Islamic Studies (Islamabad) 17:2 (1978)

ETHICAL FOUNDATIONS OF ISLAMIC ECONOMICS

Syed Nawab Haider Naqvi

Islam is a self-sufficient entity, with clearly defined features-an

arabesque wherein reside the religious, economic and social dimensions,
providentially equilibrated to form a unity. It contains complete guidance
for man in spiritual and mundane matters. The Qur'gn has advised all
mankind to seek God's mercy in both: "Our Lord! Give unto us in the
world that which is good and in the Hereafter that which is good.. ."
(2201). The way to Heaven, according to Islam, passes through the Earth.
In fact, the Qur'gn condemns misplaced self-denial. "Say: Who hath
forbidden the adornment of Allah which He hath brought forth for His
bondman, and the good things of His providing?' ((732). Islam's origina-
lity lies in unifying the other-worldly and the mundane aspects of man's
life, and in establishing a correct equilibrium between them.

The prefiguring vision of man in relation to his environment that

Islam presented to the world at the beginning of the seventh century A.D.,
got obscured as the Islamic world moved away from the Centre. This
divergent movement was helped by a decline in the spiritual values among
the Muslims and the rise of the cult of materialism in the West. The colo-
nial era, which gathered momentum in the 18th century, also fostered the
cultivation and propagation among Muslims of the secularistic-materia-
listic values of the West. The cumulative effect of all these forces, buttres-
sed by the powerful weapons of modem science and technology, was to
undermine seriously the faith of Muslims. In fact, many a frustrated sou[
blamed Islam for his economic backwardness.
For a time, the victory of the Western value system over Islam's
was complete; or'so it seemed. However, the West, though it appeared
to be regenerated intellectually, had in fact degenerated through spiritual
decadence. Excessive materialism, in the end, proved to be self-destruc-
tive.1 There has occurred, as a result, a remarkable resurgence of in-
terest throughout the Muslim world in the Islamic way of life. Economic

© Dr Muhammad Hamidullah Library, IIU, Islamabad. http://iri.iiu.edu.pk/

106 S.N.H. NAQVI

prosperity among the oil-rich Muslim countries has forced even the Western
countries to take Islam seriously, if only for transitory political ends.

Yet the modem Muslim looks back on the Islamic heritage with
bewilderment. The world has come a long way since the Middle Ages.
It has become much more complicated than it ever was; and easy solutions,
which sufficed in those halcyon days of ascetic simplicity, have become
inadequate in the modem world. What is the Islamic 'way' of solving these
intricate economic problems? The situation becomes more difficult as
we do not have a model Islamic economic system anywhere in full opera-
tion, which can be 'simulated' and generalized to form the basis of Islamic
economics. No doubt, Muslim philosophers, like al-FkBbI, Tiid
and Ibn Khaldiin, wrote extensively on economics;z yet they all belonged
to a different socio-economic milieu.

While it is true that the Islamic way of life forms a self-sufficient

orbit of social, economic and moral values, it is by no means insular.
It is complete in terms of given socio-econoinic parameters, which change
with time, but is not closed with respect to future potentialities. In fact,
"Islam was given providentially the power to synthesize, to integrate and
absorb what was in conformity with its perspective from previous civili-
zation."3 As a living religion, Islam cannot fail to absorb from its
surroundings what conforms to its own native genius. In particular, there
is nothing wrong with assimilating Western thought into Islamic economics.
After all, Muslim philosophers did study Pythagoras, Plato and Aris-
totle to propound the Islamic point of view on science and metaphysics,
in a language which even non-Muslim philosophers and scientists could
understand.

How can this task be accomplished in the field of Islamic economics

-the task of transforming and integrating into the Islamic pattern the
extant economic wisdom, most of which has evolved in the Christian West?
It is important to remember that this assimilation and integration cannot
be done by an indiscriminate levelling out into uniformity what essentially
runs counter to basic Islamic ethical values. The first step in the elabora-
tion of an Islamic economics is to recognize and understand clearly what
these fundamental ethical values are, in order to discover the touchstone
by reference to which can be established the Islamic (or un-Islamic) nature
of given economic principles or economic systems.
 ETHICAL FOUNDATIONS OF ISLAMIC ECONOMICS 107
THE ANALYTICAL FRAMEWORK
The essence of scientsc method is to discover a general theory,
which can unify particular theories of a discipline with respect to its central
features.4 Any such fruitful generalization presupposes a limited number
of restrictive hypotheses which can explain a wide range of phenomena.
The aim of this article is to outline a "general" theory, which can "span"
the essential features of an Islamic economic system. Its basic insight
is the observation that Islam's ethical system provides such a "unifying
principle."

Our approach in this study, therefore, has been to formulate a

minimum number of ethical axioms, which adequately summarize the basic
Islamic views on the philosophy of life. Such an axiom system furnishes
the framework within which to study the concrete objects of an Islamic
economy. Then, through the process of logical deduction, we arrive at a
set of economic principles which can be recognized as unambiguously
Islamic.5 The general criterion of accepting any existing "alien" economic
principle into the Islamic fold is that it must satisfy all the axioms simul-
taneously. The choice of this method was dictated by the inapplicability
of inductive method for want of a fully-functioning Islamic system.

Such an analytical technique is warranted because the subjective

approach, so common in the literature on Islamic economics, must be re-
placed by scientific objectivism in order to minimize the element of personal
idiosyncracies. The four ethical axioms-Unity, Equilibrium, Free Will
and Responsibility-described in the next section, seek to provide a
set of necessary and suflcient conditions for Islamic economics: not only
does an Islamic social ordering imply these axioms; but these axioms also
imply a social rank ordering based on the teachings of Islam. Such a claim,
however, constitutes a refutable hypothesis and needs at least an
heuristic proof. The necessary part of this hypothesis is proved if it can
be shown that the set of axioms is 'independent'. Its sufficiency also fol-
lows from the demonstration in this article that all the basic principles of
an Islamic economy can be derived from the given set of axioms.

However, it should be noted that a full validation of such a claim,

particularly that relating to the consistency of the axiom system, can be
substantiated only by a thorough research on Islam, based on the Qur'in
108 S.N.H. NAQM

and the Sunna. It may turn out that the set of axioms, stated below, is
smaller and may, therefore, be enlarged by adding more axioms to the set.
The effect of this enlargement of the set will be to make the ceriteria
of 'acceptability' even more 'restrictive'. Also, in this case the axiom
system, described below, will constitute only necessary but not sufficient
conditions for a truly Islamic economic order. The reverse possibility of
the 'contraction' of the existing criteria set can also not be ruled out.
It may be argued, for instance, that while Equilibrium is implied by Unity,
Responsibility is implicit in Free Will. The set may therefore be contrac-
ted to only two, dropping Equilibrium and Responsibility as additional
axioms from the set. However, as pointed out later in this study, the
axioms of Unity and Equilibrium constitute the vertical and horizontal
dimensions respectively of the Islamic ethical system; and are, therefore,
(mathematically) 'independent'. The same holds for the third axiom of
Free Will, which also is independent of both Unity and Equilibrium. As
for the axiom of Responsibility, from a strictly logical point of view, it is
not independent of Free Will and Equilibrium. However, we have kept
it as a separate axiom only for analytical convenience and clarity. This
decision is, however, based on 'expediency' rather than on logic. At any
rate, our analysis will not be much affected by such a contraction of the
criteria set, since its effect will be only to make implicit what in our system
is explicit, without invalidatingit; which, incidentally, is a decisive argument
against any such contraction.

THE ETHICAL VALUES OF ISLAM

Man, in the Islamic perspective, is not the one "fallen" with "ori-
ginal sin", but a theomorphic (not anthropomorphic) being, with some-
thing God-like in him. The Qur'iin explicitly attests to this exalted state
of Man's situation: "So, when I have made him and have breathed into him
of My spirit" (15:29).6 Like the universe around him, his sinner self
has been chosen by God to reflect His glory:" We shall show them Our
portents on the horizons and within themselves until it will be manifest
unto them that it is the Truth" (41 53). Man could not have been assig-
ned a higher place in the scale of the Universe than be the reflector of God's
portents.

By virtue of his exalted station in the Universe, man has the poten-
tiality of becoming God's vicegerent on Earth; of walking where angels
 ETHICAL FOUNDATIONS OF ISLAMIC ECONOMICS 109
fear to tread, and of ultimately becoming crystallized in immortality.
At the same time, man is prone to avarice and given to love for material
possessions: "And lo! in the love of wealth he is violent". (100:8). Also,
"if you possessed the treasurs of the mercy of my Lord, ye would surely
hold them back for fear of spending, for man was ever grudging." (17 :100).

