ISLAMIC ECONOMICS: AN OVERVIEW

The contemporary economic systems have failed to solve the economic problems of mankind and the Islamic economic order presents a ray of hope for the redemption of humanity from the quagmire of economic problems. The defeat of socialism is too obvious to be documented after what has happened in Eastern Europe and USSR during the last few years. The track record of capitalism is also not very promising.

Although a small minority has achieved unprecedented high material standards of living, yet a vast majority of the people on the globe is still living under conditions of abject poverty. Even in the industrially advanced countries the problems of unemployment, inflation, poverty amidst affluence, unequal distribution of wealth, frequent bouts of business recessions, environmental pollution, and ecological imbalance, to name a few, still bedevil man's present life and threaten his future. We need not mention that the focus of prosperity of these countries is uni-directional. It concentrates on the material dimension of life and completely ignores its spiritual, ethical, and social dimensions. With the retreat of socialism, the erstwhile socialist countries are eagerly looking forward to adopting market capitalism - the system which they rejected about half a century ago. So impatient are they to embrace capitalism that they have hardly paused for a moment to think whether they will be able to establish an exploitation-free human economic order in the search of which they have rejected socialism. In all probability, these countries will soon become markets for the industrially advanced Western Europe, US, and Japan. In fact, their markets have already flooded with the products of the capitalist countries. They are keen to imitate the lifestyles of the rich capitalist countries for which they will have to adopt the same economic strategies as the industrially advanced countries had followed.The results would be no different.

In pursuit of a materially abundant lifestyle, they will end up with a similarly distorted prosperity. The financial institutions of the capitalist world are already spreading their network to these countries

and in a few years, the people of these countries would also be trapped in interest-bearing finance. They would toil hard to repay the loans and interest on these loans to the financial institutions of the

rich countries. The day is not far when it would dawn upon the erstwhile socialist countries that they are no happier in their newly-won freedom from socialism.

It is our contention that there.is an economic order other than the capitalist and socialist economic orders which has the potential of ushering in an age of human bliss. This economic order has been

presented by Islam. Islam casts a comprehensive look at the human economic problems. It promises a free, just and responsible world for everyone on this earth. It treats all human beings in a similar

manner and rejects the monopoly of a few nations on the resources of the earth.

The present chapter proposes to disc, liss the basic assumptions of Islamic economics. It will, then, take up the questions of economic organization, the role of money, consumer behavior: the problem of poverty, fiscal management, research and development and the strategy for change. Obviously, such a vast field cannot be covered comprehensively in a short chapter purporting to give an overview. Since the Islamic economic order has some outward similarities with capitalism, such as the recognition of private property, free market, social security system, etc., we shall try to delineate the difference between Islam and capitalism, in each major area.

1. ISLAMIC WORLDVIEW:

God, according to the Islamic view, has created the universe for the benefit of all human beings. God has made the resources of this earth available to a man who has the responsibility to make use of them, to mould them, and transform them according to his needs. God has given a man the necessary apparatus to cultivate his faculties, to understand himself and nature, and to develop the means to nourish himself and satisfy his needs. But man is supposed to observe certain limits in the exercise of his freedom. Within these bounds, all his acts are worship of God. Nothing remains profane or secular. This belief fills man with an enthusiasm to proceed continually in his pursuit to

discover, understand, live and enjoy this world without having any feeling of guilt, - provided he seeks to please God and lives within the limits prescribed by Him - that such acts constitute indulgence in profanity or sin. 

1 Islam requires man to maintain a balance between his love for an abstinence from material things.

2 This counsel of restraint in the acquisition of material resources is true for the entire humanity.

The requirement is that man should not cause the non-renewable resources of the earth to be recklessly depleted.

3 Every generation should show consideration for the future generations in the use of resources.

4 At the global level, all nations should exercise restraint in the use of the resources of the earth.

Islam treats all human beings as children of Adam. 

