Forum Comments:

"Initial reflections on MAC-IE, 
the Islamic economics of Dr. Masudul Alam Choudhury"


Dr. Mohammad Omar Farooq
Associate Professor of Economics and Finance
Upper Iowa University 

IBF-Net; 3/14/07

[Note: To access the messages to which my comments were in reply, one may need to subscribe to the respective forum.]

 
In response to:
http://finance.groups.yahoo.com/group/ibfnet/message/6383
===========================================
 
Dear forum members,
 
Salam and greetings.
 
Our Binarian friend, who has also taken up on himself to advocate Dr. Masudul Alam Choudhury's "new" Islamic economics [referred to hereafter as MAC-IE), has been persistently asking to respond about the "26 (now 31)" points. Hopefully, by the time this message is posted, the number of points has not grown. In his attempt to explain each of these points, the Binarian friend once again resorted to personal-level, patronizing comments.  Here are some samples:
Not only the above person-focused statements are unnecessarily personal in making the points, but also those are patently incorrect or misplaced. But I will not reciprocate these person-focused observations, as I consider such approach and attitude counter-productive (and unislamic).
 
Before I share my reflections on those points, let me state a few things. These are not for our Binarian friend, because whatever I state, he seems to think it is his right to define and describe me as he deems fit (and his reach seems to go all the way to even "the dark recesses" of my mind).
 
First, within Islamic parameters, values and maqasid, Muslims should be completely open to explore new ideas dealing with real challenges and problems of life. That's why there is no reason why people should not be open to the ideas proposed by Binary Economics.
 
Second, not everything needs to be borrowed from other sources, and not everything is already worked out in Islam in regard to addressing our economic problems.
 
Third, even in economics, one should not be glued to a particular school, model or theory.
 
Fourth, establishment of justice, elimination of poverty and exploitation, betterment of our lives in the broadest sense possible, etc. are among important goals of Islam. Any economic system we come up with from an Islamic viewpoint must make these concerns central.
 
Five, many of our current ideas about Islam at the applied level are not appropriately "mapped out". That's why when I began the discussion about Binary Economics, I mentioned that I like this "mapped out" aspect of BE. We should not be exclusively focused on laws and injunctions in a legalistic manner, without regard to their connections with the results/consequences/effects. We must not merely claim that let's have Islamic finance, because it would be shariah-compliant, but not map out as to how the Islamic finance (and economics) leads to addressing the broader socio-economic goals (maqasid).
 
Now let me turn to the 31 points. Of course, I am not making exhausive arguments for or against, but only as a starter.
1.    God's creation of the universe
You, a Muslim, dare not admit God's creation of the universe because to do so leads on to tawhid, unicity and ethics -- all of which are not in conventional economics. I understand perfectly why you choose not to comment.
That God created the universe is the first thing a Muslim not just recognizes, but affirms to be a Muslim. So, it is puerile (and even insult to Muslims - coming from a non-Muslim) to state "You, as a Muslim, dare not admit God's creation of the universe." However, unless we hold that basically no economic development has occurred over the last 2-3 centuries, it is a fact that there are many countries that have economically developed that did not need this affirmation. We may suggest that there can be (and thus we should pursue) better, more balanced and just models of development. However, we are not reinventing the wheel here. Even Malaysia, a Muslim-majority country, has advanced economically, WITHOUT formally taking or acknowledging this point #1. That the conventional economics won't have this as one of its point is obvious, and as such a redundant issue from that angle. Anything Islamic pertaining to economy, politics, society, culture, education would have this point as an axiom.
2.    tawhid and unicity
 Conventional economics sees itself as a separate study.  There is no attempt at holism and seeing connections. It is today largely an isolated mathematical construct based on false assumptions.  You did not dare compare tawhid and unicity with conventional economics because that reveals the intellectual and moral paucity of the latter.
This is a broad-brush approach toward conventional economics. Tawhid is the first central belief for a Muslim. However, Muslims must also acknowledge Risalat (divine messengership) and Akhirat (existence of afterlife where we would be held accountable by our Rabb - Creator, Sustainer and Evolver) as part of the core belief. One can't merely take Tawhid, without acknowledging risalat and akhirat, because the latter two do not axiomatically follow from Tawhid. Tawhid IS an integrating concept and perspective, which Muslims have failed to articulate and apply in a relevant manner. However, once again, many countries, including Malaysia, have developed (or is developing signficantly) without this point - identified as a point. Any Islamic approach would have this tawhid and unicity, but it actually is misleading and inadequate, as it leaves out risalat and akhirat. Indeed, we don't know of Tawhid or Akhirat, except through Risalat.
 