The remarkable thing about Islam's ethical system is that it combines

the soaring idealism of man's spiritual ascent with a deep concern for his
worldly attachment, which within specified limits, has been willed by God.
Its ethics are based on the clear recognition that the basic traits of man's
nature can at best be neutralized at a personal level; they can never be al-
together abolished on the plane of our social existence. Hence, while every
effort must be made to cure man of his weaknesses, his natural love for
self-interest cannot be altogether ignored. No ethical system which
suspends natural laws for the benefit of some kind of hypocritical idealism
can find any place in a revealed message; for only God knows his creatures
best: "We verily created man, and We know what his soul whispereth to
him, and We are nearer to him than his jugular vein." (50:16).

This integrated, balanced and realistic view of man's nature and his
social role, exclusive to Islam, can be summarized exactly by four ethical
axioms.

FUNDAMENTAL ETHICAL AXIOMS

(a) Unity: Islam's ethical system, which encompasses man's life

on this earth in its entirety, resides eternally 'prefigured in the concept of
Unity. This concept forms the cornerstone of the Islamic message and
bears out all Islamic arts and sciences.7 It shows, within the compass
of one immaculate, divinely revealed vision, the inter-relatedness of all
that exists. Indeed, in the Islamic view, which is perfectly coordinated
and necessary, the Universe, this life on earth, and man himself all form
a Unity, wherein the perceptible and the imperceptible, material abilities
and spiritual powers coalesce and intersperse with the theomorphic charac-
ter of man. Through the direct knowledge of all things created, that alone
makes a unified view possible, the dream of a humanity marching towards
the ultimate Truth can be realized on the Earth. The Qur'iin is explicit on
this point: "But seek the abode of the Hereafter in that which Allah hath
given thee and neglect not thy portion of the world." (28:77).
110 - S.N.H. NAQVI

The Islamic ethical conceptualization, of which its economic system

is only a subset, must therefore be seen from the vantage point of Unity,
which can be described as the "vertical" dimension of Islam. According
to this view, economics gets integrated with ethics and gains strength
from it; for it is only with the aid of Islamic ethics that a rank ordering of
economic preferences is possible in an Islamic society. Indeed, an Islamic
economic system is meaningless outside of the matrix of an Islamic ethical
system.
(b) Equilibrium: In addition to the "vertical" dimension, contai-
ned in the concept of Unity, Islam has also a "horizontal" dimension,
symbolized by Equilibrium.8 In fact, Unity carries within itself all the
qualities in an "undifferentiated equilibrium", so that any "rupture"
of it is a positive evil.9 Equilibrium exists in the very order of the universe:
"-He hath created everything, and hath meted out for it a measure."
(25 :2) ; also: "Lo ! We have created everything by measure." (54 :49).
This fundamental Equilibrium must hold in our individual lives also.
The innermost of each individual, itself a living tabernacle of Truth, is not
only unified with it vertically as a homogenous whole, but is also equili-
brated with respect to the elements within this whole. 1 0 Within ourselves
there is a world of conflicting emotions, wild instincts and errant desires
which must be held together in correct balance to produce a balanced and
just human being. Furthermore, being an integral part of this universe,
man must live in harmony with it.11
The idea of social justice is only one aspect of universal Equili-
brium. The Qur'ln enjoins:
"-Be Ye staunch in justice, witnesses for Allah, even though it
be against yourselves, or (your) parents or (your) kindreds, whether
(the case be of) a rich man or a poor man, for Allah is nearer unto
both (than ye are)-" (4:135).
An undue concentration of wealth or of power are both inimical to the
Natural Law, since both of these disturb economic and political equili-
brium. The Qur'gn ordains: "Wrong not mankind in their goods"
(26 :183). This injunction warns against producing social and economic
disequilibrium. Hence equilibrium must hold in all aspects of human
society. And one of the most important modes of realizing Equilibrium
is precisely an accord between the sacred Law relating to man as such and
the law relating to society.
 ETHICAL FOUNDATIONS OF ISLAMIC ECONOMICS 111
(c) Free Will: Man has been endowed with a free will. This
follows from the theomorphic character of man. Only God is absolutely
free, but man is also relatively free since God has willed it so. Because of
this faculty, man not only has the capacity to become God-like but, exer-
cising his free will, can also deny God.12 This freedom to accept or
reject followed from man's acceptance, even before creation, of a burden
which no one else could take. The Qur'an relates this eloquently: "Lo!
We offered the trust unto the heavens and the earth and the hills, but they
shrank from bearing it and were afraid of it. And man assumed it.
Lo! he hath proved a tyrant and a fool." (33:72). Man alone was thus
given the power to choose between good and evil, to separate the grain
from the chaff.

His theomorphic character, combined with Free Will, assigns man

to the most distinguished niche in the universe. It also follows that de-
priving man of his natural freedom is to degrade him below his God-
given stature and produce disequilibrium in the social framework. Any
such move is, therefore, against the fundamental laws of the universe.
Hence the absolute need for maintaining it in any viable social ordering.13
(6) Responsibility: Within the grand Unity that lords over this
universe, man is free. However, his freedom must be counter-balanced by
"responsibility", if only to satisfy the dictates of nature's equilibrium.
Man, having opted for the power to choose, must logically endure the
consequences of this power. The Qur'Bn is explicit: "Remind (mankind)
hereby lest a soul be destroyed by what it earneth." (6:70). The Qur'Bn
warns :
"Say: 0 mankind! Now hath the Truth from your Lord come unto
you. So whosoever is guided is guided, only for (the good of)
his soul, and whosoever erreth. erreth only against it. And I am not
a warder over you." (10:109).
The effect of the doctrine of responsibility is to curtail man's natural
freedom, mainly by placing ethical constraints on his social behaviour.14
While man cannot be denied his natural freedom, the cult of unbridled
individualism is also not allowed by Islam. Even pure logic should con-
vince us that unlimited freedom implies unlimited responsibility, which is
a contradiction in terms. At any rate, according to the Qur'Bn, man can
take only limited responsibility: "Allah would make the burden light
112 S.N.H. NAQVI

for you, for man was created weak." (4:28). It thus follows that his free-
dom must also be limited.

To summarize, the doctrines of Free Will and Responsibility ultima-

tely merge with the law of universal Equilibrium to create a just and fruit-
ful socio-economic order, within the framework of the all-embracing Unity;
and maximize material happiness, without depriving man of spiritual
bliss.
THE ELEMENTS OF ISLAMIC ECONOMIC ORDER
A practical Islamic economic system entails three inter-related issues
(i) We must clearly identify the specific institutional setting, and the
ideological framework wherein a distinctly Islamic economic system must
operate. (ii) The economic objectives of such a system need to be clearly
defined; and (iii) the policy instruments required to achieve the specified
policy objective explicitly stated.15 Our search for an ethically acceptable
solution to these problems must be guided by the axiom system stated
above, namely, Unity, Equilibrium, Free Will and the doctrine of Responsi-
bility. These axioms are our objective criteria set: anything that does not
satisfy these must be rejected. They should also help us compare the
existing economic systems from an Islamic point of view and to determine
what can and what cannot be borrowed from other systems. Such an
analysis is essential because indiscriminate borrowing from "alien" systems,
not in conformity with basic Islamic values, is not permissible: Islam can-
not be "modernized" by destroying or eroding its highly distinctive ethical
base.
(i) The Economic-Ideological Framework

The Islamic system has been variously identified with capitalism,

socialism, or even with welfare state, without laying down any explicit cri-
teria by reference to which the legitimacy of these conflicting assertions
can be tested. The resulting intellectual ambivalence has obscured the
vision of a new Islamic economic order. Within the framework of the
axiomatic approach adopted in this study, we shall make an effort to find
a more probable answer to this problem.
(a) Socialism: Is the Islamic framework socialistic? The tem-
ptation is great to give at least a partially affirmative answer. Not only
in theory, but also in practice, socialism has come to grips with the problem
 ETHICAL FOUNDATIONS OF ISLAblIC ECONOMICS 113
of ensuring an equitable distribution of income among various social
classes. Furthermore, the institution of private property, and with it the
parasitic rentier class of feudal lords, has been effectively routed. The
equalization of the opportunities of education, culture, medical care etc.,
has been carried the farthest in socialistic countries, which were the pioneers,
the idea-givers and the practitioners, in this area. In terms of the Islamic
axiom system, as far as the distribution of iticome and wealth is concerned,
socialism ensures social equilibrium to a much greater degree than any
other system. Furthermore, by mobilizing the labour force effectively for
social reconstruction, socialism also satisfies the axiom of responsibility.

