Economics and Business

Maximization Postulates and Their Efficacy for Islamic Economics

Abstract : This paper examines the nature and role of maximization postulates concerning profit and utility in the mainstream price theory formation, from a methodological perspective. Mainstream economics retains these postulates, despite much criticism, mainly for two reasons. Firstly, they help establish cause-effect linkages among economic variables and markets. In that they greatly facilitate predictions and their empirical verification over a wide field of inquiry. Secondly, no other behavioral rule has so far been established that gives equally valid, if not superior, results over such range. It is argued that the postulates are required in Islamic economics as well for the same reasons. Maximization, per se, is not un-Islamic: what is maximized, how and for what purpose are the real issues to investigate before passing judgment. Contrary to the current position in the literature, we find it preferable to include moral values and social considerations of Islam in the assumptions of economic theorems, rather than attempting to include them in the objective elements of the models, until Islamic economics evolves as an independent subject. For maximization is a mathematical concept, and cannot fruitfully accommodate what cannot somehow be measured.

Introduction

The postulate that the conditions of equilibrium are almost always determined with reference to the maximization (or minimization) of some magnitude has been the fulcrum of a number of micro economic theories. Two leading examples of the commitment to a postulate of the sort which this paper seeks to examine from an Islamic viewpoint are: (1) that the firms in general desire to maximize their profits, and (2) that the consumers attempt to maximize their satisfaction or utility. The postulates underlie respectively the supply and demand curves of the simple Marshallian cross, giving the equilibrium price-output combination for the market. Through price theory, they pervade most branches of the discipline. Not all is considered satisfactory about the postulates. There exists a sizable body of literature on their theoretical and operational limitations in the mainstream economics. Still, the discipline finds their retention appropriate, indeed necessary, for analytical purposes because of reasons we shall have occasion to mention.

Maximizing behavior may promote avarice and come into conflict with notions of impartiality and justice in decision-making. Therefore, expression of uneasiness concerning the postulates has been all the more pronounced in writings on Islamic economics. For example, according to Kahf, the proposition of profit maximization, as it stands in the capitalist system, is not in line with the Islamic rationale in relation to the time horizon and the connotation of “success.”1 Metawally feels that a Muslim entrepreneur activated by the relatively impersonal motive of fulfilling his obligation as trustee will not have profit maximization as his motive.2

Following Herbert Simon, Syed Omar mentions many constraints leading to the non-maximization of individual satisfaction: the individual “satisfies” rather than “optimizes.”3 This approach for analyzing economic behavior became quite common in economic literature after the fifties, and soon led to the generalization of the issue, focusing on motives in decision making beyond economics to other social studies, especially to political science and sociology. It was insisted that human beings do not make all calculations to obtain a maximizing solution. Rather, guided by bonded rationality, they take to a “heuristic search to find satisfying – good enough – courses of action.” Islamic economists were particularly attracted to the position because it allowed them to bring moral and ethical values of religion into the picture. They ignored the fact, even recognized by Simon, that these ideas have not been assimilated into mainstream economics. Thus, one finds Siddiqi insisting that no maximization hypothesis is “very helpful” in understanding an economy, secular or Islamic.4 Such observations have substance, but what must be the alternative behavioral rules for price formation, if the maximizing postulates were to be dropped, Islamic economists fail to spell out. Presumably, an appropriate answer to the question requires inter alia a prior decision concerning our approach to Islamization of knowledge.

Two shades of thought are identifiable in scholarly writing on the subject. The first seems to insist on what may be called an all-or-nothing approach to the subject. It requires Islamic economics not to brook any intrusions which the classical interpretation of the Shari’ah would not permit. The underlying assumption of the writings in this vein is of a practicing Muslim society being in existence at all levels. Under the assumption Islamization would result, as it does, in producing “pure” Islamic models rarely having links with ground realities.5 However, the assumption could, hopefully, enable the proponents to shun, inter alia, the maximization postulates from the purview of Islamic economics. But in that case, it would be a subject aiming more at the explanation and formal tractability of economic events, rather than envisaging the construction of theories and making predictions. It would have an independent paradigm with primary emphasis being on equity, not efficiency.

In contrast, the second view seems to look at things in a rather pragmatic way. It underlines a step-by-step approach for Islamization to achieve the ultimate, in an evolutionary mold rather than at one go. In fact, recent writings in the area of Islamic economics are increasingly following this course. Today, there is more talk of teaching economics from an Islamic perspective than of Islamizing economics.6 The shift probably is in recognition of the compulsions of history, the ever-increasing sway of the “economies without boarders” concept, the job market requirements, and the aspirations of the young. Thus, the Islamic universities remain dominated by the curricula frames, course structures, reading materials, and evaluation procedures largely borrowed from the West.

The latter process of Islamization takes appropriate parts of secular knowledge that can be sifted, pruned, and modified, where needed, to conform to the norms of the Shari`ah. Thus, it allows in Islamic economics, as in other social sciences, those useful portions of mainstream knowledge which do not defy the tenets of the Shari`ah, and seeks to alter or reject those which do. However, the process of submerging Islamic economics into the mainstream must severely restrict one’s freedom to change the “hard core” of the latter: we may not do many things here which we can in an all-or-nothing approach. The issues of maximization postulates may need, for example, different treatment in the two cases. Since Islamic economics is presently following the step-by-step approach, the critics rightly suggest modifications in the postulates, not their elimination. However, as maximization is often rejected ab inirtio, the subsequent insertion of modifications in the postulates tends to go awry. There seems to be little awareness, let alone concern, that the way chosen to effect changes cripples the postulates, and renders price formulation infirm.7 Methodological issues of significance are involved.

It seems to us that the dissatisfaction concerning maximization postulates in Islamic economics mostly arises because of a lack of proper understanding of their nature and role in the formation of price theory. We shall argue that the postulates are not only relevant to Islamic economics; they are in fact needed by the discipline. However, the step-by-step approach to Islamization of knowledge, in our view, does not permit us to attempt the modification of the postulates, as is often attempted, by assimilating into them the moral norms and social considerations of Islam.8 We shall plead that these norms and considerations could better be incorporated in the assumptions of maximization models without detracting in any way from their Islamic conformity. The issue essentially is epistemic: the postulates have to be evaluated with reference to certain methodological considerations: what problems do the postulates address, do they have any empirical content, and what is their predictive value?9

To accomplish our task, we have divided the paper into five sections including the present one. The following section provides the methodological reference-frame for the work. This contains what is quite basic and known in mainstream economics, but here it serves a purpose. Section 3 examines profit maximization as a business objective. Section 4 looks at utility maximization as a behavioral norm for consumers. The last section summarizes the argument, and makes a few concluding remarks.

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