverty, correct income and wealth maldistribution,
and economic injustices gripping human societies. The danger is that the
disaster, which is now Islamic finance, could be replicated by Islamization
of Economics on the same Fiqh grounds that maslahah demands it.

Allah o ‘A’lam.

Notes
1. Berry, Thomas, 2020. “Historical Mission of Our Time.” Journeyofthe-
universe.org, November 24, 2020.
2. See, Ethics, Economics, Finance, and Governance for the Anthropocene.
Third Draft of: A Working Paper of the Third Millennium Economy
Project, 2014. Brooklyn, NY: Capital Institute.
3. See, for example, Lawson, Tony, 2009. “The Current Economic Crisis: Its
Nature and the Course of Academic Economics.” Cambridge Journal of
 6 ISLAMIZATION OF ECONOMICS? AN IMPOSSIBILITY … 235

Economics 33: 759–777. On differences between the philosophy of science

and that of social science, see, Rudner, Richard, S., 1966. Philosophy of
Social Sciences. Englewood Cliffs, New Jersey: Prentice Hall.
4. Leshem, Dotan, 2013. “Oikonomia Redefined,” Journal of the History of
Economic Thought 35 (1): 43–61. See also, Lowery, S. Todd, 1998. “The
Economics and Jurisprudential Ideas of Ancient Greeks: Our Heritage
from Hellenic Thought,” In Ancient and Medieval Ideas and Concepts of
Social Justice, edited by S. Todd Lowery and Barry Gordon. Leiden: Brill.
5. See George Dalton, ed. 1968. Primitive, Archaic and Modern: Essays of
Karl Polanyi. Garden City: New York: Doubleday.
6. Mirakhor, abbas, 2014. “Muslim Scholars and the History of Economics,”
In Islam and the Challenges of Western Capitalism, edited by Murat
Cizacka. London: Edward Elgar.
7. Patriarca, Giovanni, 2021. “Introductory Reflections on Scholastic
Economic Thought. From the Thomistic Approach to the Franciscans,”
Iberian Journal of the History of Economic Thought 8 (1): 81–92.
8. Kaye, Joel, 2014. Economy and Nature in the Fourteenth Century.
Cambridge: Cambridge University Press.
9. It appears that the writers, philosophers, and intellectuals of the Enlight-
enment employed the ideas of “reason” and “rationality” in their vigorous
polemics against organized religions.
10. On scientific revolution see, Cohen, H. Floris, 1994. The Scientific
Revolution: A Historiographical Inquiry. Chicago: University of Chicago
Press.
11. For an interesting article on this subject see, Ragep, F. Jamil, 2007.
“Copernicus and his Islamic Predecessors: Some Historical Remarks,”
History of Science 14: 65–81. Ragep suggests that “…Copernicus
borrowed much of the mathematics of his heliocentric system from Islamic
astronomers.”
12. Gay, Peter, ed. 1973. The Enlightenment: A Comprehensive Anthology.
New York: Simon and Shuster, pp. 16–18. It is important to note that
during this period, an idea of “natural religion” developed called Deism
that while rejecting organized religions, believed the idea of a Supreme
Creator—whose existence can be proven by rational thought through
observations of the natural world—but refused the idea that such a Deity
would interact with humans or interfere in their affairs. The idea was
developed with a view toward Newtonian physics that the universe was
created as a machine and set in motion by the Supreme Creator and
governed by “natural law.” Deists extended this idea to the social system.
They believed in the immortality of the soul, Divine reward and punish-
ment, and Devine Providence. Adam Smith is believed to have been a
deist as was Thomas Paine, the author of the Age of Reason in the 1790s,
referring to the Enlightenment period.
236 N. EL MAGHREBI ET AL.

13. Ibid, p. 19.

14. For a historical account of the evolution of the concept of “self-interest,”
see, Rogers, Kelly, ed. 1997. Self-Interest: An Anthology of Philosophical
Perspectives. New York: Routledge.
15. See, Hume, David, 1958/1888. A Treatise of Human Nature. Edited by
L. A. Silby-Bigge. Oxford: Clarendon Press, p. 450.
16. Ibid, pp. 574–575.
17. Bentham, Jeremy, 1780. An Introduction to the Principle of Morals and
Legislation. London: T. Payne and Sons, pp. 1–6, and 26–29.
18. Jevons, William Stanley, 1871. The Theory of Political Economy. Reprinted
in 1957 by Kelly and Macmillan, Inc. New York.
19. Menger, Carl, 1871. Principles of Economics. Reprinted in 1981 by the
New York University Press.
20. Hume, David, 1748/1999. An Enquiry Concerning Human Under-
standing. Oxford: Oxford University Press, p. 211.
21. See, for example, Davis, John B., 2013. “Economists’ Odd Stand on the
Positive-Normative Distinction: A behavioral Economics View,” In Hand-
book on Professional Economic Ethics: View from the Economic Profession
and Beyond, edited by G. DeMartino and D. McClosky. Oxford: Oxford
University Press; also, Putnam, Hillary, 2002. The Collapse of Fact/Value
Dichotomy and other Essays. Cambridge: Harvard University Press.
22. See, for example, Hands, D. Wade, 2001. Reflection Without Rules:
Economic Methodology and Contemporary Science Theory. Cambridge:
Cambridge University Press.
23. For critique of logical Positivism see, Joad, Cyril Edwin Mitchinson,
1950/2011. A Critique of Logical Positivism. Whitefield, MT: Literary
Licensing LLC. Also, Zaman, Asad, 2013. “Logical Positivism and
Islamic Economics.” International Journal of Economics, Management and
Accounting 21 (2): 1–18. For critique of empiricism, see, Mure, G. R. G.,
1958. Retreat From Truth. Oxford: Basil Blackwell.
24. Holt, Jim, 2007. “Positive Thinking,” In The New York Review of Books,
December 21, 2007.
25. Robins, Lionel. 1932. An Essay on the Nature and Significance of
Economic Science. London: Macmillan.
26. Schumpeter, J. A., 1909, “On the concept of social value.” Quarterly
Journal of Economics 23 (2): 213–232.
27. Udehn, L., 2001. Methodological Individualism: Background, History and
Meaning. London: Routledge; see also, Oliveria, Thiago Dummont and
Carlos Eduardo Suprinyak, 2018. “The Nature and significance of Lionel
Robbins’ methodological individualism.” Economia 19 (1): 24–37.
28. Robbins, Lionel, 1938. “Live and dead issues in the methodology of
economics.” Economica 5 (18): 342–352.
 6 ISLAMIZATION OF ECONOMICS? AN IMPOSSIBILITY … 237

29. Rational Choice theory has three fundamental axioms (or assumptions):
(1) Completeness. Individuals have complete preferences, meaning that
the individual can rank-order all available alternatives and that this order
is transitive. (2) Preferences are stable. (3) Invariance principle argues that
while a person making a choice between two alternative, availability of the
third alternative is irrelevant in that it does not affect the choice between
the first two options.
30. Note that scarcity is such a crucial assumption that the entire edifice of
Economics depends on its validity. This means that if it is shown that
resources humans need are not scarce but in fact abundant, Economics as
a “science” collapses. Charles Eisenstein makes such an argument in his
book: Sacred Economics. Berkeley: Evolver; as well, its arguments weaken
considerable, if the word “want” is changed to “basic,” or “essential”
needs.
31. See, Korner, Axel, 2011. “The Experience of Time as Crisis. On Croce’s
and Benjamin’s Concept of History,” Intellectual History Review 21 (2):
151–169. Also, Roberts, D. D., 1987. Benedetto Croce and the Uses of
Historicism. Berkeley: University of California Press.
32. Croce, Benedetto. 1914. Historical Materialism and the Economics of Karl
Marx. Translated by C. M. Meredith. New York: Macmillan.
33. Mure, G. R. G., 1958. Retreat From Truth. Oxford: Basil Blackwell,
pp. 20–23. See also, Mure, G. R. G., 1967. “The economic and the
moral in the philosophy of Benedetto Croce.” Lecture delivered before
the Centre for the Advanced Study of Italian Society in the University
of Reading, Tuesday 8 November 1966. Thanks are due to Professor
Idris Samawi Hamid for making this paper available. Croce discusses his
ideas on “Economic science” in his book: Historical Materialism and the
Economics of Karl Marx published by Macmillan in 1914 some three
decades before Robbins. He also devotes some 40 pages of his book,
Benedetto Croce, 1913. The Philosophy of the Practical: Economic and
Ethic. Translated by Douglas Ainslie. London: Macmillan, pp. 113–157.
34. See Chapter 2 of his book, Historical Materialism and the Economics of
Karl Marx.
35. An exception is, Jankovic, Ivan, 2018. “Benedetto Croce as an
Economist.” Cosmos and Taxis 6 (1/2): 42–53.
36. See A. D. Lindsay “Introduction” to Croce’ Historical Materialism and
the Economics of Karl Marx.
37. ‘Abd ArRazzaq BilAbbas has attempted an archeology of the term “Al-
Iqtis.ād Al-Islami” in his article in 2014 “Al-Iqtis.ād Al-Islami: Hafriyyah
Mustalah,” Islamiyyah Al-Ma’rifah 78: 105–132.
38. See, for example, Verse 172: Chapter 7. All references to verses of the
Qur’an will follow the convention used her; verse will be mentioned
followed by the chapter.
238 N. EL MAGHREBI ET AL.

39. See, for example, 56: 51.

40. See, for example, 2–3: 61.
41. See, for example, 102: 3; 136: 4; 35: 5; 119: 9; 70: 33; 28: 57.
42. See, for example, 196: 7.
43. See, for example, 2: 62.
44. See, 9: 16.
45. See, 19: 31.
46. 42: 9.
47. See, 66: 5 and 32: 31.
48. The semantic field of the verb “Yatlow: ‫ ”یتلو‬is rather wide, see for
example entries under the verb ‘tlow’ in Raghib al-Isfahani: Mufradat, or
in Arabic-English Dictionary of Qur’anic Usage, by Elsaid M. Badawi and
Muhammad Abdel Haleem, pp. 135–136, published in 2008 by Brill in
Leiden, The Netherland. Other Arabic lexicons have even more expansive
semantic field for this verb, see for example, Lisan al-Arab.
49. See, Sadr, Kazem, 2016. The Economic System of Early Islamic Period. New
York: Palgrave.
50. See Verse 25: Chapter 57. See also S. M. N. Al-Attas, 2015, pp. 1–17.
51. See, for example: Nasr, S. N., 1968. The Encounter of Man and Nature:
The Spiritual Crisis of Modern Man. London: George Allen and Unwin;
also, see, Al-Attas, S. M. N., 2015. On Justice and the Nature of Man.
Kuala Lumpur: IBFIM. Thanks are due to S. Dr. Adam al-Habshi for
gifting a copy of this book.
52. See 2: 62.
53. Mirakhor, Abbas and Idris Samawai Hamid, 2009. Islam and Development:
The Institutional Framework. New York: Global Scholarly Publication.
54. Ghazi, bin Muhammad bin Talal, 2010. “Love in the Holy Qur’an.
Chicago: Kazi Publications”. In the Foreword to this book, S. H. Nasr
writes: From Divine Love, from God’s Love for Himself, has issued all of
creation, at whose centre resides man, and there has also emanated from
that Love revelation to guide him to that love and through Love to Him
who is not only the source of all love, but Love Itself. Let us recall that on
of His beautiful names is Love or al-Wadud. Does not the sacred tradition
(al-hadith al-qudsi) state, “I was a hidden treasure; I loved (ahbabtu) to
be known; therefore, I created creation so that I would be known”?
55. See 16: 50 for example.
56. For more on Walayah see the excellent books of Professor Hamid on
the subject. Hamid, Idris Samawi, 2011. Islam, Sign & Creation: The
Cosmology of Walayah. New York: Global Scholarly Publications, and
Islam, Station & Process: The Spirituality of Walyah, Published in 2011
by Scholarly Publications.
57. 9: 42, for example.
58. 62: 10, for example.
 6 ISLAMIZATION OF ECONOMICS? AN IMPOSSIBILITY … 239

59. 257: 2, for example.

60. 107: 2; 28: 3; 55–56: 5; 119: 4; 63: 16; 51, 81: 5; 1–2: 60, for examples.
61. 31: 3, for example.
62. For a good analysis of reciprocity from economics point of view see, Serge-
Christophe Kolm, 2008. Cambridge: Cambridge University Press. Many
anthropologists believe that humanity could not have survived without
cooperation, sharing and reciprocity. The Qur’an expresses the imperative
of reciprocity in form of a question: “Is not the reward of Ihsan other
than Ihsan?” While Ihsan is generally translated as “good doing,” there
is an incredibly astute Hadeeth of the Noble Messenger when asked the
meaning of Ihsan, he is reported to have said that Ihsan means acting
always as if you are in the presence of Allah, that you see Him because
even if you do not see Him, He sees you. This is a definition of full rule-
compliant behaviour of those who are in a constant state of consciousness
of the presence of Allah.
63. For example, 10: 49.
64. 23: 42, for example.
65. For example, 177: 2; 36: 4; 26: 17.
66. For example: 71: 9; 72: 8.
67. See, for example: 44, 45, 47: 5 and 59: 4.
68. Ng, Adam, et al., 2016. Social Capital and Risk Sharing. New York:
Palgrave.
69. For example, Al-Tabari, Abu Ja’far Muhammad ibn Jarir, 915. History
of Messengers and Kings. Albany: State University of New York Press.
Also, Al-Miskawayh, Ahmad ibn Muhammad. Tajarib Al-Umam (known
as History of Ibn Miskawayh). Leiden: Brill, 1908–1924.
70. See for example, Darraz, Muhammad ‘Abd Allah, 1950. Dustor Al-Akhlaq
Fi Al-Qur’an (rules governing behaviour in the Qur’an). This book was
written in French. It was translated into Arabic in 1973 by Dr ‘Abd as-
Sabur Shaheen and published by Al-Azhar Al-Shareef. The book is the first
attempt by a Muslim scholar in contemporary history to extract all rules
governing behaviour from the Qur’an and Sunnah. Also see extremely
useful and helpful 5 volumes of a book on the subject, Al-Hakimi,
M. R., Al-Hakimi, M., and Al-Hakimi, A., 1992. Al-Hayat. Tehran:
Maktab Nashr al-Thaqafa Al-Islamiyyah. See also, Mirakhor, Abbas and
Hossein Askari, 2017. Ideal Islamic Economy: An Introduction. New York:
Palgrave.
71. This proposition came to be known as Pigou-Dalton Principle; see,
Pigou, A. C., 1912. Wealth and Welfare. London: Macmillan; and
Hugh Dalton, 1920. “The Measurement of the Inequality of Income.”
Economic Journal 30 (119): 348–361. In the last two decades there
has been a renewed interest in Pigou-Dalton Principle, see for example,
Anthony b. Atkinson and Andrea Brandolini, 2015. “Unveiling the Ethics
240 N. EL MAGHREBI ET AL.

Behind Inequality Measurement: Dalton’s Contribution to Economics,”

The Economic Journal 125 (583).
72. See, for example, Al-Ilwani, Taha Jabir, 2001. Maqasid Al-Shari’ah. Beirut:
IIIT. Also, Kamali, Mohammad Hashim, 2014. Maqasid Al-Shari’ah Made
Easy. Occasional Paper Series. Washington and London: IIIT.
73. The book was republished by King Abdulaziz University in 2014. See
also, Jilali ‘Asheer, 2011. “Al-Qira’ah Fi Al-Mirsad Fi Masa’il al-Iqtis.ād li
Al-Shaikh Abdulqadir Al-Majawi Al-Tilmisani” Dirasat Islamiyyah 6 (3):
125–146. Shaikh Al-Majawi is enamoured with the economy of UK,
the US, and, especially, France and their economic policies that among
his last words of the book he claims: “…‫ان الدولة الفرنسویة جادة فی نفع‬
‫’العباد و تعلیمهم و فتحت ابواب ًا لکل من یرومه‬. For a view that expresses
close (nearly one-to-one) correspondence between Islamic Economics and
Fiqh, see Muhammad, Yusuf Kamal, 1998. Fiqh Iqtis.ād Al-Suq: Al-Nashat
Al-Khass. Cairo, Egypt: Dar Al-Nashr lilJami’at.
 CHAPTER 7

Behavioural Norms and Institutional

Structure of Iqtis.ād

The vexed questions about the norms of individual behavioural and

institutional rules cannot be addressed without raising many strands of
argument about moral philosophy and empirical demonstration. Insofar as
the development of Islamic economic thought is concerned, these ques-
tions need to be settled if the structure of the discipline as a whole is to
be sound. When confronted with normative problems, it is not beyond
the wit of economists to offer elaborate devises that combine the rational
maximizing behaviour of economic agents with normative value judge-
ments. It is, however, difficult to arrive at distributive justice because
the invisible hand theorem, which underlies the second welfare theorem
of Pareto optimal allocation of resources achieved as the outcome of
competitive equilibrium, is a theorem of positive economics not norma-
tive one. It is a theory that leaves out the difficult questions of property
ownership, and the justice of the underlying distribution of endowments.
Thus, Islamic Economics shaped in the mould of conventional
economic thought with a secularization process whose end product
is historical relativism cannot promote economic justice. There is,
indeed, fundamental unfairness in theories of morality-based utilitarianism
and social contracts that provide distributional mechanisms but fail to
promote just outcomes. Inconsistent social and economic policies are
not conducive to justice in accordance with the primary conceptions of

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Palgrave Studies in Islamic Banking, Finance, and Economics,
https://doi.org/10.1007/978-3-031-41134-2_7
242 N. EL MAGHREBI ET AL.

distributive justice by Aristotle or social justice by Saint Thomas Aquinas.

The concept of justice, which is at the foundation of thriving economies
and stable societies, has been, historically, defined by philosophy and
religion, and increasingly so by economic thought. It is clear that it is
difficult for Islamic economics to set an agenda for the organization of
an ideal economy on the basis of changing conceptions of justice, ‘adl
which should be, in the words of Ibn Khaldun, the foundation of social
organization and human civilization.
As argued in the previous chapters of this book, a paradigm shift
to al-iqtis.ād is necessary because it precludes conflation and regime
shifts between conflicting worldviews, and reinstates the importance of
justice al-mı̄zān in keeping equity amongst mankind according to the
Islamic worldview. A misguided approach to the construction of Islamic
economics is conducive to the cumulation of methodological errors and
policy mistakes. It is difficult to concur with the view that compounded
doctrinal flaws and errors are inevitable because learning takes place by
doing. Such a view cannot earn intellectual credence in the presence of
authentic knowledge from the Qur’an and the tradition of the Prophet
(saa) for the development of a stream of economic thought, Iqtis.ād,
concerned with the organization of an ideal system based on economic
justice. That unique stream of economic thought does not require a sepa-
rate theory of justice. The system of justice is endogenous to Islam and it
simply arises as the natural outcome of practices by rule-compliant soci-
eties. As argued by Muhammad Baqir as-Sadr (1982, [1994], p. 9) in
Iqtisādunā (Our Iqtis.ād), “justice by itself is not a scientific idea; so
when it combines with an idea, it imprints it with doctrinal stamp and
makes it distinct from scientific thinking.” Thus, justice should not be
simply regarded as the abstract expected outcome of solving the puzzle of
optimal equilibrium based on the rationality postulate, utility maximiza-
tion, perfect knowledge, and perfect competition. It is rather the doctrinal
stamp that should imprint every practical aspect of social and economic
life.
Thus, justice, which is inseparably mixed with Islamic economy, is
too important to be forsaken in the pursuit of weak links between
two conflicting worldviews. As argued in previous chapters, if Islamic
economics is dissociated from the Islamic worldview, nothing of substance
can render it discernable from conventional economics. It is further
argued, in this chapter, that an ideal economy cannot be organized
without behavioural norms and institutional structures that govern social
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 243

interactions and economic exchange based on justice. The usual criticism

about a lack of objectivity because economic thought is not necessarily
contaminated with value judgements. It is important to seek justice (‘adl )
because it is closest to piety (taqwa), irrespective of the conceptual prolif-
eration of the notions of justice and truth. To err is human, but in the
words of Ali Ibn Abi Talib, (raa), “whoever seeks truth but misses it
cannot be likened to that who seeks falsehood and achieves it.” Thus, it is
difficult for Islamic economic thought to occupy itself with partial truth
and partial justice, when these notions constitute the core of its teaching.
As the principles should be pursued for their own sake, it is impossible
for a discipline that disowns its own conceptions of justice and truth and
neglects its own set of normative behavioural rules to articulate its own
agenda for economic justice and human development.
The contour of an ideal Islamic economy, or Iqtis.ād is, as succinctly
described by Abbas Mirakhor and Hossein Askari (2017, p. 205), “one
where everyone who is able works, using knowledge to combine with
their own labour and the resources provided by the Creator, to produce
goods and services for society. Economic, social, and political affairs are
conducted with the goal of removing barriers to the progress of all
humans and in full compliance with rules, including those governing
property rights, market behaviour, exchange and trade, and contracts and
trust. Knowing that they are responsible and accountable, individually
and collectively, they invest allegiance in a legitimate authority to carry
out their affairs, with the legitimacy of the authority established by rule-
compliance.” It is thus, important to note that Iqtis.ād is founded on
a belief system, authentic knowledge, and rules-based behaviour, which
ensure that man accepts the wisdom of Allah swt in all aspects of life
in ways that positive propositions become essentially undiscernable from
normative statements.
Iqtis.ād is about the recognition of the nature of being, dignity of work,
sanctity of property, inviolability of covenants, and truthfulness in deal-
ings. It is about the organization of an ideal economic system that is
intimately connected to the Islamic worldview, rather than one subor-
dinated to the system of morality and value-free judgements that depend
on individual and social inclinations, self-interest, and utilitarianism. Thus,
the principal purpose of this chapter is to explain the rule-guided human
actions including norms of behaviour and institutional structure, which
derive directly from the authentic sources of knowledge in Islam, and
render thereby Iqtis.ād distinctively different from alternative sources of
244 N. EL MAGHREBI ET AL.

economic thought and reasoning, which rely on praxis, subjectivism, and

notions about justice that may be just as likely to be false as true.

Etymology and Quranic Foundations of Iqtis. ād

Iqtis.ād is a collection of Islamic economic thought deriving from two
streams of thinking, ‘ilm or knowledge, namely jurisprudence or fiqh, and
economic analysis, respectively. Whereas the development of fiqh depends
on the cognitive abilities to deduce and extract rulings from the Qur’an
and Prophetic tradition to regulate economic affairs, economic thinking
is about understanding, predicting, measuring, and guiding the impact of
fiqh rulings on economic reality. This line of argument implies that corpus
juris is a pre-requisite for economic analysis, and that a distinction should
be made between fiqh scholars concerned with eliciting legal rulings and
economists devoted to the analysis of economic phenomena. The forma-
tion of legal opinion requires from jurists the possession of the appropriate
knowledge and understanding about the principles of jurisprudence usul
ul-fiqh, and the ability to make ijtihād through analogical reasoning.
The same argument applies to economists, who should possess the
fundamental knowledge and understanding about the causal forces at
work in the economic system in order to express an intellectually sound
and informed opinion about the nature of economic phenomena. To
argue that all opinions, on either of the legal and economic sides, carry
the same weight cannot be helpful in distinguishing truth from falsehood.
It is, thus, important that Muslim economists possess also a minimum
understanding of the language and meaning of legal rulings, and that legal
jurists understand those of economic opinions. It is not possible to keep
legal rulings and economic opinions scrupulously out of sight from each
other because they are both interested in understanding and regulating
the same ideal economy. Thus, authoritative knowledge and expertise
in fiqh and economic analysis are inseparable. The relation between the
science of fiqh (‘ilm al-fiqh) and science of economics (‘ilm al-iqtisad) is
not one of rivalry. None can be sufficient on its own in designing the insti-
tutional structure of an ideal economy, making inferences, and reaching
policy decisions. The danger is that one discipline ignores the other
because there is no benefit in legal rulings based on inaccurate economic
knowledge and in economic opinions that contravene the tenets of Islamic
law. It is this balanced mixture that sets Muslim jurists and economists
with responsibilities beyond those of technocratic policy advisers because
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 245

a normative discipline requires consistency between legal rulings and

economic opinions for the organization of an ideal economy.
Thus, Iqtis.ād provides a paradigm for complementary and mutually
enhancing sciences of fiqh and economic analysis aimed at achieving the
Qur’anic vision of an ideal economy. It is a paradigm that does not rest on
a contentious relation between religion and science, but on a consistent
Islamic worldview that is distinct from the secular ideologies underpin-
ning conventional economics. As argued in previous chapters, it is difficult
to merely incorporate the maqasid of the Shari’ah or Islamic morality
maqāsid or Islamic morality into the mould of conventional economics in
order to develop a school of integrated economic thought called Islamic
economics, the essence of which is unlike Iqtis.ād that is based solely on
authentic sources of knowledge, by no means unambiguous. It is not
clear, given the wide spectrum of conventional economic theory, which
secular doctrines can be satisfactorily “Islamized” and corroborated as
part of Islamic Economics. Neither the gap between economic reality
and economic theory from conventional economics nor the confusion
in knowledge and intellectual disorder in the universe of discourse called
Islamic economics can be safely ignored. In contrast, Iqtis.ād, on the other
hand, rests on the certitude of sacred knowledge, grounded in its natural
habitat of the Qur’an and Sunnah. It is a paradigm that does not suffer
from internal failures and contradictions, and to believe that the reorga-
nization of the economy to serve justice is a utopian ideal would be an
intellectually disabling belief.
Etymologically, there is no word for the term “economics” in clas-
sical Arabic because, as argued by Seyyed Hossein Nasr (1993, p. 204), it
was never regarded in traditional civilizations as an independent discipline
separate from ethics. Economics became “gradually both a scientific disci-
pline and distinct activity of its own and in many areas it became divorced
from ethics.” Though the term iqtis.ād is commonly used in translation
of the modern field of economics, it linguistically connotes a rich collec-
tion of notions in Arabic. As explained also in previous chapters, it is
a noun derivative from the gerund q-s.-d or qas.ada ‫قصد‬, which literally
means “to mean” and “to intend.” The Qur’an includes several deriva-
tives, ranging from the noun qas.d used in reference to remaining steady
on the path, to the imperative iqs.id in an injunction to moderate the
pace, and the adjective qās.id to describe a moderate trip. The derivative
noun maqs.ad, which means aim and purpose, is also frequently used in
the literature of Islamic economics in its plural form as in the objectives of
246 N. EL MAGHREBI ET AL.

The Lawgiver (Maqās.id as-Shāri’ ) and purposes of the law (Maqās.id as-
Shari’ah). Thus, the term Iqtis.ād is directly derived from the verbal root
iqtas.ada ‫إقتصد‬, with the feminine adjective muqtas.idah appearing in the
Qur’an (66:5) with reference to an Ummah or community persevering
on the right path. It portrays a spiritual dimension as clearly manifested
in the notion of Moderation in Belief or “al-Iqtis.ād fil-I’tiqād” explained
by Abu Hamid al-Ghazali (1058–1111).
According to AlMajawi and Brihmat (1904 [2014], pp. 82–83),
Iqtis.ād can be defined linguistically as “moderation in spending, as a
degree between frugality and extravagance” and terminologically as “the
measures intended to increase wealth in ways that require less efforts and
yield more revenues to promote the means of comfort and luxury.” But it
is also noted that the relation between the social measures to the wealth
of nations, or Political Economy, and individual measures to increase the
wealth of individuals, Personal Iqtis.ād, is bound to be hostile in nature. It
is argued that hostility between political economy and personal economy
can be partly explained by difficulties in distributing wealth on equal
basis and in proportion to human efforts given the competition of indi-
viduals, and “the dominance of the strong over the weak, and the rich
over the poor, due to the disparity of power among individuals, espe-
cially financial power, so the strong grows stronger and the weak becomes
weaker” (authors’ translation from Arabic). This is a definition of Iqtis.ād
that adheres to the view that part of the economy is hostile to another,
which is not necessarily true because the overriding objective of Iqtis.ād
should not be reduced to the pursuance of economic prosperity and stan-
dards of material comfort at the detriment of others. Given the human
nature and potential conflict between public and private interests, the
definition and promotion of justice should not be left to the whimsical
arbitrariness of individuals or societies. It is imperative, indeed, that an
ideal economy be founded on iqtis.ād-driven behavioural rules and insti-
tutional structure that balance the spiritual with the material, the eternal
with the temporal, and the individual with the communal, in order to
secure economic justice.
Thus, it is important to derive an appropriate definition of iqtis.ād
that is consistent with the notion of justice and its epistemological and
ontological foundations. As argued by Baqir as-Sadr (1982 [1994], pp.
xliii-xliv), the word “Islamic economics” should be distinguished from
“economics” because whereas the latter is a relatively new science, Islam
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 247

is rather a way of life that cannot be reduced to the pursuance of scien-

tific endeavour. Iqtis.ād can be defined as “the economic doctrine of Islam
which embodies the Islamic system in the organization of economic life
on the strength of the balance of thought this doctrine possesses and
denotes and which is made up of the moral ideas of Islam and the scien-
tific, economic or historical ideas which are linked with the problems of
economics or the analysis of the history of human societies.” This line is
argument is shared also by Al-Daghistani (2022, p. 270), who contends
that “iqtis.ād cannot mean only economy from a dominant modern
understanding in its technical sense as a rational, accumulation-based,
and profit-oriented process but as a human behaviour of providence,
structured around the principles of moral uplift.”
Iqtis.ād is intrinsically related to the notions of perseverance, modera-
tion, and golden mean. It can be defined as the optimal use of resources
provided by The Creator in accordance with rules that are prescribed
by The Lawgiver in the Qur’an and operationalized by His Prophet to
achieve felicity in this life and in the hereafter. As argued by Askari,
Iqbal, and Mirakhor (2015, p. 31), the Qur’an is the fountainhead
of all Islamic paradigms, and “the framework within which all relevant
envisioned conceptions of reality find their source.” The fundamental
principles of Iqtis.ād, which provides a vision for an ideal economy, can
only be derived from the Qur’an in order to be regarded as immutable
rules both temporally and spatially. As it has its roots in the Qur’an rather
than a secular mind, Iqtis.ād is neither a pure construction of the human
mind as in Immanuel Kant’s (1724–1804) conception of mathematics,
nor a mental and abstract science concerned with conduct of economic
man as in Mill’s conception of political economy.
The immutability of the iqtis.ād-driven behavioural and institutional
rules stems from the Qur’an’s unique attributes of authenticity, time-
lessness, and inimitability. In contrast to other prophets who were given
signs of wonders apart from divine revelation, Prophet Mohammad
(saa) received the Qur’an itself as the greatest sign to provide guid-
ance and assurance to mankind. The clarity and force of evidence in the
Qur’an make the Qur’an itself its own proof, as argued by many scholars
including Ibn Khaldun (p. 73). It is a divine revelation that cannot be
produced by other than Allah swt, without any crookedness, or false-
hood, and that is immune to alteration, deformation, and falsification.
And so are the behavioural rules contained therein.1 It is inconceivable
248 N. EL MAGHREBI ET AL.

that economic principles derived directly from the Qur’an as operational-

ized by Prophet (saa) suffer from the inconsistency and vagueness of
secular paradigms. There is a real problem if the development of Islamic
economic thought is conditional on the immutable rules were to be
dismissed, either in whole or in part, as irrelevant in order to acquiesce to
the demands of secular worldviews.