5 As human beings, they are all equal.

6 It visualizes equal opportunities for everyone. It opposes the creation of monopolies. It liberates man from the bonds of other human beings. It envisages a society where everyone is self-reliant. At the global scale, it expects all nations of the world to live a respectable life. Thus the present-day situation in which the poor countries are heavily indebted to the rich countries is not in conformity with the Islamic vision of the world. By the same token, according to the Islamic vision, justice should be provided to everyone and to all nations. It is opposed to all forms of exploitation. Islam encourages a free market economy but with a degree of government intervention that would prevent the building up of concentrations of economic power.

As the vicegerent of God man is accountable to Him for all his actions on the Day of Judgment. Thus Islam prescribes a strong system of accountability at all levels. This is true at the international level as well. The present situation in which certain powerful nations and global corporations are not accountable to anyone in this world is not in consonance with the Islamic Worldview. Islam envisages a world in which everyone with authority is accountable for his actions. It aims at the establishment of an economic order in which all nations of the world would get together to devise a global arrangement to monitor and check irresponsible behavior by any nation. The resources of the earth must be safeguarded against waste, 7 reckless depletion, and destruction for narrow economic gains.

2. BASIC ASSUMPTIONS:

2.1 Human Nature:

The conventional economic analysis assumes that human beings are inherently selfish, that their primary concern is to derive maximum satisfaction or utility; and that in so doing they maximize the utility of the society as a whole. As a result, under capitalism, the selfish behavior of individuals and nations is not only rationalized but also encouraged. At the individual level, a starkly selfish and individualistic attitude which shows little concern for the betterment of others is accepted as reasonable. At the national plane, it is considered perfectly legitimate both for individuals and nations to adopt policies which serve selfish interests. This assumption has been widely criticized in the light of everyday observation and the findings of other social sciences such as psychology, sociology, and

anthropology.

Islam, however, recognizes the dual nature of human beings. Human beings are selfish as well as altruistic. It does not, however, encourage human selfishness. Instead, it seeks to control human selfishness. It channelizes the selfishness of people to common good and prevents men from hurting others. It energizes their altruistic motives and arouses them to help one another. Consequently, the Islamic economic order visualizes the third sector, besides the private and public sectors, known as the voluntary sector. It recognizes that every individual, besides serving his selfish interests, should play a positive role in promoting the common good by helping other ·human beings. Thus, it propagates that everyone can and should make a contribution to creating a better society.

2.2 Materialism:

The capitalist economic order places a very high value on material attainments. In fact, progress and material possessions are used synonymously. The capitalist approach to life has resulted in widespread depletion of non-renewable natural resources, deforestation of wide areas, pollution of the environment, and ecological imbalance. 8 Islam treats material possessions as embellishments of life.

But it treats them as secondary to the moral and spiritual development of human personality.

9 It does encourage enterprise and effort to increase one's material well-being, but it also enjoins that the focus of human striving on this earth is to obey God and to achieve His pleasure in the Hereafter. This change in the focus of human striving introduces a balanced approach ·to economic development. The Islamic approach visualizes a restraint in the human endeavor to increase material consumption. It supplements material accomplishments with the moral and spiritual growth of personality as desired goals.

2.3 Ownership:

Capitalism visualizes an absolute right to private ownership so far as it is not acquired by damaging another person's similar right. Consequently, people are free to make use of their resources the way they like. For example, if they so choose, they may destroy and squander some of their resources. They are free to consume, save, invest (or lend on interest) whatever they own. They have an unlimited freedom to engage iii any activity or profession. They can invest their money in any trade or occupation, even if it is socially harmful or destructive.

Islam recognizes the right of absolute ownership for God only. Man has been granted the right to benefit from the resources of the earth. He can earn his livelihood through lawful (Halal) means. He is not totally free to consume, save or invest his earnings in any way he likes. There are definite moral limits on his right to earn, consume, save and invest. Within this general framework, Islam accepts the right of a person to sell, bequeath and leave to his heirs the property ·which he happens to own. Thus the Islamic concept of property limits human freedom to the use of the resources of the earth. It holds everyone accountable to God for the proper use of those resources.

