Resolving the Crisis in Islamic Economics

Lecture 3, titled "Resolving the Crisis in Islamic Economics," is part of the GRADE course "Islamic Economics: The Polar Opposite of Capitalist Economics" led by Dr. Asad Zaman. This lecture dives deep into the current challenges faced by Islamic Economics, particularly focusing on the intellectual crisis that has arisen within the discipline.

The lecture begins by acknowledging the central role of knowledge in Islam, emphasizing that true understanding stems from divine revelation rather than solely from human experience. Dr. Zaman highlights how historical events and cultural shifts have led to the development of modern economic theories that are fundamentally at odds with Islamic principles. The Enlightenment, for instance, is critiqued for sidelining revealed knowledge and traditional wisdom in favor of secular logic and empirical evidence, which, according to Dr. Zaman, leads to a profound misinterpretation of human experiences.

One of the critical points addressed is the failure of the second generation of Islamic economists (2GIE) to effectively integrate Islamic values with modern economic theories. Dr. Zaman argues that this failure is due to the mistaken belief that economics is a neutral science, rather than a collection of ideologies that serve to maintain the status quo in capitalist societies. As a result, efforts to "Islamize" these economic theories have been unsuccessful, leading to a crisis in Islamic Economics.

The lecture also touches on the Global Financial Crisis of 2007-08, which exposed the weaknesses of modern economic systems and, by extension, the inadequacies of 2GIE. Dr. Zaman advocates for a third generation of Islamic Economics (3GIE) that would develop new, revolutionary approaches to economic theory and practice, rooted in Islamic epistemology.

The session concludes with a call to action for the transformation of educational institutions, urging them to produce scholars who not only understand the modern world but also approach it from an Islamic perspective. This, Dr. Zaman asserts, is the key to resolving the ongoing crisis in Islamic Economics and developing an economic system that is truly reflective of Islamic values.

1. GRADE 03: Islamic Economics: the Polar Opposite of Capitalist Economics Lecture 3: Resolving th e Crisis in Islamic Economics . Download THESE slides from: bit.ly/IE2024L 3

2. اَللّٰهُمَّ اَرِنَا الْحَقَّ حَقًّا وَّ ارْزُقْنَا اتِّبَاعَهٗ وَ اَرِنَا الْبَاطِلَ بَاطِلًا وَّ ارْزُقْنَا اجْتِنَابَهٗ

3. Resolving the Crisis in Islamic Economics Session #:3 The Polar Opposite of Capitalism with Asad Zaman Islamic Economics: GRADE COURSE Fonts : EB Garamond Montserrat - Normal - Medium - Semi Bold - Bold 17 Aug - 5 Oct 2024 Every Saturday

4. Resolving the Crisis in Islamic Economics Dr. Asad Zaman Lecture 3 of GRADE course on Islamic Economics: the Polar Opposite of Capitalist Economics

5. Knowledge: The Central Battleground "Be either a scholar, or a student, or a listener, or a lover of knowledge, but do not be the fifth, for you will perish.“ Islam is unique among world religions in giving a central place to knowledge. The Final Message of God to mankind begins with the command to Read , and goes on to state that God taught to man that which did not know . The powerful knowledge given to the Muslims changed the tides of history, and gave Muslims global leadership for a thousand years. See: Rise & Decline of Muslims: bit.ly/ azrdm

6. Ibn Khaldun: Effects of Conquest Ibn Khaldun, in his renowned work " Muqaddimah ," sheds light on the effects of conquest on subjugated nations. He explains that when a group is conquered, it loses its cultural identity and adopts the customs and habits of the conquerors. This leads to a decline in their social cohesion and group solidarity (' asabiyyah '), making them more susceptible to further subjugation and exploitation. The conquered people begin to view themselves as inferior, and this mentality perpetuates their subjugation and hinders any efforts at regaining their independence or former glory. Recep Şentürk lecture series on Ibn-e-Khaldun’s Approach to Social Science bit.ly/ RSIbnKhaldun

7. Meta-Knowledge or Epistemology: Knowledge about Knowledge How does conquest and colonization shape minds of colonized? How does conquest and colonization shape minds of conquerors? How does historical experience lead to theories & ideologies? How do historical events shape our understanding of the world around us, and also of our own relationships and identities? These questions were LOST in the transition to secular knowledge! Observations and Logic – defined in Enlightenment terms – put these questions out of bounds of knowledge. This illustrates Quranic transition from Light to Darkness.

8. Analyzing Knowledge Created by Experience Three types of knowledge were declared faulty by Enlightenment: Revealed Knowledge Tradition and Intellectual Heritage. Knowledge derived from personal experiences, and from historical experiences. We prioritize 1 and 2, and this is the right thing to do. But, in the battleground of knowledge, 3 is the most important weapon. Meta-Knowledge : Understanding knowledge within its historical context leads to deep insights.

9. Foundations of Human Knowledge: Islamic Epistemology Knowledge comes from human experiences, interpreted in the light of correct theories. Correct theories cannot come from experience – they can only come from ilham or wahi (intuition or revelation). Neither is certain! Not understanding this leads to common misunderstanding: Learning comes from experience. Experience, mis-interpreted, can lead to false theories. Then, greater experience leads to greater ignorance.

10. The Danger of Misinterpreting Experience: A Behavioral Psychology Insight Near-Miss Effect :Study shows that drivers who narrowly avoid accidents often attribute the near miss to their "skill" rather than luck. This leads to overconfidence and more reckless behavior, increasing the likelihood of future accidents. Key Insight :Misinterpreting the cause of a near-miss (experience) leads to a false sense of control (incorrect interpretation).This demonstrates how incorrect theories or beliefs can turn experiences into sources of increased ignorance. Rabin, M., & Thaler, R. H. (2001). The Psychology of the Near Miss: A Model of False Narratives, Perceived Control, and Recklessness.

11. Correct Theories Are Only From Quran! Only Muslims can have knowledge. Only they have the theories which permit them to gain knowledge from experience. Exceptions: Islam is Deen-ul- Fitra : A lot of knowledge of correct theories is built into human nature. The true religion was revealed to all peoples. So, some forms of wisdom survive distortion in other knowledge traditions. Only Quran teaches us how to learn from experience, this is dramatically in conflict with Western epistemology

12. Islamic Epistemology: Knowledge/Action If (correct) knowledge does not lead to (correct) action, it will be witness against the believer. This is USEFUL knowledge. USELESS knowledge has no relevance to real world (action) HARMFUL knowledge leads to wrong actions. Pedagogical Methodology: Teach only USEFUL knowledge. Personal Experience: Vast majority of what we teach in Economics and Econometrics is USELESS or HARMFUL knowledge. Some very small portion can be TURNED INTO useful knowledge by teaching students HOW to act on the basis of that knowledge.

13. Meta-Knowledge: All Events in this life are a test! But when his Lord tries him and [thus] is generous to him and favors him, he says, ‘My Lord has honored me’. But when He tries him and restricts his provision, he says, 'My Lord has humiliated me.’ Test of wealth: success if excess use to help the poor. Failure if spent on luxuries. [ Qaroon , Haman] Test of Power: Success if used to help the oppressed. Failure if used for oppression and exploitation. [ Fir’awn , Namrood ] Test of Knowledge: Success if used to recognize and obey God. Failure if it leads to arrogance and pride, and for harmful purposes.

14. Mis-interpreting Religious Wars Experience: Devastating Religious Wars over centuries. Interpretation: Why? And How can we prevent them? Obvious answer: Religious dogmaticism and fanaticism. People believe stubbornly in their own Theology, and are willing to kill or die for it. But there is no logical basis for their beliefs. Enlightenment Solution: Create a secular society. Confine religion to personal belief. Make foundations of society on empirical and rational basis, using theories equally acceptable to all religious backgrounds.

15. Enlightenment Solution Was Wrong. The deadliest wars in human history occurred in the 20 th Century, between nations founded on secular principles and ideologies. The search for peace remains the most important collective problem facing humanity. We must look deeper into causes of wars.

