Prelude to a Textbook
October 2007 < email@example.com>
The subject matter of economic analysis, behavior of economic agents, is susceptible to human volition. There are no iron laws. One can do things in a manner then change to another way of doing. In one’s choice of how to behave/do things, one is influenced by a number of factors. Self- interest seems to be the most influential of these. But tradition, what the others are doing, what is the easiest course of doing, impact on others, public interest, what is morally preferable, what is spiritually higher, etc. are also involved.
Some abstraction is necessary for scientific analysis to proceed. Traditions change only in the long run and can be abstracted away in a short-term analysis. Demonstration effect and peer pressure also belong to that category, though to a lesser extent. Taking the easiest course (by maintaining the status quo, for example) leads to different paths in different cases and cannot be handled scientifically. It is better left to be taken into account at the policy level, if and when needed. The remaining four factors are of a different nature. They should not be abstracted away without careful consideration of the implications of doing so.
Before we proceed to consider the desirability and possibility of including care for others and spiritual-moral dimensions of economic decisions into behavioral analysis, a word on the interrelation between analysis and policy prescription is called for. In other words we have to ponder over the relation of studying what is and what should be in an aspect of life susceptible to human will. When the ‘is’, the existing reality at a particular time and place, is the creation of willful choice by economic agents, it becomes very important to know how those choices are made. One’s view of what one should choose would affect what one actually chooses. This in turn is of great significance to policy makers targeting results that are easier obtained through reshaping incentives.
Insofar as policy is directed at well-defined goals, it would help to get economic agents willfully choose paths leading to those goals. A study of the relation between possible paths of action and desirable goals would, therefore, occupy center stage in economic policy studies. To make these studies meaningful, economic analysis too would have to pay attention to factors influencing choice. One’s world-view (spirituality) and leanings towards goodness (morality) would be prime influencing factors to be considered. Care for others, individuals as well as the society or humanity as a whole, becomes the immediate expression of spirituality and morality in economic choice. While the actual content of care for others in a particular time and place for a particular economic agent will require empirical rather than logical/theoretical study, the mere admittance of this dimension in economics has far reaching consequences.
It is a well-established point that incentives can be reshaped, by education, example, promise of reward, threat of punishment, etc. The possibility of a change in behavior in response to a change in incentives opens a whole range of topics in economic analysis as well as in policy studies. Instead of posing as passive observers recording how economic agents behave, economists could proceed, in the light of desirable goals of behavior, to lay down proper policies for guiding economic agents’ behavior towards those goals.
An economic agent’s perception of his or her interests in a particular situation is fairly clear so as to prompt suitable action. Need fulfillment, wealth acquisition, power seeking, etc. require taking specific paths of action within the constraints imposed by the availability of relevant information. Simultaneously with having interests, men and women have values they cherish: Truthfulness, honesty, keeping promises, justice and fairness, compassion, etc. Adherence to values may be weak or strong, capable of overriding interests or being overridden by them. There may not always be a conflict calling for sacrificing part of the perceived interests for the sake of a cherished value, or vice versa. What is important to note is that choices, including economic choices, are made in a framework in which both interests and values are involved and that the two are distinct from one another. Ignoring any one of the two would render the understanding faulty. The challenge facing the social scientist is not to lose sight of either dimension while studying economic behavior. Insofar as demands of higher values and those of material interests coincide, as they sometimes do, there is little for policy makers to do, except reconciling individual decisions with social priorities and global considerations. In case there is a conflict, and social consideration require giving priority to higher values, policies directed at reshaping incentives will be called for.
Emerging from the bosom of a religion with its world-view and moral values, Islamic economics focuses on behavioral and policy studies that take both values and interests into account. Its primary task is to understand. This involves not only observation (empirical studies) but explanation too. Part of the explanation refers to values Islam seeks to inculcate in its adherents. But the other factors involved: local conditions and cultures, etc. are also in focus. In fact the former, Islamic values, enter into picture as frame of reference, they are not imposed on reality, which is recorded as observed. But since the policy goals involve transformation of human behavior from what they actually are to what they should be, reference to Islamic values serves the dual purpose of revealing the actual impact of Islam, if any, as well as indicating the gap that remains to bee bridged.
How to go from here to there, from the state of the economy that actually obtains to the state of the economy desired, is a big question to ask. It cannot be answered by economics alone. But economics sure can play a role in answering it. One of the major problems of economic management in our age of globalization is the widening gap between the desirable state of the economy and the actual state of the economy. A major task for economics in the coming days would be to discover the causes of the widening gap, its consequences for people and the possible ways to remedy the situation. Islamic economics should be able to make significant contribution in view of its incorporating values and care for society in its analytical framework and its emphasis on the possibility of reshaping incentives and harnessing a variety of policy tools for realizing the goals, termed maqasid al-Shariah in Islam.
There is a fundamental difference between the two elements in the economist’s field of observation, values and interests that needs to be noted. Values are above time and place whereas interests are situation bound. Values such as truthfulness, honesty and compassion do not differ from person to person, situation to situation. Interests do. Values may sometime be so interpreted that they serve the interests of the interpreter. It is also possible for an economic agent to pursue his or her interests in clear violation of certain values. There is no compulsion. Values do not impose themselves. Pursuit of value is an act of will, one is free to do so or not to do so. The role of Islam is suasion, goading man to pursue higher moral and spiritual values. Islam also provides substance to values by means of anecdotes and episodes that help one in interpreting values in one’s own situation. Islamic economics envisages economic agents in pursuit of their interests within a framework of moral and spiritual values. Applied to a particular situation this would lead to a vision. The ground reality may or may not conform to that vision. But the exercise is nevertheless useful as it helps in identifying the gap between the reality and the desired state of the world that can help policy makers in their efforts at transforming what exists into what is desirable.
