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Political Economy of Islam

Saeed Mortazavi, Ph.D.

Humboldt State University


Preface Introduction Part I Introduction to Islam Chapter One Islam: A Brief Review Muhammad: The Prophet of Islam Principles of the Religion The Oneness of God The Prophethood of Muhammad The Day of Judgment Muslims Duties Towards God Daily Prayers Fasting Zakat Hajj Jihad Commanding the Right and Forbidding the Wrong Sunni and Shiite Islam Sunni Islam Shiite Islam Justice (Adl) Imamate (Leadership and Guidance) Islamic Law The Sources of Islamic Law The Quran The Prophets Tradition Rule of Reason (Qiyas) Ijma (Consensus of the Community) The Subject matter of Islamic Law Schools of Islamic Law (madhhab) Sunni Schools of Law

Chapter Two

Chapter Three

Maliki School Hanafi School Shafii School Hanbali School Shiite School of Law Jafari School

Part II Political Foundations of Islam Chapter Four Political History of Islam Sunni Political Ideology Shiite Political Ideology Chapter Five Islamic State Chapter Six Justice and Freedom in Islam Chapter Seven Islam and Democracy Ijtihad Sociological Foundations of Democracy Democratic Institutions of Islam Islamic Democracy: Government According to Gods Will Chapter Eight Islamic Republic of Iran Historical Background Iranian Quest for Democracy Islamic Government of Iran Ayatollah Khomeinis Model of Islamic Government
Velayat-e Faqih (Governance of the jurist)
Creation of the Islamic State in 1979 and its Consequences
State structure of the Islamic Republic of Iran Iran, Islam, and Democracy Chapter Nine Political Islam Fundamentalism Islamism Final Words on Political Islam Part III Economic Foundations of Islam Chapter Ten The Essence of Islamic Economics Positive vs. Normative Economics Homo Economicus vs. Homo Islamicus Chapter Eleven Islamic Economic Values Justice Moderation Waste Avoidance Charitable Contribution (Infaq) Chapter Twelve Islamic Economics Islam and Ownership Private and Public Ownership in Islam Lawful Income Islam and Markets Islam and Government Chapter Thirteen Stabilization Policies in Islamic Economics Fiscal Policy Monetary Policy Chapter Fourteen Islamic Banking

Chapter Fifteen

Chapter Sixteen

Chapter Seventeen

Islam and Development Measures of Development Per Capita Income Gini Coefficient Human Development Index Islam and Economic Performance Economic Performance of Islamic Republic of Iran Struggle for Economic Independence Economy of Iran Future of Iranian Economy Postscript: Hopes and Reality

Preface In spring 2003, I taught a course in political economy of Islam at Humboldt State University. The required reading list for the course comprised three books and numerous journal articles in order to present Islam as a complete and comprehensive ideology encompassing political and economic issues of Islam at the present time. This pedagogical scheme required a thorough understanding of both Western and Islamic theories and paradigms of political economy and provided the motivation for writing this book. There are scores of excellent books on the religion of Islam and its politics. However, there is a scarcity of books on economics of Islam. There are even a few books on political economy of Islam That attempt to integrate political and economic bases of Islam; however, they are replete with excessive Arabic terms and quotations and devoid of a meaningful comparative analysis of the Western and Islamic models. In a word, they are not suitable textbooks for a college course. My lecture notes for the aforementioned course provided the platform for this textbook. My objective is to introduce political and economic foundations of Islam in an accessible style and a familiar format to college students. Hopefully, this text will help them to participate in the discourse on Islam and its political economy as informed citizens during this turbulent time.


Every colonized people-in other words, every people In whose soul an inferiority complex has been created By the death and burial of its local cultural originalityFinds itself face to face with the language of the civilizing Nation; that is, with the culture of the mother country. Frantz Fanon, Black Skin, White Masks [1] Iranian revolution of 1979 and the subsequent Islamic Republic of Iran brought Islam to the attention of the world as a political force. For the first time in the Islamic world, a popular uprising toppled a corrupt and tyrannical regime supported by the United Kingdom and the United States from its inception. The Iranian success emboldened other Muslim revolutionaries to dream of the glorious past by extirpating their governments and creating an Islamic society. The Iranian success also appealed to a larger group of intellectuals influenced by the broader political movement of anticolonialism in the Third-World countries. The champions of this movement, Frantz Fanon, Aim Csaire, Ral Prebisch, and other social thinkers, were concerned about political, economic, and cultural dependency of the Third-World countries on the Western colonial powers. They believed a true political, economic, and cultural independence can be achieved through establishment of national governments, pursuit of import substitution policies, and restoration of indigenous cultural norms and values. The rise of political Islam also coincided with the collapse of the Soviet Union. The end of the Cold War redirected the worlds focus from Communism to the incipient political Islam. Historians and political theorists expounded on political Islam. They generally saw the Islamic societies as intolerant, averse to modernity and democracy, and politically aggressive. Borrowing from Bernard Lewis [2], Samuel Huntington [3] popularized the phrase clash of civilizations. He hypothesized that the new battleground for the Western civilization is the clash with the Islamic civilization. In retrospect, his article had a significant influence on the neoconservatives in Washington, and was partly responsible for the inclusion of Iran in the Axis of Evil group, which in

turn resulted in the development of the recent Preemptive War doctrine of the Bush Administration. The Iranian revolution also expanded the western lexicon by introducing Shiism, Sunnism, Islamic government, Islamic democracy, Islamic feminism, and Islamic economics. The objective of this book is to shed light on these terms and concepts. This is not another book on the religion of Islam. Its focal point is on political and economic foundations of Islam. The book is organized in three major parts. Part one is a brief historical review of Islam, its principles, and its laws. Part two considers political institutions of Islam, politics of Shiite and Sunni Islam, and analyzes the compatibility of political Islam with political institutions of socialism, democracy, and nationalism. Part three studies economic fundamentals of Islam, the institution of private property and the operation of the market place in Islam, and investigates the relationship between economics of Islam and Western capitalism. Throughout the book, the Islamic Republic of Iran will be used as a case for studying political economy of Islam.

Part I
Introduction to Islam

Chapter One Islam: a brief review Muhammad: The Prophet of Islam Muhammad was born in 570 C.E. in Mecca. He lost his father, Abdullah, before his birth and his mother, Aminah, when he was 6 years old. For a short while, his grandfather, Abd al-Mutallib, raised him. After Abd al-Muttalibs death his uncle Abu Talib became his guardian. Figure 1 The Family of the Prophet Abd Manaf

Abd Shams



Abd al Muttalib



Abu Talib






Umayyad Caliphs

Shii Imams

Abbasid Caliphs

Adapted from Albert Hourani, A History of Arab Peoples [1].

As a youth he worked for the trading caravans and traveled between Mecca and Syria. His engagement in commerce had significant consequences on Islamic view of

trade and established a personal reputation for him as an honest man and earned him the epithet Muhammad al-Amin or Muhammad, the Trusted One. A wealthy widow and caravan owner of Mecca, Khadijah, proposed marriage to him in 595 C.E. She was forty years old while Muhammad was only twenty-five years old. After marriage, he became Khadijahs business manager and she remained his only wife until her death in 619 C.E. His business affairs and frequent travels took him to Jewish and Christian territories and made him familiar with both religions.

One night in the month of Ramadan in year 610 C.E., known as the Night of Power and Excellence (Qadr), he received the first revelation of the Quran. Angel Gabriel appeared to him in sleep and commanded him to Recite. Recite in the name of your Lord who created, created man from clots of blood! Recite! Your Lord is the Most Bountiful One, who by the pen taught man what he did not know. (Quran, 96:I) His wife Khadijah and his cousin Ali were the first people who accepted him as the Apostle of God and converted to Islam. For the first two years, Islam was spread quietly among his friends and family and then to general public. He received the earlier chapters of the Quran in the first twelve years in Mecca. These chapters were concerned with moral and religious issues. The chieftains of Meccan tribes viewed him as a threat to their livelihood and their polytheistic society. Muhammad faced serious challenges in Mecca when his uncle and supporter, Abu Talib, died in 619 C.E. In year 622 C.E. Muhammad migrated from Mecca to Medina. This historical migration is known as Hejira and is the beginning of Islamic calendar. He received additional revelations in the next ten years in Medina. These new revelations were dealing with laws, taxation, warfare, and other public matters. The socalled Constitution of Medina declared Muhammad as both religious and political leader of the newly founded Muslim community in Medina. Political, economic, and social institutions that were created in Medina by Muhammad are still considered an ideal model for establishing an Islamic society. He conquered Mecca in year 630 C.E. and united the entire Arabia under the banner of Islam. Muhammad died in 632 C.E.

Principles of the Religion

Etymologically the word Islam comes from two Arabic words- one means submission or surrender and the other one means peace. In light of the first root, Islam means absolute surrender to the will of God (Allah). In terms of the second root, Islam is related to the Arabic term salam (peace) and is the religion of peace. Islam is also a belief system between a believer and God without the need for any intermediary. Therefore, Islam unlike Christianity lacks an established hierarchy of priests and has no official church. One becomes a Muslim simply by believing in three primary theological doctrines of the Oneness of God, the Prophethood of Muhammad, and the eschatological belief in the Day of Judgment.


The Oneness of God Islam, like Judaism, is a strictly monotheistic religion. Say:Allah is One, the Eternal God. He begot none, nor was He begotton. None is equal to Him. (Quran, 112:1-4) The unity of God is an absolute element of the faith. Any deviation from this

absolute concept is tantamount to heresy and is considered a great sin in Islam. The unity of God is a paramount principle that is manifested in every aspect of life in Islam. The Oneness of God also implies a unified people (ummah) and a total integration of political, economic, and social institutions in Islam under the divine Islamic law (shariah). These issues will be discussed in parts two and three of this book.


The Prophethood of Muhammad Muslims believe that God has sent 124,000 prophets throughout time. This

continuous line of prophecy started with Adam and ended with Muhammad. Muhammad is the father of no man among you. He is the Apostle of Allah and the Seal of the prophets. Allah has knowledge of all things. (Quran, 33:40) Islam is a religion in the Abrahamic tradition that intended to reform past religions. It accepts the previous scriptures and refers to the Jews and Christians as People of the Book.

Be courteous when you argue with the People of the Book, except those among them who do evil. Say:We believe in that which is revealed to us and which was revealed to you. Our God and your God is one. To Him we surrender ourselves. (Quran, 29:46) The acknowledgment of the first two principles of Islam is known as shahadah (testification) and is sufficient to make someone a Muslim. One can simply recite, I testify that there is no god apart from God, and Muhammad is the Messenger of God to become a Muslim. Muslims believe Muhammad was a man and the servant of God. Although he is the last prophet of God, he is not considered a divine character. However, Muslims think of him as a perfect man whose behavior has become the paragon of morality for all Muslims.


The Day of Judgment Muslims believe that God will judge every person on the Day of Judgment. When Earth is rocked in her last convulsion; When Earth shakes off her burdens and man Asks What may this mean?- On that day she will proclaim her tidings, for your Lord will have inspired her. On that day mankind will come in broken bands To be shown their labours. Whoever has done an Atoms weight of good shall see it, and whoever Has done an atoms weight of evil shall see it also. (Quran, 99:1-8) There is no Original Sin or collective redemption in Islam. Every individual is

responsible for his/her deeds during his/her earthly life and will be judged accordingly.

Muslims Duties Towards God

Muslims are required to observe certain rituals to show their reverence and absolute obedience to God. These acts of worship are obligatory for every adult Muslim. Adulthood begins at the age of puberty in Islam.


Daily Prayers Every Muslim is required to offer daily prayers five times every day at dawn,

noon, afternoon, sunset, and night time. Recite your prayers at sunset, at nightfall, and at dawn; the dawn prayer has its witness. Pray during the night as well, an additional duty for the fulfillment of which your Lord may exalt you to an honorable station. (Quran, 17:78-79) One is required to wash oneself ritually (ablution) before each prayer so that she/he stands before God physically and spiritually in a clean state to address Him directly. The individual prayer faces in the direction of Mecca, the holy city of Islam, and recites certain verses from the Quran in Arabic, the language of Islamic revelation.


Fasting Every Muslim is required to fast during the month of Ramadan subject to a

suitable health condition. Believers, fasting is decreed for you as it was decreed for those before you; perchance you will guard yourselves against evil. (Quran, 2:184) The individual is supposed to abstain from food, drink, and sexual relations from dawn to sunset. The end of Ramadan marks the Feast of Ramadan and all Muslims celebrate it.


Zakat Zakat is an obligatory tax on wealth. It is usually 2.5% of ones wealth and must

be paid annually. Due to the absence of an official church in Islam, one calculates ones zakat and distributes it to needy individuals directly or indirectly through mosques or charity organizations. Alms shall be used only for the advancement of Allahs cause, for the ransom of captives and debtors, and for distribution among the poor, the destitute, the wayfarers, those that are employed in collecting alms, and those that are converted to the faith. That is a duty enjoined by Allah. He is wise and all-knowing. (Quran, 9:59)


Hajj Every Muslim is required to participate in the annual pilgrimage to Mecca once in

her/his lifetime if she/he is physically and financially able to perform it. Make the pilgrimage and visit the Sacred House for His sake. If you cannot, send such offerings as you can affordBut if any of you is illhe must pay a ransom either by fasting or by alms-giving or by offering a sacrifice. (Quran, 2:196) Make the pilgrimage in the appointed months. He that intends to perform it in those months must abstain from sexual intercourse, obscene language, and acrimonious disputes while on pilgrimage. Allah is aware of whatever good you do. Provide yourselves well: the best provision is piety. Fear Me, then, you that are endowed with understanding. (Quran, 2:197) Mecca is the birthplace of Islam and the location of the holiest site in Islam known as the Kabah. Muslims believe that Abraham and his son Ishmael built the Kabah as a shrine for worshiping God. Abraham and Ishmael built the House and dedicated it, saying: Accept this from us, Lord (Quran, 2:127) Therefore, the ritual of the hajj has an Abrahamic origin. The Feast of Sacrifice marks the end of the hajj and together with the Feast of Ramadan constitute the great feasts of the Islamic calendar.


Jihad Jihad in Arabic means struggle. It is primarily understood that jihad is the

personal struggle to live a virtuous life. According to a Prophetic saying (hadith) The best jihad is the conquest of the self. [2]. This spiritual effort is known as the greater jihad. Jihad as the holy war constitutes the secondary and the more common understanding of the term. This combative interpretation of jihad is considered a lesser form of jihad. The Quran instructs the Muslims to fight only for defensive reasons. Fight for the sake of Allah those that fight against you, but do not attack them first. Allah does not love the aggressors. (Quran, 2:190)

Even in the case of defensive wars Islam forbids any aggression against women, children, animals, and trees [3]. The warriors must protect innocent lives and fight a just war for self-defense. Furthermore, despite the Western conviction, Islam does not sanction war for the purpose of promulgating religious beliefs. There shall be no compulsion in religion. (Quran, 2:256) During the life of the Prophet, jihad was possible since he was able to declare it. However, due to the absence of an official church and priesthood in Islam, jihad is not possible. There is no single authority that could make such a declaration for all Muslims. Currently, the term jihad is used as a political symbol for uniting Muslims for political causes. This abuse of the term jihad has, therefore, political connotations that will be discussed in later chapters.


Commanding the Right and Forbidding the Wrong Muslims are required to be active in their community to promote good deeds and

thoughts and to prevent others from doing the wrong ones. Let there become of you a nation that shall speak for righteousness, enjoin justice, and forbid evil. Such men shall surely triumph. (Quran, 3:104) This active and positive participation in the community is an act of worship and not a voluntary act. Therefore, it is impossible to justify any evil act under the name of Islam.

Chapter Two Sunni and Shiite Islam Prophet Muhammad died in 632 C.E. His death brought a political crisis to the newly founded Muslim community regarding the question of leadership and the qualifications of the new leader. This issue ultimately caused the division of the Muslim community between the Sunni and Shiite Muslims.

Sunni Islam When the Prophet died, Abu Bakr, one of his closest companions brought the news to his followers: O men, if you worshiped Muhammad, Muhammad is dead; if you worship God, God is alive [1]. Muhammad had lived for twenty-two years among his Muslim brothers and sisters. His deeds and words (his tradition) were alive. The word sunni comes from the Arabic word sunnah (tradition) and refers to the continuation of the Prophets tradition. The Sunnis believe in the right of the Muslim community to choose Muhammads successor. A designated assembly must select the new political leader by consensus (ijma) and all Muslims must pledge their oath of allegiance (bayah) to the new leader. An assembly of the Prophets closest companions chose the Prophets successor (khalifa in Arabic and caliph in English). Abu Bakr, one of the early Muslims and the father of Aisha, one of Muhammads wives, was selected as the first caliph. The next three caliphs were selected in the same fashion. The first four caliphs are known as the Rightly Guided caliphs (the Rashidun): Abu Bakr (632-634) Umar ibn al-Khattab (634-644) Uthman ibn Affan (644-656) Ali ibn Abi Talib (656-661) Abu Bakr quickly restored peace and order and unified the entire Arabia. Umar conquered the Persian Empire and set the pace for the creation of an empire unparalleled in history. During Uthmanns tenure, the Quran was compiled and put in writing. He

favored his family members, the Umayyads, and consequently, people accused him of nepotism. In the year 656 C.E. he was assassinated and Ali became the fourth caliph. The Umayyad family used the excuse that Ali had not avenged Uthmans assassination and started the first civil war in Islam. Muawiyyah, a relative of Uthman and the governor of Syria challenged Ali at Siffin. To prevent a bloody civil war, Ali submitted to an arbitration that favored Muawiyyah. He proclaimed himself as a new caliph and established the Umayyads dynasty. Therefore, the practice of choosing the caliph by the community came to an end and it was replaced with a hereditary monarchy regime. The Umayyads rule lasted about ninety years (661-750). They established an Arab kingdom with Damascus as their capital. The Umayyads considered non-Arab Muslims as second-class citizens. In year 750 C.E., the Abbasids with the help of Persians defeated the Umayyads and created the Abbasids dynasty (750-1258). The Abbasids were the descendents of Abbas, the Prophets uncle. They moved their capital to Baghdad and their military and administration became Persianized. The Abbasids era is the golden era of the Islamic empire. Baghdad became the center of science and philosophy in the world. The Islamic law (shariah) was completed during the Abbasids time. In 1258, Hulagu Khan, the grandson of Genghis Khan, led the Mongols to Baghdad and brought the Islamic empire to an end.

Shiite Islam The term Shiite is a derivative of the Arabic term meaning the partisans of Ali. Shiite Muslims believe that the Prophet had trusted the leadership of the Muslim community in Ali, his cousin and son-in-law. Shiite Muslims share with the Sunnis the belief in the principles of Islam and the duties of the Muslims towards God. In that respect the Shiite movement should not be considered a challenge to the unity of Islam. However, Shiite Muslims believe in two additional doctrines of justice and imamate.

Justice (Adl) The doctrine of Justice has important political, social, and interpretation that separates the Shiites from Sunni Muslims. Shiites believe that God is just. They believe

that God in His justice would not have left the Muslim community without a leader. Therefore, the leadership of the Muslim community was not a matter of choice for Muslims, but a divine appointment. Justice also implies the belief in individual free will as opposed to the notion of determinism. Shiites believe that God in His justice has endowed each person with free will and hence will judge him/her individually for his/her deeds accordingly. Furthermore, the justice of God implies that any injustice is the creation of man and, therefore, Muslims have the responsibility to fight against such injustice. This political interpretation of justice has a significant bearing on political institutions of Islam and the current political regime in Iran.

Imamate (Leadership and Guidance) Shiites believe that during the Prophets last pilgrimage to Mecca in the spring of 632 at a place called Ghadir Khumm he announced to his followers whoever I am his leader (Mawla), Ali is his leader (Mawla) [2]. Consequently, Shiite Muslims believe that the leadership of the community was vested in Ali and his children by a divine appointment through the Prophet himself. Shiites believe that the leader of the Muslim community must be a just and righteous individual. Furthermore, the new revelation required interpretation, which in turn needed perfect knowledge of the inner meanings of Islam. Such knowledge was vested in Ali and his direct descendants. The main branch of Shiite Islam is called the Twelvers. The Twelvers believe that the leadership was passed from one Imam to another until the twelfth Imam. Shiites believe that he is still alive and living in occultation and will return one day to establish true justice on earth.

Chapter Three Islamic Law Islam is a non-hierarchical religion. One becomes a Muslim by declaring the Oneness of God and the Prophethood of Muhammad. One also fulfills ones religious duties and obligations directly without reliance on an official church and/or clergies. However, Islam clearly intended to create a nation from individual Muslims. We have made you a just nation, so that you may testify against mankind and that your own apostle may testify against you. (Quran, 2:143) The faith itself is the most important unifying factor responsible for the creation of an Islamic community (ummah). The belief in one God, the final Scripture, and the last Prophet unite the Muslims and create an intra-national society. Muslims are supposed to create a just society. The creation of the just society requires active participation by all Muslims in political, social, and economic issues of their community. Therefore, Islam promotes social engagement and requires Muslims to live in a certain way prescribed by the religion. Shariah is the Arabic term for Islamic law and it means the path. Hence, Islamic law (shariah) delineates the path and sets the behavioral norms for individual Muslims and classifies their responsibilities towards God and other members of the ummah (community) for the creation of a just society. As a result, Islamic law and its implementation is a necessary condition for the creation of a just Islamic society. The Prophet was the political and religious leader of the Muslim community. He was also presiding over all legal matters as a judge and an arbiter. His death left the society without a leader and a jurist. Therefore, the development of Islamic law became a necessity. His close companions, including his wife Aisha, started to teach law and adjudicate cases based on legal precedent set by the Prophet himself. Thus, they were acting like a common-law judge. The religious and legal scholars developed the Islamic law over an extended period of time. It was finally completed in the tenth century during the Abbasid dynasty. Islam like Judaism is a law-based religion. Islamic societies and Islamic law are inseparable. The practice of Islamic law makes a society Islamic. Islamic law plays a

significant role in the legal system of Muslim countries directly or indirectly. Countries can develop secular laws and laws that reflect local customs as long as they do not contradict Shariah. For instance, Iranian Constitution of 1906 was a successful marriage of Islamic law and the European laws. Iranian revolution of 1979 brought Islamic law to a prominent position in Iran. At the present time, Iranian courts enforce Islamic law in Iran.