Behavioural Rules and the Promotion

of Economic Justice and Social Welfare
The Qur’an is by no means a rules-laden divine revelation, but by neces-
sity, it is inclusive of a body of behavioural rules because faith should
be reflected by consistent deeds. As argued by Al-Attas (1993, p. 72),
“Islam is both belief and faith (iman) as well as submission in service
(islām); it is both assent of the heart (qalb) and mind (‘aql ) confirmed
by the tongue (lisān) as well as deed and work (‘amal ).” Thus, a distinc-
tion is made between ı̄man as the system of belief, Islām as the acts of
worship, and ihsān as the highest devotion to worshipping Allah swt as if
one could see Him.2 Thus, as a religion based on Unity or tawhid, Islam
is not merely a system of beliefs and convictions without consequences
but also a system of practices, values, and attitudes that are consistent
with the Islamic worldview. There is no room, in Islam, for cognitive
dissonance leading to a dichotomy between belief and practice. The exis-
tence of various levels of understanding and practice across Muslims is a
natural outcome of differences in spiritual levels, and degrees of resolve
and devotion, but there is only one Islam.
There is no room for individual conduct that blends truth with decep-
tion, benevolence with malevolence, and good with evil. The behavioural
rules that are meant to resonate in the entire fabric of society and
economic life are asserted in the Qur’an and operationalized by the
Prophet (saa) with a level of clarity and consistency that leaves no room
for errors of understanding and interpretation. The normative rules are
not meant to bind individuals and institutions to specific bits of behaviour
and neglect others at the risk of undermining economic justice. As the
rules rest on a human conscience that is vitally linked to faith, they reflect
a complete harmony between reason and intellect. It is a conscience that
values rectitude and righteousness in all economic and social activities
without exception. Iqtis.ād, thus, is not destined to paint only a partial
picture of economic life where value judgements are eschewed, but an
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 249

entire portrait where contractual freedom and risk sharing are embraced
to serve justice in the entire economy.
It is because the conduct of economic activities is necessary to human
sustenance and a pre-requisite to social life that the Qur’an includes
several references to the primary concept of vicegerency (khilāfah) and
the economic notions of subsistence (ma’āyish), sustenance (rizq), and
building and settlement (’imārah and isti’mār). With respect to khilāfah,
there are numerous references in the Qur’an to the notion that Allah
swt decreed the creation of a vicegerent on earth.3 Since this is a divine
will, the meaning of vicegerency should not be the subject of doubt
or misinterpretation. As noted by Al-Attas (1993, p. 39), “This does
not mean that he should be presumptuous enough to regard himself as
‘copartner with God in creation.’” The stewardship of the kingdom of
nature is rather a trust (amānah) offered to the Heavens, the Earth, and
the Mountains but they declined to assume it out of fear.4 The place-
ment of the burden of trust on humanity implies the necessity to live in
harmony with nature and other creations.
It is undeniable that this harmony necessitates the promotion of justice
in all aspects of life. This requirement is clearly reflected in Allah’s injunc-
tion to Prophet Daoud (as) to judge between people in truth and justice
based on the status of vicegerent on earth.5 A failure to promote justice
by following one’s lust, desires, and whims is thus a failure to serve as
vicegerent of Allah (swt ). Though obedience (tā’ah) is a duty that flows
directly from worship (‘ibādah), which is the purpose of creation, disobe-
dience on the other hand may follow from forgetfulness (nis’yān), which
is also inherent to mankind. Indeed, man is honoured over many of
Allah’s creation, but he is called (insān) in reference to his behaviour and
conduct, partly because he is ungrateful, hasty, impatient, miserly, and
prone to forgetfulness (nis’yān), which derives from the same verbal root
“to forget” (nasiya). It is forgetfulness of the original state of harmony
with that of all beings and existence ( fitrah), and there is indeed no
change in the pattern of creation and work of Allah swt.6 As described
in the Qur’an, the first human creation forgot the prior Covenant, and
Allah swt found on his part no firm resolve.7 Thus, forgetfulness as part
of man’s attributes of weakness, is conducive to a lack of resolve, and
injustice in the fulfilment of the requirements of vicegerency khilāfah.
The state of forgetfulness leads to the certainty of ignorance ( jahl ) and
the tragedy of injustice (dhulm), which have no remedies in secular theo-
ries about knowledge and definitions of justice but in divine guidance and
250 N. EL MAGHREBI ET AL.

remembrance of man’s ultimate purpose of existence and true relationship

with his Lord.
Allah swt who placed man with authority on earth to fulfil the duties
of amānah and vicegerency, would certainly provide the material means
to fulfil the requirements of life.8 By virtue of his very nature, man is in
permanent need to satisfy both the spiritual and physiological demands.
Indeed, Allah swt has provided the means of subsistence and sustenance
through the subjection (taskhı̄r) of all creation on earth. The subjection
of the seas is such that fresh and tender flesh and ornaments may be
extracted, and ships may sail through by His command.9 The spreading
out of the earth like a carpet and heavens like a canopy, the setting
of mountains firm and immovable, and the production of all types of
bounties in due proportions implies the provision of adequate means of
subsistence.10 This subjection means that the means of subsistence are not
provided solely for man’s own sustenance but also for those whose suste-
nance man is not responsible.11 It is a testament to the fact that Allah swt
has subjected all creation and provided subsistence in due balance for the
sustenance of mankind and other creation in order to seek of His boun-
ties and be grateful. Given the divine provision of ample bounties and
means of subsistence in due proportions for the sustenance of all creation,
the perpetual conditions of food poverty and human hardship can only
derive from man’s forgetfulness, ignorance, and negligence of the duties
of vicegerency. It is, indeed, difficult to reconcile the fact that the very
resources made available in due proportions by divine will are also found
to be in perpetual scarcity without conceding to the notion of man’s
complicit tempering of the cup with the salt of ingratitude and indiffer-
ence, which are leading to economic injustice. Silence and wavering in the
face of institutionalized injustice in the form of infringement on property
rights, encroachment on the fundamental right to equal wage for work
of equal value, and inequitable taxation, is tantamount to complicity and
acquiescence. The absence of justice is conducive, among others, to the
erosion of trust, which is an essential force in organizing social life and
economic activities.
The Qur’an refers also to the notion of isti’mar, the conditions of
settlement on earth, which is necessary also for the fulfilment of trust
Amanah. Indeed, Allah (swt ) created Adam and all mankind from soil,
and settled them on earth from which the necessary nutrients for the
human body can be extracted.12 He decreed that Adam shall inhabit the
earth, and the meaning of settlement is conferred by the Arabic terms
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 251

istimar or ‘umran. The word ‘imarah conveys also the meaning of phys-
ical building, construction, and maintenance as implied by the divine
decree that the masjids of Allah shall be maintained only by believers.13
It implies also physical presence in the masjid for ‘ibadah purposes as
in ‘umra, which literally means visiting populated sites. Ibn Khaldun
uses the word ‘umran in a broader meaning than hadhāra (civilization)
and tamaddun (city-dwelling), and distinguishes between al-‘umran al-
hadhari (urbanism and sedentism) and al-‘umran al-badawi (bedouin
civilization). Ibn Khaldun (1337 [2005], p. 91) argues that “differences
of condition among people are the result of different ways in which they
make their living. Social organization enables them to co-operate toward
that end and to start with the simple necessities of life, before they get
to conveniences and luxuries.” Thus, Iqtis.ād can be, alternatively, defined
as the organization of economic activities to achieve the conditions of
‘umran and social welfare.
The sign of ruin of ‘umrān or civilization is the prevalence of injustice,
as argued by Ibn Khaldun, who defines justice as the placing of everything
in its proper place and giving everyone his due. Al-Attas (1993, p. 76) also
defines justice means “a harmonious condition or state of affairs whereby
everything is in its right and proper place.” This implies that with respect
to man, justice means the condition or state whereby he is in the right and
proper place, both in relation to his self and in relation with others. It is
impossible to pursue a harmonious organization of the economy without
the promotion of a system of justice where man lives in harmony with his
self and with his environment. Thus, the settlement of man on earth was
not to proceed without divine guidance about economic justice, legiti-
mate ways of earning a living, and behavioural rules that govern all aspects
of life and interactions of man with his environment. Indeed, if there were
angels settled on earth living in peace and quiet, rather than error-prone
human beings, Allah swt would have certainly sent an angel messenger
nevertheless.14 Prophets were sent to remind mankind about the prior
Covenant with Allah swt. As norms represent standards of conduct that
individuals are expected to adhere to, there is a need for a benchmark
against which behaviour is compared and contrasted to. The benchmark
model for Muslims is the Prophet saa who is described in the Qur’an as
a man with an exalted standard of character (khuluq adheem).15 As no
obedience and loyalty to Allah swt can be conceived without obedience
and loyalty to His Messenger, the only legitimate path to vicegerency is to
emulate the Prophet’s (saa) leadership in all spheres of societal life from
252 N. EL MAGHREBI ET AL.

the religious and spiritual to the political and economic aspects. Given the
fact that the Prophet’s (saa) experience is not one of an angel but that of
a human being and merchant walking in markets, the behavioural rules
that govern man’s economic life can be directly drawn from the Prophet’s
conduct, which is perfectly consistent with the Islamic worldview.
Thus, the Qur’an indicates that for the purposes of ‘umrān and
fulfilment of amānah, Allah swt secures the means of sustenance in
due balance. Whether the provisions are made in abundance or limited
proportions for individuals or communities at a particular point in time,
is a matter for Allah swt alone to decide, as it is to Him that belong the
keys of the heavens and earth.16 It is to Him that belong also the keys of
the unseen, as not even a leaf falls without His knowledge.17 It is with His
perfect knowledge of all things that He expands and restricts provisions
to whoever He wills.18 These bounties are not conditional on belief, or
lack thereof, as they are provided to those who seek the transitory lusts of
this life as well as those who seek the hereafter.19 It is impossible to count
the favours of Allah because they are innumerable, but man is rather given
to injustice and ingratitude.20 Indeed, man is created with an element of
impatience, he tends to be unsettled when evil touches him and stingy
when good reaches him, except those whose conduct is consistent with
their covenants.21 Thus, there is a tendency for man to regard Allah’s
testing with favours as an act of honouring and restrictions on subsistence
as one of humiliation.22 This is a secular view of individual life where a
relentless struggle to climb the social ladder casts Allah’s expansion and
restriction of wealth and means of sustenance as an act of honouring or
humiliation.
The alternative worldview on which iqtis.ād is founded, calls for the
weight of conscience to bear within a greater scheme of things, where
restrictions on bounties are meant to test patience, resolve, and resilience,
and extensions to test empathy, altruism, and humility, in fulfilment of
the responsibilities deriving from the Covenant amānah.23 The argu-
ment that it is difficult to exhibit altruism in a heterogenous society
would embolden attempts to steer Islamic economics from a discipline of
normative behaviour to one of merely descriptive statements. The orga-
nization of an ideal economy based on iqtis.ād principles is based on
the tawhı̄d worldview, which implies the unity of creation, and relies on
conscious human action not hedonistic calculus based on social status, or
ethnicity. It is Allah swt’s wisdom that there are orders of hierarchy in
human societies, with none composed of equal elements. If He so willed,
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 253

He could have made mankind one people, but they will not cease to
dispute.24 Thus, a man of discernment entrusted with the responsibili-
ties of vicegerency can recognize the fact that heterogeneity is inevitable,
and that endless disputes about social structure are just a distraction from
the more important issues of social organization and from the duty to
organize the economy in ways that serve justice to all.
The real honour or humiliation, thus, does not lie in increasing or
diminishing wealth but in the conscious exercise of vicegrent duties
of providing care, or lack thereof, for other members of the society,
including the orphans and the poor.25 The system of alms zakat, which
is a pillar of distributive justice in iqtis.ād, is based on moderation and
risk-sharing through the provision of a pre-determined share of individual
wealth exceeding one’s needs in sustenance of particular segments of the
society. Indeed, righteousness cannot be achieved through an insatiate
passion for wealth but with spending from what is most cherished.26
Furthermore, there are many injunctions to follow behavioural rules
related to moderate consumption and savings. The principle of modera-
tion is clearly stated in the Qur’an in terms of avoiding conditions leading
to one’s hand becoming tied to the neck or overstretched in ways that
lead to niggardness or destitution.27 This fundamental principle of iqtis.ād
stands in stark contrast to the maxims of consumer sovereignty and self-
ishness that underlie the development of conventional economics. The
integration of secular maxims within a synthetic discipline called Islamic
economics cannot be harmless because they are clearly inconsistent with
the behavioural norms explained above. As these rules emanate from the
Qur’an and Sunnah, they depend on a permanent covenant with Allah
swt not on a mutable social contract a Social Contract, and unless Islamic
economics abandons the grafting of secular maxims, it would remain
entangled in secular worldviews. The Impossibility Theorem proposed in
previous chapters, suggests that given the radically different worldviews
and philosophical foundations, it is impossible to graft polar disciplines
one onto another through the process of Islamization or secularization.
Thus, iqtis.ād, which provides an organic and complete framework for
Qur’an-based rules that govern the structure and functioning of an ideal
economy, implies that grafting is an impossible exercise and a dangerous
source of confusion, doubt, and scepticism.
Justice and harmony necessitate an ideal form of human social organi-
zation, which can be explained by the fact that, as noted by Ibn Khaldun
(1337[2005], p. 45), “God created and fashioned man in a form that can
254 N. EL MAGHREBI ET AL.

live and subsist only with the help of food. He guided man to a natural
desire for food and instilled in him the power that enables him to obtain
it. However, the power of the individual human being is not sufficient
for him to obtain (the food) he needs, and does not provide him with
as much food as he requires to live.” Given the differences in aptitude
and nature of risks associated with the necessary seeking of livelihood, it
is difficult for one person to satisfy his own needs without cooperation
with others. Thus, man, as noted again by Ibn Khaldun (1337, [2005],
p. 45), “cannot do without a combination of many powers from among
his fellow beings, if he is to obtain food for himself and for them. Through
co-operation, the needs of a number of persons, many times greater
than their own number, can be satisfied.” The recognition of coopera-
tion and exchange relations, rather than threat relations, are central to
economic activities is consistent with the definition by Boulding (1969,
p. 14) of economics as “the study of that part of the total social system
which deals with exchangeables.” The emphasis on exchange implies that
risk-sharing is important in organizing economic activities. This is also
a clear departure from the classical definition of economics in terms of
optimal allocation of scarce resources. As argued above, iqtis.ād discards
the axiomatic treatment of resources as scarce, because it implies that the
hands of Allah swt are tied up.28 There is compelling evidence from the
Qur’an that Allah swt provides both the necessary bounties in due propor-
tions as He pleases through the subjection of all creation on earth as well
as the means of subsistence.
Thus, while there are no limits to His bounties, it is also Allah’s wisdom
to exercise restrictions because unless the provisions are made in due
measure, there is a potential for people to transgress beyond all bounds.29
Thus, part of the reason for restricting provisions is the avoidance of
mischief, transgression, and injustice. The history of mankind reveals,
indeed, that cooperation is not the only means through which a division
of labour and increased output can be achieved. There is also a tendency
for threat and aggressiveness, which lead to injustice in the division of
the economic pie. The wealth and income inequalities are reflective of
fundamental problems related to property rights not only with respect to
providers of labour and capital but also other members of society who
cannot seek livelihood by themselves. With reference to Boulding (1969,
p. 14) again, an exchange system of social organization differs from the
integrative system based on one-way transfer of exchangeables, and most
importantly from the threat system. A restraining influence is needed to
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 255

ensure normative conduct, behaviour, and etiquette befitting the duties,

qualities, and properties of vicegerents.
The restraining forces should be guided solely by a conscious urge to
promote justice, in the economic sphere as well as in all other aspects
of social life. It is a duty imposed on all Muslims without exception,
simply because justice is the ultimate objective or maqs.ad of Shari’ah
and because acts of injustice can be contagious, leading to the ruin of
‘umran. The requirement of enjoining good and prohibiting evil (al-
amr bilma’ruf wan-nah’i anil-munkar) is a fundamental principle of
behavioural norms, from which economic rules flow naturally. Both legal
(halal ) and illegal (haram) matters are indeed evident, and it is incum-
bent on Muslims to save their religion and honour by avoiding doubtful
issues in between, of which many people may not be aware.30 As the
perseverance of a party on the right path is described in Qur’an as ‘ummah
muqtas.idah, it is important to understand iqtis.ād also in terms of compli-
ance with Qur’anic ordinances and prohibitions related to economic
life. It is further ascertained beyond doubt that compliance with divine
law constitutes not just salvation in the hereafter, but also guarantee of
enjoying happiness and economic prosperity in this life.31
Thus, iqtis.ād as a paradigm that offers normative prescriptions for the
organization of an ideal economy cannot remain silent on normative rules
of behaviour, which allow man to live according to the dictates of divine
law. As the very meaning of Islam is to submit (aslama) to the Will of
Allah swt, following the form of right religion (millah) of Ibrahim (as)
and subsequent prophets, and since there is no compulsion in religion,32
compliance with Iqtis.ād-based behavioural rules depends on the freedom
of the rational soul, conscious of its Covenant with Allah, to do justice to
itself. It is difficult indeed, to cultivate harmonious relations with others
without harmony between man and his self, which cannot be achieved
in turn without knowledge about the purpose of creation and existence.
A collective doctrine, as argued by Baqir As-Sadr (1982 [1994], p. 8),
is one that “cultivates in every individual a deep consciousness about the
responsibility toward the society.” This consciousness requires a constant
reminder that the fulfilment of responsibilities cannot be achieved with
ignorant imitation but with rational judgement deriving from the intel-
lect, which lies in the spiritual organ of cognition, the heart (al-qalb). This
implies that individual actions can be assumed to be ideally conducted
in good faith in the presence of a deep consciousness that they will find
256 N. EL MAGHREBI ET AL.

favour with Allah swt and that they are not merely the outcome of a quest
for individual happiness but in accord with collective welfare as well.
Thus, the rules of behaviour, which are often identified with the
institutional framework can be useful, as argued by Askari, Iqbal, and
Mirakhor (2015, p. 51), in achieving three objectives, including the
reduction of cognitive demand on individuals in the face of uncer-
tainty, the distinction between acceptable and unacceptable behaviour,
and the rendering of individual actions more predictable. These rules
imply that with full knowledge of the consequences of lawful and unlawful
behaviour, individuals can be assumed to act with truthfulness and bona
fide, and share a common sense of responsibility. The choices taken
by individuals under conditions of uncertainty are bound to influence,
directly or indirectly, the decisions of others, affect the level of trust and
counterparty risk, and inhibit or facilitate coordination and exchange. It
is important to note that though rules of conduct are often referred to
as institutions, it is incumbent on public institutions to impose norma-
tive rules on individual behaviour and shape the social and economic
relations between individuals. Thus, given the nature of man created
with the conditions of forgetfulness, impatience, and inclination toward
natural desire (hawa), there is indeed a need for a cautious exercise of
restraining forces and for the alignment of institutional incentives that
promote justice across time and space.
Criticism levied about the immutability of behavioural norms and their
suitability for all human societies independent of time and space are
misguided and unfounded. For instance, Kuran (1983, p. 353) argues
that behavioural norms derived from a traditional seventh-century Muslim
society are not appropriate for the development of modern economies
because of differences in the perceptions of reality, intractability of altru-
istic behaviour, and free-rider problems, among others. While acknowl-
edging the importance of norms, it is also argued that “the principal
strength of the Islamic doctrine is also its most glaring weakness” because
a normative system cannot be expected to provide “perfectly well-defined
and clear constraints on individual economic decisions and to be appli-
cable with equal force to all societies in all stages of development.” It
is not clear how initial arguments about normative behaviour are trans-
formed, without strong evidence, from praiseworthy to blameworthy
ones. It is an implicit subscription to the neoclassical view that positive
rather than normative analysis should drive economic science. Indeed,
the argument implies that economic man whose worldview is secular
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 257

and whose behaviour is governed by self-interest and free-riding instincts

rather than altruism and consciousness about social responsibility provides
a more viable alternative. If, however, the behavioural norms derived from
the Qur’an and Sunnah were to be substituted by the axiomatic ratio-
nality of economic man, then Islamic economics would have to abandon
its Islamic worldview, and it would, thus, be deprived of its raison d’être.
There is a failure to understand the purpose of behavioural norms and
the nature of their relationship with the institutional framework. Insofar
as normative principles and institutional framework are derived from the
Qur’an not from local customs, traditions, and habits, they are immutable
and should stand the test of time. However crude and unsophisticated
the economies of seventh-century Arabia may be, the normative princi-
ples were successfully operationalized by the Prophet saws in a society
with diverse perceptions of reality and different worldviews. The reality is
that even in the absence of the Prophet’s (saws) teachings and demonstra-
tive practices, criticism from “modernist” reformers would still be levied
against abstract divine injunctions that have little bearing on economic
life. It is irrational to abandon a tested system of consistent economic
thought that avoids gaps in knowledge and generational crises of identity
in the presence of evidence from alternative economic doctrines based on
human experience, that is neither strong nor compelling. The reality also,
is that, as argued by Kamali (2000, pp. 2–3), every human society guided
by the same Islamic norms of behaviour preceded the rest of the world
by many centuries in the inception of forward trading and in the issuance
of commercial papers, which constitute an integral part of present-day
financial systems. The reality, also, is that economies are always in a state
of permanent change with technological advances affecting the terms
of exchange and means of sustenance, but the behavioural and institu-
tional principles that regulate change are immutable. Several aspects of
economic life can, indeed, be instituted, altered, and improved through
new policy and legislation, and this argument applies with equal force to
an ideal economy, the organizing principles of which are derived from
authentic sources of knowledge. As noted by Stiglitz (2017, p. 629), the
critical norm that should be used in the assessment of policy changes is
that “change is desirable only if it improves social welfare, taking into
account the impacts on distribution. The objective of policy is not to
maximize GDP.” GDP is merely a measure of economic activity not
human welfare, and as argued by Nutter (1968) also, it seems that output
258 N. EL MAGHREBI ET AL.

and growth in output have become ends in themselves. Indeed, the objec-
tive of economic and social policies is not to pursue different labyrinths
of prosperity without adhering to the norms of equity and justice. Thus,
it may be difficult for a secular mind in a secular society to under-
stand the bare essentials of behavioural norms and institutional framework
deriving from the Islamic worldview. And it is more difficult to establish
the foundations of an ideal economy if Muslim scholars and jurists who
have the ability to effect change by elucidating authentic knowledge and
promoting justice, choose simply to resist it.

Institutional Framework
of an Organic Iqtis. ād-Driven System
As noted above, there is a tendency to use the terms “rules of behaviour,”
“rules of conduct,” and “institutions” interchangeably, but it may be
useful to distinguish, hereafter, between normative rules and institutional
structure. The distinction is important because it is for institutions to
impose constraints on individual conduct that are consistent with the
normative principles derived from the Qur’an and operationalized by
the Prophet (saws). The role of institutions is to enforce the law and
demand compliance with particular rules of conduct and human interac-
tion. It is noted that there is a tendency to conceive institutions as the
rules of the game in a society. North (1990, p. 3) defines institutions
as “humanly devised constraints that shape human interaction.” Also,
Aoki (2001, p. 275) argues that “an institution constrains each agent’s
action choices through the beliefs implied by it,” and further contends
that in the absence of constraints, unenforceable laws cannot be quali-
fied as institutions. It is noted that institutions differ from organizations,
which are created, according to North (1990, p. 7), to take advantage of
the opportunities determined by institutions in the society in accordance
with the standard constraints of economic theory. However, as organiza-
tions evolve, they also transform institutions. It is the interaction between
institutions and organizations that is conducive to institutional change,
but economic theory plays an important role in creating opportunities,
developing organizations, and changing institutions.
Thus, a distinction between rules of conduct and institutions may
not be necessary when both the norms of behaviour and constraints
are designed by the society, and economic theory is derived from a
secular worldview. For an ideal iqtis.ād system however, this distinction
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 259

is crucial because the normative rules of behaviour with respect to which

institutional constraints are imposed, are derived from the Qur’an, not
defined by the society. It is crucial that the constraints imposed by insti-
tutions are accompanied by a system of incentives that guides individual
behaviour in consideration of social and economic choices. The definition
and alignment of incentives depend, in turn, on the conceptions of man
and society, and on the way in which a receptive mind (‘aql ) and heart
(qalb) make logical interpretations of reality and choices based on belief
in reward and punishment in the hereafter. It is clear that a paradigm
shift cannot be based on a mixture of Islamic and secular worldviews, a
blend of truth and falsehood, which leads to confusion and uncertainty
about normative rules, shared beliefs, and institutional constraints and
incentives. The ultimate objective of the institutional framework for an
ideal iqtis.ād system is to achieve economic justice in the use and alloca-
tion of resources, production, and exchange, as well as in the distribution
of income and wealth. Following the above discussion about normative
behaviour, the focus is placed, hereafter, on the properties of the insti-
tutional structure, including the notions of property, contracts, markets,
risk-sharing, wealth, work, cooperation, and competition.

Property and Property Rights

The organization of economic and social activities requires justice and
harmony in human interactions. This can only be achieved with a recog-
nition for all individuals of the fundamental right to property. It is possible
to define property as a set of claims, powers, liabilities, and duties attached
with an asset. An early theory of property rights from a Western perspec-
tive dates back to the seventeenth century’s work about a normative
theory of the creation of property rights by Locke (1680, p. 274), who
argued that “Though the earth and all inferior creatures be common to
men, yet every man has a property in his own person. This nobody has any
right to but himself. The labour of his body, and the work of his hands,
we may say, are properly his. Whatsoever, then, he removes out of the
state that nature hath provided and left it in, he hath mixed his labour
with, and joined to it something that is his own, and thereby makes it
his property.” He further contended that “government has no other end
but the preservation of property.” The line of argument that private prop-
erty, which exists before government, derives from natural law and natural
rights and that original appropriation occurs through labour, is shared to
260 N. EL MAGHREBI ET AL.

some extent by Adam Smith (1901 [2007], p. 129), who states in The
Wealth of Nations that “The property which every man has in his own
labour, as it is the original foundation of all other property, so it is the
most sacred and inviolable.”
These important insights are not new, however, since the institution
of property rights has a rich and long history in Islam, which precedes
the above intellectual insights by almost a millennium. The recognition
of legitimate property rights to all human beings irrespective of faith,
gender, or race, implies that Muslim women enjoyed, indeed, property
rights centuries before women in Western countries in particular. There
are also Qur’anic injunctions against eating up each other’s property by
false means, or using it as bait for the authorities to devour a portion
of other’s property knowingly.33 It is incumbent also on guardians to
provide orphans their property as soon as they are found to possess sound
judgement in protecting their interests.34 These rules represent a clear
recognition of the important role of private property in the conduct of
social and economic affairs. As noted by Mirakhor and Askari (2015,
p. 80), there are three bases of private property in Islam. The first
source of property includes property based on natural resources obtained
from a combination of personal skills and technologies. It includes also
income from self-made assets as well as assets acquired in exchange of
the product of labour. The second and third sources include property
acquired through transfer and inheritance from producers, respectively.
Thus, whereas the first source of private property is consistent with the
Lockean theory as it relates to personal abilities and effort, it is the
second and third sources that provide the necessary basis for the rules
of distributive justice to operate.
The notion of economic justice in iqtis.ād is founded on the funda-
mental principles that Allah swt is the ultimate owner of all resources,
that the right of access to resources is universal, that no individual should
be excluded from opportunities to combine mental and physical abil-
ities with resources, that work is a primary source of property-rights
claims, that claims can be transferred through gifts and-or inheritance,
and that no other claims to property rights can be deemed legitimate. As
noted by Mirakhor and Askari (2019, p. 193), “instantaneous property
rights claims that do not result from labor or gifts, such as theft, bribery,
gambling, rent on money or from prohibited activities, are not recog-
nized as legitimate.” Thus, distributive justice is concerned with economic
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 261

relationships, which result, by their very nature, in the creation of prop-

erty rights through combinations of resources and skills or in the transfer
of rights among parties. As argued by Phelps (1991, p. 164), economic
justice is related to relationships in terms of “collaboration in production,
trade in consumer goods, and the provision of collective goods. There is
typically room for mutual gain from such exchange, especially voluntary
exchange.” It is further argued that distributive justice is justice in the
arrangements for the distribution of gains among participants in accor-
dance with individual contributions, efforts, and opportunity costs. Given
these definitions, it is still unclear, however, how economic justice can be
achieved if property rights are regulated by economic theories, economic
laws, and economic institutions that have no bearing on the promotion
of justice. In this respect, Stiglitz (2017, p. 631) recognizes the impact
of abuses of property rights and monopoly powers, and suggests that a
weakening of intellectual property rights, and restrictions on abuses of
monopoly powers in the granting of patents can improve not only the
static efficiency of the economy, but also the ways in which the fruits of
innovation are shared, and incomes are distributed.
These important insights are consistent with the argument proposed by
Baqir as-Sadr (1982 [1994], pp. 9–10), and explained in other chapters,
that justice is not a scientific idea but when it attaches itself to an idea,
it transforms it into a doctrine that is intrinsically different from scien-
tific thinking. Thus, the notions of private property, economic freedom,
and prohibition of interest are connected with the Islamic doctrine of
economics only because they are imprinted with justice. In contrast,
economic laws usually expressed as scientific explanations of economic
phenomena, are not imprinted with the seal of justice because they are
mere descriptions of economic reality rather than normative rules driven
by economic justice. For instance, the iron law of wages, which stipu-
lates that labourers should be entitled to remuneration not exceeding
the means of bare sustenance, alienates justice as a mere theory and a
futile illusion that is irrelevant to policy formulation or justification. Thus,
when economic laws and distributive justice belong to different realms,
it is difficult to conceive laws aimed simultaneously at the protection of
property rights and the promotion of justice.
In contrast, it is possible to conceive justice-imbued principles of prop-
erty rights consistent with the Islamic worldview as argued by Askari,
Iqbal, and Mirakhor (2015). It is crucial to acknowledge, first, the ulti-
mate ownership of all property and assets rests with Creator of all things.
262 N. EL MAGHREBI ET AL.

It is from the ultimate owner that a conditional right of possession is

transferred to the collectivity of humans in order to fulfil the duties
attached with their status of vicegerents on earth. This transfer establishes
the right of collectivity to the resources provided as means of suste-
nance by the ultimate owner. Access to the natural bounties should be
provided to all on the basis of equal opportunities in order for individuals
to combine resources with human labour for the production of goods
and services. The transfer of property created from the combination of
labour and resources does not diminish the original rights of collectivity
to the natural resources or goods and services. It is possible to derive two
corollaries from the above fundamental principles. First, an individual is
entitled to property rights only through the combination of resources
with his/her own labour or through transfer from other individuals with
the means of exchange or inheritance. Second, it is also crucial to recog-
nize the immutability of property rights in the sense that the rights to
property acquired through the application of creative labour on resources
imply priority in the possession, use, and exchange of the goods and prod-
ucts, but do not annul the original property rights of the ultimate owner,
the Creator, and Provider of all things.
In addition to the above principles, it is important to acknowledge
the duty of sharing part of income generated from property given the
nature of the trust covenant between the ultimate owner and trustee.
The Qur’an explains the purpose of the duty of zakāh alms as purifica-
tion of one’s wealth from the right of others. It is not an act of favour or
voluntary charity but an obligatory redemption of the rights of the poor
and the needy, whose human dignity must be protected. The final prin-
ciple imposes another limitation to property rights in the sense that the
destruction, waste, squandering, and use of property for unlawful ends are
prohibited. Thus, the Western conception of property rights as confer-
ring to individuals an absolute freedom to dispose of property as he/
she wishes is refuted from an Islamic perspective. The absolute ownership
belongs rather to the Creator and Provider of all things, and transfer of
resources to the collectivity of humankind is a matter of entrusting the
responsibilities to rule according to His will and be just to all creation.
The above principles imply that an individual unable to work, for what-
ever reason, should not be denied the benefits of the original right granted
to the collectivity to access the resources on the basis of equal opportuni-
ties. It is clear also that the primary sources of poverty and inequality lie
in the existence of rules that restrict access to resource endowments and
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 263

distort the exchange and transfer of property rights. Given the weaker
or weakening mental or physical capabilities, the old and poor tend to
be regarded as a burden to society because of their limited ability to
contribute to society through creative labour. Whereas the focus is often
placed on the protection of private property against the threat of govern-
ment expropriation, rent-seeking through non-productive profit activities
should be recognized as a violation of the property rights of others.
Insofar as rent-seeking does not entail the application of one’s labour
to resources in order to create property rights, a claim on property rights
accrued through the creative labour of others is clearly illegitimate. It may
be argued that the notion of rent-seeking is intractable because it is based
on subjective value judgements, and that conventional economics should
be purged of any moral content if it aspires to the status of economic
science. From the perspective of an ideal economy based on the iqtis.ād
paradigm however, moral questions are central to the normative definition
of an ideal structure of property rights, where relative individual rights are
recognized, respected, and protected.
It is difficult, indeed, to abide by rent-seeking and interest-based
arrangements in the absence of precise economic logic that justifies profit
seeking activities. The very definition of rent-seeking as non-productive
profit activities implies the appropriation of a share of property rights
created by others without a commensurate exposure to the economic
risks associated with the use of resources. The prohibition of interest in
Islam can, thus, be justified by the absence of risk-sharing in the creation
of property rights through the application of creative labour to orig-
inal resources. The rent-seeking activities are not only distortive of the
mechanisms of creation and transfer of property rights, but they are also
the source of oppression and exploitation, income and wealth disparities,
financial crises and economic recessions, and poverty amid plenty.
The central contradiction of capitalism, as argued by Thomas Piketty
(2014, p. 571), is that “a market economy based on private property,
if left to itself, contains powerful forces of convergence, associated in
particular with the diffusion of knowledge and skills, but it also contains
powerful forces of divergence, which are potentially threatening to demo-
cratic societies and to the values of social justice on which they are based.”
The destabilizing force does not lie, indeed, in human knowledge and
skills, which can be applied to resources in order to create property rights,
but in the capital, which is used to claim rights on income generated by
others, without sharing the risks of economic activities, and without one’s
264 N. EL MAGHREBI ET AL.

own creative labour. This implies that the existing property, or wealth
accumulated in the past, is bound to increase at a higher rate than the
growth rate at which the uncertain rights to property may accrue from
creative labour. Thus, it is in a market economy where the structure of
private property is distorted by interest rates that the private rate of return
on capital is bound to remain significantly and persistently higher than the
growth rate of income and output.
Thus, an ideal iqtis.ād-driven system should be based on this unique
set of principles about property rights, which derive directly from the
Islamic worldview. These principles do not rely on the relative views
and changing beliefs of individuals and society, but reflect the unity of
creation, the duties of vicegerency, the endowment of resources in due
balance, and the provision of means of sustenance, including human intel-
ligence and reason. It is impossible for Islamic economics to reorganize
the economy in ways that alleviate poverty, reduce income disparities,
and promote shared prosperity, without a structure of property rights
conceived within the realm of justice. There is a need to redefine the rules
governing the creation and transfer of property rights so that opportuni-
ties to access resources, including information, and intellectual property
rights are available to all, and incomes are distributed on equitable basis.

