Three Generations of Islamic Economics

Abstract

The idea of social science is based on the false assumption that universal laws applicable to all societies can be derived from the historical experiences of European societies. Instead, we argue that all social theory emerges as an attempt to handle challenges facing particular societies within a particular historical context. Within this framework we analyse how the first generation of Islamic Economics emerged as part of the struggle for liberation in the colonized Islamic lands after the second world war. The first generation argued that Western economic systems – capitalism, communism, and socialism – were created by human beings, and led to inequities and injustice, and brought misery to the masses. Instead, they offered the vision of a system built on the teachings of Islam which would serve and promote the welfare of all members of society. Failure to achieve the political control required to create genuinely Islamic socio-political systems led to the emergence of the second generation in the mid 1970’s. Whereas the first generation had rejected capitalist economics, the second generation sought to build an Islamic Economic system within a capitalist framework. The defects of both the capitalist system, and the accompanying economic theory, became glaringly obvious to all in the global financial crisis of 2007-8. This led to a re-evaluation of the 2nd Generation approach and the birth of the Third Generation of Islamic Economics, which seeks to go back to the revolutionary ideas of the First Generation. The critical insight at the heart of the third generation is that capitalism is fundamentally incompatible with Islamic ideals, and must be rejected and replaced by an alternative system built on Islamic foundations. The goal of this paper is to describe the historical contexts within which the three generations emerged. Also, we aim to describe the central characteristics of the third generation of Islamic Economics, which builds on the experiences gained from both the first and second generations.