CHAPTER 3

THEORY BUILDING IN
ISLAMIC ECONOMICS
 LEARNING OUTCOMES

At the end of the chapter, you should be able to:

 Recognize multiple sources of knowledge in Islamic epistemology which can be relied upon in building the Islamic
Economics theories.
 Understand the approaches and processes for theory building in Islamic economics.
 Explain the purpose of theory building in Islamic economics and its differences from the conventional economic
methodology.
 Know the criteria of acceptance or rejection of a theory in Islamic economics.
 SOURCES OF KNOWLEDGE IN ISLAMIC
ECONOMICS
Theory in Islamic Economics: Sources of Knowledge
• Islamic epistemology recognises multiple sources of knowledge
from where we can derive economic knowledge and theories. These
multiple sources of knowledge have been classified in various ways
such as:
1 Āyāt qawliyyah to denote the revealed texts
the Qurʾān (these are mostly explicit);
2 Āyāt kawniyyah to denote the source of
knowledge from the observation of the
universe and phenomena in human life
(these are mostly implicit i.e. by allusion); and
3 The ʿaql (that comes from the intellect).
• In Islamic epistemology, all these sources of knowledge are
considered complementary and are integrated methods for the
pursuit of truth and will lead to the deepening conviction of the
truth.
• Divine revelation in the form of the Qurʾān and Sunnah is central to
the Islamic epistemological framework. This principle differentiates
Islamic epistemology from Western secular epistemology.
• In Islamic epistemology, revelation occupies a fundamental place and
plays a definite role, but in Western epistemology there is absolutely
no room for revelation and divine guidance.
of
• The scientific development of Islamic economics as a science depends
very much on the interaction with this primary source (namely, the
Qurʾān that sets up the doctrinal foundations).
• The methodological query in Islamic economics would be to determine
how we should derive knowledge from the mentioned sources, and
how to link our means of acquiring knowledge (the mind and the
senses) to the sources of our knowledge.
 SOURCES OF KNOWLEDGE IN ISLAMIC
ECONOMICS

 In addition, how we authenticate theories derived from those sources and how we evaluate the theories appraised, are also
among the questions that need to be scrutinised.

 To understand, explain and gain knowledge, one needs to have a fine combination of the sources of knowledge as well as the
methodology.

 Any knowledge or theory derived from whatever sources has to be in line with the principles, values, criteria and framework set
out by the Qurʾān and Sunnah.

 In addition, if the knowledge or theory derived from experience or intellect contradicts the revelation, there will only be two
possibilities: either that the knowledge or theory is false, or our interpretation and understanding of the revelation is false.

 The revelation, with proper interpretation, is never false.

 DEFINITION OF THEORY IN ISLAMIC
ECONOMICS

A theory is a simplification of the world that is A theory is developed to provide a logical

A theory in general is a statement of aimed at clarifying and explaining some framework or skeleton in relation to which the
relationships between units observed or aspect of how it works. It is a statement about necessarily inexact and incomplete
approximated in the empirical world. what is going on with the phenomena that you observations of the real world can be
want to understand. apprehended with greater insight.
DEFINITION OF THEORY IN ISLAMIC
ECONOMICS

1. Abstract concepts:
Start from conceptual
exploration.

4 basic 2. Relationship
building:
4. Transforming event
Constructs a theory. elements Uses a set of logically
related propositions.
of theory

3. Formal
propositions:
Shape a model.
DEFINITION OF THEORY IN ISLAMIC
ECONOMICS

Theory Building from Islamic

be defined as
A Theory in Islamic Economics can

Perspective can be Defined as

A statement of relationships between
units observed or approximated in the
empirical world that aims to clarify and
explain some aspects of how the
relationship works, and transform the
realities into certain ideals or objectives
as envisaged by Islam.
The steps, processes and procedures to
construct a theory and evaluate the reliability
of that theory. It is the whole arrangement from
conceptual exploration by observing abstract
phenomena, comprehending the Islamic
principles and values, the formal construction
into a proposition and model, to the evaluation
of a theory for reliability and validity.
 DEFINITION OF THEORY IN ISLAMIC
ECONOMICS

Theory in Islamic Economics:

• From the perspective of Islamic epistemology, a theory should also be based on (and not against) the principles as
envisaged in the Qurʾān and Sunnah.

