Articles on Islamic Economics

How Religion Becomes Important for Economics?

Salman Ahmed Shaikh

This question can be answered through four postulates which summarize how religion and economics come across each other.

Postulate 1: Religious values and norms are used in legislation and affect preferences, choices and markets.

Religions, especially divine religions, have a strong focus on morality and values. Religious scriptures specifically describe what are the morally upright actions and what are the immoral actions.

Abrahamic religions in their pure form also provide a worldview in which morality of actions leads to consequences in this life and hereafter.

Preferences of religious people are influenced when they learn these values and believe in this worldview. These preferences affect choices and in some cases result in new markets, such as faith inspired banking or missing market of certain goods and services, such as market for alcohol etc. Such values, if held at large, also affect economic regulation, especially in countries where faith-based population is in majority.

For instance, if alcohol is not permissible in Islam, Muslim majority countries may have a missing market for alcohol. If prostitution is not allowed, labour market would not exist for that.

Postulate 2: Religious institutions help in social intermediation and redistribution.

Religious institutions like Waqf create third sector which holds economic resources as common property beyond private property and public property. Furthermore, Zakat is an institution which redistributes resources from endowment surplus people (holding wealth above the threshold value of Nisab) to endowment deficient people (holding wealth below the threshold value of Nisab).

Postulate 3: Economics recognizes time as resource and religious people spend time in religious activities or religiously inspired activities.

Religious people engage in worship where time is spent and time is an economic resource. Religious people also engage in volunteering for imparting education, contributing in relief efforts and providing services in healthcare. In such engagements, time is allocated and it is an economic resource. Such choices affect labour supply and hence level of employment and wages.

Postulate 4: Economics recognizes scarcity of endowments and religious people use these endowments in religiously inspired spending.

Religious people engage in religiously inspired spending for self, such as Hajj travel, Umrah travel, animal sacrifice, Halal banking, Halal investments, Halal cosmetics, Halal medicine, Halal food etc. Furthermore, they also engage in religiously inspired spending for/on others, such as charity in cash and charity in kind. Such spending affects budget and hence optimal choice and demand for other goods and services.

Approach of Economics to Deal with Religion or Religious Impulse

To incorporate the various cases where the paths of religion and economics interchange, mainstream economics has four approaches to deal with religion or religious impulse.

First Approach: When it comes to religious norms affecting rules or acting as institutions of intermediation and redistribution, their effects can be analyzed through institutional economics, which is flexible in its analytical framework than micro-founded mainstream economics which chiefly focuses on market behaviour.

Second Approach: Economics claims to be neutral between ends. It would regard religious or religiously inspired allocation of time outside of labour market as leisure. It claims to not pass value judgements on preferences. Hence, if a person has a backward bending labour supply curve beyond a certain wage/level of income, it would not regard it as irrational.

If a person exhibits greater patience and saves due to avoiding excessive spending on self, then this would be captured in parameters of patience and intertemporal elasticity of substitution in economic models.

Third Approach: Spending inspired by religious impulse in market would still result in purchasing goods and services from the market and where the purchase decision would be influenced by common attributes like relative price and income. Differences on intensity of some preferences can be entertained through differences in tastes and where such differences in intensity will reflect in measures of elasticity and price effect including substitution and income effect.

Fourth Approach: Spending inspired by religious impulse outside of market, such as voluntary transfer of resources through charity and donations is explained through warm-glow effect. In self-interested paradigm, utility framework can explain impure altruism through reasons like feeling good in seeing someone happy, i.e. warm glow, gaining prestige, social influences, peer pressure, avoiding perception of being unfair and expecting reciprocity.

Nonetheless, pure altruism does not conform to self-interested utilitarian framework. But, mainstream economists argue that it is rare and insignificant anyways in comparison to institutional and corporate giving which is usually not anonymous and is made with the intention of building reputation. For instance, corporate social responsibility related spending, establishing chair and endowments in educational and health institutions etc. Lastly, economics confines itself to market behaviour. As can be seen that these approaches are limited in their capacity and flexibility to incorporate pure altruism and beyond market exchange and distribution of resources.

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