Thoughts from Iraj Toutounchian’s ‘Islamic Money & Banking: Integrating Money in Capital Theory’
The neoclassical economists believed that they had discovered a truly scientific method of argument, embellished by mathematics. They purported to diminish the moral problem by showing that if every individual pursues his own interests, the maximum benefit is attained for all. This view somewhat ignored society, not as a sum of individuals, but as a totality of social interests. However, it is well understood that individual differences naturally produce conflicts between self-interest and social interest. Hence, a moral code becomes necessary for any kind of society. Economics, being partly a vehicle for the ruling ideology and partly a method of scientific investigations, also has conflicts that need to be resolved.
The ideology behind self-interest is individualism, in a sense that society is of no relevance as long as each person pursues his own interest. The relevant question here is whether individuals are the best judges of their own welfare and are able to choose what is best for them and the society of which they are members. Even if they do realize what is best for them, it does not necessarily mean that this is also best for society. Every society is run in accordance with its own value judgments; without them, society becomes meaningless. For Vilfredo Pareto, there was no society above and beyond individuals; thus, value judgments need only be concerned with the welfare of individuals and nothing else. Much of modern welfare economics is based on Pareto’s value judgments. Surprisingly, this part of economics is basically constructed on the notions of ‘justice’ and the equitable distribution of income and wealth.
According to Professor Nath, the “Paretian optimum ignores the fact that the distribution of incomes is relevant to social policy decisions. After all, even according to Pareto-type welfare function, all Paretian optima are not equally desirable; nor is a Paretian optimimum better than each and every non-optimal allocation.’ (Nath 1976: 89)
Based upon Pareto efficiency, then, justice becomes a man-made code, which changes through time and place. This necessitates that ‘justice’ be defined as an absolute truth that cannot be changed. This absolute justice, we Muslims believe, comes from Divine guidelines. Where this is properly done, there can be no conflict between self and social interests. Hence, in Islamic economics we have both wisdom and conflict, Divine Rules have the veto power. This power stems from the generality of the Divine Rules over the particularity of wisdom.
But why follow Divine Rules in the first place? Quranic teachings tell us that we are supposed to please God and the best (though not always the easiest) way to do this is to follow His advice and guidelines, as opposed to man-made rules, particularly when they are in conflict with His. In other words, wisdom is a subset of Divine Rules.
We are further taught that both permitted (halal) and prohibited (haram) actions are based on justice. Obviously, justice goes parallel with society in that without society there can be no justice.
In order to fully understand where man stands within the scope of traditional economics, it is instructive to see how the system is linked to the past. There is much to be learned about the history of economics by examining why the focus of intellectual inquiry was on ethics and theology rather than on economics qua economics. It was not until the eighteenth century that speculation about economic phenomena began to emerge as economic analysis rather than economic thought.
The view of the Churchmen, like that of Aristotle before them, was that it is essential that human affairs be conducted in accordance with the principles of distributive and commutative justice. Distributive justice is concerned with the criteria for allocating honors, income, and wealth to particular persons or classes. Commutative justice is concerned with equity, or fairness, in transactions among individuals.
While modern economists are not interested in such theological considerations, the Summa Theologica of Saint Thomas Aquinas (1225 – 74) survives as a masterwork of economics because it confronts the co-existence of ethical and economic questions in human behavior as a seminal issue.
In Summa Theologica, Aquinas devoted himself to the task of providing guidance for Christian behavior under circumstances that arose as a result of expanding commercial activities. In contrast with modern economics, which seeks to explain economic phenomena, Aquinas and the schoolmen sought to lay down rules of conduct for Christian behavior and salvation.
Modern philosophy, the Protestant Reformation and modern science, which together brought about a wholly new intellectual climate, had a common origin: the thesis that human reason, as distinct from divine revelation, was sufficient to discover the truth. This thesis destroyed the nexus between faith and reason, and thus between theology and philosophy – a nexus forged by the Scholastics of the Middle Ages.
To Aquinas, knowledge was the product not only of reason (philosophy) but also of revelation (theology). All branches of learning (logic, ethics, politics, and economics) were welded together into one great whole through theology. The union between philosophy and theology was, however, far from permanent, and over a period of centuries, it was challenged from within the church itself. The consequence of the eventual divorce of reason from faith was secularism. In essence, this so –called intellectual revolution asserted the primacy of the individual as capable of reason and in possession of an individual will. These principles became fundamental to the spiritual revolution inherent in the Protestant Reformation. The Renaissance and the Reformation gave birth to the idea of the ‘masterless man,’ the autonomous individual created in the image of God and therefore inherently good, but individually responsible for salvation. Only one essential prerequisite of capitalism at this time was absent: an ethical standard that was compatible with the accumulation of wealth.
In the sixteenth century, Martin Luther and the reform movements of John Calvin and John Knox laid the foundation for ideas that later found clear expression in Max Weber’s The Protestant Ethic and the Spirit of Capitalism (1904/05). Protestantism considered ‘acquisition a virtue rather than a sin’ and merchants, as Rima points out, came to be regarded ‘as pillars of the church and community. Their pursuit of gain became as integral a part of Protestant ethics as the autonomy of the individual … The Protestant emphasis on frugality served the capitalist system well for it stimulated thrift and capital accumulation.’ (Rima 1967: 27-9)
The new intellectualism during the century of the Enlightenment brought with it a quest for new knowledge, new techniques for its acquisition, and new bases for its evaluation.