Why conventional economics, even Binary Economics does not take Tawhid & unicity as one of its foundations. Does it? So, why bring this up in contrast with conventional economics, which does not take into account any religious angle in general and Islamic/Christian/Judaic angle in particular.  It should also be noted that current ideas about Islamic economics [referred to hereafter as CIE] do acknowledge both point #1 and #2. Thus, nothing unique here about MAC-IE.
3.    ethics to imbue everything
You would not dare to claim that ethics imbues conventional economics.  Conventional economics of course likes to claim that all its outcomes are just.  But that's because it has a perverted notion of what is just.
That "conventional economics ... likes to claim that all its outcomes are just" is an erroneous remark. One of the things about any modern social science is that it does not hold anything as "sacred" and it always has the room for improvement. For example, in economics, one relevant concept is Pareto-optimality. If even one person's lot can be improved without worsening another person's, we have room for improvement. Not only there is nothing unislamic about it, I have not seen anything persuasive from MAC-IE as to why it is unacceptable. The only reason he rejects it is because it is part of neoclassical economics, which Dr. Choudhury has taken up as a mission to "kill." There are serious and fundamental problem with neoclassical economics, as there are shortcomings of almost any school one can name. However, there is no pure or perfect, exclusive source for even Islamic laws. In regard to many aspects of Islamic laws and practices, the Prophet Muhammad adopted as part of Sunnah from the pre-Qur'anic society, which was shirk-based. Thus, urf (custom), subject to certain validations, is one of the sources of Islamic law. There was no broadbrush approach by the Prophet and, thus, such broadbrush approach of Dr. Masudul Alam Choudhury lacks the desired Islamic credibility.
 
CIE does acknowledge #3. Points #1, #2, and #3 are not unique to MAC-IE.
4.    economy and society are inextricably intertwined
 The economy and society are separate in conventional economics -- one example of which is that  the crucial caring/nurturing, long hours, stressful work of women is recognised as part of society but not as part of the economy.
Unless economics is understood as merely neoclassical economics, broadly speaking, this point is acknowledged in economics. Indeed, even Adam Smith saw economy and society as inextricably intertwined. Adam Smith's work was not related to merely an economy, but the entire social system.  [See for example, Prof. Edward W. Coker, "Adam Smith's concept of the social system; only abstract is available online]. BE or MAC-IE is not reinventing this point. Institutional economics, Evolutionary economics, Social economics also view economy and society as "inextricably intertwined." CIE also acknowledges this point. It is not unique to "new" Islamic economics of Dr. Choudhury.
5.    there are pervasive complementarities and connections
There are hundreds of complementarities and connections not recognised by conventional economics.  One reason why you attempted to slur Tarek el-Diwany (The Problem with Interest) is that he points out the connection between interest and environmental destruction.  Moreover, of course, there is a connection between interest-free loans and the financial viability of things like huge barrages generating clean electricity (a UK example).
Pervasing complementarities and connections are well-recognized in economics. Anyone studying development economics, social economics, environmental economics ought to know. One of the economists who made most pivotal contributions in this regard is Nobel Laureate Gunnar Myrdal. Complementarities is one of the key notions in his economic thoughts. This is nothing unique about MAC-IE. See The Fall and Rise of Development Economics by Prof. Paul Krugman [currently at Princeton University].
6.    a desire for distinctiveness
 Oh dearie me, this is not something that you would say was in conventional economics, would you? You would not say it because you believe that conventional economics is essentially the best that is possible and so  there cannot be a  fundamentally new Islamic economics.   You should shake hands with Francis Fukyama (The End of History). 
 And -- would you believe it? -- oil was certainly one factor in the 2003 invasion of Iraq but I happen to think that an egregious belief in the universal efficacy of 'free market' finance capitalism and its complete acceptability to all (even though in practice it rips off assets to outside ownership and is bent on putting countries into debt) was a bigger factor in the decision to invade than oil.  In a sentence, it was hubris (stemming from the collapse of communism in 1989) -- a belief that there is nothing substantially better than 'free market' finance capitalism  -- that played a big part in the 2003 invasion.
Why should I shake hands with Francis Fukuyama? And, why such remarks? Anyone who claims that in any respect of our human experience has reached its ultimate in terms of progress or development is incorrect and presumptuous. Thinking about me by our Binarian friend is so off the mark. After I have clarified so much about my position, shouldn't we have any learning curve in this regard? Also, the dynamism within economics is constantly searching for distinctiveness. Keynesian economics has its own distinction, Monetarism has its own distinction. Rational Expectation School has its own distinctiveness. Now, if we want to discard the accumulated knowledge and understanding in economics altogether and want to be "distinctive" in that sense, that is different. However, the West or the traditional economics hardly can claim that we have reached the End of History. Therefore, distinctiveness should not be sought for the sake of distinctiveness. If certain principles, values and solutions render a particular model, approach or paradigm distinctive, that is natural to human progress in the field of knowledge. Newton or Einstein did not begin his paradigm with a "desire to be distinctive." They were seeking answers to ongoing quesitons, problems and puzzles. They were open to new ideas, framework, tools - inside OR outside the box. That led to their distinctiveness. Muslims should be seeking distinctivess in terms of performance, results, and values. It is a shallow proposition to pursue distinctiveness for the sake of distinctivess or as a dogma. Mimicry of others is a waste and betrayal of the endowments of God, as each of us is God's reflection of distinctiveness. In any respect Islam has distinct parameters, goals, and even tools, we must not succumb to mimicry. One excellent, highly recommended book in regard to the distinctiveness of Islam is Ethics and Economics: An Islamic Synthesis by Dr. Syed Nawab Haider Naqvi [Jan 1981].
 
For another reason, I have additional reservation about this particular point. I am not aware of anything in the Qur'an that teaches us that we should try to be "deliberately" distinctive. However, the Qur'an does emphasize a common-ground seeking approach.
I am particularly concerned about this deliberate pursuit of "distinctiveness," because the extremists among Muslims also believe that anything western is unislamic. The groups such as Murabitun, led by Dr. Vadillo, regards democracy or constitutional democracy as unislamic. For many such extermists, if it is western, it is unislamic, just like if it is neoclassical, it is the Great Evil - leading to Let's KILL it! missionary fervor, unsuitable for engaging intellectual pursuits.
7.    accordance with Islamic heritage and tradition
Before agreeing with this conventional economists would choke on their Iowan cornflakes, would they not?  There are many aspects of Islamic heritage  but three are money and real economy; anti-inflation; and abhorrence of riba.
This obviously does not apply to conventional economics. However, this point is not unique to MAC-IE. Current Islamic economics also acknowledges this.
8.    money to be connected with the real economy
This will undoubtedly cause you much puzzlement, Dr. Farooq, because you think that it is perfectly reasonable for money to be created and then directed at anything except the productive economy (as happens at present).  It is therefore not surprising that you think inflation is necessary, inevitable and even desirable.
There are schools in economics, such as Austrian school of Mises, also argue the same. There is no reason for me to be puzzled. I am not glued to the notion of fractional reserve as something sacred. Anything we can improve upon with better and more just/balanced result for the greater humanity is welcome and actively pursued. I have clearly stated that I don't consider inflation inevitable. Indeed, historical experience is that zero inflation has been experienced. However, whether a sustained, induced, zero inflation is not a matter of "dogma." I open to this as a premise to explore and based on empirical experience affirm or reject.  
9.    money supply to be endogenous (as specifically defined)
This will cause you much intellectual distress because conventional economics likes to think that endogenous money is interest-bearing money created by the banking system and exogenous money is debt-free ('printed') money created by the government.
 