The Sources of Islamic Law Islamic jurists have used four sources to compile Islamic law: the Quran, Prophets tradition, qiyas (reasoning by analogy), and ijma (consensus of the community). In practice, local customs (urf) have also influenced Islamic law in different societies. This integration might be necessary to reflect specific ways that people do perform their social function in different social settings. 1. The Quran Muslims believe that the Quran is the Last Testament of God revealed to Muhammad over twenty-two years in Mecca and Medina. Muslims also believe that Muhammad was ummi (unlettered). He was not able to read or write. Therefore, the eloquence of the Quranic language is the proof of its miraculous nature and the authenticity of the Quran. Consequently, Muslims believe that the Quran is the word of God verbatim. If they say: It is your own invention, Say: compose one chapter like it. (Quran, 3:38) Therefore, the Quran is the primary source of Islamic law. However, the Quran mainly deals with religious and moral matters and only about 5% of its content deals with legal matters [1]. However, the laws set by the Quran are Gods enjoinments for humanity and, hence, they are immutable. 2. The Prophets Tradition The Prophets tradition consists of reported oral statements of Prophet Muhammad (hadith) and reported deeds and practices of the Prophet (sunnah) as a religious leader and a jurist. Prophets tradition became a legal precedent and the secondary source of Islamic law.

During the ninth century, legal and religious scholars began collecting the Prophets hadith and sunnah for legal purposes. These scholars had to scrutinize every oral report through investigation of the chain of transmission of the tradition to establish the authenticity and reliability of the report and the credibility of individuals responsible for the transmission of the report. One of the most authoritative anthologies of the Prophets tradition was developed by Bukhari (d. 870) that is widely used in practice of law and legal research in Muslim countries. Shiite Muslims believe that the Prophets legitimate successors, imams, were also divinely guided on all matters of religion. Therefore, they also use the tradition of their imams in addition to the Prophets tradition. As a result, they have a larger set of precedents for application in legal matters. 3. Rule of Reason (Qiyas) Greek philosophy and philosophers are of particular importance to Islamic philosophy and Islamic law. During the Abbasid dynasty, Muslims translated the works Greek Masters- Pythagoras, Plato, Aristotle, and other Greek philosophers into Arabic. This was the beginning of Islamic philosophy, which attempted to reconcile the new revelation with reason. Furthermore, the Arabic translation of Aristotles logic made Muslims familiar with the rules of logic that resulted in integration of rules of reason and Islamic law. Soon after that, Muslims began using the rules of reason (qiyas) in the development of Islamic law. Sunni Muslims interpreted qiyas as reasoning by analogy. Shiite Muslims used a stronger rule of reason and interpreted qiyas as reasoning by deduction. The application of these rules allowed Muslim scholars and jurists to analyze the existing legal precedents and create new laws using analogy or deduction. The application of the rules of reason in Islamic law also created the new doctrine of ijtehad (independent reasoning). A person who is knowledgeable about the religion of Islam and its laws (mujtahed) could use independent reasoning to resolve religious issues for himself/herself without reliance on official priesthood. The doctrine of ijtehad and its application could create the so-called dynamic jurisprudence. This could allow the adaptation of Islamic law to new situations and new time.

Islamic law was completed in the tenth century. Sunni Muslims believed that there was no reason for independent reasoning any longer. Therefore, they argued that Muslims must apply the existing laws and the future generations should simply imitate (taqlid) or emulate the past. This is known as closing the gates of ijtehad. Shiite Muslims never closed the gates of ijtehad and as a result were able to reinterpret Islamic law and adapt it to new time and new situations. The doctrine of ijtehad is an essential component of political Islam at the present time. Part two of this book will reconsider the doctrine of ijtehad and analyze its role in creation of democracy in Islam. 4. Ijma (Consensus of the Community)

According to a prophetic hadith a Muslim community will not agree on error [2]. Therefore, the final source of Islamic law is Ijma. Gradually, the consensus of the entire community was replaced by the consensus of the community of jurists or religious scholars. This narrow concept of the community is similar to the representative form of democracy as opposed to the direct form of democracy practiced in Ancient Athens. Part two of this book will revisit this source of Islamic law to support the concept of Islamic democracy.

The Subject matter of Islamic Law The creation of a just Islamic society (ummah) was the divine Will for Muslims. Islamic law was the pathway for the creation of such a normative society and the means by which Muslims could fulfill the divine will and achieve salvation for themselves. Figure 1 shows the sphere of Islamic law. Islamic law deals with the rights of God and the rights of individual. It also deals with duties and responsibilities of individuals to God and to each other. Finally, it prescribes a code of ethics and behavioral norms for Muslims. Islamic law also covers a set of sanctions and punishments for individuals who violate the norms or shirk their duties.

Figure 1

Islamic Law and its Components

Islamic Law

Rights of Individuals (Transactions)

Disciplinary Codes

Rights of God (Acts of Worship)

Behavioral Norms

God has enjoined Muslims to worship Him. Therefore, Islamic law enumerates the acts of worship (ibadat) for all Muslims. This part is concerned about the relationship between individuals and God and is considered immutable. The second part of Islamic law deals with social transactions (muamelat). This part is concerned about the relationship between individuals and their duties toward each other. It covers business laws, personal laws and other social transactions. The doctrine of ijtehad might be applicable in this area to bring changes to Islamic law dealing with social transactions. Individual relationships might go beyond social transactions and become a violation of the rights of God. For instance, fornication might be considered an act against the will of God. In that case the punishment of stoning the adulterers is prescribed by law and is immutable. On the other hand, if fornication is considered a social transaction, then the punishment can be changed according to the rule of ijtehad. Islamic law also deals with ethics and behavioral norms of an Islamic society. Individual acts can be classified as: (1) obligatory acts (wajib) such as the acts of worship; (2) recommended acts (mandub) such as additional charity contribution beyond the obligatory zakat; (3) permissible acts (halal or mubah) such as intimate relationship between married couples; (4) reprehensible acts (makruh) such as divorce; and (5) forbidden acts (haram) such as drinking wine [3]. God will reward individuals for fulfilling their obligatory acts, performing the recommended acts, and not doing the reprehensible acts. God will punish individuals for not doing their obligatory acts or committing the forbidden acts. An individuals

salvation depends on the totality of his/her acts during his/her lifetime. The society is also allowed to punish individuals for committing forbidden acts. Some of these punishments are quite controversial and will be considered in pat two of this book.

Schools of Islamic Law (madhhab)

Currently, there are four established schools of law for Sunni Muslims and one for the Twelver Shiite Muslims. These schools are named after their founders.

Sunni Schools of Law (1) Maliki School is named after Malik ibn Anas (d. 796) (2) Hanafi School is named after Abu Hanifa (d. 767) (3) Shafii School is named after Mahammad al-Shaffi (d.819) (4) Hanbali School is named after ibn Hanbal (d. 855) Twelver Shiite School of Law Jafari School is named after Imam Jafar al-Sadiq (d.765), the sixth Shii Imam.

These schools differ from each other with respect to applicability of rules of reason, the doctrine of ijtehad, and other points of law. Malikis and Hanbalis base their schools on the first two sources of Islamic law: the Quran and Prophets tradition. Hanafis allow liberal integration of local customs (urf) into Islamic law. Shafii School uses all four sources of Islamic law and it is the closest to Jafari School of Law. Jafari School focused on the legal precedents set by the Prophet and imams and integrated the rule of reason as a primary source of law.

Part II Political Foundations of Islam

Chapter Four Political History of Islam Islam does not regard numbers as criterion for truth and rectitude Ayatollah Khomeini Islam was a religious, social, and political design for the creation of a righteous, equalitarian, and just society from the very beginning. The Quranic enjoinments and Islamic law defined individuals relationships with God and each other and delineated a comprehensive way of life for Muslims. Prophet Muhammad was both the religious and political leader of newly formed Muslim community in Medina. The Prophets leadership in Medina became an archetype of Islamic states for the future Muslim societies. As a result, inseparability of church and state became a norm in Islamic societies. A single political and religious leader could enforce Islamic law more forcefully, promote Islamic values more effectively, and make it possible for Muslims to perform their collective religious duties with ease. Part I presented the dispute about the leadership of the Muslim community after the death of Prophet Muhammad. The dispute resulted in a division in Islam between the Sunnis and Shiites with their specific political ideology.

Sunni Political Ideology As mentioned in Part I, Sunnis believe in the right of Muslims to choose their leader, caliph, after the Prophets death. The choice of the caliph was through consensus (ijma) of the community. The choice of the first caliph was left to a group of the Prophets closest companions. The selection of the caliph by the community was followed by an oath of allegiance (bayah) of the entire community to the selected caliph. This process of selecting the leader was ended with the establishment of the Umayyads and Abbasids dynasties. The Umayyads and the Abbasids kept the title of caliph and preserved the unity of religious and political leadership in one Arab person until the demise of the Abbasids.

The fall of the caliphate in Baghdad provided an opportunity for the Ottoman sultans (kings) to call themselves caliphs later on. However, Ottoman sultans authority was not ecumenical since neither the Persians nor the Indian Muslims accepted them as Caliphs. The destruction of the Ottoman Empire in World War II brought an end to the institution of the caliphate. Sunnis political theory can be summarized in three terms: the caliphate, ijma (consensus), and bayah (oath of allegiance). Ijma and bayah imply that people of the community were Gods vicegerent here on earth and hence caliphs were earthly rulers. This in turn implies that caliphs must be held responsible to people, and they were not free to rule as they pleased. Generally, Sunnis have valued social and political stability rather than change. Therefore, they have been tolerant of the dominant political regime throughout the history. Sunnis believe in the stability of the society and the presence of law and order in their community. They believe that even a bad government is better than no government, which will result in chaos in the society. Their political theory is rather a conservative theory and is more pragmatic than Shiite political theory.

Shiite Political Ideology Shiite political theory encompasses two terms- Imamate and Justice. According to Shiites the leadership of Muslims was divinely bestowed on Ali and his children. Imams are considered to be sinless, infallible, and divinely guided and appointed to rule all Muslims. Consequently, only Imams can lead Muslims according the Gods Will. Unlike caliphs who might be considered accountable to people, Imams are responsible to God and their rule is independent from popular demand and political pressures. Furthermore, Imams are just individuals and can guarantee the justice of God on earth. The doctrine of Justice assumes divine justice and concludes that any injustice in Islamic world must be man-made. Social injustice is the result of social decay and political corruption and Muslims have the responsibility to fight against injustice to restore the archetypal Muslim society. Shiite Muslims are reminded of this important responsibility every year during the ninth and tenth of the month of Muharram when they commemorate Imam Husayns (d.

680) martyrdom in Karbala. Imam Husayn refused to accept Yazid I (680-83) as the legitimate caliph and with his family and companions, seventy-two people in total, stood against an army of thousands around Karbala where every one of them was martyred. As a result, Shiism became the religion of protest and Shiites have become the revolutionaries of Islam. Shiites have always been the minorities in Islam and yet they consider themselves the legitimate branch of Islam. Politically, this suggests that majority is not always right. Imams are the only legitimate leaders and any other leader is considered a usurper of power. Shiites have been the idealists in Islam and throughout the history of Islam stayed away from politics until Iranian revolution of 1978.

Chapter Five Islamic State Leave this Europe where they are never done talking of Man, yet murder men everywhere they find them. Jean-Paul Sartre Preface to Fanons The Wretched of the Earth Prophet Muhammad unified Arabia under the banner of Islam. During Caliph Umars tenure, Persian Empire was conquered and the stage was set for the creation of a vast Islamic Empire. Initially, Arabs thought Islam was their religion, however, the expansion of Islam changed this attitude and established Islam as a religion that was not limited to an ethnic group. The Quran makes it clear that all Muslims are equal before God. O mankind! We created you from a single pair of male and a female and made you into nations and tribes, that you may know each other. Verily the most honored of you in the sight of Allah is the most righteous of you. (Quran, 49:13) Therefore, the integration of all Muslims in one large community was a political matter that became the political objective of the empire. Fortunately, there were a number of unifying factors in Islam that made this grand union a possibility. First and foremost, the principle of Oneness of God implied a broader concept of unity in Islam. The principle implied one God, one Prophet, and one community for all Muslims and made it possible for multiple ethnic groups to unite under Islam. Islamic law was the second unifying factor in Islam. The practice of Islamic law in the vast empire established equality of all Muslims before Islamic law. The equal treatment of all Muslims provided an incentive for non-Muslims to convert to Islam and become an equal part of the unified community. The division of Islam between Shiism and Sunnism after the Prophets death seemed to be a challenge to the unifying feature of the Islamic society. The legitimacy of caliphs, except Ali, was an issue for Shiite Muslims. However, except the matter of

leadership of Muslims, Shiite and Sunni Muslims share the same belief system and, therefore, they have much in common. Islamic Empire remained a unified society to a significant degree until the demise of the Abbasids. During the Abbasids dynasty, kings and amirs who paid homage to the Caliph in Baghdad ruled the empire. He had both political and religious authority over the entire empire. The destruction of the Abbasids dynasty brought an end to this pan-Islamic union. Religious unity on the basis of common allegiance to the caliphate was dead, and with it the caliphates claim to preeminence over temporal powers and ultimately jurisdiction over political legitimacy. Later on, the Ottoman sultans assumed the title of caliph and tried to create such a unity within their territory. However, many Muslims societies, including Persians and Indians, remained outside the empire. The defeat of the Ottoman Empire in World War I ended the institution of the caliphate completely. This event provided an opportunity for the Arabs to reclaim the institution of the caliphate. However, soon it became obvious that the revival of the caliphate was not a possibility due to disagreement on the qualifications of a single political and religious leader as the caliph of all Muslims. The demise of the Ottoman Empire also brought Muslim countries under the control of the colonial powers, England and France particularly. The rise of nationalism in many Muslim countries, Especially in Egypt, mobilized Muslims to fight against colonialism to become independent countries. The rise of nationalism in Muslim countries was essentially in conflict with pan-Islamic political ideology of the caliphate. The rise of nationalism also made it easier for Muslim countries to move towards secularism and constitutional democracy. The doctrine of Islamic state was a response to these new challenges that Muslim communities faced. Although, there was no generally accepted model for the creation of an Islamic state, many Muslim thinkers considered it a pragmatic second-best solution. Muhammad Rashid Rida (1865-1935) was a Syrian scholar who made a significant contribution towards the development of the concept of Islamic state. He was concerned about the influence of Western secularism in Muslim countries and considered

the return to Islam as the best alternative to political and social problems of Muslim societies as he explained it in the following quotation. The Muslims say that it is religion that was the cause of their sovereignty and well-being, and that turning away from it was what landed them in misery and caused misfortune to descend on themBut most of them say this without understanding, imagining that there is an irrational secret in religion which enables the believers to attain victory and power and gives them success by miraculous and special blessings [1]. The doctrine of Islamic state begins with the belief in absolute sovereignty of God. The divine Islamic law (Shariah) reveals Gods Will for human affairs and creation of a just society. Therefore, the implementation of Islamic law is a necessary condition for the creation of an Islamic state. The next important issue for the Islamic state is the selection of a leader and the determination of the leaders authority and responsibilities. Rashid Rida considered the institution of the caliphate during the tenure of the Rightly Guided Caliphs as the model for the selection of leader for the Islamic state. The combination of ijma (consensus) and bayah (oath of loyalty) is necessary and sufficient for the election of the leader who enjoys the concurrence of the ummah (community). Rashid Rida believed that this elective process makes caliph (leader) responsible to the community since the community can only exercise authority over itself through its representatives [2]. Rashid Rida also considered certain qualifications for this leader. He must be an adult Quraishite (Quraish is the Prophets tribe) Muslim male who is capable of doing ijtehad, independent reasoning [3]. Rashid Rida believed that the Quraishite lineage was necessary and sufficient condition for the leader to exert influence in the Islamic state. Having considered a leader who is responsible to the community, he contemplated the principle of consultation (shura) that was introduced by Caliph Umar in early days of Islam as a natural consequence of ijma. Therefore, the elected leader of the Islamic state must govern through consultation to enjoy the communitys support. The leaders most important function is to implement Islamic law and making sure that the state laws remain compatible with Islamic law. This suggests that the leader must be mujtahed, capable of ijtehad, to allow him to reinterpret the laws for contemporary application

since, according to Rashid Rida, there is no contradiction between religion and the rules of reason. Islamic state is, therefore, a political system that enforces the religious laws on spiritual and temporal aspects of life to create an equalitarian and just social system. The absence of separation of church and state creates a significant degree of conformity in Muslim communities. This is surely good for the spirit of the community, but might dampen popular initiatives that are necessary for political, social, and economic progress. Due to the absence of a central priestly authority in Islam, Islamic state should not be considered as a theocracy. As a matter of fact, Islamic state can be compared to a constitutionally limited form of government.

Chapter Six Justice and Freedom in Islam

Justice is equality Aristotle Man is condemned to be free Jean-Paul Sartre Justice is raison dtre of Islam. Political leaders, caliphs or imams, must be just individuals in order to uphold and promulgate the rule of justice in Islamic societies. The Quran repeatedly reminds Muslims that the creation of a just society is the divine will for them. Allah commands you to hand back your trust to their rightful owners, and to pass judgment upon men with justice. (Quran, 4:58) Believers, conduct yourselves with justice and bear true witness before Allah, even though it be against yourselves, your parents, or your kin. (Quran, 4:135) Say:My Lord hath commanded justice (Quran, 7:29)

Allah commands justice

(Quran, 16:90)

We sent aforetime our messengers with clear signs and sent down with them the Book and the Balance (of Right and Wrong), that men may stand forth in justice. (Quran, 57:25) To understand the politics of Islam, one must analyze the concept of justice. Is there a universal understanding of the term justice? Is it possible that justice, like beauty, is in the eye of the beholder? Western philosophers are quite divided on this issue. Utilitarian philosophers, such as Jeremy Bentham and John Stuart Mill, are generally interested in end results. They believe in individuals freedom to act and make decisions based on what she or he

considers to be a desirable end. The invisible hand of the market will translate these selfish individuals acts into common good of the society. Rule utilitarians believe that these ends must be achieved subject to a set of social and moral norms imposed on them as social and moral constraints. Egalitarian philosophers, such as John Rawls, believe in collective interest of the society and are willing to sacrifice individuals interest for the good of society. Equality of opportunity is the minimal egalitarian goal, however, there must be social and political mechanisms in place for rectifying historical wrongs and to correct natural inequalities. Rawls defines justice as fairness and his book, A Theory of Justice. His theory consists of two principles of justice: the inviolability of individuals rights and the so-called maximin rule, the idea of giving priority to the needs of the most deprived people in the society. [1]. Libertarian philosophers, such as Hayek and Nozick, believe in limited collective intervention since in a free society distribution issues are determined according to individuals contribution to create values in the society rather than on moral merit. Libertarians believe that liberty (freedom) and equality are fundamentally incompatible. Taking side with freedom, they believe in minimal government (state) and are against any government action that unjustifiably reduces individuals freedom. It should be obvious that modern theories of justice are inseparable from economics. Economic justice seems to be a necessary condition for social and political justice. The creation of a just society requires reallocation of societys resources to rectify historical wrongs and undeserved natural inequalities. The state must create equal opportunity in real sense for everyone. This form of justice is known as distributive form of justice, or economic justice. The objective of Islamic state is to create an equalitarian and just society by ameliorating social, political, and economic inequalities through the implementation of Islamic law. Islamic law guarantees equality of all Muslims before law, while Quranic enjoinments and legal penalties prescribed by Islamic law enable the state to enforce the administration of justice. The Quranic symbol of Balance is an indication of Islamic justice. Gods creation is in balance. Therefore, living in harmony and balance based on

divine rule is just. Muslims have to deal with man-made injustice to restore divine justice on earth. Islam put an end to Arabs tribal culture and replaced it with a collective and communitarian value system for all Muslims. The collective norms of the society and the administrations of justice also pertain to individual Muslims rights and duties to God and to each other. The notion of Islamic justice and the activism of Islamic state in administration of justice could restrict individuals freedom and liberty. The concept of freedom, however, has two different interpretations. The negative form of freedom requires freedom from interference by others in an individuals autonomous acts and decisions. Politically, this form of freedom requires limited government intervention in the affairs of individuals to guarantee maximum freedom and liberty for them. According to the negative form of freedom, an over-zealous government clearly can infringe upon individuals rights and freedom, which in turn creates a non-democratic society. Many political philosophers believe that negative form of freedom (liberalism and individualism) is necessary for democratic political regimes. In The Open Society and its Enemies , Karl Popper took side with negative form of freedom-individualism, strict non-intervention (laissez faire), and absence of coercion, which he argued are necessary for creating an open and democratic society. In contrast, he considered collectivism and government intervention a direct approach to creation of a closed and authoritarian society. Contrary to this laissez-faire liberal political doctrine, The British political philosopher Thomas Hill Green (1836-1882) coined the phrase positive freedom and defined it in the following passage: We shall probably all agree that freedom, rightly understood, is the greatest blessings; that its attainment is the true end of all our effort as citizens. But when we thus speak of freedom, we should consider carefully what we mean by it. We do not mean merely freedom from restraint or compulsion. We do not mean merely freedom to do as we like irrespectively of what it is we like. We do not mean a

freedom that can be enjoyed by one man or one set of men at the cost of a loss of freedom to others. When we speak of freedom we mean a positive power or capacity of doing or enjoying something worth doing or enjoying, and that, too, something that we do or enjoy in common with others. [2]

Green provided the philosophical justification for the upcoming development of modern welfare-state, which requires pervasive government intervention in political, social, and economic spheres to reduce poverty and other social ills for all citizens. A homeless person, or a starving individual, may be negatively free and positively not free. While government regulation is viewed undesirable by advocates of negative form of freedom, Green considered it necessary for the modern states to safeguard the well-being of their citizens and enhance their capacity to lead a good life. Our modern legislationwith reference to labour, and education, and health, involving as it does manifold interference with freedom of contract, is justified on the ground that it is the business of the state, not indeed directly to promote moral goodness, for that, from the very nature of moral goodness, it cannot do, but to maintain the conditions without which a free exercise of the human faculties is impossible. [3](Germino, p.269)

It is important to note that Islamic justice is primarily of distributive form that requires reallocation of societys resources to alleviate basic needs of all Muslims. Islamic taxation of wealth, Zakat, is the means by which an Islamic state redistributes wealth form the rich to the poor to create economic equality in the society. It is clear that Islamic justice and negative form of freedom are not compatible. However, Islamic justice and positive form of freedom are well matched. God has ordained all Muslims to be fair to each other and create a just society. Islamic law is a design for enjoyment of life and preparation for after life. Individual Muslims freedom

is defined in his/her attunement to a transcendent order of being. Furthermore, Muslims freedom and their political rights are effectively linked to their religious duties. Rights and duties are two sides of the same coin. Therefore, Muslims will be free when they fulfill their duties to God. As a result, Muslims do not have the freedom to live against the rule of God. To live according to divine rule frees people from greed, exploitation of others, and other undesirable social entities. This is the true meaning of freedom in Islam. In that respect, individuals freedom is subject to restrictions provided by Islamic law and the notion of individual freedom against the will of God that is prescribed by Islamic law is an unviable proposition.