And yet the answer to the question is in the negative: socialism does
not seem to be Islamic. Firstly, and most importantly, socialism negates
the Islamic concept of unity in every possible manner: the notion of the
mutual cooperation and brotherhood has been replaced by that of class
war. The Qur'in preaches the providential oneness of human society by
virtue of their belonging to one religion: "Lo! this, your religion, is one
religion, and I am your Lord, so worship Me" (21 :92). According to the
Islamic message, even the differences of sex, religion and culture are a
means to unity, based on mutual understanding: "0mankind! Lo! We
have created you male and female , and have made you nations and tribes
that ye may know one another." (49:13). Socialism, in sharp contrast,
slices up societies into classes to promote mutual hatred and distrust.
Even the so-called social equilibrium, the Marxian synthesis, is seen only
in terms of cataclysmic turmoil in the passage from a thesis to its antithesis.
Furthermore, man's material desires have been totally divorced from his
spiritual aspirations. This is again a negation of the Islamic ideal of
Unity.
Secondly, while socialism restores equilibrium in the distribution
of income and wealth, it effectively destroys the most fundamental equi-
librium in the distribution of power, political and economic.16 Thirdly,
thanks to the concentration of all power in the hands of the S t a t e i n
fact the ruling elite-the axiom of Free Will is also violated in socialistic
societies.1 7 This is by far the most serious violation of Islam's ethical sys-
tem. As a result, man is reduced in a socialist order to the degrading level
of a cog in a gigantic social machine; and even the mobilization of man-
power, in which socialisUountries take so much pride, is brought about
through draconian m+lles like concentration camps and the so-called
8 .-
2.
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5
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community projects. Islam stznds for a more even distribution of both
power and wealth; but it rejects an unnatural degree of harshness in work
which snuffs out all leisure and happiness from life. The Qur'an beauti-
fully summarizes the deeply humanistic philosophy of Islam: Thus "Allah
would not place a burden on you, but He would purify you and would per-
fect His grace upon you, that ye may give thanks."(5:6). At the same
time, Islam does not tolerate indolence, irresponsibility and sloth: "And
that man hath only that for which he maketh effort." (53-39). Even more
emphatically: "Whatever of misfortune striketh you, it is what your right
hands have earned." (42:30). Thus scapegoats, so popular in socialistic
thinking (e.g., the capitalists), find no place in Islamic thinking. In this
way, Islam induces an even greater personal responsibility than socialism.

Socialism thus destroys social equilibrium by negating human free-

dom, and dissipating the essential unity of all living things envisaged by
Islam. The conclusion thus emerges: Socialism is not only not near to
Islam but is very far removed from it.18.

(b) Capitalism: Is capitalism, then, any nearer to the Islamic

ideal? One can easily be trapped, at the conceptual level, in the following
logical fallacy: Having shown that Islam rejects socialism, one might con-
clude that capitalism may be nearer to Islam since both reject the same sys-
tem with great vehemence. This is, however, a very dangerous conclusion.
Any Islamic edifice raised on such a fallacious reasoning will be the grea-
test disservice to Islam. The falsity of such reasoning will become trans-
parent when analysed in terms of the fundamental ethical axioms.
Firstly, like socialism, capitalism also fails to realize the unity of
life, by overemphasizing man's material values at the cost of his spiritual
aspirations. Indeed, the longing for material acquisitions under a capi-
talistic order soon degenerates into mammonism. This is bad, because
worship of money and lust for material acquisitions dulls human initiative
and dries up the well-springs of happiness, which comes from creative
work. 1 9 From an Islamic point of view, such an attitude is a fatal diver-
sion of man's efforts, which should instead be bent to the realization of his
theomorphic nature Hence, the acquisition of money has been reduced
considerably in the scale of human values in the Islamic perspective. The
Qur'an makes this clear: "Wealth and children are an ornament of life of
the world; but the abiding things, the deeds of righteousness, are better
in Thy Lord's sight for reward, and better in hope"(18-46).
 ETHlCAL FOUNDATIONS OF ISLAMIC ECONOMICS 115
Secondly, capitalism destorys social equilibrium. It allows wealth
to get concentrated in few hands on the grounds that only the rich save and
invest. The institution of private property deepens social disequilibrium
under capitalism and sets up a vicious circle wherein opportunities for
material advancement are preempted by the owners of wealth. As poin-
ted out above, the Qur'ln rejects the closed circle of wealth getting narrower
at each turn: "Wealth does not circulate only among your rich."(59:7).
The failure of capitalism to keep social equilibrium also follows from its
undue emphasis on competition-indeed, cut-throat competition-as a
key to wordly success.20 By contrast, according to Islam, life is a matter
of mutual cooperation and personal responsibility.
Thirdly, while capitalism safeguards Free Will, it violates the axiom
of Responsibility. True, at the collective level, responsibility is forced on
individuals through policies like progressive income taxes and death
duties, yet the individual in such societies is almost entirely attuned to
grabbing rather than giving. Widespread tax avoidance and tax evasion,
hidden from the public eye in a labyrinth of complicated legal systems,
attest to this insensitiveness of the individual to collective responsibility.
In this respect, socialism does just the reverse of what capitalism practices:
it overemphasizes responsibility but destroys human freedom. Islam
spurns both these attitudes.
Welfae State Doctrine: The development of the Welfare State
doctrine in the West, particularly in England and the Scandinavian coun-
tries, was accelerated by the establishment of a Communist state in Soviet
Russia. The objective was to save the West from communism. This
could be achieved only by curing the main ailments of capitalism. The
unorthodox Keynesian remedies-so considered in the mid 30's-focussed
mainly on state intervention to forestall major economic depressions.
Before him, the Cambridge economist Pigou had also 'legitimatized'
state intervention in cases where market profitability of specific investment
projects diverged from its social profitability due to the existence of various
"distorting" factors-like monopolies, external economies. Under these
circumstances the market mechanism cannot maximize social welfare since
market prices no longer reflect their opportunity cost.
This brief review should serve to highlight the middleof-theroad
philosophy of a modem welfare state. Let us examine this philosophy
in the light of the Islamic ethical axiom system. It may be noted that, like
116 S.N.H. NAQVI

capitalism and socialism, a welfare state also fails to ensure the unity of
material preoccupations and spiritual pursuits. It is exclusively oriented
to material welfare. The general orientation is materialistic because of the
secularistic outlook of Western societies.21 Such an attitude cannot last,
even for a short time, in a society reorganized on the teachings of Islam.
It is the only religion in the world which calls attention to the theomorphic
nature of man, endowed with free will; and capable of unlimited spiritual
distinction by reproducing in his individual life that unity which per-
vades the entire universe.

However, apart from this vital distinction, welfare state is the only
institutional framework which, from among the extant economic institu-
tions in the West, comes closest to the Islamic ideal.

It strengthens social equilibrium by ensuring an egalitarian and

democratic social order, by enhancing liberty and honour of the individual,
by providing unemployment insurance, universal education and by progres-
sive direct taxation.

(ii) Economic Objectives of Islamic Society

We next turn to elucidate the economic objectives of a social order

founded on Islamic teachings. Again, the basic criteria of judging the
legitimacy of these objectives will be the four ethical axioms explained
above.

Social Justice: As pointed out above, social justice is an aspect

of universal equilibrium, which forms the cornerstone of Islam's ethical
system. It implies guarantees for man's innate freedom, with the concomi-
tant social responsibility. Furthermore, social justice is not only economic
justice but requires a simultaneous adjustment in all aspects of human life,
as ordained by the axiom of Unity. It follows that a "just" society satis-
fies all of the fundamental ethical axioms and is, by definition, an Islamic
society.

