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The Economic Problem: Can Islam Play an Effective Role in Solving it Efficiently as well as Equitably?
M. Umer Chapra
Shaban 12, 1432H | July 13, 2011
Islamic Economics and Finance Research Division
IRTI Working Paper Series
IRTI Working Paper 1432-01
Title: The Economic Problem: Can Islam Play an Effective Role in Solving it Efficiently as well as Equitably?
Author(s): M. Umer Chapra
Abstract The generally recognized economic problem of mankind is how best to satisfy the basic needs of all people around the world in spite of the prevailing scarcity of resources. Since this is not happening, the paper argues that the primary reason is the secular worldview which has weakened the social and ethical foundations of human life and placed primary reliance on the market mechanism to ensure efficiency as well as justice in the use of resources. This has inadvertently ended up providing sanctity to the social-Darwinist principles of ‘struggle for existence’ and ‘survival of the fittest’. The result is that the concepts of economic man and the serving of self-interest by maximizing wealth and want satisfaction have gained supremacy. In sharp contrast with this, the worldview of most religions, and particularly that of Islam, emphasizes the concepts of human brotherhood and the well-being of all and provides certain moral restraints on the serving of self-interest. While it recognizes the important role of the market mechanism for this purpose, it does not consider it to be sufficient. It provides a moral orientation to all human activity, including the market mechanism, so that they operate within the framework of moral principles emanating from Divine revelations which treat all human beings as brothers and the resources at their disposal as a trust from God. The whole paper hovers around a discussion of how such a worldview can help solve the economic problem efficiently as well as equitably.
Islamic Research and Training Institute
P.O. Box 9201, Jeddah 21413, Kingdom of Saudi Arabia
IRTI Working Paper Series has been created to quickly disseminate the findings of the work in progress
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THE ECONOMIC PROBLEM: CAN ISLAM PLAY AN
EFFECTIVE ROLE IN SOLVING IT EFFICIENTLY AS
WELL AS EQUITABLY?
M. Umer Chapra, Ph.D.
Adviser
Islamic Research and Training Institute
Islamic Development Bank
Jeddah, Saudi Arabia
* The author registers his grateful thanks to Dr. Lamine Doghri, Director General of the
Islamic Research and Training Institute, Islamic Development Bank, for the support he
provided to enable him to write this paper. He is also thankful to Shaikh Muhammad Rashid
for the efficient secretarial assistance rendered by him in the preparation of this paper.
1
The generally recognized principal economic problem of mankind is how to
adequately satisfy the basic needs of all people around the world. Even though the
effective solution of this problem is one of the essential requisites for ensuring
general human well-being, it does not seem to have been satisfactorily solved
anywhere. The consequence is that, as well articulated by The Economist (2009),
“life is becoming a dismal slog in an ugly world”.1 Why is this the case?
One possible reason may be that the resources at the disposal of human
beings are scarce and not sufficient for fulfilling the needs of all. The acceptance
of this reason would be tantamount to justifying the status quo and exonerating
ourselves of any responsibility for our failure to remedy the situation. In addition,
it would also fail to explain why there is abundance, waste and conspicuous
consumption in some places while there is poverty and hunger in others. The real
fact, however, is that the resources at the disposal of humanity are scarce only in a
relative sense. If they are used efficiently as well as equitably, it should be possible
to fulfill the needs of all.
This, then, raises the crucial question of what is the cause of the failure to
use these resources efficiently as well as equitably. It may not be possible to
answer this question satisfactorily without finding an effective mechanism for
answering the three familiar questions of what, how and for whom to produce. This
makes it imperative to decide how much of which alternative goods and services
should be produced, who will produce them most efficiently at the lowest possible
cost, and who will enjoy, to what extent, the benefit of the goods and services
produced.
The answers to these questions in any economic system depend essentially
on its vision and strategy. The vision as well as the strategy are, in turn, outcomes
of the system‟s worldview or underlying philosophy about the origin of the
universe, the meaning and nature of human life on earth, the real ownership of the
resources at the disposal of individuals, and the goals that need to be realized with
these resources. Such a philosophy serves the same purpose for the economic
system as the foundation does for a building. When the whole building is
completed, the supporting masonry is often invisible and unmentioned. It has,
however played, and continues to play, a determining role in answering these
questions.
THE UNDERLYING PHILOSOPHY OF CAPITALISM AND MARXISM
The underlying philosophy of capitalism, which developed in the 18th and
19th
centuries, tried to answer these questions under the influence of the prevailing
zeitgeist, which was, and continues to be, secular and materialist. It arose in
Europe as a reaction against the domination and corruption of the Church. The
reaction, as is often the case, took an extreme form and, instead of getting rid of
just the corruption and domination of the Church, it went to the extreme of shaking
faith in the metaphysical foundation and values that the Church stood for.2
Consequently, in sharp contrast with the religious worldview, the whole universe
came to be considered as having come into existence through the operation of
random forces in a self-designed and self-propelled evolutionary process without
any planning and design by a Supreme Creator.
2
If the universe was the product of random forces in such an automatic
evolutionary process, then the human being, who is an integral part of it, could not
have been different. He also, therefore, began to be considered as a product of the
same random forces. There was, then, no reason to assume that there would be any
purpose behind his creation. Human purpose accordingly became, in the words of
Bertrand Russel, a concept which was “scientifically useless
”.3
In spite of resistance from religious forces, secularism began to gradually
strengthen its roots in not only the Western societies but also the rest of the world.
In the process of this drift towards secularism, there was a substantial weakening of
the social and ethical foundations of human life? 4
The vacuum left by the
weakening of these foundations began to be filled by concepts like the „struggle for
existence‟ and „survival of the fittest‟5 under the influence of what came to be
termed in the late nineteenth century as social-Darwinism. Another concept which
also tried to fill the vacuum was utilitarianism which tried to determine the values
of „good‟ and „bad‟ or „right‟ and „wrong‟ in relative terms by the measurable
criteria of „pleasure‟ and „pain‟6, instead of the absolute principles of morality.
. The
human being thus became denigrated to a covetous machine interested primarily in
maximizing his wealth and want satisfaction. This gave birth to the concept of
„economic man‟, which has served as the kingpin of modern economics in spite of
several protests against it.
