What is money?

MONEY IN AN ECONOMY WITHOUT BANKS

On 4 May 1970, a prominent notice appeared in Ireland’s leading daily newspaper, the Irish Independent, with a simple but alarming title: ‘CLOSURE OF BANKS’. The announcement – placed by the Irish Banks’ Standing Committee, a group representing all of Ireland’s main banks – informed the public that as a result of the severe breakdown in industrial relations between the banks and their employees, ‘a position has now been reached where it is impossible for the undermentioned banks to provide even the recent restricted service in the Republic of Ireland’. ‘In these circumstances it is with regret,’ the notice continued, ‘that these banks must announce the closure of all their offices in the Republic of Ireland on and from Friday, 1st May, until further notice.’

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It may come as a shock to learn that virtually the entire banking system in an advanced economy could have shut down overnight as recently as in 1970. At the time, however, this development was widely expected – not least because it had happened once before, in 1966. The matter of dispute between the banks and their employees was a familiar one in the Europe of the late 1960s: the extent to which pay was keeping up with prices. High inflation throughout 1969 – by the autumn, the cost of living had risen by more than 10 per cent over the previous fifteen months – had prompted a demand by the employees’ union for a new pay settlement. The banks had refused, and the Irish Bank Officials’ Association had voted to strike.

From the beginning, it was expected that the banks’ closure would not be short-lived, so preparations were made. The first reaction of businesses was to stockpile notes and coins. The Irish Independent reported that:

There were massive withdrawals of cash throughout the country as firms built up their reserves in anticipation of a shutdown. Insurance companies, safe dealers, and security firms are expected to do brisk business while banks remain closed. Factories and other concerns with large payrolls have arranged to obtain ready cash from large retailers such as supermarkets and department stores to meet wage bills.31

But in the first month of the crisis, it became apparent that things might not turn out quite as badly as feared. The Central Bank of Ireland had deliberately accommodated the additional demand for cash in March and April, so there were about £10 million more notes and coins in circulation in May than usual. There was an inevitable tendency for the stream of payments to give rise to gluts of small change in some places – generally shops and other retail operations – and dearths in others – usually wholesalers and public institutions which had no reason to take in cash in the course of their daily business. The Central Bank even made a vain plea to the state-owned bus company to have it distribute cash to passengers. But these blockages in the circulation of coins and notes proved a relatively minor inconvenience.

The reason was that the vast majority of payments continued to be made by cheque – in other words, by transfer from one individual’s or business’ current account to another’s – despite the fact that the banks at which these accounts were all held were shut. In its review of the whole affair, the Central Bank of Ireland noted that prior to the closure ‘some two-thirds of aggregate money holdings are in the form of credit balances on current accounts, the remainder consisting of notes and coin.’32 The critical question, therefore, was whether this ‘bank money’ would continue to circulate. For individuals in particular, there was really no other option: for any expenses in excess of the cash they had in hand when the banks shut their doors on 1 May, their only hope was to write IOUs in the form of cheques and hope that they would be accepted.

Remarkably, as the summer wore on, transactions continued to take place and cheques to be exchanged almost exactly as usual. The one difference, of course, was that none of the cheques could be submitted to the banks. Normally, this facility is what relieves sellers of most of the risk of accepting credit payments: cheques can be cashed at the end of every business day. With the banking system shut, however, cheques were for the time being just personal or corporate IOUs. Sellers who accepted them were doing so on the basis of their own assessment of buyers’ credit. The main risk, therefore, was of abuse of the improvised system. Since cheques were not being cleared, there was nothing in principle to prevent people writing cheques for amounts that they did not have. For the system to work, payees would have to take it on trust that payers’ cheques were not going to bounce – and all this when they had no clear idea when the banks would reopen and allow them to find out. The Times of London was following events over the Irish Sea with interest – and in July it noted both the extraordinary fact that nothing much seemed to have changed, and the apparent fragility of the situation. ‘Figures and trends which are available indicate that the dispute has not had an adverse effect on the economy so far,’ wrote its correspondent. ‘This has been due to a number of factors, not least of which is the prudence which business has exercised against overspending.’ But could the balancing act continue? ‘There is now, however, a psychological risk that if the dispute drags on, caution will be cast aside, particularly by smaller businesses.’33