• In other words, a theory is not only about describing a fact as it is, but a theory should also be based on Islamic principles.

• A theory in Islamic economics does not only attempt to describe the world or fact as it is (positive), nor does it attempt to
merely describe an ideal state of affairs in economic realities (normative).

• A theory in Islamic economics also attempts to prescribe, change and transform the economic conditions (transformative).
 WORLD VIEW, VALUES AND FACTS IN
ISLAMIC ECONOMIC THEORY BUILDING

 The world view and values held and adopted by a scholar influence the initial understanding and explanation of the
nature and dynamics of the issue problem, or phenomenon that is the focus of the theory.

 The world view and value judgement are the basis by which we consciously or unconsciously place or fit everything we
believe, and by which we interpret and judge reality (Nash, 1988).

 It is a map that people use to orient and explain, and from which they evaluate and act, and put forward prognoses and
visions of the future.
 WORLD VIEW, VALUES AND FACTS IN
ISLAMIC ECONOMIC THEORY BUILDING

 The world view affects the way a society operates in its social, political, economic, and cultural dimensions.

 The impacts of the world view could then be seen in various aspects of life, religious rituals, philosophical and
scientific belief, ethical position, and many others.

 In the scientific development, the world view provides a framework of thought, and objectives as well as a set of
axioms and principles on which a theory is proposed and operates.

 Economics as a system of thought is founded and developed based on world views of how the scholars and thinkers see
the appropriate relationship of economic phenomena.
 WORLD VIEW, VALUES AND FACTS IN
ISLAMIC ECONOMIC THEORY BUILDING

 The secular world view supported by the materialist and reductionist principle has deeply influenced the establishment
of economics (its conception, system of thought and values).

 Modern economics is developed within the world view of detaching metaphysics (religion) and economics.

 The physics-like approach in developing economic theory is the paradigm in conventional economics methodology.

 It is believed that economic activity encompasses only materials and processes in the physical world that could be
described scientifically and studied analytically.
 WORLD VIEW, VALUES AND FACTS IN
ISLAMIC ECONOMIC THEORY BUILDING

 According to Morchio (1991), reductionism can be defined in three different ways:

1 Formal reductionism
Economic theories could be deduced from the principles of other sciences: physics, biology and
chemistry.
2 Factual reductionism
Physical and chemical laws are in principle sufficient to give account of structures and
functions of economic systems.
3 Methodological reductionism
The methods that have so efficiently worked in physics, should work as efficiently in economics.

 The limits imposed by methodological reductionism in enquiring the fundamental nature of economic phenomena keep
economics from dealing adequately with complex reality.
 WORLD VIEW, VALUES AND FACTS IN
ISLAMIC ECONOMIC THEORY BUILDING

Islamic Economic Theory

 In Islamic economic theory building, the shortcomings in conventional economic theory building will be taken into
account.

 The Islamic world view, which is based on the Qur’ān and Sunnah, is the basis of our understanding in interpreting
human life and the surrounding environment.

 In theory building, the Islamic world view would have direct impact on assumptions made and how we perceive things,
including the components of the subject matter and relationships between these components in the Islamic perspective.

 Islamic economic theory is expected to develop an explanation of economic phenomena and the dynamic relationships
of economic entities such as the individual, state, institutions and society with a socio-scientific explanatory power
based on the revealed, rational and empirical sources of knowledge and having a balance and proper ethical perspective
in achieving the noble objectives of the Sharīʿah.
 WORLD VIEW, VALUES AND FACTS IN
ISLAMIC ECONOMIC THEORY BUILDING

Islamic Economic Theory

 A theory in Islamic economics makes its ethical-religious connections explicit at the very outset of its theory building
which also marks spiritual consciousness in economic activities and economic analysis as a science.

 The scientification process in conventional economic theory building intends to screen religious, metaphysical, spiritual,
normative and ethical aspects from economics.

 Meanwhile, the scientification process in Islamic economic theory building intends to incorporate the derived ethical
principles from the Qurʾān and Sunnah in Islamic economic theory and analysis and to actualise them in the behaviour
of the Islamic man (individual who acts in accordance with Islamic principles) in his or her practical economic pursuit as
a manifestation of the ethical doctrine.
 OBJECTIVES OF THEORY IN ISLAMIC
ECONOMICS

Theory and explanation

 A theory is constructed to explain the logically necessary connections in economic phenomena which exist between
various economic variables, and to show their direction of causation.

 A theory provides conceptual analytical interpretive tools to read economic phenomena.

 In methodological reductionism, economic realities are represented only by partial knowledge due to the
compartmentalisation of realities.
 OBJECTIVES OF THEORY IN ISLAMIC
ECONOMICS

Theory and explanation

In contrast to modern neoclassical economics that has been shaped by positivism to reject the unobservable phenomena and
unquantifiable realities or experience, an explanation in Islamic economic theory:
 Should not be reductionist in nature (for example, by reducing all entities to the level of the individual to explain the
nature of the economic man’s behaviour);
 Should not be isolationist by detaching one entity from the ‘whole’;
 Should recognise all entities in their proper place, relating and integrating them in an orderly and meaningful way; and
 Should recognise the relationships between realities in a broader perspective.
 OBJECTIVES OF THEORY IN ISLAMIC
ECONOMICS

Theory and unification

 The Islamic economic theory shall attempt to link the Islamic doctrine, principles and values with practical reality.

 The theory produced is not merely a reflection of doctrine, but also has a root in practical realities and serves as a means
to achieve the goals promised by the doctrine.

 Theory building in Islamic economics shall attempt to formulate a theory according to the principles and ethos of the
Qurʾān as well as the practical realities or historical data of human real-life experience.

 Islamic economic theory should be both ‘ideational’ and ‘factual’ in content (Chapra, 2000).

 At the doctrinal and practical domain, it will interpret the ideals and practical realities and translate them into a set of
theoretical propositions, assumptions as well as hypotheses.
 OBJECTIVES OF THEORY IN ISLAMIC
ECONOMICS

Theory and unification

 A theory should be able to absorb the message of the doctrine and portray the factual reality at once, something which is
missing in conventional neoclassical economic theory that has swayed too much to empiricism.

 Islamic economics will then study the gaps between ideals and realities and propose recommendations (theoretical and
policy) to close the gaps.

 Islamic economics is not only in explaining phenomena as ‘it is’, but also as ‘it should be’ according to Islamic
principles.

The interaction of doctrine and realities is a continuous process in Islamic economic theory building.
 OBJECTIVES OF THEORY IN ISLAMIC
ECONOMICS

Theory and policy prescription

 In Islamic economics, theory building shall also aim to produce an economic theory that could assist in prescribing
workable policies for goal realisation.

 In Islamic economics, the purpose of analysing facts is not solely for the sake of explaining the apparent realities but
also for the purpose of putting them in the proper place in accordance with the ideals, values and goals of Islam, to
change the imperfect realities, and to prescribe workable policies to solve economic problems, if found.

 Policy prescription is an integral part in Islamic economic theory building that attempts to analyse the unity of doctrine,
principles, values and goals with the practical or factual realities, and putting forward reasons or suitable policies, if
there exists a gap between the two, and to show how the gap may be removed.
 APPROACHES OF THEORY BUILDING IN
ISLAMIC ECONOMICS

Two approaches are mainly adopted in Islamic economic theory building, namely:

1 The Modification Approach

Modifying and recasting the conventional economic theory in accordance with Islamic principles.

2 The Non-modification Approach

Building a new theory from Islamic epistemological sources.
 APPROACHES OF THEORY BUILDING IN
ISLAMIC ECONOMICS

The Modification Approach

 Theories produced in conventional economics are not altogether rejected in Islamic economics.
 Hence, the development of Islamic economic theory should not necessarily start from scratch by ignoring all the wisdom
of modern economics which have been generated through the long process of intellectual interaction and debate.
 There might be some common ground where some conventional theories might be accepted as long as they are not in
conflict with the logical structure of the Islamic world view.
 Such theories, according to some scholars, are not against the explicit or implicit injunctions of Islam, or they do not contradict the
principles of Islamic teachings and should be evaluated within an Islamic framework and using Islamic criteria.
 APPROACHES OF THEORY BUILDING IN
ISLAMIC ECONOMICS

 Theories like utility maximisation, rationality and self-interest to explain the behaviour of individuals in making choices
or decisions are constructed in certain world view and the setting of a capitalist society.

 To adopt them ‘as is’ in Islamic economics might not be suitable. These theories need further scrutiny within the Islamic
world view and values.

 Modifying conventional economic theory in this regard, must start from the very basic foundation of the Islamic world
view, paradigm and values.

 The approach of integrating conventional economic theories with the Islamic perspective seems to be dominating today.

 It aims to recast the whole legacy of human knowledge from an Islamic perspective by adopting the best that
conventional economics offered, then to imbue these with Islamic principles and to inform further development with
Islamic values.
 APPROACHES OF THEORY BUILDING IN
ISLAMIC ECONOMICS

The Modification Approach: Process of Integration

 Type A
The existing conventional economic theory is modified by removing non-Islamic elements or adding Islamic principles into the theory.
The likely output usually takes the form of adding Islamic assumptions or principles into the theory and retaining the conventional economic
theory, attaching the ‘Islamic’ prefix to the theory such as, ‘Islamic utility’ to explain the concept of utility maximisation in Islamic economics.

 Type B
The researcher would attempt to find the normative basis of theory by investigating the Islamic principles, norms and values found in the
Qurʾān and Sunnah which are relevant to the theory used in the research.
In the dimension of providing empirical evidence, conventional tools and methods are used. The likely output produced in this approach is the
confirmation and justification of existing conventional economic theory in Islamic cases.
 APPROACHES OF THEORY BUILDING IN
ISLAMIC ECONOMICS

The Non-modification Approach

 Supporters of the non-modification approach argue that Islamic economists should first develop an ‘Islamic economic
conceptual scheme’ based on the Islamic world view and general Islamic scientific conceptual scheme.

 The scheme equips the discipline with a strong foundation including values, principles, benchmarks, concepts, terminologies,
methodological criteria, justifications and processes.

 Developing new framework for economic analysis of human behaviour is needed not only to get more realistic insight into the
economic behaviour of man, but also to understand the divine commandments about the behaviour and their role in improving
economic conditions for human existence in this world.

 The challenge will be in integrating the sources of knowledge in Islamic epistemology (divine revelation, intellectual
reasoning and fact observation).

 Using any of the two approaches―modification and non-modification approach―Islamic economic theories shall not have
the fundamental flaws that conventional economic theories have.
 PROCESS OF THEORY BUILDING IN
ISLAMIC ECONOMICS

Three main steps:

 Pre-construction
 Construction
 Post-construction
 PROCESS OF THEORY BUILDING IN
ISLAMIC ECONOMICS

Pre-Construction: Deriving Basic Philosophy, Principles and Axioms from the Revelation

 In the context of theory building in Islamic economics, guidance from the Qurʾān and Sunnah provides the basic foundations and parameters of the model of social and
economic behaviour in society.

 At this stage, we attempt to develop ‘philosophical foundations’ or ‘primary concepts’ that would be our ‘conceptual framework of Islamic economic theory building’
and function as benchmarks, parameters, schemes and guidelines for the construction of Islamic economic postulates, hypotheses, precepts, assumptions and theories.

 This begins with visualising the Qurʾānic philosophy and principles of economics, including those related to the relationships of man, nature, state and society in the
realm of exchange, production, consumption, distribution and others.

 This attempt is not easy. While we may say that the Qurʾān and Sunnah provide the necessary foundations for Islamic economics in terms of principles and norms, most
of them are not explicit and are general in nature, and hence the majority of economics today would not be covered explicitly.

 Therefore, interpretations of the texts to gain insights for theory appraisal has become a central methodological challenge.
 PROCESS OF THEORY BUILDING IN
ISLAMIC ECONOMICS

Construction: Constructing Theoretical Propositions

 The first step would be to identify economic phenomena/problems as an object to be observed and get insights from
revelation, intellectual reasoning and facts observation on how that phenomenon/problem should be look at.

