Topic 4: Methodology and significance of Islamic Economics

1. Topic 4: Methodology and significance of Islamic Economics MFK ISB544 Topic 4

2. Methodology of Islamic Economics MFK ISB544 Topic 4

3. Learning outcomes At the end of the lessons, students should be able: • To describe methodology of Islamic economics. MFK ISB544 Topic 4

4. Methodology of Islamic Economics • Definition of IE(Revisit) “Islamic economics aims at the study of human falah achieved by organising the resources of earth on the basis of cooperation and participation” MFK ISB544 Topic 4

5. Methodology of Islamic Economics • The economist develop their analysis by employing reason and real life data to the divinely intended content. • However, the basics premises in Islamic economics (IE) are defined by the Shari’ah. MFK ISB544 Topic 4

6. Methodology of Islamic Economics • IE takes into account the economic behaviour of man in the overall human context:- • It does not restrict itself to the ‘market’ variables • The approach of IE is inter-disciplinary • Hence, a very high content of IE is normative – Muslim economist have the obligation to discharge the Qur’anic duty of amal makhruh nahi mungkar (enjoining the proper and forbidding the improper). MFK ISB544 Topic 4

7. Methodology of IE (ctd) • IE studies the impact and reaction of various Shari’ah injunctions and ethical values on the economic variables. • For instance, Muslim economist study:- • the effect of prohibition of riba on the level of savings, investment and employment • the effect of zakat on the consumption level of the society • The positive findings of IE may be utilised for normative policy making. MFK ISB544 Topic 4

8. Methodology of IE (ctd) • IE may utilise the tools of analysis developed by modern economics. • Therefore, mathematics, statistics, operation research, system analysis and computer technology i.e. software may be utilised with benefit to develop IE (deductive approach). • Need to emphasis that, IE may adopt findings of Western economics as long as they have a universal application. MFK ISB544 Topic 4

9. The worldview of Islam MFK ISB544 Topic 4

10. Methodology of IE (ctd)

11. Methodology of IE (ctd) 1. Identifying subject matter- Economic Vision • Establishing assumptions, relevant variables and their tentative relationship- natural worldview 2. Refer to primary sources of Shariah i.e. The Quran and the Hadith • Modify Islamic economic vision 3. Refer to work of scholars of Islam and Islamic economics • Modify Islamic economic vision MFK ISB544 Topic 4

12. Methodology of IE (ctd) 4. Refer to contemporary economics and finance • Modify Islamic economic vision 5. Establish principles, laws, assumptions, hypothesis, models based on (1) to (5) i.e. the tentative theory (what should be: normative) MFK ISB544 Topic 4

13. Methodology of IE (ctd) 6. Test hypothesis and models i.e. empirical studies (what is: positive) • If empirical tests verify (or do not falsify yet) the hypothesis, they are accepted and if repeatedly observed, they become ultimately the building blocs for theory. • If empirical tests do not support the hypothesis, all aspects of steps 1-6 are rechecked.If this review manages to solve the divergence, then the problem is solved. • If after this review, there is still a divergence between the tentative theory and the practice observed,we would ask why the “what is” differs from the “what ought to” and then proceed to change the “what is” so that it conforms to the “what ought to.” MFK ISB544 Topic 4

14. Significance of Islamic Economics MFK ISB544 Topic 4

15. Learning outcome At the end of the lessons, students should be able: • To explain significance of Islamic economics. MFK ISB544 Topic 4

16. Significance of Islamic Economics • Conventional economics is meant for Western societies • Most of modern economic analysis is the study of the behavioral patterns of individuals, firms and public bodies of Western capitalist societies. • Hence, the conventional economic analysis may not be applicable to the Muslim. • Nonetheless, the study of conventional economic which based on study of human nature may be the same everywhere and for all times – thus conventional economic analysis may be valid for Muslims as well. MFK ISB544 Topic 4

17. Significance of Islamic Economics (ctd) • Central assumption in Western economics • Assumption in the western economic paradigm is that individual maximise their own satisfaction and in doing so they have behave rationally in utilising resources. • Maximising one’s own satisfaction presumes that man is basically selfish by nature and is indifferent towards others. • Satisfaction also means satisfaction of body and mind by acquisition of material goods and services. • Maximization means minimization of direct cost to an individual leaving aside social costs to others and society. • Rationality stands for a pleasure-pain calculus which every individual applies in carrying out economic decision. MFK ISB544 Topic 4

18. Significance of Islamic Economics (ctd) • Central assumption in Western economics (ctd) • The assumption of selfishness, greed, and materialism as instinctive in man are not supported by Qur’anic injunctions. • The Qur’an informs that man has been created with an inborn nobility and has been equipped with positive qualities of character. • In addition, the Qur’an says that man can overcome these latter traits of character with the help of faith in God, in the Hereafter and by noble deeds. MFK ISB544 Topic 4

19. Significance of Islamic Economics (ctd) • The concept of Islamic rationality • A rational act in Islam emphasis on the one which brings in a positive reward in the Hereafter (akhirah). • Hence, the cost benefit calculus in the Islamic sense treats accountability of the akhirah as of paramount importance. MFK ISB544 Topic 4

20. Significance of Islamic Economics (ctd) • Objective • Western economic analysis assumes that the economic agents are busy in the satisfaction of maximum wants for material goods and services. • However, Islam treats the object of economic activity as falah and not satisfaction of wants. MFK ISB544 Topic 4

21. Significance of Islamic Economics (ctd) • Western economic paradigm is market context • The variables usually included in the models are related to ‘economic factors’. • Such variables as population, state of technology, distribution of wealth, economic power, savings, investment, rate of interest, level of consumption, wage rates, cost of operations, etc. • Restricting the models to those variables which can be easily quantified but it looks away the whole social system. MFK ISB544 Topic 4

22. Significance of Islamic Economics (ctd) • Distribution • The Western economics has disregarded the question of distribution – its main focus has been on ‘production’. • One of the basic tenets of the Shari’ah lays down equitable distribution of income as imperative. MFK ISB544 Topic 4

23. Recap MFK ISB544 Topic 4

24. References • Islamic economic: nature and needs, M. Akram Khan. MFK ISB544 Topic 4

25. Next class • Read methodology and Islamic economics approach functions - production MFK ISB544 Topic 4

26. THANK YOU… MFK ISB544 Topic 4