Such a society is based on two well-known maxims: it must not only

secure "from everyone according to his ability", but also provide "to every-
one according to his needs." This general principle forms the basis of a
welfare state, but is in complete accord with the Islamic conception of what
 ETHICAL FOUNDATIONS OF ISLAMIC ECONOMICS 117
is socially just. Essentially, these maxims entail an effective 'separation'
of the requirement to satisfy man's basic needs from his ability to earn it.
This is exactly what Islam seeks to accomplish at the social plane. The
Qur'iin makes this point crystal clear: "And in their wealth the beggar and
the outcast has due share." (51 :19)

However, the redistributive mechanism in Islam is embedded in

voluntary submission to God's will': "And bestow upon them of the wealth
of Allah which he hath bestowed upon you." (24:33) Persuasion rather
than coercion is the basis of the Islamic scheme of ensuring social justice.
The act of giving has been exalted to be the noblest virtue of man ir! pursuit
of spiritual salvation. "Ah, w b a ~will convey unto thee what the Ascent is!
(it is) to free a slave; And to feed in the day of hunger; An orphan near
of kin; or some poor wretch in misery." (90:12-14). Such a message
touches the human heart with a whiff of morning breeze. No forcible
expropriation is warranted for a man prepared to part with his wealth
voluntarily: "Who giveth his wealth that he may grow (in goodness)."
(92 :18).
It should be noted here that socialjustice is not an absolute objective.
For justice is as much ensured by making all men equally happy, as by
making them all equally unhappy.22 Also, social justice can as much be
the property of a stagnant economy as of a dynamic economy. Islam
cannot possibly stand for a justice with unhappiness and economic stagna-
tion. It is a dynamic religion which seeks to maximize man's happiness,
not only in the Hereafter, but also in this world.
There is another aspect of social justice. There is a sense in which
all men are equal; and there is yet another sense in which they are not. All
men are born equal because they all are theomorphic in nature; and have
the God-given potentiality of spiritual ascent. However, this potential can
only be actualized through the acquisition of knowledge; and not all succeed
in doing so. Islam, instead of equalizing, differentiates between those who
have knowledge and those who have not: "Allah will exalt those who be-
lieve among you and those who have knowledge to high ranks." (58:II)
At another place in the Qur'zin, these two aspects of man, equality and in-
equality, have been beautifully brought together: "He it is who hath
placed you as viceroys of the earth and hath exalted some of you in rank
above others, that He may try you by (the test of) that which He hath given
you." (6:166).
118 S.N.H. NAQVl

Employment and Education: Here we consider these objectives as

inter-related: better education leads to technological change, which then
is directed to lowering the capital labour ratios in the case of a labour-
surplus country and raising it in a capital-rich country. If this sequence
holds, more education leads in the long run to more employment. These
two objectives, thus, merge into one: universal education.
An Islamic society must distinguish itself by the excellence of its
educated class. The seeking of knowledge has been declared to be the
sacred duty of man and finding it to be his greatest good fortune. The
Qur'Bn extols both the process of learning and the learned: "He giveth
wisdom unto whom He will, and unto whom wisdom is given, he trully
hath received abundant good. But none remember except men of under-
standing:' (2:269) Also God has advised men to pray: "My Lord! in-
crease me in knowledge." (20:114). It is, therefore, clear that the acquisi-
tion of knowledge in an Islamic society must be subsidized and the men of
learning be assigned to the highest niche. The Qur'Bn makes the clearest
possible distinction between those who are educated and those who are
.
not: " . .. Say (unto them, 0 Muhammad): Are those who know equal
with those who know not? But only men of understanding will pay heed."
(39:9).
It follows that the opportunities to educate oneself should be open
to all equally, without any regard to the accident of their birth. This ob-
servation has a direct policy implication: an Islamic society must provide
free universal education to all. This is essential because, starting from a
position where men are differently endowed with wealth and property,
education has a great equalizing effect in case the opportunities to get it
are open to all who deseme. In this way education contributes to social
equilibrium. It guarantees human freedom; and brings up the type of
people who not only know the worth of their natural freedom but also have
a special conscience and are prepared to take up the corresponding respon-
sibility voluntarily. It helps man also to unify, at least in his own person,
this-worldly and the other-worldly desires and aspirations.

Economic Growth: As pointed out above, social justice has meaning

only in the context of a growing economy. Economic growth enlarges
national wealth, 'which then becomes available for consumption and capital
formation. Over a period of time, the main policy objective of an Islamic
society shall be precisely to achieve an equilibrium between present and
 ETHICAL FOUNDATIONS OF ISLAMIC ECONOMICS 119
future consumption. In technical language, the policy-maker will seek
to maximize an integral of the flows of consumption over a specified period
of time, subject to the all-important constraint of providing enough resour-
ces for capital formation.

It must be noted that maximizing the growth rate of national inwme

per se cannot be the primary objective of an Islamic economy. This may
sound paradoxical; but is true since economic growth is a function of in-
vestment. which in effect constitutes a postponement of current wnsump
tion and amounts to sacrificing the welfare of the present generation for
posterity. In Soviet Russia, for example, untold sufferings were imposed
on the generation which lived on the morrow of the Bolshevik Revolution
in order to let the national income grow at the fastest possible rate. High
rates of reinvestment in succeeding years were used to impose a dispropor-
tionate amount of austerity on one generation after another. Most of
this growth potential has however been used for defence production to stay
one up in the armament race, instead of contributing positively to human
happiness.
Such a strategy has nothing to do with the Islamic ideal; for it
violates the axioms of equilibrium and human freedom, with an unnatural
(and therefore unIslamic) emphasis on responsibility. Since economic
progress is bought at a very high price in terms of the sacrifice of human
happiness and spiritual advance, a helter-skelter growth falls right outside
the unitary scheme of things envisaged in Islam.23 In sharp contrast to
the communist strategy, the welfare states of Western Europe have settled
for a lower growth rate, precisely because of their commitment to the egali-
tarian objectives of s o d policy which, in turn, set an upper bound on feas-
ible growth rates. Such a humane attitude is in full accord with the mora-
listic spirit of Islam.
We now come to a very important point: what should be the place
of individual initiative in this growth-oriented Islamic economy? The
answer should now have become obvious: Islam assigns a central role to
the individual, by virtue of the axioms of Equilibrium and Free Will. At
the same time, the unbridled individualism of laisser faire is also not accep
table since it negates the axiom of responsibility and also upsets social equi-
librium. It follows that the regime of free competition must gradually be
replaced by an order wherein economic cooperation and social harmony
are emphasized. Again, in sharp contrast to socialism, where individual
120 ... S.N.H. NAQVI.

is completely stifled, and to capitalism where it runs wild, the middle-of-

the road philosophy of Welfare State is nearer to Islam than any other
economic system.
The upshot of the analysis presented above can be put briefly: an
Islamic society should aim at providing universal free education in order to
help the individual to realize his God-given potential; and to set in motion
an income-equalizing mechanism of great force. Such a policy will also
activate, to the fullest extent possible, individual initiative, which in free
societies constitutes the primary agent of growth and change. The policy
of unbridled growthmanship will be replaced, in an Islamic state, by a more
moderate policy which eschews unnatural haste and, along the growth
path, makes ample provision for education, health and social welfare.
It is only in a dynamic context that social justice has any real meaning.
Any justice achieved by a profligate squandering of capital resources is con-
trary to Islamic prudence, which insists on social equilibrium and human
freedom along with individual responsibility.

(iii) Economic Policies in an Islamic Economy

Having analysed the basic policy objectives of an Islamic economy,
the final question concerns the choice of specific policy instruments for their
attainment. It may be noted that, as a general rule, Islam insists not only
on the legitimacy of the policy goals but also of the policy instruments,
since both must satisfy, or at least be not inconsistent with the fundamental
ethical axioms of Islam.z4

The specific economic policies suitable to an Islamic society will

naturally be determined by its economic objectives. Accordingly, they
fall under two broad headings: (a) redistributing income, wealth acd eco-
nomic power; and (b) ensuricg economic growth consistent with (a).
The policies concerning educahon and greater employment will be discus-
sed in the context of these two sets of policies. The ultimate test of the
"legitimacy" of specific instruments will again be their conformity with the
ethical axioms.
(a) Redistributive Policies
An Islamic society will have to devise a proper redistributive machi-
nery to correct income inequalities not only on the margin but also intra-
marginally. Equality on the margin will require, over time, an equitable
 ETHICAL FOUNDATIONS OF ISLAMIC ECONOMIC3 121
distribution of the fruits of economic progress, among various classes of
the society. Intra-marginal equality, at any given point of time, will be
ensured by correcting the initial endowments of wealth, symbolized by the
institution of private property. In economic jargon, the former is a flow
concept, while the latter is a stock concept. We will begin our analysis
with the latter.

The Institution of Private Property: The institution of private

property has three dimensions. First is the right of the worker (in
the broadest of the term) to the fruits of his work. If an individual is not
allowed the monetary reward of his labour, the creative instinct in him will
become atrophied; though this line of reasoning, while generally correct,
cannot be pushed too far, for the very best work is done for the satisfaction
that Gmes naturally from all creative work. However, it will be legiti-
mate, from an Is arnic point of view, to concede one's right to the income
received from his work. The labour theory of value, while formally incor-
rect and practically unworkable because of the impossibility of "imputa-
tion", has an element of truth which must be recognized to avoid unplea-
sant social consequences.

Second, the right of an individual to own some property in the

form of cultivable land or a house can also be sociallyjustified. Everyone
needs some security. However, the need for security comes essentially
from fear-a fear of the unforeseen. Even the so-called ordinary prudence
is mostly nothing but disguised fear. Islam minimizes fear by making man
to rely on God's Mercy. The QurPn is explicit: "Say, 0 My slaves who
have been prodigal to their own hurt: Despair not of the Mercy of Allah,
who forgiveth all sins. Lo! He is the Forgiving and Merciful". (3953).
This soul-lifting verse destroys in one sweep fear and awakens hope;
for hope is the well-spring of individual initiative on which all creative
activity, including economic activity, depends. Within this frame of
thought, the desire to own property will be checked, in the same measure
, as man conquers that fear which arises from purely psychological reasons.