Sure enough, cracks did begin to appear here and there. A month into the closure, there was a scare when some livestock markets announced that they would no longer accept private cheques.34 In July, a farmer from Omagh who had been convicted of smuggling seven pigs into the Republic was unable to pay the £309 fine handed down to him, for want of ready cash.35 And over the summer, the business lobby – encouraged by the banks and exasperated by the expenses they were incurring to find ways round the closure – began planting scare stories in the newspapers claiming, for example, that ‘a rapidly growing paralysis is spreading through the economy because of the banks dispute’.36 But the evidence collated by the Central Bank of Ireland once the crisis was finally resolved in November 1970 showed quite the opposite. Their review of the closure concluded not only that ‘the Irish economy continued to function for a reasonably long period of time with its main clearing banks closed for business’, but that ‘the level of economic activity continued to increase’ over the period.37 Both before and after the event, it seemed unbelievable – but somehow, it had worked: for six and a half months, in one of the then thirty wealthiest economies in the world, ‘a highly personalized credit system without any definite time horizon for the eventual clearance of debits and credits substituted for the existing institutionalized banking system’.38

In the end, the main impediment imposed by this highly successful system turned out to be logistical. By the time the banks and their employees finally reached a new pay settlement, and it was announced that the banks would reopen on 17 November 1970, an enormous volume of uncleared cheques had accumulated with individuals and businesses. Advertisements were placed in the newspapers warning customers not to submit all of them at once, and forewarning that it was unlikely that account balances would be reconciled fully for several weeks. It was another three months – until mid-February, 1971 – before matters had returned completely to normal. By then, a total of over £5 billion of uncleared cheques written during the period of the closure had been submitted for clearing. This was the money that the Irish public had made for itself while its banks were on strike.

How had this apparent miracle of spontaneous economic co-operation come to pass? The general consensus after the event was that several features of Irish social life were uniquely conducive to its success: not least, that most famous feature of all, the Irish public house. The basic challenge was that of screening the creditworthiness of those paying by unclearable cheque. Ireland had an advantage in that communities, both in the countryside and in the cities, were close-knit. Individuals had personal knowledge of most of the people they transacted with, and so were comfortable forming judgements as to their creditworthiness. But by 1970 Ireland was nevertheless a diverse and developed economy, so this could not always be the case. It was here that the Republic’s pubs and small shops came into their own, by serving as nodes in the system, collecting, endorsing, and clearing cheques like an ersatz banking system. ‘It appears,’ concluded the Irish economist Antoin Murphy, with admirable circumspection, ‘that the managers of these retail outlets and public houses had a high degree of information about their customers – one does not after all serve drink to someone for years without discovering something of his liquid resources.’39

THE HEART OF THE MATTER

The case of the Irish bank closure provides an unusually useful opportunity to understand more clearly the nature of money. Like Furness’ report from Yap, it forces us to reconsider what is essential to the functioning of a monetary system. But because the Irish case is so much closer in time and technology to our own, it is much more suitable for economic triangulation. The story of Yap showed that the conventional theory of the origins and nature of money is confused. The story of the Irish bank closure helps point the way to a more realistic alternative.

The story of Yap stripped away a central, misleading preconception about the nature of money that had bedevilled economists for centuries: that what was essential was the currency, the commodity coinage, which functioned as a ‘medium of exchange’. It showed that in a primitive economy like Yap, just as in today’s system, currency is ephemeral and cosmetic: it is the underlying mechanism of credit accounts and clearing that is the essence of money. We were left with a very different picture of the nature and origins of money from the one painted by the conventional theory. At the centre of this alternative view of money – its primitive concept, if you like – is credit. Money is not a commodity medium of exchange, but a social technology composed of three fundamental elements. The first is an abstract unit of value in which money is denominated. The second is a system of accounts, which keeps track of the individuals’ or the institutions’ credit or debt balances as they engage in trade with one another. The third is the possibility that the original creditor in a relationship can transfer their debtor’s obligation to a third party in settlement of some unrelated debt.