Just as Isaac Newton (1642 – 1727) sought to discover the regularities governing the behavior of the physical universe and give them expression in a system of natural laws, the Physiocrats of France and the Scottish moral philosophers (among them David Hume, Franches Hutchenson and Adam Smith) sought to identify the natural laws ruling the behavior of society. Developments in the natural sciences, physics, and in particular, astronomy were influential in establishing the point of view and methodology for studying the behavior of the economic system.
Smith dealt at length with the ethical values of life in The Theory of Moral Sentiments (1759), before turning his attention to subjects that today constitute the major concern of economic enquiry; that is, the self-interested behavior of people engaged in market activity. Self-interest was seen as directing every aspect of human behavior and activity. Standing at the center of his system were individuals who followed their own interests while promoting the welfare of society as a whole, for such is the nature of natural order. The end result was that a beneficent social order emerged as an unintended consequence of individual actions.
The idea of self-interest has traditionally been taken to the extreme, culminating in the idea that essence belongs to the individual and that nothing exists as society. This leads to a position whereby self-interest takes the central role to the neglect of social interest. Individuals were promoted to a position of being ‘masterless,’ while the emphasis on self-interest converted the individual into a ‘machine of happiness,’ which derives happiness solely from consumption. Individual desire eventually led the masterless man to become master of the ‘man.’ His desires became the new master, who had to be served endlessly. Western economists more than likely intended to free man from ‘slavery’ rather than to degrade the individual but the end result was, nevertheless, to relocate ‘man’ to a much lower level.
The dominant idea described above eventually transformed man as a social animal into a being with no desire to interact with others.
…Individuals have no sense of empathy, sympathy, jealousy, hatred and love, despite a wealth of evidence pointing to the contrary. In such an environment where there is no externality, negative, or positive, no increasing return and perfect information, pure competition makes sense. Further, the market mechanism works and efficiency is obtained. Nevertheless, it should be noted that optimum conditions and perfect competition have been argued to be different subjects. Professor Mishan, for example, asserted that perfect competition is neither a necessary nor sufficient condition for meeting the optimum conditions (Mishan 1957: 210), and Nath emphasized that the propositions about the relations between a Paretian optimum and the perfectly competitive model apply only when the system is at equilibrium (Nath 1976: 31).
The view of man and his behavior on earth outlined above is very different from the Islamic view, in which, rather than serving their own interests, individuals serve ‘The Higher Master of All,’ Allah (SWT).
In human society, interaction among individuals is inevitable; at least in the sense that people have to meet the exigencies of the general condition of living under one roof. When it comes to consumption in such a condition – that is, in an imaginary situation where a man and his wife are under one roof – interaction might come to zero. The inevitable reciprocal marginal externalities are necessarily reduced to the degree of freedom of each individual in observing the freedom of others. In some instances, interaction produces positive externalities, and in others, negative externalities. It is the total sum of the interactions of individual behavior, in a Venn diagram, that we call ‘society.’ This led Nath to conclude that a Paretian optimum is not necessarily superior to any non-optimum (Ibid: 22).
The formulation of the social-welfare function is not independent from ethical considerations and some have argued that only ethical considerations can determine the particular functional relationship between the economic welfare of a society and the individual ordinal indicators.
In conventional economics, the place of man in society is ambiguous in that it (society) works as an instrument whose goal is consumption. Islamic economics is designed to give man the dignity and status he deserves. He is given the potential to enhance his spiritual life in parallel with his physical life. Islam provides rules and regulations giving him the option to choose between vice and virtue. Without this option, there is no way for spiritual elevation. Unlike in the capitalist system, comfort and happiness come from both material and spiritual elevation.
Islam teaches us that life is a test: ‘Blessed be He … who created death and life, that He might try which of you is fairest in work’ (Qu’ran 67:2). Allah (SWT) endowed people differently and in many ways: in mental and physical ability, in material and social environment, in power, knowledge, wealth, and so on. Some of these things an individual is born with; some are acquired by effort and still others come from circumstances; but each individual is accountable to Allah (SWT) for all the ways in which he has been preferred over others. ‘It is He who has appointed you vice-regents in the earth and raised some of you in rank above others, that He may try you in what He has given you…’ (Qu’ran 6:165) On the Day of Judgment, each individual will be held accountable for the way he lived his life, how he used his knowledge, and how he spent his wealth.
It has been said that nothing a man uses (as a consumer or as a producer) is morally free, even if it is economically free. It must be paid for by being thankful to its Creator and by sharing some of its fruits with other rightful claimants.
Faced with the basic philosophical questions of what man is and what his duties are on earth, the task of constructing an economic system becomes easy. Attempts have been made by Western scholars and thinkers to find answers to these questions but to no avail. Logically, a person cannot judge what man is on the grounds that he himself is a member of the same set, and his judgment is almost invariable biased. Muslims have to avoid such a misleading practice. Only the Creator knows in absolute terms who we are and why He created us.
For Muslims, the ultimate goal of man is to please Allah (SWT) by following His orders as well as His guidelines and recommendations. Man, as vice-regent of Allah (SWT) on earth, is responsible to society as well as to himself. He should understand the reciprocity of actions between individuals and society and, at every stage of life, he has an obligation to all societies and people who have made contributions to the present state of knowledge and technology.
The doctrine of vice-regency indicates that wealth is not an end in itself. Material and spiritual comfort work as the wings of a bird to take him to the destined place. The doctrine further implies that wealth exists to serve others and it is this balance between material and spiritual comfort that is one of the most valuable lessons to be learnt from Islam. (Iraj Toutounchian)