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Topic 4
ALLOCATION OF RESOURCES IN ISLAMIC ECONOMIC SYSTEM
Objectives:
This chapter aims to cover the following topics:
• Importance of resources allocation, the role and importance of markets; the
structure of market in Islam; the ‘Rules of Game’ governing supply and demand;
the role and importance of state; the institution of al-Hisbah, functions in an
Islamic Economic System.
• Normative and technical aspects of resource allocation; consumption and
production in Islam; Micro aspects; assumptions and normative framework of
analysis; technical analysis of production and consumption.
• Goals and principles of distribution in Islam; Types/categories of distribution in
economics; equity, equality and justice; provision of basic needs and elimination
of poverty.
• Preproduction/ initial distribution; concepts of Khilafah and Amanah and the
ownership of natural resources – argument for public and private ownership.
• Postproduction distribution; returns to factors of production; arguments on
minimum wage rate and minimum standard of living.
• Redistribution; rationale, positive and preventive measures; Zakat, Waqf, Fara’id
and Sadaqah.
Further readings:
Zarqa, Muhammad Anas al-, 1992, “A Partial Relationship in A Muslim’s Utility
Function”, in Sayyid Tahir, Aidit Ghazali and Syed Omar Syed Agil, Readings in
Microeconomics: An Islamic Perspective, Longman Malaysia, Selangor, Malaysia, pp.
105-112.
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SCARCITY AND CHOICE
In pure economic terms what people require are called needs, but people want more than
what they require, and these extra (if we may call them so) plus the needs are termed as
wants. Human beings have unlimited wants, which cannot be met with the limited
resources we have. Thus there exists a state there are more wants than can be met with,
this being that of scarcity.
Scarcity can be absolute or relative. Absolute scarcity is said to be present when there is a
shortage in absolute terms, of resources, especially non-renewable natural resources.
Relative scarcity relates people’s wants with the ability to satisfy those wants. Relative
scarcity exists because the resources available to satisfy our unlimited wants are limited.
The resources that we have can be used for different alternatives and therefore there is a
need to make choices.
In Islam, all the resources are from Allah and are subject to man (the concept of
vicegerency). Allah has promised sustenance for all His creation. Islam does not support
the concept of absolute scarcity as it presumes that Allah will provide alternatives to
replenish the usage of natural resources (for example gases instead of coal) Relative
scarcity is accepted in Islam since a particular resource may be present in limited
amounts.
RESOURCE ALLOCATION
The state of scarcity demands that among the alternatives we have of spending our
resources we choose the best alternative. While choosing the best we have to sacrifice
those which ranked below and had to be forgone. The second best choice, which we
sacrifice, is called Opportunity cost. Man being a rational animal tries to ensure that the
opportunity cost is always lower than the choice made.
While allocating resources choices have to be made, which are made to ensure that only
the best alternative is chosen. Choices have to be made in all areas of economics:
Consumption (what to produce), Production (how to produce) and Distribution (for
whom to produce).
Ž Resource allocation has two aspects the normative and the technical aspect.
- Normative aspect:
The normative describes the ‘what ought to be’ and hence deals with the ‘rules of the
game’ according to which technical decisions are made. The answers to how things ought
to be, are derived from a vision 1 , which sets the boundaries and parameters that will limit
or guide the decision making process.
1
Topic one discussed how vision sets the normative aspect of anything, which include the concepts, values,
rules and law that explain man, nature, scarcity, production and consumption (rules governing these) as
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Under the Islamic economic system the normative framework is derived from the Quran
and the Sunnah which limits and guides the choices that we make. Among the important
concepts that form the normative framework are the concepts of halal and haram.
