Where Islam Deviates from Classical Economic Theory is the Beginning of Keynisian Economics
Islam proposes a moderate economic policy where the government has the power to intervene in the market only while people go about polluting the economic order. Islamic economic policies, moreover, together constitute the best solution for meeting macro-economic hitches like inflation, poverty and unemployment, writes MUHAMMED SHAFEEQUE.
Recently, I happened to go through an academic text erroneously reconciling Classical Economics with Islamic Economics. The most important economic crisis for a citizen is the hike in prices and inflation in the economy. The main reason behind these hitches is the redundant interventions of government.
As far Islam is concerned, market should be free from the interventions of government for better determining the Market demand and Market supply in its way. This viewpoint is widely criticized from the modern economic readings as it shows resemblance with Classical Economic theories which proposes the complete negation of government intervention in the Market.
To meet this controversy, it is vital to have properly read the classical texts of Islam and to know that there is a crying need to solve the connotations of various economic terms like money, inflation, and price-rise etc., from the viewpoint of Islam. This article will depict Islamic economics as a concept and practice that are at variance with classical economic theories and modern economic approaches.
Classical theory was framed upon the assumption of full employment. Moreover, the price of goods was determined in concern with money supply in the market. In brief, if money supply increases, price of good will also increase. Classical economists negatively regarded the government intervention in market.
Later, in between 1929 and 1936, United States faced the greatest economic crisis which ensured the stagnation of economic dealings all over the world. The stock market crash of 1929 was the beginning of this crisis. Within three years, it added fuel to fire as unemployment increased from 3-15%. There was a noticeable depression of 50% in the industrial sector.
It was during the eve of this crisis that the book ‘The General theory of employment, interest and money’ written by Keynes became especially relevant in the Economic arena as it critically approached the drawbacks of classical economic theories. He exemplified the failure of so called theories in terms of its negative attitude towards government intervention and he proposed government intervention as the best tool to regulate the market demand and supply.
The outcome of the book was the introduction of ‘fiscal policy’ or government policies in regulating the market. In reality, Islamic finance is not a varied concept from what Keynes proposed as a solution to the great Economic depression.
Government Intervention and Moral Principles in Price Determination
As Raghuram Rajan said, inflation is the prominent tool used to calculate the economic status of a nation. Inflation can be implicitly defined as hike in prices of goods and a fall in money value. In short run, development and inflation are positively related. In contrast, both are negatively related in long run. And the final victims of this dogma will be the poor who are not even able to meet their basic necessities.
The so-called danger of inflation can be almost regulated using Islamic financial tools. The strong stand of Islam towards unnecessary changes in price is the foremost reason for its success. It is an agreed reality that price is determined by the changes in demand and supply.
When Capitalism allowed complete private intervention in market demand and supply, it was widely questioned in terms of economic inequality. This was while Socialism went to the other extreme of surrendering all entitlements to the government which step actually blocked development policies and individual economic freedom.
The Islamic viewpoint is totally different from these two ideologies as it pursues the ultimate ownership of everything to almighty Allah. He interconnects buyer and seller in the market. The demand and supply needs to be natural and free from any government intervention.
Once, one of the Companions of Prophet Muhammed, peace be upon him, complained about the hike in prices. The Prophet replied: “Allah is the giver and taker; let him decide the price. Never ask me to commit a falsehood in matters of wealth and blood-wit.”
Here, the intervention of God needed to be concerned as a natural phenomenon. But if people came forward to negatively intervene in the market, it is compulsory for an Islamic government to stabilize the market conditions from those interventions. This is to loosen the economy from being tightened in the hands of rich as mentioned in Holy Qur’an.
The hike in price is one of the prime byproducts of inflation. Islam always asks the believers to act justly while changing the price of goods. Allah (swt) said:
“And establish weight in justice and do not make deficient the balance.”(Qur’an 55: 9)
From this verse, we can read the criticism of Islam towards the monopolistic attitude in terms of hike in prices and modern corporate dogmas to capture the market by reducing the prices. In interpreting this verse, Islam keeps a moderate policy in price determination. It is also to be understood from the inner meaning of this verse that we ought to treat others the way we wish to be treated by others – as quoted by Imam Qurtubi and Qushairi in their respective Qur’anic exegeses.
We can discuss some of the rulings that Islam established while determining the prices to better understand the stance of Islamic Finance.
- The Market should be known both to buyer and seller.
- The system of ‘Najsh’ is prohibited in Islam. Najsh means a type of cheating, where two people engage in conversation and one will suggest a huge price for the commodity concerned, in the presence of a third person. The third person will try to buy the commodity for high price by seeing its demand, without knowing that both the first and second persons were merely enacting a predetermined drama to cheat him.
- It is not allowed to sell the product by showing false advertisements.
- Speculation of prices by holding the goods is prohibited.
What is the Solution?
Monetary policies are introduced by central banks to regulate the economic unseen of a nation. Changing the interest rate is one of the most accepted tools in monetary policies. As interest rate increases, borrowings from bank will also increase. The main customers of these borrowings are belonging to upper class sector as we can see these facts from the records of bad debts.
Moreover, the so called borrowings are not transferred to productive sectors and it will result in future hike in inflation rates. Here, the lending facilities of Islamic banks get varied as it negates the space of interest or usury. Moreover, it is vital to have these borrowed loans go to augment the production sector, so that both borrower and bank will get benefited.
In brief, Islam proposes a moderate economic policy where the government has the power to intervene in the market only while people went polluting the economic order. Moreover, the Islamic economic policies are best solution for meeting macro-economic hitches like inflation, poverty and unemployment.
Muhammed Shafeeque is a research fellow at Jamia Markaz, Kerala, India. He can be contacted at Shafeeq2cm@gmail.com.