Chapter 1: A Muslim’s Primer on Economics

July 9, 2024

Before talking about Riba, fiat money, and Bitcoin, we first need a firm grounding in basic economic concepts. While these concepts are not absolutely essential in getting an idea of Bitcoin and how to use it, it will prove immensely useful in understanding the Islamic case for Bitcoin, and what it actually means when we assert that Bitcoin is “anti-Riba” money. In our humble opinion, the single main reason why Muslims fail to embrace Bitcoin is due to economic illiteracy. This economic illiteracy does not just apply to the average Muslim, but it’s clear that many Islamic scholars, while extremely knowledgeable in their respective fields, fall short in their understanding of even the most basic economic concepts when approaching the topic of Bitcoin. 

Our goal here isn’t to try to “reinvent” the field of Islamic Economics or assert what it should be, as we’re wholly unqualified to do so, and we would not be able to do so in one book, let alone in one chapter. Instead, we will attempt to grok economics from a deductive and logical approach employed by the Austrian school, and we will use a few sources from well known Islamic scholars of the past that have spoken about economic concepts to augment our points. Through this approach, we hope to deliver a useful primer on Economics for Muslims. 

To this end, we provide a basic overview of economics where we discuss human action, subjective value and marginal utility, time preference, money and prices, and capital. Armed with this economic knowledge, we will then expose some common Keynesian fallacies found in contemporary Islamic Economic textbooks, which should hopefully give the reader a general idea of the potential scope of the economic illiteracy problem mentioned above.

Human Action as the Basis for Economics

There are many different approaches and schools of thought in the vast and relatively new field of economics. With this, there are also many different definitions of economics that encompass a wide array of concepts and philosophies. In order to continue with this section on a primer for Economics, let’s attempt to construct a working definition before venturing forth. 

From reading the first few pages of Thomas Sowell’s handy introduction to economics, aptly titled Basic Economics, we see a formal definition that formulated by the British economist Lionel Robbins:

“Economics is the study of the use of scarce resources which have alternative uses.”

Sowell, Thomas. Basic Economics: A Common Sense Guide to the Economy. 4th edition, Basic Books, 2010.

While this is a great definition, it misses a key aspect that arrives at the result in scarce resources having alternative uses. The missing component that is key to fully grokking actual economics is the individual that makes use of these resources. 

Many modern economists treat the entire economy as an aggregate as if it has a will of its own. But it must first be recognized that the “economy” is made up of individuals taking actions and acting purposefully to effect a change in their environment. The study of economics should always start from the individual.

This is actually the same approach to economics used by the eleventh century Islamic scholar Al-Raghib al-Isfahani in his book titled Al-Zarìah fi Makàrim al-Sharìah, or “Means of Glorious Shariah”. While this book isn’t strictly an economics textbook, since Economics wasn’t really a formalized field back then, it covers relevant economic subjects including production, wealth, and spending. Before he delved into these economic topics, he started the discussion by talking about man first, as El-Ashkar and Wilson note:

“Al-Asfahànì’s Zarìah begins with a first chapter on man. This is not particularly surprising as man is regarded in Islam as the centre of the universe for whom God has made every thing possible. Starting his book with a first chapter on man, his/her nature, creation, duties, needs, and motivation is an intelligent realisation by al-Asfahànì of the position of human beings in the universe as manifested in the Muslims’ sacred book. In terms of a logical classification of the contents of a book on economics, a first chapter on human beings, needs and behaviour, could be a reasonable start as he/she is the consumer, producer, distributor, investor, wealth seeker, entrepreneur, decision maker, and so on, and as such, man is the pivot upon which economic decisions revolve.”

 El-Ashkar, Ahmed. Wilson, Rodney. Islamic Economics: A Short History. Brill, 2006. p. 239.

So we’ve established that the study of economics should start at the individual, but economics isn’t just about the individual only, it’s about the actions that individuals take. And when an individual executes an action, he does so in a purposeful way, provided that the action isn’t just some reaction to some stimulus. To assert that individuals take actions purposefully might seem like it’s an obvious claim, but it’s actually a powerful tool in producing theoretical frameworks for studying economics. 

Action entails that there’s a person taking the action, and we can assume this person has a will. This person expects to effect a change in the real world where a cause has a certain effect. We don’t need to classify or concern ourselves whether the action of the “economic man” is rational. The science of economics, or of human action, is methodological and deductive. Therefore, it can not say what rational means normatively or what humans ought to do. 

One of the most revered figures in the Austrian School of Economics, Ludwig von Mises, in his magnum opus about Economics, aptly titled “Human Action”, expands on why individuals take actions:

“Acting man is eager to substitute a more satisfactory state of affairs for a less satisfactory. His mind imagines conditions which suit him better, and his action aims at bringing about this desired state.The incentive that impels a man to act is always some uneasiness. A man perfectly content with the state of his affairs would have no incentive to change things. He would have neither wishes nor desires; he would be perfectly happy. He would not act; he would simply live free from care.”

Mises, Ludwig von. Human Action: A Treatise on Economics. Scholar’s Edition, Ludwig von Mises Institute, 1998. p. 13.

So when an individual acts, he seeks to remove a state of uneasiness with a state of satisfaction. From this, we can deduce that an individual has preferences. A person has to choose one action over another, or a set of actions over another set of actions. Therefore, a person takes an action over another by preferring an outcome over another outcome that would have occurred. This makes direct measurement in economics impossible, as you cannot measure an event against an event that did not occur. This aspect of the field of economics in weighing the cost of choosing one act over another act that would have occurred is called an opportunity cost. Basically, every action that we take has an opportunity cost. 

The formulation of this concept of opportunity cost is usually attributed to famous 19th century economists such as John Stuart Mill and Friedrich von Weiser. While we don’t seek to dispute this, there is evidence that the 18th century Indian scholar Shah Wali-Allah alluded to this economic concept:

“While discussing socially desirable and beneficial products, Shah Wali-Allah clearly identifies the concept of opportunity cost without naming it. He says: ‘If a large number of people involve themselves in such a job [that is, the production of luxuries], they will correspondingly neglect jobs of trade and agriculture. If the chief of the city spends public funds on such items, he will be equally losing the welfare of the city.’ The opportunity cost is defined as ‘the cost of foregoing one thing … to get an acceptable alternative.’ The use of this term was not known during Shah Wali-Allah’s time. The idea came very late in economics…It is based on the fundamental fact that resources are scarce and have alternative uses, and therefore they should be used in such a way as to maximize public benefits. This is very clear in Shah Wali-Allah’s statement. His purpose was to draw the authority’s attention to take this into account while selecting a project and allocating the limited available resources to various public purposes.”

Islahi, Abdul Azim. Islam and Economics: Shah Wali-Allah’s approach. The Islamic Foundation, 2022. 4.3.4.

