Many people always try to fit in Islamic economic principles into modern economic terminologies instead of adopting a vice versa approach, without even realising the fact that modern terminologies were originated from the Greeks or research of Muslim economists. To remove the misconception, this article is an endeavour to highlight the origin of modern economic concepts and key aspects of Islamic economics, including monetary and fiscal policy from principles to practice.
Monetary Policy
Conventional monetary policy can be traced back to late 19th century when it was used to maintain gold standard and its most modern form is gold bullion standard. GBS is a system in which gold coins do not circulate, but in which authorities agree to sell gold bullion on demand at a fixed price in exchange for circulating money. Until 1971 most monies were backed by gold. Surprisingly, the current value of paper or electronic money are not backed by gold but can be adjusted by the creators of money.
Monetary policy attempts to stabilise the economy by controlling interest rates and spending by restricting government borrowings. The monetary policy is a big impediment to free market economy because the government controls the economy through monetary policy which is not possible in a gold environment. This was what happened in the so-called free market capitalist economy in 1931 when gold replacement of currencies were stopped by banks.
With the passage of time, to control the so-called free economy through monetary policy, a layer upon layer over currencies was introduced ie initially the currency was introduced and then undermining currency positions were covered up through book adjustments and now through the concept of plastic money.
The prime concept of free economy is present in Islamic economic principles. IEP is against the concentration of wealth and prohibit the one and only evil — the riba [Interest]. In contrast to conventional monetary policy, IEP does not suffer from the evils of interest rates, Seignorage (the benefit from printing money) and borrowing money from the population through bills etc. As the concept of interest is absent in IEP, the concept of monetary policy in IEP is restricted to maintaining gold standard — for what it was developed.
Gold standard is based on Islamic principles. Islam considers commodities with intrinsic value as currency. Following are some examples of commodities used as currency: Gold, silver, rice, dates, wheat, barley and salt. Price of a commodity is set by the market without any government intervention.
The concept of money was prevalent even prior to the Last Prophet (PBUH), whereby one dinar [gold] was equal to 10 dirhams [silver]. Even today, silver has a defined parity with gold. The goldsmith used to put there stamps on dinar and dirham to prove there authenticity.
Most historical accounts say that among the Rashideen caliphs, Syeddana Uthman ibn Affan RA was first to use coins, some accounts say Syeddana Umar RA was first to do so. When Persia was conquered, three types of coins were in vogue in the conquered territories — Baghli of eight dang; Tabari of four and Maghribi of three. Umar (according to some accounts) made an innovation and introduced an Islamic dirham of six dang.
The role of central banks under IEP would be of international trade accounting of a country, to review Shariah-compliant financial products and regulate financial institutions. Consequently, the concept of banking under IEP would be to offer Shariah-compliant financial products as intermediary gold vaults for customers and converting currency into gold on account holders’ demand apart from currency handling in transitory phase.
Basics of Fiscal Policy
The fiscal policy is contrasted with monetary policy which attempts to stabilise the economy by controlling interest rates, exchange rates and the supply of money. It uses two instruments — government spending and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy:
• Aggregate demand and the level of economic activity;
• The pattern of resource allocation;
• The distribution of income.
Keynesian Economics
Keynesian economics, called Keynesianism and Keynesian theory, is a school of macroeconomic thought based on ideas of 20th-century English economist John Maynard Keynes.
Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilise output over the business cycle. The theories forming the basis of Keynesian economics were first presented in The General Theory of Employment, Interest and Money, published in 1936. The interpretations of Keynes are contentious.
Keynesian economics advocates a mixed economy — predominantly private sector, but with a significant role of the government and public sector — and served as the economic model during the later part of the Great Depression, the Second World War and the postwar economic expansion (1945–1973), though it lost some influence following the stagflation of the 1970s. The advent of the global financial crisis in 2008 caused resurgence in Keynesian thought
Fiscal Policy in Islam
During the period of Islamic governance in Madina, a social transformation took place as a result of changing land ownership giving individuals of any gender, ethnic or religious background the right to buy, sell, mortgage and inherit land. Based on the Holy Quran, signatures were required on contracts for major financial transactions concerning agriculture, industry, commerce and employment. Copies of the contract were usually kept by both parties involved, hence, all we are practising now is not an alien to Islamic economic principles. As we all know IEP is deduced from Quran and Sunnah. Early Islamic economic thinkers developed economic models that form the concrete basis of modern economic principles.
Islamic Thinkers
Among the earliest Muslim economic thinkers was Abu Yousuf (731-798), a student of Imam Abu Hanifah. Abu Yusuf was chief jurist for Abbasi Caliph Haroon Rasheed, for whom he wrote the Book of Taxation (Kitab Al Kharaj). It outlines Abu Yusuf’s ideas on taxation, public finance, and agricultural production. He discussed proportional tax on produce instead of fixed taxes on property as being superior as an incentive to bring more land into cultivation. He advocated forgiving tax policies which favour the producer and a centralised tax administration to reduce corruption.