The primary well-spring of the economic man‟s life became the serving of
self-interest. His behaviour was supposed to be in conformity with what Jevons
called “the mechanics of utility and self-interest”.7 This may not have deserved
censor because it is also possible for a person to serve his/her long-run self-interest
by serving social interest. However, the Nobel Laureate, Prof. Milton Friedman,
specified it more clearly by saying that the economic man‟s “one and only one
social responsibility was to increase his profit.”8 In a human society which was
influenced so far by the humanitarian moral values, even though not fully, the
undue emphasis on maximizing profit naturally led to the crucial question of how
would social interest be served if everyone was concerned only with the serving
his own self-interest?
In reply to this vitally important question, it was argued that competition
would help create the needed harmony between private and public interests. In a
perfectly competitive economy, the Invisible Hand of market forces would exert a
restraint on self-interest and, thereby, promote the interest of the whole society.9
The answers to the three questions of what, how and for whom to produce would
be provided by the „Invisible Hand‟ of market forces in a way that would serve the
interest of all. There was no need for any socially agreed values or of government
role for this purpose. Self-interest, competition and profit motive thus became the
pillars of the capitalist philosophy and gave primacy to material acquisitions,
consumerism, and the growth mania. It was not realized adequately that there are
several clandestine ways of avoiding and curbing competition, and benefiting at the
expense of others. If the inner goodness of human nature along with moral values,
even though weakened, had not exerted a restraining influence on this mania, the
condition of the world might perhaps have been worse than what has been actually
experienced.
Marxism is just an extension of this same secularist philosophy of
capitalism. In fact, it has played a greater role in undermining the authority of
morals as a result of its antagonism towards religion. The major difference between
3
the two is that under Marxism the answers to the three questions of what, how and
for whom to produce were to be provided by collectivization and central planning,
while they are provided by private property and market mechanism under
capitalism. This proved to be worse than capitalism as a result of a built-in flaw in
its very foundation. Its fundamental philosophy did not contain anything that
would help reform the individual who is at the core of decision making related to
private as well as collectivized property. If the individual is considered to be
incapable of managing private property within the constraints of social interest,
how would he be able to manage collectivized property in a way that would serve
social interest when he has greater power to benefit himself at the expense of
others? The system accordingly failed.
THE UNDERLYING PHILOSOPHY OF ISLAM
The underlying philosophy of Islam is fundamentally different from the
secularist approach of both Capitalism and Marxism. It aims at creating a balance
between the material and the spiritual needs of human beings and between self-
interest and social interest. While there is nothing basically wrong in serving one‟s
self-interest there has to be some kind of a mechanism to ensure that the individual
does not cross the limit and transgress the rights of others.
The primary mechanism generally considered sufficient for this purpose in
a secularist environment is perfectly competitive market system with some
government intervention in the economy. Marxism relied excessively on the
government but did not succeed in creating a better society. Capitalism, initially
considered perfect competition to be sufficient for safeguarding the social interest
and was, therefore, in favour of only a minimum role for the government in the
economy. However, social unrest, economic fluctuations and financial crises have
led to the recognition of a much larger role for the government in the economy.
While increased role of the government has been beneficial, it has also led to an
unhealthy expansion in government budgetary deficits and public debt.
This has worsened the economic fundamentals in favour of greater
economic and financial instability. The economic problem, thus, continues to
remain unresolved and leads one to reflect on the real cause of the inability to solve
the problem. Is it just the size of the private or public sectors in the economy or is
it the human factor which plays a central role in both of these? It is often not
realized that the common element in both the public and private sectors is the
human being. If he is not right, the public sector may also fail to solve the
economic problem in the same way as the private sector has. It may, in fact, be
worse because of the greater power in the hands of bureaucrats. It is well-known
that power corrupts and absolute power corrupt absolutely. Therefore, reform of
the human being and the institutions that affect his behaviour need to be given a
prominent place in any effort to ensure the safeguard of social interest.
Accordingly, the crucial ingredient of the Islamic philosophy is reform of the
individual human being himself as well as the institutions that affect his outlook
and behaviour. While he is, directly or indirectly, the end of all socio-economic
and political activity, he is also the means and, unless he is reformed, it will be
difficult to solve the problems faced by human beings.
For the reform of the human being, the building blocks of the Islamic
philosophy consist of three interrelated concepts. These are: Tawhid (Oneness of
4
God, the Creator of this universe), Khilafah (Vicegerency of human beings), and
‘Adalah (The central role of justice in all aspects of life). All these three concepts
are interrelated and are together intended to change the worldview of the individual
and his outlook towards life. These concepts can together help reform him in three
ways, firstly, by adjusting his attitude towards himself in the light of accountability
before God for everything that be does; secondly, changing his relationship with
other human beings on the basis of brotherhood and mutual care; and lastly,
reorienting his outlook towards all the resources at his disposal, including the
environment, as a trust from God to be utilized in a way that would ensure the
well-being of all.
This raises the question of what is Tawhid and why is it necessary to have
belief in an abstract other-worldly concept like this to solve the economic problem
in this world. Tawhid10
, even though it appears to be an other-worldly concept, has
a tremendous impact on human attitudes and behavior. It is oriented towards
creating a meaningful change in a persons‟ behaviour toward himself, his family,
other human beings, the resources at his disposal, and the environment. It
essentially implies that the universe which is so vast and complex but which,
nevertheless, runs in an orderly and efficient manner, has not come into existence
by itself. It has been created by the Supreme Being. Once this fact is accepted, it
would be inconceivable to think that the Supreme Being would create the universe
as well as the human beings without a purpose. This raises the crucial question of
what the purpose is behind the creation of human beings. The purpose, according
to the Qur‟ n, is to be a „mercy‟ or „blessing‟ (rahmah) for everyone and
everything created by God (al- lam n) („al-Qur‟ n, 21:107). The word al- lam n
is normally translated as mankind. It has, however, a much wider connotation and
incorporates everything other than God Himself. It, thus, encompasses not only
human beings but also animals, birds, insects, and the entire physical
environment.11
How can human beings become a blessing for all of God‟s creation? Can
this happen automatically by everyone trying to serve his/her own self-interest? If
this had been the case, the task would have been much easier. This has, however,
not been the case. There has been a great deal of exploitation and conflict in this
world along with usurpation of the rights of others. It may not, therefore, be
rational to expect the answer to this question to be yes. This is because while the
serving of self-interest is sometimes in harmony with social inertest, it is not
always so. It is also in conflict at other times. To minimize the chances of conflict,
it is necessary to create harmony in human relationships and interactions. How to
create such harmony? Market forces can themselves be helpful to a certain extent.