Let us move on. If we were to consider a hypothetical scenario that contrasts with the observed outcome, then this is called a “counterfactual”, and this is a crucial concept in economic analysis, particularly in evaluating the impact of policies and interventions. This is the methodological basis of analysis employed in Henry Hazlitt’s phenomenal introduction to economics in his book, Economics in One Lesson, where he draws on Frédéric Bastiat’s broken window allegory to illustrate the seemingly obvious point that a broken window is not a net benefit to society, despite it creating more jobs and boosting spending. 

“A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $50 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $50 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.”

Hazlitt, Henry. Economics in One lesson. Ludwig von Mises Institute, 1988. p. 23-24

From reading this excerpt, it’s easy to see why neglecting to consider the counterfactual when studying human action can result in erroneous conclusions. The error stemmed from neglecting the counterfactual scenario of the baker buying a new suit, which never gets made, because the people in this allegory only observe what is seen, which is the job created by the broken window. So when studying or “doing” economics, not only does one have to consider a given policy’s impact, but also what would have happened in the absence of that policy. 

So with these concepts about action in mind, we can develop our own working definition of Economics that will prove useful for the rest of this book: Economics is the study of individuals taking purposeful actions and analyzing their effects in relation to their counterfactual scenarios. 

Let’s bring the discussion back to preference. We stated that man always prefers an outcome over another outcome when he chooses, or acts. This is a very valuable insight that many contemporary economists miss. Preferences for action necessarily mean ordinal rather than cardinal valuation. We will examine the concept of value in more detail in the next section, but we want to emphasize the point that since actions are graded ordinally, the value that we assign to actions cannot be empirically measured. The study of human action cannot be conducted in isolated experiments in a laboratory. Therefore, using quantitative analysis is not the correct way to approach the field of economics. Saifedean Ammous explains this very well in the first chapter in his masterful work, Principles of Economics, where he expounds on 4 main problems of quantitative analysis in studying economics:

  1. There are no constants in economics
  2. There is no replicable experimentation
  3. It conflates factors that can be measured with causal factors
  4. It conflates accounting identities for causality  

Therefore, we can conclude this discussion on human action by emphasizing the point that the goal of Economics is to comprehend the causal mechanisms driving economic activity and their subsequent logical outcomes. Through the use of logical deduction and counterfactual thought experiments, we can truly understand the actual end results and effects of human actions.

Subjective Value and Marginal Utility

Let’s start with understanding what value is. Carl Menger, the founder of the Austrian school of Economics, defines value as:

“…the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs.”

Menger, Carl. Principles of Economics. Ludwig von Mises Institute, 2007. p. 115

So the value we derive from goods is how much they can satisfy us, and the capacity for a good to satisfy a need or desire is called utility. However, this doesn’t mean that a good will satisfy the same way or same amount for each person. A good that may satisfy one person might not satisfy another person at all. Also, a good may satisfy the same individual differently based on particular circumstances. From these arguments, we can assert that value is subjective rather than intrinsic or inside the good itself. Let’s go through a few examples, which will require thinking in hypotheticals, that will demonstrate the subjective nature of value.

Someone may claim that food has intrinsic value, but sometimes food can have no value to a certain person. For example, one person might value bread very highly, but a gluten intolerant person does not value bread at all because he can’t eat it and derive satisfaction from it. Therefore, bread doesn’t have value “intrinsically”, because if it did, this would mean that it would have value regardless of any person deriving satisfaction from it. But as we can plainly see, bread can only be valuable to a person that actually wants to or is able to consume it. 

Another example that illustrates the concept of subjective value is from Saifedean Ammous’s book, Principles of Economics, in which he demonstrates how oil went from having a negative value to a positive value:

“Up until the nineteenth century, the presence of oil in a plot of land would decrease its value, as it required costly removal before the land could be utilized for agricultural, commercial, or residential use. For as long as human consciousness saw oil as a dirty nuisance, oil had negative economic value. Once humans realized that refined oil could be burned in an internal combustion engine to power machines that satisfy their needs for transportation, electricity, and heat generation, oil went from being a costly nuisance to an enormously valuable and essential commodity, which nobody in the modern world can now live without. Oil in the year 2020 is no different chemically and physically from oil in the year 1620, and yet its value has changed from negative to positive. While our conscious assessment of our needs cannot change the physical and chemical properties of oil, it can change its economic value. Oil went from having a negative to a positive value once human consciousness recognized it as useful”

Ammous, Saifedean. Principles of Economics. The Saif House, 2023. p. 30

Nothing about the physical or chemical properties of oil changed throughout the years, yet the value of oil drastically changed once humanity discovered how to harness the energy from oil. 

Another point to understand about subjective value is that the valuation is conducted at the margins. What we mean is that the satisfaction an individual derives from a good is always done in relation to the last unit of that good. Per Bylund explains this concept of “marginal utility” in his excellent primer, How to Think About the Economy:

“We never value things in themselves, but for the satisfaction we think they can provide us. A glass of water in the desert is probably more satisfying than a glass of water while loafing on the couch at home. Why? Because we value things by the satisfaction they can give us in the situation we are in. When loafing on the couch, the greatest satisfaction we can get from a glass of water is not nearly as high as when trying to stay hydrated and alive in a desert. And the more we have of something, the lesser the satisfaction of using another one. In fact, each unit of something is valued at the satisfaction we can get out of the last (marginal) unit. So in any situation, if we have three glasses of water, we value each of them less than if we had only two. But more than if we had had four. Because the value to us of any one glass is the satisfaction it contributes—the lowest and marginal value. That’s why we act differently depending on how many we have of something and how important those things are to us—what satisfactions we expect to get from them.”

Bylund, Per. How to Think about the Economy. Ludwig von Mises Institute, 2022. p. 25.

The concept of marginal utility is not just specific to the Austrian school of Economics. The 8th century Islamic Scholar, Ya’qub ibn Ibrahim al-Ansari, or better known as Abu Yusuf, who was a student of the Hanafi Madhab founder, Imam Abu Hanifa, also briefly referenced “marginal utility” in his book, Kitab al-Kharaj. This book, which was commissioned by caliph Huran Al-Rashid, could be considered the first formal book on “Islamic Economics”, which was primarily a book on taxes. 

In this book, he makes an interesting point about the permissibility of charging for a good that is commonly and readily available, like water, as El-Ashkar and Wilson note:

“When dealing with pricing, Abu-Yusuf touched on a very important point in economics, on the relationship between economic goods, scarcity, and value. Discussing the issue whether one could charge for a good that is regarded as readily available commonly and the conditions for the charge, he, using the example of water, stating that while the water from a running river may not have a value, it would have a value if it was brought to a different location where the river was not running.”

El-Ashkar, Ahmed. Wilson, Rodney. Islamic Economics: A Short History. Brill, 2006. p. 196.