In Islam all things which are not considered unlawful (haram) are considered lawful
(halal), and should be used and not refrained from. As Allah says in the Quran:
O you who believe! Make not unlawful the Taiyibat(all that is good as regards of foods,
things, deeds, beliefs, persons etc.) which Allah has made lawful to you, and transgress
not. Verily, Allah does not like the transgressors. (Al-Maidah: 87)
Thus there is a order from Allah to use the good things that He has provided, and at the
same time not transgress the boundaries that have been set for man. In the following
Quranic ayah, Allah specifically relating to food and clothes, orders man not to deny
himself the comforts and good things that have been made for him.
Say (O Muhammad saw): “Who has forbidden the adoration with clothes given by Allah,
which He has produced for His slaves, and At-Taiyibat (all kinds of halal things) of
food?” Say: “They are, in the life of this world, for those who believe, (and) exclusively
for them (believers) on the Day of Resurrection (the disbelievers will not share them).”
Thus We explain the Ayat (Islamic Laws) in detail for people who have knowledge (AlAraf:32)
Thus we see that Islam enjoins people to use the good things that Allah has provided for
them, and at the same time sets the condition that those who believe will continue to get
the good things in the hereafter, where the disbelievers will denied these things. A
Muslim is ordered to use the things in such a way that he doesn’t transgress the
boundaries that Allah has set (which would include the rules regarding halal and haram,
and the obligatory duties like giving of Zakat etc.)
Due to the relative scarcity, there is a need to make choices about the utilization of these
limited resources. The choices made in an Islamic Economic System will be different
from those made in a conventional economic system, because under the Islamic rules of
game the decision will be guided by the Islamic worldview.
Choices in Islamic Economic System should result in economic activity following under
the remit of Fard 2 , Sunnah 3 or Mubah 4 – they should not embrace the Makruh 5 and must
not include the Haram 6 .
well as the criteria that will influence choices made. This is the framework within which the technical
decisions are made
2
Fard: that MUST be done
3
Sunnah: that which the Prophet did and hence is highly recommended, though not a MUST
4
Mubah: that if not done will not lead to sin, but if done will lead to reward.
5
Makruh: that if done will not lead to sin, but if not done will lead to reward.
6
Haram: that if done will certainly lead to sin.
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-Technical Aspect
The technical aspect deals with the constrained decision-making within the normative
framework (one of those displaying this is the LaGrange’s function, where …optimise
subject to constrains) It works within the constrains of laws of nature and the laws/values
of the society (one example of the natural law in economics is the law of diminishing
returns).
It includes the tools and methods which seek precise solutions to constrained
optimisations (LaGrange’s application).
As Naqvi 7 says, in Islamic Economics, we have restrained decision-making and not
constrained decision-making. The difference between the two is the internal mechanism
(for instance, the Islamic consumer chooses not to consume haram items), external forces
impose constrained decision-making on.
Ž Mechanism of resource allocation
The mechanisms for resource allocation could be market signals, or plan directives. In
Islamic economic system, the market is generally preferred.
Ž Agents of decision making in an Islamic Economic system are primarily individuals.
However the government may intervene to keep the decision making by individuals so
that there is no transgression of the limits set by Islam.
Ž The Islamic rules of the game apply for the demand and supply.
These rules of game are derived from the vision. The individual is ultimately responsible
for a failure in the community’s collective effort. Although a minimum level of goodness
is clearly defined, the Muslims are urged by ethical system of Islam to go beyond the
minimum level of good.
This implies that the normative or the Shar’iah ‘rules of game’ will become the rule of
society. Thus the individual, although not necessarily a Muslim man, will be an Islamic
man in terms of his natural role.
Markets will function on basis of these rules, such as demand and supply will follow the
Shar’iah requirements, for instance, the halal to haram 8 continuum. This will ensure that
the prices determined by the market forces are just prices. The state may intervene to
correct the market imperfections (monopoly).
7
8
Ethics and Economics (1981)
What is forbidden for use had no economic value!
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Muslim Man vs. Islamic Man!
A Muslim is one who believes in Islam i.e. he accepts Islam as the way of life due to his
belief in Quran and Sunnah. An Islamic Man is one who follows the Islamic injunctions,
irrespective of whether or not he believes in the Quran and the Sunnah.
