Crisis in Islamic Economics occured because Islamic Economists accepted without question many axioms of modern Economics which were directly in conflict with Islamic teachings. This made it impossible to develop the subject on sound Islamic Foundations. This issue is discussed in detail in the following paper:
Zaman, Asad, The Crisis in Islamic Economics (January 31, 2012). Journal of King Abdul Aziz University: Islamic Economics,Vol. 25 No. 1, pp: 147-169, Available at SSRN: https://ssrn.com/abstract=2725421
Date Written: January 31, 2012
The paper quotes leading Islamic Economists who are saying that the field of Islamic Economics has gone astray, and abandoned the original vision and mission of the founders. In this article we argue that the main reason for the current crisis is that most Muslim economists have accepted too many of the ideas of Western economists uncritically. The methodological framework, and underlying assumptions are wrong, and also in conflict with Islamic views. The paper describes four fundamental flaws in conventional theories. (1) A-historical approach, which takes economic laws to be universal invariants, instead of being bound by historical context and social norms. (2) Mathematical methodogology which fails to recognize free will and lack of determinacy of human behavior. (3) Materialist theories fail to recognize the all important invisible characteristics like trust, community, social and spiritual capital which are the true drivers of development. (4) Erroneous assertions and claims that economic theories are factual and objective, when in fact they are normative.
Islamic economics has failed because of the attempt to combine contradictory bodies of knowledge. Alternative foundations on which a genuine Islamic economic theory could be constructed involve recognizing the freedom of human beings to choose between good and evil. The goal of an Islamic economics is to create a spiritual transformation in human beings, and to use material means to bring this about. Instead of being normative or positive, it is transformative.
This paper has been broken up into sections, with some additional comments, notes, and video supplements. These are available from the following blog posts:
Islamization of Knowledge: This project is of vital importance for the future of the Ummah, because thinking of our generations is shaped by the education they received. Western education creates strong Eurocentric biases and anti-Islamic prejudices. But we currently have no genuine alternative to this education. Developing an alternative is of central importance, but the projects which attempt to do so have generally failed. This is because they have incorporated too much Western thought, under the illusion that this thought is objective and scientific, whereas it is concealed ideology, in conflict with Islam.
Crisis in 2nd Generation Islamic Economics: Whereas the first generation of Islamic Economists had a revolutionary spirit, the second generation abandoned the thought of revolution. Instead, they accepted mainstream Economics, sought to make minor modifications in it, like banning interest and introducing Zakat. This idea, that Islamic Economics is just a branch of conventional economics, instead of a revolutionary approach, caused enormous harm to development of a genuine Islamic Economics.
Four Flaws of Modern Economics: The idea that economics is a "science" just like physics created fundamental flaws in the Western approach to Economics.
Two Puzzles about Islamic Economics: This situates Islamic Economics in its historical context. The two puzzles are: (1) Why did Islamic Economics emerge and become important in the 20th Century, and not earlier? (2) If a new subject with a new treatment emerged 14 centuries after the birth of Islam, how can it be "ISLAMIC"?
The Revolutionary Islamic Alternative: Capitalist economics is built on foundations of selfishness, competition, individualism and hedonism. To create an Islamic alternative, we must replace these foundations by generosity, cooperation, social responsibility, and the life-goal of success in the Akhira. It should be obvious that these changes will create a radically different social systems - with different economics.