Chapter Seven Islam and Democracy It is in duty that the individual finds his liberation Hegel Political Islam is a phenomenon of the twentieth century. Generally, Muslims had no voice in the selection of their leaders after the era of the Rightly Guided Caliphs. When the Umayyads succeeded Ali, the fourth Rightly Guided Caliph, they replaced the tradition of selecting a caliph through ijma (consensus) and bayah (oath of allegiance) with a hereditary dynastic regime that lasted until the demise of the Abbasids. Therefore, Muslims never had the chance to participate in political decisions of the Umayyad and the Abbasid caliphs. The defeat of the Ottoman Empire in World War I provided Muslims, particularly Arab Muslims, to form political groups to fight against colonialism with the hope of restoring Islamic values and institutions in their societies. Hence Muslims participation in political movements and in politics is a recent event. In that respect, it is rather nave to compare political Islam with mature Western democracies. One has to remember the long Western political struggle from the time of Reformation to American and French revolutions, which resulted in separation of church and state. Therefore, it is misleading to use our modern political value system to judge a nascent political movement that has not had the chance to go through reformation. Having said that, this chapter investigates the compatibility of Islam with democracy. Even better, we will investigate if Islam is compatible with Karl Poppers idea of the open society. In his book, The Open Society and Its Enemies, Popper criticized grandiose social engineering that was defended by some philosophers from Plato to Marx for the creation of an ideal state or a utopia. These totalitarian models discourage criticism, they are typically collective in nature and accompanied with a social and moral code of ethics enforced by the state, and ruled by one person or a group of individuals who are supposedly wise enough to be the leaders. In contrast, he introduced the concept of an

open society as a social and political system that guarantees basic civil rights for its individual citizens, and brings about social changes through piecemeal approaches. If the concept of an open society and Islam are reconcilable, then political reform will follow to create an open and democratic Islamic society. Alternatively, if Islam is not congruent with Poppers open society, then Islamic societies are clearly closed societies. In that case, one can argue that a closed Islamic society is also a non democratic society. For that reason, we proceed this discussion by examining Islamic institution of ijtehad (independent reasoning) that is necessary for the creation of an open Islamic society.

Ijtehad Concordance between reason and religion has been a ubiquitous problem in every religion. Thomas Aquinas (1225-1274) is credited for reconciling Christianity and rationality that influenced political philosophers and theologians, such as Richard Hooker (1554-1600), who were responsible for the Reformation of the church and promotion of understanding and reasoning in the matters of religion and state. Greek philosophy entered Islam during the Abbasids period. This was the golden epoch of Islamic civilization. Muslims were the guardians of cultural, scientific, and philosophical heritage of different peoples living in their vast territory. It was a true multi-cultural open society. Baghdad was the center of knowledge in the world and Muslims spread the new discoveries throughout their empire. More importantly, Muslim societies were tolerant of diversity of ideas and religious practices. Everyone is familiar with Omar Khayyam (1048-1122) and his Rubaiyat, which questioned many tenets of the religion without fear of persecution as opposed to Salman Rushdies Satanic Versus that, caused an international crisis. During this time Muslim scholars translated the Greek masterpieces into Arabic and gave birth to Islamic philosophy. Different schools of philosophy like the Mutazilites (9th century) and the Asharites (10th century) integrated the rules of reason in development of Islamic theology. However, the Persian Sunni theologian Ghazali in his

Incoherence of the Philosophers argued against the rules of reason in understanding transcendental truth and substantially dampened this trend [1]. Greek philosophers, particularly Plato and Aristotle, had an everlasting influence on Islamic political philosophers such as Farabi and Ibn Sina (Avicina). Political philosophers of Islam shared Platos belief in the division of the society into different classes of individual with respect to their knowledge and understanding of the truth. More specifically, Muslim scholars divided people in three groups: the elites (khawass) who have an intimate knowledge of Islams esoteric truth, the masses (awamm) who could only understand the exoteric aspects of Islam, and the middle class (mutawassitin) who are capable of independent reasoning (ijtehad) for the purpose of interpreting the allegorical language of the religion [2]. Muslim scholars considered qiyas (reasoning by deduction for Shiite Muslims and reasoning by analogy for Sunni Muslims) the third important source of Islamic law. Therefore, the rules of reason had an important role in development of Islamic law. However, the completion of Islamic law was used as an excuse by Sunni scholars to announce the closure of the gates of ijtehad. Some authors argue that the closure of the gates of ijtehad is a myth rather than reality. Nevertheless, one can argue that the closure of the gates of ijtehad is a matter of degree. For instance, the Muslim puritan movement founded by Muammad ibn Abd al-Wahhab in the eighteenth century that was adopted by the Saudis in 1744 emphasizes literal belief in the Quran and the Tradition of the Prophet as the only acceptable sources of Islamic law and condemns all innovations. So, for Wahabi Muslims the gate of ijtehad is clearly closed. Therefore, the Sunni world, through this self-imposed closure required the Muslims to imitate and emulate the past-established tradition (taqlid) after the fifteenth century. This hostility to independent reasoning and change reinforced the idea of inseparability of church and state in Islam at the time that Western civilizations took the opposite direction of the Reformation that resulted in separation of church and state. Greek philosophy also influenced Muslim political philosophers with respect to the qualities of political leaders. Muslims philosophers shared with Plato the idea that the leader needs to be a philosopher-king. Such a leader will have an intimate knowledge of the religious law that in turn makes him a just and perfect ruler.

Although Shiite Muslims kept the gates of ijtehad open and allowed further development of Islamic philosophy and independent thinking, however, they shared the belief that the leaders must have certain qualities to merit the leadership of Muslim communities. Shiite Muslims believe that the leadership of Muslims belongs to Ali and his children because of their knowledge of esoteric aspects of Islam. They held that that the divine law did not reveal its true meaning in any automatic or easy fashion. However, Imams grasped the law through divine guidance and were able to reveal the inner meaning of it gradually when the time was right. As a result, in the absence of the Twelfth Imam, the true leader of Muslims who lives in occultation, the leadership must be left to the community of ulamas (Muslim jurists) who can use ijtehad to deduce the correct decisions that the hidden Imam would have made. of jurist in Islamic Republic of Iran. According to Abdolkarim Soroush the combination of religion and democracy is an example of the concordance of religion and reason [3]. The doctrine of ijtehad is a necessity for reinterpretation of Islamic laws to make them compatible with the concept of an open society. As the philosophers of Islam showed, reason and religion are compatible and ijtehad can be used to reveal the allegorical meaning of religious law to create a dynamic jurisprudence, which is necessary for the gradual changes, needed in an open society. The absence of ijtehad makes a Muslim society closed and hence non democratic. This is the basis for the rule

Sociological Foundations of Democracy The origin of modern liberal democracy and its institutional system lie in the eighteenth century when economic and political power transferred from landed gentry to men of capital. The development of capitalism had profound social and political consequences that were materialized through American and French revolutions. Capitalism, in order to flourish, required social institutions in support of individualism and political institutions to support individuals freedom of choice in the

marketplace. Therefore, the success of capitalism depended on the removal of social, legal, and political obstacles associated with the ancien rgime.

Figure 1 The New Political Economy

Economic Institution of Capitalism (Free Market - Free Choice)

Political Institution of of Limited Government (Negative Rights)

Social Institution of Individualism (Primacy of Individual)

Figure 1 depicts the essential parts of modern liberal democracy. Economic, political, and social institutions are fully integrated and facilitate the operation of the new political economy. Specifically, capitalism requires a limited government- a government that enforces laws, protects private property, and defends the country against foreign enemies. Furthermore, the political system must protect individuals against undue government interference in their social and economic exchanges. Consequently, the political system protects individuals freedom by establishing negative rights for its individual citizens. These so-called first-generation rights give rise to negative form of freedom, which is essential for the operation of modern liberal democracy. An alternative explanation for the rise of modern liberal democracy has to do with the process of economic development. Political sociologists argue that countries like England, France, and the United States that began economic development at the micro level, naturally developed democratic political institutions. In these countries, farmers, shopkeepers, and small industrialists thrived for improving their economic performance. This individual-driven development resulted in an economic transformation that started at the bottom of social hierarchy and moved upward. The political consequence of such an

evolution was limited democratic government that facilitated the success of individual activities. In contrast, those societies that imposed economic development from the top of the social hierarchy were prone to develop fascist and authoritarian political systems. German development under the leadership of Bismarck and Meiji Restoration in Japan are perfect examples of development from above . The state-driven style of development was partly responsible for the development of fascist political systems in Germany and Japan before World War II. In conclusion, democratic political regimes require social institution of individualism, limited governments, and economic transformation that starts at the bottom of social hierarchy. Alternatively, countries that have collectivist cultures and active governments that attempt to impose economic development on their citizens and their governments are actively involved in redistribution of income to provide social justice, are prone to develop non-democratic political system in comparison to the liberal model of democracy. Muslim countries have collectivist culture and Islamic states pursue social, economic, and political justice through establishing second-generation rights associated with positive form of freedom. Furthermore, we will discuss in Part II that economics of Islam is not compatible with institution of capitalism. Therefore, political economy of Islam is not compatible with liberal form of democracy. However, democratic societies have developed different models of democracy. European forms of democracy are usually accompanied with active government in pursuit of social and economic fairness. These models of democracy are much more compatible with Islamic political economy as opposed to the liberal form of democracy practiced in the United States.

Democratic Institutions of Islam To consider the democratic institutions of Islam, we need a broad and generally accepted definition of democracy. Since it is very difficult to define democracy in an allinclusive manner, we will consider the common elements of multifaceted definitions of democracy.

First and foremost, democracy is the opposite of dictatorship. As a result, democracy is a political system representing the sovereignty of the people as opposed to the sovereignty of the leader. For that reason, free elections are necessary in democratic societies for the people to reveal their general will to their governments. Consequently, the opinion of majority shapes government policies in democratic societies. Secondly, democratic societies function based on compromises made between different political groups. Hence, democratic societies will balance between the will of majority and the rights of minorities. Equally, there has to be a compromise between the rights of individuals and the rights of the state. These rights are protected by the rule of law and equality of all citizens before law. Finally, democratic regimes are pluralistic political systems tolerant of criticism and diversity of opinions. Therefore, democracies protect freedom of expression, freedom of press, and freedom of association. If democracy is the opposite of tyranny and autocracy, then Islam is clearly compatible with democracy. Absolute sovereignty belongs to God and Muslim leaders are His vicegerents whose rule must consider public Islamic interest regardless of their own personal interest. Islam generally considers individuals interest subordinate to the interest of public. This common interest of public or general will constitutes the basis of Jean Jacques Rousseaus social contract. In Rousseaus political theory as well as in Islam, there is no room for the arbitrary rule of an individual leader. According to Ayatollah Khomeini Islam is fundamentally opposed to the whole notion of monarchy [4]. The legitimacy of hereditary monarchy regimes, even constitutional monarchy regimes, can be questioned on two grounds: the leadership of a country is too important to be left to the accident of birth and the laws of nature guarantee the regression towards mediocrity of future kings. Furthermore, as Thomas Paine said the mere term monarchy is an insult to human dignity. Apart from philosophical objections to monarchy regimes, one can clearly argue that monarchies were forced on Muslims by the Umayyad and Abbasid Caliphs and innately incompatible with Islam and its political institutions. Democracy is also a political system based on the rule of law. In this regard, Islam is compatible with democracy. As mentioned, the implementation of Islamic law (Shariah) is the primary reason for creation of an Islamic state. The Quran has declared the equality of all Muslims before God.

O mankind! We created you from a single pair of male and a female and made you into nations and tribes, that you may know each other. Verily the most honored of you in the sight of Allah is the most righteous of you. (Quran, 49:13) Islamic law is Gods decree and command for Muslims communities. If Muslims are equal before God, then they must be equal before Gods law. The function of Islamic state is to enforce the Islamic law by treating all Muslims equally. Islam also protects the rights of non-Muslim minorities. There shall be no compulsion in religion (Quran,2:256) Historically, Islamic states have not proselytized non-Muslims and have recognized the rights of religious minorities (People of the Book) to practice their religions with impunity. It is generally agreed that Muslims have the right to criticize their leaders (Quran, 4:148), they have the right to belong to different political groups and parties (Quran, 9:122). Islam also promotes moderation in all aspects of life. This behavioral norm is also conducive to creation of a democratic political system. There are also specific Islamic institutions that are noteworthy in terms of reconciliation between Islam and democracy. Consensus of the community (ijma) and the oath of allegiance (bayah) to the new leader can be interpreted as the rule of majority through the right of voting for individual Muslims. More importantly, the institution of consultation (shura) can be used to introduce parliamentary form of democracy. For this reason, Majlis-e Shura (Consultation Assembly) represents the legislative branch of government in Islamic states.

Islamic Democracy: Government According to Gods Will

The reconciliation of religion and democracy has been a challenge throughout history. According to Abdolkarim Soroush, there are three problems in reconciliation of religion and democracy: to reconcile peoples satisfaction with Gods approval; to strike a balance between the religious and nonreligious; and to do right by both the people and by God, acknowledging at once the integrity of human beings and of religion [5]. Islam

is a religion of the law. Islamic law is the divine blueprint for governing mankind and for the creation of a normative and just society for all Muslims. In such a society, individual rights and freedom are subject to Gods approval. Muslims freedom and their political rights are limited. Muslims will be free when they fulfill their obligations to God. Consequently, Islamic law is the supreme law in Muslim communities and secular laws must be in conformity with Islamic law. In that sense, separation of church and state is not an issue for Muslims. For Western scholars, this is an unviable proposition since Western democracies are totally based on this notion. Islamic law deals with the rights of God and the rights of individuals. While the rule of ijtehad might be applied to modify the rules governing social transactions, the rights of God are immutable. The secularists have criticized Islamic law due to their failure to recognize the difference between the rights of God and the rights of man. Islamic disciplinary code is often criticized in this respect. However, the creation of a just Islamic society is a necessary condition for the application of harsh disciplinary acts. In a true Islamic society, such laws and their applications become unnecessary. When people live according to Gods will, then there is no need for harsh disciplinary acts. In such an environment, the existence of such laws is only necessary for deterrence and prevention of un-Islamic acts. Democracies also must guard and protect the rights of their minorities, in order to prevent the dictatorship of majority. As mentioned, the rights of recognized religious minorities are protected in Islam. The so-called People of the Book can practice their religious rites freely in an Islamic state. The rule of ijtehad can be used to expand the number of recognized religions in Islam. For instance, Iranian Constitution recognizes Christianity, Judaism, and Zoroastrianism as religious minorities and protects their rights. However, there are certain belief systems that are considered as false religions and remain outside this legal protection. Bahaiis of Iran and Qadiyanis of Pakistan are considered heretics and, hence, have no political rights in Iran and Pakistan. Additionally, minority of atheists can never be recognized in an Islamic state. For such minorities, the best they can expect is quiet form of peaceful coexistence. Finally, we must address the issue of gender inequality in the Islamic world. One has to remember that Islam emancipated women from misogynistic tribal tradition of

Arabs. For the first time in history, women were given property rights, inheritance rights, and marriage became a contract between two consenting adults. The Quran declared equality of all Muslims before God. The social transactions between men and women were brought under the purview of Islamic law. It is true that in Islam, women and men have different and yet complementary roles in the society. Islam promotes education for all Muslims and requires activism form all. There are also behavioral norms in Islam for both men and women. For instance, both men and women are required to dress modestly and behave according to a certain social decorum that might be different for the two sexes. Many of the existing inequalities are the results of local customs (urf) that have been imposed on women under the name of Islam. The inequalities prescribed by Islamic law are mainly related to social transactions among men and women and, hence, the rule of ijtehad can modify them. For instance, some have interpreted the following quotation form the Quran as a necessity for legalizing monogamy. If you fear that you cannot treat orphans with fairness, Then you may marry other women who seem good to you: two, three, or four of them. But if you fear that you cannot maintain equality among them, marry one only or any slave girls you may own. (Quran, 4:3) Islamic feminism is an indigenous response to such inequalities. This movement intends to eliminate man-made inequalities from Islamic societies. A series of fatwas (legal opinion) by Iranian religious scholars indicate that it possible to remove social inequalities for women in an Islamic state. Shirin Ebadi, Iranian Nobel laureate is a good example of this movement. She is a lawyer and human rights and democracy activist who believes there is no conflict between Islam and human rights believes in reforming Islam from within. Such reform clearly requires the application of the rule of ijtehad by Muslim jurists for the removal of inequalities. In conclusion, the development of dynamic jurisprudence through the application of the rule of ijtehad is necessary and sufficient condition for the concordance between religion and democracy. Although, one can conclude that Islam is not compatible with liberal form of democracy, it is clearly compatible with a broad concept of democracy, and more importantly, with the concept of open society. The creation of an Islamic state

that could guarantee and support human rights, civil rights, and basic fundamental rights for individual Muslims is attainable. The democratic struggle in Iran is a good indication of such a goal.

Chapter Eight Islamic Republic of Iran Islam is the religion of those who struggle for truth and justice, of those who clamor for liberty and and independence. It is the school of those who fight against colonialism. Ayatollah Khomeini

The choice of Iran for this case study is based on historical uniqueness of Iran in the Islamic world. Arabs invaded Egypt, Syria, the present-day Iraq, and Iran during the reign of caliph Umar (634-44). Iran is the only country that preserved its language and its national identity in this group. Egyptians, Syrians, and Iraqis became Arabs while Iranians remained Iranians. Iranian Muslims are also predominantly Shiite Muslims while majority of Muslims in the Islamic world are Sunnis. Shiism became the official religion of Iran in 1500 C.E. when the Safavids came to power. As was discussed in the previous chapters, Shiite revolutionary political philosophy has a critical relevance to the recent events and perhaps it is a better platform for the creation of Islamic democracy at this time due to the openness of the Shiite clergy to non-Islamic modern political institutions. Finally, Iranian revolution of 1979 and the establishment of Islamic Republic of Iran turned the idea of an Islamic state into a reality. For the first time in history a popular uprising created a model that can be followed in other Muslim countries and provide hope for reconciliation between Islam and democracy. Historical Background Iran has been an independent country since 1500 C.E. However, in nineteenth century, because of its geo-political importance got involved in the political game of balance of power played by the Great Britain, France, and Russia. As a result of two wars with Russia in 1813 and 1828 Iran lost major part of its Caucasian provinces to Russia including Georgia, Armenia, and northern Azerbaijan. The war with the Great

Britain resulted in permanent separation of Heart from Iran and terminated Iranian territorial claims in Afghanistan. Although Iran remained nominally independent, it was ipso facto controlled by the European powers, particularly the Great Britain, during the reigns of the Qajar and Pahlavi regimes. Nineteenth century was also an important intellectual turning point in the history of Iran. Up to that time, Iran was a traditional Muslim country with Islamic education. Interaction with Europeans introduced Iranians to modern medicine, engineering, European languages, are, and music. Ever since, Iranian intellectuals have embraced the European values and have reconciled them with their national and religious heritage. Abdolkarim Soroush, an Iranian social, political, and religious thinker summarizes this augmentation of Iranian cultural base in the following passage. The three cultures that form our common heritage are national, religious, and Western origins. While steeped in an ancient national culture, we are also immersed in our religious culture, and we are at the same time awash in successive waves coming from the Western shores. Whatever solutions that we divine for our problems must come from this mixed heritage to which our contemporary social thinkers, reformers, and modernizers have been heirs, often seeking the salvation of our people in the hegemony of one of these cultures over the other two. [1] In retrospect, middle of nineteenth century set the foundation of modern education in Iran. Social and educational reform of the nineteenth-century Iran was also key to political reform that resulted in the Constitutional Revolution of 1906. Iranian Quest for democracy Iranian struggle for democratic political regime can be traced back to the Constitutional Revolution of 1906, which was the first attempt to amalgamate Islamic law and European laws to create a democratic regime that could satisfy both the religious and secular scholars and activists. Knowing that the Russian and British governments supported the crony Qajar regime, the revolutionaries decided to opt for a constitutional monarchy regime instead of

a republic. A special assembly wrote the constitution in 1906, borrowing from the Belgian constitution and Islamic law and added a supplement in 1907. Two events were responsible for the demise of democracy in Iran by 1912. First, in 1901 William Knox DArcy, a British subject, received an oil concession from the king of Iran, Muzzaffar al-Din Shah for 20,000 British pounds [2]. Oil was discovered in 1908. The Anglo-Persian Oil Company, the forerunner of the British Petroleum, took over DArcys concession. By the year 1912, the British government owned more than 50 percent of the Anglo-Persian Oil Company. The second event happened in 1907. In August 1907, unbeknownst to Iranian government, a treaty was signed between Russia and the Great Britain dividing Iran into three zones. Russians controlled northern Iran while the oil-rich southern Iran came under the British control. A neutral zone in between was left to Iranian government [3]. Clearly, the two imperial powers were not happy with the development of democracy in Iran and effectively stopped it through the division of the country. Iranian Majlis hired an American banker, Morgan Shuster, in 1911 to reform Irans finances. Governments of Russia and the Great Britain protested this appointment and when Majlis refused to remove him, with military help from Russia, the king dissolved the second Majlis in December 1911 and put an end to incipient Iranian democracy [4]. Although the constitution was not enforced after 1912, it was not revoked and remained the fundamental law of the land until Islamic Revolution of 1979. In 1951, the democratically elected prime minister of Iran, Dr. Mohammad Mossadegh, put in motion the Iranian constitution again. As was expected, he nationalized the Anglo-Iranian Oil Company (AIOC) with the approval of the Majlis. Over the next two years he fortified his position and popularity at home and defended the nationalization case in international arenas. In a short period of time, he became the national hero in charge of the country and making the monarchy regime irrelevant. Consequently, the king fled to Baghdad in August 1953. Shortly after, a British-American joint covert operation removed the prime minister from power and restored the despotic monarchy regime of Pahlavi dynasty. The crony regime immediately rewarded its masters by signing a new contract with a

consortium of international oil companies. The British Petroleum received 40% share, five American companies (Standard Oil of New Jersey, Socony, Socal, Texaco, and Gulf Oil) received 40% share, Royal Dutch Shell got 14% share and the French Company, CFP, got 6% share [5]. The coup of 1953 left a profound imprint on the national psyche of Iranian people and set the stage for the revolution of 1979.