16. The Right Analysis of Reasons for Wars For power and profits, a small minority manipulates the masses. Divisive ideologies – religion, nationalism, racism, and others – are used to manipulate the masses. This methodology goes back to Plato, Machiavelli, and has been used throughout history by leaders of Western world. For details, see: http://bit.ly/AZffoe (First Flaw of Enlightenment) Islam offers strong counters.

17. Islamic Approach to Tolerance & Peace Wael Hallaq : The Impossible State. The ideology of modern nation-states gives sovereignty to the people, not God. In Islamic states, all people, leaders and masses, are equally bound by the Shari’a . The majority cannot vote against it. Islam preaches equality of mankind, and tolerance for non-believers. The best of the Ummah has been brought out for the welfare of mankind. There is no compulsion in religion. Our prophet was mercy for all nations. Contrast with hate-producing ideologies of nationalism, Zionism, and the Chosen People.

18. Polanyi: The Great Transformation: The Political and Economic Origins of Our Times Meta-Principle: Streams of History shape our thoughts. But this is NOT a deterministic process. We choose the narratives. How did the industrial revolution, which produced capability of massive excess production, shape the theories (economic and political) upon which modern civilization is built? Summary of the Great Transformation: bit.ly/AZGTET Zaman, Asad, The Rise and Fall of the Market Economy (March 15, 2009). Review of Islamic Economics, Vol. 14, No. 2, 2010, pp. 123-155, SSRN: https://ssrn.com/abstract=2142803

19. Meta-Principle: Understanding Historical Context of Theories leads to deep insights How did the capitalist economic theories arise? Class Struggle (Marxist concept) Two critical modifications: Classes can be created or destroyed by historical forces. Soft power is critical element of class struggle. Thus, victory or compromise between classes is created by an ideology (economic or political theory) which is accepted by all – this acceptance is also created by power.

20. Understanding Modern Economics: Power/Knowledge It is presented as a “science” – a set of universal truths. In fact, it is a sequence of mis-interpretations of history, combined with consequences of power struggles between social classes in England. Taking it at face value – as a scientific truth – leads to battle on the wrong grounds, with greater confusion, and less chance of victory Heterodox Economists have been battling on this ground, without success. They have far better theories, but far less power! Empirical Evidence Against Utility Theory : https://ssrn.com/abstract=2033641

21. How did Modern Economics Emerge, as an effort to understand/manipulate history? Any theory (right or wrong) has policy implications. Theories emerge which can be sold to the masses, but have policy implications which favor the powerful minority. ET 1%: Blindfolds Created by Economic Theories: bit.ly/AZet1p Zaman, Asad “Power/Knowledge and Economic Theories,” Lahore Journal of Policy Studies. vol 4, No 1, p. 71-78, 2011, Available at SSRN: https://ssrn.com/abstract=2273133

22. Example: Theories of Poverty Collapse of concept of social responsibility for poor. Led to the emergence of the poor as a social problem! French Revolution highlighted the revolutionary potential of poor. Social Reforms proposed, providing many benefits to poor. Malthusian Interpretation: Excess breeding => poverty. Supporting the poor will exacerbate problem. Zaman, Asad, Anti-Poverty Policies and Anti-Poor Philosophies: https://ssrn.com/abstract=2273127 An Islamic Approach to Inequality and Poverty: https://ssrn.com/abstract=3096325

23. Polanyi’s Analysis of Emergence of Capitalism DRIVER OF CHANGE: Industrial Revolution led to possibility of massive excess production. Aristocrats: Land and Agriculture: Threatened by this change. Emerging Merchant & Industrial Class: Formed from Tradesman. Social Change was revolutionary, not evolutionary: Love of Money: Root of All Evil => Lack of Money: Root of All Evil

24. Three ARTIFICIAL Commodities: Labor, Land, Money To organize mass capitalist production, we must hire and fire labor. A labor market requires human resources – interchangeable, exchangeable, and anonymous parts of production process. When human lives can be purchased, money automatically becomes the most prized goal for individuals and society. Commodification of land turns mother nature into plots for sale, forests into timber, and oceans into garbage dumps. Money is the most mysterious of the three.

