UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Society and Cooperation in Islam: Incentives and Consequenes




By Iraj Toutounchian

The classical economists did not treat society as a co-operative…

Joan Robinson

The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.

Joan Robinson

Economics is haunted by more fallacies than any other study known to man.

H. Hazlitt

Society is a real compound like the natural compounds.  But the synthesis here is of minds and thoughts and of wills and wishes.  [The] new compound comes into existence and the elements continue their existence with a new identity, individuals also, who enter social life with their gifts acquired from nature and their inborn abilities, spiritually merge into one another to attain a new spiritual identity, which is termed the ‘social spirit’…in the synthesis of society and individuals, though an actual synthesis takes place—because, the constituents, the individuals, as a result of their interaction, attain a new form and identity—the plurality of individuals is not converted into a unity…Society conceived as a single physical entity is only a hypothesized abstraction.

M. Mutaahhari

Society, then, as is conceived has its own identity albeit this identity is derived from each individual member of the society; such that no one individual member of the society loses his/her identity.  The mutual interaction between individual and society best exemplifies the paradigm: unity in diversity and diversity in unity.

Mankind’s well being has to be based on global responsibility and cooperation.  It should provide benefit to all cooperating nations.  If no action is taken to address the manifold deficiencies of the existing global zero-sum game, the universal gap between south and north will simply widen.  It will take a global will to make the world a better place.  The will has to be directed towards instituting an increasing-sum game in which underdeveloped and developed countries alike have an equitable share of life’s rewards.  Without this, the global financial crisis will become a global humanitarian crisis.

Many misunderstandings can be found in the Islamic banking literature, but that is not to say that nothing valuable has been done on the subject.  On the contrary, there are many more outstanding works, which deserve special attention and admiration.  In this assessment of some of the mistakes, I have endeavored to follow four complementary criteria, but three of them, which we call the Trinity Criteria as three pillars of Islamic economics, deserve special attention:

1-    Social justice is the ultimate goal of Islamic economics, in general, and Islamic Banking, in particular, the importance of which cannot be exaggerated.  Any deviation from such teachings brings about Zulm (injustice).  Embedding justice into the heart of an economic system is not as hard as most mainstream economic theorists imagine.

2-    There must be cooperation among all individuals and legal entities, from which positive synergy emerges.  This will naturally bring about externality, both in consumption and production.  Externality in consumption takes the form of interdependent utility functions; in production, it gives rise to “the share economy” or a “Grand Cooperative System,” which makes it possible for individuals to enjoy part of the profits of the firms for which they work.

3-    In any conflict between social and personal interests, the social interest must prevail.  To most Western economists, the concept assumes that: a) there is no “society” above and beyond individuals.  Thus, we should be interested in the welfare of individuals and nothing else; b) individuals are the best judges of their own welfare and choose what is best for themselves; and c:) social welfare can be said to have increased if at least one person’s welfare has increased and no-one else’s has fallen.  Pareto optimality has little to say about the “correct” allocation of resources and says nothing about equity (justice)…In brief, the capitalist system exhibits all the hallmarks of a zero-sum game…only with cooperation among individuals will social welfare be increased.  With cooperation and the resulting externality, both individual and society benefit without incurring any loss to either side; thus, the Islamic economic system can be visualized as an increasing-sum game.  The degree of certainty of receiving just remuneration in cooperatives for each individual member should be of such a magnitude that it precludes staying out of the sphere of cooperation.  An effective incentive scheme restrains misbehavior while rewarding active and cooperative behavior.  An institution’s continued viability is dependent on just and cooperative behavior.  Its success requires collective action towards a common goal.  “A collective is a set of entities with mutual trust and unconditional cooperation.  The incentive for cooperation in a collective stems from being a member of the same collective”.  Mutual trust and unconditional cooperation induces each member to put its utmost effort in the cooperative in which he/she is a member.  Effort takes on a value of unity in the conventional wage system and greater than unity in the case of a cooperative enterprise.

An incentive pattern should not assume remote future cooperation in order to stimulate cooperation.  Cooperation between labor and management can be thought of as a two-person game in which both share the same goal and form a coalition.  As long as incentive patterns for cooperation are well organized and effectively implemented, selfish players will do well for a while, but will tend to change their behavior as they see that the more cooperative players have higher payoffs.

