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Islamic economics and a third fundamental theorem of welfare economics

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  • Hayat Khan

Abstract

The discipline of economics started as a moral science but became detached from moral concerns over time to emulate natural science and to adopt positivism. Consequently, mainstream economics assumes people to be sordidly selfish. The teachings of Islam, however, promote social preferences where individuals should be other†regarding and have preferences over social outcomes. This paper replaces the selfish agent with a social agent and presents the results in a theorem referred to as the third fundamental theorem of welfare economics (TFTWE). The TFTWE states that “when the selfish agents are replaced with the social agents, market outcomes are Pareto optimal, equitable, and unique†. This is an important result which has widespread implications. We show that the TFTWE holds under conditions where the first two fundamental theorems of welfare economics fail and that a Walrasian equilibrium is more likely to exist when selfish preferences are non†convex. Unlike the popular convention, there is no equity†efficiency trade†off. In fact we point to the possibility of reversal in equity†efficiency trade†off.

Suggested Citation

  • Hayat Khan, 2018. "Islamic economics and a third fundamental theorem of welfare economics," The World Economy, Wiley Blackwell, vol. 41(3), pages 723-737, March.
  • Handle: RePEc:bla:worlde:v:41:y:2018:i:3:p:723-737
    DOI: 10.1111/twec.12508
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    Cited by:

    1. Nayeli Hernandez-Martinez & Nevin Mutlu & Jan C. Fransoo, 2021. "Social equity in supplier–buyer relationships in smallholder agri-food supply chains," Flexible Services and Manufacturing Journal, Springer, vol. 33(4), pages 1027-1089, December.
    2. Ghlamallah, Ezzedine & Alexakis, Christos & Dowling, Michael & Piepenbrink, Anke, 2021. "The topics of Islamic economics and finance research," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 145-160.
    3. Gianluca Grimalda & Alain Trannoy & Fernando Filgueira & Karl Ove Moene, 2020. "Egalitarian redistribution in the era of hyper-globalization," Review of Social Economy, Taylor & Francis Journals, vol. 78(2), pages 151-184, April.
    4. Ezzedine Ghlamallah, 2023. "Sustainable Development And Islamic Economics Paradigms Compared," Post-Print hal-04363875, HAL.
    5. Necati Aydin & Hayat Khan, 2021. "G-Donic Happiness: An Alternative to Hedonic and Eudemonic Happiness for Sustainable Consumption," Sustainability, MDPI, vol. 13(11), pages 1-18, May.

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