This third element is vital. Whilst all money is credit, not all credit is money: and it is the possibility of transfer that makes the difference. An IOU which remains for ever a contract between just two parties is nothing more than a loan. It is credit, but it is not money. It is when that IOU can be passed on to a third party – when it is able to be ‘negotiated’ or ‘endorsed’, in the financial jargon – that credit comes to life and starts to serve as money.Money, in other words, is not just credit – but transferable credit. As the nineteenth-century economist and lawyer Henry Dunning Macleod put it:

These simple considerations at once shew the fundamental nature of a Currency. It is quite clear that its primary use is to measure and record debts, and to facilitate their transfer from one person to another; and whatever means be adopted for this purpose, whether it be gold, silver, paper, or anything else, is a currency. We may therefore lay down our fundamental Conception that Currency and Transferable Debt are convertible terms; whatever represents transferable debt of any sort is Currency; and whatever material the Currency may consist of, it represents Transferable Debt, and nothing else.40

As we shall see, this innovation of the transferability of debts was a critical development in the history of money. It is this, rather than the graduation from a mythical barter economy, which has historically revolutionised societies and economies. In fact, it is barely an exaggeration – if we make allowance for the unmistakable overtone of Victorian melodrama – to say, as Macleod did:

If we were asked – Who made the discovery which has most deeply affected the fortunes of the human race? We think, after full consideration, we might safely answer – The man who first discovered that a Debt is a Saleable Commodity.41

The recognition of this third fundamental element of money is important. It explains what determines money’s value – and why money, even though it is nothing but credit, cannot just be created at will by anyone. For sellers to accept buyers’ IOUs in payment, they must be convinced of two things. They must have reason to believe that the debtor whose obligation they are about to accept will, if it comes to it, be able to satisfy their claim: they must believe, in other words, that the money’s issuer is creditworthy. This much would be enough to sustain the existence of bilateral credit. The test for money is more stringent. For credit to become money, sellers must also trust that third parties will be willing to accept the debtor’s IOU in payment as well. They must believe that it is, and will remain indefinitely, transferable – that the market for this money is liquid. Depending on how powerful are the reasons to believe these two things, it will be easier or harder for an issuer’s IOUs to circulate as money.

It is because of this third critical element of transferability that money issued by governments, or by the banks which governments endorse and backstop, is thought to be special. Indeed, there is an influential school of thought – known as chartalism – which argues that governments and their agents are the only viable issuers of money.42 But the story of the Irish bank closure exposes this as another misleading preconception. The closure of the Irish banks showed that the system of credit creation and clearing need not be the officially sanctioned one. The official system – the banks – was suspended for the best part of seven months. But money did not disappear. Like the infamous fei that sank to the bottom of the sea, the associated banks suddenly vanished – and with them the official apparatus of credit accounts and clearing – and yet money continued to exist.

The Irish bank closure demonstrates that the official paraphernalia of banks and credit cards and solemnly printed notes with unforgeable insignia is not what is essential to money. All of this can disappear and yet money still remains: a system of credit and debt, ceaselessly expanding and contracting like a beating heart, sustaining the circulation of trade. What matters is only that there are issuers whom the public considers creditworthy, and a wide enough belief that their obligations will be accepted by third parties. For governments and banks to fulfil those two criteria is generally easy; whereas for companies, let alone individuals, it is generally hard. But as the Irish example goes to show, these rules of thumb do not apply universally. When the official monetary arrangements disintegrate, it is surprising how effective society is at improvising an alternative.

EXCERPTED FROM “MONEY: THE UNAUTHORIZED BIOGRAPHY” by Felix Martin

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Murkier beginnings of League of Nations – White Man’s Burden

From William Easterly’s masterly “Tyranny of Experts”

The negotiations in Versailles for a treaty to end World War I occupied the first half of 1919, until the participating nations signed the treaty of Versailles on June 28, 1919. Although twenty-seven nations participated in the Versailles talks, the dominant powers were the United States, the United Kingdom, and France.

The first decision was to transform former German colonies into “mandates.” The mandates were places, not commands. They were regions whose trustees answered to the League of Nations (the precursor international organization to the United Nations) that was also created at the Versailles conference. This was the context for Woodrow Wilson’s inaugural address quoted above about how “the first time in history the counsels of mankind are . . . concerted” to improve “the conditions of working people . . . all over the world.” Wilson spelled out the idea of the mandates further “with regard to the helpless parts of the world”: “All of those regions are put under the trust of the league of nations, to be administered for the benefit of their inhabitants—the greatest humane arrangement that has ever been attempted—and the rules are laid down in the covenant itself which forbid any form of selfish exploitation of these helpless people by the agents of the league who will exercise authority over them during the period of their development.”

The mandates were not directly relevant to China, which was not a colony. However, the idea of development as a neutral enterprise in some territories “for the benefit of their inhabitants” would indeed be relevant in China. It was one of the first statements of technocratic development, in which the focus is on the development of the “helpless” and not on who is doing the developing. It displays either naïveté or indifference to who actually holds the power.

In practice, the mandates were hard to distinguish from colonies. The League of Nations awarded the former German colonies to other colonial powers, notably Britain (e.g., Tanzania) and France (e.g., Togo). The League had no enforcement power to prevent “exploitation” by those colonial powers who “will exercise authority over them during the period of their development.” So the mandates just became British or French colonies in all but name. Cynics could dismiss the whole exercise as a power grab by the British and French.

Murky beginnings of United Nations – White Man’s Burden

From William Easterly’s excellent “Tyranny of Experts”

The triumph of the technocratic idea of development was written into the charter of the new United Nations. On June 26, 1945, in San Francisco at the United Nations Conference on International Organization, representatives of the world’s countries signed the United Nations Charter, which reads in part: “We the peoples of the United Nations,” in order “to reaf-firm faith in fundamental human rights, in the dignity and worth of the human person, in the equal rights of men and women and of nations large and small, and . . . to promote social progress and better standards of life in larger freedom,” have determined “to employ international machinery for the promotion of the economic and social advancement of all peoples.”53 This sounds admirable, of course, but there is a fundamental omission. The UN Charter paid at least lip-service to rights and freedom, but it made no mention of independence for colonial peoples. Perhaps it helps to understand this contradiction to learn that the main author of the soaring language of the charter was Jan Smuts, the long-time South African leader and long-time advocate of white rule in Africa. At the conference in San Francisco, Smuts praised the United Kingdom as the “greatest colonial power” in the world. Smuts saw the United Nations as serving “men and women everywhere, including dependent peoples, still unable to look after themselves.”54 The “international machinery” to promote “advancement” of “dependent peoples” included the British Empire. At the time of the UN’s founding, the United Nations and the British Empire were mutually supportive international organizations.

W.E.B. DuBois accused Smuts and the other UN founders of “lying about democracy when we mean imperial control of 750 millions of human beings in colonies.”55

Friedrich Hayek had questioned the moral value of any real power given to an international organization in The Road to Serfdom in 1944. Hayek, with his realism about the Allies wielding such power and his suspicion of unchecked power at any level, reacted a lot like the left-wing anti-imperialist DuBois. He asked, “can there be much doubt that this would mean a more or less conscious endeavor to secure the dominance of the white man, and would rightly be so regarded by all other races?”56

Article 73 of the UN Charter said that some unspecified UN members have “responsibilities for the administration of territories whose peoples have not yet attained a full measure of self-government.” As Lord Hailey pointed out in the 1956 revision of the Africa Survey, this provision did not give “the organization of the United Nations any authority to intervene in the control of these territories.” The article requires such members to ensure for these peoples “protection against abuses.” This article thereby firmly required colonial powers to protect their colonial subjects against—themselves.57

When the United Nations published its first report on development in 1947,Economic Development in Selected Countries: Plans, Programmes and Agencies, it included plans for “British African Non-Self-Governing and Non-Metropolitan Territories” and “French African Overseas Territories.” The introduction to the report lumps together all “governments of the less developed countries,” including the European colonial rulers of these territories next to local rulers like those in Argentina, Brazil, Chile, Poland, and Yugoslavia. The report declared that all members of this diverse group of autocrats, democrats, Stalinists, and colonizers shared the “ultimate aim in economic development” which “is to raise the national welfare of the entire population.

Why do rich people donate to museums or charity?

It’s not just philanthropic. Sometimes it’s just selfish self-interest. From John Brook’s “12 Business Adventures of Wall Street”:

But if the [Tax] Code is anti-intellectual, it is probably so only inadvertently—and is certainly so only inconsistently. By granting tax-exempt status to charitable foundations, it facilitates the award of millions of dollars a year—most of which would otherwise go into the government’s coffers—to scholars for travel and living expenses while they carry out research projects of all kinds. And by making special provisions in respect to gifts of property that has appreciated in value, it has—whether advertently or inadvertently—tended not only to force up the prices that painters and sculptors receive for their work but to channel thousands of works out of private collections and into public museums. The mechanics of this process are by now so well known that they need be merely outlined: a collector who donates a work of art to a museum may deduct on his income-tax return the fair value of the work at the time of the donation, and need pay no capital-gains tax on any increase in its value since the time he bought it. If the increase in value has been great and the collector’s tax bracket is very high, he may actually come out ahead on the deal. Besides burying some museums under such an avalanche of bounty that their staffs are kept busy digging themselves out, these provisions have tended to bring back into existence that lovable old figure from the pre-tax past, the rich dilettante. In recent years, some high-bracket people have fallen into the habit of making serial collections—Post-Impressionists for a few years, perhaps, followed by Chinese jade, and then by modern American painting. At the end of each period, the collector gives away his entire collection, and when the taxes he would otherwise have paid are calculated, the adventure is found to have cost him practically nothing.

The low cost of high-income people’s charitable contributions, whether in the form of works of art or simply in the form of money and other property, is one of the oddest fruits of the Code. Of approximately five billion dollars claimed annually as deductible contributions on personal income-tax returns, by far the greater part is in the form of assets of one sort or another that have appreciated in value, and comes from persons with very high incomes. The reasons can be made clear by a simple example: A man with a top bracket of 20 per cent who gives away $1,000 in cash incurs a net cost of $800. A man with a top bracket of 60 per cent who gives away the same sum in cash incurs a net cost of $400. If, instead, this same high-bracket man gives $1,000 in the form of stock that he originally bought for $200, he incurs a net cost of only $200. It is the Code’s enthusiastic encouragement of large-scale charity that has led to most of the cases of million-dollar-a-year men who pay no tax at all; under one of its most peculiar provisions, anyone whose income tax and contributions combined have amounted to nine-tenths or more of his taxable income for eight out of the ten preceding years is entitled by way of reward to disregard in the current year the usual restrictions on the amount of deductible contributions, and can escape the tax entirely.

Thus the Code’s provisions often enable mere fiscal manipulation to masquerade as charity, substantiating a frequent charge that the Code is morally muddleheaded, or worse. The provisions also give rise to muddleheadedness in others. The appeal made by large fund-raising drives in recent years, for example, has been uneasily divided between a call to good works and an explanation of the tax advantages to the donor. An instructive example is a commendably thorough booklet entitled “Greater Tax Savings … A Constructive Approach,” which was used by Princeton in a large capital-funds drive. (Similar, not to say nearly identical, booklets have been used by Harvard, Yale, and many other institutions.) “The responsibilities of leadership are great, particularly in an age when statesmen, scientists, and economists must make decisions which will almost certainly affect mankind for generations to come,” the pamphlet’s foreword starts out, loftily, and goes on to explain, “The chief purpose of this booklet is to urge all prospective donors to give more serious thought to the manner in which they make their gifts.… There are many different ways in which substantial gifts can be made at comparatively low cost to the donor. It is important that prospective donors acquaint themselves with these opportunities.” The opportunities expounded in the subsequent pages include ways of saving on taxes through gifts of appreciated securities, industrial property, leases, royalties, jewelry, antiques, stock options, residences, life insurance, and inventory items, and through the use of trusts (“The trust approach has great versatility”). At one point, the suggestion is put forward that, instead of actually giving anything away, the owner of appreciated securities may wish to sell them to Princeton, for cash, at the price he originally paid for them; this might appear to the simple-minded to be a commercial transaction, but the booklet points out, accurately, that in the eyes of the Code the difference between the securities’ current market value and the lower price at which they are sold to Princeton represents pure charity, and is fully deductible as such. “While we have laid heavy emphasis on the importance of careful tax planning,” the final paragraph goes, “we hope no inference will be drawn that the thought and spirit of giving should in any way be subordinated to tax considerations.” Indeed it should not, nor need it be; with the heavy substance of giving so deftly minimized, or actually removed, its spirit can surely fly unrestrained.