Obviously, water is very abundant when near a river. It wouldn’t have much value since it is plentiful and abundant. But if water was brought to a different location where there was no river or body of water, it would be valued higher.

In our opinion, Abu Yusuf, knowingly or not, was hinting about the concept of marginal utility. To reiterate, people value goods based on the last available unit of that good. The value of a good is dependent on the satisfaction it gives us in the situation or circumstances we are in. The value is not “static” and it is not a fixed variable that’s embedded in the good itself. 

From this, we can also conclude that the value of a commodity is not in itself, because there needs to be a person conducting the valuation. Think about this. How would we ascertain value intrinsically? And how would we even ascertain this value objectively? If we could measure value objectively, would we be able to reproduce the measurement of value consistently? We can’t measure units of value since, as we’ve already mentioned, each person will value every commodity, or more specifically, every unit of every commodity, differently based on particular circumstances.

Now that we are armed with some knowledge on the nature of value, let’s analyze a common claim that people use for gold, in that it has this property called “intrinsic value”. These claimants argue that gold possesses value beyond its function as a medium of exchange because it finds utility in various industrial and ornamental applications like electronics, jewelry, and dentistry.

This line of argument is true; gold does indeed have utility outside of its use as money. However, just because gold serves these diverse non-monetary purposes, doesn’t mean that these purposes bestow inherent value upon the metal itself. Gold’s value as an input into these non-monetary utilities is not a manifestation of “inherent worth” residing within the gold molecule itself. So, the subjective theory of value still applies to gold. Once again, value is contingent upon subjective human valuations.

To give another hypothetical scenario to further illustrate this point, imagine if, overnight, every individual suddenly found themselves in possession of 100 kilograms of gold in their homes. In such a situation, would gold still retain its perceived value? The answer is obviously no, it would not. If everyone were to possess such vast quantities of gold, the supply would overwhelm the demand, inevitably leading to a precipitous decline in its market price or its perceived worth. But herein lies the critical question: did anything intrinsic about the chemical composition of gold change in this scenario? The answer, unequivocally, is no. The intrinsic qualities of every gold bar remained unaltered. It did not gain or lose any “intrinsic” attributes. Yet, people began to appraise differently than they did before based on different circumstances.

Speaking of gold, one of the most famous scholars in Islam, Imam Al-Ghazali understood that gold and silver have no value of their own. In one of his most well known books, Ihya Ulum Al-Din, he makes reference to this point about gold and silver being valued due to their use as money rather than having value in and of themselves.1 We will come back to this point from Imam Al-Ghazali in a later section about money and prices. 

The reader might be perplexed, and possibly fatigued, as to why we would go through such lengths to explain the simple concepts of subjective value and marginal utility. As we’ll observe in the last section of this chapter, failure to understand this concept is prevalent among modern economists, and leads to some inaccurate and erroneous conclusions, which in turn could translate to catastrophic consequences resulting from short-sighted and high-modernist government policies.

Time Preference

The inherent scarcity of time compels individuals to make continuous choices throughout their lives, and this introduces opportunity cost that comes with each decision where we can only choose one action at the expense of other actions that would have taken place. We know that once an action is taken, we cannot go back to reverse it. We also know time is uncertain; Allah can end our life at any moment, and he tests us with trials that increase this uncertainty. But as Muslims, we know that the occurrence of death is a certainty, Allah (swt) says in Surah Al-Anbya verse 35 in the Quran:

كُلُّ نَفْسٍۢ ذَآئِقَةُ ٱلْمَوْتِ ۗ وَنَبْلُوكُم بِٱلشَّرِّ وَٱلْخَيْرِ فِتْنَةًۭ ۖ وَإِلَيْنَا تُرْجَعُونَ 

Every soul will taste death. And We test you ˹O humanity˺ with good and evil as a trial, then to Us you will ˹all˺ be returned.

Because of the opportunity cost and uncertainty associated with the nature of time, we can assume, all else being equal, that man prefers the present over the future, and of course this ratio varies from person to person. The ratio of preferring present consumption and satisfaction over future consumption and satisfaction is called ‘Time Preference’, or the rate at which the future is discounted. So a short-term thinking person who prefers to enjoy satisfying his present needs and desires is someone who has ‘high time preference’, and conversely, someone who is long-term thinking and prefers satisfying his future needs and desires is someone who has ‘low time preference’. What’s important to understand about time preference is that it’s always positive; it can never truly approach zero, or be negative. Conceptually, this makes sense, as we’re always discounting the future to some degree since we live in the present. 

As Muslims, we should always strive to lower our time preference as much as possible. After all, we are not living for the satisfaction or enjoyment of this present life, but for a life to come afterwards. The pious Muslim should strive as much as he can to trade the pleasures of this life for the life to come afterwards. Allah (swt) even uses the word “Tijara” (تِجَـٰرَةٍۢ) referring to this trade as an exchange or transaction, like one would do at a marketplace. Allah says in the Qur’an Surah As-Saf:


يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوا۟ هَلْ أَدُلُّكُمْ عَلَىٰ تِجَـٰرَةٍۢ تُنجِيكُم مِّنْ عَذَابٍ أَلِيمٍۢ ١٠

O you who have believed, shall I guide you to a transaction that will save you from a painful punishment?


تُؤْمِنُونَ بِٱللَّهِ وَرَسُولِهِۦ وَتُجَـٰهِدُونَ فِى سَبِيلِ ٱللَّهِ بِأَمْوَٰلِكُمْ وَأَنفُسِكُمْ ۚ ذَٰلِكُمْ خَيْرٌۭ لَّكُمْ إِن كُنتُمْ تَعْلَمُونَ ١١

[It is that] you believe in Allāh and His Messenger and strive in the cause of Allāh with your wealth and your lives. That is best for you, if you only knew.


يَغْفِرْ لَكُمْ ذُنُوبَكُمْ وَيُدْخِلْكُمْ جَنَّـٰتٍۢ تَجْرِى مِن تَحْتِهَا ٱلْأَنْهَـٰرُ وَمَسَـٰكِنَ طَيِّبَةًۭ فِى جَنَّـٰتِ عَدْنٍۢ ۚ ذَٰلِكَ ٱلْفَوْزُ ٱلْعَظِيمُ ١٢

He will forgive for you your sins and admit you to gardens beneath which rivers flow and pleasant dwellings in gardens of perpetual residence. That is the great attainment.

Conversely, Allah (swt) warns humanity about the punishment befalling those with high time preference, or those who exchange this life for the here after:


أُو۟لَـٰٓئِكَ ٱلَّذِينَ ٱشْتَرَوُا۟ ٱلْحَيَوٰةَ ٱلدُّنْيَا بِٱلْـَٔاخِرَةِ ۖ فَلَا يُخَفَّفُ عَنْهُمُ ٱلْعَذَابُ وَلَا هُمْ يُنصَرُونَ ٨٦

Those are the ones who have bought the life of this world [in exchange] for the Hereafter, so the punishment will not be lightened for them, nor will they be aided.

