Abstract

The global financial crisis that unfolded since the end of 2006 has shaken the very foundation of the Western free-market economic system. Its fundamental regulatory principle of the separation of state and market is now seriously discredited. The objective of this article is to argue that the economic principles of Islam can provide a better alternative to the free-market system. Firstly, an Islamic economic system is highly integrative where the purpose and interest of the state and the individual citizen overlap and are complimentary to each other. So, market and state are rather inseperable in Islamic political economy. Secondly, the free-market system is fundamentally oriented to the philosophy of unlimited consumption, that is – greatest number produces greatest happiness, which demands production and appropriation of resources beyond needs. But the Islamic economic philosophy puts restrictions on unnecessary consumption, thereby capping competition over resources. These two essential principles in Islamic political economy are highly interdependent on state and individual agency of a human being. Therefore, once the economic needs and purpose of the state and the individual citizen are properly enmeshed, it produces a balanced market system. Islamic political economy has moral regimes and instrumental structure for economic behavior that reinforce each other.

Highlights

  • The recent US and global financial crisis has jolted the very foundation of the New Financial Architecture (NFA)

  • The NFA is built on the philosophy of liberalism which originated in the UK in the eighteenth century, and became institutionalized in the post-World War II international economic system

  • Does this mean an end of the free market economy and the NFA? Does it indicate a need for fundamental rethinking of the Western free market economic ideology?

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Summary

Introduction

The recent US and global financial crisis has jolted the very foundation of the New Financial Architecture (NFA). After the end of the Cold War, ‘market economy’ was formalized through “Washington Consensus” which advocated policies to reduce inflation and fiscal deficits, privatization, deregulation, and open market economy. This meant the market was to be separated completely from the state. The recent financial crisis has forced many staunch advocates of the free market economy to heavily intervene into the market abandoning the non-interventionist policy of NFA. Does this mean an end of the free market economy and the NFA? The paper argues that the philosophy of Islamic political economy is far better than utilitarian liberalism because it creates a balance between these institutions which can ensure stability in political economy

Theoretical Approach
Genesis of the Crisis
Global Extent of the Crisis
Response of the Free Market Economies to the Crisis
What is Wrong with the Market Mechanism?
An Islamic Alternative?
Conclusion
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