They cannot, however, be relied upon fully for this purpose. It is also necessary to
have certain rules of behaviour along with a motivating mechanism to ensure
abidance by these rules.
If certain rules of behavior are needed, then we are faced with the difficult
question of who is going to provide these rules of behaviour? It has to be someone
who is impartial and has no axe of his own to grind. The only one who is qualified
to do this is the Creator of human beings Himself? He does not have any axe to
grind and also knows very well their strengths as well as weaknesses. In order to help them, and not to leave them in the dark, He has Himself formulated these rules
(called moral values) and sent them to mankind through a chain of His Messengers, the
last of whom was Muhammad, peace and blessings of God be on them all.
5
Once it is accepted that there is a purpose behind the creation of human
beings and that there are also certain rules of behaviour that need to be observed,
then it is necessary to ensure that these rules are observed. It would be to the
advantage of human beings themselves to observe these rules, so as to ensure the
well-being of all and thus become a blessing for them. However, they may not
necessarily do so unless there is accountability along with reward and punishment.
Without such accountability and reward and punishment, the rules may be violated
and the purpose of making human beings a blessing for all, may not be realized.
This accountability can be in this world by the society and the government.
However, since it is possible to evade accountability by the society as well as the
government and to escape the punishment as a result of influence, wealth or power,
it is also necessary to have accountability by someone who cannot be swayed in
this manner. The only one who can be relied upon for this purpose is the Supreme
Being Himself from whom nothing can be kept hidden and who is also fair and
impartial in His judgment. This accountability will take place in the Hereafter
where everyone will be rewarded or punished in accordance with the way he has
spent his life in this world.
To enable the human beings to fulfill the purpose of their creation, the
Creator has also equipped them with four indispensable assets. One of these is the
best possible physical constitution (ahsana taqwim) (al-Qur‟an, 95: 4). This should
enable them to fulfill all their needs and, thereby, make their life more comfortable.
The second asset is a clean inner self (fitrah) without any inherent flaw in it.
Accordingly, all human beings are good by nature and are capable of preserving
this inner goodness if they so desire. If they do not preserve their inner goodness
and do things that are in conflict with it, then they will hurt not only their own
interest but also that of others and may, thereby become the “lowest of the low”
(al-Qur‟an, 95:5).The third asset is intellect (‘aql), which distinguishes them from
all other creatures. If used properly, it should enable them to use the God-given
resources in a way that would enable them to become a blessing for themselves as
well as the rest of mankind and the environment. In addition to these three assets,
they also have the advantage of having the fourth asset, which is Divine Guidance
(huda) sent to them from time to time by their Creator Himself through a chain of
Messengers, all of whom were human beings. Their mission was not just to deliver
the message like postmen but also to act upon and implement it so as to serve as
role models (uswah hasanah) for others.
Given these assets, the human beings have not been left alone to grope in
the dark. They have rather been well-equipped by their Creator to enable them to
fulfill their mission of being a blessing not only for mankind but also the rest of
God‟s creation. If they do not use these assets in a consciencious and meaningful
manner to ensure the well-being of all and, thereby, become a blessing for them,
they will also subject their own selves to misery (al-Qur’an,20:124). It will,
accordingly, be in their own larger interest to live up to their mission and to lead
their lives in accordance with the Guidance provided by Him.
Within the framework of this worldview, the human being is not a „born
sinner‟, a „pawn on the chessboard of history‟, a „product of chance evolution‟, or a
„tabula rasa‟. He is rather the khalifah or vicegerent of God on earth (al-Qur‟an,
2:30), created with the purpose of being a blessing for all of God‟s creation. His
designation as the khalifah of the Creator of the Universe does not only accord him
an honour and a dignity, but also provides his life with a meaning and a purpose.
His enabling physical constitution and his innate good nature (fitrah) along with
his intellect and the guidance sent to him by God through His Messengers should
6
enable him to fulfill the purpose of his creation in a meaningful and respectable
manner.
The concept of khil fah thus involves a number of implications. Some of
these are:
(1) A conviction in the fundamental unity of the human family and the
equality and dignity of all human beings, irrespective of whether they are white or
coloured, rich or poor, and male or female.
(2) A conviction that the human being, as khalifah of God, is not the
primary owner of resources provided to him by God. He is just a trustee.12
He must
acquire them only rightfully13
and use them in accordance with the terms of the
trust to serve not only his own self but also his family, other human beings, all
other creatures, and the environment.14
It is not becoming of him to act in a selfish
manner or to use these resources wastefully or lavishly.
(3) A conviction that the right attitude towards other human beings, all
members of God‟s family, is not „might is right‟, struggle to serve just one‟s own
„self interest‟, and „survival of the fittest‟, but rather of brotherhood and equality,
love and affection, and mutual care and cooperation with the objective of fulfilling
the basic needs of all, developing the entire human potential, and enriching human
life in such a way as to become a “blessing for mankind” in keeping with the
Qur‟anic vision. Competition is hence allowed in what is good and noble but not in
snobbery, selfishness and mutual destruction.15
(4) A conviction that the human being is born free and is subservient to
none but Him. The Qur‟an states that one of the primary objectives of all the
Messengers of God, irrespective of when and where they lived, was to release
mankind from the burdens and chains that bind them (al-Qur‟an, 7: 157). It is this
teaching which prompted „Umar, the Second Caliph, to ask: “Since when have you
enslaved people when their mothers gave birth to them as free individuals”?16
According to this conviction, man is independent in his decision making and is
himself accountable before God.
(5) A conviction that the human being is accountable before Him and
must, therefore, lead a life in keeping with his status as khalifah of God.