Islamic Government of Iran The revolution of 1979 was in the making since the coup of 1953. When the king fled Iran in 1953 he told the U.S. ambassador in Baghdad that he would be looking for work shortly as he has a large family and very small means outside Iran [6]. Upon his return to Iran he was determined not to make the same mistake for a second time. With the help of the CIA he established a notorious secret police (SAVAK) that its sole function was to crush political dissent in Iran. Over the next twenty-six years his

autocratic and oppressive regime imprisoned, tortured, and killed thousands in order to preserve the corrupt Pahlavi regime. His association with the West, especially the United States, is the reason for anti-western sentiments in Iran. By 1979, Iranian activists were looking for an indigenous experiment and the Shiite revolutionary ideology provided the answer. Iranian revolution was the uprising of people against absolute monarchy. It was also an anti-imperialist and nationalist struggle in search of democracy, political, and economic independence. Unfortunately, political oppression during the last quarter of the century had eradicated or overpowered most of organized political groups. However, the clergy group had remained organized with a symbolic leader in exile. During the course of his sojourn in Iraq, Ayatollah Khomeini had developed the blueprint for the development of the first Shiite theocracy or theo-democracy. Upon his triumphant return to Iran in 1979, he seized the opportunity to implement his model of Islamic government, which resulted in the establishment of the Islamic Republic of Iran.

Ayatollah Khomeinis Model of Islamic Government In an Islamic state, sovereignty belongs to God. Islamic law (Shariah) is His design for the creation of a just Islamic society. Though laws are necessary for the creation of an Islamic society, they are not sufficient to guarantee such a creation. Therefore, an Islamic government is necessary to execute the law. Therefore, Islamic government must be a government of law [7]. Since Islamic government is a government of law, an Islamic government must be of constitutional form [8]. The constitution must comprise of certain rules and

conditions that are set in the Quran and the traditions of the Prophet and Imams. These rules and conditions will make all political institutions secondary to the laws of Islam. The Prophet himself established the necessity of such a government when he formed the first Islamic state in Medina and acted as the religious and political leader of Muslim community. He transferred that responsibility to Ali and his children shortly before his death. Therefore, Shiite Muslims believe that the legitimate leadership of Muslim communities belongs to imams starting with Ali and ending with the Twelfth Imam who lives in occultation. As a result, Shiite Muslims have considered the temporal leaders and kings illegitimate and generally they stayed out of politics in order not to cooperate with illegitimate rulers. Revolution of 1979 provided the opportunity for the creation of an Islamic state based on Shiite political ideology. The framework for the Islamic government was based on a series of lectures, which Ayatollah Khomeini gave in Najaf in 1970, while in exile [9]. With the

occultation of the Twelfth Imam, the question arises as to who should hold political authority and whether a legitimate government may exist during this time period. Since Islamic government is a government of law, Ayatollah Khomeini claimed that in the absence of the legitimate Imam, the leadership belongs to the faqih (a Muslim scholar who is knowledgeable about Islamic law, a Muslim jurist) who has the knowledge of the law and could use the rule of ijtehad (such a person is called mujtahed) to deduce the decision that the Hidden Imam would have made. The foundations for Khomeinis claim are based on interpretation of certain traditions of the Prophet and the Imams, which he

believed delegated political authority to the fuqaha (plural of faqih) during the time of the Great Occultation. Velayat-e Faqih (Governance of the jurist) Ayatollah Khomeini believed in the supreme authority of faqih in the political process of establishing an Islamic state in the absence of the Twelfth Imam. He also claimed that the executive branch belongs solely to the fuqaha and that no other power may rule. Furthermore, he stated that the ulama (religious scholars) must strive for the establishment of the Velayat-e Faqih (governance of the jurist) because fuqaha had been delegated as the only legitimate rulers in the Imams absence and all rights and authorities of the Imam would be exercised by the faqih. If at the time there is one faqih who can take charge and establish this state, then it is incumbent upon him to do so. If there is not one faqih, then it is up to the fuqaha as a whole to do so [10]. Khomeini was against the traditional theory that an Islamic state would only be established by the return of the Twelfth Imam. He believed that God had created a set of laws for humans to follow and that these laws must be observed at all times. Since religious rituals did not stop with the Occultation of the Imam, therefore the political aspect also should not stop. Therefore, Muslims must live in an Islamic state with the Shariah implemented and practiced. Since the Muslims must live in an Islamic state, the question arises as to its composition. The Islamic government would be a constitutional government, because it must work within the frame of the Shariah laws, with no ambiguity in its roles. In an Islamic state, there would be no legislative body because God has set any laws, which are needed for the people already. The executive would be in the hands of the faqih, but the faqih would have more of a veto power. The judiciary also would be in the hands of the faqih, since the faqih is the most versed in Islamic laws. The check on the executive power would come from the executive himself because his self-control, moral integrity, and religious knowledge would stop him from abusing any powers [11]. Khomeinis justification that the ulama (Muslim scholars) are the rightful leaders during the time of the Occultation is based on a number of hadiths and Quranic verses. He used his own ijtihad (reasoning) to deduce the true meaning of these sources. He used both strong and weak hadiths (a hadith is determined to be strong if its chain of

transmission is unbroken from the person saying it all the way back to the Prophet, if the people conveying its messages are trustworthy, and if it has a number of different chains of transmissions) to prove his thesis that the Prophet and the Imams had designated the ulama to govern the people. First Hadith One hadith which he used to justify his thesis is from the Prophet Muhammad. This hadith is a strong hadith, which appears in five reliable chains of transmissions. The Most Noble Messenger (upon whom be blessings and peace) said: O God! Have mercy on those who succeed me. He repeated this twice and was then asked: O Messenger of God, who are those that succeed you? He replied: They are those that come after me, transmit my traditions and practice, and teach them to the people after me. [12] Khomeini began his justification by analyzing the phrase and teach them. Khomeini assumes that being able to teach a person about Muhammads tradition takes a certain level of knowledge. If one is not a faqih, then he will not be able to understand the traditions of the Prophet to be able to teach them to others. One must be a mujtahed (one who practices ijtihad) to be knowledgeable enough to use reasoning to deduce the meanings of the various traditions to teach them to others. Without being able to deduce the meaning of a tradition then a person is unable to teach others and may give an incorrect teaching about what the Prophet was attempting to convey. It is very important that the correct meaning of the traditions are taught because those that are teaching will be spreading the Prophets words to others and only a faqih has the ability to know what the true meanings of the traditions are [13]. Khomeini then considers the phrase, those that come after me and transmit my traditions and practices. Khomeini claimed that this phrase is speaking of the faqih and not those who merely recite the traditions [14]. To transmit a tradition is to reveal the tradition to others. To be able to reveal a tradition, again, one must be a faqih because to understand what is truly meant by the tradition one must have studied the traditions and learned how to use reasoning to reach the actual meaning of the tradition. In addition, the phrase includes a section about my traditions. Further, to decipher whether the tradition

is a genuine tradition of the Prophet, one must be a faqih. For if one does not have the education to learn how to tell true from false then he may relay traditions which are false. If false traditions are relayed, the message of the Prophet will be distorted and Islam will not survive. Thus, to be able to propagate the traditions of the prophet, one must be a faqih, one who knows all of the ordinances of God [15]. By claiming that those who come after the Prophet are the fuqaha, then Khomeini is showing that the Prophet is relaying to the people that the fuqaha are his successors. Khomeini asserts that, by successor, the Prophet means in all capacities of the Prophet, which includes not only religious guidance, but also political leadership [16]. He makes this claim by deducing that, when the person asked the Prophet who are those that succeed you, the questioner and the Prophet knew the definition of succession (replacement in all senses of the word and, thus, in all duties). He further backs his claim by stating that, when the Prophet stated that Ali and the Imams are his successors, no one questioned in which capacity they were succeeding him, whether in all capacities or merely in a religious non-governmental succession. In addition, since the fuqaha are his successors in every sense, then this hadith shows that Khomeini is correct in assuming that the faqih has the right to govern in the absence of the Twelfth Imam. Second Hadith This tradition comes from Imam Sadiq, the sixth Imam and one of the most knowledgeable Imams in regard to Islamic law. It is a reliable and authentic tradition. Imam Jafar as-Sadiq said: Refrain from judging, because judging is reserved for an imam who is knowledgeable of the law and legal procedures and who behaves justly toward all the Muslims; it is reserved for a prophet or the legatee of a prophet. [17] Khomeini began by stating that a judge must have three qualities. The first quality is that the judge must be an imam. His assumption is that when the Imam stated judging is reserved for an imam, he was not speaking of the Twelve Shiite Imams. He claims that the term imam here indicates its literal meaning of leader or guide. The reason for this claim is that if Imam Sadiq were speaking of an imam in the technical sense, then he would not have defined the characteristics of an imam afterwards (who is knowledgeable of the law and legal procedures and who behaves justly toward all the

Muslims). This would have been excessive because these traits are inherent in the imam in the technical sense. Therefore, the Imam was saying that a judge is a leader or guide. The second quality, which a judge must have, is that he should possess knowledge. To be able to judge correctly, the judge must be knowledgeable of Islamic laws to be able to judge correctly. If a judge is not knowledgeable, then he will not give correct judgments because he does not know Gods laws. Only a person who has studied the Shariah is able to discern what Gods laws are and can judge correctly. The fuqaha are leaders who are versed in the Islamic laws and legal procedures and, therefore, can legitimately judge Muslims. They are also experts in the doctrines, institutions and ethics of the faith . . . a faqih is a religious expert in the full sense of the word [18]. As such, the fuqaha have the qualifications to judge. The third quality a judge must have is that he should be just. The fuqaha have this quality. Since the fuqaha are knowledgeable about the law and are just, they must be the leaders of which the tradition speaks. The hadith states that these leaders are the Prophet or the legatees of the Prophet. Since the fuqaha are not prophets, they must be the legatees of the Prophet who inherit the entire legacy of a prophet. Khomeini states that the most important function of a prophet is not just delivering judgment, but establishing a just social system so that Muslims may live in a legitimate state. To enact a just social system, a prophet must create a governmental system in accordance with the laws which God has sent. Since the legatees are bequeathed all of the Prophets roles, they have the function of establishing and leading a legitimate governmental system. Khomeini shows that this hadith is further proof of his thesis that the fuqaha are the rightful rulers in the absence of the Imams, since the Imams were the prophets legatees. In their absence, the fuqaha have the qualities needed to rule. They are knowledgeable of the Islamic laws and have the spiritual rank and privilege to qualify as the leaders of the Muslim community in the absence of the Twelfth Imam. Third Hadith This hadith also comes from Imam Sadiq. It also is a strong hadith, with several different versions having different chains of transmissions. Khomeini uses this hadith to further his theory.

Umar ibn Hanzala says: I asked Imam Sadiq (upon whom be peace) whether it was permissible for two of the Shiis who had a disagreement concerning a debt or legacy to seek the verdict of the ruler or judge. He replied: Anyone who has recourse to the ruler or judge, whether his case be just or unjust, has in reality had recourse to taghut (the illegitimate ruling power). Whatever he obtains as a result of their verdict, he will have obtained by forbidden means, even if he has proven right to it, for he will have obtained it through the verdict and judgment of the taghut, that power which God Almighty has commanded him to disbelieve in (They who wish to seek justice from illegitimate powers, even though they have been commanded to disbelieve therein [4:60]). Umar ibn Hanzala then asked: What should two Shiis do then, under such circumstances? Imam Sadiq answered: They must seek out one of you who narrates our traditions, who is versed in what is permissible and what is forbidden, who is well acquainted with our laws and ordinances, and accept him as judge and arbiter, for I appoint him as judge over you. [19] Khomeini makes the claim that this hadith is a political ruling. It orders the Muslims not to seek out other governments because only the Imams rule is legitimate in the eyes of God. The government of Imam is the only legitimate government because Imams are the only ones whom have been divinely selected to rule. They are knowledgeable about the Shariah and their government would be ruled by Shiite doctrines. Imam Sadiq explains that Muslims must only seek those who narrates our traditions, who is versed in what is permissible and what is forbidden, who is well acquainted with our laws and ordinances, and accept him as judge and arbiter, for I appoint him as judge over you. Therefore a Muslim may seek the judgment and guidance of a judge who knows the Shiite doctrines so that they may judge in a fair way. Khomeini claims that the Imam is speaking of the fuqaha since they are the only ones who have studied the traditions of Imams and the Shariah. Since the fuqaha have studied the Shiite doctrines they are knowledgeable enough to understand the traditions and decipher which are authentic. Thus they are able to use ijtihad to interpret the traditions

correctly and thus to judge justly. Any other group has not studied the Islamic law enough to understand the meanings of the traditions and thus Muslims cannot seek them to judge their case. Therefore Khomeini claims that Imam Sadiq was stating that only the fuqaha may manage judicial procedures since the Imam appointed them to do so since they are the only ones qualified to act in such a capacity. By being the judge, the fuqaha are the authorities in the Muslim community, therefore, when Imam Sadiq later in the tradition states that he has appointed such a person to rule you it is because he realizes that the fuqaha are the only ones capable of understanding Islamic laws. Also since the Muslim community must obey the ordinances of God as stated in the Quran Obey god, and obey the Messenger and the holders of authority among you (Quran, 4:59), they must obey the fuqaha as their rulers in the absence of the Imams because they are the ones who hold authority over the Muslim community since they are the ones who are most knowledgeable of the Shariah. Therefore, Khomeini claims that this tradition helps to support his thesis that during the Imams absence the faqih is to govern the people. Khomeinis lectures show the importance of the rule of ijtehad for the establishment and governance of an Islamic state. Since Muslims must live under the Shariah at all times there needs to be a legitimate government, which abides by the Shariah. He also shows that during the Prophet and Imams time the Muslims were guided religiously and politically by their leaders. Therefore in the time of the Twelfth Imams absence, there still needs to be a legitimate government to govern the Shiite population. The bulk of his lectures explain why the ulama must be in charge of this government because they are the most versed in Islamic laws and have been appointed by the Prophet and the Imams to lead a legitimate government in the time of their absence.

Creation of the Islamic State in 1979 and its Consequences

In 1979, Ayatollah Khomeini took power in Iran and began to implement his ideas into actual state structures. However, his theories of the state structure were quite vague. Therefore, he and his followers formed an alliance with other political and intellectual groups to create a pragmatic solution to implement the theories into the

modern political system to ensure its survivability over time. The state system, which was established, combined certain Islamic traditions with more modern state structure to create a semi-democratic Islamic state.

State structure of the Islamic Republic of Iran

Islamic Republic of Iran is a constitutional government with modern political institutions based on universal suffrage. However, the laws, which the constitution is based on, are not manmade, but are divine laws based on the Shariah. So it combines the concept of constitutionality with the need for Shiites to live under the Shariah. Since the constitution is based on divine law, which is perfect, there is no need to implement other laws, which would be manmade and thus imperfect. Therefore, the legislative branch does not have the ability to create new laws and must only pass legislation, which complies with the Shariah. The Shariah also binds the judicial branch. Since the fuqaha are the most knowledgeable about Islamic laws they head the courts and give out punishments based on the Shariah. The executive branch also must abide by the Shariah when governing the country. Article 2 of the Constitution of the Islamic Republic of Iran
( declares a government based on

belief in: The One God (as stated in the phrase "There is no god except Allah"), His exclusive sovereignty and the right to legislate, and the necessity of submission to His commands; Divine revelation and its fundamental role in setting forth the laws; the return to God in the Hereafter, and the constructive role of this belief in the course of man's ascent towards God; The justice of God in creation and legislation; Continuous leadership (imamate) and perpetual guidance, and its fundamental role in ensuring the uninterrupted process of the revolution of Islam; The exalted dignity and value of man, and his freedom coupled with responsibility before God; in which equity, justice, political, economic, social, and cultural independence, and national solidarity are secured by recourse to:

Continuous ijtihad of the fuqaha possessing necessary qualifications, exercised on the basis of the Quran and the Sunnah of the Masumun, upon all of whom be peace; Sciences and arts and the most advanced results of human experience, together with the effort to advance them further; Negation of all forms of oppression, both the infliction of and the submission to it, and of dominance, both its imposition and its acceptance. Therefore, The Constitution makes it abundantly clear that Islamic Republic of Iran is an Islamic state based on the Shiite theology and belief in dynamic jurisprudence derived from continuous ijtehad of the fuqaha. Figure 1 depicts the structure of political system in Iran. It shows how the Islamic tradition was mixed with modern political institutions to create a hybrid political system. Figure 1: Political Structure in Iran



Assembly of Experts

Parliament Majlis-e Shura-e Eslami Council of Guardian All Armed Forces & Police

Supreme Leader Expediency Council Head of the Judiciary

Adapted from the Economist (January 18th, 2003, P. 5)

Iranian Constitution differs considerably from those in the Western democracies. The doctrine of the separation of powers is the dominant theme of Western constitutions. The three branches of government are designed to share power and create a system of checks and balances to limit the exercise of power by any of them. Iranian Constitution creates three branches of the government; but the checks and balances are provided by the clerics. Therefore, Iranian Constitution clearly violates this important Western tradition.

The Constitution superimposes a religious structure on the modern political institutions of the government. The primacy of the clerics is established through the doctrine of Velayat-e Faqih. Article 5 of the Constitution the office of the Velayat-e Faqih: During the Occultation of the Wali al-Asr (may God hasten his reappearance), the wilayah and leadership of the Ummah devolve upon the just ['adil] and pious [muttaqi] faqih, who is fully aware of the circumstances of his age; courageous, resourceful, and possessed of administrative ability, will assume the responsibilities of this office in accordance with Article 107. Based on the doctrine of the Velayat-e Faqih the entire government is under the supervision of the Velayat-e Faqih (governance of the jurist), which is the Imams representative while he is in Occultation, and this office has checking ability over the other three branches (Article 107). The office can consists of one faqih if there is a Grand Ayatollah to take the position. If there is no Grand Ayatollah then the office will be held by three to five learned individual (fuqaha). This Supreme Leader has the last say in the policies implemented by the state and the judicial system. Like the Imams, he has the power to declare war and appoint and dismiss judges. He also can dismiss the president and overrule any decisions made by the other branches of the government. Therefore, the Constitution grants the ultimate responsibility of safeguarding the Islamic government to the most learned Muslim scholar. The creation of the supreme leadership based on the authority of the most learned one has no precedent in history of Islam. To assist the Velayat-e Faqih in deciding the constitutionality of policies there is a Council of Guardians which consist of twelve members (six fuqaha appointed by the Supreme Leader and six appointed by the Majlis (the legislative body in Iran)) to examine all legislation passed by the Majlis to make sure that it abides by the Shariah and to approve of candidates who want to run for office (Article 91). The Supreme Leader is commander-in-chief of the armed forces and the military forces of Iran. The President is the highest ranking elected officer in Iran. People directly elect the President for a four-year term for a maximum of two terms (Article 114). The President is in charge of the executive branch with all due responsibilities. However, the Supreme Leader supervises the President and the executive branch and has the final word on domestic and international affairs.

Iranian parliament is a unicameral system. Article 62 empowers people of Iran to elect the 290 deputies of the Majlis (parliament) directly by secret ballot every four years. Article 72 limits the legislative power of the Majlis. The Majlis cannot legislate new laws contrary to the religion or the Constitution. The Guardian Council is responsible to check the conformity of the laws with the Shariah and the Constitution. The Guardian Council also has the authority to examine the qualifications of the candidates for finalizing the list of the candidates for a new election. The Assembly of Experts is the cornerstone of the Islamic regime in Iran. It consists of 86 religious scholars (clerics) who are elected by people for a term of eight years. The Guardian Council must approve the list of candidates for this Assembly as

well. The main responsibility of the Assembly of Expert is the selection of the Supreme Leader and supervising his activities (Article 107). The Expediency Council (Article 112) is in charge if mediating disputes between the parliament and the Council of Guardian and is acting as an advisory council to the Supreme Leader. Finally, the judiciary branch of the government is independent form the executive branch and is supervised by the Supreme Leader. The Supreme Leader appoints the head of the judiciary and he appoints the head of the Supreme Court. The independent Islamic judiciary is the key to any Islamic regime that establishes the primacy of Islamic law. The Islamic courts are responsible for implementing the Shariah. Therefore, all different courts are headed by the clerics.

Iran, Islam, and Democracy Islamic Republic of Iran is a hybrid political system. It is a political system with democratic institutions that are controlled by a religious structure. It is an attempt to create a modern political regime that guarantees the basic political and economic rights of its citizens while it is submitting to absolute sovereignty of God. Consequently, its structure can be criticized from religious and democratic viewpoints. Islam is a non-hierarchical religion. Therefore, any person who is capable of doing ijtehad (such a person is called mujtahed) could become a source of imitation and

emulation. It is up to individual Shiite Muslims to decide which mujtahed to follow. By creating the state system, which is so structured based on clerical hierarchy, in a religion, which has no church system, the Islamic government in Iran has nullified this choice. The supra-constitutional power of the Supreme Leader is also contradictory to non-hierarchical nature of the religion. The doctrine of Velayat-e-Faqih is based on Ayatollah Khomeinis interpretations of the three cited hadiths. Other Ayatollahs might interpret these hadiths differently and the ruling of one Ayatollah does not overrule anothers ruling even if they contradict each other. Since the Supreme Leader has the ability to overrule other Ayatollahs rulings, the state has created an authority which fuqaha have never possessed throughout the history of Islam. Furthermore, based on Shiite theology only Imams are infallible. The Supreme leader is not an Imam and, therefore, is capable of making mistakes in his decisions. As a result, the nullification of other Ayatollahs ruling could be a mistake. The Council of Guardians has been given a significant role in Islamic Republic of Iran. The Supreme Leader chooses six of its twelve members, so these members would often agree with the opinions of the Leader. Even if the Council offers a contradictory opinion, the Leader may overrule its decision since the Velayat-e Faqih has the final say in the laws and judgments made in Iran. Ayatollah Khomeini also created the Expediency Council in 1988 to decide the final fate of the legislation, which the Parliament passed, and the Council of Guardians voided. Creation of such councils ensured that the Leaders opinions alone would be the deciding factor of the state and not the will of people or the fuqaha as a whole. Moreover, the Guardian Council has the power to disqualify candidates for parliamentary elections and other national elections. By exercising this power, the Guardian Council creates a favorable condition for the conservatives and hence prevents reformers from becoming majority in the Majlis. To evaluate the democratic nature of the Islamic regime In Iran, one has to consider the rights of women and religious-social minorities under the Islamic regime. Article 20 of the Constitution guarantees equal protection of all citizens, men and women, under the law subject to conformity with Islamic criteria. Article 21 charges the government to create a favorable environment for the material and intellectual growth of women. Consequently, Iranian women are among the most educated and accomplished

in the Islamic world. The practice of ijtehad in Iran has improved womens rights in family courts and has empowered them in family planning and other health-related issues. However, there are still significant numbers of inequalities that must be removed for women to have the same rights as men. For example, at the present time women are barred from becoming judges and treated unequally in inheritance cases. One can argue that Shiites reliance on the rule of ijtehad will bring about reforms, though in piecemeal form, that ultimately solves women problems in Iran. However, the issue of religious and social minorities is a different matter. According to Article 13 of the Constitution Zoroastrians, Jewish, and Christian Iranians are the only recognized religious minorities who have the right to practice their religions freely. As a result, the Constitution does not consider the Bahaiis as a legitimate religious minority. In such an environment, the best such minorities can expect is dont ask / dont tell policy. Such a treatment is clearly undemocratic and inhumane. The Iranian case is a clear demonstration that Islam and liberal (Western) form of democracy are incompatible. The presence of a Supreme Leader who controls all three branches of the government with a veto power, and councils that the leader appoints their members clearly violates the principle of separation of power and hence is undemocratic. However, setting aside clerical authority in Iran, the remaining political structure is quite secular and democratic with indigenous political institutions. Limiting the power of clerical institutions and reforming Islamic laws through the exercise of dynamic jurisprudence could bring the religious institutions in conformity with democracy. Therefore, the Iranian case is potentially a model for combining religion and fundamental democratic rights of the citizens in a pragmatic political system that can move the country toward an open society. Iranian Constitution, if implemented, safeguards fundamental democratic rights of the citizens while superimposes a religious structure on the political system. Iranian struggle for democracy over the last century is a good indication that the Islamic state cannot survive without respect for democratic principles.