Contrary to common belief, cooperation and justice are not separate issues.  It has been shown that they go hand in hand.  Furthermore, justice is not unattainable in this world.  It has to be sought in the causalities of Islamic verdicts, so to speak.     Also cooperation is not hard to achieve between and among individuals.  The problem lies in the fact that most, if not all, laws and regulations protect self-interested  institutions and much less have been devoted to strengthen the ties between individuals in one institution.  There is nothing wrong with cooperation; we should blame scarcity or lack of legal-legislative protection of cooperation.

“Where the invisible hand fails to direct each person, mindful only of her own gain, to promote the benefit of all, cooperation provides a visible hand…cooperation is the domain of justice.  Justice is the disposition not to take advantage of one’s fellow, not to seek free goods, or to impose uncompensated costs, provided that one supposes, others similarly disposed…”, says D. Gauthier.  Thus, we find ourselves in agreement with the most beneficial contemporary theorist of justice, John Rawls, when he says, ‘The circumstances of justice may be described as the normal conditions under which human cooperation is both possible and necessary’.

It does not look hard to well define the principles of cooperation.  A set of well-defined principles of cooperation can produce a larger pie from the synergy that results and can distribute that pie on an equitable basis.

A simple non- economic example about the fruit of cooperation (interaction) is as follows:

The product of any two numbers each of which is greater than 2 is always greater than the sum of them; that is:

A x B > A + B          given that: A, B > 2

Like: 3 x 3> 3 + 3.

A x B shows the interaction between person A with person B and A + B demonstrates mutual unconcern between them.  The former demonstrates cooperation, say, in Islam, and the latter shows self-interest in capitalism.

We might call the difference between A x B and A +B as Barakah resulting from cooperation (interaction between and among individuals) whose origin might be interpreted to be the following:

يدالله مع الجما عه

This emphasizes the benefit derived from cooperation.  Another evidence is that in our daily prayers the Surahs we use all are in plural verbs not singular.

Why should citizens within a community be treated differently if they all strive to achieve common goals?  If the goals are the same, each individual member of a society has to contribute towards those goals.  Logically, inconsistencies and fallacies emerge from a segmented society.  But how is it possible to achieve a common mission in which: (1) consumers are assumed to maximize their utilities when they prefer to pay less for the commodities they purchase with given quality; (2) producers have the ultimate goal of maximizing their own profits, which is possible only if prices of the commodities they produce exceed the average cost of production by the maximum amount possible; and (3) money lenders (conventional banks) enjoy the highest possible  interest rate spread, which is ultimately passed on to consumers?  There is clearly a conflict of interests here, which does not lead to increasing the size of the pie.  This is a perfect example of a zero-sum game, which best characterizes capitalistic economic system.  “It is through the drive for maximization and for minimization that modern big business has obtained its dominating position in the economy.  This continually disrupts the organic balance of the economy; obviously, the organs and cells in an organism must be in balanced relationships with one another if they are to function correctly”, F. Wilken.

Unlike Adam Smith, who mistakenly thought individual self-interest was a minimum unifying social force in all economic activities, I firmly believe that cooperation among all agents of economic activity is the answer to the failure of capitalism (and socialism).  The cooperative environment that produces maximum efficiency provides love and envy, the powerful dynamism for self-improvement and promotion, and these replace hatred, greed, jealousy, and oppression.  Unity in diversity and diversity in unity becomes a fact of economic life.

Mutual human interactions produce externality, whether positive or negative.  The Islamic economic system provides an environment full of externalities, which take different forms in production, exchange, and consumption but are all rooted in the same logic; cooperation.  Without mutual interaction, justice becomes irrelevant.  Mutual cooperation and interaction between individuals, between individuals and firms, and between firms and firms guarantee justice and pave the way for preventing the evils of conflict.  “…the greed that knows no limit…is the very opposite of justice” says T. Gorringe aptly.

Islam Future → The Future For Islam

Holy Qur'an, E-Books, Audios, Videos, Lectures, Articles and much more


Muslim Bibliophilia

Adventures Of Douglas Sonders

Follow My Adventures In the Photography and Video Industry

%d bloggers like this: