In the essay, Ethical Foundation of Islamic Economics, S.N.H. Naqvi outlines the ethical axioms which would serve as a base for a modern Islamic economy. These are unity, equilibrium, free will, and responsibility. All economic instruments/mechanisms must foster and respect each of these principles. However, given we have no post-industrial example of an Islamic economy based on this ethic, he is careful to add a caveat:

“It may turn out that the set of axioms…is smaller and may, therefore, be enlarged by adding more axioms to the set.…Also, in this case the axiom system…will constitute only necessary but not sufficient conditions for a truly Islamic economic order. The reverse possibility of the 'contraction' of the existing criteria set can also not be ruled out.”

So it’s not certain which axioms are necessary for an economy to be Islamic. Nonetheless, Naqvi is sure that an Islamic economy is market based, allows private ownership of property, including capital and the means of production, and allows for landlordism and wage labour.

The essay notes that in capitalist systems, “the individual in such societies is almost entirely attuned to grabbing rather than giving.” This, in part, comes from fear of the unseen. And according to Naqvi:

“Islam minimizes fear by making man to rely on God’s Mercy. The Qur’ān is explicit: “Say, O My Slaves who have been prodigal to their own hurt: Despair not of the Mercy of Allah, who forgiveth all sins. Lo! He is the Forgiving and Merciful”. (39:53). This soul-lifting verse destroys in one sweep fear and awakens hope…”

This is an example of how the ‘spiritual aspect’ of Islamic economics is supposed to set it apart from other systems. But given that it’s even necessary to theorise what an Islamic economy might look like, suggests Naqvi is overly optimistic about the effect spirituality has in influencing economics. If Islamic spirituality is the unique regulating element of an economy, unseen in capitalism, wouldn’t people in Muslim majority countries be voluntarily rejecting the excesses of capitalism now, as per Quranic guidance?

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In essence, Naqvi and other theorists accept capitalist systems, but believe the justice of the Islamic system lies in its mechanisms for distribution of wealth. One example is Islam’s inheritance laws. These laws require a person’s estate to be divided amongst family and relatives at death, reducing the power base of the institution of private property. Business ventures are liquidated or dissolved at death as well. There is historical evidence to show that this can actually prevent wealth from concentrating in the hands of the few, however this also has implications for economic growth:

“Islamic partnerships and inheritance law limited the ability of merchants to pool capital and build competitive enterprises with long life spans. Islam’s emphasis on fairness and a division of assets among children had the unfortunate effect of preventing large-scale businesses from taking root.” x

This is important because one of the main objectives of an Islamic economy according to Naqvi is economic growth. A stagnant economy – one where there is little or slow growth – implies wealth is not moving around. It’s difficult to see how in modern markets growth can happen without entrepreneurs being able to incorporate. This goes unanswered in Naqvi’s essay.

Not allowing entrepreneurs to incorporate puts the onus back on the state to take on projects which require large capital investments. The state is the only entity with longevity and access to extensive resources, either from tax revenues or by sourcing capital via a state/central bank. And this highlights a common thread in theories of Islamic economics. The only practical way of preventing the excesses of capitalism is not through spirituality, but state intervention. The state becomes a locus of power because it must oversee and intervene in so many aspects of the economy.

This is at odds with the more libertarian attitude of classical scholars, who believed the state should not interfere too much with people’s daily lives. As Naqvi notes, “An undue concentration of economic power in the hands of the state also upsets social equilibrium, and negates human freedom.” But he also concedes that in an Islamic economy there must be a “considerable degree of state control of the economy through fiscal, monetary and other economic policies.” How considerable is considerable?

Evidently the balance between the ethical principles of an Islamic system and the economic mechanisms needed for it to function as a modern economy is tricky. While there is heavy dependency on the state to correct the inherent problems of capitalist structures, the possible interventions available to an Islamic state are limited – many of which are already in play in modern mixed economies today. Such as inheritance taxes, minimum wage, social security and trade laws etc. all of which are designed to bring about some form of social equity. So the common mantra that Islam is neither communist or capitalist, but a unique third way, doesn’t ring true.

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Tagged: #IslamicEconomics #Naqvi