As khalifah of God, man is expected to try his best to satisfy all his own
essential material as well as spirited needs so as to be able to remain physically,
mentally and spiritually healthy, so as to be able to develop and utilize his full
potential, and capable of performing his responsibilities as khal fah. There is no
point in shunning the “good things that God has provided” (al-Qur‟an, 7:32). He
must enjoy life. It is not the enjoyment of life that stands in the way of spiritual
uplift, it is the way this is done. It is not wealth itself, which is bad; it is the way it
is acquired and the way it is spent. There is nothing wrong in enjoying life within
the framework of the values for righteous living through which Islam seeks to
promote human well-being and to become a blessing for mankind.
The belief in vicegerency and universal brotherhood would be of little
significance without the prevalence of justice. Therefore, socio-economic justice
enjoys paramount importance in the Islamic value system. It has been declared to
be nearest to righteousness or taqwa (al-Qur‟an, 5:8) in terms of its significance in
Islam. Righteousness is naturally the most important because it serves as a
springboard for all rightful activity, including justice. The Prophet (pbuh) warned
Muslims to “Beware of injustice for injustice will lead to absolute darkness on the
7
Day of judgment”17
. Absolute darkness in the Hereafter will be a reflection of the
darkness we have spread in this world by perpetrating injustice.
One of the indispensable ingredients of socio-economic justice is the social
equality of all, irrespective of whether they are white or black, high or low, rich or
poor, and male or female. The only criteria for determining a man‟s worth are
character, ability and service to humanity as the Prophet stressed: “God does not
look at your body or your wealth; He looks rather at your heart and your deeds.”18
“The noblest of you are the best in character” and “the most beloved of you before
God is the one who is the most beneficial to others”.19
The second ingredient of socio-economic justice is everyone‟s equitable
right of access to God-given resources and the absence of anyone‟s monopoly over
them or the denial of a „fair‟ share to others. One of the ways through which this
can be attained is to enable everyone to get his due for his contribution to society
or to the social product and to prevent the exploitation of one individual by
another. The Qur‟an urges Muslims to “Withhold not things justly due to others”
(al-Qur‟an, 26:183), implying thereby that every individual must get what is really
due to him and not be deprived by others of his/her fair share.
A third ingredient of socio-economic justice is the fulfillment of
everyone‟s basic needs through his own effort and not by begging unless he is
constrained to do so because of his handicap and inability to earn. This is the
natural implication of the dignity inherent in every human being‟s status as God‟s
vicegerent. Adequate income from work should be the primary basis of his well-
being. Everyone should be able to utilize his time and ability productively and
should have a job or an occupation in keeping with his ability to enable him to do
so. An important goal of the Muslim society should, hence, be the creation of
conditions that would enable a person to earn sufficient income to enable him to
realize a standard of living that is adequate for not only his own well-being but also
that of his family. However, it is the moral responsibility of the society to fulfill the
basic needs of those who are unable to do so because of some handicap.
The Islamic economy should hence be organized in such a way that:
a) Everyone who is able to work and is looking for a job or a vocation is
able to find one in accordance with his ability, and is able to earn a „just‟ income
which is adequate to satisfy his own as well as his family‟s fundamental needs;
b) No one is able to get an income that is not justified by the services
rendered by him;
c) There is no concentration of political, financial and/or economic
power in a few hands;
d) There is a built-in arrangement to provide social security to those who
need it in the event of unemployment, sickness, disability, old age and inability to
earn an adequate livelihood as a result of circumstances beyond their control; and
e) Redistribution of income and wealth to the extent necessary and
justified to prevent the concentration of wealth in a few hand, and to meet the
genuine needs of all members of society who are unable to do so through their own
effort.
A balanced and just economic system should be able to help actualize the
above goals whose realization is necessary to foster the feelings of brotherhood and
8
cooperation in society and to bring to a readily the Islamic vision of becoming a
blessing for mankind. An unbalanced and unfair economic system can, however,
create a vast array of unwarranted wants, sharpen the acquisitive spirit in human
beings, cultivate in them greed and envy, make them selfish and unscrupulous, and
become a major source of injustice and misery for others. The balanced and just
economic system that Islam wishes to establish cannot be brought to reality by
making marginal adjustments here and there in the prevailing acquisitive system. It
would require not only a transformation of the human beings themselves but also a
reform of their social relationships and socio-economic institutions.
THE THREE QUESTIONS
In the light of this underlying philosophy of Islam, and particularly the
status of human beings as khalifahs of God, it should be possible to derive the
answers to the three fundamental economic questions of what, how and for whom
to produce in a way that would help realize the vision of being a blessing for
mankind that Islam has set before itself.
WHAT TO PRODUCE
One of the most important things that fulfillment of the vision requires is
the use of „scarce‟ resources in such a way that everyone‟s essential needs are
adequately satisfied without depleting the non-renewable resources „excessively‟
and without deteriorating the environment. Is it possible for the market system
operating in a secular framework, where everyone is free to lay as much claim on
resources as he wishes in keeping with his income and his tastes and preferences,
to answer by itself the crucial question of what to produce, or is it also necessary to
complement it by something else? Keeping in view the experience of the market
system so far, it may not be possible for the answer to be anything other than „no‟.
The system needs to be complemented by something else. Three of the most
important of these for creating a „just and balanced‟ society where the needs of all
human beings are adequately satisfied from the available limited resources are: (i)
a set of values or rules of behaviour that would help create an equitable balance in
the claims on resources along with (ii) a motivating mechanism to enable people to
act upon these values, and (iii) a supporting role of the government.
The answer given by conventional economics with its utilitarian philosophy
is, however, yes. Sidestepping the crucial questions of ethics, justice and
redistribution, it puts excessive emphasis on the serving of self-interest. It therefore
considers maximization of total utility by each individual in keeping with his own
tastes and preferences to be the sole end of economic activity. It assumes, without
any empirical or logical basis, that total human well-being can be maximized by
everyone trying to maximize his/her total individual utility through the satisfaction
of a maximum amount of wants. The nature and quality of this utility and its
distribution among members of the society do not get the kind of attention they
need because these involve value judgments and economists are not supposed to
make value judgments.