Chapter Nine Political Islam Islamic extremist is to Islamic as KKK is to Christianity. The West Wing: Isaac and Ishmael Political Islam is far from being a monolithic movement. Some political groups express national interest while others have pan-Islamic tendencies. Some political groups are reformists while others are traditionalists. However, the establishment of the Islamic state provides the convergence of opinions among all political groups. Muslim countries have also shared a common fate since the eighteenth century; namely, they have been under influence and control of Western powers. Therefore, Islamic political movements of the twentieth century have intended to establish political independence by means of indigenous Islamic political institutions. They see Islam as the only solution for the establishment of a just, free, equitable, and moral society. Consequently, Islamic political movements can be symbolized as the battleground of ideas for the creation of an independent Islamic state in their respective countries. Figure 1 identifies three different approaches to the creation of an Islamic state.

Figure 1: Three Approaches to Islamic State

Islamic State

Fundamentalism Centered on the Shariah

Islamism centered on Orientalism

Islamic Democracy centered on political modernity

Chapter 8 introduced Islamic Republic of Iran as an attempt to combine Islamic tradition with modern democratic institutions that could potentially become a model for Islamic democracy and creation of a civil society. This chapter will focus on fundamentalism and Islamism as two different radical movements for the creation of an Islamic state.

Fundamentalism Fundamentalists are the most conservative political groups in the Islamic world. They do not accept or even tolerate the separation of church and state. Consequently, they reject the Western secular model of state. They believe in Islam as a comprehensive way of life and they want to return to the original community of believers: the Medinan state of the Prophet and the Rashidun caliphs. The fundamentalist movements are religio-political organizations that are dominated by conservative ulama (clergy) and they generally believe in strict interpretation and implementation of Islamic law. Muslim Brotherhood of Egypt is perhaps the original model for all other fundamentalist groups. Muslim Brotherhood was founded by Hasan al-Banna in 1928 when Egyptian monarchy regime was de facto controlled by the British Empire. advocated the establishment of a just Islamic state centered on the Shariah and the emancipation of the Islamic world from foreign control [1]. Muslim Brotherhood was an anti-secular and pan-Islamic movement, which aimed at rejuvenation of Islam. Despite the assassination of Banna in 1949, Muslim Brotherhood remained a powerful force in Egypt until 1954 when Gamal Abd al-Nasser, the secularist President of Egypt crushed it and executed its leaders [2]. As a result of government overreaction to Muslim Brothers movement they went underground and became a more militant organization. Groups that have emerged from Muslim Brotherhood in the latter part of the twentieth century have turned to violence and martyrdom and were responsible for the assassination of President Sadat of Egypt in 1981 and tried to topple Hafiz al-Asads regime in Syria [3]. Muslim Brotherhood has been a popular movement all over the Middle East. Their Iranian followers, Fadaiyan-e Islam (the Devotees of Islam) and their leader, Ayatollah Sadeq Khalkhali, gained power in Iranian revolution of 1979. Ayatollah Khalkhali became the lead prosecutor and judge of the revolutionary courts. He and his followers formed the judicial philosophy of the revolutionary government under two doctrines directly taken from the Quran: fighting God and His Apostles and corrupting (or causing disorder) on the earth [4]. Within a short span of time he executed a number of officials of the former regime under one of the two newly formed doctrines and became known as the hanging judge. He remained in power for almost two years and He

executed many drug dealers to clean-up the problem. Ayatollah Khomeini finally dismissed him due to concerns about his preferred method of punishment. Fundamentalists have also succeeded to establish fundamentalist governments in countries such as Saudi Arabia. The government of Saudi Arabia is the follower of the teaching of Muhammad ibn Abd al-Wahhab (1703-92) who believed in returning to archetypal Medinan community by strict implementation of the Quranic codes and the prophetic Hadith with no room for other sources of Islamic law, namely, qiyas (analogy or deduction) and ijma (consensus of the community)[5]. This is a tribal system of government founded based on the religion and the absence of the rule of reason and citizen participation in political and social affairs of the country. More importantly, Saudi government has actively been involved in exporting its Islamic model to countries like Pakistan, Talibans Afghanistan, and newly independent Muslim countries of former Soviet Union.

Islamism Islamists belong to a larger political movement that can be symbolized by its orientalist, anti-colonial, anti-imperialist tendencies. They consider Islam as an ideology and they concur on the anti-Western philosophy of the Third-worldists. The Islamist intellectuals consider westernism a disease as explained by Iranian intellectual Jalal Al-e Ahmad in the following passage.

I say that Gharbzadegi [Weststruckness] is like cholera. If this seems distasteful, I could say its like heatstroke or frostbite. But no. Its at least as bad as sawflies in the wheat fields. Have you ever seen how they infest wheat? From within. In any case were talking about a disease [6]. Islamists reject Western models and they adopt Islamic theories and models as indigenous solution for their respective societies. They differ from fundamentalists since they believe in reforming Islamic laws, particularly, to enhance the role of women in the society. This chapter will focus on the Organization of the Fighters of the People (MKO: Mujahedin-e Khalq Organization) of Iran to explain this broad political movement.

Islamists of Iran found themselves in competition with fundamentalists and secularists in Iran in the second half of the twentieth century. Ali Shariati, a religious sociologist with a doctorate degree from France and Islamic education in Iran, was the major Islamist figure in the 1970s Iran who had a significant influence over the Mujahedin-e Khalq Organization. His theory of return to the self was similar to Frantz Fanons return of the oppressed and very much in line with Jalal Al-e Ahmads consideration of westernism as a disease [7]. To him, westernism was an alien phenomenon that should be abandoned by Iranian in favor of return to their Shiite Islamic roots. He rejuvenated Shiite political philosophy among college students and represented it as a revolutionary ideology against the corrupt monarchy regime of Iran. Mujahedin-e Khalq was founded in 1965 as leftist, anti-imperialist political group that had mixed Islam and socialism as its main ideology. Socialism, minus atheism, has been very attractive to Muslim intellectuals. According to Dr. Enayat Islams central summons for brotherhood, social harmony and egalitarianism complements socialists attempt to establish a classless society based on collectivism [8]. Mujahedin-e Khalq, like their socialist counterparts, believed that private property was the root of all social ills [9]. Consequently, Mujahedins main political objective was to abolish the institution of private property in order to create a classless Islamic society as an alternative to other secularists political movements in Iran. They helped Ayatollah Khomeini ascent to power during Iranian revolution of 1979. However, soon Ayatollah turned against them and their leader, Massoud Rajavi fled Iran for Paris in 1981. Mujahedin-e Khalq organization adopted a new face through its political arm known as the National Council of Resistance of Iran (NCRI) and formed a 10,000-strong fighting force in Iraq which joined Saddam Hossein in his eight-year war against Iran killing one million Iranians. The smooth National Council of Resistance of Iran has won support among the politicians in the U.S. Congress and the European Parliaments to the extent that at the present time the United States has kept the group in Iraq as a nuisance to Iranian regime for political reasons.

Final words on Political Islam The review of political movements in Islam is a clear indication of their non democratic nature. Fundamentalists have denied women and religious minorities their basic rights and dignity while Islamists are waiting to implement the manifestos of their leaders. Both movements represent what Oliver Roy has called the failure of political Islam [10]. As was discussed in Chapter 8, in the absence of a true democracy that requires the separation of church and state, Islamic democracy is perhaps a second-best solution for Muslim countries.

Part III Economic Foundations of Islam

Chapter Ten The Essence of Islamic Economics We did not make a revolution to lower the price of watermelon. Ayatollah Khomeini The opening quotation that is attributed to Ayatollah Khomeini shows his apathy for material aspects of life, which is the quintessence of Western economics and economic values. The preamble to the constitutions of Islamic Republic of Iran declares economics simply as a vehicle for achieving social and political ends, and not an objective to be pursued for the creation of wealth and opulence. Consequently, the term political economy of Islam is a much better term reflecting the true nature of Islamic economics. Economics and economists are at the service of politics and political authorities for the creation of a just Islamic society. Figure 1 presents the place of economics in the overall social-political apparatus of Islam and Islamic states.

Figure 1: Political Economy of Islam Islam

Islamic Law and Islamic Ethic Islamic Economics

Islamic State

Figure 1 demonstrates the fact that Islamic economics is a part of Islamic value system. This implies that Islamic economics and economic models must embrace Islamic law and ethic and operate for the good of the Islamic state. Throughout this book we have shown that Islamic value system is incompatible with Western value system. By the same token, Islamic economics must be essentially different from Western economics. The purpose of this chapter is to bring to readers attention some of these differences.

Positive vs. Normative Economics Western political economy, as initially was called, was a branch of moral philosophy. Adam Smith and his followers were quite concerned about moral issues and the norms of good social behavior. In times, Western economics became independent from ethics and Western economists declared it as a value-free discipline. Consequently, Western economists principally focused on self interest to explain human motivation in social, political, and economic transactions. In this milieu, the invisible hand of the market is responsible for the unintended consequence of translating individuals interest into social good and the wealth of nations. The metamorphosis of modern Western economics was completed when economics lost its political side and adopted the engineering concept of efficiency. The efficiency of an economic solution is measured by the principle of Pareto optimality. A solution is Pareto optimal if improvement is no longer possible, i.e., one can become better off by making another person worse off. There seems to be a trade-off between Pareto optimality (efficiency) and equity, fairness, and other distribution issues as the following passage shows. A state can be Pareto optimal with some people in extreme misery and others rolling in luxury, so long as the miserable cannot be made better off without cutting into the luxury of the rich. Pareto optimality can, like Caesars spirit, come hot from hell [1].

This transformation of economics was responsible for the rise of positive economics (analysis of the facts and explanation of how markets do operate) at the expense of normative economics, which is concerned about concepts such as rights, equity, and other desirable social-political values that are concerned about how markets ought to operate. Figure 1 showed the influence of Islamic law, Islamic ethic, and Islamic politics on Islamic economics. Undoubtedly, Islamic economics is of normative form while the contemporary Western economics is of positive form and has lost its

moral foundations. Whereas Western economics is value-free, Islamic economics is a value-driven discipline.

Homo Economicus vs. Homo Islamicus Western classical economics is based on the idea of unlimited needs of individuals who face limited resources. Homo economicus (economic man) represents the prototype of economic behavior. The classical homo economicus is a rational and calculating person who seeks to maximize his/her happiness (utility). Individuals search for happiness is represented by an emotionless cost-benefit analysis of their decisions. More importantly, happiness is usually measured by material means. Furthermore, due to scarcity of resources, individuals must compete with each other to secure their happiness. Consequently, homo economicus is a competitive and acquisitive person who is interested in his/her own self-interest. Additionally, due to independence of economics from moral philosophy, the rational and materialistic homo economicuss behavior has turned into a value-free calculation. Table 1 depicts homo Islamicus (Islamic man) as the antithesis of homo economicus.

Table 1: Two Opposite Models Homo Economicus 1. Assumptions a. Limited resources (scarcity) b. Unlimited needs 2. Behavioral Norms a. Individualism b. Self-interest c. Competition d. Amoralism Homo Islamicus 1. Assumptions a. Bountiful resources (abundance) b. Limited needs 2. Behavioral Norms a. Collectivism b. Common interest c. Cooperation d. Moralism

In contrast to classical economics, Islamic economics begins with the abundance of heavenly resources and assumes the limited needs of individuals. The problem of scarcity in classical economics is due to unnatural assumption of unlimited needs. Human needs emanate from two different sources: nature and society. Natural needs of human beings are similar and limited by definition. For instance, people need food for sustenance. However, the type of food, quantity of food, and quality of food that are consumed are by-product of social norms and values. As a result, what appears to be unlimited needs of human beings is often an artificial need created by artificial means such as advertising. Islam, like other religions, imposes legal and moral restrictions on totality of human behavior, including individuals needs. Limitation of needs also makes competition unnecessary. Therefore, the Islamic and cultural norm of collectivism guides economic behavior as well. An individual Muslim is a member of an Islamic community. As a result, his/her behavior is grouporiented and it is subject to social and religious norms and values of the community. Hence, homo Islamicus, unlike his/her counterpart, must be a paragon of values.

Chapter Eleven Islamic Economic Values The moral name of just desire is moderation. Abdolkarim Soroush Islam, as a comprehensive way of life, embraces the totality of Muslim conducts, including their economic transactions. Part II of this book showed that individual Muslims freedom is always bounded by his/her social and religious responsibilities. Muslims are free, but they are responsible to God and other Muslims for their actions. As a result, freedom and responsibility are the two sides of one coin in Islam. Social and religious responsibilities are the constraints imposed on Muslims behavior, including their economic behavior. Islamic norms of behavior are the restrictions that are meant to change the innate selfish nature of man to altruistic and compassionate economic behavior. Islam does not prescribe asceticism for Muslims.

Say: Who has forbidden you to wear decent clothes or to eat the good things which Allah has bestowed upon His servants? Say: These are for the enjoyment of the faithful in the life of this world, though shared by others; but they shall be theirs alone on the Day of Ressurection. (Quran, 7:32) Muslims can live a full life and enjoy all Gods blessings subject to rules, duties, and responsibilities that restrict their economic choices. This chapter will focus on Islamic norms and values that set boundaries for economic life of Muslims.

Justice Islamic concept of social justice governs individual Muslims dealings in the market place as well. BelieversDeal justly; justice is nearer to true piety. (Quran, 5:8)

Keep your promises; you are accountable for all that you promise. (Quran, 17:34) Give full measure, when you measure, and weigh with even
scales. That is fair, and better in the end. (Quran, 17:35)

Muslims must deal with each other justly. These Quranic injunctions direct Muslims to pay fair wages, charge fair prices, be honest in their transactions, and fulfill their contractual obligations. These codes of conduct make it clear that profit seeking is not the primary objective in Islam. The Quran makes it clear that Muslims are responsible for observing these rules. Woe to the unjust who, when others measure for them,
exact in full, but when they measure or weigh for others,
defraud them!
Do such men think that they will not be raised to life upon
a fateful day, the day when all mankind will stand before
the Lord of the Creation? (Quran, 83:1-6)
The Quranic reference to even scale and full measure should be viewed literally and allegorically. They stand for fairness in every transaction. As a result, Islamic economics condemns unfair and exploitative dealings between individuals. Muslims cannot take advantage of market conditions that are the results of sudden shifts in demand or supply to charge unfair prices or pay unfair wages. For instance, bakers cannot charge much higher prices for bread simply because of scarcity of flour in the market place. That is why in Islamic world, there has always been a market regulator (muhtasib) whose job was to check prices and business practices to make sure they comply with Islamic norms and values. Equally, economic formations and business transactions that are meant to create market power for the purpose of charging higher prices and improving profitability are also deemed illegal. Consequently, practices like hoarding or collusion among business firms to form monopolies and oligopolies that enable them to charge higher prices in the market place are not permissible in Islamic economics.

Moderation Moderation is considered the best practice in life. Be neither miserly nor prodigal, for then you should either be reproached or be reduced to penury. (Quran, 17:29) The objective of Islam is to create a just society. Islamic social justice demands a certain degree of economic equality, though not an absolute equality. Your Lord gives abundantly to whom He will and sparingly to whom He pleases. He knows and observes His servants. (Quran, 17:30) Islam has established a system of wealth and income redistribution through zakat (wealth tax) and other forms of taxes and has imposed social and religious restraints on Muslims economic behavior to achieve a reasonable degree of economic equality [1]. The social and religious norm of moderation voids any extreme course of action. Islam does not relish extravagance, excessiveness, and any other form of extremism. Neither too much wealth nor too much poverty is tolerable in an Islamic community. Moderation is the norm applied towards establishment of standards of living in a Muslim society. This suggests Muslims must work, consume, and live moderately. Islamic society does not tolerate excessiveness in any aspect of life, particularly in consumption. Islamic economic equality demands a moderate level of consumption to prevent conspicuous consumption and other forms of ostentatious behavior, which will result in a stratified society and economic and social injustice.

Waste Avoidance Wastefulness is a sinful act in Islam. O children of Adam! Wear your beautiful apparel at every time and place of prayer; eat and drink: But waste not by excess, for Allah loveth not the wasters. (Quran, 7:31) God has blessed mankind with everything that is needed for his/her sustenance. Wasteful behavior is a sign of ungratefulness. Consequently, conservation is an important economic norm in Islam. Muslims are custodians of Gods resources on earth. They

should use them for their own benefit and preserve them for future generations use as well. Muslims are commanded not to waste these resources. This suggests that Muslims must conserve time, money, food, water, or any other valuable resource under their care. As a result, Islamic economics could eliminate the problem of negative externalities: external cost imposed on the society due to improper use of natural resources such as environmental pollution. This issue will be discussed at length in future chapters.

Charitable Contribution (Infaq)

In addition to obligatory religious taxes, Muslims are recommended to give in the way of God voluntarily. Have faith in Allah and His apostle and give in alms of that which He has made your inheritance; for whoever of you believes and gives in alms shall be richly rewarded. (Quran, 57:7) You shall never be truly righteous until you give in alms what you dearly cherish. The alms you give are known to Allah. (Quran, 3:92) And there are those who hoard gold and silver and spend it not in the Way of Allah: announce unto them a most grievous chastisement. (Quran, 9:34) The phrase in the Way of Allah creates a broad responsibility for Muslims. They are commanded to spend their disposable income and wealth to help their family, neighbors, the poor, and the needy. They should also spend their money to promote moral rectitude and righteousness and prevent inequality, injustice, and other vices in their community. Charity contribution has become an important economic institution in Islam. Religious endowments (awqaf (plural of waqf)) is a more formal arrangement whereby wealthy Muslims donate their money or property to build schools, hospitals, mosques, and other public projects that could help their community.

Chapter Twelve Islamic Economics Islamic economics is based on neither unlimited freedom of individual ownership which results in unbridled capitalism nor public ownership which leads to total Privation of individual freedom. Ayatollah Taleqani Part I of this book showed that Islamic law (shariah) covers three major areas: acts of worship (ibadat), transactions (muamelat), and punishment and restrictions (hudud). The latter two parts of Islamic law have sufficiently covered economic transactions of Muslims such as buying, selling, contracts, etc. These rules have always been subject to rules of morality in Islam. Therefore, Islamic law has combined material and spiritual life of Muslims in their daily affairs. As a result, economic rules of Islam are a subset of its ethical rules and have been in operation in Muslim countries throughout the history of Islam. Islamic economics as a discipline dealing with micro-decisions of individual Muslims or macro-decisions of Muslim societies is, however, a phenomenon of the twentieth century that can be traced back to Abul-Ala Mawdudi (1903-79), the founder of Pakistans Islamic Society (Jamaat-I Islami), a fundamentalist movement similar to the Muslim Brotherhood of Egypt [1]. Islamic economics, like Islamic state, is an anti-colonial and anti-Western development. Newly independent countries like Pakistan must run based on a new political and economic model to remain independent and preserve their cultural identity. The rules of Islamic law need to be further developed to allow these countries to deal with societies economic problems like inflation, unemployment, and economic growth. Mawdudis political and economic ideas were quite conservative. He rejected socialist revolution of proletariat and its goal of establishing a classless egalitarian state. Any attempt, he asserts, to impose equality on entities which are naturally unequal is as unjust as fostering inequality among the equals [2]. In fact, he encouraged Muslims to pursue a prosperous life within the limits set by Islam. His political economy was based on the application of the rule of ijtehad (independent reasoning) for further development of ideas and models derived from the Quran and the Prophets tradition.

Contemporary Islamic economics ideas are developed along two opposite models of capitalism and socialism. Many followers of Mawdudi have rejected atheist socialism and embraced his conservative proclivity and have developed their models by Islamicizing the neoclassical models. Most of these adaptations are quite superficial and essentially incompatible with Islam. An example might shed light on this approach. Capital Asset Pricing Model (CAPM) is an important development in financial economics that relates the securities rate of return to their riskiness. Kj = Krf + j ( Km - Krf ) Where Kj = Security js rate of return Krf = Risk-free rate of return (interest rate on short-term government bonds) j = Risk of security j relative to overall market risk Km = Markets rate of return ( return on a portfolio such as S&P 500 index) Given that risk-free rate of interest is available to everyone; it becomes the minimum acceptable rate of return. If security j is risky, then a certain amount of risk premium (reward for taking risk) equal to j ( Km - Krf ) is required to provide an incentive for an individual investor to take the risk associated with security j which is measured by its . Subsequent sections of this chapter will show that the payment of interest is prohibited in Islam. A nave attempt to Islamicize this model results in Kj = zakat rate + j ( Km zakat rate )

Since Muslims must pay 2.5% tax on their wealth, then 2.5% is the minimum rate of return acceptable for a riskless investment. However, if the security j is risky, then a risk premium equal to j ( Km zakat rate ) is required as a reward for the securitys risk measured by its . Therefore, Kj = 2.5% + j ( Km 2.5% ).

Now, if j = 1.2 and Km = 12%, then the required rate of return is

Kj = 2.5% + 1.2 ( 12% 2.5% ) = 13.9%. Such a nave conversion simply assumes by eliminating interest rate from the model, now it is a useful tool in an Islamic environment to establish the relationship between risk and return. However, this conversion ignores a slew of assumptions behind this model such as wealth-maximization objective of homo-economicus type investors. Such an assumption is essentially incompatible with Islamic norms and values and, hence, renders the modified model useless. The second approach in development of Islamic economics is along the socialists idea of creating a classless egalitarian society. Many Muslim scholars consider socialism minus atheism quite compatible with Islamic goal of creating a just and equitable society. Abul-Hassan Bani Sadrs (the first President of Islamic Republic of Iran) Islamic Economics book is a good example of this approach. To him, a just society must be a classless society in which the source of legitimate ownership is simply honest-hard work. He Islamicizes Marxs famous quotation by declaring, to produce according to ones capacities, to consume according to virtue [3]. Therefore, each person contributes to societys welfare according to his/her physical and mental capacity and consumes according to Islamic norms. Iranian activists are very much in favor of this approach and they implemented some of these ideas in the early years of Islamic Republic of Iran. In the absence of an ecumenical Islamic economics model, we devote the rest of this chapter to introduce the pieces of the model as depicted in Figure 1. Figure 1: Islamic Economic System Social Justice & Islamic Norms Islamic State Private Ownership Consumption


Redistribution System


Figure 1 places the institution of private property at the center of Islamic economics system. Understanding this institution is essential for the development of a true economic theory of Islam.

Islam and Ownership The earth belongs in usufruct to the living Thomas Jefferson In Islam, ownership in an absolute sense belongs to God. The earth and its natural resources are Gods blessings that He has mercifully made available to mankind for his/her sustenance. To Allah belongs al that the heavens and earth contain. (Quran, 2:284) Do you not see how He has subdued to you all that is in the earth? (Quran, 22:65) He has subjected to you what the heavens and the earth contain; all is from Him. (Quran, 45:13) The Quran also indicates that God has created man as His deputy on earth to enjoy and protect Gods creation. Bohold, thy Lord said to the angels; I will create a vicegerent on earth. (Quran, 2:30)

It is He who hath made you the inheritors of the earth. (Quran, 6:165) It is important to remember that Islamic economics is of normative form. This means that the use of these resources is subject to Islamic norms of moderation and avoidance of wastefulness. The earth and its resources must be protected for all generations to come. In a few words, Islamic social justice demands intergenerational equity as well. This suggests that while we are allowed to use these resources for our own benefits, we must also protect them for our progeny. Consequently, Islamic economics could resolve a major problem that has preoccupied Western economists for a long time, namely, the problem of negative externalities and its impact on the environment.

Negative externalities are the external costs imposed on one group of individuals by another persons action without proper compensation. For instance, a firm might dump its industrial waste into a river and harm the people who use the rivers water for drinking or agricultural purposes. The absence of a legal and formal private ownership of the river allows the firm to overproduce since it can pass its cost of waste disposal to the society. Presence of negative externalities will cause market failure since market mechanism fails to internalize the social cost of pollution in the firms production cost and its production decisions. Government regulation of the firm is the recommended solution to deal with the problem of negative externalities as a substitute for market failure. Although government regulation of negative externalities has improved significantly in the recent years, it is not a complete solution for variety of technical problems that are beyond the scope of this book. In Islam, the earth and its resources belong to God and Muslims are obligated to protect these resources for future generations. Consequently, Islamic norms will not allow one to benefit from these resources and impose cost on others. A complete application of Islamic norms will eliminate the problem of negative externalities and provide a safeguard for environmental protection.

Private and Public Ownership in Islam

We have already established that absolute ownership belongs to God and human beings are His trustees and care takers who have the right to use and enjoy the earth and its resources and yet they must protect and preserve it for future generations. Islam, being a pragmatic religion, has established the limited right of private ownership as a system of rewards and incentives to motivate individuals in their trusteeship function. Therefore, private ownership is Gods reward for those who fulfill their obligations through honest-hard work. That each man shall be judged by his own labors; that his labors shall be scrutinized and that he shall be justly requited for them; that all things shall in the end return to Allah. (Quran, 53: 39-42)

In a just Islamic society, wealth is the reward for hard work and it is accompanied with a great deal of social and religious responsibilities. As a result, it should not cause any disquiet among Muslims. Do not covet the favors by which Allah has exalted some of you above others. Man as well as women shall be rewarded for their labors. Rather implore Allah to bestow on you His gifts. Allah has knowledge of all things. (Quran, 4:32) It is also important to remember that Muslims may not use their wealth in pursuit of luxurious life style. One must use his/her wealth to help other Muslims, particularly the paupers. And in their wealth there is a due share for the beggar and the deprived. (Quran, 51:19) This is perhaps the reason for Iranian scholars affinity with the socialist approach to Islamic economics. In fact, Iranian scholar, Ayatollah Taleqani states that in Islam ownership, possession, and utilization are based on work in its general sense, and distribution is based on need [4]. He argues that this Islamic principle precedes the nineteenth-century socialism of Europe by centuries. Mans usufruct of the earth and its protection are also possible through public ownership. In fact, Bani Sadr states that Islam recognizes both private and public ownership [5]. According to a prophetic tradition (hadith) people own three things in common: water, grass, and fire[6]. Enayat argues that in modern context this hadith can be interpreted broadly to embrace public water projects, electricity, mines, pasturage, etc. [7]. Since in Islam, individual rights, including property rights, are secondary to societys welfare, the government of an Islamic state has a strong case for nationalizing many resources to manage them, as public property, collectively. The institution of waqf (religious endowment) is another avenue that legitimizes public management of private property. Wealthy individual Muslims bequeath their property for charitable purposes in perpetuity. This institution effectively separates ownership form control. The management of the property is left to a trustee that can be a public agency. The sheer size of religious endowments and the presence of awqaf (plural

of waqf) organizations in Muslim countries provide further support for nationalization of private property in favor of public property as well [8]. Lawful Income So far, we have shown that Islam recognizes limited ownership right as an effective method of preserving earth and its natural resources and providing an incentive for hard and honest work by Muslims. Therefore, the primary source of income is labor. Muslims can combine their labor and capital and use them in legal manners to produce income for their livelihood. Contemporary Muslim economists argue that such income is also justified since Muslims are taking a certain degree of risk in their economic endeavors. As a result, risk is the secondary source of income through legitimate use of capital. Since Islam bans gambling and speculation, risk is a legitimate source of income if and only if the economic activity is a permissible (halal) one. Consequently, an income that is not the product of labor and assumption of risk is an illegitimate income in Islam. This is the logic behind Islams injunction against practice of usury (reba). Those that live on usury shall rise up before Allah like men whom Satan has demented by his touch; for they claim that usury is like trading. But Allah has permitted trading and forbidden usury. (Quran, 2:275) According to Ayatollah Taleqani, the word reba (usury)refers to those transactions in which capital automatically increases without any productive labor[9]. Furthermore, in modern economic sense, one can also argue that reba is prohibited since a fixed amount of income is promised without the assumption of risk. Therefore, the combination of labor and risk can be used to explain Islams view of permissible (halal) income and forbidden (haram) income associated with economic activities. The prohibition of usury (reba) is not limited to monetary transactions and loans in Islam. It includes any unequal exchange through time, which embodies interest payment in disguised form. For example, Islam prohibits credit transactions since they require payment of interest explicitly. It also prohibits prepaid transactions; Futures market type transactions, with an implicit payment of interest. Islam also recommends lending without interest as a way to help other Muslims in need [10]. God of course, rewards such a humanitarian act.

Allah will deprive usury of all blessing, but will give increase for deeds of charity: For He loveth not any ungrateful sinner. (Quran, 2:276) In conclusion, if labor and capital are used in legal assumption of risk, then income that is generated by such activities is legitimate and permissible in Islam. We must remember that mans right to ownership and freedom is limited is Islam. Therefore, Muslims do not have the freedom to pursue wealth in manners unacceptable in Islam. This means that wealth accumulated by illegal activities such as gambling, speculation, and harmful trades do not constitute ownership right while legal and fair business transactions could generate legitimate income in the forms of wage, rent, profit, etc. Islams prohibition of interest payment and allowance of profit has further consequences for financial decisions of firms in Islamic economics. Firms assets are usually financed through debt and equity in Western economies. Figure 2 shows the balance sheet of a typical Western firm.

Figure 2: The Balance Sheet Assets Debt Equity

The left-hand side of the balance sheet contains firms assets. The right-hand side of the balance sheet shows how these assets are financed. Debt and equity represent claims against firms assets and its operating profit. The composition of firms assets signifies its business risk while financial risk is represented by the magnitude of debt in firms capital structure. A larger amount of debt creates a larger degree of financial risk. The total risk of the firm is the sum of business risk and financial risk. Therefore, a lager amount of debt in capital structure of the firm increases its total risk. The presence of debt in capital structure of the firm magnifies the return to its equity holders for any change in sales of the firm. This phenomenon is known as financial leverage and is the reason for financial risk of the firm. The added financial risk

of the firm, in turn, increases its chance of bankruptcy, which has social and economic consequences for the firms stakeholders. In Islam economics, firms must be financed totally through equity. Therefore, the total risk of an Islamic firm consists of its business risk. The absence of financial risk in Islamic economics could result in less variability in firms profit and return to its equity holders and more stability in the economy of an Islamic state.

Islam and Markets Having discussed the institution of ownership in Islam, we now direct our attention to the economic concept of markets. Buyers and sellers of goods and services form markets. The traditional marketplace was a specific location for sales. Today, any entity that facilitates the exchange of goods and services can be qualified as a market. For instance, online bookstores provide the same opportunity over the Internet and form a market for buyers and sellers of books. Markets play a key role in capitalism (or market economies). They determine the market-clearing price at which buyers and sellers voluntarily exchange goods and services with each other to pursue their own satisfaction as declared by Adam Smith in his Wealth of Nations [11]. It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves not to their humanity, but to their self-love.

It is the invisible hand of the market that controls and coordinates these individuals actions to create the unintended wealth of nations. Markets are among the oldest economic institutions and an important one for preIslamic Arabia. Mecca was the center of trade for different tribes of Arabia. The term bazaar (market) is a Persian word representing collection of shops and stores in close vicinity. The presence of the market institution in the Islamic world and Islams respect

for trade and private property has caused some scholars to resemble Islamic economics to capitalism. We have already alluded to differences between the two economic systems. Islamic collective norms, values, and injunctions have put limitations on individuals freedom, their ownership right, and their pursuit of self-interest. Additionally, Islamic state has a very visible presence in Islamic economics and regulation of markets and individuals exchanges. Markets have always existed in the Islamic world, but so have market regulators (mhutasibs). The following passage from Ayatollah Taleqanis book shows the irreconcilable differences between Islamic economics and capitalism [12]. Given the limits on freedom of trade and the governments supervision of commodities in Islam the law of supply and demand in the capitalist sense does not apply. Demand in common capitalist usage and in its reality is determined by purchasing power and wealth whereas demand based on Islamic jurisprudence (feqh) arises out of need. In Islam the supply and provision of commodities will be to the extent of satisfying (kamali)[morally elevating] necessities. In Islamic economics the market cannot become the toy of capitalist greed which may open the way to eat in vanity (11:188). Islamic social justice demands regulation of market to guarantee that prices remain fair in the marketplace. Therefore, the invisible hand of the capitalist market is supplanted by the visible hand of market regulators in Islamic economics. Capitalism strives for competitive outcomes: competitive markets and competitive market prices. Such outcomes are considered desirable and hence are not subject to government control. In contrast, Islamic economics does not rely on market prices, but strives for fairness in the marketplace. To guarantee the fairness of prices, Islam prohibits hoarding, black markets, and the concentration of market power in any form and fashion. There is no room for monopolies, oligopolies, and cartels in Islamic economics. Individual exchanges and trade, in general, must also be legal, fair, and based on honesty and mutual consent. Therefore, the exertion of force and economic power in business transactions are totally banned in Islam.

Believers, do not consume your wealth among yourselves in vanity, but rather trade with it by mutual consent. (Quran, 4:29) Give just weight and full measure. (Quran, 6:153) Give just measure and defraud none. Weigh with even scales and do not cheat others of what is rightly theirs. (Quran, 26:181-183) The Quranic reference to even scale (balance) is the reinforcement of moderation, justice, and honesty in business transactions. The relationship between employers and employees must also be based on justice and fairness. Individual workers must be paid fair wages on timely basis. According to a hadith attributed to the Sixth Shiite Imam a worker should be paid wages due before the sweat on his or her brow has dried [13]. Consequently, Islamic economics and its institutions are always combined with Islamic rules of ethics and morality.

Islam and Government

The role of government in economics is another discernible difference between capitalism and Islamic economics. Governments have a very limited role in neo-classical economics. They provide national defense and they enforce rules and laws to guarantee orderly operation of markets. Their augmented economic responsibilities can be justified when markets fail to generate efficient solutions. There are four cases under which market solution is inefficient and result in market failure: the provision of public goods, the existence of externalities, the presence of an asymmetric information environment, and the presence of non-competitive markets. Markets fail to provide public good since there is no rivalry among individual users of public goods and the exclusion of users is either impossible or prohibitively costly. National defense and public parks are two examples of public goods. There is no competition among the users of national defense and exclusion is impossible. Therefore, governments assume the responsibility of providing national defense and finance it through taxes.

Markets also fail when externalities are present. Externalities are external costs or benefits generated for a larger group by the action of an economic actor. The cost of pollution born by the entire society is an example of negative externality while the benefit of individuals inoculation against a communicable disease received by the entire society is an example of positive externality. In the case of negative externalities, the output of the firm is larger than optimal amount since the social cost of negative externalities is externalized and borne by the society as whole. The output of positive externalities will be too little since the beneficiaries will not pay for these benefits. Therefore, the government has to regulate the industries that produce externalities, positive or negative, to guarantee an optimal (desirable) level of output for the entire society. The absence of symmetric information between buyers and sellers will allow one group to take advantage of the other group. For instance, used-car dealers are more informed about the quality of the car as opposed to the buyers and hence they might overprice a low-quality car. Therefore, the presence of asymmetric information environment begs for the existence of some ethical norms to protect the buyers such as the Hippocratic oath taken by new physicians to treat their patients ethically and professionally. In the absence of such codes, the government must intervene through laws and regulation to protect the group that is less informed. Finally, capitalism can provide optimal solutions if and only if markets remain competitive. As a result, the government must create rules and regulations, such as anti trust laws, to safeguard the competitiveness of the markets. Islamic government is the guardian of Islamic social and economic justice. Islamic law (shariah) is the main instrument for the achievement of social and economic justice. Therefore, the primary responsibility of Islamic government is the reinforcement of Islamic law and the Islamic value system. As was mentioned, Islam recognizes the limited freedom of individuals in social, political, and economic arenas. Freedom is always accompanied by certain responsibilities in Islam. Muslims have responsibilities to God, to His creation, and to each other. Therefore, Muslims economic transactions (production and or consumption decisions) are subject to Islamic norms, values, and injunctions. Consequently, Islamic norms, values, and injunctions guide Muslims economic decisions to help them fulfill their religious and social responsibilities. This is

the reason why Islamic normative economics is culturally, not market, driven. Therefore, in Islamic economics the government is the predominant economic institution rather than market. Islam also recognizes the necessity of market mechanism, though the visible hand of Islamic government corrects market solutions to guarantee social justice and equity. Therefore, Islamic governments regulation of market is not limited to those responsibilities dictated by market failure. Islamic social and economic justice requires the closure of all means of exploitation. Consequently, market regulation put an end to firms exploitation of natural resources and production of negative externalities. It also prevents individuals to take advantage of each other. Market regulators must guarantee the fairness of market outcomes. Consequently, prices, wages, rent, etc. must be fair in Islamic economics. Islamic governments, like all other governments, have multiple economic functions. Their fiscal structure (revenues and expenditures) is designed to respond to these responsibilities. They must determine the optimal mix of private and public goods and they must allocate resources for their production (allocation function). They must also devise a distribution system that allows them to achieve distributive justice and equity (distribution function). Finally, they must control and guide the economy to achieve prosperity and stability (stabilization function). Provision of social and economic justice propels Islamic government to produce myriad of public and social goods or to allocate public resources to private firms for such productions. Islamic social justice also demands eradication of poverty from an Islamic society. Muslims charity contribution might not be sufficient to achieve this goal. As a result, Islamic government must commit itself to an aggressive policy of wealth redistribution through different forms of taxes. Islamic government is also responsible for social and economic planning to facilitate the achievement of social and economic justice. Unlike capitalist economic system that relies on market allocation and distribution of resources, Islamic government assumes this responsibility directly. Therefore, the operation of Islamic economics is similar to socialist economic planning or state form of capitalism where the governments

subsidies provide an incentive for private firms to move in the direction decided by the government. Taxes are the main source of revenue for governments. Part I showed zakat (wealth tax) as an act of worship prescribed by the Quran for all Muslims. Every Muslim must pay 2.5% (proportional tax) of his/her wealth on annual basis as zakat. Although this is an individual responsibility, an Islamic government can act as a collecting agency and hence facilitate this responsibility for all Muslims. Alms shall be used only for the advancement of Allahs cause, for the ransom of captives and debtors, and for distribution among the poor, the destitute, the wayfarers, those that are employed in collecting alms, and those that are converted to the faith. This is a duty enjoined by Allah. He is wise and all-knowing. (Quran, 9:60) Islamic governments can use those that are employed in collecting alms to create a central zakat system. Using zakat as a legal precedent, Islamic jurists have established other forms of taxes such as inheritance tax, land tax (kharaj), and poll tax (jizya), etc. As can be seen, there is a clear and strong case for an Islamic governments authority to levy new taxes to fulfill its political, social, and economic responsibilities. Historically, Islamic taxes have been of proportional form, which requires a fixed average tax rate from everyone, irrespective of their income and wealth. Islamic quest for social and economic justice can be used to design new fair and equitable taxes for an Islamic state. For taxes to be fair and equitable, their burden must fall either on those who benefit from a certain government service, like tolls paid by the users of a bridge or a highway, or on the ability of taxpayers. This latter equity requirement provides justification for a progressive tax system such that the wealthier individuals pay more taxes at a higher rate. There is also a strong case for nationalization of natural resources and government control of key industries in Islamic economics. Consequently, an Islamic government has access to revenues produced by these resources and industries in addition to its tax base. Furthermore, Islamic governments could also assume the responsibility for and management of awqaf (religious foundations) and effectively transform private property into public property. According to Ayatollah Taleqani a sizable portion of

cultivated land in Islamic countries has become endowed and has escaped private ownership[14]. The efficient management of these resources should provide Islamic governments with an augmented revenue base that could help them achieve their social, political, and economic objectives.

Chapter Thirteen Stabilization Policies in Islamic Economics In the long runwe are all dead John Maynard Keynes Having considered the interventionist tendencies of an Islamic government in allocation and distribution of resources, we now focus on its stabilization function. Wide fluctuations of markets in the 1930s forced all governments to pursue Keynesian interventionist policies to achieve full employment, stable prices, and a satisfactory rate of economic growth by managing the aggregate demand in their economies. Figure 1 depicts this macroeconomic model.

Figure 1: Aggregate Demand and Aggregate Supply Price level AS0

P2 P0 P1 AD1 Output Q1 Q0 Q2 FE AD2 AD0

Figure 1 shows the aggregate demand (AD), the sum of individuals demand, as a downward sloping curve implying a larger quantity demanded at a lower price. Aggregate supply (AS) is an upward sloping curve indicating a larger quantity supplied at a higher price. However, once an economy approaches full employment of its resources (labor, land, and capital) the output can no longer be increased. That is why the aggregate supply gets steeper as we approach the point of full employment (FE). Now, consider AD0 and AS0 as the original aggregate demand and aggregate

supply curves and their corresponding output level of Q0 and price level of P0. Notice that Q0 is to the left of FE, implying the presence of unemployment in the economy. Now, if the government desires to reduce unemployment, it must stimulate the aggregate demand

and shift it outward to the right, AD2. The intersection between AD2 and AS0 results in a larger level of output at Q2 and a drop in the level of unemployment. However, if the original P0 is considered too high, then the government can destimulate the aggregate demand by shifting it inward to the left, AD1. Now, notice the price level is dropped to P1below P0. Governments can manage aggregate demand through fiscal and monetary policies. This chapter investigates the practice of fiscal and monetary policies by an Islamic government subject to limitations set by Islamic jurisprudence. Fiscal Policy Fiscal policy represents government intervention in the economy for the purpose of counteracting fluctuations caused by business cycles in the short run rather than waiting for the market adjustment in the long run. The main instruments of fiscal policy are taxes and government expenditures. Manipulation of these economic tools by the government results in a shift in the aggregate demand curve to achieve the desired outcome. The most common measure of economic performance is the gross domestic product (GDP). The gross domestic product is the market value of all goods and services produced in a country during a given year. This measure can be defined more precisely by the following equation:

GDP = C + I + G + X M Where C = Consumption I = Investment G = Government expenditures X = Export M = Import.


The government can stimulate the aggregate demand by increasing consumption (C), investment (I), or government expenditures (G). Consumption is a function of individuals disposable income (Income after taxes). Therefore, to increase consumption,

the government will cut taxes and allow individuals disposable income to increase, which will result in a higher level of consumption or investment. Alternatively, the government could spend more money in the economy to improve the economys performance measured by the GDP. Government expenditures can be financed by taxes, borrowing, or by increasing the money supply. Of course, it is easier for the government to borrow money to stimulate the economy by increasing G. Government debt creates financial obligations for the government and must be serviced by the payment of interest. The government can destimulate the aggregate demand by decreasing consumption (C), investment (I), or government expenditures (G). This in turn requires increasing taxes or cutting government spending on public projects. Islamic economics will limit the power of the government to conduct fiscal policy. Islam prohibits government debt and interest payment. Of course, the government still can introduce new taxes or change the tax rates to implement its fiscal policy. Because of these limitations, Islamic economics relies on Islamic norms to manage the economy. Islamic norms such as moderation in consumption and the governments inability to borrow money act as automatic stabilizers. Such norms provide an automatic brake in the economy and prevent it from becoming heated. The inability of the government to borrow money forces the government to have a balanced budget that by itself is an anti-inflationary device in an Islamic economy. Therefore, inflation will be controlled by Islamic norms and, hence, the government does not have to rely on discretionary fiscal policy to destimulate the aggregate demand curve to combat inflation. An Islamic government is more concerned about stimulating the economy to reduce the unemployment rate and generate a satisfactory rate of growth in the economy. Here again the government faces limitations. Islamic law has determined the tax rates on wealth, income, inheritance, etc. Consequently, the zakat tax rate of 2.5% and the Shiites khoms tax rate of 20% are immutable. Therefore, an Islamic government is unable to implement discretionary fiscal policy in its true sense. As a result, Islamic economics again relies on Islamic norms such as charity and religious endowments (waqf) and minor manipulation of the tax rates to stimulate the economy in order to achieve economic stability.