Notice in this verse, Allah (swt) uses the word “Ishtaru” (ٱشْتَرَوُا۟ ) in this instance, which can also mean to exchange or buy something, like one would do at a marketplace. There are a number of other verses in the Quran that talk about making this most important and life changing trade. But in order to make this trade, an individual must exhibit a certain degree of low time preference. 

Of course, time preference is inextricably linked to action. An individual must necessarily desire, to some degree, no matter how small, wanting current satisfaction over later satisfaction. Otherwise, the action would never take place. The critic might propose that there are sometimes situations where future satisfaction is even more preferred than later satisfaction, as Tariq El-Diwnay notes in his legendary and timeless book, The Problem with Interest:

“Yet it is quite apparent that in some cases individuals actually prefer pleasure in the future to pleasure today. Even an older individual would prefer one breakfast per day, rather than a remaining lifetime’s worth of breakfasts today.”

El-Diwany, Tarek. The Problem with Interest, 3rd edition. Kreatoc Ltd. p. 29.

However, in this scenario, it’s important to understand that the breakfast obtained today is providing a different level of satisfaction compared to the satisfaction of a breakfast the next day or the next year. The level of time preference is dependent not only on wanting goods now compared to the future, but also dependent on the satisfaction from those goods. If the satisfaction were exactly the same in both scenarios, and the conditions for making use of that satisfaction were the same, then time preference is positive. So, time preference is positive in that we prefer current satisfaction over later satisfaction, ceteris paribus, or all else being equal. If time preference were zero or negative, then no action would be taken. In this sense, time preference is a requirement before any action is taken, as Ludwig von Mises explains:

“Time preference is a categorial requisite of human action. No mode of action can be thought of in which satisfaction within a nearer period of the future is not—other things being equal—preferred to that in a later period. The very act of gratifying a desire implies that gratification at the present instant is preferred to that at a later instant. He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction. If he were not to prefer satisfaction in a nearer period of the future to that in a remoter period, he would never consume and so satisfy wants. He would always accumulate, he would never consume and enjoy. He would not consume today, but he would not consume tomorrow either, as the morrow would confront him with the same alternative.”

Mises, Ludwig von. Human Action: A Treatise on Economics. Scholar’s Edition, Ludwig von Mises Institute, 1998. p. 481.

This concept of time preference is extremely critical to understanding the human actions and conditions in modernity, and it directly influences people’s dispensation to save and allocate capital and resources for the future. Without the high time preference influence of the Shaitan and his minions, humanity naturally gravitates and marches towards a process of lowering time preference. This natural process of humanity’s advancement toward lowering time preference is what Hans-Hermann Hoppe, in ‘Democracy: The God that Failed’, calls a “process of civilization”:

“…no matter what a person’s original time-preference rate or what the original distribution of such rates within a given population, once it is low enough to allow for any savings and capital or durable consumer-goods formation at all, a tendency toward a fall in the rate of time preference is set in motion, accompanied by a “process of civilization.”

Hoppe, Hans-Hermann. Democracy: The God That Failed. Transaction Publishers, 2001. p. 6.

Taking Hoppe’s comment into consideration, one can easily grasp that time preference, being the basis of individual human action, is at the center of the development and advancement of civilization.

Money and Prices

Money emerges from indirect exchange used in barter. Because barter doesn’t solve the “coincidence of wants” problem, where both participants in a transaction want exactly what the other participant is offering. Over time people ended up using indirect exchange, where they obtain “placeholder” goods not for their own sake, but for what those “placeholder” goods can be exchanged for. Because of how cumbersome this is, humanity eventually converged on a common medium of exchange that’s desired by everyone. The most commonly used medium of exchange is referred to as ‘money’. So we don’t use money for its own sake, we use money as a medium of exchange. What we desire in money is its purchasing power, or its expectation for its future capacity to acquire other goods and services for consumption or capital accumulation. 

One point that we’ll return to in more depth in a later chapter when we discuss the origins of money is that money emerges naturally and spontaneously by market participants. Money doesn’t emerge from a top-down structure by decree, as people would not accept it voluntarily as money. And if people did accept a new money by decree, they wouldn’t even know how to properly price goods as there are no previous prices which to base current prices off of. The state cannot simply decree and will into existence the economic function of money. Rather, what makes sense logically and deductively concerning how money came to be, is that the state adopts whatever is currently used as money, and over time, can monopolize it’s production and distribution, whether it’s minting or implementing a credit layer on top of the already existing money.

So far, we’ve described the function of money as being a medium of exchange. Money can also serve as a store of value. Individuals may choose to not exchange money now, but will need to exchange it for goods and services in the future.2 This deferment of exchange can only be done if money is able to retain some degree of purchasing power. In addition, money can also serve as a unit of account to provide a standard numerical unit of measurement of the relative prices of goods and services. By serving as a common base for pricing, it enables buyers and sellers to compare the relative exchange values of different items efficiently. This uniformity in accounting facilitates economic calculation, budgeting, and the formulation of economic strategies by businesses and consumers. 

In order to execute these functions of money, it also needs certain properties to make it a viable and effective money. These six properties of money include:

Scarcity: This is perhaps the most important property of money. A viable money needs to be scarce, and it must have substantial cost to create and make it difficult to replicate or mass-produce. Scarcity is crucial for the ‘store of value’ function of money. 

Durability: Money needs to exhibit long-lasting properties, resistant to decay or destruction. For example, commodities like wood or iron, which can perish or become damaged over time, do not serve as optimal stores of value.

Portability: A viable money should facilitate ease of transportation and storage, enabling its safekeeping from theft or loss and aiding in trade across distances. Additionally, it should retain its value and purchasing power throughout transit without depreciation or degradation. 

Divisibility: Money should be easy to subdivide into smaller units to facilitate transactions. 

Verifiability: Money should be simple to recognize and confirm as genuine. It would be very unlikely that a trade would take place without the ability to verify its authenticity. 

Fungibility: Money must be fungible, meaning one unit is interchangeable with another of the same quantity. Fungibility addresses the coincidence of wants issue. 

In addition to expounding on money’s functions and properties, we will also briefly mention two misconceptions made by many contemporary economists as well as Islamic economists. The first is the mistaken belief that money needs to increase in supply. Typically, the policies of governments and central banks aim for a 2% inflation target, and will steadily increase the money supply to achieve this arbitrary target. However, when thinking about this issue clearly, we arrive at the conclusion that the money supply does not need to increase at all. If the supply of a particular good increases, we can infer that overall, there’s an increase in social benefit and general standard of living. But money is a different case as it is not demanded for its direct consumption, but for its capacity for acquiring other goods. When the supply of money is increased, the resulting purchasing power of each monetary unit decreases. All this means is that each unit of money will now buy less goods. There is no wealth created as a result of increasing the money supply. Therefore, the money supply itself does not matter, as Murray Rothbard explains:

“An increase in the money supply, then, only dilutes the effectiveness of each gold ounce; on the other hand, a fall in the supply of money raises the power of each gold ounce to do its work. We come to the startling truth that it doesn’t matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness of the gold-unit. There is no need to tamper with the market in order to alter the money supply that it determines.”