However you will be able to lessen the distress by learning that, in the developing Islamic economics, to achieve the money/real economy connection, endogenous money is defined as interest-free loans emanating form the central bank (administered by the banking system) and directed at productive capacity and its spreading.  Exogenous money is then defined as interest-bearing money created by the banking system or coming from abroad.  (And debt-free money remains as 'printed' money).  OK?
Both as a Muslim and as an economist (not belonging to any school), I am open to any new, more effective ideas, including this one. But, once again, not as a dogma, but as a premise. It is unfortunate that our Binarian friend keeps harping the same chord. Such new ideas do not "distress" me, but intriguing and exciting for me to explore. But there must be opportunities to explore and reflect, not throw a point at some one's face and ask them instantly to agree in a binary-like (yes/no, agree/disagree) manner.
10.    no interest
There is no need to say much more on this -- you have confirmed that you are a Muslim who does not object to interest-bearing loans.
It is not just me, but many Muslim scholars and economists hold such view. I have already documented that.
11.  free markets
Ah, this is a bit more difficult because many people do not understand that, at present,  there is not a free market for capital ownership -- which is the main reason why productive capital remains narrowly owned and why  huge rich-poor divisions remain.
Good point. There is no reason to accept the notion that when we say we have "free market" that we actually have. Indeed, too much hypocrisy is prevalent in this regard.
12.    private property
This is connected with 11 above.
Conventional, market-oriented, economics acknowledges this point. This is neither unique to BE nor MAC-IE.
13.    widest possible capital ownership
This is connected with 11 and 12 above and with the Islamic understanding of Say's Theorem.  It is also connected with the modern understanding as to who or what physically creates the wealth.  Capital instruments play an increasing percentage of total output and so, if true market principle it to be upheld, capital ownership (and its associated consuming power) must become widespread.  Conventional economics denies that it matters if capital ownership is not spread.
I am in complete agreement with this new focus. However, I am not yet persuaded by the theoretical and empirical foundation of the "Binary framework" to achieve this. I like this aspect as part of "mapped out" solution.
14.    no inflation
This matter still perplexes you because you accurately recognise that inflation is an inevitable, even necessary, part of the present system but do not also recognise that it need not be part of a new one.  Your mind being rigidly fixed within the present paradigm, you are unable to understand the meaning, and effects, of simulfinancing i.e only one lot of (interest-free) financing for both production and consumption. 
I am open to the idea of zero inflation economy, but as a premise, not as a sacred or dogma. If we can achieve it, why not? This is, however, not an Islamic injunction. There is NO revelatory basis for treating this as an injunction.
15.    a specific economic and social justice
To take but one example, neither you nor conventional economics has any serious proposal about those 26,000 who die every day and you would never dream of using interest-free money for clean water or sewage projects, would you?
This is another broad brush approach. Grameen Bank does not believe in BE or MAC-IE, 100% fractional reserve, zero inflation economy, abolition of interest, etc. Yet, it has a mapped-out approach and it has already positively affected 6 million+ lives in Bangladesh alone. What is the actual such record of BE or MAC-IE? We need to be innovative and problem-solving oriented, and thus be open to new ideas, including BE/MAC-IE. But the impression our Binarian friend wants to give as if BE or MAC-IE is the only one that has serious proposal about this is patently incorrect and misleading.
16. recognition that the banking system creates money out of nothing
 
Peter Challen and I have always been grateful to the then Governor of the Bank of England who explained the essence of this matter to us in a letter.