Resource Scarcity : Islamic Economics

The Qur’an informs us that God has stocked the Earth (and heavens) with his inexhaustible treasures to provide sustenance for all His creatures. But to draw from this, as Akram and others do, the inference that scarcity becomes non-existent for economics, secular or Islamic, is rather eristic, to put it mildly. The catch is in the failure to realize that the fact of existence of ample resources for human beings and others at all points in time and space is one thing, while their availability to individuals or groups at a given hour and location is quite another. It is not the existence per se, but the state of their availability that lends meaning to the idea of scarcity as a cornerstone stone of economics. The availability of resources is an increasing function of knowledge – knowledge of their existence, of the ways to extract or obtain them, of their uses and of their costs. The history of the march of human civilization is the history of human conquest of nature. It is the history, in essence, of pushing outward relentlessly the frontiers of scarcity through unceasing inventions and innovations in science, technology, and societal management.

 Scarcity, as explained above, is a part of divine scheme to spur humanity into action and to test people thereby; for the Qur’an not only talks of God’s bountiful resources but also informs us that He alone is the source of knowledge and that He gives it to those who seek only bit by bit, lest they become proud and arrogant. The proposition that scarcity of resources is just a human made phenomenon must be taken with a grain of salt. To regard scarcity as a mere disturbance factor in the ‘natural state of adequacy ….is neither correct nor necessary….Thus, resources remain limited because of the inadequacy of human knowledge despite God’s benevolence. Presumably, one can visualize Islamic economics as a study of human behavior concerning the use of scarce resources for satisfying multifarious wants in such a way as would maximize falah.

Hasan (1996) quoted in “Methodology of Economics – Secular vs Islamic” by Waleed J Addas

Shariah Compliance or Maqasid-as-Shariah

The functions of maqasid as-shari’ah and shari’ah-compliance are not identical. The maqasid as-shari’ah is necessarily and sufficiently in agreement with the idea of shari’ah-compliance; but ‘‘shari’ah-compliance’’ as practiced today may not necessarily invoke maqasid as-shari’ah. It has been pointed out loosely that the maqasid as-shari’ah includes the goals of sustaining Islamic belief, self which comprehends progeny, needs which includes property and security, and intellect which includes knowledge, and sustainability of the Islamic community (Shatibi, 1884). There is a close correspondence between Shatibi’s delineation of the maqasid as-shari’ah and those explained by Imam Fakhruddin Razi and Imam Ghazali. This topic was covered earlier while discussing the concept of moral self-actualization in Islam. The comprehensive way of delineating moral development of society in terms of the shari’ah-compliant basket of essentials comprises necessaries (durruriyath), comforts (hajiyyath), and refinements (tahsaniyyath) of Shatibi. Likewise, according to Imam Fakhruddin Razi the moral development regime comprises ubudiyyah (life-sustaining by means of worship). To Imam Ghazali it meant sustaining knowledge and the world system in the light of inner surrender to the conscious oneness. Shah Waliullah joined in the projects of explaining the Islamic worldview as a comprehensive multidisciplinary and multidimensional quest for an integrated approach to real experiences. This experience extended across economics, society, politics, philosophy, science, and belief (ibadah). He focused his project on the Qur’an and the Sunnah to explain the need for the multidimensional approach in the comprehensive development future of Muslims. But he went beyond to universalize the Qur’anic message by launching the translation of the Qur’an into other languages. In so doing, Shah Waliullah introduced a dialectical methodology to the study of worldly phenomenology in the light of Islamic epistemology.

The maqasid as-shari’ah was thus seen as the comprehensive understanding of the Islamic law in addressing the time-bound problems of human societies. Even science as human pursuit was not missed out in this comprehensive structure of socio-scientific development prescription for the Muslim world (ummah). We have seen in this regard, that dynamic basic needs of life were at the center of all development prescriptions of the great learned Qur’anic scholars, the mujtahids, for the rise of the conscious world-nation of Islam (ummah). In such a precept of the maqasid as-shari’ah only, it is possible to realize the essential impact of the Islamic law in life’s overarching and integrative functions. The shari’ah-compliance concept makes objective sense only in such an understanding and application of maqasid as-shari’ah.

The idea of ‘‘shari’ah-compliance’’ is not necessarily that of maqasid as-shari’ah. Most often it is found that shari’ah-compliance as an idea has fell victim to an overly legal-religious interpretation of the shari’ah to specifics taken separately from the overarching general system worldview of Islam. Besides, the tenets of Islamic law became increasingly surrendered to such piecemeal interpretations and applications. The result was a differentiated interpretation (fiqh) of the Islamic law by different Islamic schools. Some of these interpretations have lost legitimacy across changes of events and their complexity in time. Above all, in none of these piecemeal approaches to the shari’ah-compliance concept is the epistemic idea of unity of knowledge and the world-system, the participatory worldview of this conscious oneness and the human future, in place. These greatest precepts are merely expressed in utterance without delivering the functional ontological understanding of the being and becoming of a dynamic sustainable moral development future.