Thirdly, private property is also a symbol of social distinction.

What makes it worse, most of such property is not due to one's labour.
This is a controversial aspect from a social angle. "Man shall have
othing but what he strives for." (53:39) At the same time, Islam, by the
Law of Inheritance, formally recognizes the legitimacy of inherited wealth.
122 S.N.H. NAQVI

But should this recognition be taken as an unlimited licence for the insti-
tution of private property? The Law of Inheritance, so often cited in its
support, may itself be considered as a distributive mechanism designed to
weaken the power base of this institution. This interpretation, read along
with the Qur'anic verse just quoted above, points towards an egalitarian
rather than a conservative Islamic view. Hence, steeply graduated death
duties, which tend to dilute over time this institiution, should be consistent
with the Islamic ideal. Redistribution of income will restore social equi-
librium inter-generationally, and ensure responsibility without compro-
mizing human freedom. At any rate, man's unlimited natural right to
property has been rejected by Islam. "To Allah (belongeth) whatsoever
is in the heavens and whatsoever is in the earth." (2:284). Man holds the
right to property only as a trust. "And spend of that whereof He hath
made you trustees" (7:7).

However, it must be pointed out that, in the Islamic perspective,

private property is not looked upon in a spirit of class war, which is ulti-
mately a destroyer of natural equilibrium. Forcible expropriation and
unwarranted nationalization of all land negate the Islamic spirit of solving
such issues in an evolutionary context. There can be no doubt, though,
that steps should be taken to dilute this institution in order to defuse social
tensions. If private property becomes merely a symbol of ostentation and
social influence, then a social upheaval cannot be avoided. Furthermore,
an Islamic society cannot tolerate a bunch of reactionaries blocking all
social reform for fear that it will be directed against them; influence
national outlook through their considerable political power, and obfuscate
the forces of social change which leads to violence. If Islam is against
violence as a solver of social problems, it is even more against the forces
and policies which make revolutions inevitable. In any case, all such
forces, in one form or another, violate all the ethical axioms of Islam;
and must therefore be rejected on these grounds alone. It follows that a
sensible mechanism for controlling private property--e.g., land reforms-
is warranted if only to prevent an inevitable cataclysmic disequilibrium.

At this point it may be interesting to analyse the Islamic injunction

against a positive interest rate in relation to the institution of private pro-
perty. The owners of wealth, including that which they inherit, can lend
money at high interest rates to those who do not have it. The institution
of interest rate, therefore, not only perpetuates the evils of the syst fmeo
 BTIUCAL POUNDATIONS OF ISLAMIC ECONOMICS 123
private property but aggravates it. Through a web of general equilibrium
inter-relations the woners of wealth can live in luxury at the expense of the
society.25 Thus the abolition of interest rate will plug in one, but only
one, source of income inequality. However, this cannot be an end in
itself.
From a philosophical angle every dogma is both a "limited idea"
and an "unlimited symbol" at one and the same time.26 The abolition
of interest rate, in this sense, is only a "limited idea". Logically, one can-
not stop at this point. The institution of interest is in a deeper sense also
an "unlimited symbol" of social injustices, arising out of a grossly unequal
distribution of income and wealth in capitalistic societies-a disequilibrat-
ing factor increasing the 'distance' between the haves and the have-nots.
If interest rate is abolished but what it symbolizes is left untouched, this
"achievement" will not bear any fruit because of the inner contradictions.
Even worse, if the abolition of interest rate leads to the adoption of such
alternative policies which tend to aggravate income inequalities instead of
reducing them, then the whole exercise will not only be self-defeating and
wasteful but considerable harm will be done to the cause of propagating
Islamic values in the modem world.27
Nationalization: The economic case of nationalizing industries
usually rests on the argument that the market does not function optimally
to maximize social consumption and production. There is an element
of truth in the second part of this argument. It is clearly rzcognized in
welfare economics that market imperfections (e.g., monopolies, and exter-
nal ecomomies),28 drive a wedge between the market profitability and the
social profitability of investment projects. State intervention becomes
warranted since, if left to the market, social production (consumption)
will be underexpanded.
The question then arises: what form should this legitimate state
intervention take. It would be logically a non-sequitur to argue that the
failure of the market to achieve the social optimum is by itself sufficient
to prove that the market system should be thrown overboard and all
industries nationalized. It must be clearly recognized that the public con-
trol of business is not the same thing as nationalization. The State can
also regulate the market system, with a view to correcting its imperfections
through fiscal and monetary policies. For instance, a properly-designed
taxcum-subsidy policy can remove the wedge between social and market
profitability arising from external economies.
124 S.N.H. NAQVl

The Islamic point of view in this matter can be easily establishad if

it is remembered that an undue concentration of economic power in the
hands of the state also upsets social equilibrium, and negates human
freedom. Furthennore, such a policy is an expression of distrust in man's
capacity to assume social responsibility. The Qur'Bnic declaration that:
"To God belongs whatever is in the heavens or the earth"~(2284)does
not necessarily imply state control; for, according to the Islamic perspec-
tive, man, in his individual capacity, is perfectly capable of holding God's
treasure in trust.
On the other hand, man's innate capacity to assume such a respon-
sibility is no guarantee that he necessarily will: Man does not always realize
his theomorpic nature. Thus hiker faire, or an excessive trust in the
"invisible hand" guiding economic affairs, does not accord with the Islamic
perspective as well. Furthermore, the assumption, on which the market
system crucially depends, that consumers "reveal" their preferences through
their market behaviour and hence production be reorganized to conform
to these preference, does not fully agree with the Islamic view point. For
just any man's preferences cannot be taken as a parameter of the Islamic
aconomic system, without regard to their social consequences.
It therefore follows that economy-wide nationalization does not
accord with the Islamic perspective. However, a considerable degree of
state control of the economy through W, monetary and other economic
policies is in consonance with it, for the simple reason that laissez faire
also negates the Islamic perspective.
Social Security System: There is another aspect of laissez faire
that is not always noticed. The system of free markets fails also because
it does not make an explicit provision for institutions which equalize the
marginal utility of consumption among all consumers. It then follows
that the state must create some such institutions. One of the most pro-
mising policy instruments is a comprehensive social security system, b a n -
ced out of government's tax revenues-particularly those collected through
a levy of Zukit tax. Such a system will provide a minimum economic
sustenance to every individual of the Islamic society, particularly the old,
the sick and the unemployed among them, irrespective of their
ability to earn. Such a system is clearly Islamic since it restores social
equiliium, upholds human freedom by releasing man from the fear of
destitution, and enables him to assume, with dignity, his social responsi-
 ETHICAL FOUNDATIONS OF ISLAMIC ECONOMiCS 125
bility. To repeat the terse Qur'iinic injunction; "And in their wealth the
beggar and the outcast has due share." (51 :19) Hence the rich are not
doing any favour to the poor if they help them. However, this is not to
say that the poor should not feel grateful for such help.

(b) Growth Policies: So far we have dwelt upon the redistributive

policies in an Islamic society. However, as obsemed above, a redistri-
bution of income (and of power) is not by itself sufficient to maximize social
bliss. It is only in a dynamic context that such redistributive policies be-
come meaningful. For, in a growing economy, a proper redistributive
policy will not only ensure the recipients an increase in their relative but
also their absolute shares in national wealth. Furthermore, a social sys-
tem wherein everybody gains is clearly superior to a static situation where
only a few gain at the expense of others.

However, economic growth can be accelerated in a variety of ways.

