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Paper prepared by Prof. Omar Hasan Kasule Sr. MB ChB (MUK), MPH (Harvard) DrPH (Harvard) Chairman, Institutional Review Board - KFMC
DEFINITION AND CLASSIFICATION
HISTORY
• Economics seems to have been the first distinct social science discipline to emerge.
• Adam Smith (1723-1790) published the Wealth of Nations in 1776 and said that there is an invisible hand in the economy.
PARADIGMS AND METHODS: CONCEPTS REFLECTING EUROPEAN WORLD VIEW
PARADIGMS AND METHODS: MATERIALISM AND HUMAN MOTIVATION
• The assertion that life in economics is materialistic. Humans can be motivated by factors that are not economic or materialistic.
• Humans are a duality of matter and spirit. Modern economics does not seem to appreciate the spiritual part of the duality.
• European economics teaches that choices that humans make cause them to pay opportunity costs. This ignores the intangibles such as thawaab that have more powerful control over the behavior of believers than material opportunity costs.
• The concept of a sovereign and rational consumer is untenable in an environment saturated with commercial advertisements that influence consumer behavior. European economists are aware of these limitations. Measures for consumer protection arise because of the realization that the consumer is not really sovereign because of a lack of full information or full understanding.
PARADIGMS AND METHODS: SCARCITY AND FACTORS OF PRODUCTION
• The central economic problem of European economics is scarcity. The assumption is that scarcity always exists due to unlimited wants and limited resources. These assumptions contradict the Qur’anic teachings that humans can achieve control over their wants and passions (shahwaat). They also contradict the Qur’anic teachings about abundant rizq.
• Under the doctrine of taskhiir Allah placed abundant unlimited resources at the disposal of humans and He is willing to increase them if humans are grateful. It is shaitan who is seeking to control humans deceives them that resources are limited. He makes humans fear poverty and is able to control them through fear.
• European economics teaches that the factors of production are natural resources, labor, capital, and entrepreneurship.
• The underlying concepts to production are the concepts of taskhiir, isti’maar, and khilafat. Under taskhiir Allah put all resources of the cosmos at the disposal of humans so that they may build a civilization, ‘imarat al ardh, and also fulfill the responsibilities of khilafat.
PARADIGMS AND METHODS: MONEY
• In the past money was a tangible medium of exchange with its own intrinsic value. With the abandonment of gold and silver as money, the economy started using fiat money which is legal tender because the government promises to redeem the paper currency at a fixed value.
• Money has 3 functions: medium of exchange, a measure of value, and a store of value. Ideal characteristics of money are: divisibility, acceptability, portability, and stability of value.
• Government controls money supply by changing the reserve requirements of banks, changing the interest rates, withdrawing from or injecting money into the economy.
• Inflation results when money supply exceeds production. Deflation occurs when production exceeds the money supply.
• The banking system has created an expansion of money that allows the economy to ‘use’ more money than really ‘exists’. Banks maintain about 10% of deposits on reserve to protect against a sudden run on the bank for money that is not available.
• The riba-based economy has treated money as a commodity instead of being a medium of exchange. Money therefore can be ‘trad ed’ for profit when it is lent on interest. When the money supply is decreased, money becomes scarce and interest rates are raised leading to an economic slow-down because consumers and producers cannot borrow money.
PARADIGMS AND METHODS: ECONOMIC SYSTEMS
• Economic systems reflect societal values. In simple human societies, the economic system was laisser-faire in which the economy was controlled by laws of demand and supply without government control.
• With the sophistication of society various forms of government control evolved. The following economic systems reflecting various degrees of government control have evolved in the European civilization: command communism, welfare capitalism, market capitalism.
• In command communism (government controls all aspects of the economy and private property is not allowed).
• Welfare capitalism allows free enterprise but government resources are used to help the disadvantaged. Industrial capitalism as in Japan.
• Market capitalism as in the US.
• Economic reality may not agree with economic theory. For example, Karl Marx had predicted the collapse of capitalism by the revolt of workers. This did not happen and capitalism was never applied in the pure form that he had envisaged.
• These underlying values of the European economic systems are different from and may contradict Islamic values. Islamic Law discourages government interference in the market unless there are malpractices or if the public interest demands that.
• Theory of value: Essentially says that the pay of a worker reflects the job content is a requirement. It is however difficult to agree on how to define or measure the content.
PARADIGMS AND METHODS: CONCEPTS BASED ON EMPIRICAL EXPERIENCE
• Production possibilities frontier is a curve showing different combinations of 2 products that can be produced in a given quantity of resources.
• Division of labor and specialization increases productivity.
• The profit as an incentive and as a means of resource allocation.
• Demand and supply: The law of demand states that people will buy more of a product if the price is lower. The law of supply states that producers produce more goods at higher prices. Diminishing g returns, shortages, surpluses, and equilibrium, price elasticity of demand, price elasticity of supply.
• Forms of business organization: single proprietorship, partnership, and corporation.
• Public vs private: Public and private property. Public goods and services include roads, schools, police, fire, etc.
METHODOLOGICAL TOOLS
• GDP is the retail value of all goods produced in the country in a year. It is measured using expenditure or income approaches. The expenditure method totals expenditures by consumers, government, businesses, and foreigners. The income approach uses data from income tax returns.
• GDP can be nominal (not adjusted for inflation), real value (adjust ed for inflation), or per capita (adjusted for total population).
• GDP does not indicate the quality of life. A high GDP may be associated with a poor quality of life and vice versa.
• GNP includes interest and dividends. GDP and GNP exclude the underground economy.
• Prediction of economic trends using leading economic indicators.
• European economics uses models to simplify complex economic phenomena. The models are based on simplifying assumptions and are used for prediction. The predictive value of these models is limited because they are based solely on material parameters and ignore other influences on human behavior that affect economic trends.
ROLE OF GOVERNMENT
• Externalities: The government has to take action to correct negative externalities. These arise when a third party who is neither a consumer or a producer pays a price associated with the product.
• Social welfare is part of income redistribution. The transfers may be in cash or in kind.
• Taxation: Taxation is based on 2 principles: taxes are by those who benefit or taxes are paid according to the ability to pay. Taxation may be progressive (the richer pay a higher proportion of their income), regressive (the poor pay a higher proportion of their income), and proportional (everybody pays the same proportion of the income), regressive (the poor pay a higher proportion of their income ), and proportional (everybody pays the same proportion of the income).
• Unemployment: the government has a duty to create jobs.
• Inflation: government should control the value of the currency. Inflation may be demand-pull (demand > supply) of cost-push (higher cost of production leads to higher prices). Inflation hurts creditors and those with fixed incomes. Inflation benefits debtors. Inflation will lead to higher interest rates and thus reduce borrowing.
• Poverty mitigation or eradication: poverty is a relative term. A distinction must be made between income (flow of money) and wealth (accumulation of assets). Income distribution may be egalitarian or highly skewed.
ISLAMIC EPISTEMOLOGICAL CRITIQUE
ISLAMIC DISCIPLINE INTRODUCTION