Muslims and Markets:

Adam Smith Prophet of Choice?

By Azhar Ghani

INTRODUCTION Popular, and even some scholarly, narratives on Islamic economics tend to focus on its two key features of zakat and the prohibition of riba1. The latter especially, as manifested in the Islamic finance movement, has gained more than its fair share of attention. This undue focus on what are mere features of a whole system could reduce the analysis to one based on an instrumental approach. At the very least, going down that road could lead to a place where the successes and failings of the two features end up as shorthand for the efficacy of the system as a whole. In the extreme case, instead of looking at the wider Islamic philosophical perspective as the core of Islamic economics, such an approach could reflexively equate the instruments of zakat and riba-prohibition to Islamic economics itself. Yet, as the only well-developed and tangible policy manifestations of divine Islamic economic principles, these two institutions can provide a good indication of whether the Muslim way can find acceptance in the world economic order. A look at developments in the administration of zakat could give us an insight on how Muslims themselves view a religious obligation that, for most believers, is not legally binding; while an examination of the

Zakat, a tax on possessions and property surrendered as an obligation before God, is the third pillar of Islam. It ranks just after the two declarations of faith (in the oneness of God, tawhid, and in the Prophet), and after the obligation of prayer, which establishes the link between the believer and his Creator. Its importance is underlined by the fact that it ranks ahead of the obligation to fast in the holy Muslim month of Ramadan -- a ritual most non-Muslims would associate as a key identifier of the Muslim faith. As for the prohibition against riba, the Quran, in 2:275-80, commands Muslims to avoid practices with riba a term which some scholars have translated as usury or interest, while others limit its definition to excess. Simply and broadly put, any financial transaction with an excess on one side can be said to involve riba. Exchanges involving riba are considered exploitative and thus counter to the principles of justice and equality that underpin the organisation of an ideal Islamic society.

phenomenon of the riba-less Islamic finance sector, could be most instructive of the appeal of Islamic economic principles, as it is available to both believers and non-believers. As it is, some Western thinkers see Islam as backward-looking and antithetical to the world economic order dominated by the preponderance of liberal economic principles2. This paper will attempt to answer why the world will or will not be inclined to accept Islamic economics as a viable alternative. Simply put, why would a system, based on immutable divine foundations of a seemingly regressive religion that was revealed in seventh-century Arabia to a desert people with a simple economy, be relevant in todays sophisticated world? WEALTH OF NATIONS OF BELIEVERS Different religions look at the material activities of man differently. Protestant ethics, for instance, teach believers to regard the pursuit of wealth as a duty, giving the life of business once regarded as perilous to the soul a new sanctity, and treating labour not as an economic means, but a spiritual end.3 The Buddhist perspective imbues work with a spiritual element, and decries not the attainment of wealth, but the attachment to wealth4. As for Islam, it considers the worldly life as a passage to the heavenly life, and worldly material joys as bounties given by the grace of God.5 While this appears to place a Muslim well in the liberal economic pursuit of wealth, he is not quite the self-interested, labour-

See for example John Esposito, Islam and Development: Religion and Sociopolitical Change (Syracuse, NY: Syracuse University Press, 1980), ix. See Weber, Max, The Protestant Ethic and The Spirit of Capitalism, translated by Talcott Parsons (New York: Charles Scribners Sons, 1950), pp 2 3. See E.F. Schumacher, Buddhist Economics, from Small Is Beautiful: Economics as if People Mattered, 1974. See, for instance, Quran (7: 31).

