The Foundations of Islamic Political Economy

356 Pages·1992·28.428 MB·English

by  Masudul Alam Choudhury, Uzir Abdul Malik (auth.)

THE FOUNDATIONS OF ISLAMIC
POLITICAL ECONOMY
Also by Masudul A/am Choudhury and published by Palgrave Macmillan
CONTRIBUTIONS TO ISLAMIC THEORY
ISLAMIC ECONOMIC CO-OPERATION
THE PRINCIPLES OF ISLAMIC POLITICAL ECONOMY
The Foundations of
Islamic Political
Economy
Masudul Alam Choudhury
Associate Professor of Economics
University College of Cape Breton, Sydney, Nova Scotia
and
Uz ir Abdul Malik
Associate Professor of Economics
Universiti Kebangsaan Malaysia
Bangi, Selangor, Malaysia
M
MACMILLAN
© Masudul Alam Choudhury and Uzir Abdul Malik 1992
Softcover reprint of the hardcover 1st edition 1992 978-0-333-54704-5
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First published 1992
Published by
THE MACMILLAN PRESS LTD
Houndmills, Basingstoke, Hampshire RG21 2XS
and London
Companies and representatives
throughout the world
ISBN 978-1-349-21975-9 ISBN 978-1-349-21973-5 (eBook)
DOI 10.1007/978-1-349-21973-5
A catalogue record for this book is available
from the British Library
This book is dedicated to the truly thoughtful and
God-fearing
Contents
List of Figures Xll
List of Tables XV
Preface XVll
Acknowledgements XIX
Note on Arabic Transliterations XX
1 The Essence of the Islamic Political Economy 1
1.1 Islamic Political Economy as a Branch of
Ethico-economics 1
1.2 The Limits of the 'Shariah' 3
1.3 'Tawhid' and 'Shariah' Extended to Scientific
Inquiry 7
1.4 A Formalisation for the Substantive and
Procedural Content of 'Shariah' 9
1.5 The Essence of Political Economy 11
1.6 Ethico-Economic Elements of the Islamic
Political Economy 14
1.7 Summary of the Content of This Book 16
2 Principles and Instruments of the Islamic Political
Economy 19
2.1 A Definition of Economics in the Islamic
Perspective 19
2.2 Derivation of the Principle of 'Tawhid' and
Human Solidarity 21
2.3 Derivation of the Principle of Felicity 24
2.4 Formalisation of the 'Tawhid' and 'Taqwa' Sets 26
2.5 The Quranic Indispensability of the 'Shura' 32
2.6 Principle of Distributive Justice in Islam 34
2.7 Interrelationship Between Distributive Equity and
Other Principles of the Islamic Political Economy 37
2.8 Distributive Equity in the Context of the Islamic
Consumption-Investment Menu 42
2.9 Primacy of the Entitlement Goal Over the
Full-employment Goal 43
2.10 'Shuratic' Policy Instruments 48
Vll
Vlll Contents
2.11 Scientific Reducibility of the Structure of the
Islamic Political Economy 58
2.12 Conclusion 61
3 'Zakat', the Wealth Tax in Islam 63
3.1 The Essential Character of 'Zakat' in the Islamic
Political Economy 63
3.2 The Productive Essence of 'Zakat' 65
3.3 The 'Nisab' Valuation Problem for 'Zakat' 66
3.4 The Distributive Essence of 'Zakat' 69
3.5 Indexing of 'Zakat' Payments 71
3.6 The Income-Investment Multiplier for the
Islamic Economy 73
3.7 The Role of 'Zakat' in the Income-Investment
Multiplier Relationship 79
3.8 The Primacy of Property Entitlement as a Social
Policy Goal in the Islamic Political Economy 84
3.9 'Zakat' Effect on Labour Force Participation 86
3.10 Labour Force Participation of Women in the Islamic
Economy 89
3.11 The Effect of 'Zakat' on Female Labour Force
Participation 92
3.12 The Economic Adequacy of 'Zakat' Funds for
Islamic Social Security at the Grass Roots Level 94
3.13 The Concept of the 'Effective Rate of "Zakat"' 99
3.14 Other Forms of Tax Revenues for the Islamic State 101
3.15 Methodological Conclusion 101
4 'Riba', Financial Interest 103
4.1 Definition of 'Riba' 103
4.2 Interest and Usury in the Islamic Concept of 'Riba' 104
4.3 The Islamic Concept of Economic Value:
