Ethics and Economics: An Islamic Synthesis

Title: Ethics and Economics: An Islamic Synthesis  

Author:        Prof. Dr. Syed Nawab Haider Naqvi      

Publisher:    The Islamic Foundation, UK, 1981

The noted author has tried to urge the need for embedding ethics in economic analysis and thus policymaking. The author firmly believes that no moral vacuum can exist on the plane of social existence.

Unlike Lionel Robbins who contended that economics should be value neutral, the noted author thinks that preference structures are determined by ethical norms of the ‘sub-culture’ the economic agents subscribe to. As per Weberian Thesis, the rise of Capitalism in the West presupposed a universal acceptance in the West of Protestant ethics which legitimized unlimited accumulation of wealth and extolled thriftiness. Thus, economic performance of a society cannot be separated from its moral philosophy, which since the dawn of civilization has proved to be a dominant force in shaping attitudinal reaction patterns in one society after another. The implicit logic of the socio-economic behaviour of a people can be traced back to their metaphysical or religious conceptions in the opinion of the author.

The central thesis of the book is that ethical principles of Islam can be condensed into four axioms through which all teachings emanate or can be explained. These axioms are: Unity, Equilibrium, Freedom and Responsibility.

Implication of unity is that all creatures have single source of creation and all mankind is united in submission to Him. The divine teachings emanating from the Creator, who is Truth, will also be True and perfect and hence leading to a uniformity and unity in thinking. 

Equilibrium implies all-pervading harmony in the universe which should also reflect in human life and conduct both in individual and collective sphere to usher social justice and order.

The author contends that there must obtain a ‘just’ balance among the basic production, consumption, and distribution relations. Humans are given freedom to exercise their free will, but that freedom is not unlimited. It is shaped by ethical guidance which necessitates responsible use of the freedom so as not to disturb the equilibrium. Islam brings social consciousness and responsibility in the hearts of economic agents. The author contends that if needed, there should be state control and intervention to bring about redistribution and resource transfers among various classes and groups in the society.

In contrast, the free market system emphasizes on invisible hand, no government intervention and consumer sovereignty and hence does not adequately address the issues of equity and social justice directly.

In Islamic economics, economic behaviour will have additional ethical constraints. The commodities and services which are not allowed to be consumed and deemed harmful due to their effects on individual’s moral existence and social welfare will be excluded from the feasible set.

Islamic teachings encourage moderation and restraint rather than unfettered pursuit of more and more goods and services with insatiability.

Efficiency would be given importance, but among the efficient outcomes, those which are near to equity, would be preferred. Social consciousness would elicit pro-social behaviour. Rather than acting selfishly with individualistic focus, there will be consumption externalities.

The emphasis on equilibrium in the sense of bringing about social justice would rule out exploitative market structures and unbridled pursuit of lust without ethical constraints. The author opines that islands of prosperity rising from a sea of poverty should not be an acceptable norm in the Islamic economy. The author argues that to bring about responsible conduct, state intervention to regulate consumption and production patterns can also feature in an Islamic economy.   

The author also compares the Islamic economics system with other economic systems. He opines that while Socialism has a useful vision of reducing income inequality and concentration of wealth, yet it concentrates economic resources and wealth at the disposal of State which is after all governed by political elite. Individual freedom, initiative and even human dignity are compromised in Socialism. Collective responsibility is taken to extreme whereby an individual’s own aspirations, interests and choices are condemned.

On the other hand, Capitalism destroys nature’s equilibrium. It allows wealth to become concentrated in few hands and constrains the government to take any policy action to correct income inequalities, concentration of economic wealth and reduce poverty and deprivation beyond what is allowed in capitalistic democracies wherein economic power and political power is with the capitalistic elite. Individualistic pursuit of self-interest is seen as more virtuous than collective welfare in capitalist system.

Finally, even the welfare state overcomes few limitations of capitalism, but not all. The spiritual welfare is absent and ethics is embedded in a narrow sense to correct some material failures in Capitalism with regards to income distribution and economic opportunities. Since welfare is funded by high levels of taxes, it requires a reasonably developed and high-income economy to bring these fruits. There is less reliance on affirmative action and collective responsibility.