The serving of self-interest by the maximization of income and satisfaction
of a maximum amount of wants has, thus, become the primary objective of the
economic system. Accordingly, the entire machinery of production is directly or
indirectly directed toward this objective, irrespective of whether the satisfaction of
such wants is necessary for fulfilling human needs and realizing human well-being.
9
Moreover, it is also considered perfectly legitimate to create and multiply wants
through advertising, including the promotion of pornography, aimless fashions and
unnecessary model changes.
This has led to two adverse results. Firstly, there is an excessive strain on
scarce resources through the production of goods and services which do not fulfill
a genuine human need. Tawney has, hence, rightly stated that a “part of goods
which are annually produced, and which are called wealth is, strictly speaking,
waste, because it consists of articles which, though reckoned as part of the income
of the nation, either should not have been produced until other articles had been
produced in sufficient abundance or should not have been produced at all.”20
Secondly, it has led to living beyond means and an excessive rise in debt,
which is generally agreed to have been one of the major causes of international
financial crises. The total amount of world debt in the form of bonds more than
doubled over the last decade from $18.8 trillion in 2000 to $ 39.5 trillion in 2010,
and is expected to rise further to $42.2 trillion in 2011 and $ 45.4 trillion in 2012.21
In spite of this excessive increase in consumption and debt, real well-being has not
been actualized.23
Accordingly, the perception, as already quoted from The
Economist (2009), is that “life is becoming a dismal slog in an ugly world”.
If resources were unlimited, such an unlimited and unnecessary expansion
of wants, even though wasteful and morally questionable, may not have created
any serious problem. However, resources available at the disposal of human beings
are limited. This raises the problem of how an equilibrium can be brought about
between infinite wants and finite resources in such a way that the basic needs of all
people are satisfied?
One of the ways would be to remove the wants that are not related to need
fulfillment. This would naturally require value judgments. Since value judgments
are considered to be ultra vires in a secular market system, the inevitable choice of
which wants are to be satisfied and what is to be produced has to be made by the
„invisible hand‟ of market forces through the plebiscite of the price system.
Everyone goes to the market and buys whatever he wishes in keeping with his
tastes and preferences within the constraints of his income and ability to borrow.
Each unit of currency spent by an individual for the purchase of a good or service
represents a ballot. If more money is being spent on liquor than on milk, it is
because the demand for liquor is stronger and so more of national resources
automatically get allocated to the production of liquor.
There are, however, a number of flaws in this reasoning. Firstly, the price
system assumes that the urgency of wants of different consumers can be compared
by the use of prices because each unit of currency represents a ballot. The
willingness on the part of two individuals to spend an equal amount of money is
assumed to indicate wants of equal urgency. This premise is questionable because,
even though the urgency for milk is the same for children irrespective of whether
they are rich or poor, the amount of dollar votes that a poor family is able to cast
for milk is not the same as that which a rich family is able to cast for liquor or
status symbols.
Secondly, the free-play of market forces would be able to bring about the
desired allocation of resources through such an inter-personal comparison of the
urgency of wants expressed via dollar votes only if there existed an equal
distribution of income, wealth and bank credit in the economy. This is, however,
10
not the case. It is well-known that incomes and wealth are unequally distributed.
The financial system aggravates this further by an unequal distribution of credit.
This is but natural because the banks give credit in accordance with the borrower‟s
ability to repay which is determined by his wealth and cash flow. In the absence of
this unequal distribution of income, wealth and credit, the richer strata of society
having a share of national income and credit significantly more than in proportion
to their numerical size, would be able to divert scarce national resources, by the
sheer weight of their votes, into products which are socially less desirable.
Therefore, the resultant allocation of resources would also be socially less
desirable.
Thirdly, perfectly competitive market conditions remain an unrealized
dream. Innumerable imperfections exist in the market. These thwart the efficient
operation of market forces and lead to prices that do not reflect real costs or
benefits. Consequently prices of goods and services tend to be far above
opportunity costs and payments to resource owners tend to be far above or below
the value of their contribution to real output.
Fourthly, the aimless pursuit by a number of people to satisfy an endless
number of wants puts pressure on individual and national resources and on public
and private finances. This contributes to: a) pollution and deterioration of the
environment as a result of unnecessary production and excessive use of resources;
b) people working much harder than they should to satisfy unnecessary wants in
conformity with the culture of consumerism, the result being insufficient leisure
for pursuing some essential objectives of life like moral and intellectual uplift,
proper upbringing of children, and family and social solidarity; and c) an unhealthy
expansion in credit to both the public and the private sectors, contributing thereby
to excessive monetary and debt expansion, inflation and financial crises. Since a
high rate of expansion in both inflation and debt are both considered undesirable,
efforts are then made to reduce aggregate demand in an overall across-the-board
manner. This contributes to an economic slowdown or recession and
unemployment and adds to human misery, particularly of the lower income people
because such an across-the-board reduction affects them more severely.
No wonder Samuelson has pointed out that “Laissez faire perfect
competition could lead to starving couples; to malnourished children who grow up
to produce malnourished children; to perpetuation of Lorenz curves of great
inequality of incomes and wealth for generations or forever”. He further adds that
“Adam Smith ... had no right to assert that an Invisible Hand successfully channels
individuals who selfishly seek their own interest into promoting the „public
interest‟... Smith has proved nothing of this kind nor has any economist since
1776”.24
The question of „what to produce‟ is, hence, not possible to be answered by
market forces alone if the desire is to satisfy the essential needs of all individuals
in society and to avoid inflationary pressures. What is needed for this purpose is
some mechanism to complement the price system with a view to remove the
demand for goods and services that does not contribute meaningfully to human
well-being. How can this be done? One indispensable way is to inject greater
responsibility and discipline into the market system by means of a set of moral
values that can help realize the well-being of all individuals in society. The market,
as aptly pointed out by Schumacher, is “the institutionalization of individualism
11
and non-responsibility. Neither the buyer nor the seller is responsible for anything
but himself.”23
How then should the question be answered? It may not be possible to
answer this question without first determining the objective of the production
process. The main objective should be to produce goods and services which fulfill
the genuine needs of all human beings and, thereby, help ensure for them a
dignified existence in conformity with the maq id al-Shari’ah.25
It should not
magnify social inequalities and snobbishness by producing goods for conspicuous
consumption and creating, thereby, an unhealthy competition to keep up with the
Joneses. Accordingly, the social milieu as well as the advertising machinery needs
to be reformed with a view to reduce the desire for inessential goods as well as the
unhealthy competition for their purchase. Since the use of force is out of question
for this purpose, the only other alternative is education that is attuned to change the
tastes and preferences of the people in a way that would help fulfill the needs of
society and solve its problems.
