Islam is compatible with a free economy, argue Muslim scholars

A new study published today by the Institute of Economic Affairs examines the compatibility of the Islamic religion with free-market economic policies. Contrary to the concerns of many in the West, the study finds that the main tenets of Islam are not opposed to the key elements of a free economy such as the primacy of property, respect for family, the importance of nurturing business, enforcement of contracts and allowing individuals to trade freely.

 

Whilst some aspects of a free economy that was based on Islamic principles would look quite different from the main features of Western economies, there are no obstables in principle to Islamic societies being economically free, open and business-friendly.

 
The most important general principles highlighted by this study, edited by Imad-ad-Dean Ahmad and published in Economic Affairs, the journal of the Institute of Economic Affairs, are as follows: 

  • The fulfilment of contracts appears immediately after prayer and charity in the list of what defines righteousness in the Qur’an.
  • Well-defined property rights, including procedures for recognition and inheritance, are basic elements of the establishment of a market economy. In Islam, private property is not simply recognised, it is sacred.
  • The Qur’an encourages trade, prohibits fraud, and prohibits envy.
  • The Western notion of “liberty” shares much with the Muslim understanding of justice, which includes freedom of religion and intellect (thought and expression).
  • While parts of the Muslim world have some catching up to do with the West in terms of women’s rights, in the case of women’s property rights it was the West that lagged behind the Muslim world. The Qur’an guaranteed women rights of property and contract, and even a share in an inheritance, fourteen centuries before some states in the USA granted married women the right to property at all. 

These principles have been applied in practice in the Muslim world – even if they are not universially applied today. For example, the parts of the study looking at Dubai, Turkey and Moorish Spain illustrate how the basic features of the market economy can exist side-by-side with a devoutly religious society.

 

Furthermore, the section of the study on entrepreneurship based on internet platforms shows how Muslims need not wait for domestic policy reforms in order to take advantage of business opportunities – trading online simply allows individuals and enterprises to bypass regulatory impediments. Finally, the substantial issue of interest on loans is addressed by a group of three Muslim scholars. Whilst the way in which Islamic finance bypasses the prohibition on interest is not uncontroversial, even within Islam, Islamic banks are thriving and using impressive self-regulatory vehicles to ensure that good business practice sits alongside the adherence to religious principles.

 

Writing in an environment in which respect for freedom of contract and property rights is being eroded in the Western world, the editor of the study concludes by arguing that: “harmonious economic development will require both Western civilisation and the Muslim world to recognise the importance of liberty, contracts and private property as universal values.”

 

Islam and the Free-Market Economy is edited by Imad-ad-Dean Ahmad. Click here to download the editorial (pdf).

In a 1979 essay for the IEA on ‘tax avoision’ I identified six different ways of classifying tax avoidance/evasion, depending on the government’s attitude:
deliberately encouraged; exempted; tolerated; disapproved; forbidden; taxed retrospectively.Some time later I happened to come across the following five-way classification of Islamic religious law:
expressly commanded; recommended or desirable; permitted or indifferent; reprobated; absolutely forbidden or abominable.These categories seem rather similar; though the British tax system is a bit fiercer than Islamic religion in having a category of retrospective taxation.

a) The ban on interest puts a bit of a kybosh on it.b) The argument is a bit like saying that under ‘pure’ communism we would all be happy and free, while admitting that in practice it never worked. A brief glance around the world at ‘Islamic’ countries suggests that their economies are very backward indeed.

Two very pertinent points by Mark. To the second, I would say that one can apply that reasoning to Christian countries too. There are a lot of Christian countries which, over time, have been very oppressive. Did that mean, at that time, that Christianity was incompatible with political and economic liberty? No. There was a battle to be won about those issues and it was fought and largely won (with substantial contributions from deists, agnostics and atheists). For the first point, I have run out of characters, see next comment!

On usury, equity interests are very much permitted of course. You could argue that we have gone the other way. The tax and regulatory system crucify equity interests in the developed world and then we wonder why the financial system is so highly geared and prone to instability. Of course I believe that fixed-interest contracts should be allowed, but our financial system has been shaped artificially to make these contracts more important than they should be. As such, we find it difficult to imagine life without them.