25. Moneyless Societies Hunter-Gatherer: Sharing Results of collective efforts. Feudal Societies: Locally self-sufficient. Money for external trade. Self-sufficient local communities: Money only for external trade. All traditional societies use principles of reciprocity and redistribution for production and distribution. The goal is to ensure provisioning of all members. Critical: Our minds are so deeply conditioned by living in market societies that it is hard to imagine societies where money is peripheral, not central, to the business of life . Self-Liberation!

26. Brief History of Capitalism Industrial Revolution => Surplus Production Possibility ONE WAY of organizing production: Capitalists/Labor Market There are OTHER ways of organizing production. Marx saw the critical importance of this method of organizing production, and suggested replacing it with state ownership of capital. There would be an Islamic approach to organizing Industrial Production, distinct from the capitalist approach (to be discussed later). No labor markets in the same sense as capitalism.

27. Requirements for a Labor Market People must be desperate, to sell lives for money. For this, social responsibility and community must break down. English History. This leads to individualism and democracy. Money is not naturally a strong motivation. Greed must be strengthened, to allow labor market & capitalism to work. Marketing surplus requires encouragement of hedonism ( nafs -e- ammara ) (Generosity, Cooperation, Social Responsibility, Simple Living) => (Greed, Competition, Individualism, Hedonism)

28. Rise of Capitalism (great transformation) Revolutionary Changes in: Society Economics Politics Ways of thinking BASE: Secular Epistemology! Social Changes led to changes in ways of thinking, which led to more social change. Entanglement!

29. Entanglement: Central to Meta-Knowledge As societies evolve and change, ideas/theories also co-evolve. However, ideas generally relate to past experience, not updated to contemporary society. This lag leads to Fighting the Last Battle Ideas which emerge and dominate protect, preserve, and glorify the status quo, to support the power of the powerful. Educational Institutions are used to propagate these ideas. Capitalist Economic theory is a terrible set of ideas, far from truth, and harmful to human welfare, but protective of power of wealthy Power/Knowledge works in both directions.

30. Evolution of Capitalism & European Society Secular Society => Legitimizing pursuit of wealth and freedom. Conception of society as a jungle, survival of the fittest. Triangular Trade: Slaves from Africa to Americas. Cotton, Tobacco Sugar to Europe, Manufactures from Europe to Africa. Addictions (social & physiological) lead to rising level of consumption, essential for a capitalist society driven by overproduction. Brutal Conquests led to deadening of hearts, racism, loss of spirituality (from light to darkness).

31. The Great European Wars: WW1 and WW2 Centuries of Religious Wars, followed by secular wars, together with imported knowledge, and learning methods for manufacturing trust (Financing Wars impersonally) gave Europeans an enormous advantage over rest of the world. 19 th Century was spent colonizing the world. The Berlin Agreement partitioned the globe into spheres of influence, to avoid European fighting over colonies. About 90% of world was colonized by early 20 th Century. After running out of areas to conquers, Europeans started fighting each other (increasing darkness).

32. The Elephant in the Room: Wars Wars have been central to European History, and central to human history after European domination. Economics textbooks make no mention of wars, even though economics (both theory and reality) is DEEPLY affected by wars. Political Science does not study wars, even though it is central. Even International Relations makes only superficial and shallow studies of it. AGAIN: possibility of knowledge revolution in study of social sciences.

33. Co-Evolution of Islamic Societies & Economics Colonization as conquest of knowledge: bit.ly/ Azcok WW1 & WW2 weaken European powers, and strengthen military skills in colonies around the globe. Start of movements for liberation. Islamic Economic system is part of the freedom struggles in Islamic lands. IES is portrayed as a revolutionary alternative to capitalism, socialism, and Marxism.

34. Perpetuation of European Power post WW2: Colonization Never Ended The Coconut Class, Macaulay’s children, trained to serve under British rule, take over governments in post-colonial error. The Educational system is central pillar of their power. It ensures that only those indoctrinated with respect, awe and love of English make it into the government. The dreams of the first generation for a revolutionary alternative remain unrealized. Political Islam is born. Second Generation: 1976 Conference in Mecca on Islamic Economics. Pragmatics suggests evolution instead of revolution.

