Islamic economics and a third fundamental theorem of welfare economics

• Author: Hayat Khan
• DOI: http://doi.org/10.1111/twec.12508
• Published date: 01 March 2018
• Date: 01 March 2018

SPECIAL ISSUE ARTICLE

Islamic economics and a third fundamental

theorem of welfare economics

Hayat Khan

1,2

1

La Trobe Business School, La Trobe University, Melbourne, VIC, Australia

2

College of Business, Alfaisal University, Riyadh, KSA

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INTRODUCTION

The field of economics began as a moral science but later became detached from moral concerns

in an attempt to emulate natural sciences and adopt positivism (Alvey, 1999; Sen, 1987

1

). This led

to the forceful removal of moral issues from the core of the discipline in the last century.

2

Moral-

ity, although successfully suppressed in the last century, has always been part of the academic

debate. Discourse around the second fundamental theorem of welfare economics and Sen’s capabil-

ity approach are two good examples. Economists have employed positivism in a narrow sense;

despite the removal of moral judgements from the discipline, economists have been frequently

making such judgements as they are inescapable when studying human behaviour. The use of

homo-economicus, as well as, the postulate of rationality is in themselves moral judgements. Simi-

larly, basing optimality on Pareto’s criterion for efficiency alone, while ignoring the distributional

aspect, is another obvious example of moral judgement.

An important building block of “positive economics”is the standard assumption that economic

agents are selfish beings whose welfare is unaffected by the welfare of others in socie ty. People’s

selfish preferences are exogenous in the sense that they are outcome neutral. There is generally a

bias against morality which is largely seen as an inefficient proposition (see, for example, Sen,

1987).

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Despite a long-standing concern about the validity of this oversimplification, or in Sen’s

words “hard-headed”assumption, standard economics textbooks continue to assume that economic

1

According to Sen (1987, p. 2), the subject of economics was seen as a branch of ethics and was taught in this way at Cam-

bridge, until fairly recently, as part of “the Moral Science Tripos.”Moreover, in the 1930s, it was unfashionable at that time

when Lionel Robbins termed the association of ethics and economics as mere juxtaposition.

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Sen (1987, p. 7) writes: “It is arguable that the importance of the ethical approach has rather substantially weakened as

modern economics has evolved. The methodology of so-called ‘positive economics’has not only shunned normative analy-

sis in economics, it has also had the effect of ignoring a variety of complex ethical considerations which affect actual human

behavior and which, from the point of view of the economists studying such behavior, are primarily matters of fact rather

than of normative judgement. If one examines the balance of emphases in the publications in modern economics, it is hard

not to notice the eschewal of deep normative analysis, and the neglect of the influence of ethical considerations in the char-

acterization of actual human behavior.”

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Sen (1987, p. 52). This line of argument is, however, valid only when agents are selfish because it ignores the efficiency

gains triggered by reciprocity when agents are other-regarding, which shifts the production possibility frontier outwards.

DOI: 10.1111/twec.12508

World Econ. 2018;41:723–737. wileyonlinelibrary.com/journal/twec ©2017 John Wiley & Sons Ltd

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