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scholars of this period are Abu Yusuf, Muhammad bin Al-Hassan, Abu Ubayd, and Junayd Baghdadi.

      The fiqh concentrated on the requirements of Shariah, and economic issues were discussed in this context. Fuqaha separate the maslaha (utility) and mafsada (disutility) in economic activities. Jurists treated economics as a normative endeavor. The contributions of Sufis to economic thought can be summarized as an important attempt to give a low weight to material pursuits in favor of altruism and unselfish service to others. The philosophers' thoughts were global and rational. Their approach was toward an ideal society. In this sense, they concentrated on macro issues while jurists focused on micro issues.

      The second phase lasted from AH 450 to 850 (AD 1058 to 1446). This period witnessed a flourishing of Islamic economic thought. Abu Hamid Al-Ghazali, Taqiuddin Ibn Taymiyah, and Ibn Khaldun were the eminent scholars of this period. Ali-Ghazali believed that individuals should satisfy only their basic needs, not more or less. Ibn Taymiyah concentrated on the need for society to establish a moral foundation for economic pursuits according to Shariah. He asserted that a ruler must preserve justice in transactions and introduced the institution of hisab (account) and the concept of fair price in transactions. Ibn Khaldun explained the reasons for the fall and rise of civilizations. He also discussed the importance of the division of labor and the role of trade in growth. He believed in the minimal role of the state in economic activities.

      The third period lasted five centuries, AH 850 to 1350 (AD 1446 to 1932). This period is characterized by stagnation in intellectual and individual thinking. Among the scholars of this time, Shah Waliullah explained the rationality of Shariah rules for conducting individual and social dealings. He believed taxation to be a necessary policy for governments to provide enough funds for public needs, such as maintaining roads. However, he was strongly opposed to heavy taxes. He also believed that extravagance, luxury, and opulent living invariably led to the downfall of civilizations.

      Source: Mohammad Nejatullah Siddiqi, “History of Islamic Economic Thought,” in Handbook of Islamic Economics, edited by Habib Ahmed and Muhammad Sirajul Hoque, vol. 1: 95–110. (Jeddah, Saudi Arabia: Islamic Research and Training Institute, 2010).

      The second important conviction articulated in these writings is a deep belief that Islam has prescribed rules of behavior for individuals and societies to comply with that assures felicity on this earth and in the hereafter. The third conviction expressed, in one form or another, is that the malaise of Muslim societies stems from general noncompliance with the rules of behavior prescribed by the Lawgiver.

      Systematic focus on economic issues, however, began in earnest in the 1950s with Sayed Qutb's book, Social Justice in Islam.19 The challenge of the two dominant systems – capitalism and socialism – and their attraction for Muslim youth during the 1950s, 1960s, and 1970s made the task of articulating an Islamic response ever more urgent. The first to respond to the challenge, positioning Islam's view on economic matters between capitalism and socialism, was Sayyid Abul A'La Mawdudi.20 His writings and those of his students, especially Professor (Senator) Khurshid Ahmad, became a major source of thought and the standard bearer of ideas for Islamic economics.

      The 1960s represent a watershed in the progress to articulating a vision of the Islamic economic system firmly grounded on the Quran and the Sunnah. The publication in 1968 of Shaheed M. B. al Sadr's book, Iqtisaduna (Our Economics), initiated a new approach in articulating Islam's vision of an economy that serves society's needs.21 Monzer Kahf suggests that Iqtisaduna became a shining beacon that began a new era in Islamic studies and marked the birth of Islamic economics.22 The central focus of the book is identifying the architecture of the Islamic economic system and then examining and understanding the behavior of its constituent elements. These are then the tasks of the discipline of Islamic economics. It is noteworthy that Iqtisaduna was written after al Sadr had already published Falsafatuna (Our Philosophy), a book that established the ethico-philosophical framework in which Iqtisaduna was later envisioned.23

      Summary

      An economic system covers the type of relationships among households, businesses, and government and the framework for producing, distributing, and consuming the goods and services produced in an economy. A critical dimension of the economic structure is the extent of government intervention, the role of markets and their regulation and supervision, the legal system of property rights, ownership of factors of production, and contracts and their enforcement. The basic issues to be addressed are what goods and services are produced and how and for whom they are produced. Although there are a number of ways to classify the range of economic systems, one classification could be traditional economies, market economies, mixed market economies, mixed socialist economies, and command (planned) economies.

      Adam Smith is widely considered to be the father of the modern capitalist market system. The Great Depression and the imploding global economy shook up the economics profession. In response, Keynes put forward his book titled General Theory of Employment, Interest, and Money to provide some answers. A number of economists further developed the Keynesian approach in what came to be known as neo-Keynesian macroeconomics. Although the Keynesian theory of demand management has become the most widely accepted macroeconomic framework, the Chicago school of economics later criticized it, largely on libertarian grounds and because it could not explain a number of observed economic developments in the 1970s and 1980s. These economists argued against discretionary macroeconomic policies in favor of the market's invisible hand and passive fiscal and monetary policies. In 2014, economists are even more divided about the effectiveness of Keynesian macroeconomic policies and the broader role of government intervention in economic management. There is no “pure” market economy in the world of 2014. There is a role for governments in any economic system to limit economic cycles and financial crises, to enhance growth, to develop a social safety net, and to safeguard the interests of future generations, interests that include preservation of the environment and provision of the social and legal infrastructure for efficient operation of a market system.

      The Islamic economic system is a market-based system, where markets are seen as the best and most efficient mechanism for resource allocation. But valuing markets for their efficiency is not the same as upholding markets as an ideology and a philosophy. The foundations of the Islamic economic system were laid down in the Quran and practiced by the Prophet Muhammad (sawa) in Medina. These rules that were established by the Almighty are the basis for the Islamic system and provide the effective institutions for the ideal Islamic system.

      Key Terms

      Economic systems

      Demand management

      Markets

      Institutions

      Traditional economies

      Market economies

      Mixed market economies

      Mixed socialist economies

      Command economies

      Questions

      1. What is an economic system, and what are its component parts?

      2. What is the function of an economic system?

      3. What is the role of government in different economic systems?

      4. What would happen to economies if governments did not exist?

      5. What are the key features of the Islamic economic system?

      6. Would you rather have the Islamic or the market capitalist system in your country? Explain your answer.

      7. How does the role of markets vary in different economic systems?

Chapter 2

      Foundation of the Islamic Economic Paradigm

Learning objectives:

      1. How Islam differs from other religions.

      2.

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