In an Islamic system, it is possible for both Muslims and non-Muslims to operate as an
agent. The non-Muslim as long as she/he chooses to accept the ‘rules of the game’ can be
a part of the Islamic system. Thus he would be an Islamic man (operating according the
rules of Islam) and not be Muslim.
Logically this can be explained using the following example:
In an Islamic economic system there is no avenue for trading in Haram goods, e.g. pork,
thus a trader who may not be a Muslim, would not be dealing in such goods, thus dealing
Islamically in this respect!
Ž Market Structure
While markets are preferred, laissez-faire may not be the Islamic Preference. Both
individuals and the state have the assigned roles. Monzer Kahf has termed the market
structure in an Islamic economy to be characterised by two components i.e. freedom and
cooperation. Freedom in this sense implies that the individual in an Islamic Economic
System bears ultimate responsibility for the collective actions of the society. When
making choices, i.e. choosing the ‘Khayr’ or that which is good will be determined by
Islamic standards. Thus the decision making process would entail that the decision maker
must have correct knowledge and action, i.e. the iman (faith) and amal (action) must
complement each other and there should be no conflict between them. Under Islamic
economic system, the individual economic freedom may be limited (including pricing of
goods and services).
Thus Islamic rules of game restrict as well as increase the freedom of an individual. The
rulings imply that there will be no barriers to entry or exit in the market, and market
information will be available to all those who seek it. This will also eliminate the
monopolistic elements in the market. The suppliers will not be forced to sell at a certain
price. Also, the deviations from the ethical standards will be punished.
Cooperation here means what Quran has put in beautiful words: “Wa ta’awunu ala birr
wa taqwa”. Thus freedom is expressed more in cooperation than in competition. The free
cooperation here is not akin to laissez faire. This is because Laissez faire has three
elements which conflict with the Islamic worldview viz: Secular individualism9 , rational
utility maximization 10 and lack of government control. 11
9
There is an inherent conflict between Secularism and Islam. Refer back to Topic 1
Rational Utility Maximization here differs from that of Islamic rules of game. This is because rational
decision here refers only to the material gains, confined to this world. If rational decision making were to
include the choices of the hereafter, only then would the concept be acceptable.
10
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Since it requires conscious effort on the part of the individuals to benefit mankind,
benefits to mankind cannot be left to chance as in laissez-faire. Therefore, positive
actions need to be taken to ensure that there is cooperation. In Islam, the concept of Fard
Kifayah and establishment of permanent institution for redistribution of income and
wealth are means to ensure cooperation. The state has a major role to play in correcting
the failure of the functioning of the free enterprise system.
Ž Role of State
The state will play a positive and complementary role to ensure that the ‘rules of game’
prevail, whereas in conventional economics, the state would be governed by what society
wants. The state will create an environment for the Islamic man – political, economical,
social, spiritual, moral and legal. This will make the realisation of the Islamic economic
system closer.
The state will also act as a regulator ( and a planner and supervisor when needed), in
order the ensure adl (justice) and ihsan( benevolence). It is state’s responsibility to ensure
minimum standards of living and to reduce concentration of wealth through Zakat and
Fara’id. It must also ensure that all individuals will have equal access to publicly shared
property—waterways, herbage etc.
AL-HISBAH
The word Hisbah is derived from the root word HSB, which literally means arithmetic
problem, or reward. Technically, the Hisbah is an institution which promotes the proper
and forbids the improper, ‘amr bil ma’aruf wa nahi ‘anil munkar’. The Quran declares
that,
“… and the believing men and women, are friends (in charge of) one of the other; they
bid to honour (ma’ruf) and forbid dishonour (munkar)…” (At-Tawbah :71)
This task is therefore a duty incumbent upon every Muslim, to the extent of his ability.
However, scholars like Ibn Taymiyah, who have written extensively on the institution of
al-Hisbah, stress the collective nature of responsibility, and advocate that Islamic state is
charged with the responsibility of making arrangements to oversee the implementation of
this institution.