Efficiency, therefore, needs to be defined in the light of this goal. An
economy should be termed efficient only if it is able to produce enough of the
essential goods and services that are necessary for satisfying the fundamental needs
of all its people. The allocation of resources should only then be considered as
„optimum‟. If not, then the economy is either inefficient or underdeveloped.26
An
economy should be considered as inefficient even if it is rich and highly developed
if its wealth and development have not led to the satisfaction of the fundamental
needs of its entire people. It is inefficient because of the diversion of resources to
the production of inessential goods and services carrying lesser priority on the
human needs scale.
How can an economy be enabled to satisfy the essential needs of the whole
society within the framework just stated. Considering the value attached by Islam
to individual freedom, regimentation of the economy is out of the question. The
appropriate answer would, hence, have to be found in a goal-oriented market
system operating within the framework of spiritual values, moral transformation of
society, and complementary role of the government. No hard and fast rules can be
laid down for this purpose. What everyone needs to do is ask himself before going
to the market: Is this good or service indispensable for me compared with the
essential need of someone also who may be deprived of it as a result of my
unnecessary claim on scarce resources? In addition to safeguarding individual
freedom, such a system can also be more conducive to individual imitative,
creativity and efficiency. All the Messengers of God came to this world to establish
such a system and their teachings are a part of the heritage of practically all
societies around the world to the extent to which these teachings have not been lost
or compromised.
HOW TO PRODUCE
The objective of any rational society should be to combine the factors of
production in such a proportion as to minimize wastage and costs, lighten the
burden of work and remove drudgery, and get the maximum out of minimum. The
costs to be minimized should not however be just private monetary costs; they
should also take into account social costs, costs to both the present and the future
generations, and costs due to moral degeneration, increase in crime, family and
social disintegration, and pollution of the environment. Moreover, the production
process or the form of business organization should be such that it does not
12
contribute to concentration of wealth and power in a few hands and does not lead
to the exploitation of some individuals by others.
In a secular market system, the profit maximizer is the society‟s agent to
determine how goods and services are to be produced. The price system serves as
his signaling device. Competition forces him to minimize his costs. He maximizes
his profit at the point where his marginal cost becomes equal to the price of the
product. Thus, it is argued, self-interest along with competition creates a self-
policing world where no moral values or government intervention are necessary to
ensure order and public interest.
While healthy competition is indispensable for not only minimizing costs,
but also improving quality and raising efficiency, ruthless competition, i.e.
competition which is in conflict with the objectives (maq id) of the Shari’ah, two
of the most important of which are brotherhood and cooperation, needs to be
eschewed. Ruthless competition takes root, on the one hand, in consumerism which
puts too much emphasis on the acquisition of more and more material goods and
the satisfaction of a maximum amount of wants, and, on the other hand, in
promoting the psychology of economic man. Both of these behaviour patterns tend
to foster aggression and unscrupulousness, and thereby, exact a considerable toll in
human well-being through their social and economic costs.
It is, therefore, important to inject a moral dimension, along with a positive
role of the government, into the market system to ensure that competition is
healthy and the market operates not only efficiently but also equitably. Hence,
every effort needs to be made in an Islamic economy to encourage healthy
competition with a view to reduce the costs of production and improve the quality
of the products through greater efficiency, innovation and organizational
improvements. Cut-throat competition, which leads to underselling, dumping,
falsifying of information, destruction of competitors, economic insecurity and
disregard of market externalities and social costs, needs to be curbed. This cannot
be done by relying primarily on the price mechanism. It is also necessary to
promote reform of the society and greater cooperation among producers and
consumers. A constructive role of social and economic organizations as well as
educational institutions and the government is also indispensable and cannot be
dispensed with.
The form of business organization that would be in harmony with the
Islamic ideal of socio-economic justice would normally be small and medium-
sized. This would be conducive to the equitable distribution of income and wealth
that Islam so forcefully emphasizes. It would also help develop the human
potential and enable entrepreneurs to contribute their best to the social product.
Being generally labour intensive, it would also be more suitable for countries with
a relatively large population. This idea gets support even from the general
awareness of economists that in many industries the optimum plant size for
efficient operations is much smaller than the average firm size.27
Large business
should normally be encouraged only where it is necessary. However, when such
business is established, it should be properly regulated to ensure that the interests
of consumers, equity holders, employees and other stakeholders are adequately
safeguarded. Such a mixture of a large number of small- and medium-sized units
combined with a few properly regulated large-scale businesses should help in the
realization of social justice, greater economic efficiency and more creativity.
13
The emphasis on small- and medium-scale business would imply a number
of structural changes in the organization of business and industries.28
Some of
these are: firstly, the development of technology that is conducive to the realization
of this goal; secondly, the establishment of businesses in places where people are
living and are, therefore, not obliged to migrate to large metropolitan areas away
from their families in search of work; thirdly, the cost of establishing such
businesses is reasonably low so as to be within the means of a large number of
individuals; fourthly, the creation of a spirit of cooperation among businesses and
industries so that they can solve their problems mutually and yet retain healthy
competition among them for greater efficiency; and fifthly, the banking system
should be so organized and regulated that it is not indulgent to large businesses and
difficult with small ones.
FOR WHOM TO PRODUCE
Conventional economists working under the self-imposed constraint of not
making value judgments or interpersonal comparisons have generally taken
themselves out of the theoretical-philosophical discussion of how income ought to
be distributed. The criterion of Pareto optimality provided the intellectual rationale
for the perpetuation of inequitable distribution. This is because any redistribution
would make the rich somewhat worse off even though it would make the poor
substantially better off and the net gain to society would be substantially positive.