In Ibn Khaldun’s philosophy of history (Mahdi, 1964) we find his immaculate praise of the shari’ah as the ideal law. But at the same time one condescends to Ibn Khaldun’s utter failure in explaining the shari’ah as the comprehensive law of the great overarching system that the Qur’an builds for humankind. In the end, the shari’ah as a systemic worldview of divine code of life and the worldly pursuits did not flourish in the writings of Ibn Khaldun. Ibn Khaldun was devoid of the holistic and multidimensional intellection of history that is found in Shah Waliullah. In modern times, the reawakening of movements for the shari’ah is by and large a political and commercial one. No intellectual emphasis is placed, and Islamic scholars have failed to realize the great overarching meaning of the shari’ah as the systemic holism of human experience, extending beyond society into science as well. We have dwelled on this issue earlier. Here we can point out the futility of the idea of shari’ah compliance mistaken for maqasid as-shari’ah. This remiss has darkened the intellectual acumen on the Muslim frontage of Islamic economics and finance. This demise that continues to ferment the Islamic intellectual growth is once again the fiqhi-basis of interpretation and understanding of the shari’ah. The emphasis has been on the particulars of the shari’ah in respect of specifics, rather than in deriving the particular from the general system worldview of conscious oneness. This kind of intellection ought to be premised on the foundational episteme of Islamic law. Yet the possibility of such a pursuit has drifted to the backbench, with only a detached mention of the maqasid as-shari’ah, rather than the instilling of its functional ontology in the scheme of ‘‘everything.’’

Taqi Usmani’s book (2004) presents the prevalent nature of detachedness of the shari’ah-compliance concept from the Qur’anic holistic overarching worldview of maqasid as-shari’ah. One can note a number of disturbing historical developments and their present days’ consequences on the shari’ah implications in Islamic economics and finance. Firstly, the field of the shari’ah has been restricted to affairs of economics, finance, commerce, and society. The greater implications of the shari’ah in science and the socio-scientific world are nowhere even referred to. Consequently, the common understanding of the shari’ah is not ontologically and analytically grounded on the Tawhidi episteme of conscious oneness. A segmented understanding of the shari’ah is erected by such a dichotomy between Sunnat Allah, the divine law that is impelled to govern the physical universe; and the shari’ah that is made to govern worldly matters (muamalat). Reference to Tawhid as the cardinal axiom of Islamic law being detached, the functional ontology of the Tawhidi worldview in action in relation to the socio-scientific world-system, remains benign. The inner dialectical essence of integrated and complementary development sustainability across the overarching multidimensional domain of intellectual inquiry and positive action as conceived by the great mujtahids has no discernible trace in the prevalent meaning of the Islamic law. Upon this contorted knowledge of the shari’ah, the notion of shari’ah compliance takes its roots. The result is consequential methodological independence between differentiated compartments of the intellectual disciplines. Such a differentiated view has led to the annoyance of de-harmonization between the maqasid as-shari’ah and shari’ah-compliance concepts among differing schools of theology, namely of the pitiful mazhabs. Mazhab has become a means of both dividing Muslims and make the world bereft of intellection in the greatness of Tawhid as the episteme of the maqasid as-shari’ah to the entire world. In the case of legal rules governing the contract and financing of the principal Islamic financing instruments there remain wide differences and no substantial advance in intellection and application.

The greater goal of maqasid as-shari’ah in the light of sustainability in the ummah has failed. In this failed portfolio there is ambivalence toward dynamic life-sustaining regimes of development, poverty alleviation, global networking of Islamic markets and institutions, and a unified determination of structures of ummah transformation, relevant policies, institutions, instruments, and participatory development within an intellectual, and fresh and learning vision of change. But it harkens to the fact that the intellectual capital of Islamic transformation has remained low. Islamic institutions and buyer–seller relations have not included the ways of inducing the moral law in their institutional consciousness. The maqasid as-shari’ah has thus been abandoned in the face of the catchword of shari’ah-compliance. The fuqaha using traditional fiqh analogies have approved of such dissociated bundle of rules for gaining legitimacy. An Islamic transformation has thus failed to realize in essence. Yet such an Islamic conscious change is not in sight through the route of contemporary Islamic economic, financial, social, and socio-scientific thinking.