The institution of al-Hisbah discharges the obligations relating to divine rights (haq
Allah) and those relating to the rights of the creation (haq al-‘ibad).
Under the first category, the muhtasib (who is the head of the institution of al-Hisbah,,
and must be knowledgeable about the Shar’iah) is responsible for ensuring that the
community has facilities for performance of Ibadah, the most important of which is Salat.
11
Ideal capitalism works without government control. Unfortunately, Adam Smith’s invisible hand doesn’t
correct all the problems, and therefore government has to take an active role in the proper functioning of
the market.
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This includes functions such as the maintenance of mosques, appointment and
supervision of muezzins and imams, and punishing non-observance of Shar’iah
obligations in the society.
The implication of the second category, the muhtasib is concerned with the
implementation of adl in the society. Thus, in direct contrast to laissez-faire economy, the
state should be actively involved in managing the economy, bringing about equilibrium
through corrective action. Numerous economic functions traditionally fulfilled by alHisbah are as follows:
1. Checking of weights and measures
Although correct weight and measures appears to relatively insignificant in
comparison with other problems faced by an economy, the Quran lay a great
emphasis on it: “Fill up the measure, and be not cheaters, and weight with straight
balance, and diminish not the goods of the people…” (al-Shura :181-183). This is
because widespread fraud in weights and measures reflect a deep-rooted malaise in
society and spells the beginning of the end of ethics in the economy.
2. Ensuring availability of essential goods and services.
According to Ibn Taymiyah, the state through the institution of al-Hisbah, must
ensure that no resources are allocated to the production of goods and services defined
as haram by the Shar’iah, including activities which harm human beings, animals and
plants (there should be no harm or reciprocating of harm – Hadith); and that there is
an adequate supply of essential goods, such as staple food, basic clothing, and
services such as the provision of basic housing. Since it is the state’s responsibility to
ensure provision of basic necessities, the state can achieve this either through active
encouragement, or through legislation, if this fails. However modern scholars such as
Umer Chapra have suggested that a filter and a motivating mechanism must exist for
channelling the use of resources into the production of goods and services which
serves the interest of the society the most.
3. Correcting the market imperfections or ensuring just prices
The idea of a just price (one determined by the free market forces of demand and
supply without manipulation) is integral to the Islamic concept of a market.
According to the Sunnah of the Holy Prophet (saw) price controls or ta’sir may not be
resorted to situation in which there are no obstructions to the determination of the free
market prices. Price ceilings are banned by majority of scholars, because it is unjust
to deprive sellers of their legitimate due. However, when the price level is being
manipulated, corrective agreement that the prices must be controlled in the interests
of the public where there is a monopoly (especially in foodstuff), and barriers have
been erected to the entry of new firms, where existing suppliers have formed a
collusion. The Prophet’s (saw) prohibition of Ihtikar (buying up food which people
need with the intention of pulling up the price) means that the state is allowed to
compel suppliers to sell their stocks for a fair value when they are urgently needed.
Other forms of market manipulation which may require state intervention are:
intercepting goods before they reach the market, withholding supplies, withholding
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market information (This can be inferred from the Prophet’s (saw) forbidding people
to go out to meet the caravans . This is especially important in stock market),
monophony buying, proliferation of middlemen who do not add value to the goods
being sold. The state may also need to protect the interests of the suppliers against
dumping of goods at low prices, as this may lead to technological obsolescence and
unemployment.
4. Checking illegal and fraudulent practices
The state needs to ensure that the commercial laws are being adhered to. Illegal
contract, such as those involving Riba, and speculative sale (bay al-gharar), bidding
up prices when there is no intention of purchase (najash) must be prohibited. Other
permissible transactions, such as cash, barter, credit transactions, and advance
payments (bai’ al salam), or loans must be free from Riba. The muhtasib could
compel the debtors to pay their dents on due dates if they had means to do so, or to
obtain extension from the creditor. If the debtor was unable to discharge his debt, the
muhtasib could arrange help from Zakat fund. The incidence of fraudulent practices
may decline when suppliers appreciate that production and earning profit is a means
to an end, not the end in itself. It has been suggested that the traditional role of
checking fraudulent practices (concealment of defects and misrepresentation of
goods) may be extended to the regulation of the role of advertisement in a modern
economy.
5. Public Utilities
Historically, the muhtasib could also compel the rich to contribute finances for
delivery of municipal services such as water supply, garbage removal, street lighting
and so on. Access to public places such as parks, roads and grazing grouds has to be
open to all, and cannot be made exclusively prerogative of any particular group or
person. In addition, in order to protect the interests of the community, the
architectural design of the buildings and pollution of the environment were matters
the muhtasib would look into.
6. Ensuring fair wages
The Quran suggests that some people are created in charge of others, as a trial of
rights has obligations of the parties. In terms of the employer-employee relationships,
this implies that the employee has a responsibility to work efficiently to earn his due,
(“God loves for one of you, of you do a job perfectly.” Al-hadith”), the employer is
charged with paying the requisite wages punctually. The Prophet (saw) said, “Thus
said God, the Great the Glorious: ‘There are three whom I will hate on the day of
resurrection – a man to whom I have been generous, and has betrayed my generosity,
a man who sells of a free man into slavery and lives of the price, and a man who hires
another at stipulated wage, and then will not give him his due.’ ‘Pay your hired
worker his wage before the sweat dries on him.’”(hadith) One of the functions of the
muhtasib was to check beggary, although basic necessities were provided to those
who were unable to earn a living. The state may intervene to ensure that the working
environment and the duty hours are reasonable and to ensure that sufficient wages are
earned to guarantee the basic necessities of life. It has been suggested that the present
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day equivalent of the muhtasib may intervene in the negotiations between trade
unions and employee federations.
7. Checking corruption
The Prophet (saw) as the first muhtasib in Islamic History took strict account of all
revenue collected for the state and dealt severely with those who attempted to defraud
the state. Thus the present day equivalent of the muhtasib would be entrusted with
ensuring efficiency in the public sector, including check malpractice in the
government offices, such a bribery and misappropriation of public funds.
It may not be practical in the complex economic environment in which we live today to
have one institution performing all the functions that al-Hisbah has historically
performed. It would be extremely difficult for an organisation to look at each of the
matters. In today’s society the job of al-Hisbah may be divided into subtasks and
organisations set up to deal with each particular job respectively. We can see examples of
such specific jobs being done by several institutions for example the Monopolies and
Mergers Commission in the UK, the Ministry of Domestic Trade and Consumer Affairs
in Malaysia. Every state should set up institution to deal with the issues that were
previously dealt by al-Hisbah.
A: CONSUMPTION
In this section we will try to discuss the normative and the positive aspects of
consumption.
Ž The Normative Aspect of consumption:
The normative aspect of consumption is derived from the vision derived from Quran and
Sunnah, as is all that forms part of Islamic system. It describes the expected behavioural
norms of individuals so that it is in line with the Shar’iah rulings.
Islam recognises that the nature of man is both greedy as well as caring; and has two
aspects: the Physical and the Spiritual. Man can choose to be guided or not to be guided.
The individuality of a person is given importance but at the same time it is recognised
that he is a part of the society at large and hence responsible not only for his individual
acts but also of the collective acts of the society in which he is living.
Rizq or Godly sustenance is mentioned in Quran 120 times in the Quran. This rizq is
provided by Allah (God) is Halal (good), Tayibat (pure: mentioned 18 times in the
Quran). Rizq is provided by Allah but man must work to obtain rizq. The hierarchy of
needs must be followed in obtaining rizq: daruriyat, hajiyat, tahsiniyat, and tarafiyyat.