Gross inequalities of income and wealth are repugnant to the spirit of Islam
and incompatible with its ethos of brotherhood and socio-economic justice. Such
inequalities destroy rather than foster the feelings of brotherhood that Islam wishes
to promote. This makes it imperative for Muslim societies to have a programme for
redistribution that would help make claims on resources „within the limits of
humanity‟.29
and also ensure a standard of living that is humane and respectable
and in harmony with the dignity of man inherent in his being God‟s vicegerent on
earth. A Muslim society that fails to guarantee such a humane standard is really not
worthy of the name as the Prophet rightly declared that: “He is not a true Muslim
who eats his fill when his neighbour is hungry”.30
In the Islamic system as in some other morally-oriented systems, firstly, all
dishonest means of earning and unscrupulous practices (including monopoly,
hoarding, dumping, cheating and fraud) to gain an advantage over others through
unfair means have been strictly prohibited. The honest implementation of this
prohibition should help reduce a major source of inequitable distribution of
income. Secondly, exploitation of labour has been condemned and payment of a
„just‟ wage has been required. What a just wage is would need to be determined in
the light of a number of factors, including the output of labor, the income that is
needed to support an average family, the extent of economic development of the
country relative to the size of its population, and the vocational training facilities
available to enable labour to be more efficient and able to earn the necessary wage.
Thirdly, return on financial capital without participation in the risk of business has
been prohibited. The financier should either participate in the risk through profit-
and-loss sharing or get no return. This will not only help remove one of the major
sources of inequalities of income but also reduce the tendency towards excessive
lending which tends to prevail in any system that is not based on risk-sharing.
Thirdly, Islam has made it morally incumbent on society to take care of the needs
of the poor, that is, those who are unable to take care of their needs themselves as a
result of their inability to work or their low productivity. This is an obligation in
14
the form of zakah, which is not a tax but rather a religious obligation on the part of
the rich to help the poor. All their essential needs which cannot be met by their
own effort must be met by the society out of the proceeds of zakah and sadaqat. If
these are not sufficient, a special tax should be levied for this purpose after taking
into account its impact on incentives, overall output, and development.
CONCLUSION
The secularist market system, with its undue emphasis on individual self-
interest and disregard for the healthy role that moral values can play in reforming
individual tastes and preferences as well as social norms and attitudes, has failed to
bring about an equitable balance between unlimited wants and limited resources. It
has inadvertently put the entire burden on the price mechanism. This has tipped the
balance in favour of the rich. Critiques of the system have, therefore, rightly
indicated that the system has on the whole been highly unjust and has aggravated
the inequalities of income and wealth. Its utilitarian philosophy, combined with the
enormous power of its advertising machine and the high social status enjoyed by
conspicuous consumption, has led to a large-scale multiplication of wants, most of
them superficial and unnecessary for human well-being. Credit to both the public
and private sectors has risen excessively to satisfy this expansion in wants. This
has been the result of a built-in flaw in the interest- based financial system where
the banks do not share in the risk and have, therefore, an incentive to lend as much
as they can to maximize their profit. The acceleration of demand at a rate far
beyond the ability of the economy to supply goods and services tends to generate
inflationary pressures. Efforts are then made to reduce aggregate demand in a
value-free, across-the-board manner. This leads to recession and unemployment,
adding further to the woes of the poor.
A role for the government has now become generally recognized under the
influence of socialism, the Great Depression, economic downtowns, and financial
crises. This is undoubtedly a welcome change in capitalist thinking. However, it
has also led to a substantial rise in government spending. Without a corresponding
decrease in inessential spending elsewhere, it has led to unduly large budgetary
deficits in many countries around the world. The total world debt has consequently
risen substantially - a phenomenon which has been generally recognized as one of
the major causes of financial crises. Only social health at a deeper level can help
bring about a just economic system that is capable of satisfying the needs of all
without creating economic imbalances.
In the Islamic economic system, the primary emphasis has to be on the
difficult but indispensable moral transformation of individuals and society and the
establishment of appropriate social and economic institutions to curb inessential
spending and improve the condition of the poor. The government should also play
an active and constructive role but depend more on the moral reform of society and
the development of appropriate social and economic institutions rather than its
coercive power which should be used only to the extent to which it is necessary.
The government machinery should not be allowed to degenerate into despotism
and to perpetuate injustice in the same manner as blind market forces do.
The replacement of wants by needs in the private sector and rationalization
of government budgets along with application of the means test in government
welfare spending should help substantially reduce the imbalances and the rise in
15
debt that has been created by the propagation of infinite wants and indiscriminate
government spending. The greater the need fulfillment of the poor and the higher
the decline in inequalities, the more effective should be the impact on efficiency
and output as well as brotherhood and social solidarity. This should help reduce the
gulf between the rich and the poor and, thereby, help extinguish the flames of
social tensions and conflict.
With wealth being considered only a means rather than an end and with
lesser emphasis being put on worldly possessions and conspicuous consumption,
more leisure should become available to the operators in the economy for devoting
to indispensable social and spiritual pursuits, proper upbringing of children, and
social solidarity. This should help restore to life the richness of its meaning, and to
human beings the dignity they deserve as vicegerents of the Creator Who is
Infinitely Wise and Merciful.
The Muslim world, however, is still in the grip of the conventional system
and is, besides, suffering from a number of maladies as a result of centuries of
decline and lack of proper Islamic education. Reform movements are, however,
trying to bring about a change, and authoritarian regimes which serve as the
backbone of the prevailing system are also gradually collapsing. Let us, therefore,
hope that the Muslim world will be able to reform itself and become able to
provide the right kind of model to the rest of the world.
16
FOOTNOTES
1. The Economist, “Onwards and Upwards: Why is the Modern View of Progress so
Improvised?”, 19 December,2009, pp. 35-38.
2. See Edwin A. Burtt, The Metaphysical Foundations of Modern Science (Garden
City, New York, Doubleday, 1955.
3. Bertrand Russel, The Impact of Science on Society (New York: Simon and
Schuster, 1953), p. 6.