2.4 Universalism:

Capitalist economics has not been able to come out of the general framework conceived by its founding fathers in the eighteenth century. The time when The Wealth of Nations was written by Adam Smith (d.1776), most of the present-day rich countries were pursuing their colonial goals. The ideas of Adam. Smith rationalized the notion of the nation-state. The Wealth of Nations provided a philosophical basis for a narrow approach to global economic issues. Instead of

conceiving the world as a place for all human beings, it rationalized the concept of national policies in isolation from other peoples of the world. It introduced a chauvinistic approach towards economic problems, giving the industrially advanced countries an unbridled right to pursue whatever policies suited them. The same approach still persists,. Individual states take economic decisions in their selfish interest. This is not to deny the fact that they do study the· situation around them. However, they continue to adopt policies which suit their selfish ends ignoring the effects such policies might have on other nations. In this process, the people of the whole world suffer.

10 The Islamic view is that the entire world has been created by ' God for the benefit of all human beings. There is, thus, a great need for all the peoples of the world to consult and cooperate with one another while pursuing economic policies which might adversely affect others. Although lip service is being paid to the need for greater international cooperation, in practice human beings have not

made any significant progress in that direction. It is time for people to transcend the conventional economic ideas and build a global economy on the basis of equality and mutual cooperation.

3. ECONOMIC ORGANIZATION:

3.1 Economic Power:

To put it very succinctly, the present-day capitalist economies are organized on the basis of free market mechanism where production of goods and services comes from a combination of capital and wage labor. The capital is provided both as equity and as an interest-bearing loan. The market, though theoretically free, is dominated by mega-corporations which determine the price level and thus influence the level of investment, saving, production, and consumption.

11 The classical economic analysis which was based on the immutable law of perfect competition has become irrelevant due to the concentration of economic power in the hands of mega-corporations.

The accumulation of economic power in the capitalist economies is caused by a number of factors. First, the interest I income of the rentier class turns the flow of wealth from the poor to the rich, which gradually enables a small minority to accumulate large amounts of .wealth.

12 Second, the legal innovations of incorporation and limited liability have enabled the corporations to collect huge amounts of capital on account of limited risk.

13 While the entitlement of the shareholders of a corporation to the profits is unlimited, the risk to bear the loss is limited to the extent of their own capital. 

14 Third, the benefits of technological developments are not passed on to the consumers in the form of lower prices which would benefit the laborers as well. Instead, the gains from technological development are mainly appropriated by the mega-corporations which enjoy near the monopolistic power to fix prices.

3.2 Equilibrium at Less than Full Employment:

Another feature of the capitalist economies is that they can be at equilibrium without attaining the full employment level. This question has been widely discussed in Keynesian economics. The main reason for this is the existence of an interest in capital. It subdues investment and, through it, effective demand. Consequently, the market mechanism, by itself, is unable to achieve full employment.

It requires active public policy to encourage investment. At the same - time, the private sector feels the compulsion of promoting the sale of their goods and services so that the return on their investment is assured. As a result, the economy has to create demand artificially by resorting to ruthless campaigns of advertisements on television and the news media. The consumers are hooked, day .in and day out, to the temptation of buying more and more goods and services. The capitalist system is forced to create demand artificially so as to keep the system going.

The above is indeed a sketchy picture of the economic organization under contemporary capitalism. To do full justice to the subject a much more detailed account would be required. However, these hints should suffice to indicate the difference between the pattern of economic organization of Islam and capitalism.

3.3 Islamic Economics Organization:

(a) Islam prescribes a free market based on supply and demand. At the same time, it ensures that the economic power is not accumulated and if it does, it is diluted in the following manner:

Islam has prohibited interest on capital and thus has foreclosed the door of accumulating wealth without work or without assuming risk. 15 The general rule is that whoever wants to earn a profit must assume risk as well. 16 The operating principle is no risk, no gain.