He favoured the use of tax revenues for socio-economic infrastructure, and included discussion of various types of taxes, including sales tax, death taxes, and import tariffs.
Early discussion of benefits of division of labour is included in the writings of Qabus, Ghazali, Farabi (873–950), Ibn e Sina (Avicenna) (980–1037), Ibn Miskawayh, Nasir uddin Tusi (1201–74), Ibn e Khaldun (1332–1406), and Asaad Davani (b. 1444). Discussions included division of labour within households, societies, factories, and among nations.
Many scholars trace the history of economic thought through the Muslim world, which was in a golden age from the eighth to 13th century.
A common theme among scholars was the praise of economic activity and accumulation of wealth. Persian philosopher Ibn Miskawayh (b. 1030) notes: “The creditor desires the well-being of the debtor in order to get his money back rather than because of his love for him. The debtor, on the other hand, does not take great interest in the creditor.”
Power of supply and demand was understood to some extent by Ibn Taymiyyah. He says: “If desire for goods increases while its availability decreases, its price rises. On the other hand, if availability of the good increases and the desire for it decreases, the price comes down.”
Ibn Taymiyyah elaborated a circumstantial analysis of the market mechanism, with a theoretical insight unusual in his time. His discourses on the welfare advantages and disadvantages of market regulation and deregulation have an almost contemporary ring to them.
Ghazali (1058–1111) classified economics as one of the sciences connected with religion, along with metaphysics, ethics, and psychology. Authors have noted, however, that this connection has not caused early Muslim economic thought to remain static. Ghazali suggests an early version of price inelasticity of demand for certain goods, and discuss equilibrium price.
He is also noted for his subtle understanding of monetary theory and formulation of another version of Gresham’s law.
Persian philosopher Nasir ud din Al Tusi (1201–1274) presents an early definition of economics (what he calls hekmat-e-madani, the science of city life) in discourse three of his ethics: “The study of universal laws governing the public interest (welfare) in so far as they are directed, through cooperation, towards the optimal (perfection).”
Farabi notes that each society lacks at least some necessary resources, and thus an optimal society can only be achieved where domestic, regional, and international trade occur, and that such trade can be beneficial to all parties involved.
In 1964, Joseph Spengler’s Economic Thought of Islam: Ibn Khaldun appeared in the Comparative Studies in Society and History journal and took a large step in bringing early Muslim scholars to the attention of the contemporary West. Khaldun or Ibn Khaldoun (March 19, 1406 AD/808 AH) was an Arab Tunisian historiographer and historian often viewed as one of the forerunners of modern historiography, sociology and economics.
Perhaps the most well–known Islamic scholar who wrote about economics was Khaldun, considered the father of modern economics. Khaldun wrote on economic and political theory in the introduction, or Muqaddimah (Prolegomena), of his History of the World (Kitab Al Ibar). He discussed what he called asabiyya (social cohesion), which he cited as the cause of some civilisations becoming great and others not. Khaldun felt that many social forces are cyclic, although there could be sudden sharp turns that break the pattern.
He is best known for his Muqaddimah (Prolegomenon) discovered, evaluated and fully appreciated first by 19th century European scholarship, although it has also had considerable influence on 17th-century Ottoman historians like Hajji Khalifa and Mustafa Naima who relied on his theories to analyse the growth and decline of the Ottoman empire.
Later in the 19th century, Western scholars recognised him as one of the greatest philosophers to come out of the Muslim world. The key concepts of Khaldun are briefly discussed below:
Khaldun wrote on economic and political theory in the Muqaddimah, relating his thoughts on asabiyya to the division of labour: The greater the social cohesion, the more complex the division may be, the greater the economic growth.
His theory of asabiyya has often been compared to modern Keynesian economics, with Khaldun’s theory clearly containing the concept of the multiplier. A crucial difference, however, is that whereas for John Maynard Keynes it is the middle class’s greater propensity to save that is to blame for economic depression, for Khaldun it is the government propensity to save at times when investment opportunities do not take up the slack which leads to aggregate demand.
LaboUr Theory
Khaldun also introduced the labour theory of value. He described labour as the source of value, necessary for all earnings and capital accumulation, obvious in the case of craft. He argued that even if earning “results from something other than a craft, the value of the resulting profit and acquired (capital) must (also) include the value of labour by which it was obtained. Without labour, it would not have been acquired.”
Economic Growth
Khaldun noted that growth and development positively stimulate supply and demand, and that the forces of supply and demand are what determine the prices of goods. He also noted macroeconomic forces of population growth, human capital development, and technological developments effects on development. Khaldun held that population growth was a function of wealth. He illustrates as follows:
When civilisation [population] increases, the available labour again increases. In turn, luxury again increases in correspondence with the increasing profit, and the customs and needs of luxury increase.
Crafts are created to obtain luxury products. The value realised from them increases, and, as a result, profits are again multiplied in the town. Production there is thriving even more than before. And so it goes with the second and third increase.
All the additional labour serves luxury and wealth, in contrast to the original labour that served the necessity of life.