Contracts and Contractual Obligations

It is clear from the discussion above that the conduct of economic
activities requires cooperation and coordination among parties. In addi-
tion to the clarity with which the bases of property rights and rules of
transfer should be defined in the realm of justice, transactions between
parties should be also regulated accordingly. The institution of contract
defines the time-dependent obligations that parties are expected to fulfil
in order to achieve the ultimate objectives of the contract. There is a clear
command to all believers, in the very first sentence of Chapter 5 of the
Qur’an, to honour all contracts (‘ukūd).35 Any promise should be made
with the serious intent to fulfil it because it carries an absolute obligation
to honour it. The concept of contract is fundamental to Islamic law (Shar-
i’ah), which is contractual in essence. The original Covenant between
man and Allah swt (mı̄thāq) is an acknowledgement by all human souls
of Allah’s Lordship, and it is a conscious and willing submission to Allah’s
Will and obedience to His Law during the course of man’s life on earth.36
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 265

As argued by Attas (1993, p. 74), the man of Islam is bound ultimately

by the Covenant that his soul has sealed with God, not by the social
contract, “though he lives and works with the bounds of social polity and
authority and contributes his share towards the social good and though
he behaves as if a social contract was in force” (italics in original). This
implies that an act of injustice against other individuals or against the
society is a violation of the Covenant with God, and thus, an act of injus-
tice against one’s own soul by placing it in the wrong course. Thus, the
fulfilment of obligations stemming from man’s Covenant with God and
man’s agreements with others are inherently related. The Covenant with
God is the dominant concept that lies at the core of the Islamic worldview
of Being and regulates other aspects of man’s life on earth both as an indi-
vidual and as member of a collectivity. It is mandatory for both parties to
an agreement to hold a genuine intent to enter into it, because the duty
of rule compliance to contractual obligations applies to the relationship
of humans to their Creator as well as to one another.
The institution of contact is governed, as with that of property rights,
by a consistent set of principles that derive from the Shari’ah’s perspective
on contracts and contractual obligations. Following Kamali (2000), the
permissibility of transactions and contracts (ibahah) is usually considered
as the first principle of the law of contracts. The Islamic law of transactions
( fiqh al-mu’āmalāt ) implies that transactions are, by default, permissible
unless there is evidence of clear prohibition. The rules of evidence operate
in the opposite direction with respect to acts of worship and devotional
matters (‘ibādāt ), where the basic assumption is prohibition unless there
is evidence of clear validation. This reversal in the balance of evidence
about legal validity and prohibition is reflective of in the nature of man’s
covenant with his Lord and his contractual agreements with others. Since
the purpose of man’s creation is ‘ibādah, acts of devotion from prayer
(salah), fasting (siyam), regular charity (zakat ), and pilgrimage (haj ) to
supplication (doā), and remembrance (dhikr) are predetermined by Allah
swt, the true Object of Worship (Ilāh).37 Innovation in worship is not
permissible because acts of service are performed for the sake of Allah
alone and approved by Him alone. In contrast, contracts between indi-
viduals are governed by the liberty granted to interested parties to provide
informed consent. Permissibility is the rule because a mere presumption
of prohibition in the absence of clear evidence of unlawfulness would
impose unnecessary restrictions on the freedom of enterprise and inno-
vation. Thus insofar as economic transactions are concerned, whereas
266 N. EL MAGHREBI ET AL.

there is no ruling on permissible matters, there is clear explanation in

the Qur’an and the Sunnah regarding prohibitions.
It is Allah’s wisdom that He gave clear guidance about the lawful
(halāl ) and the unlawful (harām), and remained silent about other
matters. For those who understand the elaborated verses of the Qur’an,
the question is asked, indeed, as to who has forbidden the adornments
and pure means of sustenance that Allah has provided to believers in
this worldly life.38 There is also is clear message not to hold unlawful
the good things that Allah has made lawful.39 It is not for humans
to falsely describe with their tongue this is lawful and this is unlawful,
because this is the prerogative of the Lawgiver.40 Thus in application of
the principle of permissibility, it is not incumbent on parties to provide
evidence on the permissibility of contractual agreements. The contract
may thus be deemed valid provided that there is no clear text of prohibi-
tion. The permissibility rule covers a wider scope of economic transactions
than the specific areas of prohibited transactions, facilitating thereby the
functions of production, exchange, and transfer of property rights while
ensuring justice in dynamic economic systems and dynamic economies
and changing societies.
The second principle is the provision of ease and prevention of hard-
ship. Again, there is clear evidence from the Qur’an that Allah swt intends
to provide ease and not create hardship in the fulfilment of man’s duties
on earth, including matters of worship.41 Allah (swt ) did not impose any
hardship in the religion.42 A relief from specific duties is conditional on
human ability, as there is no blame on the weak, or on the sick, or on
those who have nothing to spend.43 Indeed, Allah swt does not burden
a soul beyond its capacity,44 and does not wish to place man in hard-
ship.45 The Prophet saa reminded his companions that they have been
sent to make things easy and not to make them difficult.46 As argued by
Kamali (2000, p. 71), the principle of provision of ease and prevention
of hardship are usually regarded as part of the objectives of Islamic Law
(Maqās.id as-Shari’ah). They are also intrinsically related to other legal
maxims such as the notions that necessity renders the unlawful lawful,
and hardship attracts alleviation, and when a matter narrows down, it
should be widened. Thus, contractual stipulations included to facilitate
the satisfaction of particular needs of contractual parties or prevent hard-
ship in the fulfilment of their obligations are, in principle, valid insofar as
the provision of ease and prevention of hardship do not alter the nature
of the contract itself and violate its ultimate purpose.
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 267

It is natural that only lawful acts sanctioned by Islamic law may form
the basis of an agreement. The freedom of contract (hurriyat atta’āqud),
which constitutes the third principle, is thus, of a conditional nature.
Indeed, it is usually argued that parties are at liberty to create a contract
and define contractual obligations through mutual agreement, but the
effects of the contract are rather determined by the Shari’ah. For instance,
the terms of transfer of property rights in a sale agreement are deter-
mined by the Shari’ah, which protects the rights of both parties. A
voidable stipulation (shart fāsid), which may be beneficial to one party,
can be nevertheless invalidated by Shari’ah on the basis that it violates
the purpose of the contract. Thus, stipulations that are neither valid nor
voidable are deemed to be null and void (bātil ), which implies that while
the contract is upheld, the condition is completely disregarded.
The rationale behind these principles is to protect property rights, and
ensure justice by avoiding the conditions where the freedom of contract
implies entry into unchartered territory of potential abuse and contractual
ambiguity. The essential requirements of a contract include the freedom
to make an offer (ı̄jāb) and that of providing acceptance (qabūl ), but
it is also important to prevent conflicts, abuse, fraud, exploitation, and
injustice among parties. There are various views about the notions of
risk, uncertainty, and ambiguity (gharar). A contract of sale may be
deemed void and null depending on the degree ignorance and informa-
tional asymmetry about the terms of the contract, including the substance
of the subject matter of sale by buyers or sellers. There may be, indeed,
contractual conditions characterized by incomplete information about the
available quantity, time of completion, prospects of delivery, and terms of
payment, and in particular for contracts where payment or delivery occurs
at a future date. Kamali (2000, p. 85) argues that in order for gharar to
have legal consequences, it must be excessive not trivial, and directly affect
the subject matter of contracts, among other conditions. However, certain
types of fiduciary contracts such as cost-plus-profit sale (murābahah) can
be deemed invalid independent of the degree of gharar. As noted above,
justice demands rule compliance, and compliance requires, in turn, clarity
about contractual terms, which in turn depends on the availability of
accurate and timely information.
The fulfilment of contractual obligations requires also sincerity and
truthfulness from both parties, who are expected to demonstrate faith-
fulness to contractual obligations in the face of increased economic
uncertainty. Thus, it is important to recognize the fact that property
268 N. EL MAGHREBI ET AL.

rights are entrusted to man from Allah (swt ), and that contractual obli-
gations, which result in the transfer or creation of property through
creative labour, are governed by Shari’ah, which has its foundation in
the Covenant between Allah and man. As Allah (swt ) does not fail in
His Promise, it is incumbent on man to perform their own duties with
the sincerity of purpose. It is incumbent on contractual parties to be
faithful to each other, refrain from violating property rights, and respect
the sanctity of mutual agreements.47 This will increase the amount of
trust among parties, which constitutes an essential element of the social
capital in Islam. The terms of trust (amānah) and belief (ı̄man) share
similar verbal roots, and the linkage between trust, trustworthiness, and
faith implies that believers are expected to be faithful to contractual obli-
gations. A loss of trust between parties constitutes, however, a serious
impediment to the negotiation of contracts and conclusion of agreements.
In the absence of trust, the costs of contract monitoring are bound to rise,
and complex mechanisms may be needed for the sole purpose of contract
enforcement.
It is important to note also that the institutions of contract and trust
are pervasive in Islam. Every single public office represents indeed, a
contract between the holders of authority and the community, and if
confidence and trust between the two parties wane, it is rather difficult
to expect compliance with contractual obligations. Thus, while no person
has the right to force appropriation or expropriation, it is also permissible
for the society to exercise priority rights over private property if individual
rights stand in conflict with collective interests. However, the absence of
trust stemming from discriminatory treatment based on socioeconomic
status, faith, or ethnicity can undermine the necessary process of coordi-
nation, which depends on the rules of cooperation. It is only when rulers
remain faithful to their contractual obligations to discharge their duties
with justice (qist ) that they can expect the subjects to fulfill their own
duties of obedience to leadership.48 As noted by North (1990, p. 7),
past attempts by rulers to devise property-rights mechanisms that serve
their own interests were accompanied by higher transaction costs and
inefficient systems of property rights. Indeed, it is the rulers, among
Muslim communities, who neglected the basic principles of property
rights and economic justice, leading to economic decay and fall of Islamic
civilization. It is misguided leadership also that sanctioned merchant capi-
talism and allowed for various aberrations of property rights, resulting in
economic injustice and increased income disparities. Thus, the blame is
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 269

not to be laid on Islam, but on the door of generations of Muslims with

secular minds who abandoned the teachings of the Qur’an and failed to
internationalize its normative rules of behaviour. It should be laid, prin-
cipally, at the door of Muslim rulers who gave precedence to secular
economic systems over the ideal economy based on the iqtis.ād principles
derived from the Qur’an and the Sunnah.
The notion that the poor economic performance of countries with
Muslim majorities is due to the prohibition of interest lays the blame
on the institution of contract. There is, however, compelling historical
evidence from the development of business partnerships which consti-
tute the foundations of capitalism, that it is perfectly possible to protect
property rights for all contractual parties and engage in various economic
activities, unhindered by interest prohibition. It may be argued that
the economic system practised by the Islamic world during the period
from the seventh to thirteenth centuries, is not a variant of “merchant
capitalism” that predates liberal capitalism, but capitalism with moral
foundations. A compelling case is made by Murat Ҫizakҫa (2011, p. 29),
who argues that various business partnerships are perhaps the most impor-
tant institutions that emerged in Islamic capitalism, which derives from
the fundamental principle of interest prohibition. In the absence of
interest (ribā), the question arises as to how to combine the key factors
of production when capital, labour, and entrepreneurship are owned and
supplied by different individuals. What is needed from the perspective
of financiers who provide capital for entrepreneurs, is to conceive some
form of reward for the risk exposure without violating the principle of
interest prohibition. It is the innovative institution of business partnership
that provided a viable solution to the important problem of protecting
the interests of all parties, including the owners of capital. The rate of
interest, which is pre-determined as a percentage of capital is substituted
by the rate of return, which is determined on ex post basis depending
on the outcome of business activities. It attributes the owners of capital
with property rights in the form of financial claims on the net assets of the
enterprise rather than fixed claims on the property rights of entrepreneurs
based on the amount of capital supplied. Thus, business partnerships,
based on the permissible contracts of exchange (bay’ ) and trade (tijārah),
constitute an innovative form of contract designed to protect the prop-
erty rights of all parties, including those of capitalists, without violating
the principle of interest prohibition.
270 N. EL MAGHREBI ET AL.

It should be emphasized that in addition to partnership contracts, it

is the use of money and credit instruments that facilitated the emer-
gence of Islamic capitalism more than a millennium before the institution
of distorted predatory forms of capitalism in the Western world. It is
noted that originally, the economy envisioned by Adam Smith invokes
the notions of moral duties, benevolence, and sympathy, ordained by the
Author of Nature to be internalized by market participants could well
be an approximation of the Islamic vision of the economy, as argued by
Mirakhor and Askari (2017, p. 74). In an ideal Iqtis.ād-driven system,
business partnerships remain one of the most important institutions. Part
of the reason is that this institution recognizes the impact of uncer-
tainty on the outcome of private enterprise and all economic activities.
It recognizes also the importance of risk-sharing in the organization of
exchange relationships in the economy. It recognizes also the importance
of protecting property rights and regulating the distribution of income
among the financiers, entrepreneurs, and labourers. It can also provide
the basis for the development of a market economy, where prices are
determined through the free forces of supply and demand. Thus, the
institution of markets that facilitate exchange provides the final linkage
in an iqtis.ād system between the institution of property rights, and that
of contracts.

Markets and Information

It is clear from the explanation above that the institution of contract
derives from the institution of property rights in the sense that it allows
parties to combine creative labour and resources to produce new prop-
erty and distribute new property rights. It can be argued also that the
institution of markets is a natural outcome of the two institutions of prop-
erty rights and contracts in the sense that it allows for the transfer of
property rights to third parties that were not necessarily involved in the
initial creation of property. Thus, the raison d’être of goods and services
markets lies in the institution of the contracts of exchange (bay’i) and
trade (tijārah). In contrast, the rationale behind the existence of stock
markets is the institution of business partnerships, which as explained
above, results in the creation of financial claims for financiers, which can
be traded with third parties.
The institution of markets is built upon the three pillars of property
rights, contract and trust, as well as information, which can be useful in
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 271

the elimination of ambiguity (gharar) and the reduction of uncertainty

in the formation of expectations. It depends also on the balance between
the right not to be harmed and the obligation not to harm others. Market
prices are the result of the interaction between the forces of supply and
demand. There is undisputable evidence about the development of free
markets in Islamic economy, which derives from a firm belief that there
should be no interference in the price discovery process. The imposition
of taxes on market participants or market transactions was prohibited
by the Prophet saws, who created also incentives for non-Muslims to
encourage participation in market activities and trade irrespective of differ-
ences in economic status, ethnicity, or faith. As noted in Mirakhor and
Askari (2017), the travelling non-Muslims were considered guests and
non-market losses were guaranteed by the Prophet (saa).
The system of rules governing markets includes the removal of barriers
to market entry and exit, and the elimination of restrictions on the free
movement of goods, services, and resources across markets. It eliminates
also restrictions on international trade in the form of taxation of imports
and exports. The rules provide also clear definitions of the terms for the
completion of trade transactions at future dates, and the state guarantee
of enforcement of all contracts. There are also clear prohibitions of price
controls, hoarding of commodities and productive resources as well as
interference of third parties in the negotiation of contracts, interference
with supply before market entrance, and collusion among market partici-
pants. The rules governing markets are based on the free and transparent
flow of information regarding prices, quantity, and quality of goods, in
order to guard against the conditions of ambiguity (gharar), which can
invalidate the contracts of sale and spot trade in particular.
There is also historical evidence that since unhindered flow of accu-
rate, complete, and timely information is crucial for market efficiency, and
compliance with behavioural rules is important for its proper functioning,
the office of market supervisor muhtesib was instituted to ensure compli-
ance to rules and their internalization before market entry. The current
prohibition of insider trading based on access to confidential information
before public announcement echoes earlier Islamic ruling about market
conduct prohibiting interference with the price discovery mechanism. The
free flow of information and rule compliance are conducive to fair and
just market prices, which imply the protection of property rights and the
sanctity of contracts. Thus, the muhtesib plays a crucial role in strength-
ening the organic relationship between the institutions of property rights
272 N. EL MAGHREBI ET AL.

and contracts. Indeed, a failure to prevent monopoly practices, market

manipulation, fraud, and any activities that undermine the functioning of
market mechanism, is conducive to unfair prices, which weaken the incen-
tives to invest and corrode the social capital of trust. These issues are of
fundamental concern because increased uncertainty about the production
and distribution functions has implications for the conduct of economic
and social life.

Risk-Sharing and Shared Prosperity

A coherent doctrine of an ideal Iqtis.ād system cannot be conceived
without understanding the impact of pervasive uncertainty on all aspects
of economic life. Indeed, the institution of private property is based
on the combination of resources with labour to create new property
rights, but the outcome of this creative combination remains uncer-
tain. Similarly, the institution of contract, which is based on the transfer
of existing or newly created property rights among contractual parties,
requires compliance with contractual obligations, but the outcome of
business agreements remains uncertain as well. It is possible through the
prescribed rules of conduct to render the behaviour of economic agents
and contractual parties more predictable, but while the risks emanating
from economic uncertainty can be reduced, they cannot be completely
eliminated.
Thus, the organizing principle of risk sharing in iqtis.ād system reflects
the contractual imperative that entitlement to property rights is condi-
tional on exposure to the risk of loss and liability. Profit, it is usually
argued, comes with liability, and higher returns are commensurate with
higher systematic risk. No party to an agreement should be entitled to
profit in the absence of liability to losses. Thus, the distinction is clearly
made in the Shari’ah between lawful and unlawful profit. The economic
rationale behind the prohibition of interest lies in the absence of liability
under any state of the world. Uncertainty can be defined, indeed, as the
existence of multiple possible states of the world that may occur in the
future. It is possible, then, for the provider of capital to remain insu-
lated from the adverse effects of uncertainty with contractual stipulations
to the effect that liability for losses is waived under all contingencies.
The charging of interest can, thus, be regarded as a claim for fixed
income proportional to capital, independent of the outcome of economic
activities.
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 273

From the Islamic perspective, the argument that exchange (al-bay’i)

is like interest (ar-ribā) has been clearly refuted by Allah swt, who
has permitted exchange (al-bay’i) and prohibited (ar-ribā) transactions.
The reasons may be intrinsically related to differences in the nature of
these transactions as governed by the institution of property rights.49
The permissibility of the exchange of assets derives from the concomi-
tant exchange of property rights from one party to another. In contrast,
ribā-based transactions imply the exchange of cashflows today for larger
amounts in the future, without the transfer of property rights over the
principal from the lender to the borrower. The retention of property
rights by the lender is also accompanied by a transfer, at the time of
contract conclusion, of the property rights over the fixed income to
the lender. As the risks of the transaction are completely borne by the
borrower alone, there is a clear violation of property rights in interest-
based debt transactions, which renders debt financing impermissible in
Islamic finance. In contrast, equity financing is based on the principle of
risk-sharing, where financiers assume the liability of losses and are entitled
to pro rata income based on the return from business activities subject to
economic uncertainty.
Financial instability is an essential feature inherent to all financial
systems based on interest-bearing debt. It reflects a profound disconnect
between the financial sector and the real economy. Indeed, debt accumu-
lation and higher leverage allow the financial sector to grow independent
from the growth rate in the real economy. It allows for the formation
of asset bubbles through debt financing, which would ultimately burst
leading to banking crises due to debt defaults. The risk of default should
not be confused with economic risks because it is a by-product of contrac-
tual agreements. Indeed, the rate of return on capital is pre-determined
in complete neglect of the reality that rates of return in the real economy
can only be determined on ex post basis. The uncertainty about future
demand and supply functions and disruptive technologies may lead to
losses, resulting in the inability of borrowers to honour the obligations of
interest-based contracts. The absence of liability for losses with respect to
lenders under all states of nature is reflective of risk transfer to borrowers.
In contrast, equity financing provides the contractual basis for the protec-
tion of property rights in the sense that a transfer of rights on future
income is conditional on the realization of profits. In the absence of
profits, there is no obligation to transfer property rights to financiers, and
274 N. EL MAGHREBI ET AL.

thus, unlike debt, there is no default in equity financing. Thus, the orga-
nizing principle of risk sharing in the iqtis.ād system, which of risk-sharing,
which promotes equity rather than debt financing, shall strengthen the
linkage between the financial sector and the real economy, and provide
the basis for shared prosperity.
It is clear from the above discussion about Islamic capitalism that risk-
sharing promotes economic justice and shared prosperity as it entitles
the different owners of the factors of production to share the income
from business activities on a fair and equitable basis. The principle of
risk-sharing can also provide some insights into the central contradiction
of capitalism, which has serious implications for income distribution. As
argued by Thomas Piketty, there is compelling evidence that the rate of
return on capital is persistently higher than the rate of growth of output
and income. Whereas the rate of income growth depends on the outcome
of the essential economic activities of production, exchange, and distribu-
tion, the rate of return on capital is function of debt or equity financing.
Since the return on equity is, by definition, a positive function of the
outcome of economic activities, it cannot conceivably exceed the rate of
growth in income and output. This leaves debt financing as the only force
of destabilization, as interest payments are fixed on ex ante basis, inde-
pendent of the rate of return in the real economy. It is the transfer of
property rights from entrepreneurs and workers to financiers that explains
the persistently higher rates of return on capital. Thus, there should be no
sanctity for interest-based debt agreements, which undermine economic
justice and tilt the distribution of income in favour of financiers through
flagrant violations of property rights.
It is the skewed distribution that implies conditions of plenty for a
few and scarcity for the many, leading to poverty trap. As noted by
Acemoglu and Robinson (2013, p. 454), there is a need to recognize the
roots of world inequality and poverty in order to avoid pinning hopes
on false promises such as foreign aid. Part of the roots of inequality
stems from the central contradiction of capitalism, and serious attempts
to eradicate poverty should start by understanding how the economic
system functions, how money becomes not just the means of exchange
but also the end of it, and how the property rights of the poor and
working poor are persistently violated. It is the approval and even admi-
ration of self-interest as an overriding assumption in economic models
that sends an unmistakable message of alienation that the poor should be
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 275

abandoned to their own fate. As poverty is regarded as a matter of indi-

vidual choice and in the absence of benevolence, there are no genuine
policy recommendations aimed at promoting economic justice. In the
iqtis.ād system, the institution of zakat provides the poor with a non-
negotiable property right and share in income distribution. Rather than
accepting poverty as a predicament, it is important to provide the poor
with some sense of empowerment and control over their own life. It is,
thus, important to reinforce the institution of risk-sharing in every aspect
of economic life in order to rebalance the distribution of property rights,
which would equalize the distribution of income and wealth, and establish
the foundations for shared prosperity.
Thus, in light of the above discussion, it is clear that the institutional
structure of iqtis.ād vision of an ideal Islamic economy is composed of
three layers. The first dimension is the institution of property rights,
which represent a conditional right of possession granted from Allah swt,
the Creator of all things and the ultimate owner of all property and
assets. The second dimension is the institution of contracts, which governs
the exchange and transfer of rights through mutual agreement, and in
accordance with the duties and obligations prescribed by the Lawgiver.
The third dimension is the institution of markets, which allows for the
exchange and transfer of rights to third parties according to normative
rules of market conduct that ensure fair prices and economic justice.
The organic relationships between the different dimensions depend on
compliance with the normative rules of behaviour at each level, as well as
on a system of incentives that promote trust, information transparency,
and risk-sharing. The three dimensions are sufficient to cover all types
of economic activities, those undertaken on individual basis and under
contractual agreements, as well as those involving third parties according
to market transactions.
It is an institutional structure for an ideal economy that should be
judged on the basis of the clarity and coherence of the rules governing
the relationships between parties rather than human malpractices and
distortions. It is impossible to build an ideal Islamic economy by insu-
lating the institutional dimensions from each other, and arguing that the
rules of compliance apply only to others. It is difficult, indeed, to protect
property rights without an uncompromising equality before the law. It
is difficult also to protect the freedom of agreement without prohibiting
contracts that violate property rights. It is difficult also to preserve market
integrity without unhindered access to information. It is impossible to
276 N. EL MAGHREBI ET AL.

promote an ideal Islamic economy without instilling a sense of respon-

sibility, mutual trust, and risk-sharing, which allows for the sharing of
economic prosperity.
Given the above behavioural norms and institutional structure of the
iqtis.ādsystem, it is impossible to graft some Islamic institutional elements
onto conventional economics in an otiose attempt to “Islamize” it, or to
graft some value-neutral ideas onto iqtis.ād to “secularize” it. From the
Western perspective, the prohibition of interest constitutes, as noted by
Presley and Sessions (1994, p. 586), perhaps the most controversial aspect
of Islamic economics, because the elimination of ribā would involve the
rewriting of capitalist economics. The far-reaching implications of interest
prohibition cannot be ignored, but it is a fond belief in the entire insti-
tutional structure and rules of behaviour derived from the Qur’an and
Sunnah that would transform capitalist economics. Given the differences
in philosophical foundations, however, it is difficult to suppress the intel-
lectual and spiritual elements of Islam in order to secularize its economic
thought, and it is futile to graft Islamic values and institutional struc-
tures onto conventional economics to develop a synthetic discipline from
heteroclite and disparate elements.
It is important, indeed, to guard against grafting new ideas from
neoclassical economics, which has a distaste for institutions. As noted by
(Skidelski, 2020, p. 117), some economists “argue that business and other
organizations are a transitional phase in the process of making markets
more complete.” While the shape of business enterprises and markets is
bound to change in the knowledge economy, the existential problem of
uncertainty will remain. It is important to reflect on the powerful forces
that may shape the economic dynamics, such as digital technologies which
affect the flow of information and communication. Given the changing
nature of secular ideas and economic doctrines, it is difficult to make
a synthetic discipline without a compromise of the Islamic worldview.
Iqtis.ād, on the other hand, has its unique set of rules of behaviour and
institutional structures that allow for the organization of an ideal Islamic
economy.
The ideal Islamic economic system is flexible to accommodate the
changing needs of society, including new production functions, new
methods of delivery, new modes of payment, new markets, and new
networks of markets, but the norms of behaviour and institutional rules
that define the creation and exchange of private property and transfer of
property rights are immutable. They are immutable not because Islamic
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 277

jurisprudence is immune to the confusion and error that some Muslim

scholars tend to diffuse, at the behest of secular peers or otherwise, in the
interpretation of the sources of Islamic knowledge. They are immutable
not because this corpus juris is the product of original intellectual efforts
in commercial law and economic issues over centuries of devoted schol-
arship. They are immutable simply because they flow from the truth that
the very Covenant that man sealed with the Lawgiver, is timeless, and
thus not subject to discounting, devaluation, or depreciation.

Notes
1. The Qur’an is described in the Qur’an itself as the absolute truth
(Alhaaqqah 69:51), without any crookedness (Az-Zumar 39:28), or false-
hood (Fussilat 41:42), and which cannot be produced by other than Allah
swt (Yunus 10:37).
2. Sahih Al-Bukhari 50 Book 2, Hadith 43.
3. On the notion of vicegerency, reference can be made to the Qur’anic verse
(Al-Baqarah 2:30) “Behold, thy Lord said to the angels: “I will create a
vicegerent on earth.” They said: “Wilt Thou place therein one who will make
mischief therein and shed blood? whilst we do celebrate Thy praises and glorify
Thy holy (name)?” He said: “I know what ye know not.”” (Al-Baqarah
2:30).
4. Reference to the concept of trust (amānah) in the Qur’an (Al-Ahzab
33:72) as follows “We did indeed offer the Trust to the Heavens and the
Earth and the Mountains; but they refused to undertake it, being afraid
thereof: but man undertook it;- He was indeed unjust and foolish.” (Al-
Ahzab 33:72).
5. The status of vicegerency applies to all human beings including prophets,
as stated in (s.ād 38:26) “O David! We did indeed make thee a vicegerent
on earth: so judge thou between men in truth (and justice): Nor follow thou
the lusts (of thy heart), for they will mislead thee from the Path of Allah.”
6. The notion of fitrah refers to the pattern upon which mankind was
created, as explained in (Ar-Rum 30:30) “So set thou thy face steadily and
truly to the Faith: (establish) Allah’s handiwork according to the pattern
on which He has made mankind: no change (let there be) in the work
(wrought) by Allah: that is the standard Religion: but most among mankind
understand not.”
7. On the notion of forgetfulness of the principal covenant, reference can be
made to (Taha 20:115) “We had already, beforehand, taken the covenant of
Adam, but he forgot: and We found on his part no firm resolve.”
8. The linkage between the provision of means of sustenance and duties of
vicegerency is clear from the following Qur’anic verse (Al- ‘Araf 7:10)
278 N. EL MAGHREBI ET AL.

“It is We Who have placed you with authority on earth, and provided you
therein with means for the fulfilment of your life: small are the thanks that
ye give!”
9. Reference can be made to (An-Nahl 16:14) “It is He Who has made the
sea subject, that ye may eat thereof flesh that is fresh and tender, and that
ye may extract therefrom ornaments to wear; and thou seest the ships therein
that plough the waves, that ye may seek (thus) of the bounty of Allah and
that ye may be grateful.” and to (Al-Jathiyah 45:12) “It is Allah Who has
subjected the sea to you, that ships may sail through it by His command, that
ye may seek of his Bounty, and that ye may be grateful.”
10. In this respect, reference can be made also to (Al-Anbya 21:32) “And We
have made the heavens as a canopy well-guarded: yet do they turn away from
the Signs which these things (point to)!” and to (Al-Hijr 15:19) “And the
earth We have spread out (like a carpet); set thereon mountains firm and
immovable; and produced therein all kinds of things in due balance.”
11. There is evidence from the Qur’an that the means of sustenance are
provided to all living creatures as in (Al-Hijr 15:20) “And We have
provided therein means of subsistence for you and for those for whose
sustenance ye are not responsible.”
12. For instance, the notion of isti’mar can be understood from the Qur’anic
verse (Hud 11:61) “To the Thamud People (We sent) Salih, one of their
own brethren. He said: “O my people! Worship Allah: ye have no other god
but Him. It is He Who hath produced you from the earth and settled you
therein: then ask forgiveness of Him, and turn to Him (in repentance): for
my Lord is (always) near, ready to answer.””
13. As with the notion of isti’mar, the term’imarah, which appears in the
Qur’an, conveys also the meaning of building and settlement, as in (At-
Tawba 9:17) “It is not for such as join gods with Allah, to visit or maintain
the mosques of Allah while they witness against their own souls to infidelity.”
14. It is clear from the Qur’an that Allah swt provides guidance for man in all
aspects of life on earth, as in (Al-Isra 17:95) “Say, ‘If there were settled, on
earth, angels walking about in peace and quiet, We should certainly have
sent them down from the heavens an angel for a messenger.’”
15. With respect to the qualities and character of the Noble Prophet (saa),
the Qur’an states in (Al-Qalam 68:4) “And thou (standest) on an exalted
standard of character.”
16. The Qur’an states that Allah swt provides provision to whomsoever He
wills as in (Ash-Shuraa 42:12) “To Him belong the keys of the heavens and
the earth: He enlarges and restricts. The Sustenance to whom He will: for
He knows full well all things.”
17. Reference can be made to the Qur’an on Allah (swt)’s perfect knowledge
about everything, as in (Al-An’ām 6:59) “With Him are the keys of the
unseen, the treasures that none knoweth but He. He knoweth whatever there
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 279

is on the earth and in the sea. Not a leaf doth fall but with His knowledge:
there is not a grain in the darkness (or depths) of the earth, nor anything
fresh or dry (green or withered), but is (inscribed) in a record clear (to those
who can read).”
18. With respect to the notion that Allah (swt) provides sustenance in due
balance, reference can be made also to (As-Shuraa 42:12) “To Him
belong the keys of the heavens and the earth: He enlarges and restricts. The
Sustenance to whom He will: for He knows full well all things.”
19. The Qur’an states that bounties of Allah swt are not restricted to particular
people, but extended to whom He wills, as made clear in (Al-Isra 17:20)
“Of the bounties of thy Lord We bestow freely on all- These as well as those:
The bounties of thy Lord are not closed (to anyone).”
20. The notion that the bounties of Allah swt are unlimited is clearly explained
by the Qur’an in (Ibrahim 14:34) “And He giveth you of all that ye ask
for. But if ye count the favours of Allah, never will ye be able to number
them. Verily, man is given up to injustice and ingratitude.”
21. It is incumbent on man, indeed, to strive despite the human characteristics
of impatience and forgetfulness, to commit himself to norms of conduct
consistent with the soul’s covenant with the Creator. The Qur’an states in
(Al-Ma’arij 70:19–34) that “Truly man was created very impatient, fretful
when evil touches him, and niggardly when good reaches him. Not so those
devoted to Prayer, those who remain steadfast to their prayer, and those in
whose wealth is a recognised right for the (needy) who asks and him who is
prevented (for some reason from asking), and those who hold to the truth of
the Day of Judgment, and those who fear the displeasure of their Lord, for
their Lord’s displeasure is the opposite of peace and tranquility, and those
who guard their chastity, except with their wives and the (captives) whom
their right hands possess,- for (then) they are not to be blamed, but those
who trespass beyond this are transgressors, and those who respect their trusts
and covenants, and those who stand firm in their testimonies, and those who
guard (the sacredness) of their worship.” (Al-Ma’arij 70:19–34).
22. The Qur’an states that the provision and restriction of bounties is for
testing purposes, as in (Al-Fajr 89:15–16) “Now, as for man, when his Lord
trieth him, giving him honour and gifts, then saith he, (puffed up), “My
Lord hath honoured me.” But when He trieth him, restricting his subsistence
for him, then saith he (in despair), “My Lord hath humiliated me!””
23. Another evidence about the wisdom behind restrictions of bounties is
provided by the Qur’an in (Al-An’am 6:165) “It is He Who hath made
you (His) agents, inheritors of the earth: He hath raised you in ranks, some
above others: that He may try you in the gifts He hath given you: for thy
Lord is quick in punishment: yet He is indeed Oft-forgiving, Most Merciful.”
24. It is Allah (swt)’s wisdom that there are intrinsic differences between
people and orders of hierarchy, as stated in the Qur’an (Hud 11:118)
280 N. EL MAGHREBI ET AL.