Rothbard, Murray. What has Government Done to our Money? Ludwig von Mises Institute, 2008. p. 29.

So in short, increasing the money supply confers no social benefit whatsoever. Well, that’s not exactly true. If the money supply increases and only one group of people get access to the newly created supply before others are able to, then this group of people benefit at the expense of everyone else. Why? Because the group of people with the newly created money have the privilege of purchasing goods and assets before the prices begin to increase in response to this artificially induced demand caused by money creation. Other individuals who did not get access to this newly created money must settle for paying higher prices. This phenomenon of individuals getting access to newly created money and enjoying its benefit at the expense of others who did get direct access to the newly created money is called the Cantillon effect.3 Henry Hazlitt explains the consequences of the money supply increasing:

“This does not mean, however, that everyone’s relative or absolute wealth and income will remain the same as before. On the contrary, the process of inflation is certain to affect the fortunes of one group differently from those of another. The first groups to receive the additional money will benefit the most. The money incomes of group A, for example, will have increased before prices have increased, so that they will be able to buy almost a proportionate increase in goods. The money incomes of group B will advance later, when prices have already increased somewhat; but group B will be better off in terms of goods. Meanwhile, however, the groups that have still had no advance whatever in their money incomes will find themselves compelled to pay higher prices for the things they buy, which means that they will be obliged to get along on a lower standard of living than before.”

Hazlitt, Henry. Economics in One lesson. Ludwig von Mises Institute, 1988. p. 168-169

So what would happen in a regime of a fixed money supply? Well, naturally the prices of goods will continuously fall as money is able to purchase a higher quantity of goods. Overall, this benefits society by increasing the purchasing power of consumers, particularly savers, which allows them to buy more goods and services over time with the same amount of money. For the economically illiterate, it would seem like falling prices would lead to depression. However, consider that falling prices would actually incentivize individuals to save more, as consumers anticipate their money will have greater value in the future. This deflationary effect is advantageous as it increases consumers’ purchasing power, enabling individuals to acquire more goods and services without nominal income rises. Further deflation attributed to productivity gains and technological innovation can lower production costs, passing savings onto consumers and potentially improving living standards. Furthermore, as money appreciates, the incentive to save rises, which can translate into more capital available for investments that spur real economic growth and development. In essence, an anti-inflationary or fixed money supply operates synergistically with the deflationary influences arising from humanity’s continual pursuit of productivity gains, spurred by relentless technological advancements. 4

The second misconception concerns the requirement that money must have intrinsic value in order for it to function. But, as the reader can guess, from our belabored explanation about subjective value, this is absolutely not a requirement for money. Money is acquired for its primary use as a medium of exchange, store of value, and unit of account. Of course, in the instance of using commodity money like gold and silver, there are other non-monetary uses for these metals. But this does not mean that gold and silver have intrinsic value, and it does not mean that money must have intrinsic value. There is no requirement for this condition for money in Islam. As mentioned earlier, Imam Al-Ghazali expounded on the concept that gold and other metals used as a medium of exchange have no value of their own. El-Ashkar and Wilson note in the following:

“What is sought as a means to an end is gold and silver which are pieces of metal having no value of their own. If God had not made them instruments of purchasing things, their values would have been equal to other stones. (Vol. 1, p. 26). In volume IV, al-Ghazàlì expands on the function of money. He perceives the function of money as a means of exchange and  as a store of value. Emphasising the function of money as a means of exchange, which facilitates transactions, al-Ghazàlì states, “Gold and silver are gifts from God and with their help all worldly acts are smoothly done. These are nothing but metals and have got no value of their own. People want to have them, as by their exchange commodities of the world can be purchased”

El-Shaker, Ahmad and Wilson, Rodney. Islamic Economics: A Short History. P. 248

With dispelling these misconceptions, and from the elaboration of money’s functions and properties, we can now expand on the concept of money being a technology for lowering time preference. It should be noted that money, being the most salable and liquid good, is the main tool people use for saving wealth. Imagine trying to transport wealth temporally over the next 20 years using iron or wood. These commodities would rot or degrade over time, making them less ideal for saving wealth, and one would need to find someone who needed these materials for exchange. In addition, commodities like wood or iron are very easy to make more of, which makes them poor stores of value. Thus, money, given its high degree of salability across space and time, is the perfect technology that allows humanity to continue their natural progression of decreasing time preference. As Saifedean Ammous explains in his book, Principles of Economics:

“As human society develops money as a good, humans find it a very convenient and powerful tool for transferring value into the future, and this allows them to lower their time preference and to engage in more saving and future provision. Money supercharges our ability to save over just holding the consumer goods for the long term…”

Ammous, Saifedean. Principles of Economics. The Saif House, 2023. p. 255-256.

Therefore, money is the technology that aids humanity on their march towards the lowering of time preference and continuing the “process of civilization”. But money does so much more than just lowering time preference; it is the single most important mechanism used in coordinating price signals. But before we talk about price signals, let’s explore what prices are and how they are formed.

In an unhampered free market, prices emerge from the interaction of supply and demand. Supply is the quantity of a good or service that producers are willing and able to offer at various price points, while demand represents the quantity that consumers are willing and able to purchase at these prices. Producers aim to maximize profits by selling where the prices cover the costs of production and provide a return on investment; consumers seek to maximize utility, balancing the value they attribute to goods against their willingness to part with their money. 

The equilibrium price, where the quantity supplied equals the quantity demanded, is spontaneously discovered through the voluntary interactions of buyers and sellers, without requiring centralized coordination. If the price of a good is above the equilibrium, a surplus develops, pressuring sellers to lower their prices to clear excess inventory. Conversely, if it is below equilibrium, a shortage arises, incentivizing producers to increase output or prices to meet the unmet demand. This dynamic adjustment process, guided by the price mechanism coordinates economic activity, efficiently allocates resources, and reflects the scarcity of goods in the real world.5

What’s truly amazing about this process of consumers and producers, through using the technology of money and continuously finding market clearing prices is that it happens every moment without a central planner or coordinator. The individuals in the marketplace involved in setting prices do not need to know all of the information that goes into the formation or the constant changing of prices, even though the prices themselves are the result of changes in supply and demand. 6

Friedrich Hayek, in his famous influential essay, “The Use of Knowledge in Society”, emphasizes that, because price signals serve as a compact form of knowledge from complex mechanisms, consumers and producers are able to coordinate economic activities across vast distances and unknowingly participate in a grand orchestration of market forces.7 This insight elucidates how complex coordination is achieved, not through central coordination, but through the interaction of billions of individual decisions, and it’s all mediated by the genius emergent technology of money.