averse homo economicus of John Stuart Mill 6 . Equally rational, the freedom of homo muslimus to pursue material wealth is, nevertheless, not unfettered. In dealing with material issues of individuals and societies, the classical sources of Islam provide numerous guidelines that lend themselves to the construction of economic norms7. In particular, it is noteworthy that Islam associate economic behavior with the doctrine of accountability before God on the Day of Judgement a consideration alien to the secular, or even atheist, homo economicus. INVISIBLE HAND VS HAND OF GOD The world economic order of today is largely shaped by the ideas of Adam Smith. With the 1990s collapse of communism in Eastern Europe, capitalism has virtual dominance on global economic thought. More than before, the marketplace is ruled by the laws of the market. More than before, Smiths invisible hand has become more visible in determining and deciding the wealth and well-being of nations and men. And more than before, human nature is assumed to be manifested in homo economicus, a selfish and rational individual driven by an unapologetic imperative to maximise his economic benefits8. In the Wealth of Nations, Smith had noted that by pursuing his own interest, an individual promotes (the interest) of society more effectually than when he really intends to promote it.9 Yet, Smiths invisible hand which guides the self-interest that inadvertently serves the public good, does not work in a vacuum. Rather, it is part of a body of rules and

The term homo economicus or "economic man" was used for the first time in the late nineteenth century by critics of John Stuart Mills work on political economy, "On the Definition of Political Economy, and on the Method of Investigation Proper to It." See for instance Quran (30: 39), which warns against riba and reminds believers of the obligation of zakat. See G.T Crane and Able Amawi, The Theoretical Evolution of International Political Economy (New York: Oxford University Press, 1991), 3-26; Jeffrey Friedan and David Lake, eds., International Political Economy (New York: St. Martins Press, 1991), 17; Robert Gilpin, The Political Economy of International Relations (Princeton, NJ:Princeton University Press, 1987), 27. As cited in Profit and the Public Good, in The Good Company, Economist, January 22, 2005.

norms that North (1990) calls institutions or rules of the game10. For Muslims, the rules of the game are circumscribed by religiously-informed economic principles. 11 Smiths invisible hand is thus seen as subservient to the Hand of God. Muslim thinkers believe that Islam provides humanity with solutions to problems created by imperfect manmade political systems and moral values. According to them, Islam is a divinely ordained social framework that best promotes the interest of society by guiding humanity to peace and tranquility in all aspects of life, physical and metaphysical. As an institution, the Hand of God draws its legitimacy from Islams association of economic behavior to the doctrine of divine accountability. Yet, despite the proverbial fear of God factor, it may have already lost the arm-wrestle match with Smiths invisible hand over the key practices of Islamic banking and zakat. From afar, God appears to be in a good position, with Islamic finance estimated to be growing at an annual growth of 15 per cent and becoming the preferred financial services choice of one in five banking customers in the Muslim countries of Asia and the Gulf 12 . Look closer, however, and the scene changes. Kuran (2004: 7-19) notes that the lending practices of many Islamic banks diverge critically from the underlying religiously-informed principles, with banks resorting to procedural gymnastics to all but mimic the interest-laden and risk-averse (as opposed to the Islamic principle of risk-sharing) operations of non-Islamic financial institutions. One account alleges that 99 per cent of the business of Pakistans Islamic banks is still based on interest 13 .

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North (1990, 3-5) says: Institutions are the rules of the game in society or, more formally, are the humanly devised constraints that shape human interaction. In consequence they structure incentives in human exchange, whether political, social, or economic. In his seminal work Iqtisaduna (Our Economic System) Baqer As-Sader elaborated on these principles which draw on Islamic fiqh (jurisprudence). Abdul Mannans Islamic Ummah: Economic Order and Conceptual Framework also explains the Islamic paradigm. See Carla Power, Faith in the Market, Foreign Policy, January/February 2009 See Kuran (2004) p 16-17

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Another study by the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) concluded that 85 per cent of bonds marketed as shariacompliant, or in line with Islamic principles, were illegitimate14. And, even when there are clear indications of the appeal of Islamic financial products among non-Muslims, credit is given not to systems Islamic foundations, but its economic utility15. As for zakat, Kuran (2004: 21-23) indicates that even in jurisdictions where there are state-sponsored compulsory zakat systems in operation like Pakistan and Saudi Arabia, there is evidence of widespread evasion in performing this Third Pillar of Islam. In addition, available studies also suggest that only a fraction of the non-impoverished population pays regularly in areas where zakat contributions are legally voluntary. Nevertheless, this contest is not quite over. For one, the Wall Street meltdown during the 2008 global financial crisis has made the public more circumspect of a capitalist system that plays fast and loose with ethics. So now, more than ever in his evolution, homo economicus could heed his rational head and try to maximise his economic benefits by opting for a less risky ethical path. Or, he could heed his heart instead. Behavioral experiments indicate that a significant number of participants behaved altruistically -- defined in economic terms, as costly acts that confer economic benefits on other individuals (Fehr and Fischbacher, 2003) -- to their own detriment in order to benefit other participants;16 and the underlying Islamic economic principles of just transactions and the redistribution of wealth could just be the kind of altruistic outlet he is looking for.