35. Failure of 2 nd Generation IE 2GIE accepts modern Economics claim to be “social science” Thus, Economics is a collection of universal truths, instead of historically contingent, evolving ideologies to support status-quo Economic ideologies are in dramatic conflict with Islam. It was not possible to patch them to make them Islamic. Capitalist Institutions are adversarial. They cannot be patched to make them Islamic. Failure to recognize nature of Economic theories and institutions led to the failure of 2GIE. However, 2GIE continues to dominate.

36. Global Financial Crisis of 2007-8 Led to many calls, by top economists and practitioners, of the need for a revolution in economic theory. bit.ly/ WEAquo But flames of revolution have been put out, and economic theories continue in the same rut as before. Fifty years of mixing fire and ice: no achievements by 2GIE During these same fifty years, many significant new branches of economics have been launched. MMT, Agent Based Models, Evolutionary Economics, Ecological Economics, Political Economy, and the New Institutional Economics.

37. Third Generation Islamic Economics GFC 2007 => Crisis in Modern Economics => Crisis in 2GIE Responses to this crisis: double down. Two textbooks produced in IIUI and IIUM – courtesy Islamization of Knowledge project. Subject to same IOK failure. See detailed critique: Zaman, Asad, The Origins of Western Social Sciences (March 11, 2009). Journal of Islamic Economics, Banking and Finance, Vol. 5, No. 2, pp. 9-22, 2009: https://ssrn.com/abstract=1357823

38. Recap: New Methodology for Social Science Study the process of social change, together with co-evolving social theories. Economic theories evolved from mercantilism, to colonialism and imperialism, to capitalism. Wars played a CENTRAL role in the evolution of economic theories. Social theories must be sold to the masses, and so must present system as being best for all. They must also support status quo The advance of capitalist production develops a working class which by education, tradition and habit looks upon the requirements of that mode of production as self-evident natural laws. (Karl Marx).

39. Differences with Marxist Methodology Marx assumes that there are laws of change (like physics). Class Struggles is the driver of change, but it moves towards a pre-ordained outcome. Disagreement: Human beings are free to analyze social change. The theories they choose affect the process of change (entanglement) Because humans choose theories to understand change, there are no determinist universal laws of social change. Specifics of history get embedded within theories as universals. Fighting the last battle is very common. Islam provides us with universal and reliable meta-principles for understanding change.

40. How can we create social change? Move toward creating Islamic Economic System? Top Down Methodology: Capture Governments, then create revolutionary change. Bottom Up Methodology: Work on individuals and create spiritual transformation. However, the central battle of epistemology is not addressed by either of these approaches. How can we transform our educational institutions, so that they produce students with an Islamic mindset and worldview, while being competent to deal with modern societies?

41. Disruptive Innovation is needed Definition : Disruptive innovation refers to a process by which a new product or service enters the market, often starting at the bottom or in a niche market, and eventually moves upmarket to displace established competitors. Unlike sustaining innovations, which improve existing products or services, disruptive innovations create new markets and value networks, ultimately leading to the decline or transformation of established industries. We need to drive existing universities out of business, or transform them completely. This is possible to do, but requires strategy.

42. 3D Methodology of Social Change bit.ly/AZ3DIE Positive: Describe & understand existing on-the-ground reality Normative: Describe the ideal forms, the goal of changes. Transformative: Actions required to transform the positive existing reality towards the normative ideals. Two Common Errors: Wipe slate clean, and build ideal society from ZERO. (Revolution). Build Ideal Society within existing real world structures. ( Shari’a Compliance).

43. Ending Dua: قُلْ إِنَّ صَلَاتِي وَنُسُكِي وَمَحْيَايَ وَمَمَاتِي لِلَّهِ رَبِّ الْعَالَمِينَ "Say, 'Indeed, my prayer, my rites of sacrifice, my living and my dying are for Allah, Lord of the worlds.’” Download these slides from : bit.ly/IE2024L3