Introduction to Islamic Economics. Mirakhor Abbas

with Keynes, argue that exclusive adherence to this view ignores “the extent to which people are also guided by non-economic motivations. And it fails to take into account the extent to which they are irrational or misguided. It ignores the animal spirits.”10

      The concept of animal spirits refers to a restless and inconsistent element in the economy. It refers to our peculiar relationship with ambiguity or uncertainty. Sometimes we are paralyzed by it. Yet at other times it refreshes and energizes us, overcoming our failures and indecisions. According to Akerlof and Shiller, the animal spirits have “five different aspects,” each of which “affect[s] economic decisions: confidence, fairness, corruption and antisocial behavior, money illusion, and stories.” Confidence derives from the basic trust that people have in one another, the market, and the state “and the feedback mechanisms between ‘confidence’ and the economy that amplify disturbances.” Fairness concerns “the setting of wages and prices.” This theory acknowledges corruption and other social behaviors as playing a role in the economy and affecting it. The theory also revives another Keynesian concept, “money illusion,” which refers to the fact that people are often fooled by nominal values of economic variables, such as wages, prices, income, and wealth. They are “confused by inflation or deflation” and do not “reason through its effects.” Finally, by the stories aspect of animal spirits, Akerlof and Shiller mean the sense of identity people hold of themselves, their economy, and society. “Our sense of reality, of who we are and what we are doing, is intertwined with the story of our lives and of the lives of others. The aggregate of such stories is a national or international story, which itself plays an important role in the economy.” Of the five aspects, Akerlof and Shiller consider confidence and money illusion as the cornerstones of their theory. They believe their theory, with its central concept of animal spirits, describes how the economy works. “It accounts for how it works when people really are human, that is, possessed of all-too-human animal spirits. And it explains why ignorance of how the economy really works has led to the current state of the world economy, with the breakdown of credit markets and the threat of collapse of the real economy in train.”11

      This digression on the view of Akerlof and Shiller demonstrates how little the classical-neoclassical economic paradigm has advanced its view of humankind, perhaps the most important cornerstone element of any social science theory. It has lasted from the eighteenth to the twenty-first century, from considering man as a purely self-interested egoist of the classical economics to the “rational” self-interested egoist of the neoclassical economics of the twentieth century and finally to the “animal spirits”–motivated, “rational” self-interested egoist of the twenty-first-century neoclassical-Keynesian hybrid conception of Akerlof-Shiller.

      Negative Impact on Environment

      A fourth major area of concern has been the continuing degradation of the environment and the inability of the global economic system to reverse years of environmental neglect. Generally speaking, the neglect of the environment is classified as a negative economic externality; it is the fallout of economic activities, such as electricity production, or of the manufacturing of goods, such as steel. Producers of electricity, whether using coal, oil, or natural gas, produce as by-products pollutants that damage the environment. In other words, buyers of electricity do not pay for the full cost of its production. Similarly, drivers do not pay the full price for gasoline; they pay for gas but not for the resulting pollution caused by their driving. All modern economies fail to address the environmental damage that their economies, and their citizens more generally, cause. One reason is that a major part of the environmental damage is passed on to future generations who have no vote in what goes on today. Environmental damage is not only local. Countries argue that meaningful policies to reverse global environmental damage, such as global warming, require international agreement, something that is elusive because most countries are not willing to sacrifice their economic output if they can put it off, especially if all countries (no matter what their past contribution to environmental degradation) do not make a similar sacrifice.

      Islamic Economics Paradigm

      Islam is a rules-based system with a prescribed method for humans and society to achieve material and nonmaterial progress and development grounded in rule compliance and effective institutions. The foundations of the Islamic economic system were laid down centuries ago in the Quran and practiced by the Prophet Muhammad in Medina during his brief time on this plane of existence. These rules laid down by the Almighty (swt) are at the foundation of the Islamic system and provide the required effective institutions. The institutional scaffolding of the Islamic economic system is thus formed by the rules of behavior defined by the Quran. As a result, the content and blueprint of Islamic economics is derived by: (1) extracting the rules that define an ideal Islamic economy and their economic implications from the Quran and the Sunnah (the teachings and the practice of the Prophet Muhammad [sawa]); (2) studying these institutions in the contemporary economy and determining the degree and extent of deviation between institutional scaffolding and that of the ideal Islamic economy; and (3) prescribing policy recommendations to bridge the gap between the two.

      The Islamic economic system is a market-based system, where markets are seen as the best and most efficient mechanism for resource allocation (production and consumption). But efficiency of the market system must not be confused with markets as an ideology, whereby unfettered markets are seen as philosophy or the basis of the economic system, something to be revered, untouched, and placed on a pedestal. To be efficient, markets must have rules (such as information disclosure) to protect market participants (workers, producers, investors, and consumers) and must be supervised with strict rule enforcement. Private property that is legally acquired is held sacred in Islam, and property rights are fully protected. However, according to Islam, Allah (swt) is the Creator of all things on this earth and His creation has been given to humans of all generations in trust. Thus land and other natural resources must be developed in ways that benefit all humans of all generations equitably. It is imperative that the rights of the disabled and those of future generations are fully honored.

      A major feature of the Almighty's rules, conveyed in the Quran and practiced by the Prophet (sawa), is justice. Thus the Islamic institutional scaffolding and the ideal Islamic economy exude justice. As a result, the promotion of social and human development on this plane of existence is founded on rules that promote justice. The Prophet (sawa) understood the essential objective of the message to encourage and insert justice in human societies as emphasized in the Quran. The Prophet (sawa) taught the responsibility of the individual, the collectivity, and the state. He particularly emphasized the equality of individuals before the law and that all rules that are incumbent on individuals and the collectivity must be more strictly observed by those in positions of authority, as illustrated by his famous saying: “Authority may survive disbelief but not injustice.” Insistence on justice became the hallmark of the institutional scaffolding of governance, a structure with full transparency and accountability. Rule compliance that embraces the pursuit of social justice is a requirement of each and every Muslim during every day of his or her life on this earth. Justice is essential in all endeavors, as the pursuit of justice leads to spiritual fulfillment and brings humans closer to their Creator. Rule compliance and justice cannot be compromised. In Islam, social and human development is multidimensional and goes well beyond the highest level of GDP and GDP per capita. Human spiritual pursuits on this earth cannot be compromised for material ends.

      In Islam, conventionally measured GDP per capita and GDP growth are not society's only economic goals. There are overriding spiritual, moral, and human dimensions to all economic endeavors. Humans need bread to live but do not live by bread alone. The goal of progress and development is the overall well-being of humans and society. While this has been the goal in Islam, it began to be recognized through the work of Mahbub ul-Haq, Amartya Sen, and numerous other economists in conventional economics only in the late 1970s. Moreover, in Islam, institutions have been seen as an essential element and the foundation of achieving human and economic development. This idea became popular in conventional economics only about 30 or so years ago; it had been almost forgotten from the writings of Adam Smith with the emergence of neoclassical economics. Institutions are the formal and informal laws and rules that shape political and economic structures

10

Akerlof and Shiller (2009, p. ix).

11

Akerlof and Shiller (2009, pp. xi, 4–5).