The last economic concept that we’ll briefly touch on is capital. Capital is often misconstrued as meaning “money” or something that greedy businessmen use to exploit workers. This single point of confusion has been the cause of much economic illiteracy found in much Marxist-leaning academic rhetoric.  

There is a more useful and insightful definition that we’ll employ here that will be useful in later chapters. Capital goods are goods that are not used for their own utility, but are used for producing goods that will be consumed. So an example would be an oven, which can be used to produce baked bread that will be directly consumed. The capitalist does not buy an oven to consume it directly, but for its capacity for producing baked goods. Another example would be a laptop that can be used to produce content for subscribers to consume. But as one could guess, some capital goods like a laptop can also be used as a consumption good and not a capital good if it’s used primarily for consumption like gaming and watching YouTube. So goods are identified as capital not by any inherent property to the good itself, but based on how the individual utilizes the good. 

Because capital can only be readily identified by its utilization and subjective valuations, this leads to the counterintuitive notion that what makes something capital is something more abstract and non-tangible. Capital can be thought of as “economic potential energy” that emerges from a social system of human actions. Allen Farrington and Sacha Meyers, drawing on the work of Hernando De Soto’s famous book, The Mystery of Capital, explain this phenomenon in more detail when explaining that capital is the most important aspect of a capitalist system:

“This all points to a higher analysis; money itself is not the most important aspect of capitalism. Nor is trade, nor markets, nor profits, nor even assets, but capital. Goods that are used to create consumable goods are a form of capital, but really, we mean something less tangible than any of the former; a kind of economic potential energy stored in the transformation of materials into higher and higher forms of complex good, but always ready to be rereleased to work again the same process of transformation. Seen this way, capital is not any particular thing or even behavior, It can exist only as emergent property of a social system in which the exchange of shares of ownership of private assets is seamless.”

Farrington, Allen and Meyers, Sacha. Bitcoin is Venice: Essays on the Past and Future of Capitalism. BTC Media, 2022.

This categorization of capital being “economic potential energy” is useful in understanding the following point, which is that capital is sought after for its potential to generate consumer goods. There is no guarantee for the capitalist that capital will yield anything profitable. It might not even result in yielding any goods that anyone would find useful, and it might even lose him money. 

So why would a capitalist take the risk of capital accumulation? Because it is expected that capital will yield higher productivity in the production of consumer goods. With the employment of new capital goods, the time that it takes to produce more consumer goods will be shortened. At first, it might seem like the capital accumulation takes a longer time when the capitalist could just use that time to produce consumer goods, but the capital accumulation will eventually result in increased efficiency and production. Saifadean Ammous explains this very well using fishing as an example:

“This might initially sound counterintuitive. Why would humans engage in longer processes of production?… Why spend hours building a fishing rod to catch a fish when you can just catch fish directly with your hands in less time? The answer lies in the productivity of the fishing rod. While producing the fishing rod takes time, once it is completed, its use should hopefully allow the fisherman to catch a larger amount of fish per unit of effort. Even though the immediate investment in manufacturing a fishing rod delays the arrival of the fish, the increase in productivity makes its long-term output more valuable than the smaller output from fishing with your hands, which arrives sooner. The success of this investment is not guaranteed, but the potential extra reward is the only motivation for engaging in capital accumulation, lengthening the process of production, and forgoing closer need satisfaction.”

Ammous, Saifedean. Principles of Economics. The Saif House, 2023. p. 91.

In other words, the risk of capital accumulation is taken for the potentially higher productivity that will take less time per unit of input of effort. Therefore, capital, in addition to being “economic potential energy”, can also be thought of as “labor, nature, and time stored up” that will help the capitalist be closer in time to his goals of turning out consumer goods compared to the one without capital, as noted by Ludwig von Mises:

“Neither is it correct to call the capital goods labor and nature stored up. They are rather labor, nature, and time stored up. The difference between production without the aid of capital goods and that assisted by the employment of capital goods consists in time. Capital goods are intermediary stations on the way leading from the very beginning of production to its final goal, the turning out of consumers’ goods. He who produces with the aid of capital goods enjoys one great advantage over the man who starts without capital goods; he is nearer in time to the ultimate goal of his endeavors.

Mises, Ludwig von. Human Action: A Treatise on Economics. Scholar’s Edition, Ludwig von Mises Institute, 1998. p. 490.

So when an individual acquires capital, and with this knowledge of capital being sought for its direct consumption, he or she must forgo the possibility of consumption in order to accumulate capital. So a deferment of consumption is a requirement before capital can be constructed and/or accumulated. In addition, capital is not indefinitely durable, so capital must also be repaired and preserved. In the context of running a business, capital must also be improved to produce more and better quality consumption goods in order to compete with other capital owners in the market.

This next point doesn’t get mentioned in the field of economics, and perhaps it is not relevant, but capital must also be nurtured, and this requires intimate local knowledge of the capital being deployed. This type of local ‘know-how’ is what James Scott broadly refers to as ‘mētis’, or a type of knowledge that “represents a wide array of practical skills and acquired intelligence in responding to a constantly changing natural and human environment.”8

The necessity for this local experiential knowledge becomes clear when looking at a farm as capital. Not only must the farmer try to maximize his yield, but he must also be cognizant of the health of the soil that his farm is built on. If the soil is used constantly year after year without letting it recover to be used for subsequent harvests, then the soil will degrade and eventually the soil might even become unsuitable for farming. The farmer must be in tune with the complex structure of his capital (soil) and understand the root cause for why his capital is degrading and not just resort to applying short-term fixes like more fertilizer and pesticides to increase yield. Jon Stika socratically guides the reader through the relevant and intricate pathways that lead to dysfunctional soil and why short-term farming practices don’t address the root cause:

“Allow me to use soil erosion as an example. Soil is leaving a field carried by water that is running off the soil sources. Why? Because the soil particles are becoming detached from the surface and moving with the water running off the field. Why? Because the water is not infiltrating into the soil. Why? Because there are no water-stable soil aggregates at the soil surface protected by plants and plant residues. Why? Because the soil has not been managed in a way to create and protect stable soil aggregates at the soil surface. Why? Because the land manager does not understand how to manage the soil to foster and protect stable soil aggregates. Why? Because no one involved in the situation understood that a lack of stable soil aggregates at the soil surface was the reason the water was not infiltrating into the soil, resulting in water runoff and soil erosion. Everyone thought erosion was the problem and focused on dealing with the detached soil and water that ran off the field. Witness the miles of terraces, waterways, diversions, filter strips, and buffers, across our cropland landscape. These practices were installed with good intentions, but serve only as Band-Aids and diapers, rather than solutions, to the problem of dysfunctional soil.”

