Islam and Capitalism

Muslim society today has been accepting democracy and human rights values, they have not yet accepted capitalism. It is easier for Muslim society to accept the concept of freedom in politic, rather than the concept of freedom in economy.Luthfi viewed several factors behind Muslim society’s antagonistic behavior against capitalism. First, bitter experience of colonialism that is regarded as the implementation of capitalistic economy. Second, materialistic behavior is regarded as part of capitalism and therefore dangerous for Islamic faith that emphasized on life after death. Third, capitalism is assumed for endorsing hedonism, which is inappropriate according to the tradition of Muslim society. Fourth, capitalism is blamed for the social gap and economic breakdown among Muslim society. Furthermore, capitalism is regarded to be socially insensitive. Assyaukanie viewed these conclusions to be over simplification and misleading.

Based on Maxime Rodinson’s work Islam and Capitalism, Assyaukanie argued that the Muslim world is actually closer toward capitalism rather than socialism. Rodinson, by using Max Weber’s theory of sociology, found that for some extend the religious awareness aspects of Protestantism, as well as Islam, were influential upon the rise and development of capitalism. Islam arrived among Arab society who practiced commercial capitalism therefore it is easy to find commercial terminologies in the Qur’an such as “Hal adullukum ala tijaratin….” (would you like me to tell you about trade… )

Rahardjo observed that although Islam was born in the context of capitalism, Islam also contribute criticism and suggestion upon it. Therefore, the relation between Islam and capitalism is not static one. Islam introduced two models of economy, financial and human economy: “Wajahidu fi sabili bi amwalikum wa anfusikum” (fight in my way by your wealth and soul). Rahardjo viewed that this principle is in line with capitalism, just as Harold-Domar’s theory of growth explained about two capitals in economy: financial capital and human labor. But socialism also emphasized on mode of production which relied on production force as well as social relation of production.

Rodinson observed that Islam developed from a traditional capitalist society. History recorded that Islam expanded across the world using the vehicle of capitalism and trade. That is why the Islamic expansion was 300 years slower than the expansion of Muslim sultanate’s political power. This argument rejects the thesis saying that Islam is propagated by sword and blood.

Rahardjo argued that the ethic of Islamic economy is in line with the norms of capitalist economy. The advancing ethic of work, wealth and property, trade, finance, industry and technology during the Islamic golden period proved that the capitalist norms had developed within the tradition of Islamic economy.

However, Rahardjo restricted the compatibility between Islam and capitalism only in the traditional or commercial capitalism. Meanwhile, capitalism in the modern form such as state capitalism, financial capitalism, or monopoly capitalism requires explanation that is more careful. The compatibility between Islam and capitalism is very serious matter since both have rich variants. Which Islam and capitalism we are talking about?

In the end, Rahardjo asserted that the existence of capitalism and its variants is a necessity. There is no single state or society which is detached from this system, be it in traditional phase (commercial), political, or rational one (using Max Weber’s category). In Soviet Union and China, it is the failure of state capitalism instead of the socialist economy. Socialism has never collapsed since it actually has never emerged. In the end, capitalism is being a sort of natural law along with the development of its variants.

Second Day Discussion: Islamic Economics and Capitalism
Teater Utan Kayu, Jakarta, 25 March 2009

On the second day, 25 March 2009, the discussion is more about the concrete issues, namely relation between Islamic economics and capitalism. About 80 participants attended this session. This session wanted to answer the question whether the global crisis is due to fundamental failure of capitalist system therefore it must be replaced by an alternative system or it is only due to peripheral mistake on its features. M. Ikhsan Modjo (alumnus of Monash University, Australia) and Bachtiar Firdaus (DPP PKS, alumnus of National University of Singapore) were the source persons of this topic.

Ikhsan Modjo from Institute of Development of Economics and Finance (INDEF) assumed that the most appropriate theory to explain today’s global crisis is Joseph Schumpeter’s theory of creative destruction. The ongoing crisis of economy is an ordinary part of creative destruction process and a natural manifestation of the inherent nature of capitalism that tries to maximize benefit throughout innovations.

If the ongoing creative destruction process is rejected, the crisis will become problematic. Ikhsan viewed that the most reasonable solution is not to replace the capitalist system with Islamic economics, but rather to find a space that enables a synthesis between both. Several similarities and distinctions between both systems appeared during comparative observation on the conceptual and practical level. On conceptual level, Islamic economics is very similar to capitalism in terms of relying and endorsing market mechanism as the medium of allocation and distribution of economic resources. In terms of market mechanism, both systems require the existence of balanced power among market actors and the extinction of unfairness such as manipulation and cartel’s collusive behavior on prices. Unlike socialism, Islamic economic as well as capitalism respect the individual property rights.

The most obvious distinction between Islamic economics and capitalism on the conceptual level is Islamic firm prohibition over five matters: usury (riba, additional value of money), prohibited commodities (haram), speculation (maysir), uncertainty (gharar), hoarding goods and profiteering (ihtikâr). Islamic economics prohibited the profit taking from money exchange and borrowing. One is allowed to take profit from the money only if he or she participates in the real business and shares the risk of financial loss. The objective behind the Islamic legal distinction between public good and services trade activity (real sector) and money trade activity (financial sector) is in order to endorse the development of real sector rather than financial one.

However, on practical level, Islamic economics also faces the same problem with capitalism in terms of implementation of its ideal concepts. The largest criticism against Islamic economic is the huge portion of purchase and selling based financing scheme (murâbahah), than any other schemes such as mudhârabah, musyârakah, salam, ijârah, or hiwâlah. The calculation of profit margin is similar to the interest in terms of giving a fixed income. The Islamic bank is regarded as seller whereas in practice it did not operated likewise.

Observing the fact that both systems have some defects on the practical level, both speakers agreed that the most appropriate solution is to find a synthesis instead of mutual negation. The academicians and actors of Islamic economics face a big challenge to create theory, policy recommendation, and economic institution that is applicable in the mixed practice of Islamic economic system and the conventional one. Many Islamic economic theories based on the assumption of free interest in a comprehensive Islamic setting. These theories and assumptions were very unrealistic and therefore were not able to be used to analyze the reality.