Generally, governments and central banks can only control the rate of creation -- which is why there is continual inflation and, as a Friedman expert, it's about time you understood the implications of the Quantity Theory of Money
.This is definitely worth exploring, but not as a dogma, but as a premise for alternatives that might produce better results. This is also not based on any Islamic injunction. There is no revelatory basis for this. Furthermore, this is also not unique to MAC-IE or BE. There are schools of economic thoughts that have already adopted this and advocate the necessary change.
17. simulfinancing -- i.e., only one financing needed for both supply and demand (whereas in conventional economics two financings are needed)
Enough has been said on this.
No comment on this. Worth exploring.
18.    a supply of  interest-free loans from the central bank (administered by the banking system) for:-
Since you uphold the conventional definition of endogenous money and its worth, there is no point in commenting on this.  An interest-free supply is inconceivable to conventional economists (please correct me if I am wrong).
I don't equate interest with riba as a dogma. However, I am completely open to the idea of interest-free supply of credit, if it can produce better result. And, yes, our Binarian friend is PATENTLY wrong when he suggests that "an interest-free supply is inconceivable to conventional economists." If he means that this is not a dogma in conventional economics, well, it is not. However, I have not come across any kind of intellectual or theoretical CONSTRAINT so that an interest-free supply is "inconceivable." Our Binanrian friend has missed it altogether that a good part of short-term business credit (accounts payable) is interest-free for certain period. I have not heard any economist complaining about or bemoaning it. If there is a convincing case for interest-free loans from the central bank, why not? But the very dismissive approach and attitude of our Binarian friend is most counter-productive indeed. This is not necessarily the shortcoming of the message, but of the messenger that how easily even open-minded people are alienated and dissuaded from a substantive engagement.
19.      i) micro-credit (e.g. Bangladeshi women/Grameen) and small business
You presumably prefer that a Bangladeshi woman should live on one dollar a day (with consequent effects on her family) rather than the two even three dollar figure which may become possible if she can borrow interest-free money.
Not only that I don't prefer, I have been directly involved in designing and implementing a microcredit project in Bangladesh that drew on the Grameen model, but on a traditional interest-free basis. That project has helped 10,000+ families to date. I am not an armchair scholar/academic. Also, because I deeply care about these issues at the human level, I am not bound by any dogma or school or field of knowledge. Anything that works, I am open to it. It is also noteworthy that Dr. Yunus was disenchanted with the economics taught in the classroom and he developed a mapped-out solution to poverty alleviation. He has affected the lives of 100+ millions of people around the world. He did not need BE or MAC-IE. This kind of comment that I "presumably prefer" is unwarranted and rebuffing.
20.    ii) farms
 
Ah, farms!   As an Iowan living among agriculture, perhaps you could enlighten IBF NET on past (and present) American campaigns to get interest-free loans for farmers.  If not, I inform you that the Sovereignty campaign (3,400 governmental bodies in support, remember) is probably being extended to such loans for small farmers (last year's AMI conference).  And why not?
Same as above. I am open.
21.    iii) student loans 
In view of your excellent relations with students I am sure you agree with this.  But lending interest-free loans for this is not part of conventional economics, is it?
Same as above. I am open.
22.      iv) public capital projects
Water, sewage, hospitals, road, bridges..... -- all at half price.  That would never occur to you.
I have not seen any empirical work about the half-price notion. But if we can effectively reduce cost, I am all for it.
23.      v) environmental capital projects
Nor would these projects at half price occur to you
Once again, I am not aware of any empirical work corroborating this "half-price" notion.
24.     vi) medium businesses (if wide ownership is thereby furthered)
Same as above.
25.    vii) large corporations (if wide ownership is furthered)
I could be wrong here.  But please understand that the extension of wide ownership requires (among other things) the use of interest-free loans coming from the central bank and then administered by the banking system on binary and market principles.  However until I see you unequivocally say that you agree to the principle of an interest-free loan supply for productive capacity and its spreading, I will never believe that you have any genuine interest in spreading productive capacity.  Your mind is locked into present-paradigm  interest-bearing loans and you do not understand new-paradigm interest-free loans.  Full stop.
I don't approach anything as a dogma, and I can't accept Binary proposition as dogma. Instead of taking that as a positive commitment, our Binary friend persistently wants to rebuff me ("your mind is locked). That's why this response is for the general forum members. It is not directed to our Binarian friend.
 