Conclusion:
The overarching and systemic issues underlying the understanding and application of maqasid as-shari’ah invoke a general-system learning model based on the episteme of conscious oneness. The methodology of conscious oneness is conceptualized and applied to all issues and problems of Islamic economics, finance, science and society. This methodological approach has not been understood by the fuqaha and the modernist scholars in the field of Islamic issues of science and muamalat. Contrarily, the dissociated ways of understanding maqasid as-shari’ah by relegating it to traditional fiqhi rules on specific issues has rendered the entire Islamic intellectual enterprise to the whims of divided Islamic schools of thought led by their juristic heads (Imams). Yet the Imams did not pronounce this pursuit at all. It is the latter days fuqaha and Islamic scholars along with institutions such as Islamic banks, Islamic Development Bank, Organization of Islamic Conferences Fiqh Council and the like that have caused such a rift to happen and deepen. The so-called shari’ah- compliant financial instruments today lie in utter disarray.

The fuqaha and Islamic scholars of the latter days have forgotten the most important premise of Islamic intellection in developing maqasid as-shari’ah across overarching domains of ‘‘everything.’’ This area of investigation comprises the way that conceptualization and rules (functional ontology) can be derived and formalized on the basis of the epistemic origin of conscious oneness for the world-system taken up in perpetuity of learning processes in reference to the Tawhidi unity of knowledge. Tawhid has become a mere uttered word, sounded in the backdrop of Islamic intellection. It has not been understood and used as a substantive learning power.

Excerpted from , “ISLAMIC ECONOMICS AND FINANCE – AN EPISTEMOLOGICAL INQUIRY” by Masudul Alam Choudhury

Principle of Economic Efficiency : Islamic Economics

In the emphasis on the economic efficiency of the use of natural resources, either for consumption or production, we find Islam is differentiating clearly between two important notions: isràf and tabzìr. This has been mentioned in the Quranic verses with a particular distinction between the two.

In consumption for example, isràf could be interpreted as extending the level of consumption beyond the level of basic needs. This may lead to, and incorporates, the consumption of luxurious goods and services. In terms of the relationship between saving and spending, isràf may also be widened to include sacrificing future consumption, saving, for the sake of immediate consumption, and spending; which is a reflection of the consumer’s time preference in allocating his consumption between present and future income. In this case the balance between the two types of consumption, in both cases, first, the basic needs as compared with luxurious consumption, and second, future as compared to present consumption, which good Muslims are required to observe, may be impaired. This is not recommended; it is frowned upon and may even attract God’s dissatisfaction. But the punishment for this behaviour, is not, as it seems from reading the Quranic verses, as severe as the punishment associated with another level of consumption, tabzìr.

Tabzìr in an economic sense is the unnecessary use of economic resources, i.e. wastage of economic resources, large or small, and at all levels of consumption. Tabzìr, is not confined to the level of extravagance, but goes beyond that to include even the level of necessities if the consumer was wasteful in satisfying his or her very basic needs of these essential physio-sociological wants. To put it another way, one may have a variety of suits, meals, electrical appliances, and may in that reach the level of extravagance, which, to remind ourselves, is frowned upon and may even attract a penalty subject to the ability of economic resources and the development state of the economy, but one may not waste fabric or food ingredients
unnecessarily in having even one modest suit or eating one meal. Wastage, tabzìr, even in fulfilling most basic needs is forbidden. Therefore, while isràf is the extensive use of resources, tabzìr is the wasteful use of these resources; and there is a distinct line between the two. While the former may lead to further comfort, better appearance and, most likely, more pleasure in life, the latter leads to no purpose but wasting valuable resources to the community and the world by putting these resources to no use. The former may make one less of a perfect Muslim, but the latter would render a person irresponsible to the point of evil: a brother of Satan, “Verily resource wasters (mubazzirìn) are brethren to Satan, and Satan is the worst
unbeliever”, (Quran 17:27). Tabzìr attracts the wrath of God, for which the penalty is His retribution.

Excerpted from
Islamic Economics. A Short History (Themes in Islamic Studies) by Ahmed El-Ashker, Rodney Wilson