There are many methodological approaches put forward by esteemed economists in Islamic economics. These approaches include the circular economy approach, moral economy approach, institutional approach, assimilative approach and pure transformative approach.
This paper presents the ideas of transformative school in Islamic economics. Transformative school of thought in the methodology of Islamic economics is not that much interested in descriptive studies and improving the predictive capability of models to analyze market outcomes and to design policies accordingly. It believes in the transformation of choices through education.
Those scientists who believe in Scientism and hold that the experimental method is the only arbiter in all matters of life need to look no further than the field of economics where the tools and concepts of physics are applied. Even though science cannot be arbiter in morals, defining motives, public policy and politics, but it cannot even be a perfect and sufficient tool in explaining economic behaviour by taking the analogy of animal behaviour which is based on self-interest and survival instincts.
Recent evidence in behavioral finance and consumer psychology points to the fact that consumer information processing capabilities are limited and prone to error. Alias paradox and Ellsberg paradox are good examples of this phenomenon. Furthermore, ‘Ultimatum Game’ reflects the fact that people tend to look at their choice outcomes relatively. Prisoner’s Dilemma highlights the fact that choices by each player in a self-centric way are not necessarily going to be best for them either individually or collectively.
Famine, death from hunger and debt enslavement is the fact of life for the half of the people on earth not because that overall, the societies have scarce resources, but because the distribution of resources is inequitable as empirically proven by Nobel Laureate Amartya Sen and noted by Thomas Piketty in his recent book ‘Capital in the Twenty First Century’.
Studies in primary-data based religious choices or economic choices by religious persons can explain differences in social and economic choices between religious and non-religious groups, but measuring both the religiosity and its causal effect on behavior is difficult to establish. Furthermore, it is only a Godly endeavor to truly judge about religiosity.
Even though the principles like prohibition of Riba and Zakat are binding as rules, they also have an important economic rationale and function in economic matters of an Islamic society. Hence, the mandate of Islamic economics will be to explain their economic merit using experimental and observational data and by applying statistical and other suited techniques to establish certain analytical hypothesis.
As much as people can be selfish, they can be altruist as well. They have free will and they can be as much responsible as they can be reckless. What we need is a conditioning mechanism that nurtures positive tendencies.
Most of the description of human economic behavior in mainstream economics is trivial at best. Mankiw once wrote in a widely used textbook ‘people react to incentives, rest is commentary’. Islamic economics cannot confine itself to commentary on material pursuits alone. In mainstream economics, the important issues of equity, welfare, equitable distribution and institutions that can ensure these are at the periphery rather than at the center.
This article briefly analyzes the logical arguments that are usually presented in the defense of interest as a price of money capital in loans.
Islamic Economics Project 