Stika, Jon. Soil Owner’s Manual: How to Restore and Maintain Soil Health. 2016. p. 68-69

This example from Jon Stika demonstrates that soil, which seems like a simple capital good, is actually quite a complex structure with complicated pathways that requires intimate local and experiential knowledge of its effective and sustainable utilization.

We can see that capital is a sort of “economic potential energy” with stored nature, labor, and time, and it has a high cost in that it requires a high degree of risk, initial time investment, forgone consumption, repairs due to depreciation, and intimate local knowledge. In order for capital to be deployed to the production of consumer goods it must be accumulated, preserved, and nurtured. This brings us to the next logical point: Making use of capital necessarily requires low time preference. As successful investment leads to increased capital accumulation, preservation, and nurturing, which increases productivity and efficiency, it eventually reduces financial uncertainty and lowers time preference, which fosters even further accumulation, preservation, and nurturing of capital. Bringing this back to Hoppe’s comment from earlier, and much like the technology of money, the feedback loop caused by the economic potential energy of capital contributes to the “process of civilization”.

Keynesian Fallacies in Islamic Economics

When we first discovered and learned this no nonsense and clear methodology of approaching economics from first principles, we then ventured to learn and see the methodology of the current “science” of what’s called Islamic Economics, as it’s a topic that we were initially not familiar with. Upon opening up our first Islamic Economics textbook, we were quite alarmed to learn and observe the prevalence of economic fallacies that greeted us. 

We want to be very clear that we have nothing against looking at the field of economics from an islamic perspective, as we used a somewhat similar approach above. We also invoked Quran verses and even incorporated viewpoints from Islamic scholars of the past to illustrate basic economic concepts. Our problem with the current state of what’s called Islamic Economics is that it builds on faulty Keynesian economic concepts. Before going further, let’s explain what we mean by Keynesian. 

John Maynard Keynes was a prominent 20th-century British economist whose advocacy for government intervention in the economy to mitigate the effects of recessions contrasted sharply with a laissez-faire approach to economics. His Keynesian economics, emphasizing aggregate demand as the primary driving force in the economy, often downplays the long-term effects of inflation and distorting impacts of government spending on market signals. Keynesian economics disregards the underlying market mechanisms and the dangers inherent in the accumulation of public debt, and Keynesian collectivist policies lead to malinvestment, economic distortions, and capital destruction. Keynesianism looks at saving unfavorably because it reduces economic activity like consumption and production, which is supposedly disastrous for the economy.

This school of economics is inherently positivist and empirical in its approach, which is the basis for many of its flawed assumptions and methods. What we mean is that keynesianism seeks to derive mathematical formulas and theories based on observed phenomena, rather than deductively and logically developing theories to help explain the observed phenomena. There are two main problems with this approach to economics. Firstly, as we’ve stated before, the objects being studied in economics are individual actions and subjective valuations that are inherently unmeasurable and unquantifiable. We cannot measure standardized units of action or value and subsequently conduct quantitative analysis on them. Also, we cannot isolate economic phenomena and replicate economic experiments in a laboratory as humans act in unavoidably intricate and complex ways. Secondly, there’s another structural problem with the keynesian approach that Saifedean brilliantly explains: “a deeper logical problem with quantitative approaches to economics is that they conflate the factors we can measure with the causative factors that shape the world around us”9. Just because we can measure aggregates like unemployment, consumption, production, etc., doesn’t mean that these are inherently causative factors that can be or should be measured. To understand causations and consequences of individual actions, a theory must be developed first, and it must be developed using logical deduction from true a priori assumptions.

The reason why we go through great lengths to expound on keynesianism is that it is the root of much of the modern discourse on Islamic Economics. This is not just a claim that we found out by ourselves. Rather, this has been expounded on by scholars themselves in the field of Islamic economics. For instance, Ibrahim Warde in his book, Islamic Finance in the Global Economy, mentions that Islamic Economics employs a Keynesian approach:

“This more pragmatic brand of Islamic economics is not fundamentally different from ‘Keynesian’ approaches (which in a broad sense include socio-economics, institutionalism and other approaches seeking to alleviate the excesses of the market through state intervention), or from attempts by Christian, Jewish or even secular thinkers to inject an ethical dimension to free-market economics by tempering the unbridled pursuit of self-interest with certain social and moral values.”

Warde, Ibrahim. Islamic Finance in the Global Economy. P. 46

One of the most prominent and renowned scholars of Islam in the 20th century is Syed Abul A’la Maududi, who not only wrote and talked about Islamic Economics, but also other Islamic subjects like jurisprudence, theology, and philosophy. One of the foundational texts that much of current Islamic Economics is based on is his “First Principles of Islamic Economics”. We consider this book to be a masterpiece, and is one of our favorite expositions on Economics in general. However, he too was likely influenced by John Maynard Keynes, and this is pretty evident in certain passages talking about wealth creation. We believe this is more than just a mere speculation on our part, Ali Salmon also notes casually in an appendix:

“There are several problems with Mawdudi’s interpretation of capitalism as well as his interpretation of Islam. As will be obvious to many, wealth creation cannot be narrowly defined as a process of savings and investment. In fact, this seems to be a very neoclassical model, and Mawdudi may have been influenced by the writings of British economist John Maynard Keynes. At best, savings is a necessary but not a sufficient condition for wealth accumulation-which is as true in the life of an individual as in the life of a nation.”

Salman, Ali. Islam & Economics: A Primer on Markets, Morality, and Justice. Acton Institute. P. 109

With this assertion in mind, let’s provide 2 brief examples of faulty Keynesian concepts found in modern Islamic Economics before we conclude this chapter. 

One of the most recommended books on Islamic Finance is “Understanding Islamic Finance” By Muhammad Ayub. In the chapter titled “Distinguishing Features of the Islamic Economic System”, Ayub says:

“The literature on Islamic economics emphasizes four types of action by government in economic life. These are:

  1. Ensuring compliance with the Islamic code of conduct by individuals through education and, whenever necessary, through compulsion.
  2. The Maintenance of healthy conditions in the market to ensure its proper functioning.
  3. Modification of the allocation of resources and distribution of income affected by market mechanism by guiding and regulating it as well as direct intervention and participation, if need, in the process

Taking positive steps in the field of production and capital formation to accelerate growth.”

Ayub, Muhammad. Understanding Islamic Finance. P. 40.

And he then cites the famous Islamic economist Umer Chapra that outlines the functions of the state in the Islamic economic system:

“1. Eradication of poverty, maintaining law and order, ensuring full employment and achieving an optimum rate of growth.