There are two main dimensions of this problem: first, economic growth is
a function of investment, mainly financed through domestic saving. Se-
cond, the human factor in the growth process is also crucial. Both
these dimensions are briefly analysed here. This discussion is followed
by a brief analysis of indirect economic controls.
Saving and Investment: In a dynamic context, the processes of
saving and investment are inter-related. More investment requires more
saving; but acts of investment can also provoke additoinal saving. The
latter sequence is mostly the characteristic of market economies, particu-
larly in the initial stages of economic development. Corporate sector is
relied upon heavily to generate the necessary savings to finance reinvestment
activity. This investible surplus grows out of corporate (undistrtibuted)
profits, which are then allowed to multiply through a combination of
liberal fiscal and restrictive import policies and the absence of any price
controls. This sequence was followed in Pakistan during the 6Us.29

Such a policy is premised on the belief that only the rich save and
invest. Thus a conscious policy of promoting saving and investment
through creating inequalities of income and wealth is justified on purely
economic grounds, even though it is conceded to be morally reprehensible.
However, this theory, which is incorrect from a purely economic point
of view also, cannot form the basis of a growth policy in an Islamic society.
Firstly, such a policy destroys the unity of moral and economic considera-
126 S.N.H. NAQVI

tions, so essential in the Islamic perspective. Secondly, it disturbs the

social and economic equilibrium. Thirdly, it frees the capitalistic class of
their social responsibility; while, fourthly, it compromises the economic
freedom of rest of the society. This policy must, therefore, be rejected.
However, this is not to deny the corporate sector a proper place in the growth
process; but only to disapprove of a more or less exclusive reliance on it.
The second sequence of generating more savings directly to finance
additional investment requires, in capitalistic societies, a properly-func
tioning capital market to form the channel through which community's
savings are made available to investors. Furthermore, depending on the
relative scarcity of capital, it can be made availableto prospective users only
at a "price". This price, which will always be high and positive in a ca-
pital-scarce economy like Pakistan's, takes at present the form of interest
rate. A positive interest rate is also required to attract saving and to make
up real losses the fixed income group has to take in an inflationary context.
The dilemma arises for the policy-makers because Islam prohibits ribd
(interest, usury) in all its recognizable forms.
The Abolition of Rib2 There are three fundamental considerations,
which must be kept in view in analysing ribd's prohibition in an Islamic
economy. First, while a zero rate of interest may be a necessary condition,
it is by no means sufficient for an Islamic economic order: a zero rate of
interest does not necessarily imply an Islamic economy; for socialistic so-
cieties are also marked by the absence of the institution of interest rate.
However, an Islamic economy, once fully established, will have no use for
interest rate as an explicit policy instrument.
Secondly, rate of interest is a policy instrument and, therefore, must
not be confused with the economic objectives of an Islamic economy-
which are mainly economic growth, social justice and the achievement of
free universal education. As pointed out above, the institution of interest
is just one fact in the chain of events creating gross economic inequalities.
This matter has been analysed in the previous section and need not be
repeated here.
Thirdly, although in an Islamic economy, the rate of interest will
ultimately disappear, the socially-desirable functions it performs will still
have to be pandered to if the economy is to grow at all. In a static context,
these functions are: (i) ration scarce capital resources; (ii) promote their
economic utilization; (iii) safeguard the real value of cash balances of the
 ETHICAL FOUNDATIONS OF ISLAMIC ECONOMICS 127
savers in an inflationary context. As argued elsewhere, while the first two
functions can be taken care of through a system of investment auctioning,
the third can be performed by a carefully devised scheme of indexing the
bank deposits.30

The theories usually advocated in this context are those of shirka

(partnership) and mudc3raba (sleeping partnership), which remain to be tes-
ted in the real world and hence cannot be meaningfully evaluated. How-
ever, on apriori grounds, their defects seem to outweigh their merits. Firs-
tly, it will make the economy highly sensitive to business fluctuations. A
remedy may be to create a sinking fund into which will be directed the
excessive liquidity flowing into the banks in an inflationary period to
cushion the losses to be incurred in a depression. In practice, this sinking
fund will absorb excessive profits from some industries and finance the
losses of the others. On balance, the depositors may end up with a zero
or very low rate of return, which will not be enough to protect the real value
of bank deposits. Secondly, by the same token, these policies will fail to
perform functions (i) and (ii). Thirdly, this system will be very costly to
operate. Active participation in business will require recruitment of
highly-trained staff to evaluate loan applications. Thus a simple system
will be replaced by a complicated system, with an uncertain impact on the
economy. This last consideration alone can prove to be a decisive argu-
ment against the proposed reform.

In a dynamic context, the rate of interest equals the rate of capital

depreciation, a positive rate of time preference and a secular decline in the
marginal utility of saving due to its growth.31 An Islamic economy, to
remain dynamic, will have to make enough provision for capital deprecia-
tion. To remain just it cannot arbitrarily force a zero rate of time pre-
ference on the individuals, since that would sacrifice the welfare of the
pmsent generation for posterity, giving rise to inter-generational inequities.
This is a common occurrence in socialistic economies; but an Islamic eco-
nomy cannot countenance such gross injustices to the present generation.
Furthermore, the marginal utility of saving will decline with the passage
of time even in an Islamic economy. All these considerations point to a
positive "shadow" price of capital. At present, this shadow price is reflec-
ted, though imperfectly, by a positive rate of interest. If interest is aboli-
shed, then some other means must be found to refict a hard economic fact:
capital is scarce. It can be doled out at an artificial price of zero, only
128 S.N.H. NAQVI

at the cost of a wasteful squandering of nation's capital resources, a cost

which the Qur'gn definitely refuses to tolerate: "0 Ye who believe! Squan-
der not your wealth among yourselves in vanity. . . .". (4:29)
The Human Factor: In development theory and practice the human
factor has generally been neglected only at a heavy cost to society. The
developmental efforts have run aground because of neglecting, in the deve-
loping countries, the crucial role of individual initiative in the process of
economic growth.
The lack of regard for the human factor manifests itself in three
main forms: (i) the employment component of investment projects remains
minimal because of high capital-labour ratios. The result is "immiseriz-
ing growth"-growth adding to, instead of subtracting from, human misery.
(ii) The contribution of human ingenuity, as an important contributing
factor in the development process, is disregarded. Investment in educa-
tion, therefore, becomes a residual and is considered to be merely con-
sumption expenditure. (iii) The objective of maximizing growth rate is
achieved through organizational efficiency, like in Soviet Russia and China,
with no place left for innovative souls, acting in their individual capacities.
As pointed out in an earlier section, the individual cannot be sacri-
ficed in the Islamic framework for the sake of organization. In it the
micro socio-economic unit, the individual, springs into significancecharged
with the task of becoming, not just a cog in a social machine, but the idea-
giver and the prime mover.32 An Islamic society will, therefore, subsidize
the process of expertise formation by promoting universal free education
and by giving monetary and other rewards for meritorious work. The
acquisition of knowledge is the highest form of prayer in Islam because it
activizes the mainsprings of human advancement by enhancing the level
of intellectual sophistication.
The first problem of high capital-labour ratios is related to the pro-
blem of insufficient technological change, which again boils down to inade-
quate education. The countries which have developed the fastest in recent
years are those which succeeded in innovating new techniques of produo
tion, without which no big "leap forward" can take place. The problem
of unemployment is also traceable to the failure of the developing countries
to invent a technique of production which suits their own resourm endow-
ment. These matters have already been discussed in the previaus sections
and need not be repeated here.
 Indirect Economic Controls: The general picture of an Islamic
economy, emerging from the analysis presented so far, is remarkably free
of both the collectivizing zeal of socialism as well as of the individualistic
anarchism of capitalism. The State features prominently in it; but, within
the specified ethical limits, leaves completely unhindred the creative ins-
tincts of the individual in order to maximize the growth impulses emanat-
ing from this source. In such a scenario, government's regulatory func-
tions will be performed through monetary, fiscal and investment controls,
to enable the market to behave in a socially desirable fashion-i.e., to main-
tain social equilibrium.
(a) Monetary Policy: Complexities will arise for the policy-
makers because the rate of interest will be practically abolished in a fully-
jhctioning Islamic economy. The Central Bank will thus be deprived of
an important policy instrument, impairing its regulatory powers to control
the level of liquidity in the economy. The Bank will also have to abandon
the Open Market Operations, which it undertakes mainly to keep the
interest rate structure-the long term rates and the short term rates-pro-
perly aligned. For instance, the government may want to encourage
domestic investment by lowering interest rates, without impairing country's
balance-of-payments position through an outaow of long-term capital.
This can be done by designing the open market operations in such a way
that short rates are lowered while keeping up the long rates-the so-called
"Operations Twist". An Islamic State Bank will have to find other
indirect means of achieving such results.
However, in practice, the absence of these two policy instruments
will not cripple an Islamic State Bank. In the post-war world even the
Bank of England have found it difficult to manage the economy only through
the manipulations of the Bank Rate and the open market operations. As
a result, increasing reliance has been placed on varying the statutory deposit
ratios to keep the commercial banks' liquidity at the socially desired level.
Even more importantly, "moral suasion", under which occasional "advice"
is given by the Bank, is used to persuade the financial institutions to follow
proper monetary policies.33 Neither of these policy instruments, which
have also been used by the State Bank of Pakistan with varying degrees of
success, runs counter to the Islamic ethical system.
(b) Fiscal and Investment Policies: The prohibition of interest
rate will also have important consequences for the role of fiscal policy in
 130 S.N.H. NAQVl