Mark – Malaysia is an example of an economically successful Muslim country. Although it is a long way from being free-market, its economy is in many ways freer than many Western economies.

Mark,Marxism has a clear-cut concept of what the state should do; Islam has not, it merely has a set of values. Values can be spread either through persuasion and voluntary social pressure, or through force.
The article on islamic home-financing in the USA is interesting in this respect. Islamic banks cannot force anyone to subscribe to their values; they can only offer them, in the form of their business model. It seems to work, so at least this Islamic principle is not incompatible with ‘doing business’.
Conversely, if some country was ruled by a Feminist Party, I doubt it would be very liberal. Still, it would be wrong to claim that feminism is as such anti-liberal.

@ Philip, but remember that Western economies only really took off after The Age Of Enlightenment and possibly not for a century or two thereafter. Until then we were pretty backward as well. Or compare the USA (secular) with Mexico (religious/socialist) – there is still a huge disparity between the two.@ Richard, I thought somebody would say that, but a) Malaysia is based on Commonwealth style free markets, has English as semi-official main language, and b) it is 40% Chinese/Indian (who do all the business stuff) while the 60% ethnic Malays wallow in subsidies (and my Mrs is a Malay, she’s the one who tipped me off to all this).

In a 1979 essay for the IEA on ‘tax avoision’ I identified six different ways of classifying tax avoidance/evasion, depending on the government’s attitude:
deliberately encouraged; exempted; tolerated; disapproved; forbidden; taxed retrospectively.Some time later I happened to come across the following five-way classification of Islamic religious law:
expressly commanded; recommended or desirable; permitted or indifferent; reprobated; absolutely forbidden or abominable.These categories seem rather similar; though the British tax system is a bit fiercer than Islamic religion in having a category of retrospective taxation.

a) The ban on interest puts a bit of a kybosh on it.b) The argument is a bit like saying that under ‘pure’ communism we would all be happy and free, while admitting that in practice it never worked. A brief glance around the world at ‘Islamic’ countries suggests that their economies are very backward indeed.

Two very pertinent points by Mark. To the second, I would say that one can apply that reasoning to Christian countries too. There are a lot of Christian countries which, over time, have been very oppressive. Did that mean, at that time, that Christianity was incompatible with political and economic liberty? No. There was a battle to be won about those issues and it was fought and largely won (with substantial contributions from deists, agnostics and atheists). For the first point, I have run out of characters, see next comment!

On usury, equity interests are very much permitted of course. You could argue that we have gone the other way. The tax and regulatory system crucify equity interests in the developed world and then we wonder why the financial system is so highly geared and prone to instability. Of course I believe that fixed-interest contracts should be allowed, but our financial system has been shaped artificially to make these contracts more important than they should be. As such, we find it difficult to imagine life without them.

Mark – Malaysia is an example of an economically successful Muslim country. Although it is a long way from being free-market, its economy is in many ways freer than many Western economies.

Mark,Marxism has a clear-cut concept of what the state should do; Islam has not, it merely has a set of values. Values can be spread either through persuasion and voluntary social pressure, or through force.
The article on islamic home-financing in the USA is interesting in this respect. Islamic banks cannot force anyone to subscribe to their values; they can only offer them, in the form of their business model. It seems to work, so at least this Islamic principle is not incompatible with ‘doing business’.
Conversely, if some country was ruled by a Feminist Party, I doubt it would be very liberal. Still, it would be wrong to claim that feminism is as such anti-liberal.

@ Philip, but remember that Western economies only really took off after The Age Of Enlightenment and possibly not for a century or two thereafter. Until then we were pretty backward as well. Or compare the USA (secular) with Mexico (religious/socialist) – there is still a huge disparity between the two.@ Richard, I thought somebody would say that, but a) Malaysia is based on Commonwealth style free markets, has English as semi-official main language, and b) it is 40% Chinese/Indian (who do all the business stuff) while the 60% ethnic Malays wallow in subsidies (and my Mrs is a Malay, she’s the one who tipped me off to all this).

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