Monetary Policy Monetary policy is implemented by the central bank through controlling the supply of money in the economy. To stimulate the aggregate demand, the central bank increases the supply of money, and to destimulate the aggregate demand, the central bank reduces the supply of money. This operation can be explained by introducing the quantitative theory of money and its corresponding quantity equation.

M*V=P*Q Where M = the money supply V = the velocity of money P = the price level Q = total output of the economy.


The right-hand side of the equation represents the monetary value of the total output in the economy. The left-hand side of the equation shows the matching transfer of money. This simple equation explains how the supply of money (M) affects the performance of the economy. Monetarists believe that the velocity of money (the speed at which the money changes hand in the economy during a given year) is constant. Therefore, the supply of money is the only variable on the left-hand side of the equation. On the righthand side of the equation, the total quantity of the output cannot be changed easily during a short period of time. Therefore, any change in the supply of money (M) translates into a change in the price level (P) in the economy. In fact, too much money chasing too few goods results in inflation. Consequently, to control the price level, the central bank must control the supply of money. Monetary policy tools are the instruments available to a central bank to control the supply of money. The most common method used by central banks is known as the open market operation. Whenever the central bank desires to increase the supply of money, it bus governments bonds (debt instruments) in the open market and injects money into the economy. Alternatively, if the central bank desires to reduce the supply of money, then it sells governments bonds and collects money in the open market.

Central banks can also control the supply of money by changing the discount rate. The discount rate is the rate of interest that the central bank charges other banks when they borrow money from the central bank. When the central bank reduces the discount rate and the cost of borrowing, it encourages banks to borrow more money from the central bank at a lower cost. In turn, they lend more money to people and increase the supply of money in the economy. If the central bank wants to reduce the supply of money, then it increases the cost of borrowing to other banks. They in turn increase the rate of interest to individuals and reduce the amount of borrowing and the supply of money in the economy. The last instrument of monetary policy is the reserve requirement. The central bank regulates the percentage of each deposit in banks that must be kept in cash or a deposit at the central bank. For instance, if the reserve requirement is 10%, then 10% of each deposit must be kept as cash or deposit in the central bank and 90% of it can be loaned to another person who will deposit the money in a second bank, etc. This chain of events increases the supply of money by a multiplier known as the money multiplier. If rr represents the reserve requirement, then the chain of deposits represents a geometric series which produces a multiplier of 1/rr. Therefore, $100 initial deposit and 10% reserve requirement increase the supply of money by a factor of 10 or total $1,000. Now, the central bank can control the supply of money by changing the reserve requirement. If the central bank increases the reserve requirement, then the money multiplier reduces and the supply of money decreases. On the other hand, if the central bank reduces the reserve requirement, it increases the money multiplier and the money supply. Some economists argue that this active manipulation of money, or discretionary monetary policy, in pursuit of economic stability is ineffective since it requires perfect knowledge of the future events. As a result, the central bank should enforce a consistent monetary rule rather then practicing discretionary monetary policy. Lets consider the quantity equation again. M*V=P*Q The right-hand side of this equation represents the monetary value of the total output in the economy, or the nominal GDP. Although the output (Q) is constant in the short run,

it expands in the long run. Therefore, the supply of money needs to increase gradually to keep pace with increase in the level of output. As a result, Milton Friedman suggested a steady 4-5% increase in the supply of money annually to allow the economy to grow in line with the growth of money supply [1]. Since the payment of interest is prohibited in Islam, the implementation of the discretionary form of monetary policy is difficult, if not impossible. As was discussed, Islamic norms and values control the price level in the economy. Therefore, the discretionary monetary policy that intends to control the rate of inflation is really not necessary in Islamic economics. This will make Friedmans proposition quite attractive for Islamic economics. An Islamic government that is not concerned about inflation could easily follow Friedmans monetary rule to allow the expansion of the economy in line with the expansion of the monetary base.

Chapter Fourteen Islamic Banking Financial intermediaries and financial markets fulfill important functions in modern economies. Their main function is to mobilize savings and allocate them to business firms for investment purposes. Figure 1 depicts this important function for a bank.

Figure 1: Financial Markets and Financial Intermediaries Loans Business Firms Interest Banks Interest Deposits Savers

Savers are the individuals who have surplus funds and are willing to invest them for augmenting their future income. Financial markets are formed by individual savers (surplus units) and business firms (deficit units) that are in need of capital for investment purposes. It is possible for the savers to place their capital directly with business firms and receive interest in return. However, in a large economy, direct placement of capital is difficult and often inefficient. As a result, banks will ease the transfer of capital from savers to business firm through the process of intermediation. Furthermore, banks provide variety of services to savers and business firms to facilitate trading of goods and services. They also supervise business firms to safeguard their use of capital and provide financial information to everyone. Interest-free banking is an important achievement in Islamic economics. The Quranic injunction against interest (riba) changes the nature of financial intermediaries in Islamic economics. The use of equity capital is religiously justified since it is based on the concept of risk sharing. The return on equity capital, or profit, is the reward for taking risk by investors. Consequently, an Islamic bank accepts deposits from individual savers without promising a fixed rate of return. The bank will invest the capital directly or indirectly and distribute the profit or loss of its investment projects among individual savers (investors). Figure 2 shows the operation of an Islamic bank.

Figure 2: Islamic Banking


Islamic Banks

Murabahah (Sales contract)

Mudarabah (Profit sharing)

Musharakah (Partnership)

Direct Investment

Individual savers will have demand deposit accounts (checking account) and time deposit accounts (savings and investment accounts) in an Islamic bank. The bank does not pay interest to individual depositors and might even charge a reasonable amount of service fees for providing financial services such as clearing checks and managing the debit cards. Now, the bank can invest the collected capital in four different ways: murabahah, mudarabah, musharakah, and direct investment [1]. In murabahah (sales contracts), the bank buys an asset and sells it to a firm on short-term installment basis. The payments will cover the cost of transaction and a certain amount of markup to the bank. Mudarabah is a passive form of investment whereby a business firm uses the banks capital and shares the profit or loss with bank proportionately. Musharakah is an active partnership between a bank and a business firm. They manage the investment jointly and share the investments profit or loss accordingly. Finally, a bank can invest in a project by itself. The bank could either manage the investment and share its profit or loss with individual investors or could lease the asset and collect lease payment as a return on its investment. Table 1 shows the use of these methods by different Islamic banks during 1994-1996 [2]. Islamic mortgage banks use combination of musharakah and leasing to finance the housing market. The bank and an individual will buy a property jointly. The individual occupies the house and will pay monthly rent to the bank to cover banks share of invested capital. The individual can buy back the banks share gradually and own the house outright or sell the house in the future and share the proceeds with the bank accordingly.

Table 1: Different Modes of Financing Provided by Islamic Banks (1994-1996)


Al Baraka Islamic Bank for Investment Bahrain Islamic Bank Faisal Islamic Bank, Bahrain Bangladesh Islamic Bank Ltd. Dubai Islamic Bank Faisal Islamic Bank, Egypt Jordan Islamic Bank Kuwait Finance Bank Islam Malaysia Bank Berhad Qatar Islamic Bank

Murabahah Musharakah Mudarabah Leasing Other Total Methods Financing (Million US $) 119 82 7 6 2 3































Islamic banking is also an attractive marketing strategy that major conventional banks pursue to service a large community of Muslims living outside the Islamic world. Table 2 lists the banks that offer Islamic banking in London [3].

Table 2: Islamic Banking in London

Bank ANZ International



Islamic Banking Department Trade finance investment, Leasing Citibank International Corporate finance Trade finance investment, Leasing, Project finance, Financial engineering Dresdner Kleinworth Islamic Banking Department Trade finance investment, Benson Leasing, Investment Banking Hong Kong & Shanghi Banking Corporation Standard Chartered Bank Global Islamic Finance Unit Trade finance investment, Leasing, Investment Banking Trade finance investment, Leasing

Islamic Banking Unit

Islamic Banking is an innovative method of financial intermediation and a major accomplishment of Islamic economics. It is a modern financial institution compatible with Islamic norms and values. However, many critics question its viability as a religious and economic institution. For instance, Timur Koran argues that murabahah contract is essentially an interest-based contract with imputed interest payment [4]. Another example comes from Iranian case of Islamic Banking. Iran has Islamicized its banking industry after the Islamic Revolution of 1979. The Central Bank of Iran has established a range of possible returns for different types of investment and different modes of financing. Table 3 summarizes these rates for the period 1984-2000 [5].

Table 3: Expected Rates of Return to Banks (in percent)

Year/Sector 1984-1989 Agriculture Industry Housing Trade Services Export 4-8 6-12 8-12 8-12 10-12 8 (minimum)

1990 6-9 11-13 12-14 17-19 17-19 -

1991 6-9 11-13 12-16 17-19 17-19 -

1992 9 (minimum) 13 (minimum) 12-16 17-24 17-24 -

1993-1994 12-16 16-18 12-16 18-24 18-24 18(minimum)

1995-2000 13-16 17-19 15-16 22-25 22-25 18

As it can be seen, the Central Bank of Iran has determined a nominal range of 4-25 percent as acceptable rates of return in different sectors of the economy with no possibility below or above those rates. In a sense, the bank guarantees a minimum rate of return to the investors that is essentially not permissible in Islamic banking. Furthermore, the rate of inflation exceeded these rates in many years during 1984-2000. For instance, the rate of inflation was 24.4% in 1992, which means in real term, the investors were receiving a negative rate of return in 1994 [6}. Furthermore, Islamic banking is based on the concept of risk sharing in a cultural setting in which risk avoidance is the norm. Many forms of financial intermediation designed to cope with risk and uncertainty such as hedging, futures contracts, and insurance are not permissible in Islam based on the principle of gharar, a principle that says you shouldnt profit from anothers uncertainty [7]. Finally, the interaction between Islamic banks and Western financial markets will be a matter of extreme difficulty. Capital accumulation and its efficient allocation to productive projects are indispensable to technological innovation, economic growth, and economic development. Financial markets are very much global at present time. Further innovative financial engineering is needed to make an Islamic bank comparable to its Western counterpart in terms of products and services offered by the latter one and ease the relationship between them.

Chapter Fifteen Islam and Development If we learn anything from the history of economic development, it is that culture makes almost all the difference. Max Weber Many Muslim countries are struggling with poverty, modernization, and economic development at the present time. The seriousness of their economic challenges has convinced some critics that Islam per se is an obstacle to modernization and economic growth. If there is any validity to this assertion, the explanation must be rooted in Islamic culture and its impact on socioeconomic development. Cultural norms and values shape individuals behavior and their attitudes towards economic achievements. Religions are important determinants of cultural values and, hence, influence and shape social, economic, and political institutions that encompass individuals needs for socioeconomic achievements. Max Weber, the German

sociologist, in his book The Protestant Ethic and the Spirit of Capitalism, argued that the Protestant work ethic was necessary for the performance of capitalism and was responsible for the affluence of northern Europe and America [1]. If one accepts

Webers hypothesis, then one must conclude that certain religious norms and values could even be advantageous to economic growth. History of economic development bears the truth as to the relationship between cultural institutions and economic development. Islamic Empire of the Abbasid era (750 1258 C.E.) is a good example of this relationship. The Islamic world was a developed part of the world during the golden age of Islam. The Abbasid period was a multi cultural epoch marked by its relative openness to science, philosophy, education, trade, and other factors important for economic growth. However, Islamic civilization changed course after this time period. The gate of ijtihad (independent reasoning) was closed in the tenth century, Imam Ghazalie (1058-1111 C.E.), one of the most influential theologians of Islam, wrote the Incoherence of the Philosophers rejecting Muslim philosophers who were trying to reconcile reason and religion [2], and mysticism entered Islam, which denigrated the worldly achievements. Consequently, Islamic civilization

turned inward and evolved a closed cultural system inimical to change. In retrospect, this cultural redirection could partially explain the under-performance of Muslim countries.

Measures of Development Development is a complex and multi-faceted phenomenon. There are numerous factors that could potentially affect the economic performance of a society. To study this complex process we must introduce a few economic indicators that are used to measure economic progress in different countries. Per Capita Income The gross domestic product (GDP) as a measure of economic performance was introduced in Chapter 13. The GDP represents the market value of all goods and services produced in a country during a given year. Individuals, who have received income in the form of wages, interest, profit, etc., produce these goods and services. Therefore, the GDP also represents total income generated in the country. The per capita income represents an average income and is calculated by dividing the GDP by total population of the country. The World Bank uses the per capita income to group countries in four classes: high-income economies with per capita income of $9,076 or more, upper-middleincome economies with per capita income between $2,936 and $9,075, lower-middleincome economies with per capita income between $736 and $2,935, and lower-income economies with per capita income of $735 or less. Table 1 shows the per capita income and the total population of one Muslim country from each class. Table 1: Economic Performance of Four Muslim Countries, 2002. Country Kuwait Saudi Arabia Egypt Pakistan Per Capita Income (U.S. dollars) 16,340 8,530 1,470 420 Population (Thousands) 2,328 21,886 66,372 144,902

Source: World Development Indicators Database, World Bank, April 2004. reference/quick ref.html

The per capita income as an average value is statistically biased since its magnitude is influenced by the extreme rich and the extreme in the country. Therefore, it is desirable to introduce an economic measure of income distribution in the country. Gini Coefficient The Gini coefficient is a measure of equality in income distribution in a country. Figure 1 depicts the Lorenz curve from which the Gini coefficient is calculated. Figure 1: The Lorenz Curve 100% C T

80 Percentage of income

B 50 L

A 10 D 0 10

P 50 Percentage of population 80 100%

The diameter of the square represents perfect equal distribution of income. Every point on this line (OT) represents perfect harmony between the percentage income and the percentage of the population receiving the income. For instance, point A shows 10% of the population receiving 10% of the total income, point B shows that 50% of the population receiving 50% of the income, etc. The curve L represents the actual distribution of income. For instance, point D represents 10% of the population receiving only 5% of income, and point E shows 50% of the population receiving 20% of income, etc. Therefore, the farther is the curve L from the line OT, the more unequal is the

distribution of income. The Gini coefficient is the ratio of the shaded area and the triangle OTP. Therefore, the Gini coefficient ranges from 0 to 1 (or 0 to 100%). The larger the coefficient, the more unequal is the income distribution. Table 2 shows the Gini coefficient for the four countries listed in Table 1.

Table 2: the Gini Coefficient for Four Muslim Countries Country

Kuwait Saudi Arabia Egypt Pakistan

Gini Coefficient
NA NA 0.344 0.33


1999 1998-99

Source: Human Development Report 2003 The Gini coefficient was not available for Kuwait and Saudi Arabia that might indicate significant inequality in income distribution in those countries. The combination of the per capita income and the Gini coefficient will give better information regarding the standard of living in a given country. However, they are not sufficient measures of development. Consequently, the United Nations has developed the Human Development Index (HDI), which is a much better measure of development.

Human Development Index

Economic development is a much broader concept than economic growth. The United Nations constructs the Human Development Index (HDI) using three measures of socioeconomic development: the standard of living measured by the per capita GDP adjusted for the local cost of living, life expectancy at birth, and the level of knowledge in the society measured by the adult literacy rates and average years of schooling. The HDI is designed to measure individuals well-being in a society. The HDI is an index ranges from zero to a maximum value of one. Countries with 0.5 or less value have low degree of human development while an HDI value greater than 0.50 represents medium and high levels of human development. Table 3 shows the HDI for the four Muslim countries of Table 1.

Table 3: Human Development Index for Four Muslim Countries, 2001.

Kuwait Saudi Arabia Egypt Pakistan

0.82 0.769 0.648 0.49

Source: Human Development Report 2003 Table 3 shows three countries with medium and high levels of human development and one country with low degree of human development.

Islam and Economic Performance

Having studied the proper measures of economic performance, we can now consider the relationship between Islam and economic growth. According to the United Nations Human Development Report of 2003, the Arab states of the Middle East and North Africa had an average GDP per capita of $5,038 and average human development index of 0.662 [3]. These figures will place these countries among upper-middle-income economies with medium to high human development. Such data do not support the allegation of negative relationship between Islam and economic growth. As a result, we must study the relationship between Islam and economic development more systematically to draw any conclusion. Economists have generally distanced themselves from cultural issues and cultural institutions. Recently, Robert Barro and his colleague Rachel McCleary at Harvards Weatherhead Center for International Affairs have paid attention to the relationship between religion and economic performance [4]. Using data for 60 countries over the last 20 years they have concluded that religious beliefs in heaven and hell are beneficial to economic growth. The data also suggest a systematic pattern that richer societies are less religious. More importantly, the presence of a state religion, like Islam in Muslim countries, sees helpful to economic growth as well. There are, however, other critics who still believe in negative correlation between Islam and economic growth. Timur Kuran has used the data for 132 countries in a regression analysis and has reported the following results [5].

Table 4: The Relationship Between Islam and Per Capita Income

Dependent Variable The logarithm of per capita income (1) Constant Independent Variable(s) Share Muslim -0.41 (-2.57) Squared Share Muslim -2.07 (-2.87) 1.76 (2.29) OPEC Member 0.42 (2.20) Sub-Saharan Africa R2 -0.67 (-5.77) 0.04 0.34 3.33 (2) 3.55

Regression (1) shows a negative and statistically significant (t=-2.57) relationship between the dependent variable (logarithm of per capita income) and the independent variable (% Muslims in total population). However, the explanatory power of this model, measured by R2 = 0.04 was quite low. To improve the results, he used a second regression model and showed better results. All the independent variables in the second regression model were statistically significant. The relationship between per capita income and the share of Muslims in total population is still negative. This suggests a negative correlation between these two variables. There is a positive relationship between per capita income and membership in the OPEC (Organization of Petroleum Exporting Countries) organization. Clearly, the oil revenue has a positive impact on per capita income of these countries. Finally, there is a negative relationship between per capita income and countries located in Sub-Saharan Africa. The explanatory power of this model was improved to an R2 = 0.34. These results contradict Barro and McClearys observation that religiosity should improve economic performance.

Historical achievements of Islam are a good indication that Islamic values are not anti-growth per se. Islam encourages education for both men and women, it promotes the rule of law, and advocates fairness, social justice, and positive form of freedom. In modern economic terms, Islam facilitates the development of social and human capital through promotion of socioeconomic rights for all Muslims. Furthermore, Islam favors free trade and commercial activities that induce economic growth. Therefore, we have to consider other factors that might be responsible for this seemingly negative relationship between Islam and economic growth. Economic development is a complex process that requires social and political support. Figure 2 shows the relationship between social, political, and economic development.

Figure 2: The Development System

Social and Cultural Development

Political Development

Economic Development

Political Development in general and democratic system in particular can help economic development. According to Amartya Sen development requires the removal of major sources of unfreedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, neglect of public facilities as well as intolerance or over activity of repressive states [6]. Perhaps this quotation is the best explanation for the negative correlation between Islam and economic performance. To start with, most Muslim countries have repressive political regimes that actively prevent social and political development in their countries. They deny opportunities, particularly, to women and prolong their own survival by preventing the development of human capital in their countries. Saudi Arabia is a good example of a country with numerous forms of

unfreedom that are responsible for its dismal economic performance despite its enormous amount of oil revenue. Table 5 shows several economic indicators for Saudi Arabia.

Table 5: Saudi Arabias Socioeconomic Indicators Population, 2001 (millions) Fertility rate per women 1970-75 2000-05 Population growth rate (1975-2001) Per capita income, 2001 ($) Per capita income growth rate 1975-2001 1990-2001 Adult literacy rate (% age 15 and above), 2001 Public expenditures on education (as % of GDP) 1990 1998-2001 Public expenditures on health (as % of GDP), 2000 Military expenditures (as % of GDP) 1990 2001 Female economic activity rate, 2001 Female economic activity as % of male rate, 2001 Imports of goods and services (as % of GDP) 1990 2001 Exports of goods and services (as % of GDP) 1990 2001 Primary Exports (as % of merchandise exports) 1990 2001 Source: Human Development Report 2003 Table 5 shows negative per capita income growth rate for the last quarter of the twentieth century while population growth rate was 4.4%. This combination clearly indicates erosion of standard of living in Saudi Arabia. The country spends significantly more on military expenditures than on education or health care. More importantly, women have no political rights in Saudi Arabia and participate in economic activities at a much lower rate. The country is also entirely depends on export of petroleum to finance its imports and public expenditures. Finally, Wahhabism that is officially followed in Saudi Arabia 22.4 7.3 4.5 4.4% 8,711 -2.1% -1.1% 22.9% 6.5% 9.5% 4.2% 12.8% 11.3% 21.6% 28.0% 36.0% 24.0% 46.0% 42.0% 93.0% 91.0%

will not permit meaningful transformation of women role in the social, political, and economic areas. Therefore, the absence of democracy and the Wahhabi version of Islam prevent the development of social and human capital in Saudi Arabia, which collectively contributes to its poor economic performance. In fact to support the argument that Islam is not responsible for the poor economic performance of Muslim countries, we turn our attention to Iran and its stellar economic performance as a model economy in the Middle East.