an Islamic economy. The government normally allows accelerated depreci-

ation allowances, tax holidays etc., to encourage new investment in speci-
fic industries. The wisdom of such over-strong fiscal incentives can be
questioned on purely economic and administrative grounds. Such incen-
tives result in a significant contraction of the corporate tax base and make
tax administration difficult. However, their legitimacy becomes all the
more questionable, shou!d capital resources be provided to industries
literally at a zero price, which itself will be a substantial monetary subsidy
-the extent of the subsidy being calculated as the differential between the
shadow price of capital and the zero price. It follows that in case the
monetary policy instrument is completely "frozen", this will result in a
corresponding "freezing up" of the fiscal policy instruments also. This
is an undesirable state of affairs and reinforces the argument against arbit-
rarily driving to zero the price of capital, in a regime of widespread capital
scarcity. If the rate of interest is formally abolished, means must be found
to raise the price of loaned capital towards its opportunity cost, say, ih-
rough investment auctioning. In that case, k a l policy will still remain
economically "operational".
In the realm of tax policy, the emphasis in an Islamic economy will
shift more towards broadening the tax base rather than increasing the tax
rates. This shift in tax policy, which incidentally is in accord with modem
thinking in public hance, is warranted by the increasing concern for social
justice and economic growth, based on individual initiative. A broaden-
ing of the tax base--e.g., by withdrawing overstrong fiscal incentives-will
permit a substantial lowering of tax rates, which alone count for the mar-
ginal investor. In an Islamic society the overemphasis on corporate sav-
ing, usuafly inflated through a conscious policy of increasing income inequa-
lities, will have to be done away with to ensure social equilibrium. Fur-
thermore, the suggested reform wili also de-emphasize indirect taxation in
favour of direct taxation, again the coroilary of the axioms of Equilibrium
and Responsibility.
A distinguishing feature of an Islamic fiscal system should be to
establish a visible link between taxation and expenditure. This is very
important. If the benefits that tax payers themselves receive, or are rece-
ived by the needy in the society, become visible to them, the psychological
atmosphere will be much improved. This will minimize the element of
tax fraud. In the Welfare States of Scindinavia the incidence of tax eva-
sion and avoidence is the lowest in the world, by comparison with other
 ETHICAL FOUNDATIONS OF ISLAMIC ECONOMICS 131
countries, simply because the tax payers know that what they themselves
get or what the poor in the society receive, is much more than what they
have to pay by way of tax. In an Islamic society, Zakiit, which will be one
of the many other taxes imposed, possesses this characteristic par excef-
lence: not only the tax rate but also the recipients of Zakiit funds have
been specified in advance.
Of course in modern societies, particularly in developing countries
like Pakistan, the need for growth-oriented investment obscures the visible
link between taxation and expenditure, but such things should be explained.
What is being advocated here amounts to a system of public accountability,
the need for which can be understood better if it is remembered that large
sums of tax money are lost through fraudulent tax practices. However,
such practices cannot really be eliminated unless the taxation system ceases
to be unnecessarily oppressive and the public expenditure acquires a
"face"--right now it is by and large "faceless"-which can be seen and
recognized by the tax payers.
CONCLUSION
We conclude that the first step towards understanding the economic
principles suitable to the Islamic perspective on life is to understand clearly
its ethical system. However, this system must be summarized into a set
of axioms which, in a mathematical sense, must be both necessary and suffi-
cient. Unity, Equilibrium, Human Freedom and Responsibility provide
such a set.
After applying this criteria set to the existing economic systems of
Socialism and Capitalism we found that these systems do not seem to be
Islamic, since they violate almost all the ethical axioms. Furthermore, the
Welfare State comes nearest to the Islamic ideal by satisfying three axioms
of Equilibrium, Free Will and Responsibility. However, it is not entirely
Islamic, since it too violates the axiom of Unity. This also conhms our
hypothesis that there exists an imperative need to develop a fully Islamic
economic system, because it alone can truly satisfy all the fundamental
ethical axioms.
Having established this, the next step is to identify the economic
objectives suitable for an Islamic system, and the specific policy instruments
which can help achieve them. Social justice, economic growth, universal
education and higher employment constitute such objectives, since they
132 S.N.H. NAQVI

help the society to h d a system which can satisfy all the ethical axioms.
In our search for appropriate policy instruments we were led to reject
abolition of private property and complete nationalization of the means of
production on the one hand; and the system of free markets, with an ex-
clusive reliance on the corporate sector, on the other. An Islamic state
will also have to impose death duties to dilute inherited wealth and to pro-
vide a minimum of income to the sick and the poor and the unemployed,
irrespective of their ability to earn. An Islamic government will, however,
be an important regulator of the economy, using mainly fiscal, monetary
and other indirect controls which regulate, but do not supplant, the market
system. The rate of interest will have to go as a policy instrument in an
Islamic economy. Its socially-desirablefunctions will, however, have to
be performed, simply because the price of capital must reflect its scarcity
and a mechanism be found to protect the real value of saving in an infla-
tionary context. An important aspect of the Islamic fiscal system will be
to establish as far as possible a visible link between tax policy and expen-
diture policy, with a marked emphasis on public accountability- on giving
a recognizable "face" to government expenditure. Furthermore, a better
balance will have to be achieved between direct and indirect taxes.
In this study we did not aim at providing a complete economic sys-
tem. We have rather confined ourselves to intreduce a scientsc method
of analysis, and to set up normative standards which can serve as guide-
posts in our intellectual venture into the unknown. Along this perilous
road there are opportunities and there are temptations. One may be
tempted to accept as gold whatever glitters in the shop window of the West;
and act ostrich-like. accepting blithely and mindlessly what is there already,
forgetting the intellectual storm that rages around him. The daring
souls will, however, like to take up the opportunity to realize their true
potentialities-as innovators and idea givers, instead of being condemned
eternally to imitate blindly what others do.
In this intellectual endeavour one must always remember that the
dark recesses of our thought and the blind spots of our action can never
be completely eradicated unless economic systems are founded on ethics
which unifies man's theomorphic potentialities and his legitimate material
desires, ensures social equilibrium, guarantees human dignity, and pre-
pares men to assume their full responsibilities towards society. Only
then will individual initiative blossom forth, innovating and creating, to
become the sheet-anchor of a process of change, combining economic
growth with social justice.
 ETHICAL POUNDATIONS OF ISLAMIC ECONOMICS

NOTES
For an excellent discussion of this theme see S.H. Nav, Islam and the Plight of the
Modern World,(London: Longman, 1975),esp.Chs. 1,2. At a different level of expo-
sition a similar theme, the essential "naivety" of the modern man, recurs in Firthjof
Schuon, Lkhtson the Ancient World,(London: Perennial Book, 1965), esp. Chs. VI
and W.
For a valuable discussion of the origins of economic thought among the early Muslims
see, Rafiq A b e d , "The Orign of Economics and the Muslims - A Preliminary
Survey," Punjab Universitv Economist. Vol. VII, Number 1, June 1969. For a brief
discussion of Ibn Khaldiin's contribution to economic science, and the relevant
references, see Note 2 of my "Islamic Economic System: Fundamental Issues,"
Islamic Studies, XVI, No. 4, (Winter 1977), pp. 342-43.
S.H. Nav, Ideals and Realities of Islam, (London: Gwrge Allen and Unwin, 1966).
p. 36.
P.A. Samuelson, Foundations of Economic Analysis (New York: Atheneum. 1947),
reprint 1965, esp. Chs. 1 and 2.
This approach is know1 as the 'axiomatic' approach and forms the basis of
mathematical logic since the time of D. Hilbert, an outstanding mathematician.
Fullest development of such an approach is, however, found in K. Popper,
The Logic of Scientific Discovery, New York (1959). See also his, "Three Views
Concerning Human Knowledge", Contemporary British Philosophy. (1956) Vol. m.
My attention to this source was d m by Dr. A~gharQadir, Assistant Professor of
Mathematics, Quaid-i-A'jarn University.
All English translations of the Qur'inic verses quoted in this article are from M.
Pickthal, The Meaning of Glorious Qur'lfn. (London: George Allen and Unwin.
1930). The first number in the parenthesis refers to the chapter in the Q u r ' a while
the second indicates the verse (rlyat).
This aspect has been explicitly emphasized in the scholarly w0rk:S.H. Nagr, Science
and Civilizationin Is&m, New American Library (1968). However, a complete
development of Unity in relation to Islamic social system is given in Sayyid Qutb,
'Islamic Approach to Social Justice," Ch. 8 in Khurshid Atgnad (ed.) Islam, its
Medng and Message (London: Islamic Council of Europe 1976), However,
the analytical edge of Qutb's profound paper, has been considerably blunted because
it does not make explicit the horizontal dimension of Islam without which the pro-
blems of social justice cannot be adequately handled.
The chamcterization of Islam as having a 'vertical' and a 'horizontal' dimension is
ma& abundantly clear in the profound work: Fritbjof Schuon. Understding LPkuu,
(Mandala Edition, Unwin Paper-backs, 1976).
134 S.N.H. NAQVI