The author opines that Islamic economic system though takes some positive features and goals of these systems, but its emphasis on ethical conduct, collective responsibility and social consciousness is far greater. Its policy instruments are different. It allows freedom with responsibility. It motivates responsible behaviour both through moral persuasion as well as direct controls by the State where required.

In the discussion on policy objectives, the author outlines key objectives as social justice, universal education, optimal rate of economic growth and maximization of employment generation.

The author emphasizes that there can be no justice if all are not equal before the law since all are equal before the God.

The author thinks that universal education is important for human capital and it has a great equalization effect on income distribution. The author favours the pursuit of economic growth, but it should not come at the expense of degrading environment, worsening income distribution and be without inclusiveness and contributing to welfare of broader sections of the society including the poor and deprived.

Hence, he compliments this objective with an exclusive focus on employment creation. Growth without increasing employment opportunities only worsens income distribution and creates distance between haves and have-nots.

In the discussion on policy instruments, the author gives some radical recommendations. The book was written at the time when Russia was still recognized as an economic and political power. The country to which the author belonged had also experimented with nationalization just a decade ago before the publication of this book. In his policy proposals, the author favours quite significant government intervention. He favours nationalization of banking industry as well as capital goods industry.

Since the rate of interest shall be zero in an Islamic economy, the author emphasizes on the need of an alternative. He favours inflation-indexation to fight inflation even though he himself notes that this can itself be inflationary.

Since people have positive time preference to receive cash flows earlier than later, he favours reliance on public savings rather than private savings. But, it is ignored that most governments in developing countries do not have budget surpluses and their capacity to tax population which is largely poor is not that high.

By resorting to government excessively and assuming that it has abundant resources with the power to increase money supply without inflationary consequences, the author seems to have oversimplified the problems.

The author opines that state should have an extensive public works programs to generate employment and to shore up effective demand.

The author opines that in expenditure approach to GDP, the public expenditure in Islamic economy would be more prominent than sufficiently moderated and restrained consumption and private investment which is allowed mostly in consumer goods industries.

The author himself is not too optimistic of wide use of profit and loss sharing contracts and whether the profit rate can replace the interest rate. The author himself notes that profits are calculated ex post and they cannot be varied at the discretion of the central bank. Hence, in author’s mind, given the lack of policy instruments to regulate private banking institutions, the possible alternative is to nationalize banks.

He also thinks that equity financing can be fostered through nationalized commercial banks who should only invest those funds in equity financing which are placed with the investment motive.

Instead of favoring capital markets which can channel funds from saving surplus to saving deficient units through equity financing, the author favours investment auctioning through banks which will be nationalized.

The author also favours limits and controls on how much capital is allocated to which sectors of the economy. Such controls are complicated and make the system very much state controlled and centrally planned, especially with proposed nationalization of capital goods sector and financial sector.

But, the author favours deposit insurance scheme which will have to be provided by the government and it would make equity financing essentially meaningless with no loss absorption by the investors.

Nevertheless, the author does not think that rate of interest being zero in Islamic economy implies that capital is virtually free. Islam only rejects fixed pricing of capital irrespective of its productivity.

The author also favours extensive land reforms to check ownership concentration and idleness in land use. The author favours minimum basic income to actualize the Islamic vision of social justice. Zakat could be used and if it is not enough to meet the needs of the poor, additional taxation can be levied.

However, at one place, the author says that the burden of tax shall be equalized on the taxpayers. If that means proportional taxation rather than progressive taxation, then it seems that this is only possible when the income distribution is already quite equal.  

Thus, in hindsight, one can find the policy package in the book to be requiring more extensive analysis, thought and direction. The book, written in 1981, outlines the optimistic aspirations of pioneer scholars in the early literature of Islamic economics. While seeking more robust policy solutions, such optimistic aspirations shall remain alive for striving towards social justice, harmony and egalitarian societies wherein the individuals are socially conscious, responsible and committed. 

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