It is advisable at this stage to devote some thought to vision and its significance for Islamic economic analysis and policy studies. Unlike a statement of moral and spiritual values based on Quran and Sunnah, which is couched in general terms, the vision mentioned above is situation specific. It is stated in concrete terms, spelling out appropriate behavior and sound policy in a well-defined situation. It is possible, building on such a vision, to project a state of the world resulting from realization of that vision. That can be compared to what currently obtains, prompting people to move on to a better world. The entire exercise takes place in a framework of freedom, assuming free people choosing freely. In studying the behavior of economic agents----as consumers, producers, employers, employees, lenders, borrowers, importers, exporters, etc.---Islamic economics does not impose the Islamic vision on what exists, which is recorded as it is, in all honesty and humility. The Islamic vision is kept in the back ground as a point of reference.
FOCUS ON THE MARKET
Households, markets and states are three entities most prominent in the economy. They act and interact in producing, distributing and consuming wealth. To them belongs ownership of and control on natural resources. In the process of exchange several other entities and institutions are created but they are invariably related to one or more of these three entities. Money and credit stand out among these institutions as among the most important, affecting almost all economic activities. For an orderly study of economy we start with the market. Our justification of preferring it to households for a starting point is that households become economically relevant mainly through interactions in the market. As regards the state it derives its role mostly from the happenings in the households and markets.
It will be unrealistic to assume, however, that each and every household has access to the market. He or she who has nothing to give has nothing to get from the market. But even the households with no purchasing power are part of the economy by virtue of being human. Whether the society handles their case by providing them access to market through grants or in any other manner is another matter worthy of study. One possible approach is entitlement based on need. The role of the state vis a vis these households is another subject of study.
Markets are for exchange. Every exchange involves at least two parties, each having something to give and desiring to acquire something. Beginning with the simplest act of exchange, bartering one thing for other, we notice how interests as well as values are involved. Interests inhere in the desirability of the things exchanged to the respective parties. The value framework inheres in truthfulness of description of their wares by the respective owners, and any promises, warnings, etc. that might be involved. Bringing money into the picture does not alter the picture. It only complicates it, increasing the importance of the value framework. Introduce credit and the problem of keeping promises and honoring any other commitments involved takes the center stage. It is in this context that some writers have emphasized the role of trust. The more we complicate the picture by introducing multiple parties to the act of exchange, bringing in middlemen and lengthening the supply chain, making the things to be acquired more exotic and sophisticated, passage of time between clinching a deal and actual delivery, etc. the more important the value framework tends to become. Today in the early years of the twenty-first century with its electronic payments, cross border deliveries and goods comprising myriad parts manufactured in a number of countries, the importance of value framework in which exchange takes place has increased manifold. Interests of the parties to economic exchange can hardly be secured unless a clearly defined framework of values is there. To what extent such a value framework needs to be reinforced by the coercive powers of law-enforcement and to what extent voluntary adherence can be relied upon is a different matter. But interests of both parties to exchange do require that certain values be honored.
The central problem for Islamic economics, and for any ethical approach to economics, for that matter, is motivating the parties to a contract to care about the welfare of the other parties too, and to adhere to moral-spiritual values to that end. It is a challenge yet to be met. Some people think they can provide material incentives for doing so, apparently under the assumption that there is no other kind of incentive. I think that is a hasty conclusion reached under the influence of the ruling materialistic ethos. We need historical and empirical research to arrive at a realistic conclusion. The role of incentives other than the material incentives needs being fully explored. Insofar as an overwhelming majority of people believe in some kind of life after death, and do things to secure a better dispensation in that life, it will be unrealistic to ignore good of the hereafter as an incentive.
Despite the potential role of ethics, matters like fulfillment of contracts cannot be left entirely to voluntary compliance. No markets can function and no civilized living is possible unless contracts that are freely entered into are legally enforced. At the same time it is also clear that the value framework mentioned above cannot be legally enforced in its entirety. Part of the reason is the cost of enforcement. The wider the coverage of law the greater the cost of redress through litigation. But this is not the only reason for some parts of the value framework remaining outside the scope of law. There are values like compassion that, though necessary for civilized living can hardly be legislated, much less enforced. Some values require for their realization information available only with one of the parties to exchange. The cost of extracting that information and/or punishing failure to act accordingly may be sometimes prohibitive, always problematic. Exchanges between a patient and her or his doctor or surgeon, or between a student and tutor come to mind. Examples may also be found in environment and ecology related matters. Fair dealings are often difficult to define in international trade or/and international financial dealings. The society would be better off relying on voluntary adherence to basic moral values than on long-winded negotiations between unequal parties whose end results often suffer in credibility. It will be a fairer world, the world where there is a greater adherence to moral values. It will also be a more efficient one, as it would avoid the cost of litigation and law enforcement to the extent of its moral betterment.
Is there a way to handle values necessary for good life but hardly amenable to legal enforcement? Can society harness morality to avoid some of the heavy costs of litigation and law enforcement? Islamic economics, which greatly values the role of moral-spiritual values in promoting human felicity, has an answer. The answer lies in demonstrating the costs/benefit of violating/voluntary adherence to these values. This is possible for Islamic economics as its very raison d’etre is the values Quran and Sunnah advocate relevant to man’s economic life. It doesn’t have to ‘discover’ the relevant values as they are rooted in human nature, indicated in Quran and Sunnah and elaborated upon in Islamic heritage with respect to various regions and periods of time in history. The present generation has only to project basic moral values onto its cultural and technological conditions. Can we do so?
The value-based legal framework for the market as developed early in Islamic history can be summarized as follows:
‘ All economic transactions require the willingness of the concerned parties with the provision that goods and services transacted do not belong to the prohibited category and the transaction is free from the following corrupt practices: