As increasing centration of wealth in hands of
As we look and observe around the world, we can see a huge amount charitable, empathy and unselfish behaviour which leads to the opposite of the teachings of neoclassical economics theory. Most of the time, due to the wrong predictions of economic theory, economists are surprised by the outcome of the final game which appear that human being frequently prefer to take a loss rather than be treated unjustly (Camerer, 2003). Dominant Western theories of human behaviour are considerably removed from the reality that we are living in. Some studies show that the operations and processes that promote the creation of wealth in the West have insignificant correlation with the economic theory that we found in neoclassical textbooks. Over the past few years, continuous efforts by determined economist to conduct the lessons of these theories to attain economic development have continuously failed. Therefore, empirical evidence strongly recommends Islamic views compared to the one that is being taught in current conventional economic texts. In perfect competition, economists believe that free markets are the solution to every economic problem. Since there are no distortions in prices and no limitation on firms, the profit motive will by itself lead to optimal and efficient allocation of resources. Also, people are not restricted from pursuing self-interest hence, will lead to socially optimal outcomes. For example, laissez-faire economics have been documented all over the world. Economists from a top World Bank try to seek a quick transformation of the Russian economy to free market and anticipated miracles following a shock treatment. It is known that the previous communist economic system was inefficient and required reform but nevertheless, it was able to produce enough output to feed the people and satisfy the requirements of the economic. Farkas (1998) mentions that industrial production collapsed by 50% due to the World Bank reforms and the predicted gains from changing to the free market competition did not happen. Consequently, World Bank economists have written tracts explaining this failure and blaming it on Russian for their inexperience with free markets, corruption, and other factors. Whatever the reasons, the free markets and perfect competition have been proven a failure on countless occasions which leads to hunger, deprivation, misery, and massive income inequalities. The most obvious example is the Great Depression where the supply and demand operations supposed to bring about full employment has also lead to failure. A lot of experiments related to free markets, perfect competition and economic liberalization lead to the same result; increasing centration of wealth in hands of the rich and social tensions and misery both directly as a result of increasing poverty and because of the frictions created by broadening the gaps between the rich and the poor. The neoclassical economics teachings are different than the Quranic teachings. The Quranic call for the circulation of wealth by emphasizing cooperation, and encourage the rich and powerful to take care of the weak and needy. By implementing this mechanism, it will build societies which are rich spiritually, morally, and materially.The assumptions of economic theory do not match observed behaviours in almost every field. It can be proved when economists tried to check for the relationship between the core neoclassical assumptions of utility maximization and profit maximization, and the actual behaviour of consumers and firms. The “As-If” philosophy has been created by Friedman which mentions that if a theory produces valid predictions, the unrealistic assumptions which are different than the actual behaviour do not affect the validity of the theory. This shows how neoclassical theory is not convenient in predictions or in policy decisions. People who are involving in business of selling goods are expected to have more understanding in consumer theory than theorist themselves. Economists believe that consumers are making choices based on the preferences given. However, this has not always been true as mentioned by Ariely et al. (2003) that choice generally made at random and preferences are created according to the choices made by the consumers. For example, the act of choosing X over Y may create a preference for X and most of the time preferences are influenced by desire, social norms, advertising, and moral and spiritual concerns. In economic affairs, it is descriptively accurate to state that self-interest mainly motivates people to spend. In secular society, it is considered as an ethical commitment that preferences may not be questioned because different people have their own religions and values. On the other hand, Islamic values disagree with this ethical commitment because there are significant differences between preferences and desires but at the same time, Islam allows and encourages fulfilment legitimate and rational desires as mentioned in the Quran from surah Al-A’raf:(7:32) “Say (0 Muhammad): ‘Who has forbidden the adornment which Allah has brought forth for His creatures or the good things from among the means of sustenance? Say: ‘These are for the enjoyment of the believers in this world, and shall be exclusively theirs on the Day of Resurrection.’ Thus, do We clearly expound Our revelations for those who have knowledge.”Also, it strongly discourages pursuit of idle desires as mentioned below from surah Al-Jathiyah:(45:23) “Did you ever consider the case of him who took his desire as his god, and then Allah caused him to go astray despite knowledge, and sealed his hearing and his heart, and cast a veil over his sight? Who, after Allah, can direct him to the Right Way? Will you not take heed?”Islam also forbid excessive spending (Israf), spending on forbidden products (Tabzeer), conspicuous spending for the sake of being envied by other people. Instead, Islam strongly encourages spending to seek Allah’s pleasure which means spending on others and on useful social causes. By following Quranic prescriptions, it will lead us to economics based on simple lifestyles, hospitality, cooperation, and trust of a type which cannot be pictured within a neoclassical framework. To describe human being as selfish by not criticizing it is a value of judgment that selfishness is ethically permissible. Kirchgässner (2005) shows that economists behave more selfishly compared to those in other disciplines. In most societies, people are taught to cooperate and help each other which can lead to good social outcomes. However, this is not the same case as how economists describe it. Economists teach that selfishness leads to good social outcome and as a result, they become more selfish than others which shows that neoclassical economic theory is normative and generate selfishness. For this reason, economist find it hard to understand and accept experimental results that prove otherwise because most people understand human behaviour as a mix motives which is different than economics theoretical framework. For example, Camerer (2003) describes that “If I had a dollar for every time an economist claimed that raising stakes would drive the ultimatum behaviour towards self-interest, I’d have a private jet and standby all day”. In neoclassical theory, it uses straight-thinking arguments to declare that firms maximize profits by saying that they would not survive if they did not do so, or a corporate raid would allow takeover, et cetera. Several studies mentioned that actual firm behaviour yields strong evidence against the profit maximization hypothesis as provided by the theory. Numerous reasons have been discovered as to why firms may fail to maximize profits and continue to survive, and not be taken over in corporate raids. The theory of ‘near rationality’ exhibit that approximate maximization of profits by firms may result to exceedingly different outcomes from those predicted by neoclassical theory of exact maximization. This is because firms have market power, actively seek to increase power through branding, and other marketing and production strategies to maintain their firm. Greenwald and Stiglitz (1991) have mentioned that when informational constraints are considered, the theory of the firm is radically changed and therefore, neoclassical conceptions of the firm become invalid. These theoretical frameworks to match observed behaviour of firms cause doubt on the nature of the supply curve, which is one of the fundamental pillars of neoclassical economic theory. The most significant difference between neoclassical and Islamic views on the production process is the implication for ethical behaviour for firms. Nobel Laureate Milton Friedman (2005) argues that it is the responsibility of firms to pursue wealth, not social goals and this statement has been widely accepted in capitalist ethics. Consequently, this idea has led to immoral actions on the part of multinationals. For example, to kill babies for a dollar, mothers are given a sufficiently great supply of powdered baby milk to stop lactation. This shows that good ethics are ignored if bad ones will lead to even higher profits. This is because to firm, reputation is more important than genuine efforts to change things for better, especially if the genuine efforts require cost. There are two main issues where Islamic views are different than the capitalist views:1. The powdered milk producers do not consider themselves responsible for the wrong use of the formula by mothers which leads to death of babies. In Islam, each one of the parties share responsibilities for the outcome. 2. Economists claim that only observable matter while the hidden does not. For example, the act of giving charity matters and the intention behind it does not. In Islam, intentions matter. People who give charity with the intention of becoming popular will be sent to the hellfire. Therefore, the idea of being socially responsible to gain more profits is not acceptable in Islam.Supply and demand is perhaps one of the most fundamental concepts of economics as mentioned above and it is the backbone of a market economy. Because of this, we find it difficult to realize that supply and demand curves only occur in the mind of the economists and it does not have any significant existence. The demand curve is a “thought experiment” and it can never actually be observed. The theories of supply, demand and equilibrium price which lie at the heart of modern classical economics are greatly flawed and all further analysis that uses sophisticated mathematical tools also share these flaws. A well-known famous institutional economist and Nobel laureate Douglass North mentions that “We live in an uncertain and ever-changing world that is continually evolving in new and novel ways. Standard theories are of little help in this context. Attempting to understand economic, political and social change requires a fundamental recasting of the way we think.” Demand curve is not well-defined because consumer cannot answer the question of what he would buy since there are many determinants of his decision have not been specified. Supply curve does not depend merely on market price, but also on the type of market structure as well as types of strategic interrelationship between different firms in the market. Therefore, demand and supply curves are not observable and cannot be the basis of a scientific theory.