Articles on Islamic Economics

Distinction and Compatibility between Islamic and Mainstream Framework

Salman Ahmed Shaikh

This article highlights the points of distinction and compatibility between the Islamic and mainstream economics framework. The distinction comes in the decision horizon and the addition of moral filters on the choice set. The difference also appears explicit when one looks at the encouragement and incentive structure for pure altruism in a two-worldly Islamic framework. The distinction is even deeper in values whereby the Islamic framework encourages contentment, pure altruism and self-less behaviour while the mainstream economics framework is at best neutral between the moral content of economic choices.

This reflects in policy implications; whereby, in the mainstream economics framework, policy intervention is either suggested to be avoided with belief in the Pareto-efficient outcome of competitive markets or even when the intervention is tolerated, it is required to follow the principle of Pareto-improvement. Though, the practical public policy bypasses these theoretical policy implications and does favour excise tax on luxuries, subsidies on essential consumption goods and provision of public goods, which are funded from progressive taxation. On the other hand, Islamic framework does not need to resort to ad-hoc policy interventions. In the Islamic framework, enacting policies to promote Maslaha (social interest) and remove Mafsadah (social harm) govern the policy framework. Islamic jurisprudence suggests that in the presence of two evils, the one whose injury is greater is avoided by the commission of the lesser. Furthermore, severe injury can be removed by lesser injury. Table below gives a summary of the distinctive features in both frameworks.

Distinction in Consumption Framework

Mainstream Economics Framework

Islamic Framework

The economic objective of a consumer is to gain maximum satisfaction when endowed with some positive, but finite resources. Ultimate lifetime objective is to achieve Falah in both worlds and please Allah and this governs all human choices and actions.
Decision horizon is confined to this life. Decision horizon incorporates a two-worldly view of life.
No cultural and institutional constraints beyond the law of the land. Besides the law of the land, the preferences are shaped and influenced by moral imperatives.
Consumption set in every period is unrestricted. Moral filter on consumption choice set. Thus, some missing markets.
Endowments can be obtained by providing labour for any gainful employment. Endowments can be obtained by providing labour in permissible occupations.
Can use all means of investments to earn a return on savings. Can use only Shari’ah compliant investments to earn a return on savings.
Can use interest based borrowings to increase/maintain consumption. Can use only Shari’ah compliant finance to obtain specific durable goods.
Non-Satiation with respect to material goods. Encouragement for pure altruistic behaviour.
Old people can dis-save all wealth by self-consumption or leave bequests. Old people cannot leave bequests which are more than one-third of their wealth.
Policy intervention has to result in Pareto improvement in theory. Generally, the practice uses ad-hoc intervention. Promoting Maslaha (social interest) and removing Mafsadah (social harm) govern policy.


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