“If thy Lord had so willed, He could have made mankind one people: but
they will not cease to dispute.”
25. There are clear Qur’anic injunctions to fulfil the obligations of every
member of the society toward others, and to provide for the rights of
the poor and needy, as stated in (Al-Fajr 89:17–18) “Nay, nay! but ye
honour not the orphans! Nor do ye encourage one another to feed the poor!”
26. The relationship between faith and deeds is clearly explained in the
Qur’an, as in (Al-Imran 3:92) “By no means shall ye attain righteous-
ness unless ye give (freely) of that which ye love; and whatever ye give, of a
truth Allah knoweth it well.”
27. The Qur’an requires man to seek balance in all aspects of life, including
moderate spending, as stated in (Al-Isra 17:29) “Make not thy hand tied
(like a niggard’s) to thy neck, nor stretch it forth to its utmost reach, so that
thou become blameworthy and destitute.”
28. The suggestion that Allah’s hand is fettered, and that spending is limited,
rendering thereby resources scarce, is strongly rejected in the Qur’an, as
stated in (Al-Ma’idah 5:64) “The Jews say: “Allah’s hand is tied up.” Be
their hands tied up and be they accursed for the (blasphemy) they utter.
Nay, both His hands are widely outstretched: He giveth and spendeth (of His
bounty) as He pleaseth.”
29. There is, indeed, wisdom in Allah (swt)’s restrictions on bounties, as
explained in the Qur’an (Ash-Shūra 42:27) “If Allah were to enlarge the
provision for His Servants, they would indeed transgress beyond all bounds
through the earth; but he sends (it) down in due measure as He pleases. For
He is with His Servants Well-acquainted, Watchful.”
30. Sahih al-Bukhari 52, Book 2, Hadith 45.
31. There is clear evidence in the Qur’an that compliance with divine law and
commitment to the cause of Allah (swt) is conducive to happiness in this
life and the hereafter, as stated in (Al-Ma’idah 5:66) “If only they had stood
fast by the Law, the Gospel, and all the revelation that was sent to them from
their Lord, they would have enjoyed happiness from every side.”
32. The notion that religious beliefs cannot be imposed against the will of
people is clearly stated in the Qur’an, as in (Al-Baqarah 2:256) “Let there
be no compulsion in religion, truth stands out clear from error. Whoever
rejects evil and believes in Allah hath grasped the most trustworthy hand-
hold, that never breaks. And Allah heareth and knoweth all things.”
33. There are several Qur’anic verses that deal with economic injustice,
including the violation of property rights, as in (Al-Baqarah 2:188) “And
do not eat up your property among yourselves for vanities, nor use it as bait
for the judges, with intent that ye may eat up wrongfully and knowingly a
little of (other) people’s property.”
34. The protection of property rights applies to all, including weakly minded
people and orphans, as stated in the Qur’an, in (An-Nisa 4:5–6) “To those
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 281

weak of understanding make not over your property, which Allah hath made
a means of support for you, but feed and clothe them therewith, and speak to
them words of kindness and justice. Make trial of orphans until they reach
the age of marriage; if then ye find sound judgment in them, release their
property to them; but consume it not wastefully, nor in haste against their
growing up. If the guardian is well-off, let him claim no remuneration, but
if he is poor, let him have for himself what is just and reasonable. When
ye release their property to them, take witnesses in their presence: But all-
sufficient is Allah in taking account.”
35. There are several Qur’anic verses providing clear injunctions to fulfil
covenants, including (Al-Mā’idah 5:1) “O ye who believe! fulfil (all) obli-
gations. Lawful unto you (for food) are all four-footed animals, with the
exceptions named: But animals of the chase are forbidden while ye are in the
sacred precincts or in pilgrim garb: for Allah doth command according to
His will and plan.”
36. Reference to the original Covenant in the Qur’an can be found in several
verses including (Al-A’raf 7:172) “When thy Lord drew forth from the
Children of Adam—from their loins— their descendants, and made them
testify concerning themselves, (saying): “Am I not your Lord (who cherishes
and sustains you)?” They said: “Yea! We do testify!” (This), lest ye should say
on the Day of Judgment: “Of this we were never mindful””
37. The Qur’an states in many verses, indeed, that all creation celebrate the
praise of Allah swt in worship, as in (Al-Isra 17:44) “The seven heavens
and the earth, and all beings therein, declare His glory: there is not a thing
but celebrates His praise; And yet ye understand not how they declare His
glory! Verily He is Oft-Forbear, Most Forgiving!”
38. It is for the Lawgiver, alone to decide about the lawfulness of the adorn-
ments and means of sustenance that He provided, as stated in the Qur’an,
(Al-A’raf 7:32) “Say: Who hath forbidden the beautiful (gifts) of Allah,
which He hath produced for His servants, and the things, clean and pure,
(which He hath provided) for sustenance? Say: They are, in the life of this
world, for those who believe, (and) purely for them on the Day of Judgment.
Thus do We explain the signs in detail for those who understand.”
39. There are also clear Qur’anic injunctions against the forbiddance of adorn-
ments that Allah swt has made lawful, as in (Al-Ma’idah 5:87) “O ye who
believe! make not unlawful the good things which Allah hath made lawful
for you, but commit no excess: for Allah loveth not those given to excess.”
40. It is also noted that Allah (swt) has clearly defined the lawful and unlawful,
and it is allowed for human beings to alter these distinctions, forging
thereby lies against Allah swt, as stated in the Qur’an, (An-Nahl 16:116)
“But say not—for any false thing that your tongues may put forth, “This is
lawful, and this is forbidden,” so as to ascribe false things to Allah. For those
who ascribe false things to Allah, will never prosper.”
282 N. EL MAGHREBI ET AL.

41. The Qur’an provides many indications about the ease with which acts of
worship can be carried, as with the duty of fasting during the month of
Ramadhan, as stated in (Al-Baqarah 2:185) “Ramadhan is the (month) in
which was sent down the Qur’an, as a guide to mankind, also clear (signs)
for guidance and judgment (between right and wrong). So every one of you
who is present (at his home) during that month should spend it in fasting,
but if anyone is ill, or on a journey, the prescribed period (should be made
up) by days later. Allah intends every facility for you; He does not want to
put to difficulties.”
42. There is, indeed, no hardship in seeking the pleasure of Allah (swt ), as
indicated in the Qur’an (Al-Hajj 22:78) “And strive in His cause as ye
ought to strive, (with sincerity and under discipline). He has chosen you,
and has imposed no difficulties on you in religion; it is the cult of your
father Abraham. It is He Who has named you Muslims, both before and in
this (Revelation); that the Messenger may be a witness for you, and ye be
witnesses for mankind!”
43. The fulfilment of duties in Islam is, indeed, function of individual abilities,
but sincerity to Allah (swt) remains the principal condition for the accep-
tance of good deeds, as indicated in the Qur’an (At-Tawba 9:91) “There
is no blame on those who are infirm, or ill, or who find no resources to spend
(on the cause), if they are sincere (in duty) to Allah and His Messenger: no
ground (of complaint) can there be against such as do right: and Allah is
Oft-forgiving, Most Merciful.”
44. It is clear that Allah (swt), the Just does not put obligations on anyone
beyond his capacity, as stated in the Qur’an (Al-Baqarah 2:286) “On no
soul doth Allah place a burden greater than it can bear. It gets every good
that it earns, and it suffers every ill that it earns.”
45. The Qur’an includes many injunctions to obey the commands of Allah
(swt) to the best of one’s capabilities, in every aspect of worship, even in
preparation for prayers, as indicated in (Al-Ma’idah 5:6) “Allah doth not
wish to place you in a difficulty, but to make you clean, and to complete his
favour to you, that ye may be grateful.”
46. Sahih Al-Bukhari Hadith 635.
47. The Qur’an includes several verses about the sanctity of covenants,
including statements that Allah swt never fails in His promise, as in (Az-
Zumar 39:20) “But it is for those who fear their Lord. Those lofty mansions,
one above another, have been built: beneath them flow rivers (of delight):
(such is) the Promise of Allah: never doth Allah fail in (His) promise,” and
in (Ar-Ra’d 13:31) “But the Unbelievers,- never will disaster cease to seize
them for their (ill) deeds, or to settle close to their homes, until the promise
of Allah come to pass, for, verily, Allah will not fail in His promise.” There
is also Allah (swt)’s promise to be fulfilled about serving justice on the
day of judgement, which is clear in (Al-Imran 3:9) ““Our Lord! Thou art
 7 BEHAVIOURAL NORMS AND INSTITUTIONAL STRUCTURE … 283

He that will gather mankind together against a day about which there is no
doubt; for Allah never fails in His promise.””
48. There is no doubt that obedience to rulers is not unconditional. The
Qur’an in (An-Nisa 4:59) states, indeed, that “O ye who believe! Obey
Allah, and obey the Messenger, and those charged with authority among
you. If ye differ in anything among yourselves, refer it to Allah and His
Messenger, if ye do believe in Allah and the Last Day: That is best, and most
suitable for final determination.” Also, Ali Ibn Abi Talib (raa) reported
that the Noble Prophet (saa) said “there is no obedience to anyone if it is
disobedience to Allah. Verily obedience is only in good conduct.” (Sahih
al-Bukhari 7257 and Sahih Muslim 1840).
49. The Qur’an makes a clear distinction between trade and usury as it states
in (Al-Baqarah 2:275) that the one indulging in riba does not stand but
stands one who is driven to madness, and “that is because they say: “Trade
is like usury,” but Allah hath permitted trade and forbidden usury.”

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 CHAPTER 8

Rethinking the Essence of Macroeconomic

Policies in the Iqtis.ād Paradigm

There is mounting evidence that a synthesis of ideologies ranging from

individualism and materialism to progressivism and evolutionism are at
the roots of the current predatory economic system, which has given rise
to severe economic and financial crises, income and wealth inequalities,
and environmental degradation. It is difficult, however, to solve these
problems without revisiting the philosophical and epistemological foun-
dations of conventional economics. As argued in other chapters, attempts
at Islamizing economics by grafting Islamic values onto a secular edifice
are bound to fail as Islamic and secular worldviews are intrinsically irrec-
oncilable. The Impossibility Theorem implies that the radical differences
between the two polar cases at the metaphysical, ontological, episte-
mological, axiological, and teleological levels render the structuring of
synthetic discipline called “Islamic economics” impossible. The combi-
nation or grafting of heteroclite and disparate elements does not make
them a synthesis but a syncretism in the words of Malek Bennabi. The
chronic conditions of extreme poverty and deprivation are prima facie
evidence of syncretism and chaos. The lingering economic inequalities
reflect, indeed, the impairment of the inner workings of justice in the
organization of economic life. It is impossible to promote justice and
solve the economic and social problems generated by income and wealth

© The Author(s), under exclusive license to Springer Nature 285

Switzerland AG 2023
N. El Maghrebi et al., Revisiting Islamic Economics,
Palgrave Studies in Islamic Banking, Finance, and Economics,
https://doi.org/10.1007/978-3-031-41134-2_8
286 N. EL MAGHREBI ET AL.

inequalities within the universes of discourse called economics, or secular-

ized “Islamic economics” when new ideas about economic justice based
on metaphysical, moral, and ethical arguments are entirely rejected.
Iqtis.ād, which offers an organically different approach to the orga-
nization of an ideal economy, offers new perspectives on the problems
of income and wealth inequalities. Because its guiding economic princi-
ples are derived directly from an undisturbed universe of knowledge, the
Qur’an and tradition of the Noble Prophet (saa), Iqtis.ād should not be
regarded as a mere translation of “Islamic economics,” a discipline that
emulates conventional economics. It is a discipline that derives its princi-
ples from divine guidance, and seeks to maintain a just and careful balance
between the scientific obligations to distinguish the true from the false,
and moral obligations to discern the good from the bad and the right
from the wrong. The conception of economic policies based on mate-
rial and spiritual discernment within the Qur’anic framework of Iqtis.ād
should promote economic justice in all aspects of social and economic
life. Iqtis.ād should not be regarded as a patently value-laden discipline
unable to establish an ideal economy and change the reality of economic
life.
Thus, as a discipline that provides practical solutions to economic
problems, Iqtis.ād does not lend itself to the argument that economic
policies can be allowed to drift away from the pursuit of economic justice.
Hence, the overriding objective of this chapter is to examine the issues
of income and wealth inequality from the Iqtis.ād perspective of posi-
tive economics. No attempt is made, here, to formulate fiscal policies
or to analyse the transmission mechanisms of monetary policies in the
absence of interest rates. Though such policy issues are important in
their own right, the focus is placed rather on the implications of risk-
sharing and property-rights protection for distributive justice. It is argued
that part of the reason for income and wealth inequalities lies in the
prevalence of risk-transfer arrangements such as debt financing, which are
conducive to economic injustice. In contrast, the organizing principle of
risk-sharing ensures effective redistribution mechanisms, which represent
a viable alternative to inherently unstable interest-based financial systems.
Hence, the central argument advanced in this chapter is that economic
policies cannot be neutral with respect to economic justice, and that risk-
sharing can regulate the impulses of the real and financial sectors of an
ideal Iqtis.ād-based economy with an integrated system of policies and
structural patterns of behaviour that promote justice and avoid income
and wealth inequalities.
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 287

The Nature of Economic Inequalities

and Redistribution Proposals
It is often argued that the problems of economic inequalities and anaemic
growth rates have been exacerbated by the onset of the US financial crisis
and the new coronavirus outbreak. The bulk of the literature focuses
on the adverse effects of persistent inequality on the economic, social,
and political life as well as public finance. Apart from well-documented
consequences of economic inequalities, recent evidence suggests that high
levels of economic inequality are conducive to financial crises (Kumhof,
Rancière et al. 2015; Rajan 2010; de Haan and Sturm 2016; Turner
2016) and lower economic growth (World Economic Forum 2017;
OECD 2015; IMF 2017). Thus, addressing the problems of economic
inequalities manifested by extreme poverty and unsustainable economic
growth is of crucial importance in the promotion of economic justice. The
concept of economic inequality suffers, however, from two misconcep-
tions that are prevalent both in academia and among policymakers, and it
is important to provide some clarity in order to understand the roots of
economic inequality and develop viable solutions. Firstly, the concept of
economic inequality is frequently confused with that of income inequality
when it is rather wealth inequality that forms the main source of economic
inequalities. Secondly, there is also a failure to recognize the economic
rents stemming from interest-based financial systems as the main source
of wealth inequality (Akin and Mirakhor 2019).
The first misconception that restricts economic inequality to the
domain of income inequality obscures the fact that economic inequality
rests principally on the existence of wealth inequalities. Wealth, which
encompasses financial assets and real estate among others, can reproduce
itself as a stock variable much faster than income, which is a flow vari-
able. One important reason for focusing on income inequality is that
mainstream economic theory assumes income inequality as the main
determinant of wealth inequality since it defines wealth as the accumu-
lation of income flows over time. However, the assumed relationship
between income and wealth has weakened for the last few decades.
Indeed, according to the World Inequality Lab (2021), the share of global
income accruing to top 10% highest incomes has decreased over the past
two decades, but both global and within-country distribution of wealth
have deteriorated compared to income.1 The share of wealth owned by
the global top 0.01% has risen at a time when the global bottom half owns
288 N. EL MAGHREBI ET AL.

a mere 2% of total global wealth. The trends in the wealth distribution

have dissociated from the trends in income distribution by making wealth
inequality the main driver of economic inequality. It is clear that in the
absence of stronger commitment to redistributive policies, these trends
are bound to worsen.
The dissociation between wealth inequality and income inequality is
related to the second misconception, which assumes that wealth inequality
is a function of capital accumulation determined by income, meritocracy,
and savings (Akin and Mirakhor 2019). However, there is compelling
evidence that wealth inequality is driven by economic rents, not capital
accumulation (Stiglitz 2015b). Today, the bulk of the wealth inequality
is composed of “wealth residual,” which can be defined as the increase in
wealth without concomitant growth in capital (Basu and Stiglitz 2016).
The concept of wealth residual is analogous to the Solow residual in the
theoretical literature on economic growth. Solow (1957) suggested that
only 13% of economic growth in the US could be attributed to the factors
of production (labour and capital) whereas the rest was residual. As indi-
cated by Stiglitz (2015b), exploitative economic rents are responsible for
the formation of wealth residual, and in turn, wealth inequalities. It is also
argued in the literature that interest-based debt contracts are the principal
vehicles of exploitative economic rents and ensuing wealth residual (Akin
and Mirakhor 2019; Maghrebi and Mirakhor 2015; Akin 2017).
Thus, it is important to understand the determinants of wealth residual
in order to develop appropriate mechanisms for redistribution policies
that address the problems of wealth inequality. The available redistri-
bution proposals roughly fall into two strands, namely, asset-based and
income-based redistributive policies. First, proposals for asset-based redis-
tribution focus on the reallocation of the ownership of assets in order to
narrow down the wealth gap between the rich and the poor. The redistri-
bution policies directly aimed at reducing inequality consider the instru-
ments to reallocate wealth per se. Historically, the objectives of asset-
redistribution policies were pursued with the means of land reforms in
Taiwan, Korea, and China, among others. Second, proposals for income-
based redistribution focuses on mitigating income inequality based on the
underlying assumption that income is the main driver of wealth inequality
(Akin and Mirakhor 2019). Proposals under the income-based redistri-
bution encompass “hard” income-based redistribution tools such as the
taxation of income and wealth at higher rates. Studies by the OECD
(2017) and the IMF (2021) argue that less distributive taxation and
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 289

benefit systems represent important causes of worsening inequalities in

the last several decades. The G7 proposal of a global minimum rate of
corporate taxes is an example of “hard” income-based redistribution poli-
cies. There are also “soft” income-based redistribution proposals such as
the proposal for shared prosperity pioneered by the World Bank (2016;
2020b).2
The “soft” school of thought take, as a matter of fact, the current
distributions of income and wealth as given, and then focus on policies for
equitable redistribution of additional income through various mechanisms
such as public investment in health and education, financial inclusion, and
insurance against risks. The working mechanisms underlying the proposal
for shared prosperity leaves, indeed, the current concentration of wealth
within the top percentiles intact and allows further economic rewards
to accrue principally to high-wealth individuals, leading thereby to an
endogenous increase in wealth inequality. The implementation of soft
income-based redistribution tools may have adverse effects on wealth
distribution such as perverse incentives in labour markets (OECD 2017)
and investment decisions (Seshadri and Yuki 2004). The status quo condi-
tions for asset inequality imply that the very governance structures, which
give rise to inequality, remain intact too. Proposals aimed at addressing
the pitfalls and weaknesses in income-based redistribution require whole-
sale changes in the rules of the game (Stiglitz 2015a), as well as changes
in the underlying property-right claims such as the asset-based approach
(Bowles 2012) and risk-sharing asset redistribution (Akin et al. 2020;
Akin and Mirakhor 2019; Akin 2017).

The Linkage Between Wealth

Residual and Interest-Based Debt
There is mounting evidence that a significant part of wealth inequalities
stems from wealth residual. As discussed by Aaminou and Akin (2020)
and Akin and Mirakhor (2019), interest-based debt is an important deter-
minant of wealth residual. The starting point in understanding the linkage
between interest-rate mechanism and wealth inequality is the “funda-
mental inequality”(r > g), where (r ) stands for the real rate of return
to capital and (g) for the growth rate of output and income. The funda-
mental inequality posits that the rate of return on capital is persistently
290 N. EL MAGHREBI ET AL.

higher than the growth rate of the economy, resulting in a rising rela-
tive share of capital income and greater wealth inequality. As argued by
Piketty (2015b),

[T]he rate of return on capital significantly exceeds the growth rate of the
economy (as it did through much of history until the nineteenth century
and as is likely to be the case again in the twenty-first century), then it
logically follows that inherited wealth grows faster than output and income.
People with inherited wealth need to save only a portion of their income
from capital to see that capital grow more quickly than the economy as a
whole. Under such conditions, it is almost inevitable that inherited wealth
will dominate wealth amassed from a lifetime’s labor by a wide margin,
and the concentration of capital will attain extremely high levels—levels
potentially incompatible with the meritocratic values and principles of social
justice fundamental to modern democratic societies.

Jordà et al. (2019) show that rate of return to wealth is systematically

higher than the economic growth rate in 16 advanced economies over
the period from 1870 to 2015. Furthermore, the gap between (r ) and
(g) increased in the sub-period 1980–2015, which coincides with the era
of increased financialization. The evidence is sample-independent as the
fundamental inequality is found to be valid at least in the selected coun-
tries over both the full sample and sub-periods. Conventional economics
suggests that the main source of wealth inequality lies in income dispar-
ities, mainly in the form of wage inequality and return to capital, both
of which are linked to economic activities.3 This theory implies that a
convergence of the rates of return to wealth (r ) and return to national
income (g) toward each other would lead the fundamental inequality
to disappear over time. Indeed, the basic relationship in the neoclassical
economics is that the rate of return to capital is the rate of interest in
the economy. The interest rate, according to this definition, is then the
reflection of the marginal productivity of capital and economic growth
(see Ljungqvist and Sargent (2012), and Wickens (2008) for textbook
explanations of the concept of interest).
Thus, a natural extension of the relationship between interest rate and
economic growth is that the rates of return to wealth (r ) and return to
national income (g) should theoretically converge, leaving no room for
the fundamental inequality. The persistence of a gap between these two
rates of return is evidence of the existence of artificial impediments to
convergence, which result in extreme imbalances in income distribution.
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 291

These impediments are conducive to the formation of wealth residual and

the exacerbation of wealth inequalities. Hence, the argument is made,
hereafter, that interest-rate mechanisms are conducive to the formation
of wealth residual through two main interrelated channels, namely, the
quantity channel and the price channel.4

The Quantity Channel

The quantity channel refers to the distortive effects of interest-based debt
contracts on wealth distribution due to the asymmetric terms of access
to finance (quantity of finance) for economic agents with different levels
of wealth. It can be argued that interest-based debt contracts allow for
asset-rich individuals to benefit from financing sources at more favourable
terms than asset-poor individuals. The asymmetric access to finance ampli-
fies the wealth inequality by facilitating the perpetuation of economic
rents for asset-rich individuals. The quantity channel operates mainly
through two salient properties of interest-based debt contracts, namely
the requirement of collateral and state-independent claims.

Collateral
In an ideal and frictionless economy, the contracts are complete and
fully enforceable. A failure to meet these essential features of contracts
has significant consequences on the behaviour of economic agents and
their ability to benefit from financing sources. In case the contracts
are complete and fully enforceable, it is the initial wealth that solely
determines the budget constraints of economic agents without affecting
their behaviour and contractual opportunities (Bowles 2012). In other
words, both asset-rich and asset-poor economic agents have the same
opportunity sets in their financial decisions. However, since incomplete
and unenforceable contracts remain the norm rather than the excep-
tion, asset-poor economic agents cannot benefit from the same financing
opportunities contained by the class of contracts available to asset-rich
agents.5 Thus, even if both asset-rich and asset-poor agents have the
same budget constraints, differential contractual terms typically favour
asset-rich agents.
The state-independent and fixed payments (principal amount plus
interest installments) that borrowers owe creditors constitute the defining
feature of credit contracts. From the perspective of the creditors, the
292 N. EL MAGHREBI ET AL.

existence of information asymmetries and high monitoring costs render

financial contracts with state-independent payoffs more advantageous
than other contractual agreements, such as partnership-type contracts. As
explained by Buiter and Rahbari (2015):

The issue of monitoring costs is intrinsically linked to the issue of asym-

metric information between entrepreneurs and borrowers. The seminal
work in this area is Townsend (1978). In his setup, information is asym-
metric, as only the entrepreneur observes the state of the world (the success
of his investment project) as a matter of course and provides the investor
with a report. The outside investor has to pay a (fixed) monitoring cost to
learn the state (in Townsend, 1978, this monitoring cost is deterministic,
given a state), which is why this manifestation of asymmetric information is
referred to as ‘costly state verification’. Monitoring here can be thought of
as the time, resource and opportunity cost of observing the actions of the
firm, its financial position as well as the environment within which the firm
operates. Monitoring costs can indeed be high as effective monitoring may
require financial as well as operational expertise. But monitoring costs also
include the costs associated with bankruptcy. Townsend (1978) showed
that in such a setting a contract that features constant, state-independent
payments from the entrepreneur to the investor and no monitoring in
the ‘good states’ and a state-contingent payoff (equal to the value of the
project minus the cost of monitoring) in the ‘bad states’ is ‘optimal’,
defined as maximising the payoff or utility of the entrepreneur, subject
to satisfying a reservation (or participation) constraint for the investor.

However, debt contracts with state-independent payoffs are “impos-

sible contracts” simply because they are incomplete and unenforceable.
These types of contracts are not incentive-driven under the axiomatic
assumptions of conventional economics, such as self-interest and ratio-
nality. Since credit contracts do not include incentives to increase the
borrower’s promise to pay back the debt (truth-telling, non-speculative
risk-taking, inter alia), the “rational” behaviour for borrower is not to
avoid using debt but to avoid, to the extent possible, the payment of
debt (Iqbal and Mirakhor 2017). A pledge by borrowers to assign assets as
collateral is important for creditors to shift the parameters of an impossible
contract and make it rather conceivable. Indeed, the collateral constitutes
a crucial determinant of access to credit (Serra-Garcia 2010). However,
the reality is that asset-poor agents typically do not have adequate assets
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 293

to pledge as collateral. Bowles (2012) summarizes the effects of collateral

on access to finance and the terms of contract as follows:

The most obvious reason why an individual’s amount of wealth influences

the kinds of contract she can engage is that only those with sufficient
wealth can undertake projects on their own account, that is, without
borrowing. And among those who do borrow, those with more wealth
borrow on better terms. This is because greater wealth on the part of the
agent allows contracts which more closely align the objectives of principal
and agent. This is the case, for example, when the borrower has sufficient
wealth to post collateral or put her own equity in a project, and there-
fore has greater incentives to supply effort, to adopt the more prudent risk
levels preferred by the lender (the principal), to reveal information to the
principal, and to act in other ways that advance the principal’s interests but
that cannot be secured in a contract.

Thus, asset-rich agents have easier access to credit at more favourable

terms even if their project is of lower quality compared to asset-poor
agents. The lower expected income associated with investment projects
undertaken by the latter gives rise to a wedge between (r ) and (g), which
amplifies the wealth inequality. A primary example of the effects of collat-
eral on the formation of wealth is provided by real-estate markets, which
constitute one of the most important investment vehicles for households.
Asset-rich agents can purchase real-estate assets at more favourable condi-
tions given their ability to provide higher collateral. As an investment
class with high returns, the wealth stemming from real estate begets more
wealth over time. On the other hand, asset-poor agents are left with the
option to purchase real estate only upon the acceptance of debt obliga-
tions with high interest rates. The combination of high debt with low
collateral increases the likelihood of debt defaults and financial crises,
which are conducive to a significant loss of wealth for asset-poor agents, as
posited by Mian and Sufi (2014), and Hintermainer and Koeniger (2015),
among others.

State-Independent Payoffs
Collateral can be regarded as a “positive” selection mechanism that
governs borrower’s access to finance since it allows asset-rich agents
to secure financing at relatively more favourable terms than asset-poor
294 N. EL MAGHREBI ET AL.

agents. On the other hand, state-independent payoffs represent a “nega-

tive” selection mechanism since asset-poor agents are required to service
debt independent of the state of the world. With the prospects of
economic growth, credit expansion allows asset-poor agents to over-
borrow relative to their capacity to pay back. However, state-independent
payoffs including debt principal and interest payments are conducive
to financial stress under conditions of economic contraction. Thus, the
reduced capacity to service debt independent of income generated under
volatile economic conditions contributes to wealth inequality.6 Buiter and
Rahbari (2015, p. 151) explains that,

[t]he academic literature has emphasized that debt, particularly when

it is relatively large, can cause either underinvestment (the debt over-
hang problem of Myers (1977)) or excessive risk-taking. For the former
(debt overhang), the presence of existing (relatively large) debt means
an entrepreneur faced with a capital call for an investment project or
considering a new (positive NPV) investment project, may refuse to invest
because the capital injection (by reducing the probability of default) would
also lead to a wealth transfer to the existing lenders. For the latter, the pres-
ence of debt coupled with limited liability aggravates the issue that equity
has a convex payoff function: the equity owner is able to capture all of
the upside (after costs, including debt service), but her losses are limited
to losing her equity investment. Debt, particularly if it is large enough,
can, therefore, systematically induce adverse behavioral distortions in the
decisions of individual households and businesses.

Mian and Sufi (2018) posit that an excessive increase in household

debt is closely associated with the severity of recessions and declines in
real GDP growth, both of which have consequences for income and
wealth distribution. A large increase in household debt leads to a size-
able decline in household spending during economic recessions because
of debt defaults and loss of wealth. The reduced capacity of households to
service debt leads to the problems of non-performing loans on the balance
sheet of banks. These conditions result in liquidity problems, leading to
credit contraction and credit crunch that affect investment in the real
sector. At the same time, firms are likely to incur losses and become
increasingly exposed to financial difficulties due to adverse demand and
increasing unemployment. The financial problems faced by firms would
ultimately reverberate on the balance sheet of banks as business activity
declines further leading to banking crises and economic recessions. The
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 295

government bailout of banks to reduce the likelihood of bank conta-

gion and systemic risk, further exacerbate wealth inequalities by exposing
borrowers and protecting lenders. Since households at the lower ends
of income and wealth distributions have a higher marginal propensity to
consume from disposable income, the adverse conditions stemming from
credit crunch reduce also the ability of asset-poor agents to service the
state-independent payoffs.

The Price Channel

The price channel refers to the ability of interest-based debt contracts
to generate capital gains for the benefit of asset-rich agents. The source
of wealth residual does not stem from differentiated access to finance as
explained with reference to the quantity channel, but from differentiated
rent (price) generated by the interest mechanism itself. The price channel
mainly works through two sources of rent directly linked to the existence
of the interest-rate mechanism, namely leverage and asset booms.

Leverage
It is the very nature of interest-based debt contracts that results in high
leverage ratios where debt claims can reach levels multiple times of current
output (Bezemer 2011). Leverage, which is typically measured as credit
to GDP ratio, has tripled in advanced economies over the last several
decades. In the two decades before the US financial crisis alone, the
growth rate of credit volume was double that of the nominal GDP in
many developed countries (Turner 2016). The same patterns can be
observed in many developing and emerging economies. Such high growth
rates of credit expansion are taking place independent of the rates of
growth in the real sector. As highlighted by Turner (2016),

credit growth appears necessary to drive the economies forward. But if

that is really true, we face a severe dilemma. We seem to need credit to
grow faster than GDP to keep economies growing at a reasonable rate,
but that leads inevitably to crisis, debt overhang, and post-crisis recession.
We seem condemned to instability in an economy incapable of balanced
growth with stable leverage.
296 N. EL MAGHREBI ET AL.

It is the expansion of credit by the banking sector independent of the

economic activity in the real sector that allows for higher leverage rates.
Most of the credit created by the banking system flows into consump-
tion, financial investment, and purchase of existing assets rather than
productive investment that allows for the optimal allocation of capital
(Turner 2016). It is credit that allows the poor to borrow for consump-
tion purposes and raise the levels of indebtedness, and thereby leverage
ratios. As indicated by Mian and Sufi (2014), leverage was instrumental
in increasing the capacity of low-income and middle-income classes in
the US to cope with declining real wages and living standards. Mean-
while, leverage enabled asset-rich agents to further increase wealth by
investing in higher income-generating assets such as stock and real-estate
assets. In the absence of a structural change in income and wealth distri-
bution, borrowing by the poor begets new borrowing, increasing thereby
the levels of indebtedness and leverage. Thus, the perpetual indebtedness
of asset-poor agents and increasing returns of asset-rich agents contribute
directly to the generation of wealth residual and wealth inequality.
There are other effects of leverage on the formation of wealth dispar-
ities. Past some threshold level, borrowers may realize the severity of
leverage ratios and reduce consumption and/or investment in order to
secure solvency. Turner (2016) explains the process as follows:

[W]hen house prices fall, borrowers suffer a fall in net worth, and the
higher their leverage is, the greater the percentage loss they experience.
With a 90% loan to value mortgage, a 5% fall in house prices wipes out
50% of the household’s equity in their house. Faced with falling net worth,
many households cut consumption. This follows in part from a simple
‘wealth effect’: when people feel less wealthy, they tend to consume less
and save more. But it is amplified if debtors are worried that the fall in
their net worth could go so far as to make them insolvent, facing them
with the additional costs of bankruptcy, repossession, and the sale of their
home at a fire sale price. Fear that default might make it impossible to
borrow in the future (except at exorbitant rates) may also be an impor-
tant concern. So when house prices fall, highly leveraged households focus
strongly on reducing their debt levels—the household equivalent of the
Japanese companies that Richard Koo analyzed—and their reduced expen-
diture depresses demand in the economy. But this reduction is not offset
by increased expenditure on the part of net creditors elsewhere in the
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 297

economy: indeed, if asset house prices mean falling prices for credit securi-
ties, or concerns about bank solvency, net creditors may themselves reduce
expenditure.

Thus, the wealth effect, described above, implies that asset-rich agents
save their net worth during economic downturns whereas poorer agents
are bound to lose disproportionally larger portions of their net worth.
The principal effect of leverage is to exacerbate wealth inequalities by
allowing the rich to benefit from more favourable access to credit in a
world of volatile asset prices (Turner 2016). The requirements for collat-
eral, inner workings of leverage, and the formation of asset bubbles and
bursts are crucial factors that explain the formation of wealth residual and
inequalities.