Chapter Sixteen Economic Performance of Islamic Republic of Iran Economic growth of Iran prior to 1979 revolution was the embodiment of Western modernization. This model of development is personified by the reenactment of Western pattern of development through the process of industrialization. It is important to notice that economic development of Western countries was accompanied by meaningful historical structural changes that made it possible for the Western countries to move gradually from traditional societies to modernity. Iranian modernization was, however, coupled with a superficial farce known as the White Revolution, a political strategy that meant to reduce the power of the monarchs rivals and the religious establishment through land reform. Iranian growth was fueled by a substantial increase in the price of crude oil in the 1970s and government expenditures, which resulted in a dual pattern of development. A few large modern industries expanded while the indigenous sector of the economy contracted. For instance, the government built a few dams to provide water for modern agricultural farms and neglected the qanats (water tunnels) that traditionally irrigated most of Iranian villages. The revolution of 1979 was a complete turn about economically. The revolution was an anti-Western movement that put an end to Irans path towards modernization. Ayatollah Khomeinis contempt for economic matters, an eight-year war with Iraq (1980 88), and the American economic sanctions against Iran drastically affected the economic performance of the country in the 1980s. Ayatollah Khomeini died in 1989 and the government of Iran gradually paid more attention to economic condition of the country. Struggle for Economic Independence Iranian revolution of 1979 was a nationalist struggle for political independence. To that end, the economic system became subservient to political system. Accordingly, the preamble to the constitution of Islamic Republic of Iran considers the economy as a means to achieve the ultimate goal of Islamic social justice. Furthermore, Article 3 of the

constitution considers economic independence necessary for political independence and directs the government to attain self-sufficiency in scientific, technological, industrial, agricultural, and military domains, and other similar spheres [1]. The achievement of social justice and economic independence are further developed in Articles 43 to 55 of the constitution. Article 43 delineates the economic objectives of Islamic Republic of Iran in a more comprehensive form: Article 43 The economy of the Islamic Republic of Iran, with its objectives of achieving the economic independence of the society, uprooting poverty and deprivation, and fulfilling human needs in the process of development while preserving human liberty, is based on the following criteria: 1. the provision of basic necessities for all citizens: housing, food, clothing, hygiene, medical treatment, education, and the necessary facilities for the establishment of a family; 2. ensuring conditions and opportunities of employment for everyone, with a view to attaining full employment; placing the means of work at the disposal of everyone who is able to work but lacks the means, in the form of cooperatives, through granting interest-free loans or recourse to any other legitimate means that neither results in the concentration or circulation of wealth in the hands of a few individuals or groups, nor turns the government into a major absolute employer. These steps must be taken with due regard for the requirements governing the general economic planning of the country at each stage of its growth; 3. the plan for the national economy, must be structured in such a manner that the form, con-tent, and hours of work of every individual will allow him sufficient leisure and energy to engage, beyond his professional endeavor, in intellectual, political, and social activities leading to all-round development of his self, to take active part in leading the affairs of the country, improve his skills, and to make full use of his creativity; 4. respect for the right to choose freely one's occupation; refraining from compelling anyone to engage in a particular job; and preventing the exploitation of another's labor; 5. the prohibition of infliction of harm and loss upon others, monopoly, hoarding, usury, and other illegitimate and evil practices; 6. the prohibition of extravagance and wastefulness in all matters related to the economy, including consumption, investment, production, distribution, and services; 7. the utilization of science and technology, and the training of skilled personnel in accordance with the developmental needs of the country's economy;

8. prevention of foreign economic domination over the country's economy; 9. emphasis on increase of agricultural, livestock, and industrial production in order to satisfy public needs and to make the country self-sufficient and free from dependence [2].

Article 44 divides the economy of Iran into three sectors: state, cooperative, and private [3]. Article 45 and 47 recognize both public and private ownership by excluding income and wealth generated through illegal un-Islamic activities [4]. Finally, Article 50 directs the government to preserve the environment: Article 50 The preservation of the environment, in which the present as well as the future generations have a right to flourishing social existence, is regarded as a public duty in the Islamic Republic. Economic and other activities that inevitably involve pollution of the environment or cause irreparable damage to it are therefore forbidden [5]. In retrospect, the numerous articles of Islamic Republic of Iran constitution depicts an economic system that is compatible with Islamic economic system depicted in the previous chapters- a normative economic system with a visible role for the government to eliminate poverty and establish social justice for all. Economy of Iran The economic achievements of Islamic Republic of Iran have been mixed at best. Ayatollah Khomeinis objective was to establish an independent Islamic state regardless of its economic outcomes. In accordance with this objective, the constitution of Islamic Republic of Iran called for self-sufficiency and Islamic justice in the economic arena. These political and socio-economic objectives resulted in massive nationalization of industries and banks, which in turn created government control of the economy, and the domestic production of goods and services in substitution for imports. Irans economic outlook was transformed after Ayatollah Khomeinis death in 1989 and the government replaced its import substitution policies with market-oriented policies focusing on export promotion.

Irans measures of economic growth and development reflect the results of this policy shift. Table 1 shows Irans human development index (HDI) and its three dimensions- life expectancy at birth, adult literacy rate, and GDP per capita. Table 1: Human Development Index (HDI) of Iran 1975 HDI Life expectancy at birth Female Male Adult literacy rate (% age 15 and above) Female Male GDP per capita (U.S. $) GDP per capita (ppp U.S. $) Female Male Source: Human Development Report 2003 Based on this broad measure of economic performance, Irans economy has continuously improved since 1975. With a score of 0.719, the United Nations Development Program places Iran among countries with medium human development. The improvement is mainly due to an ambitious government commitment to ameliorate measures of life expectancy and adult literacy rates, particularly for women. For instance, life expectancy at birth was 55.3 years during 1970-75 [6] and adult literacy rate was only 48% in 1979 [7]. However, GDP per capita of $6,000 (adjusted per capita income based on purchasing power parity (ppp) model to reflect local price levels) in 2001 is still only 76.8% of the highest GDP per capita of $7,808 achieved in 1976 [8]. It is important to mention that Irans population increased from 33.4 million in 1975 to 67.2 million in 2001 [9], which is mainly responsible for lowering per capita GDP. Finally, the Gini coefficient of 51.44% in 1977 [10] is reduced to 43% [11], which represents an improvement in income distribution in Iran. 1980 1985 1990 1995 2001

0.562 0.566 0,607 0.646 0.690 0.719 69.8 71.3 68.5 77.1 70.2 83.8 1,767 6,000 2,599 9,301

The average annual growth rate of GDP is a common measure of economic growth. By that measure, Iranian economy has performed impressively in recent years. According to the World Bank, the annual GDP growth rates have been 6%, 5%, and 7% in the years 2000, 2001, and 2002 respectively [12]. Table 2 provides more complete information about Irans GDP and its composition.

Table 2: Structure of Iranian Economy 1982 (% of GDP) Agriculture Industry Manufacturing Services 20.2 37.1 9.6 42.7 23.9 29.2 14.3 46.9 59.6 10.4 20.7 18.6 37.7 16.3 43.6 51.0 13.2 21.5 15.2 38.9 13.9 45.8 51.4 14.1 23.3 1992 2001 2002

Private Consumption 61.5 Government Consumption 18.1 Imports of goods & services 11.9 Balance of Payments (U.S. $ millions) Exports of good & services 20961 Imports of goods & services 15613 Balance of trade 5348 (Average annual growth) Agriculture Industry Manufacturing Services Private Consumption Government Consumption Gross Domestic Investment Imports of goods & services 1982-92 4.3 3.0 6.5 -0.5 1.9 -3.7 1.2 -0.7

20427 29057 -8630 1992-02 3.8 -2.2 5.6 7.8 3.4 3.3 4.7 -8.9

26020 21586 4343 2001 4.7 7.5 10.0 4.8 5.1 1.1 3.0 4.1

28439 25954 2485 2002 6.1 10.5 11.0 5.1 6.3 5.0 12.0 11.2

Source: The World Bank Development Data (Iran, Islamic Rep. At a glance 9/3/2003)

The data in Table 2 shows a typical pattern of development where agricultures contribution to GDP shrinks while industry and services share increase. More

importantly, all three sectors have had an impressive rate of growth in recent years. Government consumption, compare to earlier years, is decreasing and the trade activities are expanded. These results indicate that the governments market-oriented policies have started to payoff.

Future of Iranian Economy Iran has set the stage to become an economic powerhouse in the Middle East. Rapid population growth rates of 1970s and 1980s are dampened through a progressive national family planning program. Table 3 shows Irans total fertility rate (the average number of children per woman).

Table 3: Changes in Irans Total Fertility Rate (TFR) and the Use of Modern Contraception, by Area. TFR Area 1977 1996 Preliminary % Change % Change % Married 2000 1977-1996 1996-2000 women using contraception 4.5 2.2 1.8 51 18 55 8.1 3.5 2.4 57 31 57 606 2.8 2.0 58 29 56

Urban Rural Total

Source: Population Reference Bureau Display.cfm&content ID=6508 Table 3 shows that Iran has achieved replacement-level fertility without restricting families freedom of choice. This remarkable success is the result of Islamic governments support for family planning, good access to reproductive health services, and improving womens education and economic opportunities. However, rapid population growth of 70s and 80s resulted in doubling the population size during 19752001. From total population of 67.2 millions in 2001, about 34% were below the age of 15 [13] and by some estimates about two-thirds of Irans population are under 30. This puts an immense pressure on the economy to create millions of new jobs for the young and educated population of Iran.

Despite the projected rapid economic growth over the next few years, Iranian economy still faces some major problems. Table 4 provides a few economic indicators that could shed some lights on these problems. Table 4: Irans Selected Economic Indicators 1999/2000 1.7 20.1 16.0 -0.6 20.2 6.3 5.6 10.8 7908 2000/2001 5.1 12.6 15.8 8.7 30.5 13.1 12.2 8.0 8078 2001/2002 5.4 11.4 16.3 1.8 25.8 5.3 16.9 7.2 7921 2002/2003 6.8 15.8 15.7 -2.3 30.1 3.0 21.8 9.2 7967

Real GDP growth CPI inflation (% change) Unemployment rate Central government Balance (% of GDP) Broad money growth (% change) Current account balance (% of GDP) Gross international reserve (billions of $) External debt (billions of $) Exchange rate (rials per $)

Source: International Monetary Fund

Table 4 shows that despite recent economic achievements, the country still faces high rates of unemployment and inflation. Central governments share of GDP is an indication of a large public sector, improper fiscal policy, and inefficiency in general. Additionally, the rapid rate of money growth signals an expansionary monetary policy, which in turn results in higher inflation rates. Table 4 also shows a surplus in trade and a substantial reserve of hard currency. Iranian external debt is relatively small and exchange rate stability has been achieved. As was mentioned, the governments structural reform has already helped the economy. The reform has promoted international trade and foreign direct investment and has eased the economic restrictions that were introduced after 1979 revolution. However, the economy still depends heavily on its abundant energy resources, oil and gas, with highly volatile prices. Irans public sector is still very large. Iranian government and

religious charities control about half of the economy [14]. This pervasive public sector signals a structural impediment for further development of the private sector. However, despite all these problems, the government aims to cut state subsidies, privatize public enterprises, and boost private investment. Iranian conservative leaders took back the legislature on the platform of economic development and future economic reform along the Chinese model of liberalizing the economy accompanied with political control. According to Business Week, the Abadegan group (the renovators) had a great victory in recent parliamentary election on the platform of turning Iran into an Islamic Japan by calling for respect for privacy, empowerment of women, and pledges to reduce government intervention in the economy[15]. Political infighting between the conservatives and reformists has been a major obstacle to economic growth and development. The recent victory of the conservatives in Iranian election has set the stage for further economic achievements by providing political security and good governance. There is strong evidence that economic growth and development and political freedom are positively correlated with each other. In other words, economic development promotes political reform and democracy. As a result, the economic agenda of Iranian government is a positive signal for the future of Iran.

Chapter Seventeen Postscript: Hopes and Reality Social and political ideologies are often distorted when they are implemented. In German Ideology, Marx declared while in communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing to-day and another to-morrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticize after dinner, just as I have a mind, without ever becoming hunter, fisherman, shepherd or critic [1]. For Marx, socialism meant emancipation of man from social, economic, and political bondage. He wanted to end mans alienation and restore his human attributes. However, the Soviet and Chinese implementation of this ideology about-faced and put man in bondage. Political Islam seems to move in the same direction. In a recent interview, Grand Ayatollah Yusef Saanei of Iran said, Islam is the religion of peace, of rights, of justice, not tyranny, violence and prisons- let alone terrorism and killing people and torture in prisons, even if this torture is putting them in solitary confinementAll of these things are against Islamin other words: what you would like for yourself, you must do for others. There are all the human rights and freedoms, which the Prophet calls justice[2]. This quotation is an indication that political Islam has been a disappointment so far. Political Islam is badly in need of social, political, and legal reform. To reform Islam, the gate of ijtihad must be opened to make room for a dynamic jurisprudence. Even in Shiism where the gate of ijtihad has always been open and in Iran where a progressive version of political Islam was established in 1979, there is a need for dramatic reform to create a true democratic and open political system. Even though the government of Iran has improved womens social, economic, and political rights, still there is a need for further improvement of womens place in the society to create a true gender equality in the country. If Islam is the religion of tolerance, then Islamic governments must learn to tolerate and respect minorities and freedom of expression. All in all, if Islamic states intend to establish open democratic societies, they must reform themselves.

Economics of Islam is a different story. Beyond the fact that Islamic economics is of a normative form and value driven, Islamic economics as a modern tool in the hand of a government to manage economic affairs of the country is proven to be ineffective and inadequate. Iranian economy started to show positive results when it adopted the established economic solutions along the Western models. Islamic economic can be used to establish Islamic justice through the distribution decisions while leaving the allocation decisions to market-oriented models of Western economics.

Notes Introduction 1. Fanon, Frantz. Black Skin, White Masks. Trans. Charles Lam Markmann. New York: Grove Press, 1967, p. 18. 2. Lewis Bernard. The Roots of Muslim Rage. Atlantic Monthly, September 1990: pp. 47-60. 3. Huntington, Samuel. The Clash of Civilizations? Foreign Affairs, September 1993: pp. 22-49. Chapter 1 1. Albert Hourani, A History of the Arab Peoples, Cambridge, Massachusetts: The Belknap Press of Harvard University Press, 1991, p.485. 2. Seyyed Hossein Nasr, The Heart of Islam: Enduring Values for Humanity, Harper San Francisco, 2002, p.38. 3. Ibid., p.267. 4. The Koran, Trans. N.J. Dawood, Penguin Books, 1974.

Chapter 2 1. Albert Hourani, A History of the Arab Peoples, Cambridge, Massachusetts: The Belknap Press of Harvard University Press, 1991, p.22. 2. Hamid Enayat, Modern Islamic Political Thought, Austin: University of Texas Press, 1982, p. 4. 3. The Koran, Trans. N.J. Dawood, Penguin Books, 1974.

Chapter 3 1. Seyyed Hossein Nasr, The Heart of Islam: Enduring Values for Humanity, Harper San Francisco, 2002, p.120. 2. Ibid., p.121. 3. Ibid., pp. 126-127. 4. The Koran, Trans. N.J. Dawood, Penguin Books, 1974.

Chapter 5 1. Malcolm H. Kerr, Islamic Reform: the Political and Legal Theories of Muhammad Abduh and Rashid Rida, Berkeley: University of California Press, 1966, p.155. 2. Ibid., p. 162. 3. Ibid., p. 166. 4. The Koran, Trans. N.J. Dawood, Penguin Books, 1974.

Chapter 6 1. John Rawls, A Theory of Justice, Cambridge, Massachusetts: The Belknap Press of Harvard University Press, 1971, p. 302. 2. Dante Germino, Modern Western Political Thought: Machiavelli to Marx, Chicago: Rand McNally & Company, 1972, p. 264. 3. Ibid., p.269. 4. The Koran, Trans. N.J. Dawood, Penguin Books, 1974.

Chapter 7 1. John Esposito, Islam: the Straight Path, New York: Oxford University Press. 1991, p. 75. 2. Seyyed Hossein Nasr and Oliver Leaman, History of Islamic Philosophy, London: Routledge, 1996, p.805. 3. Abdolkarim Soroush, Reason, Freedom, and Democracy in Islam, Trans. Mahmoud Sadri and Ahmad Sadri, New York: Oxford University Press. 2000, p. 131. 4. Ruhullah Khomeini, Islam and Revolution: Writings and Declarations of Imam Khomeini, Trans. Hamid Algar, Berkeley : Mizan Press, 1981, p. 202. 5. Abdulkarim Soroush, p. 122. 6. The Koran, Trans. N.J. Dawood, Penguin Books, 1974.

Chapter 8 1. Abdolkarim Soroush, Reason, Freedom, and Democracy in Islam, Trans. Mahmoud Sadri and Ahmad Sadri, New York: Oxford University Press. 2000, p. 156. 2. Stephen Kinzer, All the Shahs Men: An American Coup and the Roots of Middle East Terror, Hoboken, New Jersey: John Wiley & Sons, 2003, p. 48. 3. Ibid., p. 38. 4. Ibid., pp. 37-38. 5. Manucher Farmanfarmaian and Roxane Farmanfarmaian, Blood and Oil: Memoirs of a Persian Prince, New York: Random House, 1997, p. 306. 6. Stephen Kinzer, p. 15. 7. Ruhullah Khomeini, Islam and Revolution: Writings and Declarations of Imam Khomeini, Trans. Hamid Algar, Berkeley: Mizan Press, 1981, p. 56. 8. Ibid., p. 55. 9. Ibid., p. 25. 10. Ibid., p. 64. 11. Ibid., p. 55. 12. Ibid., p. 68. 13. Ibid., p.69. 14. Ibid. 15. Ibid., p. 70. 16. Ibid. 17. Ibid., p.83. 18. Ibid., p. 84. 19. Ibid., p. 93. 20. The Koran, Trans. N.J. Dawood, Penguin Books, 1974.

Chapter 9 1. Karen Armstrong, The Battle for God, New York: Knopf, 2000, p. 221. 2. Ibid., p. 244.

3. Albert Hourani, A History of the Arab Peoples, Cambridge, Massachusetts: The Belknap Press of Harvard University Press, 1991, p.446. 4. Hamid Enayat, Modern Islamic Political Thought, Austin: University of Texas Press, 1982, p. 95. 5. Karen Armstrong, pp. 257-58. 6. Jalal Al-e Ahmad, Garbzadegi [Weststruckness], Trans. John Green and Ahmad Alizadeh, Lexington: Mazda Publishers, 1982, p. 11. 7. Mehrzad Boroujerdi, Iranian Intellectuals and the West, Syracuse University Press, 1996, p. 106. 8. Hamid Enayat, p. 139. 9. Ibid., p.154. 10. Olivier Roy, The Failure of Political Islam, Trans. Carol Volk, Cambridge, Massachusetts: Harvard University Press, 1944.

Chapter 10 1. Amartya Sen, On Ethics and Economics, New York: Basil Blackwell, 1987, p. 32.

Chapter 11 1. Timur Kuran, Behavioral Norms in the Islamic Doctrine of Economics: A Critique, Journal of Economic Behavior 4(1983), pp. 360-61.

Chapter 12 1. Timur Kuran, The Genesis of Islamic Economics: A Chapter in the Politics of Muslim Identity, Social Research, Vol. 64, No. 2 (summer 1997), p. 304. 2. Hamid Enayat, Modern Islamic Political Thought, Austin: University of Texas Press, 1982, p. 108. 3. Abul-Hassan Bani Sadr, Iqtesad-e Tawhidi (Economics based on Tawhid (oneness of God), In Persian. Nashr-e Hajr, 1357 (1978), p. 392. 4. Seyyed Mahmood Taleqani, Islam and Ownership, Trans. Ahmad Jabbari and Farhang Rajaee, Lexington, Kentucky: Mazda Publishers, 1983, p. 124. 5. Abul-Hassan Bani Sadr, P. 5.

6. Hamid Enayat, p. 146. 7. Ibid. 8. Ibid., p. 147. 9. Seyyed Mahmood Taleqani, p. 107. 10. Rodney Wilson, Economics, Ethics and Religion: Jewish, Christian, and Muslim Economic Thought, New York: New York University Press, 1997, p. 154. 11. Adam Smith, An Inquiry into the Nature and Cause of the Wealth of Nations, Chicago: the University of Chicago Press, 1976, p. 18. 12. Seyyed Mahmood Taleqani, p. 135. 13. Seyyed Hossein Nasr, The Heart of Islam: Enduring Values for Humanity, Harper San Francisco, 2002, p.145. 14. Seyyed Mahmood Taleqani, p. 98.

Chapter 13 1. Milton Friedman, The Role of Monetary Policy, American Economic Review (March 1968), p. 16.

Chapter 14 1. Mabid Ali Al-Jarhi and Munawar Iqbal, Islamic Banking: Answers to Some Frequently Asked Questions, Islamic Development Bank: Islamic Research and Training Institute, Occasional Paper No. 4, 2001, pp.14-15. 2. Ibid., p. 17. 3. Rodney Wilson, Challenges and Opportunities for Islamic Banking and Finance in the West: The United Kingdom Experience, Islamic Economic Studies, Vol. 7 Nos. 1&2 (October 1999 & April 2000), p. 44. 4. Timur Koran,Islamic Economics and the Islamic Subeconomy, Journal of economic Perspectives, Volume 9, Number 4 (Fall 1995), p.162. 5. Nezamaddin Makiyan, Islamic Banking System in Iran: Its Experience in Lending Operations, Iranian Economic Review, Volume 8, No. 9 (Fall 2003), p. 36. 6. Ibid., p.37.

7. Jerry Useem, Banking on Allah, Fortune, June 10, 2002, p.158.

Chapter 15 1. Max Weber, The Protestant Ethic and the Spirit of Capitalism, New York: Scribners, 1958. 2. Seyyed Hossein Nasr, Islamic Life and Thought, Albany: State University of New York Press, 1981, P. 72. 3. United Nations: Human Development Report 4. Robert J. Barro and Rachel M. McCleary, Religion and Economic Growth. PP.1-52. 5. Timur Kuran, Islam and Underdevelopment: An Old Puzzle Rvisited, Journal of Institutional and Theoretical Economics, Vol. 153, No. 1, March 1997, p.43. 6. Amartya Sen, Development As Freedom, New York: Alfred A. Knopf,

1999, p.3.

Chapter 16 1. 2. Ibid. 3. Ibid. 4. Ibid. 5. Ibid. 6. Human Development Indicators 2003 (Iran), p. 5. 7. Microsoft Encarta Online Encyclopedia 2004 (Iran) 8. Human Development Report 2003 9. Ibid. 10. Ali Farahbakhsh, Iranian economy in Six Snapshots, Paym-e Emruz:Economic, Social, Cultural (Monthly), February 2001, No. 23, p.42.

11. Human Development Report 2003 12. The World Bank 13. Ibid. 14. Iran: The Mideasts Model Economy?, Business Week, May 24, 2004. 15. Ibid. Chapter 17 1. Erich Fromm, Marxs Concept of Man, New York: Fredrick Ungar Publishing Co., 1961, p. 206. 2. Scott Peterson, Irans revolution at 25: out of gas,The Christian Science Monitor (, p.3.

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