9. Compare Frithjof Schuon, l%e Transcendkt Unity of Religions (London: Harper

and Row, 19751, p. 114. We have substituted the word Unity for Existence used by
Schuon. See also Schuon. Islam and the Perennial Philosophy, (1976), (World of
Islam Festival Publishing Co. Ltd.. 1976). "It is the aim of Islam to combine the
sense of the Absolute with the quality of Equilibrium.. . ."(p. 23).
10. In fact, in an 'historical' perspective. Islam itse1f:represents a providential synthesis,
equilibrating perfectly and finally the verious elements of the Divine Message. As
Frithjof Schuon has profoundly remarked, "the equilibrium between the two Divine
aspects of Justice and Mercy constitutes the very essence of the Mohammedan
Revolution, in which it rejoins the Abrahamic Revolution," op. cit., p. 96. This also
explains the logic of the Q u r ' u c injunction: "So follow the religion of Abraham,
the upright. " (3:95) For the religion of Abraham represented an ''undifferentiated
equilibrium", between Justice and Mercy, the exoteric and the esoteric, which Islam
providentially sought to re-establish. Indeed, it is equilibrium which distinguishes
the Islamic concept of Unity from that of the Jewish and of the Christian religions
and aligns it with that of the original Abrahamic religion.
11. Social equilibrium must be maintained not only in material terms (e.g., an equita-
ble distribution of wealth) butalso, and even more importantly, in terms of an equit-
able distribution of self-respect among the haves and the have-nots. The rich are not
allowed to exchange their money for the self-respect of the poor. The Qur'hic
denunciation of such upright attitudes among the givers attests to Islam's total com-
mitment to upholding human dignity: "0 Ye who believe! Render not vain your
almsgiving by reproach and injury, like him who spendeth his wealth only to be seen
of men and believeth not in Allah and the Last Day. His likeness is as the likeness
of a rock whereon is dust of earth; a rainstorm smiteth it, leaving it smooth and
bare. ..."(2:264).
This aspect has been pointed out in the two most profound works on Islamic philo-
sophy by S.H. N a ~ r Ideals
, and Realities.. .., (op. cit.); and by Schuon, (1976),
(op. cit..).
Schuon has beautifully remarked: "Islam is a religion of certitude and equilibrium".
op. cit; p. 16. Certitude comes from unity, while "free will", if not associated with
equilibrium, will result in pure 'noise'.
For an excellent discussion of this aspect of Islam's ethical system see Syed Ameer
Ali, The Spirit of Islam, (London: Christophers, 1922), esp. Ch. 10.
The discussion in this section enlarges considerably the analysis presented in my
"Islamic Economic System: Fundamental Issues", Islamic Studies (Winter 1977).
The reader may also consult the admirable piece: M.U. Chapra, "Objectives of
Islamic Economic Order," in Khursheed A4mad (ed.), op. cit.. Ch. 1 1 .
Bertrand Russell has discussed at great length the central importance of the power
motive in human affairs. "When a moderate degree of comfort is assured both
individuals and communities will pursue power rather than wealth." He seeks to
 ETHICAL FOUNDATIONS OF ISLAMIC ECONOMlCS 135
prove that power is to social dynamics what energy is to physics. See his, Power:
A New Social Analysis (London: Unwin Books, 1938). p. 9. If Russell's p-p-
tion is right, the concentration of all power in the hands of the State destroys the
social equilibrium in such a way as can neverlbe restored by the income-distribution
palliatives advocated by socialism.
Betrand Russell has pointed out, "there can be no adequate individual freedom
where the state is all-powerful, even if the state be a socialist one." Roe& to Free
dom (London: Unwin Books, 1918).
The system that goes under the name of "modem Anarchism", which originated
with Michael Bakunin, is subject to similar criticism as far as its economic program-
me is concerned. However, there is an important element of truth in its political
programme which seeks to replace the rule of majority by one of consensus. Accord-
ing to the Anarchist doctrine, the rule of majority can be as detrimental as the rule
of minority. "For the divine right of majorities as a dogma is as little possessed of
absolute truth as any other." See Russell. Roa& to Freeabm, ibid, p. 50. (This book
contains an excellent analysis of socialism. Anarchism and Syndicalism). In fact,
the rule of majority is not a divine law, according to Islam, if only because it violates
the axioms of equilibrium and human freedom. Muslim political scientists ought
to ponder this aspect of democracy, which has been generally held close to the
Islamic ideal.
Bertrand Russell has denounced worship of money, because "it leads men to mutilate
their own nature from a mistaken theory of what constitutes success, and to give
admiration to enterprises which add nothing to human welfare." "Principles of
Social Reconstruction (London: Unwin Books. 1916). p. 79.
Many an acute social philosopher has noted this. For instance, Russell held the
opinion that "all institutions, if they are not to hamper individual growth, must be
based as far as possible upon voluntary combination-", Principles of Social
Reconsruction, op. cit.. p. 2.5.

Asad Ahmed has traced this aspect of the westernthoughtto Christianity: inherited
sin, and its mystical- to the average man incomprehensible-redemption through
the sufTering of Jesus on the cross, erects a barrier between man's s p ~ t u alonging
l
and his legitimate desire to live. "See Asad Ahmed, "The Spirit of Islam. Ch. 3
in Khursheed Ahmad, op. cit.
For instance, Bertrand Russell notes: "There is equality where all are slaves as well
as where all are free. This shows that equality, by itself, is not enough to make
a good society." Authority and t k Individual, (London: Allen and Unwin. 1949).
Such a growth strategy has also been ruled out in the modern economic literature,
which emphasizes the optimization of the utility of consumption flows as the most
appropriate policy objective. See for instance, Robert Dodman, "An Economic
Interpretation of Optimal Control Theory." American Economic Review, 1967.
For a discussion of alternative policy objectives, see S. Chakravarty, Capital
ond Development Pl-ng (M.I.T. Press: 1969), pp. 19-24.
136 S.N.H. NAQVI

However, while this principle holds generally. Islamic realism leaves room for ex-
ceptions, when "ends may sanctify the means"; also, in appropriate circumstances,
"means may profane the ends." Indeed, these exceptions are also a part of divinely
revealed vision of Islam, and just one example of Islam's ethicalphilosophy it never
pulls in the webs of individual idealism so tightly so as to exclude collective possi-
bilities. See Frithjof Schuon, op. cit., p. 28. An example of ends sanctifying the
means, is the use of force to make the recalcitrant souls see the truth. This is the
philosophy behind J i m , which is one of the basic cornerstones of the Islamic
teachings.
Bertrand Russell has observed: "The power of lending money gives such great
wealth and iduence to private capitalists that, unless sdctly controlled, it is not
compatible with any real freedom for the rest of the population." Pinciples of
Social Reconstruction, cit., p. 87.
Frithjof Schuon. Transcendant Unity of Religions, op. cit.. p. 7 .
I have agrued elsewhere that if additional saving and investment are generated
exclusively through the corporate sector, i.e., byallowingcorporate savings to mud
tiply without limit on the facile assumption that onlytherich save and invest, social
inequalities will be even more sharply increased with a zero rate of interest. In
fact, such a policy is an interest-free loan to the industrialists. In the past, indus-
trialists misused it and contributed to overcapitalization, excess capacity, allocative
inefficiency and unemployment. See my, "Islamic Economic System", op. cit.,
esp. pp. 335-37.
Extcmal economies-i-e., extra benelits that are incidental to the main operations of
the industry, but accrue free of cost to other users - drive a wedge because the
private producers will not reckon these extra sqcial benelits, as such since they cannot
change any price for them. Social production is therefore unedr- expanded.
For details of this strategy and its consequences, see my, Egalitarianism Versus
Growthmanship (Islamabad: Pakistan Institute of Development Economics. 1971).
See my, "Islamic Economic System," op. cit.. p. 339.
This is the thesis of my (unpublished) study: "Rate of Interest and Inter-temporal
Allocative mciency in a Dynamic Islamic Economy." (Paper to be presented at
the Mecca Conference on the Fiscal and Monetary Economics of Islam, October
1978).
Russell o b s e ~ e"The
i chief test of an economic system is not whether it makes man
prosperous or whether it secures distributivejustice (though these are both desirable)
but whether it leaves man's instinctive growth unimpeded." Principks of Sociol
Reconstructwn, op. cit., p. 94.

For a detailed discussion, see R.S. Sayers, Modem Baaking (London: Oxford Uni-
versity h, 7th ecl.1967). Ch. 5.