Transcript Islamic Economics - James Madison University

Islamic Economics
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Norm setting environment
Welfare of the society at large
Constraints for the economic function of
the state
Unity and entitlement to equality
The “third way”?
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Dissociation with either socialism or
capitalism
Religion embeds a broader
social/cultural framework
Taoism
http://www.thetemple.com/alt.phi
losophy.taoism/
Confucianism
http://www.cnn.com/2000/ASIAN
OW/east/01/28/confucius.revival/i
ndex.html
Islam and economics
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Zakat
Fair deals and hard working
Gharar(riba):capitalizing on uncertainty
Qirad (profit sharing and risk sharing)
Capital formation and economic growth
Ethical practices and
institutions
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The Islamic doctrine of economics
permits degrees of individual freedom
and state intervention, but leaves the
determination of these degrees to the
wisdom and consciousness of those
involved. This flexibility has made
Islamic economics open to alternative
options within its framework.
Economic rights and duties of
the individual
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Avoidance of ribã: there is quite a bit of
controversy about inclusions and exclusions
from this rule (government debt interest
payments, for instance)
Payments of zakat (poor dues): sometimes
appears as income tax (10% on irrigated
lands and 5% on non-irrigated ones) or
wealth tax (various rates?)
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Working hard at one’s profession:” A
man has not earned better income than
that which is from his own labor”.
Obeying various behavioral injunctions:
not wasting resources, fraudulent
business, consuming in moderation,
performing good works for the
community, etc.
(continued)
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Avoidance of aleatory contracts and
other enterprises of chance(gharar).
When buyer and seller are in no
position to predict full financial
consequences of a transaction, e.g.
buying fruit on a tree before it ripens.
Gambling, forward trading, lotteries, etc
would be examples. Insurance policies
sales are on the borderline.
Economic institutions
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Property: “ To him along belongs
everything in the galaxies and
everything between them.” Individuals
are holding property in trust, receiving
the profits but are accountable to Him
regarding its use. No direct objection to
private property but some ambiguity in
language and enforcement.
Economic institutions
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Interest is explicitly forbidden, profit is
not. Profit in in an accounting sense
contains a number of different elements
like implicit interest payment on capital
“accounting profit”
Economic institutions
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Rental incomes are more complicated.
Land rents have existed from times
immemorial. Predominant form is
sharecropping. Fixed rents with
absentee landlords (Egypt). The
sharecropping rent is close to qirad,
fixed rents are ribã.
Inequality
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Acceptance of profits and to a certain
degree rents will result in inequalities:
“Allah decreed some of you to have
more wealth than others. Do the people
who have more wealth share it equally
with their dependents and slaves?”
Financial institutions
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Profit sharing (qirad): deposits to be
channeled into ownership shares in a
particular investment effectively making
a depositor a partner in a business. A
bank becomes a proto-mutual fund.
Macroeconomics of
Islamonomics
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Attenuation of speculative demand for
capital
Demand for cash and inflationary
expectations
Supply of money is government fiat
only? (100% reserves according to
some, no bank creation of money)
Capital-cash economy
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Disequilibrium of cash balance
Constant price level and savings rate
If cashD<S then prices of land, stock
etc are bid up and their nominal returns
are lowered so that the supply and
demand for cash balances is equalized.
If prices and savings were flexible than
equalization would result in inflation.
Aggregate saving
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Income and substitution effects
between current and future
consumption
Long-termism of consumers
Increased risk factor of saving
The discounting is discouraged