the Investment-Saving Problem 107
4.4 The Islamic Theory of Value Applied to the
Financial Asset 111
4.5 The Islamic Unacceptability of all Forms of Interest 116
4.6 The Debate Over the Unacceptability of the Real
Rate of Interest in the Islamic Economy 120
4.7 The Nature of Inflation and Price Stabilisation in
the Islamic Economy 121
4.8 The Concept of the Numeraire in the Islamic Economy 123
Contents ix
4.9 Summary: the Law of 'Riba' 130
4.10 'Zakat', 'Riba' and the Principle of Simultaneity
Between Economic Efficiency and Distributive Equity
in the Islamic Economy 131
4.11 Does the Rate of Interest at All Explain the
lntertemporal Efficiency of Capital? 136
4.12 Functional Characterisation of 'Taqwa' Relations
on Banach Spaces as Power Functions 145
5 'Mudarabah', the Profit-sharing System in Islam 147
5.1 Treatment of Profit-sharing in Microeconomic
Terms 147
5.2 Problem of Valuation of Shares in the Islamic
Economy 148
5.3 The Islamic Interpretation of the Profit-sharing
Rate as the Opportunity Cost of Investment 151
5.4 The Intertemporal Methodological Framework
for Resource Allocation in the Islamic Economy 152
5.5 The Long-run Analysis of the lntertemporal
Evolution of the 'Zakat'-Investment Relationship 154
5.6 The Macroeconomic Treatment of the Profit-sharing
Analysis in the Islamic Framework 155
5.7 Formalisation of the Tripartite Flow of
Resources in a 'Mudarabah' System 156
5.8 The Asset Valuation Model in Islamic
Macroeconomic Analysis 158
5.9 The Social Rate of Return for Islamic Projects 160
5.10 The Policy-theoretic Implications for the Islamic
Economy 166
5.11 The Concept of the Social Good in the Islamic
Economy 167
5.12 Policy Considerations Surrounding the Basic
Needs Regime 168
5.13 The Consumption, Production and Distribution
Menus of Social Goods 169
5.14 Problems of Production and Distribution in the
'Mudarabah' System 172
5.15 Input-Output Methodology Applied to the
Islamic Resource Allocation Problem 177
5.16 The Problem of Entitlement Formation in the
Islamic Economy 181
X Contents
5.17 The Case of a Mix in Wage Labour and Profit-
sharing Labour in the Islamic Economy 184
5.18 The Average Pricing Principle of 'Mudarabah' 192
5.19 Long-run Stability in the Profit Rate in the
'Mudarabah' System 195
5.20 Treatment of 'Mudarabah' as a Policy
Instrument in Banach Spaces 197
6 'lsraf', Economic Waste 201
6.1 The Problem of 'Israf' as One of Economic and
Social Justice 202
6.2 The Consumption-Investment Menu of the
Islamic Economy 207
6.3 The Social Welfare Optimisation Problem Under
'Israf' Considerations 212
6.4 The Question of Long-run Waste in the
Consumption and Production of Basic Needs 215
6.5 The Allocation Problem Relating to Basic Needs
and Luxury Goods in the Islamic Economy 217
6.6 The Static Optimisation Problem of the Basic
Needs Regime in the Islamic Economy 218
6.7 The Dynamic Optimisation Problem of the Basic
Needs Regime in the Islamic Economy 222
6.8 The Importance of 'Shuratic' Decision Making
in the Formulation of the Islamic Social
Welfare Function 227
6.9 An Effective Measure of 'lsraf' 229
6.10 Measure of 'Israf' for Total Production and
Consumption 234
6.11 Comparative Examination of the Islamic
Two-sector Model of Growth in Respect to
the Consumption-Investment Menu 237
6.12 Financial Interest as 'Israf' 241
6.13 A Note on the Selective Use of Neoclassical
Methodology in Islamic Economics 243
6.14 Algebraic Formulation of the Total Interrelationship
Among the Principles and Policy Instruments of
the Islamic Political Economy 245
6.15 The Process of Social Consensus Formation in the
'Shura' 247
6.16 Formulating the Islamic Social Welfare Function
Through the 'Shuratic' Process 249