Asset Prices
The speculative activities leading to the formation of asset bubbles are
facilitated by expansionary monetary policy and excessive supply of credit.
The inherent instability of interest-based debt systems is the result of a
growing disconnect between the financial and real sectors of the economy.
The unlimited expansion of credit, reflected by higher leverage and
unrestricted money creation, leads to upward pressures on asset prices,
particularly in the markets for equity, housing, and commodities. The crux
of the problem is that demand for goods and assets is not financed from
existing incomes or savings, but by abundant credit. The buying pressures
on assets are driven not only by speculators but also by rational individuals
who contribute to asset price bubbles based on expectation of rising asset
prices (Askari and Mirakhor 2015). The disconnection between the finan-
cial and real sectors is largely explained by the existence of interest-bearing
debt and increasing leverage, fuelled by expectations of ever-increasing
asset prices.
The vicious cycle of asset bubbles and bursts is indicative of the crucial
role of volatile asset prices in the perpetuation of wealth inequality.
Indeed, heterogeneous income and wealth groups benefit from asset
bubbles and suffer from asset bursts differently. As highlighted by Turner
(2016), “superior access to credit in volatile economic circumstances has
often been crucial to the accumulation of large fortunes.” There are typi-
cally two mechanisms that give rise to the formation of wealth disparities
related to fluctuations in asset prices. First, asset portfolios differ across
298 N. EL MAGHREBI ET AL.

various income and wealth groups. Asset portfolios are more diversified
and equity holdings are higher for top segments of wealth distributions.
On the other hand, lower segments of wealth distributions are associ-
ated with portfolios biased toward fixed-income deposits (Domanski et al.
2016). As argued by Jordà et al. (2019) investment by higher wealth
groups into real estate and equity markets is associated with histori-
cally highest rates of return. Second, the different financing opportunities
available for asset-rich and asset-poor agents result in different levels
of indebtedness and portfolio compositions. Leverage is found to be
significantly lower for top segments of wealth distribution whereas lower
segments are associated with higher indebtedness in relation to real-estate
purchases.
Historically, capital gains in real-estate investment during periods of
asset booms constitute the main component of the price channel. In
contrast to equity, which is associated with a disproportionally smaller
share in the middle and lower segments of wealth distributions relative
to the top segment, real estate represents higher a share in the portfolio
composition of middle and lower segments. The portfolio disparities can
be explained by differences in net worth positions between the rich and
the rest. Real estate is typically the most important asset for households,
and the main mode of finance for real estate is represented by bank credit.
Indeed, the composition of bank loan portfolios shifted over the last
half century from productive investment activities to real estate (Turner
2016). Furthermore, the bulk of credit for real-estate investment repre-
sented the purchase of preexisting real-estate assets. Since the supply of
land is fixed, more demand implies higher prices. When real-estate prices
increase due to asset booms, a vicious cycle ensues as rising prices give
impetus to further buying pressures, leading to even higher prices and
increased buying pressures (Bacha and Mirakhor 2013). The formation
of asset bubbles reflects upward movement in market prices independent
of fundamental values. Asset bubbles have asymmetric effects on asset-
rich agents, who tend to benefit from higher asset prices than the rest. It
is the asset-rich agents who stand to benefit from easier access to credit
on more favourable terms, which allow for the purchase of real estate as
the momentum for rising prices becomes evident. In contrast, the condi-
tions of ever-increasing real estate prices require, from the rest, more bank
credit and higher collateral despite their lower net worth.
Thus, as the asset-rich agents gain disproportionally with the increase
in asset prices, it is the highly leveraged poor who are exposed to larger
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 299

losses as asset prices fall. The asymmetric effects are explained by the
propensity for debt to exacerbate price falls because of the likelihood of
foreclosures and the concentration of losses on heavily indebted house-
holds, leading to negative equity. Thus, depending on the extent of price
falls, borrowers may be forced to absorb most of the losses, if not all, while
rich lenders and investors in senior tranches in structured finance products
may be entirely protected from losses through risk transfer to mezza-
nine or equity tranches, or through government bailouts. As a result,
severe financial crises and recessions exacerbate the conditions of wealth
inequality by further exposing borrowers and protecting lenders (Askari
and Mirakhor 2015).

Risk-Sharing and the Notion of Wealth Residual

It was argued earlier that the persistent divergence of the return on capital
(r ) from the rate of growth in output and income (g) stems from the
existence of impossible contracts based on interest-bearing debt, which
constitute an important determinant of wealth residual. This argument
reflects the importance of risk-sharing as an alternative to risk-transfer
agreements, which are conducive to financial crises and wealth inequality.
If the rate of return to wealth is determined ex post as a function of
the outcome of economic activities rather than ex ante as fixed-income
streams based on interest rates, the fundamental inequality (r > g) can be
transformed into a form of cointegration relationship (r = f (g)), where
the rate of return to wealth moves in tandem with the growth rate of the
economy. As argued by Maghrebi and Mirakhor (2015),

[s]ince the payoffs are contingent on the realization of a particular state

of nature, the realized return on real investment is known only on ex
post basis. The growth rate can be positive or negative depending on the
realization of favorable or unfavorable states of nature. This implies that
capital is not allowed to increase irrespective of growth rates, and that it is
bound to decrease with negative growth.

The linkage between the rate of return to wealth and the growth
rate of the real economy has the potential to address the problem of
wealth residual. Hence, the organization of an ideal economy based
on the Iqtis.ād principle of risk-sharing can provide viable solutions
to the enduring crisis of income and wealth disparities. In order to
300 N. EL MAGHREBI ET AL.

understand the notion of risk-sharing and its relevance to mitigating

wealth inequality, it is important to consider first the conceptual and
semantic differences between risk, uncertainty, and ambiguity. As stated
by Bartholomew (2008), risk is an indispensable ingredient to human life
as it provides “the richness and diversity of experience necessary to develop
our skills and personalities.” Since risk results from the diversity of human
beliefs, expectations, freedom of choice, and free will, “to forego risk is to
forego freedom; risk is the price we pay for our freedom.” The notion of risk
reflects the possibility of loss, whether small or large, as well as the oppor-
tunity for profits stemming from human development and technological
innovation.
It is rationality, according to standard assumptions of conventional
economics, that guides human behaviour. The assumption of ratio-
nality implies that the formation of expectations by economic agents
is constrained only by random errors given the probability distribution
of outcomes (Erbas and Mirakhor 2013). This assumption implies an
ergodic, stationary, stochastic world. In a non-ergodic world, the future
is ontologically uncertain, and while systematic risks can occur, they can
never be entirely predicted in advance (Davidson 2009). Frank Knight
(1921 [1964]) argues that risk applies to situations in which the odds can
be measured while the outcomes are not known a priori and that uncer-
tainty applies to situations in which even the odds are not available. Thus,
whereas risks with known probability distributions can be insured, uncer-
tainty is not subject to insurance because there is no known probability
distribution with prospective payoffs to be insured. There is, however,
a semantic alteration of conceptual definitions in more recent research
about probability theory, where uncertainty is substituted by “ambiguity,”
and refer rather to risk in its Knightian definition. The concept of ambi-
guity stems from the “impossibility of cognitive completeness,” which is,
in turn, explained by the absence of complete information (Askari and
Mirakhor 2014). Since ambiguity renders decision-making almost impos-
sible, patience and increased knowledge constitute the principal strategies
for optimal decision-making (Erbas and Mirakhor 2013).
The relatively new fields of behavioural economics and the concept of
bounded rationality proposed by Daniel Kahneman and Amos Tversky
provided new insights about human behaviour under uncertainty (see
Kahneman 2003; Kahneman and Tversky 1979). Kahneman (2003)
suggests that the reactions of economic agents to risk in real-life situ-
ations differ from what the standard assumption of rationality predicts.
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 301

Kahneman models of human behaviour under risk are based on the

proposition of framing effects and the prospect theory. The framing
effects imply that ambiguity may be suppressed by individual perceptions
in the sense that the same situations result in different outcomes due to
differences in perceptions across economic agents (Kahneman 2003). This
implies that reactions may differ as economic agents conceive the same
situations differently based on their own perceptions. The way prospects
are framed leads to different choices of the economic agents (Tversky
and Kahneman 1981). The prospect theory, on the other hand, implies
that an abrupt shift from risk-aversion to risk-seeking can be explained
by changes in attitudes toward potential gains and losses with respect
to reference points not necessarily defined by utility functions alone
(Kahneman 2003). Part of the reason for the behavioural changes has to
do with the endowment effect, status quo bias, and loss aversion, which
are examined by Kahneman et al. (1991), Samuelson and Zeckhauser
(1988) and Kahneman and Tversky (1988), respectively. These economic
anomalies represent violations of the assumptions underlying the prefer-
ence order in standard theory, either in terms of stability, symmetry, or
reversibility. For instance, the loss aversion implies a tendency for agents
to remain at the status quo when departure from current conditions is
associated with unfavourable outcomes.
Thus, as summarized by Askari and Mirakhor (2014), the framing
effects and the prospect theory provide some guidelines in addressing risk
and understanding the importance of risk-sharing:

i. when it comes to a choice between certain and uncertain gains,

people generally prefer certainty even if the prospect of uncertain
gains is objectively much larger than certain gains;
ii. in choosing between certain and uncertain losses, people generally
prefer uncertain alternatives even if the prospective loss is larger
than the certainty case; and
iii. people generally overestimate small short-term risks and underesti-
mate long-term risks.

It is important to note also that there are two main types of risk,
namely, systematic and idiosyncratic risks (Rizvi et al. 2016). Systematic
risk, including market risk and inflation risk, inter alia, is undiversifiable
and thus, uninsurable by nature. It is possible to manage systematic risk at
302 N. EL MAGHREBI ET AL.

the macro level through institutional and policy measures, but it consti-
tutes part of total risk that is impossible to eliminate. The idiosyncratic
risks are limited to specific segments of the economy, including shocks
to particular sectors, risks inherent to particular assets or markets, firm
bankruptcies, and job losses. While idiosyncratic risks can affect economic
agents, they remain diversifiable, and thus insurable.
Apart from the above classification of risks with respect to their system-
atic or idiosyncratic effects, it is possible also to examine alternative classi-
fications of risk according to their distribution among parties. Contractual
relationships involve risks that can be either transferred, shifted, or shared.
Risk-transfer takes place in arrangements among intermediaries, depos-
itors, and borrowers where risk is transferred from surplus units to
deficit units (Bacha and Mirakhor 2013). The banking system is based
on risk-transfer relationships between surplus and deficit units since the
investment risk to depositors is transferred to banks, who in turn, transfer
risk to borrowers. On the other hand, risk-shifting occurs when the
burden of losses in financial transactions is laid at the door of third parties
without prior consent (Mirakhor and Bao 2013). Risk-shifting is manifest
during financial crises, where government bailouts of financial institutions
are financed with public funds, giving credence thereby to criticism levied
against the privatization of profits and socialization of losses. In contrast,
risk-sharing reflects contractual or societal arrangements whereby the
outcomes of random events are borne collectively by contractual parties
(Askari et al. 2012). Risk-sharing is undertaken with the expectation that
collective involvement and allocation of multiple resources and skills result
in safety-in-numbers, risk diversification, and reduction of idiosyncratic
risks. Instances of risk-sharing arrangements range from equity investment
to participation in cooperatives and insurance against idiosyncratic risks.
Risk-sharing finance is an effective mechanism to address the problem
of wealth inequality through the preclusion of economic rents, which
constitute the main determinant of wealth residual. As opposed to
risk-transfer and risk-shifting relations inherent to debt-based financial
systems, risks are rather shared between parties. Risk-sharing prevents
the realization of state-independent outcomes and shocks to the finan-
cial system as all parties to financial transactions are not only entitled
to share profits but are also liable to bear losses. Moreover, risk-sharing
finance does not contribute to the procyclicality of the financial system,
which reflects the association between economic growth and recession
with credit expansion and contraction (Rochet 2008). In contrast to debt
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 303

financing, risk-sharing contributes to the stability of the financial system

since the returns to financial contracts are not predetermined but depen-
dent on the outcome of economic activities (Askari et al. 2010). The
preclusion of procyclical financial systems results in the elimination of
systemic risk, and the prevention of asset booms based on debt-fuelled
speculative activities. Risk-sharing finance is not conducive to increased
leverage because returns on financial assets are determined ex post as a
function of returns in the real economy. It is noted also that risk-sharing
finance does not necessarily require the provision of collateral since it is
essentially based on partnership relations that preclude the risk of debt
default. The salient features of risk-sharing finance prevent the perpetua-
tion of economic rents and the formation of wealth residual. As argued by
Mian (2013), it is the failure of promoting risk-sharing that constitutes a
serious source of economic problems and financial crises, and thus income
inequality.

Risk-Sharing Asset Redistribution

The notion of asset redistribution focuses on policy solutions to the
lingering problems of wealth inequality based on asset rather than income
redistribution. Historically, several forms of asset redistribution were
implemented such as land reforms as well as inheritance and wealth
taxation. More recent policy proposals for asset redistribution include
the implementation of domestic and global wealth taxation. Given the
narrow room for policy manoeuvre in the aftermath of the US financial
crisis, and the fiscal impact of the disease outbreak, it is tempting for
governments to seek alternative sources of revenues. In the absence of
prompt economic recovery and sustainable growth, the taxation of top
wealth percentiles may remain among the priority measures of policy-
makers. It may be argued that the essence of Thomas Piketty’s proposal
for a globally coordinated wealth tax, which would allow for sustain-
able investment in infrastructure and education (Piketty 2014; 2015a).
It is the crucial problems of coordination and compliance that constitute
the main challenges in implementing global tax proposals. It is noted, in
this regard, that 130 countries have agreed in 2021 to impose minimum
corporate tax rates of at least 15% as a first step in coordinating tax
initiatives. However, the drive toward the globalization of finance compe-
tition to attract capital beyond borders, and the existence of tax havens
304 N. EL MAGHREBI ET AL.

have the potential to dilute the effectiveness of tax-oriented proposals for

asset-based redistribution.
The current proposals for asset-based redistribution do not alter the
nature of exchange relations in the economy governed by debt contracts.
It is the debt-based contracts that inhibit growth-enhancing gover-
nance structures that are essential to the elimination of fundamental
inequality.7 It is because asset-poor agents cannot enter contracts avail-
able to asset-rich classes that they remain poor. The need for the former
to accept fixed-income contracts rather than returns more in line with
the opportunity costs of their resources. Fixed-income contracts impede
productivity-enhancing behaviour, such as the full exertion of work
efforts, provision of full information, and full cooperation. An important
feature of fixed-income contracts is that productivity-enhancing behaviour
cannot be embedded in contracts such as debt agreements, because of
high monitoring costs. It is also argued that fixed-income contracts do
not incentivize borrowers to elicit maximum levels of efforts, and that
they lead to coordination failures (principle–agent problems) because of
weaknesses in the incentives structure.
There are other important inefficiencies reflected by missed opportuni-
ties for potential entrepreneurs, investors, and innovators to contribute to
economic activities and enhance productivity. There is, indeed, mounting
evidence that asset-poor entrepreneurs are either excluded from credit
markets or compelled to incur higher financing costs than entrepreneurs
with higher levels of wealth. There is also evidence that asset-poor agents
have higher rates of time preference as well as higher levels of risk-aversion
(Lawrance 1991; Moseley 2001; Carney and Gale 2005; Hopkins 2018).
In consideration of the economic costs of wealth inequality, Bowles
(2012, 37) argues that,

where contracts in financial markets are incomplete or unenforceable, indi-

viduals lacking in wealth are either precluded from engaging in a class of
contracts that are available to the wealthy, or enter into these contracts on
unfavorable terms. [...] why an individual’s amount of wealth influences the
kinds of contract she can engage in is that only those with sufficient wealth
can undertake projects on their own account, that is without borrowing.
And, among those who borrow, those with more wealth borrow on better
terms. This is because greater wealth on the part of the agent allows
contracts which more closely align the objectives of principal and agent.
This is the case, for example, when the borrower has sufficient wealth to
post collateral or put her own equity in a project, and therefore has greater
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 305

incentive to supply effort, to adopt more prudent risk levels preferred by

the lender (the principal), to reveal information to the principal, and to
act in other ways that advance the principal’s interests but that cannot be
secured in a contract.

It is possible to consider alternative approaches to asset-based redis-

tribution that do not involve hard radical redistributive policies, but
critical changes in the design of contracts for economic exchange away
from debt-based contracts toward skin-in-the-game agreements (Bowles
2012). There is, indeed, a class of contracts that are incentive-compatible,
enhance productivity, and generate sustainable economic growth. The
incentive-compatible contracts have the potential to rethink the relation-
ship between principal and agent based on the ownership structure and
information sharing. Asset redistribution, in effect, rewrites the rules of
property-right claims by allowing agents to share the three crucial dimen-
sions of property rights: (a) the right to control access to the asset; (b)
the right to control the usage of the asset; and (c) the right to claim the
residual income generated by the asset (Bowles 2012). A typical example
of such contracts is the joint partnership agreement where ownership
of an economic venture is shared between parties. Partners share the
property-right claims jointly and have joint claims on the residual income
of the venture as well. In this respect, Bowles (2012) further argues that:

in contrast to income-based egalitarian strategies, which are rarely better

than productivity-neutral (and often a lot worse), asset-based egalitarianism
can in principle be productivity-enhancing. This is true both because it can
implement more efficient distributions of residual clamancy and control
rights and because redistributing assets addresses a major cause of unequal
incomes, and thus gives greater scope for markets to do what they are
good at: identifying losers—firms that fail to produce good products at
competitive prices—and getting them out of the game.

Asset-based redistribution has the potential to enhance efficiency and

effectiveness in the economy as each party to the contract is bound by
skin-in-the-game conditions, reducing thereby the disparities between
principle–agent differences. The existence of skin-in-the-game can also
minimize the monitoring and supervision costs associated with the prob-
lems of information asymmetries. A direct consequence of skin-in-the-
game conditions is that contractual parties have the liberty to choose
306 N. EL MAGHREBI ET AL.

investment projects with different risk-return profiles. Moreover, asset-

based redistribution can create a reciprocal and trusting environment
that strengthens social cohesion and solidarity. It reduces also income
inequality without the perverse incentives that promote resistance to
change in the case of income-based redistribution. The theoretical frame-
work proposed by Bowles demonstrates the rationale for a preference of
asset-based over income-based redistribution, but it does not provide clear
guidance about the implementation of asset-based redistributive policies.
It is possible to refer to the risk-sharing principle of Islamic finance
in order to understand the practical implications of asset-based redistri-
bution. The Kuala Lumpur Declaration in 2012 by prominent experts in
Islamic jurisprudence and Islamic economics contends that risk-sharing
is the essence of Islamic finance (ISRA 2012). Risk-sharing in Islam is
achieved mainly through three interrelated forms (Maghrebi et al. 2016):

i. redistributive institutions for risk-sharing such as zakah, sadaqah,

qard al-hasan and waqf ,
ii. intergenerational risk-sharing through Islamic inheritance rules, and
iii. risk-sharing financial instruments such as mudaraba and
musharakah, inter alia.

With respect to redistributive institutions based on risk-sharing, zakah

is the most important redistributive mechanism, and one of the five pillars
of Islam. From the policy-making perspective, zakah constitutes a more
effective instrument in the fight against wealth inequality than alternative
proposals based on wealth taxation. A pre-determined rate applied to the
portion of individual wealth beyond a given threshold nisab represents
the legitimate share of asset-poor agents in the accumulated wealth of
the asset-rich segment of the society.8 It is interesting to note that the
minimum zakah rate of 2.5% is rather close to the optimal rate of wealth
taxation proposed by Piketty (2014). But in contrast to the challenges
of implementing Piketty’s proposal for global wealth taxation in terms
of political viability, global coordination, rule compliance in discharging
zakah is based on clear Qur’anic injunctions that apply to all asset-rich
Muslims irrespective of race or ethnicity. There are also other forms of
redistributive mechanisms such as the institution of waqf , or endowment
which played historically an important role in the alleviation of poverty
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 307

and the development of Islamic civilization. With respect to intergener-

ational risk-sharing, there are clear inheritance rules in the Qur’an and
Sunnah that govern the transfer of wealth on equitable basis.
There is still room for further research on the design of financial
instruments based on risk-sharing and on their usefulness for asset-based
redistribution. Macro-market securities constitute a potential instrument
of risk-sharing in public finance as they “can allow people to mitigate risks
to their income and countries to enhance international risk-sharing ” (Rizvi
et al. 2016). These financial instruments resemble sukuk securities, which
represent a primary mode of risk-sharing in Islamic finance. GDP-linked
sukuk can be regarded as macro-market instruments based on sharing the
country’s economic output (Bacha et al. 2015; 2014; Ismath Bacha and
Mirakhor 2017). GDP-linked sukuk can be useful instruments of asset-
based redistributive policies aimed at mitigating wealth inequality. They
present investors with the prospects of stable financial returns function
of growth rates in economic output.9 The issuance of sukuk provides
an important alternative to debt-based instruments which promote, as
discussed earlier, the procyclicality of the financial system. Also, sukuk
instruments reduce the reliance of governments on public debt as they
appear as equity in the balance sheet of the public sector. This allows
also for the elimination of inherently regressive features of interest-bearing
debt, which foster wealth inequalities.
Akin and Mirakhor (2019) provide the first quantitative analysis of
risk-sharing as a mechanism of asset redistribution. The simulation model
assumes that the public sector allows for the lowest 40% of the popula-
tion to hold risk-sharing instruments but there is no secondary market
in which households can transact GDP-linked sukuk in case of liquidity
needs. Since GDP-linked sukuk constitute a substitute for the income class
of transfer payments, households can allocate part of their income to the
purchase of new risk-sharing assets. The evidence from the simulation
analysis of income distribution suggests that secondary markets and other
complementary institutions of income redistribution should be promoted
in order to implement asset-based redistributive policies.
Thus, GDP-linked sukuk and similar variants, such as revenue-
generating sukuk for infrastructure projects, constitute innovative forms
of financial instruments based on risk-sharing as the fundamental Iqtis.ād
principle for the organization of an ideal economy. However, there are
308 N. EL MAGHREBI ET AL.

practical issues in the use of risk-sharing mechanism for the purposes of

asset-based redistribution that remain unanswered. Indeed, the theoret-
ical model developed by Akin and Mirakhor (2019) assumes risk-sharing
sukuk are made available to the bottom 40% in wealth distribution, but
it is not clear how sukuk allocation and trading can promoted from the
practical policy perspective. The purpose of the following sections is to
explain some practical aspects of risk-sharing finance and its implications
for asset-based redistribution.

Risk-Sharing Universal Basic Assets (RUBA)

The objective of Iqtis.ād, as a discipline aimed at elucidating the founda-
tions of an ideal Islamic economy derived from Qur’anic and Prophetic
injunctions, is to promote social justice through optimal exchange and
redistribution mechanisms. The optimality of economic equilibrium and
social stability is reflected by the alleviation and elimination of poverty,
ensuring thereby decent standards of living for all segments of the society.
Economic policies should ensure that individuals are entitled to adequate
income and wealth levels to lead a decent life with human dignity. In
line with the objectives of Iqtis.ād, the principal functions of the govern-
ment are twofold, namely the provision of adequate infrastructure for
education, security, welfare, public services, health and safety as well as
the promotion of generational and intergenerational redistribution. These
interrelated functions imply that members of the society have a collective
responsibility for income and wealth redistribution through the transfer of
surplus income and wealth toward the asset-poor agents. As noted earlier,
zakah constitutes an important redistribution mechanism, but it should
be supported by other distributive and redistributive policies. In addi-
tion to the functions of ensuring full employment and economic growth
and stability, fiscal policies should be geared also toward the mitigation of
shortfalls in redistributive mechanisms.
As economic benefits tend to accrue asymmetrically to asset-rich
agents, current redistribution proposals, such as wealth taxation and
shared prosperity, may not be sufficient to mitigate ever-increasing wealth
inequality. It is important to examine novel mechanisms for asset-
based redistribution founded on the Iqtis.ād principle of risk-sharing
such as the risk-sharing universal basic assets (RUBA). The RUBA refer
to macro-market securities for income generation, which are annually
distributed either on unconditional or partly conditional basis to younger
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 309

economic agents below a certain age. The salient features of these

income-generating securities resemble those of the existing programs for
Universal Basic Income (UBI), but they provide incremental advantages
deriving from the risk-sharing principle.
The principal merit of the UBI scheme lies in the provision of regular
and unconditional cash payments to all members of the society through
government social programs. As noted by Standing (2017), it is a stable
and predictable basic income that differs from the “minimum income
guarantee, which tops up low incomes to a given level, usually requiring
complex means tests. And it is different from a negative income tax or tax
credits, which are withdrawn as income rises.” The UBI proposal is an old
new notion dating back to the 1980s by some economists, philosophers,
and social scientists in Europe, but it gained further interest among both
academics and policymakers in the aftermath of the US financial crisis.
The debate revolves around issues related to implementation plans and
viability, but it focuses also on the role of the state and financial markets
in promoting asset-based wealth redistribution.
At the foundations of the UBI proposals, there is an element of moral
sentiments consistent with the holistic perspective of Adam Smith. Tony
Atkinson (2011) notes that “[UBI] is not just a form of redistribution; it is
a moral statement.” The recent interest in the UBI idea is indeed, reflec-
tive of an increasing awareness about the serious implications of wealth
and income inequalities, which are accompanied by the erosion in social
protection systems and safety nets in the face of automation, globaliza-
tion, pervasive informality, and degradation in human capital (Gentilini
et al. 2020). As indicated by Standing (2017):

The growing interest in basic income partly reflects a recognition that

current economic and social policies are producing unsustainable inequal-
ities and injustices. The twentieth-century income distribution system
has broken down, as globalization has swept forward, as ‘neo-liberal’
economics has done its work, and as the technological revolution has facil-
itated transformative changes in labour markets. One outcome has been
a growing ‘precariat’, consisting of millions of people facing unstable,
insecure labour, a lack of occupational identity, declining and increasingly
volatile real wages, loss of benefits and chronic indebtedness.

Thus, the UBI is deemed not just as a poverty reduction program,

but an economic right intrinsically related to the pursuit of social justice.
310 N. EL MAGHREBI ET AL.

The UBI can be viewed also as a social dividend and a mechanism for
income smoothing against the deterioration in purchasing power, particu-
larly in the face of monetary policies based on inflation targeting and weak
protection against diminishing real wages. Since the rationale for new
redistribution schemes based on the UBI proposal is to reduce income
inequality stemming from the formation of economic rents (Standing
2017), it constitutes mainly a relief mechanism against wage inequality. It
is important to bear in mind, hence, that it addresses the issue of inequal-
ities deriving from the formation of wealth residual on ex ante rather than
ex post basis.
The feature of universality in the UBI proposals is justified by the
problems of limited coverage from which the existing social protection
schemes suffer. According to recent estimates from the World Bank, only
18% of the eligible population effectively receive some form of social assis-
tance in low-income countries, and the small share increases only as the
country becomes more developed (Gentilini et al. 2020). It is the limited
awareness and unaffordable application costs that may explain the low
rates of access to social protection schemes by the eligible segments of
the population. As explained by Gentilini et al. (2020), the rationale for
the UBI implementation rests on several arguments. First, the provision
of unconditional cash payments to members of society that meet simple
eligibility criteria, such as citizenship and age, minimizes the potential
risks associated with exclusion and inclusion errors. Second, the univer-
sality feature may minimize also the impact of individual factors including
ignorance, fear, stigma, or sense of humiliation. Third, the elimination
of application and selection mechanisms is conducive to lower processing
and settlement costs. Fourth, the schemes are not necessarily conducive
to a loss in efficiency because universality weakens the disincentives for
some segments of the population exceeding a certain income threshold
to abstain from work and rely on social benefits alone. Fifth, from a polit-
ical perspective, the UBI schemes are not necessarily repulsive to certain
segments of the voting population as they benefit all voters independent
of income and wealth distributions.
There are however, several arguments against the UBI proposal
ranging from concerns about fiscal sustainability to labour market inef-
ficiencies. It is thus argued that unconditional payments to all members
of society would divert scarce resources away from the poor benefiting
from the existing social programs. It is also argued that they are associ-
ated with disincentives from participation in the labour markets. However,
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 311

the main concerns about the implementation of the UBI schemes derive
from the increasing financial burden on government finances. The cost of
regular payments to all eligible citizens can be significant by any budgetary
measure. It may be possible to provide funding for the UBI policies
through budget reductions in the existing social protection schemes or
tax increases, but these fiscal options raise questions about their net long-
term economic benefits and political support. The literature finds that a
budget-neutral implementation of UBI schemes in many countries would
benefit the asset-poor and reduce the existing burden on social protection
programs (Gentilini et al. 2020).
The growing interest in the UBI proposals may be explained, in part,
by the fact that the income distribution system of welfare states has rather
broken down. The share of labour in the generation of national income
has diminished due to many factors such as economic globalization, and
technological change, as well as the rise in rentier income. It can be
argued that the new social and economic conditions require new income
redistribution mechanisms. However, the question remains as to whether
even a fully implemented UBI would ensure that the desired reduction of
wealth inequalities in particular would be achieved. Similar to the proposal
of shared prosperity advanced by The World Bank, the UBI schemes do
not address the fundamental sources of wealth inequality. As noted previ-
ously, the problem of wealth inequality has its root causes in the formation
of wealth residual, and insofar as the underlying causes are not addressed,
the problem of wealth inequality will persist. Thus, the implementation of
the UBI proposals may be associated with perverse effects on inequality
and poverty as the resources currently available to the most vulnerable
segments of the society would be allocated to all members independent
of income and wealth distributions.
Thus, in light of the above arguments and counterarguments about the
UBI schemes, it may be argued that RUBA proposals are more consis-
tent with the objectives of Iqtis.ād, and provide a more effective means to
address the problem of wealth inequality, on an ex ante basis, in accor-
dance with the principle of risk-sharing. Nevertheless, some features of
the UBI mechanism can be useful in devising and implementing an effec-
tive RUBA framework. Part of the lessons drawn from the UBI proposals
can be summarized as follows.

• As highlighted by Acemoglu (2019), the implementation of the

UBI proposals can be prohibitively expensive unless accompanied
312 N. EL MAGHREBI ET AL.

by deep cuts to other social safety nets or by significant increases in

tax revenues. The lesson is that an effective asset-based redistribu-
tion mechanism should not create significant additional burden on
public finances.
• The universality feature of the UBI schemes may result in deterio-
rating conditions for the most vulnerable and poorest segments of
society as resources are reallocated to benefit all members of society,
including the rich.
• The principal objective of the UBI proposals is to provide social
protection against wage inequality resulting from failures of the
welfare state. It is the more serious and urgent problem of wealth
inequality stemming from the formation of wealth residual that
should constitute the main focus of policymakers.
• It may be argued that relative to wealth inequality, income inequality
is the lesser of two evils. The UBI idea cannot possibly solve the
problems of increasing wealth inequality because it does not address
the issue of wealth residual. Whereas a basic income sustained with
regular modest amounts reinforces the status quo of “capitalism
with baseline income maintenance,” a basic capital grant with single
large amount may lead to “capitalism with equal starts” that permits
market-driven inequalities (Standing 2017, p. 8). The important
issue, then, is not to limit the focus of policymakers on income
maintenance alone, but on the necessity to address the market-driven
inequalities as well.
• The argument of social justice used to justify the UBI proposals
should be also reconsidered. In a world where contracts are incom-
plete and unenforceable, interest-based agreements constitute a
serious source of injustice. As discussed previously,
(i) credit constraints may prevent high-quality projects from
being implemented by the asset-poor,
(ii) credit-constrained agents can typically undertake projects
associated with lower expected returns,
(iii) access to credit increases risk-taking by economic agents with
higher expected returns, and
(iv) credit constraints on economic agents affect their degree of
risk tolerance, which influences, in turn, their saving and
investment decisions.
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 313

Given the above explanation, it should be noted that the UBI proposals
provide the recipients with the imputed income endowment from govern-
ment budgets or stock of capital, as in the case of the Alaska Permanent
Fund, but do not entitle them with ownership of capital or asset itself.
There is arguably a failure to address the root causes of the problem
because wealth inequality is the direct result of not just lower income but
also poverty in asset ownership. As argued by Skidelsky (2001), people
need an asset or endowment to “start a business, or buy a house, or invest
in their education or ‘blow it’.” Indeed, once people are entitled with
ownership over income-generating assets, it is more likely than not, that
the generated income will constitute a substitute for basic income. But
it is important to understand also the nature of risk and decision under
uncertainty, and the impact of opportunities for the creation of property
rights on inequality.
Thus, the next section proposes a blueprint for the implementation
of asset-based redistribution schemes founded on the Iqtis.ād principle of
risk-sharing in Islamic finance.

Blueprint for the RUBA:

Public Basic Asset Fund (PBAF)
It is possible, at this juncture, to propose a blueprint for asset-based redis-
tribution derived from the Iqtis.ād principle of risk-sharing. A Public Basic
Asset Fund (PBAF) can be established by the government as a citizen-
trust endowment for young adults. The PBAF allows eligible participants
to accumulate financial assets through direct investment into financial
instruments based on risk-sharing. The channelling of funds into real
investment allows the economy to thrive and the society to share risks and
benefit from shared prosperity. Once the pre-determined eligibility condi-
tions are satisfied, participants can allocate assets to predefined objectives
based on their own needs and preferences, ranging from education and
health to housing and entrepreneurship. Participation allows also for
subsequent trading of PBAF shares in the capital markets.10
The salient feature of PBAF proposals is the reliance on investment
vehicles based on risk-sharing finance. There are, however, similar initia-
tives such as the Child Trust Fund (CTF) program in the United
Kingdom based on long-term tax-free savings accounts for children. It
was a short-lived experiment, as the CTF program was announced in
2001, initiated in 2005, abolished in 2010 arguably for political reasons,
314 N. EL MAGHREBI ET AL.

and replaced by individual saving accounts in 2011. The CTF program

provided children from birth until the age of seven with vouchers to
which parents were allowed to add more funding subject to annual
limits, but the main objective was to increase awareness about the impor-
tance of saving and management of personal finance. With relatively less
emphasis on asset redistribution. Also, the Alaska Permanent Fund and
the Norwegian Pension Fund represent similar initiatives in the sense that
the revenues generated by these endowments are distributed as social
dividends to eligible citizens. As indicated by Standing (2017), “viewed
as a rightful share of income flowing from our collective wealth, the social
dividend approach is politically attractive since it would not require either
dismantling existing welfare systems or raising taxes on earned income.”
In Malaysia, the Permodalan Nasional Berhad (PNB) scheme bears
close resemblance to the PBAF proposal, and it is possible to draw lessons
from the PNB experience for the adoption of PBAF as an effective mech-
anism of asset-based wealth distribution and economic development. The
PNB initiative was established in 1978 and designed as a model for the
creation and redistribution of wealth by entitling Malaysians to contribute
individually toward economic development through investment oppor-
tunities in investment unit trusts.11 As highlighted by the World Bank
(2020a),

[T]he intent was to increase equity ownership of Malays up to 30% of

the total value of listed companies, as part of the NEP’s aim of creating
a share-owning class among the Bumiputera. The government created an
institution designed to encourage Malay participation in corporations and
to assuage traditional fears of losses given the risk averse nature of Malay
society. The government also wanted to promote long-term investments
and avoid speculative profit-making, envisaging PNB as a vehicle to both
increase and sustain economic participation. The aim was to create a less
disparate society with shared prosperity.