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See Carla Power, Faith in the Market, Foreign Policy, January/February 2009. Ibid. See Rachlin, H and M. Locey, A behavioural analysis of altruism, Behavioural Processes 87 (2011) 25-33.

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FEAR FACTOR Finally, it must be said that the acceptance of Islamic ideas, even economic ones, will likely be affected by perceptions of the religion. Views of Islam in the world, especially in the West, have been always been coloured by fears of Islamic expansion, both territorially and in terms of influence. This has greatly politicised the discourse on Islam while preventing a fuller understanding of Islam17. Indeed, some in the West, like Republican leader Newt Gingrich of the United States, have called for a rejection of not only violent and presumably Muslim -- extremists, but also Islamic ideas. Gingrich believes that Americans are at risk as a nation, not only from the violence of a militant Islam, but also from the cultural integration of Muslims in the West, whom he calls stealth jihadists.18 CONCLUSION The fact that Islam does not abhor wealth indicates that those in the market to pursue economic self-interests would not be jeopardised by Islamic economics. There could, however, be some impact on benefit maximisation, as certain lucrative conventional practices like the use of interest, is prohibited. However, in the aftermath of the global financial crisis, trading off such potential benefits for the greater financial security afforded by a more ethical system could be selling point. Nevertheless, empirical evidence shows that both Muslim and non-Muslims alike will still generally pick Adam Smith as their prophet of choice when it comes to economics, and behave with conventional rationality by cherry-picking options that are most economically beneficial to them, regardless of the underlying foundations.

17

See Mohammed A Muqtedar Khan, Islam and the International Relations Discourse, paper presented at the Annual Convention of the International Studies Association, Chicago, 21-24 February 1995 See Thistlewhite, Susan Brooks, Under God: Is Fear of Islam the new McCarthyism?, Washington Post August 1 2010.

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REFERENCES Crane G.T and Able Amawi, The Theoretical Evolution of International Political Economy (New York: Oxford University Press, 1991), 3-26 Esposito, John, Islam and Development: Religion and Sociopolitical Change (Syracuse, NY: Syracuse University Press, 1980). Fehr, E. and U. Fischbacher, 2003. The Nature of Human Altruism. Nature 425, 785-791. Friedan, Jeffrey and David Lake, eds., International Political Economy (New York: St. Martins Press, 1991) Gilpin.R, The Political Economy of International Relations (Princeton, NJ:Princeton University Press, 1987). Kuran, Timur, The Economic Impact of Islamism, Islam and Mammon: The Economic Predicaments of Islamism (Princeton University Press, 2004) Power, Carla,Faith in the Market, Foreign Policy, January/February 2009 Rachlin, H and M. Locey, A behavioural analysis of altruism, Behavioural Processes 87 (2011) 2533. Schumacher E.F, Buddhist Economics, from Small Is Beautiful: Economics as if People Mattered, 1974. Thistlewhite, Susan Brooks, Under God: Is Fear of Islam the new McCarthyism?, Washington Post August 1 2010. Accessed on May 29, 2011 at http://newsweek.washingtonpost.com/onfaith/undergod/2010/08/is_fear_of_islam_the_new_mccarthy ism.html Weber, Max, The Protestant Ethic and The Spirit of Capitalism, translated by Talcott Parsons (New York: Charles Scribners Sons, 1950). Online e-book accessed on May 20, 2011 at http://www.archive.org/stream/protestantethics00webe#page/n5/mode/2up.