 The next step would be deriving assumptions and proposing theoretical propositions to explain the economic
reality/phenomena under observation.

 Theoretical propositions, assumptions and postulates are essentially value judgments claiming for objective validity.

 Methodology of Islamic economics would evaluate the reliability of those theoretical propositions, assumptions and
hypothesis in practice by providing empirical evidence and then analyse them to provide feedback for further refinement
and development of a theory in Islamic economics.
 PROCESS OF THEORY BUILDING IN
ISLAMIC ECONOMICS

Post-Construction: Evaluating the Theory

 A theory needs to be evaluated to check its validity. Empirical investigation of a theory as in positive economics.
Endeavouring in this realm should not cause Islamic economics to be trapped into logical positivism that would exclude
doctrine and values.

 In Islamic epistemology, the empirical truth is not the ultimate truth. Facts alone do not provide sufficient information to
the ultimate truth. It has to be guided and be in line with the doctrine and values as laid down in the Qurʾān and Sunnah.

 The integration and unification of empirical truth, doctrine and values would lead us to the ultimate truth in the Islamic
sense.

 The evaluation of a theory in Islamic economics should also be done at the doctrinal level as well as the logical
structure. The doctrinal and logical consistency is also a criterion for an acceptance or rejection of a theory in Islamic
economic theory building.
 PROCESS OF THEORY BUILDING IN
ISLAMIC ECONOMICS

Post-Construction: Evaluating the Theory

 Internal integrity (Doctrinal integrity, Logical integrity, Factual integrity)

 Relational unity (Unity in realities, Unity of doctrine, values and facts, Unity in practice and desired goals)

 Good Theory should properly reflect and capture the values and norms of Islam and Islamic epistemology principles that are also
consistent with the economic vision of Islam.

 In the logical positivism paradigm, the empirical truth constitutes the highest rank in the scientific endeavor; hence, the scientific method
requires a theory to be examined on its reliability in the empirical sense.

 In Islamic epistemological tradition, knowledge comes from divine revelation, intellectual reasoning and fact observation. Each source of
knowledge has its own methodology and criteria to achieve truth and what constitutes truth.

 A reliable and sound theory is one that shows internal integrity of doctrine, logic and fact as well as relational unity.
 PROCESS OF THEORY BUILDING IN
ISLAMIC ECONOMICS

Internal Integrity

Unlike conventional scientific methodology, the validity of a theory in Islamic economics is not simply obtained by measuring it
against empirical evidence; instead, it has to be put first to the test of doctrinal integrity (compliance) and logical validity.

 Doctrinal integrity means the theory should be internally consistent with Islamic doctrine and principles as outlined in the
revelation.

 Logical integrity means a theory should be logically valid; the coherence or logical consistency of a theory from the hypothesis
to the conclusion is examined.

 Factual integrity means a theory shall be empirically proven, the correspondence of a theory to the factual reality is examined.
 PROCESS OF THEORY BUILDING IN
ISLAMIC ECONOMICS

Relational Unity

The relational unity criteria come from the principle in Islamic epistemology that aims at realising unity in doctrine and
practical realities, ideals and facts, and normative and positive dimensions.

The relational unity criteria include three aspects, namely:

 Unity in the doctrinal, logical and factual dimensions of an Islamic economic theory.
 Unity perspective in understanding economic realities.
 Unity of doctrine and facts.
 SUMMARY

 Islamic epistemology recognises multiple sources of knowledge from where we can derive our economic knowledge and
theories. The sources of knowledge in Islam are waḥy (divine revelation), ʿaql (intellect or mind) and empirical
evidences from the facts of experience.
 Islamic economics as a new discipline is challenged as to whether it can produce theories that could better explain
economic realities with a new ontological perspective in understanding realities using epistemological and
methodological approaches.
 The purposes of theory building in Islamic economics is to produce an economic theory that could explain economic
realities in a comprehensive perspective, promote unification of doctrine and realities, values and facts, and prescribe
suitable policies to achieve certain goals as promoted by Islam.
 The scientific criteria of acceptance and rejection of a theory is developed based on Islamic epistemological tradition of
what constitutes truth. Therefore, the theory that is examined should have an internal integrity and a relational unity.