The PNB experience spanning several decades demonstrates the

viability of financial instruments for asset-based redistribution driven by
risk-sharing and dynamic capital markets. Given the large number of
participants, it provides also strong evidence that it is indeed possible
to reach many segments of the population including low-income classes,
and provide opportunities for profitable long-term investment even for
risk-averse households.
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 315

Thus, with reference to the various initiatives including the CTF

program, Alaska Permanent Fund, the Norwegian Pension Fund, and
the PNB, it can be argued that public funds providing social dividends
can offer opportunities for large-scale redistribution mechanisms. Simi-
larly, the Public Basic Asset Fund has a strong potential to offer a
risk-sharing mechanism for sustainable and inclusive asset redistribution.
The blueprint for the Public Basic Asset Fund proposal includes three
main steps:

• Establishment of the Public Basic Asset Fund,

• Investment in risk-sharing instruments, and
• Trading of Public Basic Asset Fund shares in secondary markets.

Establishment of the Public Basic Asset Fund

As noted earlier, there are serious concerns about the implementation of
the UBI initiatives because of its increased burden on public finances with
higher taxation or other means of public revenues. In contrast, the PBAF
proposal depends on the issuance of central (investment) deposits (CDs)
to initialize the income-generating asset base. It should be noted, here,
that public wealth funds can also be harnessed in resource-rich countries
as a complement to the issuance of CDs. However, it can be argued that
the CDs should be the main source of initial PBAF funding in order
to promote public awareness about the importance of risk-sharing and
shared prosperity.
The fractional reserve system weakens, indeed, the grip of central banks
on money supply since banks can also create money through interest-
based lending. Given the nature of debt financing based on promises of
state-independent income, money created in the fractional reserve system
constitutes one of the most important determinants of financial crises,
and thus, wealth inequality (Hodgson 2013; Dietsch 2021; Colciago
et al. 2019). As indicated by Al-Jarhi (1981), the adoption of full-reserve
system would provide the central bank with exclusive power to control the
money supply and contribute toward the reduction of wealth inequalities.
However, monetary policies driven by lower interest rates or quantita-
tive easing have rather exacerbated the problem of wealth inequality. As
strongly argued by Standing (2017), “the $4.5 trillion in QE by the US
Federal Reserve was enough to have given $56,000 to every household in
316 N. EL MAGHREBI ET AL.

the country… Instead, QE has enriched the financiers, worsened income

inequality and hastened the alarming oncoming crisis of underfunded
pension schemes.”
Thus, it is not possible to rely on fiscal or monetary policies based on
the interest-rate mechanism and debt financing. In this regard, Al-Jarhi
(1981; 2020) proposes the adoption of CDs created by apportioning the
total money supply between Islamic and conventional shares. Conditional
on full-reserve banking system, the CDs can, thus, be used as invest-
ment funds to be placed in Islamic banks with Shariah-compliant modes
of financing. It is argued, also, that the proceeds from central deposit
certificates (CDCs), which are Shariah-compliant and tradable monetary
management instruments, can be added to the CDs. It is important to
note that, in contrast to the rate of interest, which is determined in
the debt-based money market, the expected payoffs on CDs instruments
depend on the rate of return in the real economy.
Thus, consistent with the arguments advanced by Al-Jarhi, the CDs
instruments remain the principal source of funding in the establishment
of PBAF initiatives, independent of the available natural resources. Since
only a portion of money supply is replaced with CDs, leaving the total
supply unaltered, and since PBAF certificates can only be used for risk-
sharing investment in the real economy, there are limited concerns about
strong inflationary pressures. These salient features stand in sharp contrast
with the current UBI proposals where large-scale payments may trigger
upward price dynamics. At first glance, the CDs proposal may be regarded
as a non-viable and costly approach to asset-based redistribution. But
on closer examination, it is the implementation of redistributive policies
driven by risk-sharing finance rather than debt that hold better prospects
for sustainable solutions to the problem of inequality.

Investment in Risk-Sharing Instruments

The establishment of the PBAF fund constitutes only the starting point in
the implementation of RUBA proposals. What makes the fund income-
generating and risk-sharing-based is how the initial funds are invested in
the real economy. There are two main investment options for the RUBA
fund:

• Real sector activity through Islamic banks

• Infrastructure investments
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 317

Al-Jarhi (2020) proposes that the CDs be placed with Islamic banks
based on mudharabah mode of financing (trustee finance or passive part-
nership). The central bank places also some portion of the CDs annually
to the Islamic banks through mudharabah contracts on the condition
that Islamic banks can only use the allotted funds to invest in selected
sectors, transactions, or modes of finance. At the end of the mudharabah
contract, the realized returns are shared between the Fund and Islamic
banks. As the funds are employed in financing investment activities in the
real economy, the average rate of return to mudharabah contracts should
reflect the realized returns in the real sector.
Another area for the effective allocation of CDs investment portfolios
is the financing of infrastructure projects by the public sector. As indicated
by Bacha and Mirakhor (2017), risk-sharing instruments are appro-
priate for development projects that generate stable revenues, such as
tolled highways, railroads, mass rapid transit systems, and airports, among
others.12 Thus, there is a strong potential for using risk-sharing-based
instruments to finance infrastructure projects in developing countries as
an alternative to the debt-based borrowing. Thus, investment in infras-
tructure projects presents PBAF shareholders with the prospects of stable
returns associated with lower risks, allowing thereby PBFA asset portfolios
also to steadily grow over time.

Trading PBAF Shares in Secondary Markets

The principal objective of the PBAF proposal is to provide effective means
for the asset-poor segments of society to benefit from revenue-generating
assets and reduce wealth inequality. Hence, the definition of appropriate
eligibility criteria for participation as PBAF shareholders constitutes a
crucial part of the proposal. Similar to the Child Trust Fund (CTF)
program in the UK and Baby Bonds proposal in the US, every child
receives at birth a PBAF trust account, which accrues benefits that can be
made available at adulthood. The sustainable growth of assets managed
by PBAF funds through investment into the real economy and infrastruc-
ture projects should ensure stable income for trust account holders over
time.
However, there is also a need to ensure that, in addition to clear
eligibility criteria, PBAF shares can be liquidated with the same ease
with which other financial assets can be disposed of. For the proposal
to work, there should be matured secondary markets, where these
318 N. EL MAGHREBI ET AL.

income-generating financial assets can be bought and sold at information-

ally efficient market prices. The PBAF proposal requires that secondary
markets are established within domestic equity markets because of the
risk-sharing nature of these financial instruments. The PBAF shares can
also be used as collateral to facilitate exchange relationships. In order
to prevent the concentration of asset ownership, investors should not be
allowed to hold a share of the total PBAF stock above a certain threshold.
Ultimately, it is the free access to accurate and timely information about
the performance of investment projects and the real economy that will
determine the degree of efficient market pricing, and the trust of share-
holders in the long-term viability of risk-sharing instruments as effective
tools of asset-based redistribution.
In conclusion, the policy issues addressed in this chapter highlight
part of the serious challenges faced in the design and conduct of fiscal
and monetary policies based on debt financing and the mechanism of
interest rates. It is clear that the chronic problems of income and wealth
inequality cannot be solved with policy recommendations derived from
conventional Economics. It is argued, indeed, that since interest-bearing
debt contracts are “impossible contracts” based on promises of state-
independent payoffs, they contribute toward exploitative economic rents,
which are responsible according to Stiglitz (2015b), for the formation of
wealth residual, and in turn, wealth inequalities. Thus, fiscal and mone-
tary policies based on the very interest-rate mechanism, which promotes
economic rents, cannot arguably be part of the solution to the problem
of income and wealth inequalities.
It is important, thus, to rethink the essence of macroeconomic policies,
and redesign more effective redistributive policies based on risk-sharing as
an important Iqtis.ād principle in the organization of an ideal economy. In
contrast to redistributive policies based on social protection and universal
basic income programs, which tend to lay additional burden on public
finances, risk-sharing addresses the problem of inequality on ex ante rather
than ex post basis. It is noted that risk-sharing finance precludes, indeed,
the formation of economic rents, which constitute the main determinant
of wealth residual, and in turn, the problem of wealth inequality. Thus,
asset-based redistributive schemes such as the Public Basic Asset Fund
based on risk-sharing finance address the challenges faced by asset-poor
segments of the society through the provision of opportunities for every
child to accrue annual benefits until adulthood, from the returns to invest-
ment in the real economy and infrastructure projects. The rate of return
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 319

on PBAF shares depends on the return on investment in the real economy

rather than interest rates determined in the money markets.
Thus, it is important to reiterate the contention, made throughout this
book, that Iqtis.ād, which provides a Qur’an vision of an ideal economy,
is founded on radically different metaphysical, epistemological, philo-
sophical, and moral foundations that make the grafting of conventional
macroeconomic policies onto Iqtis.ād-driven redistributive policies based
on risk-sharing impossible. The Impossibility Theorem implies that there
is no basis for a synthesis of fiscal or monetary policies when the forces
that govern the dynamics of an Iqtis.ād-driven economy do not depend
on interest rates but on risk-sharing. The challenges of income and wealth
disparities cannot be addressed with fiscal and monetary policies based on
the same interest-bearing debt financing that is the crux of the problem
of inequality. Hence, it is important to rethink the essence of macroeco-
nomic policies, which should be responsive to the needs of risk-sharing
finance and asset-based redistributive policies rather than steered toward
debt-based financing that perpetuates economic rents, financial crises,
economic recessions, and social injustice.

Notes
1. The statistics from the World Inequality Lab (2021) indicate a decrease in
the top 10% of income distribution from 61% in 2000 to 55% in 2020,
but the share of the global top 0.01% (composed of 520,000 individuals)
rose from 7% in 1995 to 11% in 2021. With a mere 2% ownership of total
global wealth, the average income of the global bottom 50% is estimated
to be 38 times lower than the average income of the global top 10%.
2. According to the World Bank (2020b), “shared prosperity measures the
extent to which economic growth is inclusive by focusing on household
income or consumption growth among the population at the bottom of
the income distribution rather than on the average or on those at the
top.”
3. It is important to distinguish between capital and wealth. Capital is rele-
vant to productive activity while wealth encompasses capital, real estate,
and other financial assets. For a comprehensive review of the difference
between these two concepts and their implications on the inequality, see
Akin and Mirakhor (2019).
4. The quantity and price channel are associated non-wealth residual compo-
nent of the wealth inequality, such as income inequality and savings, as
well. For instance, capital income depending on the interest rates has an
effect on the income inequality part of the wealth inequality. However,
320 N. EL MAGHREBI ET AL.

we assert that the bulk yet unexplored part of the wealth inequality is the
wealth residual. Due to this fact, the quantity and price channels solely
focus on the links that have an effect on the wealth residual.
5. As defined by Wang (2013, 63), “complete contract is a contract in which
the income-sharing rule is capable of handling all possible contingencies so
that additional mechanism are unnecessary.”
6. It should be noted, here, that the existence of interest-based debt
contracts gives rise to problems of limited access as well as unlimited access
to credit. This implies that it is not just the quantity or pervasiveness of
debt contracts, but the very existence of debt contracts that is the source
of problems related to wealth and income disparities.
7. Bowles (2012) considers governance structure as productivity-enhancing
“if the winners could compensate the losers (which would make the
change Pareto improvement), except that the implied compensation need
not be carried out or even be implementable under the informational
conditions and other incentive problems in the economy.”
8. Nisab is the minimum amount of wealth over which the payment of zakah
becomes compulsory.
9. It might be argued that tying sukuk returns to GDP makes the returns
more volatile and riskier. However, it is possible to redesign the rate of
return mechanism to reduce the level of return volatility. For instance,
there can be upper or lower bounds in the rate of return on GDP-linked
sukuk. Theoretical studies and simulations of the behaviour of GDP-linked
bonds indicate that a shift from conventional bonds to GDP-linked bonds
can benefit high-debt countries in terms of increased macroeconomic
stability and lower market volatility.
10. The entire OIC region, which includes the Middle East and North Africa,
as well as Sub-Saharan Africa, most of Central Asia and South & South-
East Asia, has a highly unequal wealth distribution. These conditions
imply that the PBAF proposal for asset-based redistribution driven by risk-
sharing finance can be relevant for the cooperation and coordination of
OIC efforts toward the implementation of viable solutions to the problem
of wealth inequality.
11. The total value of assets under PNB management in 2020 reached RM
322.6 billion, including more than 14.5 million accounts.
12. It is noted, in this respect, that around 30% to 40% of the government
budgets in the OIC countries are devoted to development projects.
 8 RETHINKING THE ESSENCE OF MACROECONOMIC … 321

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 CHAPTER 9

The Risk-Sharing Organizing Principle

of Iqtis.ād

A paradigm shift toward iqtis.ād principles is necessary because society

cannot hold together if fails to address risks inherent to all economic
activities to ensure justice. The alternative is bleak because principles are
indivisible and the consequences of risk transfer are dire. Risk sharing
should not be confused with alternative attitudes toward risk, including
risk transfer, which is conducive to recurrent financial crises, economic
recessions, and increasing income disparities. Government bailouts of too-
big-to-fail institutions using public funds to mitigate the risk of contagion
during banking crises constitute an implicit shifting of private losses to
third parties. A recourse to risk shifting to solve problems caused by
risk transfer is a misguided approach that violates the basic principles of
property-rights protection. In the resolution of financial crises, economic
justice would be better served with risk-sharing arrangements such as
debt-equity swaps seem to be systematically dismissed as impractical
solutions.
Perhaps, it is easier to lament the accumulation of debt, explain the
unpredictability of financial crises, and defend a status quo of fragile debt-
based financial systems. It is arguably more difficult to redefine the role of
financial intermediation, and risk diversification which does not eliminate
aggregate shocks to the real economy, and restructure financial systems

© The Author(s), under exclusive license to Springer Nature 327

Switzerland AG 2023
N. El Maghrebi et al., Revisiting Islamic Economics,
Palgrave Studies in Islamic Banking, Finance, and Economics,
https://doi.org/10.1007/978-3-031-41134-2_9
328 N. EL MAGHREBI ET AL.

on the basis of risk sharing finance. It is easier to blame the depress-

ingly common occurrence of crises on maturity mismatches, high leverage
ratios, low interest rates, and lack of regulation. It is more difficult to hold
non-traditional beliefs that defy conventional economic wisdom about the
usefulness of interest-based debt and risk-transfer financial systems. As
repeatedly argued by Reinhart and Rogoff, among others, the roots of
eight centuries of financial folly lie in debt defaults and banking crises.
It may be argued, thus, that no amount of banking regulation or debt
ceiling can lessen the likelihood of the next crisis in debt-driven financial
systems. Systemic risk may indeed, migrate from the banking to non-
banking institutions as more securitized bank loans lie in the balance
sheets of pension funds, insurance firms, and investment funds.
Thus, it is rather difficult to advance the agenda for an ideal economy
based on iqtis.ād principles without understanding the causes of finan-
cial instability. Part of the reason for the recurrence of financial crises is
the accumulation of debt through financial regulation and policies that
entrenches expectations about fixed income and undermine risk sharing.
Historical evidence about the regulation of interest on loans dates back to
1775 BC in the Babylon of Hammurabi, and though elaborate schemes
were designed to eschew accusations of de facto interest structures, and
despite the conditional hostility under the Jewish and Christian tradi-
tions, the rationale behind its clear prohibition in Islam is evidence of
its timeless economic and moral implications. There are clear injunctions
against interest in the authentic sources of knowledge, the Qur’an and the
Sunnah, which leave no room for rapprochement between Islamic finance
and conventional finance based on a compromise about interest-based
arrangements. At prima facie, marginal deviations from an ideal economy
based on risk-sharing may seem trivial and inconsequential, but on closer
observation, the serious cumulative effects of interest-based transactions
on economic justice and social stability should not be underestimated.
Indeed, as interest-based debt and risk-transfer transactions become the
norm, the notions of justice and morality, as well as the normative rules
of behaviour would be redefined in order to accommodate new forms of
rent-seeking practices.
The danger for Muslim societies is that silent acquiescence to a
compromise with consciousness can ultimately lead to tolerance of a
change in consciousness. The disintegration of consciousness would, in
turn, render criticism of debt finance and inherently unstable financial
 9 THE RISK-SHARING ORGANIZING PRINCIPLE OF IQTIS.ĀD 329

systems irrelevant to the derivation of Iqtis.ād principles for the orga-

nization of an ideal economy from the Qur’an and Sunnah. Indeed,
if interest is differentiated from usury and tolerated as a pre-requisite
to the integration of Islamic finance with global finance, it would
be impossible to enshrine its prohibition as an axiomatic principle of
Islamic economic thought. As demonstrated in previous chapters, the
Impossibility Theorem implies that a reconciliation between conven-
tional economics and Iqtis.ād, which represents the ur’an’s vision of ideal
economy is not possible. It will be clear also from the present chapter
that it is impossible to reconcile the organizing principle of risk sharing
in Islamic finance with the theory and practice of conventional finance
based on risk transfer. Thus, it is imperative that the economic ratio-
nale behind the prohibition of interest and other forms of risk transfer
as well as the essence of risk sharing are well understood in order to
avoid shifting the windows of morality to accommodate rent-seeking and
eschew skin-in-the-game agreements. It is the organizing principle of
risk sharing that ensures economic justice based on the iqtis.ād’ s norma-
tive rules of behaviour and institutional structure. The failure to share
economic risk is a failure to share economic prosperity, and to ensure
safety in numbers. Given the impossibility to diversify aggregate shocks
to the real economy, there remain the real prospects of widening income
disparities, poverty, destitution, and social instability, which would leave
economists and policymakers with.

Economic Uncertainty and the Notion of Risk

For the purposes of extracting the orgarnizing principles of an ideal
economy, it is important to understand the notions of risk and attitudes
toward risk, which in turn necessitate the examination of the impact of
uncertainty on economic life. There is, indeed an irreducible amount
of randomness in economic systems, where failure to predict the future
cannot be simply explained by flaws and deficiencies in human knowledge.
The complexity of social and economic systems derives from an amount of
indeterminism even larger than biological systems. As noted by Kenneth
E. Boulding (1987, p. 116), “Parameters change all the time. We are
constantly passing from one region of time to another, and at the bound-
aries between them the parameters change… The failure of prediction can
come either because we don’t know what the parameters of the system are
or because the parameters of the system change. We can imagine what
330 N. EL MAGHREBI ET AL.

celestial mechanics would be like if the planets were moved by angels

who either did or did not like astronomers. I would no longer be a lovely
constant, but would wobble all over the place, just like the propensity to
consume, or the money supply, or even demand and supply curves.”
Thus, it is rather difficult to view the economy as a predictable
system, where the exact timing and extent of recessions can be fore-
seen with the same precision that eclipses can be expected based on
accurate and stable parameters in celestial mechanics. Economies cannot
be seriously described as predictable systems because economic parame-
ters such as the propensity to consume, investor confidence, and market
sentiment, among others, are notoriously unstable. The random arrival
of new information and disruptive technologies may alter a variety of
parameters related to skills, beliefs, and expectations. It is because parts
of the economic system interact with others in dependable and unde-
pendable patterns that there is room for the system to grow in size
and shrink unpredictably. Indeed, the economy, as a system, cannot be
simply regarded as the sum of its parts, and if the rules governing such
interactions are responsive to innate and established patterns of human
behaviour and heterogeneous experiences and learning processes, then
there is an irreducible element of randomness about the propensity of the
economy to expand and contract.
There is a degree of uncertainty about the outcome of economic activ-
ities, about future profits and losses, and even about the mutable rules
of behaviour and institutional structures. Economic uncertainty can, for
instance, affect the behaviour of participants in fixed-income markets
leading to anticipations of imminent recession, and bond pricing with
invariably high yields similar to those demanded from debtors with high
risk of default. Also, uncertainty about future tax regimes may be differ-
ently perceived. As noted by Adam Smith (1776, [2007], p. 565), “[l]et
the tax be light or heavy, uncertainty is always a great grievance.” It is,
thus, argued that a significant degree of inequality across taxpayers under
a regime of light taxation can be perceived as “less insupportable than
any degree of uncertainty.” Given the pervasiveness of uncertainty in all
aspects of economic life, aversion towards risk cannot justify its transfer to
other parties. There is, thus, no logical justification for a pre-determined
stream of income to accrue with certainty to the lender, despite the uncer-
tain nature of profits and losses. Positive interest rates, it is usually argued,
are justified by the presence of uncertainty, but it is the very pervasiveness
of uncertainty that should justify sharing risk rather than diverting it away.
 9 THE RISK-SHARING ORGANIZING PRINCIPLE OF IQTIS.ĀD 331

Thus, economic agents may behave differently because of uncertainty

about the outcome of economic activities and business cycle fluctuations.
Heterogeneous expectations result in different views about future rates
of economic growth and inflation, cost of capital and cost of labour,
and other time-varying economic parameters. As noted by Frank Knight
(1935, pp. 37–38) on the theory of investment, the relation between
capital and time is “one of the most vexed questions of economic theory
which must be cleared up if the structure as a whole is to be sound.”
Uncertainty about the future dynamics of economic systems is the rule
not the exception. Yet, it is investment under certainty that seems to
constitute the rule, and uncertainty seems to be dismissed as an unnec-
essary impediment to theoretical analysis. Indeed, the theory of the firm
provides, as argued by Mark Blaug (1992, p. 151), a textbook defini-
tion of business enterprise as an “ideal type” that is “patently unrealistic:
for example, instead of conceiving of entrepreneurs as maximizing an
index of preferences that includes pecuniary and non-pecuniary returns,
on analogy with the consumer in the theory of demand, the utility func-
tion of businessmen is reduced to directly observable monetary returns;
moreover, the elements of time, uncertainty, and the costs of obtaining
information are put aside as unnecessary complications.” Economic deci-
sions are taken, thus inevitably, under conditions of uncertainty and
incomplete information.
It is important to examine the impact of incomplete information and
the relation between uncertainty, risk and statistical inference. Drawing
inferences about the unknown properties of the entire population from
the characteristics of sample observations is associated with two types of
error. Type I error is about rejecting a hypothesis that is in fact true,
and type II error of mistakenly accepting one that is found to be false.
Making inferences about the true population and judgement about the
relative significance of type I and type II errors are bound to influence the
process of decision-making under uncertainty. An economic relationship
accepted at conventional levels of statistical significance does not make
it an undisputable fact. It may be argued that economic and social rela-
tions are inherently probabilistic in nature. There is a failure, however, to
acknowledge the necessary element of risk associated with economic deci-
sions under uncertainty eschew harm and risk is part of human nature and
instinct, but it is also a conscious one. Thus, individual attitudes toward
risk may differ, but aversion toward risk does not justify its transfer in
order to maximize one’s own utility at the detriment of others. Indeed,
332 N. EL MAGHREBI ET AL.

risk transfer is an attempt to redefine the risk and return tradeoff and
dissociate risk from uncertainty by resticting the probability of losses.
Risk and uncertainty are inseparable, indeed. In his treatise about risk,
uncertainty and profit, Frank Knight (1921 [1964], p. 198), “it is our
imperfect knowledge of the future, a consequence of change, not change
as such, which is crucial for the outstanding of our problem.” With
respect to the problem of profit and competition, it is also argued that
it is “conceivable that all changes might take place in accordance with
known laws, and in fact very many changes do occur with sufficient regu-
larity to be practically predictable in large measure.” However, even upon
allowing for changes to occur with sufficient accuracy and regularity such
as interest rates, and in accordance with known laws and forward guidance
as with unconventional monetary policies, there still remains an element
of risk associated with debt defaults that cannot be completely eliminated.
Thus, even a systematic adjustment of interest rates does not alter the
essential nature of pre-determined rates of return, which remain set on
ex ante basis, independently from the outcome of economic activities.
Thus, variations in interest rates do not entirely address the implications
of uncertainty and risk in economic activities.
It is also argued that with respect to risk, the distribution of possible
outcomes can be known a priori based on mathematical calculation or
statistical inference from past observation or experience. With respect to
uncertainty, however, it may not be possible to estimate the distribu-
tion of outcomes and quantify probabilities because of the uniqueness of
the conditions under consideration. The amount of uncertainty depends,
among others, on the degree of homogeneity in beliefs and dogmatic
assumptions, as well as individual levels of confidence and capacity
to form correct judgement. The distinction between measurable and
unmeasurable uncertainty is further complicated by a time-dependent
learning process that may undermine rational judgement about changing
conditions.
The world of change in which people live is indeed a world of uncer-
tainty. As argued by Knight, Frank H. (1921 [1964], p. 199), it is possible
to live only by “knowing something about the future; while the problems
of life, or of conduct at least, arise from the fact that we know so little.
This is as true of business as of other spheres of activity.” (italics in orig-
inal text). Life and possessions cannot be completely protected from all
peril, as noted also by Haynes (p. 409), who argues that “[e]ven when it
is certain that an unfavourable event will happen, a risk may exist, because
 9 THE RISK-SHARING ORGANIZING PRINCIPLE OF IQTIS.ĀD 333

the time of the occurrence is uncertain. Death is a certainty for all, but
the time of death is among the greatest of uncertainties.” It is undeniable
that no human being has control over the beginning of life or its end, and
that life is shrouded with uncertainty. There remains, indeed, an element
of uncertainty in the timing of death, which is the most certain of events.
This implies that as change in society is inevitable, it is impossible to gain
accurate a priori knowledge about the outcome of economic activities.

The Pervasiveness of Risk-Transfer Relations

It is difficult to reconcile the notion that uncertainty and imperfect
knowledge are part of economic life with the disturbing thought that
some economic agents can be completely insulated from economic losses.
This insulation is hard to defend on moral and economic grounds, and
it cannot be sanctified by legally binding agreement because, notwith-
standing the freedom of contract, its effects are determined by the
Shari’ah not fiqh arguments that give precedence to economic growth
over economic justice. The insulation of lenders from potential losses is
inconsistent with the direct exposure of other economic agents such as
entrepreneurs and workers to similar risk. Adam Smith (1776 [2007],
p. 69) acknowledged that the “wages of labour in different employments
vary according to the probability or improbability of success in them.”
Thus, for the sake of consistency, the same line of argument should apply
to other forms of productive engagement including financiers. It may be
also argued that lenders who provide funding for risky investments should
be entitled to payoffs in excess of the risk-free rate of return. But the
very exposure to risky enterprise should justify state-contingent payoffs
rather than fixed incomes reflecting a risk premium commensurate with
the probability of default.
The question arises as to what may constitute the moral grounds on
which fixed payoffs can be justified for lenders when the income streams
accruing to other parties, including workers, are invariably exposed to
the risks of entrepreneurial endeavours. It is not clear, indeed, why the
wages of labour should vary with the probability of success whereas the
payoffs of lenders are invariant to the probability of loss. The general view
of interest as an inevitable reality is indicative of the way in which beliefs
about interest accumulated into social tolerance for economic irrationality.
It is the uncritical understanding of facts in ways that defy logic that
leads to the acceptance of interest despite clear evidence of prohibition on
334 N. EL MAGHREBI ET AL.

moral, historical, and theological grounds. The practice of interest-based

lending is so pervasive in the society that, for tax collection purposes,
arbitrary minimum rates of interest can be legally imposed on interest-
free loans. Even if lenders charge no interest or offer rates below market
interest rates on any loan transaction, taxes may be levied regardless of
the existence of family relationship between parties.
A mandatory limit on interest rates may be aimed at preventing tax
evasion on loans or gifts among family members, but the underlying
message is clear. It can be argued that such a tax treatment of interest-
free loans is intrusive and punitive, as interest payments are thrusted upon
parties who freely consent to enter into interest-free agreements. It rests
on the view that debt is necessarily interest-bearing, and it leaves little to
room for benevolent loans or qardh hasan between relatives and friends,
among others. Debt may be interest-free between parties but in the sight
of tax collectors, it is not. Thus, interest-based loans are the de facto rule
rather than the exception. As the innate conscience about benevolence
and moral sentiments is flattened, it becomes difficult for societies to
realize that rules should be enacted to provide solutions to debt problems
not to exacerbate them. As secular ideologies dispense with historical and
theological arguments about the prohibition of interest, it becomes diffi-
cult for governments, which are presumed to beget power from people,
to prevent the entrenchment of interest in every aspect of social and
economic life.
Financial regulation, which should be aimed at promoting economic
and social outcomes, seems to be geared toward protecting the interest
of creditors than ensuring financial stability. There is a policy failure to
address the destabilizing role of financial practices such as repurchase
agreements and the transfer of credit risk off the balance sheet of banking
institutions. At the aggregate level, credit risk is difficult to assess because
of the inevitable correlation between default probabilities and the conta-
gious effects of counterparty defaults. The social costs of litigation and
law enforcement through courts are also huge. Risk-transfer arrangements
are also entrenched in the society through other regulations including
the tax deductability of interest payments. Financial measures are also
taking to shift the burden of losses during banking crises, providing
relief to financial institutions at the expense of the large public. Given
the pervasiveness of uncertainty in the real economy, financial measures
that insulate certain parties from suffering losses due to aggregate shocks
 9 THE RISK-SHARING ORGANIZING PRINCIPLE OF IQTIS.ĀD 335

and economic downturns, condemn others to suffer economic injustice,

leading to destitution, and poverty.
Thus, a failure to understand the implications of uncertainty cannot
lead to fundamental change in the way risk is managed to serve economic
justice. If belief in the importance of economic justice in ensuring social
stability is abandoned, and lies about econmic laws are accepted with
warm applause, it is difficult to pursue the vision of an ideal economy.
If ends are allowed to justify the means, it is difficult to restore credi-
bility to governments and to palliative measures that faciliate the bailout
of banking institutions during financial crises. The hard truth is that debt
problems cannot be solved with more debt, and that uncertainty cannot
be accommodated with risk-transfer and risk-shifting solutions that, given
their inherent flaws, cannot be sustainable.

Debt and Financial Instability

The most important challenge in macroeconomic modelling is to provide,
as noted by Joseph Stiglitz (2018, p. 70), convincing explanations about
repeated economic downturns and proposals for adequate remedies.
There is, however, a failure of macroeconomic models, including the
Dynamic Stochastic General Equilibrium (DSGE) model over the past
quarter-century, to meet expectations, and part of the reason is due to the
“inadequate modelling of the financial sector meant they were ill-suited
for predicting or responding to a financial crisis; and a reliance on repre-
sentative agent models meant they were ill-suited for analysing either the
role of distribution in fluctuations and crises or the consequences of fluc-
tuations on inequality.” There is a failure of DSGE models, in particular,
to explain the sources of perturbance in the economy, and the mechanism
through which shocks are less likely to be absorbed, than to get amplified
and persist. In fact, the inability to predict crises is hardly surprising the
reluctance of most models to meaningfully incorporate debt instruments
despite the established evidence that financial crises are essentially debt
crises.
Also, Paul Romer (2016), expressed similar disenchantment, as he
argued that macroeconomics has experienced more than three decades of
intellectual regress. The economics profession, Richard A. Werner (2016,
p. 362) argues, “has singularly failed over most of the past century to
make any progress in terms of knowledge of the monetary system, and
instead moved ever further away from the truth as already recognised
336 N. EL MAGHREBI ET AL.

by the credit creation theory well over a century ago.” As a result of

repeated financial crises associated with the cyclical nature of credit, it
is becoming extremely difficult to manage risks to the stability of the
financial system, with the traditional instruments of monetary and fiscal
policies. In this regard, the Bank for International Settlements (2015,
p. 3) noted that “interest rates have been extraordinarily low for an excep-
tionally long time, in nominal and inflation-adjusted terms, against any
benchmark. Such low rates are the most remarkable symptom of a broader
malaise in the global economy: the economic expansion is unbalanced,
debt burden and financial risks are still too high, productivity growth too
low, and the room for manoeuvre in macroeconomic policy too limited.
The unthinkable risks becoming routine and being perceived as the new
normal.”
Many years later, the BIS suggests also in its Annual Report (2022,
p. 27) that nominal and inflation-adjusted interest rates remain at histor-
ically low levels partly because of “a weaker impact of monetary policy
on aggregate demand following the prolonged period of unusually low
interest rates.” Thus, it is not clear whether the persistence of low interest
rates is the outcome of persistently lower aggregate demand or the other
way round. The question arises as to whether there are limits to the
ability of central banks to stimulate demand since the transmission chan-
nels of monetary policy are weakened under low interest rates. There
is growing evidence that aggressive monetary policy easing has become
gradually ineffective. Borio and Hofmann (2017) argue that the transmis-
sion mechanism may be weakened by headwinds, including debt overhang
and heightened uncertainty, which often accompany balance sheet reces-
sions, and by inherent nonlinearities in the relationship between interest
rates and spending. Also, Ahmad, Borio et al. (2021) provide evidence
about the diminishing traction of monetary policy on aggregate demand
after accounting for potential nonlinearities associated with business cycle
fluctuations, debt levels, and decreasing equilibrium interest rates.
The lack of responsiveness of aggregate demand to monetary easing
is indicative of a flattening of the Philipps curve, which describes the
inverse relation between inflation and unemployment. It is also accom-
panied with a flattening of the IS curve, which relates investment to
savings, output to interest rates, or goods markets to money markets
in the Keynesian IS-LM macroeconomic model. Theoretically, reducing
interest rates to lower borrowing costs is expected to stimulate real invest-
ment, leading to stronger output and income. Given the narrow room
 9 THE RISK-SHARING ORGANIZING PRINCIPLE OF IQTIS.ĀD 337

for policy manoeuvre, however, the flattening of the yield curve may
not be effective either, since short-term nominal rates can be regarded
as proxies for ex ante long-term real interest rates, as suggested by Fuhrer
and Moore (1995) in their analysis of inflation persistence.
There are conceptual difficulties in understanding the current
economic conditions and the impact of limited policy manoeuvre, which
may be partly attributed to the complex implications of interest rates for
the real economy. Persistently low interest rates may affect bank prof-
itability in various ways, including diminishing term premium, which
reflects the differential between short-term deposit and long-term lending
rates. An environment of lower interest rates may not necessarily provide
stronger incentives for capital expenditure by firms that do not regularly
adjust hurdle rates in the evaluation of investment projects. Since hurdle
rates are not systematically aligned with the levels of interest rates, under-
investment may persist even under low borrowing costs. The conditions
of underinvestment are conducive, in turn, to a shortfall in demand, and
economic stagnation.