2. Economic planning.

3. Ensuring social and economic justice.

4. Stability in the value of money. This is vitally important not only for the continued long-term growth of an economy but also for social justice and economic welfare… Money being a measure of value, any continuous and significant erosion in its real value may be interpreted in the light of the Qur’an to be tantamount to corrupting the world because of the adverse effect this erosion on social justice and general welfare, which are among the central goals of the Islamic System….

5. Harmonizing international relations and national defense.”

Ayub, Muhammad. Understanding Islamic Finance. P. 41.

On the surface, it doesn’t seem like there’s anything egregious with what Ayub and Chapra are proposing. The ruling authority in Islam does have responsibility to uphold social justice and maintain law and order. However, the problems we have with the above quotes are strictly economic in nature, and we can use the economic concepts introduced in this chapter to see why. 

We can already see that it’s a foregone conclusion that governments must maintain healthy conditions of the market, interfere in the formation and allocation of capital, and eradicate poverty, maintain full employment, and maintain stability in the value of money. But what these islamic economists fail to understand is that economics is the study of individual human actions under scarcity and their causal processes and consequences. People act by subjectively valuing things, and their valuations are constantly changing. Therefore, a government cannot assess the “healthy conditions” of the overall market through quantitative analysis, as value cannot be expressed in cardinal terms. Also, as stated earlier, quantitative analyses of economic issues are not replicable, as there is no standard unit of value to measure. So what does it even mean to have “healthy conditions” if we can’t even replicate any experiments or empirically test any macroeconomic aggregates? 

So when a government interferes in the market to allocate resources to “accelerate growth”, through the manipulation of money, they achieve this without any objectivity, and the growth isn’t anything meaningful. A big problem with Islamic economists is that they only approach the field of economics at the aggregate level, not at the individual level. So if value is determined at the individual level via subjective valuations, then what sense does it make for governments to maintain the “stability in the value of money”? Governments and central banks can not assign value to things. And what’s the purpose of having full employment? Employment is a means to an end, not the goal itself. We can achieve full employment without anyone making anything useful, and we can also achieve full employment by forcing everyone to work for the state as a slave. These aren’t real metrics to assess the amount of wealth in an economy.

Just because we can measure some irrelevant economic parameter doesn’t mean we can make quantitative economic analyses. Islamic economists ignore the causative factors of the phenomena they study and make erroneous theories based on measuring arbitrary aggregates. 

To witness the height of the influence of Keynesian dogma on the field of Islamic Economics, look no further than Hossein Askari et al.’s “Introduction to Islamic Economics”. This textbook is filled to the brim with Keynesian fallacies that will be too long to refute in this section. We will leave the reader with this revealing quote where they justify money printing in Islam:

“While some argue that money and value cannot be created out of thin air in Islam, we believe that this proposition can be challenged if money is created to benefit particular members of the community. To our mind, there is nothing in the Quran or in the Sunnah that recommends or prohibits the state from creating money (of course, we realize that there was no paper money at the time of the Prophet (sawa). Yes, the state cannot issue interest bearing bonds and paper money that earns interest. But if the state prints money in order to facilitate business transactions and enhance prosperity for the benefit of the community because the economy’s output is below its potential, then money creation by the state should be permissible. Such a situation can be operationally defined as when there is unused productive capacity in the economy. Also, the central bank can print money to accommodate expected additions to productive capacity. This would mean that there is accurate estimation of full employment output and expected future growth of the economy.And yes, the state gets the normal advantage of seigniorage, but again if this is used for the equitable benefit of all members of society, not rulers and privileged classes, then why should the central bank be barred from issuing paper money? It is in the interest of the community.”

Askari, Hosein. Introduction to Islamic Economics: Theory and Practice. Wiley. 2015. P. 282-283.

The above passage is quite telling and eye-opening and perfectly highlights the end result of this Keynesian influence on modern Islamic Economics. The authors attempt to justify that the Islamic state, using its central banking apparatus, should be able to arbitrarily create fiat money. This grossly looks over the injustice that creating new money violates the Islamic, and even non-Islamic, principles of property and ownership. As stated earlier, when a group of people are allowed to print money, it devalues the purchasing power of the rest of the population. This money creation occurs without any proof-of-work, risk undertaken, or consent of the original owners of money. This is tantamount to theft, nevermind it also having elements of usury. 

The authors mention “seigniorage” by the state as a result of money printing, but, according to them, it’s okay, because we can trust these central planners to achieve “equitable benefit”. However, there is no benefit to society when the supply of money is increased, as mentioned earlier in the section on money and prices. And consider that whatever “benefit” the central planners might achieve is done at the cost of theft and violating other people’s property. Also, what about the price instability that always occurs as a result of money printing? What about the resulting inflation caused by more money chasing fewer goods? What about the resulting Cantillon effect? What about the capital misallocation and destruction caused by distorting price signals? None of these consequences are considered by Islamic economists that are brainwashed by Keynesian wishful thinking. They are unable to look outside of their positivist approach to economics, and they never consider the unintended consequences resulting from these Keynesian economic policies. All of these Keynesian beliefs stem from not understanding basic economic concepts like human action, subjective value, marginal utility, time preference, and capital.

  1. El-Shaker, Ahmad. Wilson, Rodney. Islamic Economics: A Short History. Brill, 2006. p. 248. ↩︎
  2. Many people argue that saving money for future use doesn’t count as “using” money and that money only becomes useful when spent. However, this view is mistaken. Saving money plays a crucial role in protecting against uncertainty aversion. Read Hans-Hermann Hoppe’s phenomenal essay ““The Yield from Money Held” Reconsidered” to learn more. Accessible here: ↩︎
  3. See Anil Patel’s “The Bitcoin Handbook: Key Concepts in Economics, Technology, and Psychology” on pages 6-7 for a brief explanation of the Cantillon Effect and its effects. ↩︎
  4. See Jeff Booth’s “The Price of Tomorrow” for an exposition on why inflationary policies work against the productivity gains from technological development. ↩︎
  5. See Murray Rothbard’s The Mystery of Banking, “Chapter II: What Determines Prices: Supply and Demand” for a more in depth exposition on the formation of prices. ↩︎
  6. This insight is even more amazing when one considers the Hadith or saying of the Prophet Muhammad (pbuh) where he was asked to fix prices and he refused saying that the prices are in the “Hand of God”. The wisdom behind this refusal becomes clear once it’s understood how prices are formed through the complex interactions in the market and not the decree of a central planner. This event will be explored more in the next chapter. ↩︎
  7. Hayek, Friedrich A. “The Use of Knowledge in Society.” The American Economic Review, vol. 35, no. 4, 1945, pp. 519-530. ↩︎
  8. Scott, James C. Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed, Yale University Press. 1998. p. 313. ↩︎
  9. Ammous, Saifedean. Principles of Economics. The Saif House, 2023. p. 17. ↩︎

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