Interest and the Modern Economy

The argument that modern economies cannot function without interest is examined in detail. We show that Islamic alternatives to interest, which vary with the context and the type of loan, provide adequate substitutes. Interest based institutions lead to many types of difficulties both practical and theoretical. Islamic alternatives provide solutions to these difficulties.interest; riba; Islamic economics; prohibition of interest; profit sharing; Ricardian equivalence; Modigliani Miller Theorem

Islamic Economics: A Survey of the Literature

A central thesis of this paper is that social science is the study of human experience, and hence strongly conditioned by history. Modern Western political, economic and social structures have emerged as a consequence of the repudiation of religion, and are based on secular principles. Many of these are inimical to Islamic principles, and cannot be adapted to an Islamic society. Muslim societies achieved freedom from colonial rule in the first half of the twentieth century and sought to construct institutions in conformity with Islam. The development of Islamic economics is part of this process of transition away from Western colonial institutions. This paper focuses on the contrasts between Western economic theories and Islamic approaches to organization of economic affairs. Neoclassical theory is centered around the acquisitive instinct of humans, and makes competition the driving force of economic analysis. Islamic approaches foster cooperation and encourage generosity as the fundamental principle for handling economic affairs. Human beings have potential for good and evil, and are free to choose between the two; their behavior is not subject to mathematical laws postulated by neoclassical economic theory. The main message of Islam is that we must strive to achieve the potential for good both at the individual and at the social level. Behavior in the economic realm is also governed by this goal. Islamic law (Shari’ah) provides the framework for all activity within an Islamic society. In the economic domain, Islamic law regulates both methods by which money may be earned and also the ways it may be spent. Acquisition of wealth is permissible only in ways which are just to all parties concerned; exploitation, arbitrary taxation, and individual profit resulting in social harm is not permissible in Islamic law. This puts numerous restrictions on business practices utilized to make profits. For example, polluting the environment, or selling products which lead to moral corruption would not be permissible in Islamic law. Wealth which has been acquired becomes private property, which is both a trust and a test according to Islamic concepts. The “trust” aspect means that property must be used in ways beneficial to the individual and society. The “test” aspect means that those who have more than they need should take care of those who are in need. Ways in which acquired wealth can be spent is also subject to Islamic law. People are expected to strive to be self-sufficient and not ask from others. Thus striving to acquire wealth and spending it on personal and family needs is encouraged by Islamic law. Islam does not preach austerity and encourages a comfortable standard of living. At the same time, it strongly discourages spending on idle desires, luxuries, and ostentation. There is also a strong encouragement to spend what is beyond ones needs on social welfare. These fundamental principles for acquiring wealth, using property (acquired wealth), and spending it impact on all realms of economic activity. Since these are substantially different from Western ideas in all three areas, there are substantial contrasts between Western economic institutions and Islamic ones. The paper traces out these differences in many realms of economic activity. The primary objective of an Islamic state is to provide justice, and Islamic public finance is concerned with tracing the concrete implications of this abstraction in the economic realm. Western financial institutions have the acquisition and multiplication of wealth as their prime objective. Since acquisition of wealth can only be a means to an end, these institutions require modification in an Islamic society. Similarly, Islamic imperatives for social welfare require construction of certain uniquely Islamic types of institutions which do not have counterparts in the West. The paper discusses these issues in some detail.Islamic Economics, Neoclassical Economics

Causal Relations via Econometrics

Applied econometric work takes a superficial approach to causality. Understanding economic affairs, making good policy decisions, and progress in the economic discipline depend on our ability to infer causal relations from data. We review the dominant approaches to causality in econometrics, and suggest why they fail to give good results. We feel the problem cannot be solved by traditional tools, and requires some out-of-the-box thinking. Potentially promising approaches to solutions are discussed.Causality, Regression, Exogeneity, Hendry Methodology, Natural Experiments

Causal Relations via Econometrics

Applied econometric work takes a superficial approach to causality. Understanding economic affairs, making good policy decisions, and progress in the economic discipline depend on our ability to infer causal relations from data. We review the dominant approaches to causality in econometrics, and suggest why they fail to give good results. We feel the problem cannot be solved by traditional tools, and requires some out-of-the-box thinking. Potentially promising approaches to solutions are discussed.causality, regression, Granger Causality, Exogeneity, Cowles Commission, Hendry Methodology, Natural Experiments

Normative foundations of scarcity

The elevation of scarcity to the fundamental economic problem rests on some unstated normative assumptions. These include a political commitment to private property, a methodological commitment to not inquire about taste formation, and the idea that human welfare is roughly equivalent to preference satisfaction.Scarcity; Normative Positive Distinction; Fact Value Distinction; private property; welfare; revealed preference

On Improving Social Science Education in Pakistan

How do we arrest the decline of the social sciences in Pakistan? Is it a matter of money or one of sending more students to the West who might then return to teaching at the local universities? In this article I argue that the solution lies elsewhere. Borrowing frames, concepts, and analytical techniques based on the concept of universalism runs a serious risk of imposing alien views on local problems. Moreover, attempts to become ‘scientific’ requires side stepping value judgments of good and bad. The current Western domination of the intellectual scene favours a single route for social science development, and kills all diversity. However, whilst we may borrow as much as we choose, we need to build our own frames that would underpin the social sciences, and this is possible only by reconnecting with our own past.Eurocentricism; Western Universalism; Positive Science; History of Social Science; Western Social Science;

Developing an Islamic world view: An essential component of an Islamic education

A traditional Islamic education develops an Islamic outlook to life but does not prepare the student assimilate developments over the past three or four centuries, in particular Western knowledge. A modern Western education inevitably entails absorption of a secular worldview built into the framework of Western sciences. For Muslims, the need of the hour is to develop an Islamic approach to understanding recent history and developments in Western physical and social sciences. Many have attempted the “Islamization of Knowledge,” but have failed to address a central need for this project, namely the development of an Islamic worldview. This paper outlines the necessary requirements.

Editor’s Introduction

Welcome to this first issue of International Econometrics Review. We aim to make this journal unique in many different ways, and hope to fill the many gaps between real world applications and theoretical econometrics that continue to exist and widen. Of course, achieving high goals depends on readers and contributors and we encourage the participation of all in this project.