Interest Rates and the Transmission of Monetary Policy

It may be argued that interest rates should be reduced in order to
discourage savings and avoid the paradox of thrift, where excessive savings
lead to reduced aggregate demand, but heightened uncertainty about
future income may provide even stronger incentives for saving rather than
borrowing. Similarly, contractionary fiscal policies meant to curb inflation
may be conducive to the paradox of austerity, where deficits cannot be
reduced due to falling demand and diminishing tax receipts. As central
banks continue to hold large shares of government bonds through asset
purchase programs, debt is destined to rise faster than economic output.
The theoretical difficulties in understanding the role of interest rates
in regulating the real economy and sustainability of sovereign debt have
stimulated the development of new economic philosophy that mone-
tary policy does not matter when there are no legal or institutional
constraints on borrowing and spending by governments that are mone-
tarily sovereign. The Modern Monetary Theory (MMT) is often criticized
for its simplistic approach to economic analysis. The fundamental argu-
ment behind the MMT paradigm is that new money creation can be used
to pay for government debt, and unlimited spending does not matter
either as long as inflationary pressures remain under control. While it is
338 N. EL MAGHREBI ET AL.

true that governments borrowing in their own currencies can neither be

subject to scrutiny nor forced default, the counter-argument is usually
made that demand on government debt would necessarily depend on
the availability of underused resources. Also, mounting burdens of public
debt may increase the prospects of higher taxation to fund future govern-
ment spending, shifting thereby the burden on the private sector, and
raising the likelihood of debt crises.
Thus, losing traction of the transmission mechanism is losing control
of monetary policy. It seems that the bond between inflation and targeted
growth in money supply is rather missing. The flattening of the yield
curve, Philipps curve, and IS curve may be symptomatic of losing control
and faith in effective monetary transmission mechanisms at low interest
rates. If monetary policy is found to be ineffective at low interest rates,
then the question arises as to whether it can be effective at higher
rates. The argument that higher rates are necessary in switching from an
inflation-targeting regime to inflation-fighting one may fall apart for the
same reasons that render lower rates ineffective. As traction of monetary
policy is waning, aggregate demand can hardly be expected to respond
better to higher interest rates. Indeed, positive and negative changes
in the level of interest rates may have asymmetric effects on aggregate
demand. It is more plausible that aggregate demand would not be so
much boosted by the lower savings resulting from lower interest rates as
suppressed by the lower disposable income resulting from higher interest
rates. Monetary policy is further complicated by expectations of higher
inflation rates, which lend little support to the argument for raising
interest rates in the presence of weak demand and anaemic growth.
Despite the compelling evidence about the theoretical difficulties
emanating from the introduction of interest rates in economic thinking,
there is a tendency for macroeconomic theorists, as argued by Paul Romer
(2016), to “dismiss mere facts by feigning an obtuse ignorance about
such simple assertions as ‘tight monetary policy can cause a recession.’”
There are indeed serious concerns that tight monetary policies can lead
to recessions, but there are equally perturbing thoughts that loose poli-
cies can fuel speculative activities and asset bubbles followed by banking
crises and economic recessions. The deliberate policies aimed at discour-
aging savings and encouraging borrowing may increase the incentives for
speculative strategies in order to compensate for lower returns from bank
deposits and bond markets. The greater exposure to riskier assets fuelled
essentially by increased borrowing is conducive to higher equity valuation
 9 THE RISK-SHARING ORGANIZING PRINCIPLE OF IQTIS.ĀD 339

and it may be appealing to policymakers as well as it increases perceptions

of greater wealth. Conventional wisdom suggests that the wealth effect
ensures stronger consumer spending, but it is not clear whether higher
asset valuation is sustainable when economic growth is essentially driven
by debt, which increases the prospects of financial instability.
It is rather difficult to articulate convincing arguments for policy tight-
ening or expansion given a dearth of investment irrespective of the level
of interest rates. With high savings and historically low net investment as
a share of total capital stock, the reality of secular stagnation poses serious
policy challenges. For instance, the theory of stagnation proposed by
Alvin Hansen (1939), is reflective of economic and philosophical conun-
drums about the ineffectiveness of orthodox and unconventional policies.
He argued that unemployment should be used as an instrument to
control inflation, and that monetary that monetary policy should pursue
negative real interest rates in order to achieve full employment with equi-
librium savings and investment. The notion that adjustments to policy
rates can effectively determine inflation and fine-tune the goods and finan-
cial markets seems to be rather implausible given the inherent flaws of the
transmission mechanism. Given the risk-transfer nature of interest rates
and financial systems, low inflation constitutes an impediment against
the lowering of real interest rates in order to increase demand. Also,
Lawrence Summers (2014, p. 29) discusses the new secular stagnation
hypothesis and notes that “it may be impossible for an economy to achieve
full employment, satisfactory growth and financial stability simultaneously
simply through the operation of conventional monetary policy.”

Monetary Policy as a Source of Economic Uncertainty

The Taylor rule of central banking operations implies that adjustments
of interest rates should be based on the significance of output gaps and
deviations of actual inflation from target rates. For instance, policy tight-
ening to control aggregate demand and ensure price stability is reflected
by measures to increase interest rates if actual output surpasses potential
levels and inflation rates exceed desired ones. As argued by Randall Wray
(2016, p. 54), this is “just a slightly updated Phillips curve notion -if
the unemployment rate gets too low, inflation results- but with far more
concern shown for inflation than unemployment.” The primary objec-
tive of inflation targeting is to promote economic stability by restricting
increase in the general price level. The target inflation and growth rates of
340 N. EL MAGHREBI ET AL.

money supply are considered to be the appropriate quantities that ensure

the operation of the economy near full employment levels. As the ability
to control fluctuations in the general price level depends on inflationary
tendencies and deviations from inflation targets, monetary policy rests on
the accuracy of economic outlooks that capture the perceptions of house-
holds and firms about the long-term stability of the general price levels.
The logic of setting a future path of inflation and adjusting interest rates
on the basis of the observed deviations of actual price levels from target
ones depends, however, on a better understanding about the determi-
nants of inflation. It is difficult to argue for contractionary policies, for
instance, when inflationary forces are essentially driven by external shocks
to global fuel and food systems rather than increase in domestic demand.
If monetary policy is expected to achieve, concurrently, a multitude
of objectives ranging from price stability to economic growth and full
employment, it is necessary to consider the question of whether the
adjustment of interest rates to transmit monetary policy and achieve its
objectives is, in fact, the source of balance or distortion. From a theo-
retical perspective, it should be noted that, according to Keynes (1937,
p. 221), The General Theory is “a theory of why output and employ-
ment are so liable to fluctuations.” The effectiveness of monetary policy
depends on the inner workings of interest rates, which should deter-
mine the optimal levels of saving and investment to attain equilibrium
output at full employment. Despite near-zero interest rates, the reality
of imbalanced and anaemic growth persists, however. It is clear also that
quatitative easing with asset purchase programs aimed at providing further
liquidity in the financial system are distortive of the price discovery process
in financial markets. The unlimited balance sheet of central banks acting as
de facto price makers and purchasers-of-last resort implies that asset prices
are bound to increase regardless of the content of economic informa-
tion. Money creation to purchase financial assets seems to take precedence
over the informational efficiency of financial markets. As monetary policy
becomes an additional source of uncertainty, the prospects of inflation,
asset bubbles, and financial crises increase because it is axiomatic, as
suggested by Kindleberger and Aliber (2005) that inflation is function
of the growth of money and that asset bubbles depend on the expansion
of credit.
Thus, monetary policies aimed at promoting price stability through
the adjustment of interest rates can constitute a source of economic insta-
bility. Further evidence from Husted et al. (2020) suggests that increased
 9 THE RISK-SHARING ORGANIZING PRINCIPLE OF IQTIS.ĀD 341

uncertainty about monetary policy results in protracted declines in firm

investment. Also, De Pooter et al. (2020) argue that the reaction of
bond yields depends on market perceptions of uncertainty about the
future path of policy rates. There is a degree of market complacency in
building large positions in interest rates when policy uncertainty is low
followed by abrupt reversals in response to monetary policy surprises.
Thus, the very instrument of interest rate, with which monetary policy is
purported to seek escape from economic uncertainty is itself found to be
embroiled with controversy. The traditional sense of security and certainty
in interest-based mechanisms is perhaps waning, and part of the reason
has to do precisely with the uncertain nature of economic activities.
The theoretical and empirical arguments about secular stagnation are
not merely suggestive of the Keynesian conundrum of low investment.
They are also indicative of the fact that central banks are losing traction
of the channels for policy transmission to the real economy in terms of
aggregate expenditure and income. As noted earlier, the ability of central
banks to boost demand and influence inflation expectations by inflating
financial assets may be technically unlimited, but there are also concerns
about credibility given the increased risks of asset bubbles and financial
instability. Given the history of debt accumulation, financial crises, and
balance-sheet recessions, it is rather difficult to concur with the argument
that interest rates can be an effective instrument of monetary policy. The
growing literature suggests that the occurrence of banking crises is not
limited to countries with low levels of income, and that government debt
is likely to increase not just as a result of bank bailouts and government
spending but also in association with lower tax revenues.

Debt and the Making of Financial Crises

It is argued that though economic theory does not provide sufficient
guidance about the exact timing of duration, financial crises, they may
occur in advanced and developing economies. It is rather the reliance on
leverage that makes financial markets markets and institutions vulnerable
to crises of confidence. Reinhart and Rogoff (2009, p. xxxix) suggest
that highly leveraged economies can be unwittingly sitting on the edge of
financial precipice, and that part of the reason for this-time-is-different
syndrome is the “failure to recognize the precariousness and feckless-
ness of confidence—especially in cases in which large short-term debts
need to be rolled over continuously.” Clear signals of impending crises
342 N. EL MAGHREBI ET AL.

may be, indeed, dismissed as irrelevant based on new theories about the
implications of new economic dynamics, new rules of valuation, or new
productivity-boosting technologies. But falling into the financial precipice
is rather a certainty because asset bubbles, where prices are not driven
by economic fundamentals but by debt and speculative trading, always
implode.
Price increases driven by erratic shifts in market sentiment are consis-
tent with individual rationality do not render asset bubbles rational. The
notion of “rational bubbles” is proposed to describe market conditions
under which price deviations from economic fundamentals are consistent
with a behaviour of economic agents governed by “rational expectations.”
Since the theory of rational expectations implies only that changes in
asset prices are driven by expectations conditional on all available informa-
tion, rationality in this narrow meaning does not exclude the possibility
of “rational” speculative bubbles. Arguably, the implosion of bubbles is
inevitable and independent of their theoretical characterization as rational
or otherwise. The inevitable implosion of speculative bubbles is a natural
outcome of the inherent fragility of the financial structure. In this respect,
John Maynard Keynes (1937, p. 210) argues that “the increased demand
for money resulting from an increase in activity has a backwash which
tends to raise the rate of interest; and this is, indeed, a significant element
in my theory of why booms carry within them the seeds of their own
destruction.”
The financial instability hypothesis, proposed by Hyman Minsk (1977),
provides an interpretation of Keynesian theory of the business cycle. The
distinction is made between three classes of firms depending on their
ability to meet debt obligations. Firms in hedge-finance positions are
expected to generate stable income sufficient to cover all debt payments
including interest and principal. Depending on the present value of future
income relative to that of debt payments, the expected income of spec-
ulative units may not be sufficient to meet debt obligations, increasing
thereby the need for new debt commitment or asset sales. The fragility of
speculative units derives from a mismatch between long-term assets and
short-term liabilities, and rising cost of refinancing with new debt, among
others. Finally, Ponzi finance units are characterized by limited income
and assets, where payments can only be met by increasing the amount
of debt outstanding. Thus, the financial instability hypothesis implies that
higher interest rates can transform hedge units into speculative units, and
the latter into Ponzi units, which may be in turn forced into extinction or
 9 THE RISK-SHARING ORGANIZING PRINCIPLE OF IQTIS.ĀD 343

constrained to short-term debt rolled over continuously. A decline in the

levels of investment and future income resulting from liquidity problems
or lower aggregate demand would amplify the risk of debt defaults, bank
runs, and financial crises.
The exact timing of financial crises may not be predictable, but
vital signs emanating from money markets cannot be ignored. The
Office of Financial Research (2022) argues that monetary market uncer-
tainty is conducive to elevated treasury market volatility and reduced
liquidity. More generally, it sends warning signals that “bond market
stress measures are showing levels comparable to March 2020 and the
early days of the 2007–09 financial crisis.” Also, the market for repur-
chase agreements is regarded as the epicentre of the US financial crisis.
Repurchase agreements allow banks, hedge funds, and investment funds
to borrow overnight against collateral, and the rise of the repo rate above
the federal-funds rate is often regarded as a sign of liquidity problems.
The Federal Reserve may intervene with large-scale overnight funding,
lowering thereby the repo rate, but concerns about shortage of liquidity
may linger longer. Because the balance sheets of banks are character-
ized by long-term illiquid assets against short-term demand deposits,
perceptions of liquidity shortage in repurchase markets increase the risk of
old-fashioned bank runs. Non-bank institutions such as insurance compa-
nies are also exposed to bank-like maturity mismatch, which increases the
risk to financial stability. There are also concerns about negative returns
in the hedge fund industry, the largest decline since the onset of the
US credit crisis, and about the ability of highly leveraged hedge funds
to hedge against adverse price movements and rising inflation.

Prudential Regulation and the Procyclicality of the Financial System

It is clear that the conventional financial systems existing financial systems
are inherently unstable, and that they do not match the pulse of the real
economy. They constitute rather an unmistakable source of unwarranted
fluctuations in aggregate demand and economic activity. As suggested by
Minsky (1977), fine-tuning in the prevailing financial systems is rather
impossible, but restraining the speculative activities of banks and busi-
nesses is warranted. Thus, attempts by central banks to promote price
stability and economic growth by fine-tuning interest rates, which consti-
tute the very source of financial instability, are also misguided. It is usually
argued that the procyclicality of the financial system, which reflects the
344 N. EL MAGHREBI ET AL.

tendency for banks to increase lending during economic expansions and

contract credit during economic downturns, exacerbates business cycle
fluctuations. As noted by Rochet (2008), procyclicality is intrinsic to
financial systems, as an alternation of credit expansions during growth
phases and credit crunches during downturns produces endogenous
financial cycles. Indeed, the accumulation of credit losses can trigger a
crisis of confidence in the banking and financial sectors, lower investment,
and a decline in economic activity. Prudential regulation can itself be a
source of procyclicality as capital requirements imply that banks are bound
to suffer credit losses during economic downturns rather than expansions.
The question remains as to whether countercyclical measures and changes
to accounting and regulatory rules can effectively reduce the risk of finan-
cial instability. Indeed, the financial instability hypothesis implies that
it is debt-fuelled speculative activities that essentially cause, not merely
exacerbate, fluctuations in the levels of output and employment.
Thus, it is not clear whether a regime of countercyclical capital buffers
aimed at attenuating the propensity for credit contraction during down-
turns can eliminate the risk of financial instability. Additional capital
requirements may, to some extent, constrain the supply of credit during
economic expansions, but they do not necessarily diminish exposure to
default risk. Indeed, higher capital-to-asset ratios during expansions may
increase bank resilience to shocks during economic downturns, but they
do not ensure lower exposure to default risk. There is empirical evidence,
Ayyagari, Beck, and Martinez Peria (2017, 2018), that macroprudential
policies result in slower growth of credit for smaller firms, and from Auer
et al. (2022) suggest that higher growth in bank lending to smaller and
riskier borrowers is associated with higher interest rates, which are reflec-
tive of larger default risk premia. It is also argued by Bhargava et al.
(2023) that the riskiness of corporate credit deteriorates as the tight-
ening of household-specific macroprudential measures increases. Thus, it
can be argued that countercyclical capital buffers may be instrumental
in smoothing the volume of credit over different phases of the business
cycle, but the risks to financial stability from bad debt, liquidity problems,
and financial contagion remain. Given the failure to address the causes
of financial instability, it seems that financial regulation is not so much
concerned about preventing the next banking crises than increasing the
capacity of the banking system to withstand one.
 9 THE RISK-SHARING ORGANIZING PRINCIPLE OF IQTIS.ĀD 345

It is difficult to expect the financial sector to smooth out economic

fluctuations when it constitutes, in fact, the very source of economic insta-
bility. As macroprudential policies do not consider the economic rationale
behind bank credit, and do not address the source of instability, there is
no reason to believe that static or dynamic capital buffers would alter
the nature of systemic risk. The bank business models are founded on
the generation of revenues from the differentials between lending rates
on long-term loan assets and borrowing rates on short-term demand-
deposit liabilities. Under the current system of fractional reserve banking,
banks are required to hold only a fraction of deposits as reserves for with-
drawal purposes, allowing thereby for money creation to take place with
each act of lending based on the remaining fraction. The reality, as noted
by Michael Kumhof (2013), is that the power to create money is “an
extraordinary privilege not enjoyed by any other type of business.”
Historically, fractional reserve banking, which has also a legal basis in
Roman law, is regarded to be inherently unstable. As noted by Collins and
Walsh (2014, pp. 203–204), “there is little evidence of the type of large,
destabilizing asset bubbles seen in modern economic history. Neverthe-
less, the Roman economy was not free from the potential instability of
fractional reserve banking: both the attested credit crises of 49 BC and
AD 33 prompted government to action to stabilise the credit markets, and
most probably, the banking system.” To lament a history of banking crises
in ancient and modern economies without a desire to address the struc-
tural flaws in the financial architecture can only perpetuate the cycle of
credit booms and busts, economic meltdowns, and job losses. The accu-
mulated experience justifies action rather than a status quo over fractional
reserve systems that are inherent unstable. It is important to realize that
banks are not just financial intermediaries that channel preexisting funds
from saving into investment, but also creators of money ex nihilo, and
architects of wealth destruction. Thus, no amount of regulation, dereg-
ulation, and reregulation can be effective in preventing banking crises
without promoting a full-reserve banking system operating under the
principle of risk-sharing rather than interest-based debt financing.

Risk-Sharing and Economic Stability

It may be argued that the mechanics of monetary policies entwined with
inherently unstable financial systems involve equal measures of complexity
and paradox. From a philosophical perspective, the conundrum derives
346 N. EL MAGHREBI ET AL.

from the fact that economic activities are essentially associated with
unknown outcomes with unknown probability distributions, and that it
is impossible to circumvent the risks inherent to economic uncertainty
by merely altering the level of interest rates. No amount of quantitative
easing may be sufficient in rebalancing economic growth and employment
with equilibrium levels of saving and investment when the economic envi-
ronment is dominated pessimistic views about future yields and prospects
of financial crises. Monetary policy based on the adjustment of policy rates
and yield curves cannot be part of the problems and their solutions. The
question, thus, arises as to whether the levels of output and employment
should be determined by a rate of interest that provides a fixed premium
as a reward for not hoarding money, or by a variable return of return on
investment, which despite economic uncertainty and risk, constitutes an
act of faith in the future.
The irrefutable evidence that interest-based debt is at the heart of
banking crises and economic fluctuations strengthens the argument that
the banking system’s unique forces of destabilization in terms of credit
expansion and money creation should be severed. The Chicago Plan,
proposed by eminent scholars in association with the Great Depression,
points out to the serious flaws of the prevailing financial systems. A full-
reserve banking system would prevent banks from drawing on demand
deposits to fund their lending activities, precluding thereby the boom-
bust credit cycles, which are the source of economic fluctuations. It would
also eliminate the risk of bank runs since no losses can be incurred by
depositors in the event of debt default and deterioration of the bank’s
balance sheet. It was also argued that the reformed monetary system
would allow the government to issue money at zero interest, and permit
banks to draw from reserves at the central bank in order to fully cover
liabilities, reducing thereby the net government and debt in the private
sector.
As argued by Phillips (1992), the plan was defeated, however, as a
matter of political expediency in favour of the institution of Federal
deposit insurance and separation of commercial and investment banking.
However, further evidence from Benes and Kumhof (2012) lends support
to the economic rationale of the Chicago Plan, which can be theoretically
achieved without diminishing the credit function of banks in extending
funding to real investment. It is also argued that the interest rate on the
treasury credit facility available to banks does not represent an oppor-
tunity cost of money but a borrowing cost to fund physical investment
 9 THE RISK-SHARING ORGANIZING PRINCIPLE OF IQTIS.ĀD 347

in the real economy. There is also evidence that a steady-state output is

attainable given the reduction in distortive factors such as net interest
rate spreads and unnecessary costs of bank supervision. Further analysis
by Fiebiger (2014) suggests that money-financed fiscal stimulus would be
also instrumental in promoting sustainable employment.

Interest Rates and Expected Rates of Return

The Chicago Plan has the merit of separating the monetary issuance and
credit functions of banks, but it only lowers the level of debt without
eliminating it. It is clear that interest rates are, unmistakably, the primary
source of complexity and confusion. The distortive role of interest rates
stems from a historical failure to deal with the inevitable implications of
economic uncertainty in terms of exposure to risk. The debate about the
concept of “natural” rate of interest, notably between David Davidson
and Knut Wicksell, which centred on the existence of a rate that ensures
full employment and price stability, provided some insights on the essence
of interest rates. From the Keynesian perspective however, uncertainty
contaminates, as noted by Robert Skidelsky (2020, p. 183) “the invest-
ment demand schedule as a whole, and not just enterprise. There is
no ‘normal’ rate of return: there is simply an expected rate of return,
governed by uncertainty.” It is not clear, thus, whether interest rates,
“natural” or otherwise, can be incorporated into models of economic
equilibrium.
As argued by Tyler Cowen (1983, pp. 610–611), indeed, if interest
rate is defined as an intertemporal price ratio for money, then the General
Equilibrium (GE) model proposed by Arrow and Debreu model (1954)
would fail to provide insights about the conditions of economic equilib-
rium under perfect competition. Indeed, it is by construction that the
notion that “equilibrium” rate of interest should be explained with refer-
ence to the relative prices of other commodities. It is difficult, then,
to impose predetermined rates of return as exogenous variables into a
system of simultaneous equations when they should be determined rather
endogenously. There is a need for a consistent theory of interest relating,
internally, the prices of various commodities, but a coherent theory does
not, or rather, exist. The inclusion of fixed rates of interest presents the
problem of overdetermination with a system of more equations than
unknowns unable to provide solutions that are internally consistent from
an economic perspective. The essential argument is that a mathematical
348 N. EL MAGHREBI ET AL.

framework designed to identify equilibrium conditions for the optimal

allocation of resources cannot be saddled with predetermined rates of
interest as no economic role for money, except for accounting purposes.
Thus, the GE model of equilibrium under uncertainty assumes the
existence of Arrow–Debreu securities or state-contingent claims, where
a payoff defined in terms of one unit of a specific consumption good
is obtained only if a particular state of the world occurs in the future,
and zero otherwise. It precludes state-independent claims that deliver
payoffs under every possible future state of nature because such securi-
ties are designed to circumvent the implications of economic uncertainty
about future payoffs. It is not difficult to identify interest-debt claims
as the only fixed-income arrangements that essentially transfer the risks
inherent to economic activity from lenders to borrowers. The notion that
rates of return should be predetermined ex ante in order to promote
savings is inconsistent with the uncertainty that shrouds virtually all
aspects of economic activity. However, with rates of interest, the finan-
cial economy is allowed to grow indefinitely independent from the reality
of random payoffs that accrue from the real economy. Since the nature of
economic activities is characterized by uncertainty, investment outcomes
cannot be predetermined ex ante. If cashflows generated from real assets
to service debt remain uncertain and unrelated to speculative or Ponzi
financing, then it is impossible to enforce fixed claims on uncertain cash-
flows without breaking the relationship between the financial economy
and the real economy. It is with the onset of credit crises stemming from
debt defaults that the weak link between finance and the real economy is
ultimately strained.

Iqtis.ād and the Islamic Financial System

In an ideal economy based on Iqtis.ād rules, monetary policy precludes
the multiplication of money capital irrespective of the real and physical
output. Essentially, the same policy instruments are available to Islamic
and conventional monetary authorities, except that open market opera-
tions are driven by buying and selling of equity shares rather than bonds.
In contrast to conventional monetary policy where interest rates are
indirectly used to regulate money supply, the latter is directly adjusted
through asset market activities. As in the standard apparatus of Arrow–
Debreu general equilibrium, there is no room for state-independent
financial claims. There is no recourse to fixed-income securities such as
 9 THE RISK-SHARING ORGANIZING PRINCIPLE OF IQTIS.ĀD 349

government bonds to induce portfolio adjustments, or direct lending to

the banking sector with lower discount rates to increase liquidity in the
financial system. Instead, it is possible for governments to adjust reserve
requirements and use risk-sharing instruments rather than interest rates to
create incentives to channel real savings toward productive investments.
The Iqtis.ād-based monetary policy depends on risk-sharing instru-
ments rather than interest-rate mechanisms, which foster a decoupling of
the financial system from the real economy. But the central challenge is
about the design and issuance of risk-sharing instruments that can be used
by the government to implement sustainable fiscal policies, and finance
its operations and development expenditure beyond tax revenues. It is
these risk-sharing instruments that would allow monetary policymakers
also to manage liquidity and portfolio adjustment by the private sector to
stabilize the real economy. It can be argued that it is possible to achieve
these objectives through the issuance of sovereign sukuk. According to
the Accounting and Auditing Organization for Islamic Financial Institu-
tions (AAOIFI 2003), investment sukuk can be defined as “certificates
of equal value representing undivided shares in ownership of tangible
assets, usufruct and services.” The negotiable financial certificates can be
regarded as pro rata ownership claims on Shari’ah-compliant tangible
assets and usufructs until maturity. Unlike conventional bonds, there is
however no guarantee of redemption of sukuk capital prior to maturity,
and theoretically, there is no assurance about fixed income.
Indeed, with reference to the issuance of investment sukuk, the Shar-
i’ah Standard (17) issued by AAOIFI (2003, pp. 477–478) stipulates
that “[t]he prospectus must not include any statement to the effect that
the issuer of the certificate accepts the liability to compensate the owner
of the certificate up to the nominal value of the certificate in situations
other than torts and negligence nor that he guarantees a fixed percentage
of profit.” Thus, there is regulatory clarity about the nature of income
expected from investment into asset-backed sukuk. Thus in theory, as
there is no promise of a fixed rate of return, it is difficult to refer to sukuk
as fixed-income securities. Depending on the nature of economic activity,
the income streams generated by the underlying assets may be to, some
extent, stable, but stability cannot legitimate promises of fixed income.
The natural implication of this argument is that there is no theoretical
basis for the notion of sukuk default because default is by definition a
failure to honour a promise for payment of a fixed amount at a fixed point
in time. The definition of the event of default on conventional bonds
350 N. EL MAGHREBI ET AL.

should not theoretically, apply to a failure by the sukuk issuer to pay a

fixed amount at a fixed point in time because the issuance of the absence
of guarantee of “fixed percentage of profit,” according to the AAOIFI
regulatory standards.
Thus, for the sake of resource mobilization in accordance with the risk-
sharing principle of Iqtis.ād system, it is important to note that Shari’ah
compliance is not just about meeting the requirement of eligible under-
lying assets, but about the prohibition of interest charging as well. Given
the economic definition of fixed-income security as one associated with
state-independent payoffs, it is difficult to distinguish between conven-
tional bonds and sukuk known as Islamic bonds. In fact, the labelling of
sukuk as Islamic bonds similar to conventional bonds raises another regu-
latory conundrum. As Shari’ah principles prohibit the trading of debt
obligations except at face value, it is not clear how the debt-based sukuk
would qualify for permissible trading on secondary markets, and consti-
tute an effective instrument for monetary policy transmission. It may be
also argued that, as a form of asset securitization, sukuk should not neces-
sarily fall under the rubrique of debt. Whereas conventional bonds are
issued without a designated underlying asset, it is the pro rata ownership
of a Shari’ah compliant underlying asset and its usufruct that distin-
guished sukuk apart from other securities including bonds and shares.
This sukuk property may be regarded as a necessary, though, insuffi-
cient condition for Shari’ah compliance because the securitization process
should not culminate into a mechanism that guarantees fixed rates of
return.
Insofar that demand is driven by promises of fixed-income streams
based on asset ownership with reference to benchmark interest rates, it
is difficult to eschew criticism that sukuk are nothing more than interest-
based debt obligations. Theoretically, sukuk valuation should stem from
the estimate appraisal of the underlying asset and its return-generating
process, but they are rather subject to credit rating based on assessment
of default probability. The credit rating of sukuk exposes the fact that they
are perceived as debt instruments that can be subject to the likelihood
of default. It should be noted that, despite promises of fixed payment,
sukuk ijārah are permissible in Islamic finance on the grounds that they
intrinsically differ from interest-based debt obligations. As demonstrated
by Smith (1979) using option pricing theory, the value of ijārah does
not depend on the financing decisions of the lessee, and does not affect
 9 THE RISK-SHARING ORGANIZING PRINCIPLE OF IQTIS.ĀD 351

its capital structure. As explained also by Maghrebi et al. (2016, pp. 214–
215), ijārah depends, exclusively, on the value of the underlying asset
net of usufructs until maturity whereas the value of debt is a function
of promised fixed payments or the residual value of assets. It is noted,
indeed, that “the valuation risk associated with the underlying asset is
shared by both the lessor and the lessee. There is no risk transfer from
the lessor to the lessee, as the potential fall in the asset value affects the
former in terms of diminishing equity and the latter in terms of declining
ijarah value. It is perhaps this risk-sharing element, which can be found
in the ijarah but not in debt arrangements, that presents the economic
rationale behind the permissibility of the former and prohibition of the
latter.” Thus, given the risk-sharing element and relative stability of future
payoffs, sukuk ijārah should be regarded as a principal instrument of open
market operations.
These conceptual distinctions are important because the design and
issuance of sukuk in an Iqtis.ād system should not be driven by an unwar-
ranted urge to mimic conventional instruments but by compliance with
the tenets of risk-sharing in financial arrangements. The pro rata owner-
ship of the underlying asset should be reflected by a commensurate
exposure to risk. This is the case of pass-through securitization where
the asset cashflows are channelled directly to investors. However, special-
purpose-vehicles in structured finance are allowed to distribute cashflows
to different tranches on prioritized basis. As actual earnings from sukuk
may fall short of expected levels, it is the equity tranches that stand
first to absorb potential losses. The sequential slicing of the loss func-
tion into additional mezzanine tranches to absorb residual losses implies
that, unless all junior tranches are depleted, senior tranches are essentially
protected against adverse cashflow fluctuations. The allocation of payoffs
reflects an asymmetric distribution of risk, with a diminished exposure
of senior tranches to payment shortfalls at the expense of subordinated
tranches. Thus, the capital structure of structured finance products may
provide opportunities for investors with different risk-return profiles, but
the lower loss probability for senior tranches reflects the fact that cash-
flows are not distributed on pro rata basis. Hence, there is little evidence
of risk-sharing when the loss function results in a fragmentation of payoffs
that benefits senior tranches under unfavourable states of nature.
Structured finance can, thus, be instrumental in transferring risk across
tranches and creating safe claims against risky assets. But it is difficult
352 N. EL MAGHREBI ET AL.

to argue for the use of financial securities based on credit enhance-

ment mechanisms as instruments of monetary policy transmission. The
complexity of structured finance lies in the implications of shock ampli-
fication to subordinated tranches and creation of debt-like obligations
with respect to senior tranches. Ultimately, it is the degree of public
trust in Shari’ah-compliant financial securities designed and issued on
the basis of risk-sharing that would determine the demand and supply
of financial instruments for the purposes of fiscal and monetary policies.
It would be a misguided conviction for policymakers to promote financial
systems based on risk-sharing while threatening their stability through
the conduct of fiscal and monetary policies with instruments based on
risk-transfer mechanisms.