26.     A gradual build-up to 100% banking reserves so that the banking system cannot create any new money (and so must use existing money)
This is related to the opening up of a money supply form the central bank.  As one opens up, the other is gradually decreased.  BUT that in no way stops banks from doing what many people think they do at the moment  but do not i.e. lend depostiors'  money.  Rather it creates a reality in which the banks will lend people's money (if given permission) and a large section of the economy will not need to borrow at interest because it will have access to interest-free loans.
Same as above. I am open to the new idea, but not as a dogma, only as a premise.
27.     an independent income for all persons  
This is inconceivable to the mind of conventional economics because it sees such a thing as only being possible via the redistribution of other people's income (i.e.taxes are raised and then used to pay out income).  But it is an entirely different matter when the income arises out of person's independent capital holding, isn't it?
This is a broad-brush approach to conventional economics. Furtheremore, the statement that conventional economics view redistribution of other people's income (i.e., taxes are raised and then used to pay out income) is PATENTLY incorrect. That applies only in case of market failure. However, the prosperity in a market economy primarily comes through income-earning opportunities for all those in are willing and able to work. Also, there is nothing in conventional economics that is opposed to people generating income "out of person's indepedent capital holding."
28    an addressing of the position of women
Every individual should have some form of independent income, and that includes women.  Oh, and each baby should also have a small independent income sufficient for food, nappies, warmth etc.
Please be familiar with my works on Islam and gender issues. Empowerment of women in all respect is an Islamic imperative. This is not unique to MAC-IE. Also, the way this is stated by our Binarian friend, it sounds like a welfare system. After all, baby's can't have independent income, except either provided for them by the society/government, or generally their parents.
29.     Profit/Loss investment
PLS and a general bias against interest.
No comment. PLS is part of contemporary modern reality. It has not been invented by Muslims. It should be noted though that the largest percentage of businesses are sole-proprietorship and they are generally not interested in PLS framework.
30    extension of the partnership principle
This is not just partnership in the sense of two people going into business together or one being active in business and the other being the 'sleeping partner' financial backer.  Rather it is about involving everybody in the economy which is integrated with the society.
Too general a point to make any meaningful observation.
31.     an overall policy towards the environment
Well, for a start, interest-bearing money is playing a big part in environmental destruction (el-Diwany) and some form of independent income is important in this matter (binary economics) and interest-free loans are essential for big clean energy projects..........Conventional economics is a long, long way from addressing the environment.
Good point. Whether interest-free money is essential to this is not established yet. An argument is not a proof.
 
These are my INITIAL comments on these points. There is nothing wrong with any of these points. However, some of the points, as I have explained, neither I nor anyone else should be expected to treat as dogmas.  Furthermore, even though all these points can be positive and worth further exploration, based on the stated mission of Dr. Choudhury to KILL the Great Evil (i.e, neoclassical) and even to think of pareto-optimality as not just unislamic but anti-Islamic, the "essential underlying ethos" behind this is still "extremist, exclusivist, and puritanically rejectionist." That is also consistent with BE's broadbrush approah to economics, which they call "conventional economics" without making any distinction regarding various schools of economic thought outside classical/neoclassical/keynesian approah. Such exclusivist ethos is counter-productive.
 
That's all for now. As I wrote before, I won't respond to any message directly, if it is written with a personal-level attitude.
 
Fi amanillah. 


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