4. Jacques Barzun, Darwin, Marx,, Wagner (New York: Doubleday, 1950) p. 87.
See also the article on Psychology, in the Encyclopedia of Philosophy which
says, “In the long reductive process man first had lost his soul, then his mind,
then his consciousness and finally even his body, which was reduced to a
permanent possibility of neutralized sensations” (New York: Macmillan and the
Free Press, 1967), vol. VII, p. 27.
5. Barzun, 1950, op. cit., p. 92.
6. George A. Miller, Psychology: The Science of Mental Life (New York: Harper &
Row, 1962), pp. 230-31.
The following passage in which Veblen ridicules the hedonistic concept of man
may be of interest to the reader: “The hedonistic conception of man is that a
lightning calculator of pleasures and pains, who oscillates like a homogenous
globule of desire of happiness under the impulse of stimuli that shift him about
the area. He has neither antecedent nor consequent. He is an isolated, definitive
human datum, in stable equilibrium except for the buffets of the impinging
forces that displace him in one direction or another. Self-imposed in elemental
space he spins symmetrically about his own spiritual axis until the parallelogram
of forces bears down upon him whereat he follows the line of the resultant, when
the force of the impact is spent, he comes to rest a self-contained globule of
desire as before”. (Thorstein Veblen, The Place of Science in Modern
Civilization, New York: B.W. Huebsch, 1919), pp.73-4
7. Jevons, W. S. The Theory of Political Economy (Reprint of the 1871 edition,
New York: A. M. Kelly, 1965).
8. 8 See, Milton Friedman, Capitalism and Freedom (Chicago: The University of
Chicago Press, 1972), p. 133.
9. Adam Smith, “Invisible Hand
” in L.S. Stepelevich, ed., The Capitalist Reader (New
York: Arlington House Publishers, 1977), p. 20. See also, Wilhelm Roepke,
“Ordered Anarchy”, ibid., p. 32.
10. For a clear presentation of the concept of Tawhid and its implications for the
Islamic way of life, see, M. N. Siddiqi, “Taw id, the Concept and the Process”
in K. Ahmad and Z.I. Ansari, Islamic Perspectives (Leicester, U.K.: The Islamic
Foundation,1979), pp. 17-33. See also, Bilal Philips. The Fundamentals of
Tawheed: Islamic Monotheism (Birmingham, UK: Al-Hidayah Publishing,
2004).
11. See the Qur‟anic exegesis by al-Qurtubi (1952), Al-Jami‘li Ahkam al-Qur’an
(Beirut: Dar al-Kitab a-„Arabi), Vol. 1, p. 138.
12. “And believe in God and His Prophet, and spend of that in which He has made
you a trustee” (al-Qur’an, 57:7).
13. “Do not eat up your wealth among yourselves wrongfully nor offer it to officials
with the objective of eating up w r o n g f u l l y and intentionally the wealth of
others” (al-Qur’an, 2:188).
17
14. And in their wealth is a known right for the needy who asks and the deprived”
(al-Qur‟an, 70:24).
“And seek, with the wealth that God has given you, the
abode of the Hereafter, but do not forget your share in this world. And do good
(to others) as God has done good to you, And spread not mischief for God does
not like those who do mischief (al-Qur’an, 28:77).
15. The Qur‟an exhorts:
“Seek to excel each other in all that is good
” (2:148). The
Holy Prophet stressed “Do not despise each other, do not turn your back toward
each other, and do not vie with each other [in worldly things) but be like
brothers, creatures of the One God” (Sahih Muslim, Cairo: „Isa al-Babi al-
Halabi, 1955, vol. 4, p. 1986: 31).
16. „Ali al-Tantawi and Naji al-Tantawi, Akhbaru ‘Umar (Damascus: Dar al-Fikr,
1959), p. 268.
17. Sahih Muslim (1955), vol. 4, p. 1996:56, Kitab al-Birr wa al-Silah wa al-Adab, Bab
Tahrim al-Zulm, from Jabir ibn „Abdallah. The Prophet, peace and blessings of God
be on him, has used the word zulumat in this hadith. Zulumat is the plural of zulmah
or darkness, and signifies several layers of darkness, leading ultimately to „pitch‟ or
„absolute‟ darkness, as is also evident in the Qur‟anic verse, 24:40.
18. Sahib Muslim op. cit. vol. 4, p. 1987: 34.
19. Sahih al-Bukhari (Cairo: Muhammad „Ali Subayhi, n.d.), vol. 8, p. 15.
20. R. H. Tawney, The Acquisitive Society (New York: Harcourt Bran, 1948), p.
38.
21. These figures were retrieved on 24 May 2011 from the „world debt clock” website
(http://ca.gdc.s3.amazonaws.com/index.html).
22. See, Bruno S. Frey and Alois Stutzer, “What can Economics Learn from Happiness
Research?” in Journal of Economic Literature (June, 2002), p.403. The literature on
the determinants of human well-being has been growing rapidly. For a survey of this
literature, see David G. Myers, The Pursuit of Happiness: Who is Happy and Why?
(New York: Avon, 1993).
23. See Samuelson, Economics (New York: McGraw Hill, 11th
ed, 1980, p. 591, p.
591.
24. E. F. Schumacher, Small is Beautiful (London: Blond and Briggs, 1973), p.40.
25. For some further light on this subject in the light of the maqasid al-Shari’ah as
developed by al-Ghazali and al-Shatibi, see Anas Zarqa “Islamic Economics: An
Approach to Human Welfare” in K. Ahmad, ed., Studies in Islamic Economics
(Leicester, U.K.:The Islamic Foundation, 1980), pp.13-17.See also, M. Umer
Chapra, The Islamic Vision of Development in the light of Maq id al-Shari’ah
(Jeddah: Islamic Research and Training Institute/Islamic Development Bank,
2008).
26. There are a number of western scholars who have expressed the same view.
Schumacher, for example, states: “An industrial system which uses 40 per cent of
world‟s primary resources to supply less than 6 % of the world
‟s population could
be called efficient only if it obtained strikingly successful results in terms of
human happiness, well-being culture, peace and harmony”. Schumacher, op.
cit., p. 109.
27. Robert L. Heilbroner, et. al., In the name of Profit (New York: Warner, 1973),
p. 209.
28. In the writing of this section, the author has benefitted from Schumacher, op.
cit., p. 163.