Iqtis.ād, Equity Financing and State-Contingent Claims

The optimal instrument of risk-sharing remains the equity market because
unlike fixed-income securities such as bonds, stocks represent state-
contingent claims. The tightening of monetary policy can be conducted
through the issuance of equity participation shares or asset-linked securi-
ties directly in the stock market to decrease money supply. The issuance
of equity or national participation papers would offer, not only institu-
tional investors but individual savers also, the opportunity to participate
directly in the financing of government expenditures such as development
projects. It is important, however, to issue low-denominated papers to
induce individual investors, reduce transaction costs, and facilitate access
to information in order to converge toward the optimal conditions of
consumption and risk-sharing with complete markets. Investors would be
entitled to a share of the expected revenues from the realization of devel-
opment projects. It may be argued that for infrastructure projects that
generate no direct revenues but are essential to economic activity, the
government may be allowed to pay also dividends conditional on the rate
of return in the real economy.
This argument is, to some extent, consistent with the notion of
sovereign GDP-linked bonds, a financial innovation advocated by some
economists including Robert Shiller (2003), who discusses the idea of
trading a security that pays a quarterly “dividend” equal to a fraction of
the GDP. Shiller (2018) further argues that the absence of such instru-
ments is rather puzzling given the willingness of governments to tie debt
with fiat money with no intrinsic value and no asset-backing as under the
 9 THE RISK-SHARING ORGANIZING PRINCIPLE OF IQTIS.ĀD 353

monetary system of gold or bimetallic standard. The binding of debt with

the real economy can be instrumental in avoiding procyclical fiscal policies
and provide the foundations for debt sustainability. But there are serious
obstacles to the implementation of GDP-linked bonds, which stem from
the behaviour of market participants and policymakers and their attitudes
toward risk. Benford and Eguren-Martin (2018) contend that however
large the benefits of macroeconomic and fiscal stability, there would be no
market for such instruments if issuers are not willing to meet the expec-
tations of investors. However, the main source of reluctance, as argued
by Eduardo Borensztein, Maurice Obstfeld, and Jonathan Ostry (2018,
p. 18), is not so much related to markets as to policymakers. Politicians,
it is argued “tend to have relatively short horizons, and would not find
debt instruments attractive that offer insurance benefits in the medium to
long run but are costlier in the short run, as they include an insurance
premium dirven by the domestic economy’s correlation with the global
business cycle.” It may be further argued that the GDP-linked bonds
have the potential to increase the capacity of the government to absorb
shocks. As noted by Andy Haldane and Maurice Obstfeld (2018, p. 1),
“[t]hey would provide the issuing government with debt relief when
growth weakens and tax receipts decline.” Given the limited room for
policy manoeuvre under low interest rates and concerns of secular stagna-
tion, the new instruments may provide innovative fiscal policy options that
strengthen the linkage between the financial system and real economy.
The design and trading mechanics as well as pricing and regulatory
issues related to GDP-linked debt are still a matter of intellectual debate.
But the basic economic rationale is that the expected payoffs are defined
as function of economic performance on ex post basis rather than naively
predetermined as fixed income. GDP-linked bonds are state-contingent
claims in the sense that payoffs are bound to vary during economic
expansions and downturns. While recognizing, thereby, the implications
of economic uncertainty about aggregate output, there remain, however,
conceptual issues about the nature of debt or risk-sharing in GDP-linked
bonds. Shiller (2018, p. 7) argues that “GDP-linked debt has to be issued
into a world with existing outstanding nominal and inflation-indexed
debt, with laws regulating the debt, such as national debt limits, and with
public expectations and rules of thumb regarding the concept of debt,
and even public hopes that the debt live up to religious principles, such as
the Islamic Shari’ah compliant sukuk.” In this respect, Arshadur Rahman
(2018) suggests that governments interested in raising Shari’ah compliant
354 N. EL MAGHREBI ET AL.

GDP-linked sukuk may opt for hybrid ijārah or mudhārabah partnership

structures as mushārakah requires a symmetry of roles and responsibilities
between parties that may not be appropriate for sovereign sukuk.
The central issue pertains to the nature and extent of debt and risk-
sharing in the design of GDP-linked bonds. To the extent that there
are binding promises of regular coupon payments and capital redemp-
tion at maturity, these securities are comparable to conventional bonds.
It may be argued, however, that since the payout structure is not fixed a
priori and the exact amount of coupon payments can only be determined
after the calculation of GDP figures, it is difficult to strictly regard the
GDP-linked bonds as fixed-income securities. There is indeed, to some
extent, an element of risk-sharing since coupon payments are allowed to
vary according to fluctuations in economic performance. As noted by
Ostry and Kim (2018, p. 33), GDP-linked bonds “act as a perfect risk
sharing device: giving the issuer a reduced obligation when its capacity
to generate resources for debt service suffers, in exchange for a higher
obligation when its capacity to pay is greater.”
It is not clear, however, whether these securities represent, indeed, a
“perfect” instrument for macroeconomic risk-sharing because fluctuations
in coupon payments may not reflect the risk of negative growth. If the
payoffs are calculated as a percentage of GDP levels rather than GDP
growth rates, investors would be exposed to the risk of lower coupon
payouts and diminishing returns rather than losses and negative returns
resulting from negative growth. The calculation of coupon payments on
the basis of GDP levels would insulate bond-holders from the risk of
negative growth. Indeed, such GDP-linked debt obligations are remi-
niscent of the loss function applicable to holders of senior tranches in
the multi-layered structured finance instruments, where shortages in cash-
flows are absorbed first by equity tranches and subsequently by mezzanine
tranches in order to reduce the risk of default to senior tranches. Hence,
if GDP-linked bonds are designed so that the promised payouts are
expressed in percentage of GDP levels rather than growth rates, then
the loss of income from negative growth is bound to be absorbed in
the real economy by the classes of entrepreneurs and workers only. This
leaves the class of investors in GDP-linked bonds with lower probability of
default on promised payments, a condition that resembles that of holders
of senior tranches in structured finance.
 9 THE RISK-SHARING ORGANIZING PRINCIPLE OF IQTIS.ĀD 355

Thus, the logic of fixed-income securities is glaringly contradicted by

evidence of fluctuations in the real economy. This evidence renders adher-
ence to the notion of linking the payoffs from government bonds to
aggregate economic performance appealing indeed. But it appears from
the above conceptual analysis that the element of risk sharing in GDP-
linked bonds remains weak. Given the difficulties in understanding the
nature of debt in GDP-linked bonds, important questions arise about the
seniority ranking of GDP-linked bonds relative to other sovereign bonds,
and about default probability despite the assumed indexation of debt with
GDP. These issues underscore a tendency to treat GDP-linked bonds as
pure debt obligations where coupon rates are fixed as a percentage of
the bond principal represented by the GDP level, which varies over time.
Indeed, in contrast to conventional sovereign bonds where a pre-fixed
coupon rate applies to a principal that remains unchanged until maturity,
GDP-linked bonds resemble rather inflation-index bonds where the prin-
cipal is allowed to vary according to fluctuations in the consumer price
index (CPI). Similar to a surge in the CPI which would force an increase
in the principal amount, and in turn a rise in interest payments, an expan-
sion in GDP would force an increase in the principal amount, and in turn
a rise in GDP-linked bond payoffs.
The GDP-adjusted principal amounts can be determined in the same
way that inflation-adjusted principal amounts are calculated as the product
of the face value with an indexation coefficient that reflects the level of
variations relative to the issuance date. Hence, it may be argued that the
design of GDP-linked financial instruments with payoffs contingent on
aggregate economic output does not constitute a clear departure from
interest-based debt. The properties of perfect risk-sharing associated with
equity financing in terms of sharing profits as well as losses may not be
evident either in GDP-linked bonds. Hence, building confidence in GDP-
linked bonds naturally raises the problem of interest, but it is clear that
the idea holds, subject to further scrutiny, the prospects providing risk-
sharing solutions to the problems of fiscal stability and monetary policy
Insofar that financial innovation recognizes the importance of economic
uncertainty and does not ignore its implications for risk-sharing finance, it
deserves serious examination and perhaps fine-tuning to ensure economic
justice.
Thus, uncertainty about future general price levels, economic growth,
and employment should ideally lie at the heart of the economic thinking
underlying not only monetary policies but corporate decisions as well.
356 N. EL MAGHREBI ET AL.

This economic reality is implicitly recognized by Alan Greenspan (1998),

who argues that “while the pursuit of price stability does not rule out
misfortune, it lowers its probability.” It may indeed, lower its likelihood,
but it does not eliminate it. Yet, while firms and households make deci-
sions about saving and investment under uncertainty, the mechanism of
monetary policy transmission relies on interest rates that reinforce the
misguided belief that fixed payoffs independent from future states of the
economy are possible. There is indeed a deep logical inconsistency in
the conduct of monetary policies, which are typically concerned with
strategies leaning heavily on a perceived tradeoff between inflation and
growth. Undue confidence is placed in policy rates and debt instruments
that must, rather, bear the blame for the making of banking and finan-
cial crises, which constitute the primary source of financial instability and
economic downturns.
It can, thus, be argued that only a shift toward equity financing can
provide solutions to macroeconomic problems, including global imbal-
ances. Indeed, Rogoff (2011) argues that “in a world of perfect financial
markets, trade imbalances would not be a problem. They would simply
be the outcome of efficient intertemporal trade and risk sharing.” It is
risk sharing, rather than risk transfer, that ensures that the payoffs to
all contracts remain state-contingent, a necessary and sufficient condition
that ensures financial stability and economic prosperity.

Risk-Sharing and Economic Prosperity

It is clear from the above examination that financial stability is conditio sine
qua non for the pursuit of economic growth and full employment. The
sources of financial instability do not seem to warrant serious thinking
as there is a level of intellectual complacency in the uncritical dismissal
of financial crises as unpredictable events or transitory disturbances. The
question arises indeed, as to what major events would compel regula-
tors to abandon fragile financial systems that are the primary source of
economic instability and develop new architectures that are immune to
financial crises. Contrary to conventional wisdom, financial instability is
not inevitable. It is simply the natural product of credit risk accumula-
tion in financial systems that rely on interest-bearing debt and fractional
reserve on interest-bearing debt, and fractional reserve banking. A finan-
cial system based on the Iqtis.ād principle of risk-sharing would be resilient
to shocks to aggregate demand and allow the conduct of effective fiscal
 9 THE RISK-SHARING ORGANIZING PRINCIPLE OF IQTIS.ĀD 357

and monetary policies with financial instruments designed to share rather

than transfer risk.
Indeed, one of the central arguments of a paradigm shift toward
Iqtis.ād for the organization of an ideal economy is that risk-sharing
can be conducive to shared prosperity. The sharing of prosperity is not
just a desirable proposition but a necessary condition for social and
economic stability. It should be clear from the discussion throughout
the book about the impossibility theorem of reconciling polar world-
views that economic life is not about self-interest, maximization of profit,
and survival of the fittest. It is about adherence to normative rules of
behaviour and institutional structure that ensure economic stability, and
thus, shared prosperity. The inherent instability of debt-based financial
systems is a descriptive proposition that has been proven to be true,
it is incumbent on economists and policymakers to seriously consider
the normative proposition that and ideal economy organized with the
principle of risk-sharing should become a reality.
Given the historical evidence about the destabilizing effects of debt
and balance sheet recessions, it is clear that equity financing should take
precedence over debt financing. There are major difficulties in a paradigm
shift toward equity because of institutional bias toward debt financing.
Though the distortive effects of the latter can be easily identified, the
regulatory remedies are often ignored. As noted by Brealey et al. (2013),
it is possible to identify serious issues with capital-structure strategies
based on debt-related conflicts of interest, which have adverse effects on
the real economy. For instance, leveraged firms may prefer risky invest-
ment projects at the expense of bondholders, while firms in financial
distress may distribute cash dividend or increase debt, a strategy that is
consistent with Minsky theory of financial instability. Also, the incentive
for issuing new equity to finance investment may be affected by higher
levels of debt. Indeed, investment projects with positive net present values
may be discarded solely on the basis that expected revenues may not
be sufficient to cover the outstanding and future debt obligations. The
suboptimal investment problem may be attenuated by the existence of
sinking fund provisions, which reduce the risk of default, but as noted
by Bodie and Taggart (1978), the underinvestment problem can be elim-
inated only when the firm exercises the option to redeem callable debt
before maturity. As argued by Kish and Livingston (1992), call options
on corporate bonds, which are useful in maximizing the market value of
equity, are found to be, in turn, highly dependent on interest rates and
358 N. EL MAGHREBI ET AL.

debt maturities. The theoretical evidence implies that a solution to the

underinvestment problem depends on a shift away from interest-bearing
debt toward risk sharing.
Thus, future investment decisions cannot be entirely separated from
past financing decisions. The risk structure of interest rates, game-
theoretic behaviour, and complex designs of callable and convertible
bonds further complicate the existing conflicts of interest between share-
holders and bondholders over the capital structure and investment deci-
sions. These conflicts of interest have the potential of curtailing the
incentives to invest, which may lower firm valuation, and undermine
economic activity. It is difficult, however, to eliminate the apparent bias
toward debt. From the Iqtis.ād-oriented perspective, the elimination of the
tax advantage of debt is a normative proposition that flows directly from
the distortive effects of debt and stabilizing effects of equity and risk-
sharing. The idea of eliminating the tax advantage of debt does not seem
to be, as argued by Luigi Zingales (2015, p. 1356), “a very politically
feasible proposal. But it is certainly the right proposal to eliminate many
financing distortions. Ignoring it and marketing alternative proposals only
contributes to making it more difficult to eliminate such distortion.”
The idea of debt-equity swap to provide a viable solution to the U.S.
financial crisis was also soundly rejected, perhaps not on the basis of
economic rationale but because it contains an element of value judge-
ment. Indeed, the right proposal to eliminate debt financing distortions
is a value-based proposition to promote equity. It is difficult, indeed, to
promote debt-equity swaps as such unconventional proposals are likely to
be dismissed as irrelevant and not germane to the traditional debate about
palliative solutions including bailouts and capital adequacy measures to
which regulators typically resort at times of financial instability. As argued
by Zingales (2008), debt-equity swaps or debt forgiveness arrangements
should be mandated on financial institutions because these resolutions
would not constitute a greater violation of private property rights than
massive bailouts resulting in wealth redistribution from taxpayers to the
financial system. The notion of swapping debt for equity resonates with
the Iqtis.ād-based financial systems founded on the principle of sharing
rather than transferring or shifting risk. Indeed, equity-driven financial
systems preclude the formation of speculative bubbles leading to financial
crises. As explained by Mirakhor (2014), the stability of Islamic financial
systems derives, in part, from the condition of materiality in financing
contracts, which ties financial assets to real assets and from the definition
 9 THE RISK-SHARING ORGANIZING PRINCIPLE OF IQTIS.ĀD 359

of returns as a function of cashflows generated by the underlying assets

rather than interest rates. Also, the risk-sharing nature of Islamic bank
assets, which differs from loan portfolios in the balance sheets of conven-
tional banks, allows the financial sector in an Iqtis.ād system to absorb
exogeneous shocks without incurring the risk of default.
Thus, from the Iqtis.ād perspective, the growth of the financial sector is
not driven by growth in credit but by economic growth from real invest-
ment. As argued by Askari et al. (2010), the two-tier financial system
that allows for organic growth in the financial sector and real economy is
founded on full-reserve monetary system and investment banking based
on equity financing. There may be incremental costs incurred under
investment banking in terms of monitoring and information gathering,
but these costs are intrinsic to risk-sharing agreements, and they can
be reduced through information sharing, trust, and transparency. The
alternative of debt-driven financial systems, it should be reminded, is
associated with immensely higher costs for the society, stemming from
asymmetric information, moral hazards, underinvestment, asset bubbles,
financial crises, and massive bailouts. As argued by Skidelski (2020,
p. 118), information is treated as a measurable cost but “what causes
people to bond together is not the cost of obtaining information but the
fear of being alone in an uncertain world.”
Given the pervasive uncertainty, the important question, thus, arises as
to whether it is possible to share economic prosperity without organizing
the exchange economy in accordance with the principle of risk sharing.
Part of the answer lies with the recognition of the logical inconsistencies
of the capitalist ideologies dominating the economic thinking and willing-
ness to seek a paradigm shift. The central contradiction of capitalism, as
argued by Thomas Piketty (2014), lies in the fact that the rate of return
on capital is persistently higher than the rate of growth of income or
output. This inequality is an inequality of income and wealth distribution.
It represents the principal destabilizing force that ensures the accumula-
tion of wealth at higher rates than output and wages. It is clear that such
an inequality cannot result from a distributive rule based on the Iqtis.ād
principle of risk sharing that achieves equity and allocative efficiency. The
fundamental logical contradiction is the outcome of risk-transfer arrange-
ments where the financier or “entrepreneur inevitably tends to become
a rentier, more and more dominant over those who own nothing but
their labor. Once constituted, capital reproduces itself faster than output
increases. The past devours the future.”
360 N. EL MAGHREBI ET AL.

Under the Iqtis.ād system, it is impossible for the past to devour the
future as social and economic interactions are governed by exchange
relations based on risk-sharing rather than rent seeking, which consti-
tutes a violation of property rights. It is clear that capital can reproduce
itself faster than output only if the relation between the financial sector
and the real economy is severed. It is important to note also that the
destabilizing forces emanate from debt rather than equity financing. It
is interest-bearing debt that entitles debtholders to fixed-income streams
independent from the sign of economic growth, reinforcing thereby the
forces of divergence between the rate of return on capital and the growth
of output and income. In contrast, the return on equity is reflective of the
rate of return in the real economy. It is this organic relation that precludes
capital from reproducing itself faster than output. There is no room for
risk premium on assets with no direct exposure to undiversifiable risk,
and no attachment with the real economy. Therein lies the central logical
consistency of risk-sharing finance in the Iqtis.ād paradigm.

Conclusion
Thus, the normative argument that economic stability and economic
prosperity can be achieved through risk sharing arrangements would lose
its entire meaning if there is no desire to confront reality. The economic
reality is that it is difficult to provide an intellectual justification for a
synergetic projection of financial arrangements driven by risk transfer
onto Iqtis.ād-based principles of economic organization. The impossi-
bility theorem proposed in the previous chapter reflects the reality that
given the radical differences in worldview and philosophical foundations
between the Islamic and secular economic thinking, it is impossible to
graft one polar case onto another. It is impossible to ignore pervasive
uncertainty and imperfect knowledge, and graft the conflicting principles
of risk transfer and risk sharing one onto another.
The crude reality is that there should be a constant ingredient of risk-
sharing that ensures financial stability, which should, in turn, pave the
way to the pursuit of sustainable economic growth and full employment.
Debt is distortive of the relationship between the real economy and the
financial system because financial claims for fixed payoffs independent
of the outcome of real investment are inconsistent with the uncertain
nature of economic activities. Speculative activities arise chiefly from the
existence of state-independent claims that essentially ignore economic
 9 THE RISK-SHARING ORGANIZING PRINCIPLE OF IQTIS.ĀD 361

uncertainty. In the absence of risk-sharing, there is no viable solution

to the central contradiction of capitalism and the unnecessarily complex
relation between the financial sector and the real economy. No amount
of financial regulation, bank supervision, monetary policy tightening and
expansion, and financial inclusion can diminish the distortive effects of
credit cycles and prospects of banking crises and financial instability
without a genuine reform of the debt-based financial system. As noted
in the previous chapters, Iqtis.ād, as a paradigm governed by immutable
rules derived from Qur’an and Sunnah, not fallible human judgement,
is a theonomy that provides practical guidance for the organization of
economic life. It seeks justice in all economic interactions, without excep-
tion. As it recognizes the implications of uncertainty, the vicissitudes
of seeking livelihood, and the risks associated with economic activity, it
leaves no room for rent seeking in lieu of risk-sharing. It is impossible
to accommodate risk-transfer agreements without distorting the system
of incentives for investment and saving, which ensure economic growth
and economic stability. The impossibility theorem, thus, implies that no
coherent policies can be derived from a synthetic discipline that rests on
grafting Islamic values onto conventional economics or secular ones onto
Islamic economics through the processes of misguided secularization of
Islamization of knowledge. There is certainly no merit in the grafting of
economic ideas from conflicting worldviews that can only increase criti-
cism and scepticism about a discipline that has so far failed to take off. And
without a wholehearted shift to an internally consistent iqtis.ād paradigm
that provides a vision for the organization of an ideal economy based
on the principles of risk sharing with normative rules of behaviour and
institutional structure, it is not clear, if it ever will.

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 Index

A Asymmetric information, 168, 292,

Absolute freedom, 262 359
Absolute ownership, 262 Austrian School, 82
Accountability, 157, 169, 172, 173, Axiological, 226, 232
229, 230
Agency costs, 152
Agency problems, 168, 174 B
Agnostic, 128 Banking crises, 167, 327, 334, 338,
341, 344–346, 361
Agnostic humanism, 128
Behavioural norms, 134
Altruism, 81, 101
Behavioural rules, 119
Altruistic, 256
Benevolence, 128, 160, 163
Arrow Debreu, 347, 348
Business cycle, 331, 336, 342, 344
Arrow Debreu Framework, 88, 89
Business ethics, 172, 175
Arrow Debreu Model, 84
Asset based distribution, 298, 314
Asset based financing, 169 C
Asset based redistribution, 288, Capitalism, 138, 139, 152–154, 160
304–308, 312–314, 316, 318 Capital scarce, 104
Asset bubbles, 88, 104, 106 Capital structure, 351
Asset linked securities, 352 Catholic, 129
Asset redistribution, 18 Central banks, 17
Asset securitization, 350 Character traits, 161, 162, 164, 172
Asymmetric distribution, 351 Christian, 215

© The Editor(s) (if applicable) and The Author(s), under exclusive 367
license to Springer Nature Switzerland AG 2023
N. El Maghrebi et al., Revisiting Islamic Economics,
Palgrave Studies in Islamic Banking, Finance, and Economics,
https://doi.org/10.1007/978-3-031-41134-2
368 INDEX

Christianity, 189, 190 E

Christian values, 4 Ecological capital, 26
Collective behaviour, 9, 50 Ecological crisis, 20
Colonialism, 192 Economic agent(s), 12, 25, 27–29,
Colonization, 183, 186, 192, 206, 64, 97, 101, 119, 123, 222, 223,
216 272
Compassion, 4, 40, 128 Economic behaviour, 85, 106, 119,
Complexity, 129 123, 131
Consumer behaviour, 101, 102, 104 Economic choices, 151, 153
Consumer choices, 102 Economic crises, 12, 13, 106, 152,
Consumption, 348, 352 167
Contract enforcement, 132 Economic decisions, 102, 103
Contractionary policies, 340 Economic development, 61, 117,
Corruption, 13 132, 138, 169, 198, 201
Credit booms, 345 Economic doctrine(s), 90, 198, 199,
Credit contraction, 344 203, 204
Credit creation, 170, 336 Economic equilibrium, 87, 95, 98
Credit crises, 345, 348
Economic exploitation, 166
Credit crunches, 344
Economic growth, 14, 26, 64, 94,
Credit enhancement, 352
168, 170, 172
Economic ideology, 113
Economic injustice(s), 85, 121, 234,
D
286
Debt crises, 328, 338
Economic institutions, 122, 141
Debt financing, 345, 357, 358
Economic justice, 116, 124, 157,
Deceitfulness, 164, 173
162, 216, 241, 246, 248, 251,
Depression, 82
259–261, 274, 275
Desacralization, 37
Economic man, 22, 26, 28
Desacralize, 3, 18
Desacralizing, 23 Economic models, 83, 94
Desecularization, 39 Economic order, 91, 93, 94
Despiritualized society, 183 Economic Policy(ies), 15, 16, 39, 82,
Destabilizing effects, 357 83, 85, 103, 106
Destitute, 21, 280 Economic power, 183, 187, 188, 190
Diminishing returns, 354 Economic prosperity, 117, 135, 138,
Disequilibrium, 14 246, 255
Dishonesty, 152 Economic rationality, 100–105
Disintegration, 186, 188 Economic recessions, 263
Distribution, 117, 118, 121 Economic risks, 273
Distributive justice, 21, 242, 253, Economic stability, 132
260, 261 Economic systems, 119, 122, 124,
Dogmatic, 89 132–135, 139
 INDEX 369

Economic theory, 83, 84, 93, 95, Financial institutions, 349

98–101, 104–106 Financialization, 167, 171
Economic thought, 115–117, 123 Financial market(s), 87, 151, 309,
Efficiency, 96 339–341
Efficient equilibrium, 85 Financial regulation, 344, 361
Enlightenment, 216, 217, 229 Financial repression, 170, 171
Entrepreneurship, 87, 138, 142 Financial sector, 344, 345, 359–361
Environmental degradation, 209 Financial stability, 339, 343, 344,
Environmental disasters, 26, 36, 58 356, 360
Environmental equilibrium, 64 Financial system(s), 59, 257, 273,
Epistemological, 5, 9, 36, 44, 92, 327, 328, 336, 343, 345, 346,
144, 190, 214, 220, 226, 230, 349, 352, 353, 356–361
232 Fiqh, 231–233
Epistemology, 39, 45, 51, 52 Fractional, 167, 169, 170
Equality, 15 Fractional banking, 167, 169, 170,
Equilibrium, 217–219 345, 356
Ergodic axiom, 96 Fractional reserve, 169, 170
Ethical beliefs, 105 Fragility, 342
Ethical dimension(s), 151, 152, 165, Free markets, 139
174 Fundamental inequality, 289, 290,
Ethical norms, 200 299, 304
Ethics, 2, 42, 48
Ethics theory, 159
Etymological, 3, 5 G
Etymology, 215, 224 Game theory, 88, 89
Exploitation, 85, 263, 267 GDP growth, 354
GDP linked bond, 352–355
GDP linked debt, 353
F GDP linked sukuk, 354
Fairness, 43 General equilibrium, 83, 84, 87–89,
Fascism, 14 93, 94, 98
Felicity, 215, 225 Gharar, 165
Financial architecture, 345 Governance, 46, 59, 132
Financial contagion, 344 Government debt, 337, 338, 341,
Financial crises, 82, 89, 104, 105, 346
170, 263, 285, 287, 293, 299, Government spending, 82, 341
302, 303, 315, 319, 327, 335,
336, 341, 343, 346, 356, 358,
359 H
Financial distress, 357 Hedonistic, 222
Financial inclusion, 361 Heidegger, 4
Financial instability, 167, 170, 335, Hellenic, 27
339, 341–344, 357, 358, 361 Human action, 189
370 INDEX

Human behaviour, 25, 28, 29, 32, Institutional, 8, 12, 51

45, 51, 103 Institutional behaviour, 119
Human capital, 155 Institutional development, 122
Human choice, 213 Institutionalized injustice, 250
Human conduct, 199 Institutional scaffolding, 8, 13, 21
Human conscious, 222 Integrity, 206
Humanism, 128 Intellectual disorder, 245
Human well-being, 201 Interest-based contracts, 273
Interest prohibition, 269, 276
Internalizing virtues, 159, 160, 172
I Invisible hand, 82
Ideologically, 61 Irrational behaviour, 101
Idiosyncratic risk, 301, 302 Irrationality, 334
Immutability, 2, 55 Islamic civilization, 38, 155, 187, 268
Immutable, 212, 233 Islamic ethics, vi
Impossibility theorem, 253, 357, 360 Islamic Institutions, 141
Incentive compatible contracts, 305 Islamic jurisprudence, 5, 6, 115,
Income-based redistribution, 288, 133–135, 137, 140, 141, 143,
289, 306 144
Income distribution, 166 Islamic norms, 257
Income inequality, 29, 30, 36, 87, Islamic society, 46, 52–54, 57, 59
287, 288, 306, 310, 312, 316 Islamic values, 2, 3, 22, 58
Individual actions, 82, 85 Islamization, xii, xiii, 6, 7, 9, 19, 23,
Individual bias, 103 36–39, 66, 114, 118, 130, 133,
142, 185, 187, 198, 211, 223,
Individual choice, 275
231–234, 253, 361
Individual freedom, 13, 24, 43
Individualism, 216, 221
Individual liberty, 15 J
Individual rights, 263, 268 Judaism, 189, 190
Inductive, 42, 59 Juridical ethics, 161
Inequality(ies), 13, 17, 18, 44, 52, Just distribution, 118
86, 262, 274, 330, 359 Just market, 271
Inequity, 228
Inflation, 14
K
Inflation adjusted, 336, 355
Keynesian, 12, 14, 15, 82, 83, 103,
Inflation index, 353, 355
336, 341, 342, 347
Inflation rates, 338, 339
Key virtues, 162
Inflation targeting, 339
Kuala Lumpur declaration, 306
Injustice, 13, 47, 50, 85, 188,
199–201
Instability, 85, 94, 183, 339, L
341–345, 357, 358, 361 Liberty, 200
 INDEX 371

Logical impossibility, 35 Moral thoughts, 155

Moral values, 158, 173
Mortality, 121
M Muslim civilization, 189, 195
Macroeconomic policy(ies), 318, 319, Muslim societies, 6, 8, 37, 38, 41
336
Macro-market securities, 307, 308
Maldistribution, 19, 22, 87, 227, N
228, 234 Natural order, 90, 91
Malthusian theory, 86 Neoclassical, 114, 121
Maqasid, 62, 63, 198 Neoclassical economics, 79, 84, 89,
Market capitalism, 43, 153 95, 98, 100, 105
Market economy, 87, 124, 263, 264 Neoliberal economic(s), 1, 9, 10,
Market efficiency, 271 12–15, 17, 22, 32, 33, 35, 39,
Market failure(s), 17, 85–87 44, 62, 63, 66
Market pricing, 117 Normative system, 256
Material development, 188
Materialism, 184, 186, 193, 213, 216
O
Medinah society, 210
Ontological, 18, 19, 23, 34, 36, 47
Meta-ethics, 155
Metamorphoses, 190
Metaphysical, 7, 9, 13, 21, 23, 31 P
Metaphysical beliefs, 120 Paradigm shift, 184, 198, 205, 206,
Metaphysically, 232 259
Metaphysical order, 130 Pareto optimal, 219
Metaphysics, 7 Pareto optimality, 86, 100
Modernists, 136, 193, 257 Pass through, 351
Modernity, 3, 4, 25, 38 Perfect competition, 84, 87
Monetarism, 82 Personal freedom, 24
Monetarist School, 83 Phillips curve, 339
Monetary policy, 83, 336–341, 346, Philosophical foundation, 10, 33, 36,
348–350, 352, 355, 356, 361 52
Monopolies, 85 Political economy, 10–12, 23, 78–81,
Moral character, 152, 159, 160, 172 83, 90, 95, 97–99, 101, 106,
Moral failure, 152 246, 247
Moral hazard(s), 152, 170, 359 Political freedom, 124
Morality, 128, 198, 202, 241 Political ideology, 13
Moral law, 90 Political instability, 183
Moral order, 90 Political philosophy, 116
Moral philosophy, 23, 28, 159, 174 Political virtues, 188
Morals, 151, 160 Positive character, 204
Moral sentiments, 100, 309, 334 Positive economic, 132
372 INDEX

Positivism, 219–221 Resacralization, 19, 36, 37, 39

Poverty, 13, 18–20, 22, 49, 154, 171, Resources scarcity, 104, 105
250, 262–264, 274, 275, 335 Righteous conducts, 156
Predatory capitalism, 9, 10, 23, 35, Risk aversion, 154
37 Risk premium, 333, 360
Price stability, 339, 340, 343, 347, Risk sharing, 47, 52, 59, 67
356 Risk-sharing asset redistribution, 289,
Price takers, 87 303
Primordial, 30, 31 Risk-sharing universal basic assets, 308
Primordial human, 2 Risk shifting, 166, 167, 327, 335
Principal–Agent, 168, 170 Risk transfer, 5, 165–167, 170, 171,
Production distribution, 117 174, 273
Property ownership, 44, 55, 59, 62, Risk uncertainty, 267
141 Rule compliant, 225, 229, 239
Property rights, 158, 165, 166, 173 Rules compliance, 41, 227, 230
Prosperity, 7, 8, 41, 54, 56, 58, 64,
210, 225
Protestant, 2, 4, 60 S
Protestant Ethic, 4 Sacralized, 37, 38
Prudence, 154, 160, 164, 173 Sacred, 187
Public Basic Asset Fund, 313, 315, Sacred tradition, 238
318 Scarcity, 11, 12, 18–23, 27, 32, 80,
102–104, 118, 121, 221, 222
Scholastics, 215, 216
R Schumpeterian, 93, 144
Rational behaviour, 12, 28, 88, 101, Secularism, 189, 193
222 Secularization, xi, xii, 26, 36, 37, 114,
Rational individuals, 24 127–130, 132, 136, 140, 142,
Rationalism, 193, 195 144, 185, 194
Rationalistic, 216 Secular systems, 137, 142
Rationality, 113, 120, 342 Secular worldviews, 185, 197, 198
Rationality axiom, 30 Securitization, 167, 350, 351
Rationalization, 12 Self-interest, 4, 13, 23–28, 30, 32–34,
Real assets, 348, 358 51, 56, 64, 81, 82, 101, 102,
Recession, 14 104, 105, 120, 122, 144, 257
Redistribution, 85, 174, 221, 232 Shared prosperity, 289, 308, 311,
Redistribution policies, 13, 22 313–315, 357
Redistributive justice, 165 Social capital, 56, 58, 68, 155, 184,
Relative scarcity, 104 268, 272
Renaissance, 185, 189, 198, 206 Social choice, 85
Renaissance humanism, 128 Social cohesion, 56
Rent seeking, 85, 106, 263, 328, 360 Social contract, 135, 241, 253, 265
 INDEX 373

Social development, 200 Unequal distribution, 11

Social economy, 28 Unity, 189, 248, 252, 264
Social good, 265 Universal Basic Income, 309, 318
Social harmony, 57, 58 Universal law, 103
Social inclusion, 171, 174 Utilitarianism, 11, 80, 81, 217, 218,
Socialism, 14 241
Social justice, 165, 166, 174, 200, Utilitarian philosophy, 99
201, 210, 242, 263 Utility maximizing, 100–102
Social values, 189 Utility-maximizing agents, 84
Sociology, 48, 58, 190, 191
Spiritual, 157, 158
Spiritual discernment, 193, 197 V
Spirituality, 56, 187 Value free economic, 243
Stabilizing effects, 358 Value judgements, 146, 248, 263
Stagflation, 82 Value neutral, 276
Stakeholders, 172–174 Vicegerents, 255, 262
State contingent claims, 348, 352, Virtue based ethics, 159, 161
353 Virtue ethics, 159
State contingent payoffs, 333 Virtues, 51
Stewardship, 249 Virtuous behaviour, 200
Sukuk, 307, 308

W
T
Walrasian theory, 84, 98
Tawheed, 62
Wastefulness, 201
Teleologically, 232
Wealth distribution, 288, 289, 291,
Too big to fail, 327
294–296, 298, 308, 310, 311
Transmission mechanism, 336, 338
Wealth inequality, 232, 285–291,
Trust, 56, 58
293–297, 299, 300, 302–304,
Trustfulness, 172, 173
306–308, 311–313, 315, 317,
Trustworthiness, 81, 162, 173
318
Truthfulness, 201, 243, 256, 267
Wealth redistribution, 308, 309, 358
Wealth residual, 288, 289, 291,
U 295–297, 299, 302, 303,
Uncertainty, 106 310–312, 318