(b) Islam visualizes a society where an individual is not dependent on others. It recognizes the need of each individual to actualize his potential abilities. Thus, it visualizes a society where a maximum number of people are independent in their earning and living. This is also one of the implications of belief in One God who is the sustainer of the entire universe.

The Messenger of God (peace be upon him) indicated his preference for this pattern of livelihood when he raised the status of· slaves to ·that of brothers and partners. 

17 Traditionally, the Muslim societies have placed a low value on wage:.labour. Instead, they have always encouraged self-employment or such forms of business as shirkah, or mudarabbah. 

18 It was the capitalist mode of production which, for the first time in human history, made large chunks of the population dependent on capitalists for their livelihood.

19 The Islamic economy would encourage such forms of business where people would join hands, preferably in the form of partners, and not as employees and workers. Once this principle is. accepted, the details of the socio-economic relationships can be worked out. But one thing is obvious. Such an economic organization spreads the ownership base over the whole economy and forestalls the accumulation of economic power.

(c) Islamic ethos does not encourage the unplanned introduction of new technology. On the one hand, it would require that the introduction of technology should be phased and planned.

20 Moreover, it would urge the industrialists to bear the cost of the dislocation or economic hardship created by the introduction of new technology. The basis for such public policies is the general principle that cost and benefit go hand in hand. 21 One who earns a profit must pay for the cost as well. Moreover, once the economy is organized on the principle of worker ownership, the benefits of new technology would automatically spread over to the whole economy.

(d) Since Islamic economy does not allow interest on loan capital, in all probability interest-free business credit will not be available on a large scale. Consequently, the question of limited liability of the shareholders in a joint stock company would lose much of its relevance. In this manner, Islamic economy would shut off another channel for accumulating the economic power.

(e) The Islamic economy discourages such market malpractices as hoarding with a view to raising prices (ihtikar), collusion to bid up prices (tanajush), counter-bidding (tasawum), efforts to forestall genuine competition by discouraging the sellers to reach the market (bay' talaqqi al-rukban), and middle manship by shrewd people to deprive the sellers of the best price available (bay' al-hadir l bid). These were typical practices in the market to weaken genuine competition in the days of the Prophet (peace be upon him). On this analogy, one may claim that all market practices which lead to monopolies or which weaken the forces of competition should be discouraged to-day in an Islamic economy. One thing is almost certain. The present-day Islamic economy will have to develop some new channels of market information for keeping the buyers and sellers informed of the market situation. This information will have to be cheap and easily available. Availability of relevant and timely information will discourage cheating, fraud, collusion; and exploitation of others on account of their ignorance.

(f) In an Islamic economic order, the problem of demand creation through advertisement would also not remain as serious as we find it in a capitalist dispensation. In the absence of interest, the brakes on the expansion of investment will be removed. The economy is likely to settle at full employment or near full employment level. The business organizations will have a lesser compulsion to create demand artificially through advertisements. The extent, coverage, purpose, and cost of advertisements in the Islamic economy will also undergo a change. But this question does not concern us at the moment. The question as to how the Islamic economy would keep itself going, where demand creation would not be a normal practice, needs some consideration. As we have discussed, Islam seems to prefer a society where the ownership of resources is widely dispersed. Islam would also like to maintain a high level of effective demand so that the resources remain fully employed. To achieve that end the Islamic economy has a mechanism of transferring wealth from the rich to the poor. It has made obligatory for everyone who owns a certain minimum of wealth to pay a fixed sum as zakah for expenditure on the welfare of the poor and the needy. Besides, it encourages infaq which signifies voluntary spending on one's relations and neighbors and on other social needs. The Islamic law of inheritance also contributes to the dispersion of wealth on a wide scale. Thus Islam visualizes transfer of sufficient purchasing power to the poor to keep the effective demand high enough for achieving a full employment equilibrium.