Islam, Market Economy and the Rule of Law

"Law is in Islam a process of discovery. Just as the physical scientist

believes that the laws of physics exist as an absolute, waiting to be
discovered rather than invented, so the Muslim legal scholar believes that
the shariah has been created by God and his role is to discover and
articulate it rather than invent it."
by Imad-ad-Dean Ahmad, Ph.D.

Secularists need to be educated about the actual history of Islam and the substance
of Islamic law. Muslims in general need not only to be educated about politico-
economic theory, but to be put in touch with their own heritage.

Free markets need the rule of law to operate. The Qur'an explicitly favors
productivity and free trade. It is not ascetic, but encourages moderation in matters
of consumption. It not only favors rules of contract and commerce but actually
specifies many of them.

Early Islamic society protected property, had only a few, well-specified taxes, and no
government intervention into the economy except to expose fraud, punish theft, or
nullify ribâ (the charging of interest). The gradual accretion of departures from the
early Muslim teachings accumulated until the "closing of the door to ijtihâd (the
exercise of reason)" which precipitated the loss of dynamism of Islamic jurisprudence
and the fall of Islam before the West.

Those who claim that Islam is some single economic or political system refute
themselves by their inability to articulate the specific nature of such a system. The
shariah (Islamic law) consists of particular ethical imperatives to which any Islamic
political or economic system must conform. The fundamental ethical principles
enunciated in the Qur'an must limit Islamic states. Politicians must not dictate
interpretations of Islamic law. The same God who created the Qur'an created the
social laws which govern societies. Any perceived conflict between them must be an
error of our understanding, and must be resolved by reasoned discussion and study
(ijtihâd), not by political coercion.

What makes democracy good is that it is an expedient way of resolving issues. It is

preferable on pragmatic grounds to permit the majority to elect a leader rather than
fight a war over it. Some issues, however, are not subject to the rule of expediency.
No majority may be allowed to take away the rights of minority even though it
outnumbers them 100,000 to 1.

Although Islam understands the fact that families and communities serve important
functions and requires the individual to fulfill his obligations to those institutions, the
Qur'an seeks to reform society by reforming the individual. It appeals to morality and
not to coercion, which it expressly prohibits.

Constructive dialog is needed between secular Muslim liberals and Islamists that will
bring the former back to the religio-ethical basis of Natural Law and give the latter
the tools they need to forge an authentic 21st century Islamic civilization rather than
blindly copy the dead institutions of their ancestors or the mistakes of socialist
Europe.

The hostility between secularists in non-Muslim nations and Islamists in Muslim

nations can be seen within Turkey. There is a difference, in that the Turkish have an
affection for Islam, even when they do not practice it. Nonetheless, secularists need
to be educated about the actual history of Islam and the substance of Islamic law.
Muslims in general need not only to be educated about politico-economic theory, but
to be put in touch with their own heritage. This is especially true in Turkey where
some of the changes which took place over this century have made it more difficult
for the people to maintain contact with their Islamic background.

Islam, not the ancient Greeks nor the Medieval Christians first instituted the concept
of rule of law in the sense that liberals appreciate it today. The Philadelphia Society
is a liberal--Americans would say conservative--organization devoted to America's
heritage of Constitutionalism and rule of law. At its annual meeting, held last month
in Chicago, noted conservative intellectual, M. Stanton Evans, gave a talk in which
he noted that the ancient Greeks did not understand rule of law the way we do
today. For the ancient Greeks the ruler was above the law. The law was a body of
rules for some men to impose upon others. In modern times we understand the rules
of law to apply to all equally, even king and parliament. Evans asserted that this
conception was an invention of the medieval Christians, the scholastics, and he gave
the example of some eleventh century scholastic who stated that the king is not
above the law.

During the question and answer period, I reminded him that the medieval Christian
scholastics studied the ancient Greeks through the spectrum of the translations and
commentaries that the Muslim scholars had provided. The Europeans, cloistered in
the Dark Ages, had lost touch with their own heritage, and it was the Muslims who
had translated Aristotle and the others in Arabic and made commentaries. It was
mainly through these translations and commentaries, translated into Latin, that the
scholastics obtained their knowledge and inspiration. It was in the classical Islamic
civilization that the modern concept of rule of law developed. I could beat his
eleventh century quote with one from the seventh century. Abu Bakr, upon his
inauguration as khalifah (successor to prophet Mohammed pbuh) said:

"It is true that I have been elected your amir (ruler) .... If I give you a command in
accord with the Qur'an and the practice of the Prophet, obey me. But if I give you a
command departing from the Qur'an or the practice of the Prophet, you owe me no
obedience, but must correct me. Truth is righteousness, and falsehood is treason."

Mr. Evans accepted my comment as "a friendly amendment," but hastened to add
that he was speaking of rule of law in practice, not in theory. I replied that for
hundreds of years, Islamic civilization practiced the rule of law and referred him to
my upcoming book Islam and the Discovery of Freedom (based on a chapter in Rose
Wilder Lane's The Discovery of Freedom) and he said he would look forward to it.

Abu Bakr's comment is extremely important, for in it he identifies the essence of the
difference between ancient systems of command and the decision-making process
under rule of law. In the wake of the fall of the Soviet Union, I'm sure you have
heard references to the difference between the "command economy" and the "law-
based economy." The ancient form of law is that human beings give commands to
other human beings. This ancient system was revived in Soviet Russia, where the
government gave commands to the people at large. In a law-based economy, a
single set of laws or rules govern the decision-making and people operate not on the
basis of commands tailored to specific transactions, but on their free choice within
the scope afforded by universally applied laws. This is precisely the Islamic system.

I often tell people unfamiliar with Islam, that if you learn nothing else about Islam,
learn this. It's fundamental teaching is la illaha il Allah: There is no god but the God.
Among the corollaries of this principle, one of the most important is that there can
be no intermediary between us and the Almighty--we are directly responsible to him.
If we obey someone else in contradiction to His will, then we are guilty of shirk, the
most serious of sins in Islam, the only God has said that He will not forgive.

It is understandable that American Christians are unfamiliar with Islamic history. Of

more concern is that we Muslims have lost touch with our own heritage. Secular
socialism, employing policies utterly unjustifiable under the Qur'anic code of ethics
are ruining the economies of Muslim countries from Algeria to Bangladesh. The
degree to which policies taken from the Welfare states of Europe have hurt the
Turkish economy have been dealt in other talks at this conference. Even without the
analyses of the economists from which we have heard, however, any tourist can tell
you that any country with an exchange rate of 76,000 lira to the dollar and an
annual inflation rate around 100% has not been following the sound money policies
of the Prophet Muhammad, who used only hard currencies like gold, silver, and hard
wheat. Muslims did not deviate from this sound practice until almost 400 years after
the Prophet (peace be upon him).

Free markets need the rule of law to operate because they do not operate by
commands, but by individual choices made under laws. The Qur'an explicitly favors
productivity and free trade. It is not ascetic, but encourages moderation in matters
of consumption. It not only favors rules of contract and commerce but actually
specifies many of them. The Prophet Muhammad not only believed in markets, he
himself made his living as a merchant, as did his wife Khadija. Under the Prophet
and under Abu Bakr there was protection of property. The few taxes that existed
were specifically fixed and non-confiscatory. There was no government intervention
into the economy except to expose fraud, punish theft, or nullify ribâ (the charging
of interest). Despite the adoption of tax practices found in newly conquered lands
(often at severely reduced rates) and the institution of some regulations made
necessary by the administration of those vast territories, the same general pattern
was practiced by all the righteous khalifahs. Departures from this pattern under the
early Umayyads were condemned and largely reversed under the great reformer
Umar ibn Abdul Aziz.

Over the hundreds of years of the classical Islamic era, the gradual accretion of
departures from the early Muslim teachings accumulated until the "closing of the
door to ijtihâd" which precipitated the loss of dynamism of Islamic jurisprudence, the
stagnation of the law, and the fall of Islam before the West. (It was about the time
that ijtihâd was being abandoned by the Muslims that the West began adopting
Islamic concepts like the rule of law, eventually leading to its Renaissance.)

Let's turn to the Islamist movement today. It is not monolithic. Those who claim that
Islam is some single economic or political system refute themselves by their inability
to articulate the specific nature of such a system. If we recognize that the shariah
consists of particular ethical imperatives to which any Islamic political or economic
system must conform, we can see that it is the fundamental principles enunciated in
the Qur'an which must limit Islamic states and not Muslim politicians who must
dictate interpretations of Islamic law. Since the same God who created the Qur'an
created the social laws which govern societies, any perceived conflict between them
must be an error of our understanding. Either we have misunderstood the Qur'an, or
we have incorrectly done our social science. Such perceived discrepancies must be
resolved by reasoned discussion and study (ijtihâd), not by political coercion.
I'd like to point out here that Americans are extremely proud of the division of the
functions of government into three branches, the executive, the judiciary and the
legislature, which serve as checks upon one another. The division of powers existed
in Islamic law in an even more extreme form. The ruler, so-called, was the
executive. The judges, although appointed by the ruler (as many American judges
are appointed by the executive) were given independence by lifetime tenure. (Also,
the people could choose which judge they would go to.) The legislature was so
separate that it was not originally part of the government. Actually, it wasn't even a
legislature per se since Islam does not admit of invented legislation. As I have
pointed out elsewhere (Ahmad 1993a), law is in Islam a process of discovery. Just as
the physical scientist believes that the laws of physics exist as an absolute, waiting
to be discovered rather than invented, so the Muslim legal scholar believes that the
shariah has been created by God and his role is to discover and articulate it rather
than invent it. They are more like scientists than legislators. Initially they were
totally separate from the rulers. About the same time that the door to ijtihâd was
closed, the ulema (scholars) began to be paid by the government. Al-Ghazali made
some beautiful criticisms of this trend. One of his comments was to the effect that
the rulers who frequent the houses of the scholars are the best and the scholars who
frequent the houses of the rulers are the worst.

The issue of democracy is very important. What makes democracy good is not that it
is morally superior. It is not, for the majority is often wrong. It is that it is an
expedient way of peacefully resolving disagreements. Since the majority will
eventually win any war, eventually, it is preferable, on pragmatic grounds, to permit
the majority to elect a leader rather than fight a war over it. This way we can save
lives and resources. Thus, if the majority wish to drive on the right side of the road
instead of the left, it advances the public safety to require everyone to drive on the
right. Some issues, however, are not subject to the rule of expediency. No majority
may be allowed to take away the God-given rights of minority even though it
outnumbers them 1,000,000 to 1. When we say this, we are recognizing a higher
law. The secularist might call it natural law and the religious person would call it
divine law, shariah, if he is a Muslim. Whatever name you give it, the majority has
no right to repeal it.

What of the charge that Islam is closer to socialism that to capitalism? This claim
does not withstand critical examination. Socialism is, after all, defined as state
ownership of the means of production. There is nothing in the shariah to justify state
ownership of the means of production. The perception of a similarity between Islam
and socialism is entirely due to the Islamic institution of zakat (obligatory alms of
2.5% on net worth annually) and prohibition of ribâ. But the purpose of zakat is the
"purification" of wealth, not its confiscation. Zakat is fixed at 2 1/2% of accumulated
wealth. It is small enough to leave most of the wealth in the hands of the most
productive while offering the poorest the means to become productive themselves. It
is in no way a limitation of wealth--the assessment does not increase no matter how
much total wealth the individual has accumulated. At the same time it is not
regressive because those without subsistence are exempt.

The dominant belief that Islam prohibits interest is more problematical. I have dealt
with it at length elsewhere. Here, I will only outline three arguments as to why the
controversy on this issue should not be taken to mean that Islam is socialistic.

Let us concede that a prohibition on interest is anti-capitalist in the Marxist sense of

the word capitalism. Nevertheless, we should bear in mind that capitalism, in the
sense of money earned through rent-seeking activity, is not the essence of the
market. The essence of the market is entrepreneurship. Trade, not banking is the
primary function of markets.

Second, as economists, we should bear in mind the fungibility of money. Money is,
by definition, liquid, and like water it can flow around obstacles put in its way. The
impediment of a ban on interest to most market transactions is minimal because it is
so easily gotten around by entrepreneurial alternatives. Profit-sharing plans are the
most commonly practiced alternatives in the so-called "Islamic banking" systems.

Finally, a careful examination of the Qur'an, hadith, and Islamic jurisprudence shows
that interest is in any case not prohibited. Islamic jurisprudence has always
recognized the permissibility of discount for cash and surcharge for credit. Any
economist will tell you is interest. It is only interest in purely monetary loans that the
jurists have forbidden. Of course, this often can be gotten around by giving the
lender equity in the goods being purchased or the industry being financed. But I
have shown elsewhere (Ahmad 1993b) that the ribâ prohibited to Muslims is
overcharging of any type, including but not limited to loan sharking. Every mention
of ribâ in the Qur'an, without exception, occurs in the context of a discussion of
charity. It is a sin for a Muslim to take advantage of a poor person's desperation to
overcharge him. But the word ribâ never occurs in a discussion of trade. On the
contrary, the only verse in the Qur'an in which ribâ and trade are mentioned
together specifically compares anyone who asserts that ribâ is like trade to a
madman (2:275).

In no sense should Islam be considered collectivist. It is true that, unlike extremist

individualists in the West, Islam understands the fact that families and communities
exist and serve important functions and requires the individual to fulfill his
obligations to these institutions. But the Qur'an primarily addresses the individual
and seeks to reform society by reforming the individual. It appeals to morality and
not to coercion, which it expressly prohibits.

I do not need to explain the importance of economics to this audience. But I believe
that it is not economics, but the human spirit that drives history. If you want to
change the economic system you must employ the human spirit in the process.
Islam teaches that we human beings are God's khalifah--His vicegerent on earth.
The stewards of his creation. For the Muslim the material world is not a place of
punishment for some original sin, but the proving ground in which we demonstrate
our submission to God (the Glorified and Exalted) by voluntary submission to His
will, making out this morally neutral material world good things for ourselves, our
families, our community, and all mankind. You cannot fulfill this charge without the
liberty to choose good over evil of your own free will. Thus, the Qur'an says: "Let
there be no compulsion in religion." We cannot improve the welfare of our society
without our property rights. Thus, the Prophet said on his farewell pilgrimage: "You
are all brothers, and you may not take from your brother anything he does not freely
give you."

Among the Islamist leadership are many skilled in critical thinking and familiar with
both the strengths and the weaknesses of Western society. A constructive dialog is
needed between secular Muslim liberals and Islamists that will bring the first group
back to their religion and give the latter the tools they need to forge an authentic
21st century Islamic civilization rather than blindly copy the dead institutions of their
ancestors or the mistakes of the European Welfare state.
This article was originally delivered as a lecture to the Second International
Symposium on Liberalism in Ankara, Turkey, 18-19 May 1996

© Imad-ad-Dean Ahmad, Ph.D., Minaret of Freedom Institute, Bethesda, MD USA

REFERENCES

I. A. Ahmad 1993a, "Islam and Hayek," Economic Affairs, 13 #3 (Apr.), 17.

I. A. Ahmad 1993b, "Riba and Interest: Definitions and Implications," paper

presented at the 22nd meeting of the American Muslim Social Scientists (Oct. 15-17,
1993) in Herndon, VA.