Those certain goods, which are prohibited, must be kept away from, at all times.
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Consumption is means to achieve falah. The reward for consumption depends upon
intention, knowledge and action. The principles of moderation must be adhered to. No
extravagance or spending on wrongful items is allowed. Tabthir is profligacy or wasting
resources on unnecessary things. Israf is excessive spending on something which is
Halal 12 . Man must consume enough goods to lead a good and healthy life “…eat freely
from it where you desire…” (Al-Baqarah:34) “O mankind eat of the lawful and
wholesome of the earth…” (Al-Baqarah:168)
The following are important in this regard:
- Basic needs must be satisfied
- One must not be dependent on others for the fulfilment of one’s own needs as
well as the needs of one’s family.
- Needs are not fixed for everyone and every place for every time.
Once we are independent we must sacrifice part of our own consumption for the sake of
others. Zakah and sadaqah must be paid ‘… expend of that which God has provided for
you…’ (Yasin :47)
The aim of Islamic consumer is to maximise consumption, subject to constrains
mentioned above.
Ž Technical Aspect of Consumption:
Due to limited resources (wealth and income), and the possibility of using out resource
on alternative uses, consumers have to choose. The choice must be made within the
framework provided by the normative aspect of consumption, taking into account the
behavioural norms. For instance, the Islamic consumer when weighing the costs and
benefits will consider a trade-off between moral and material reward.
There is a need to quantify the qualitative factors, such as moral rewards.
There is much debate on the issue of whether conventional tools can be used. Some
Islamic scholars have opined that given that modern tools are based on the 17th Century
Jeremy Bethem’s principle of utilitarianism, we should not use conventional tools based
on utility (which is based on hedonism – pain/pleasure). Other scholars have no basic
objection to the use of utility functions, as long as utility is redefined to take account of
moral utility. In Islamic economics, it should be possible to make ordinal preferences
(non-quantitative rankings) if not cardinal preferences (which tries to quantify utility in
units called utils) for production, consumption and distribution, but this must be based on
moral system.
Anas Zarqa, is one of the Islamic economists who has tried to quantify the benefits
received by an Islamic consumer, in what is known as “A partial approach to utility
12
“O Children of Adam! Take your adornment (by wearing your clothes), while praying and going round
(the tawaf of) the Kabah, and eat and drink but waste not by extravagance, certainly He (Allah) likes not
Al-Musrifun (those who waste by extravagance). [Quran 7:31]
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maximization.” 13 His article, although having serious shortcomings, is an attempt to
depict Islamic norms in a graphical analysis.
A PARTIAL APPROACH TO UTILITY MAXIMIZATION
Ž Elements of an Islamic approach to individual economic behaviour
An individual’s satisfaction is a function of many variables, one of which is the amount
of goods and services consumed. Due to the extended time horizon concept, the amount
of goods and services we consume, or the kinds of goods and services we consume may
be inherently in conflict with the rewards a person can get in the hereafter. Thus to guide
the consumer behaviour numerous injunctions, rituals, guidance, rewards and threats are
designed.
Following the Shar’iah rulings has two effects:
a) It shifts an individual’s utility function so as to coincide with his true welfare
function; and ;
b) It makes the individual’s utility an increasing function of social welfare. (Islam
clearly recognises important divergences between the individual’s and the social
welfare function).
Ž Introduction to a Partial Relationship in a Muslim’s utility function
One fundamental difference between Homo economicus and Homo Islamicus is that the
utility function of the latter has a new variable in it, namely, the reward or penalty in the
hereafter.
Here we will study the relationship between this reward/penalty variable and another
important economic variable that effects utility: total consumption of the individual . The
discussion here is based on clear-cut teachings of the two primary sources of Islam – the
Quran and the Sunnah.
Ž Possible Hypothesis
One’s reward in the hereafter (R) is dependent on one’s belief, and the ‘balance’ of all
one’s intentions and actions in this life. We are only studying the partial relationship
between (R) and (C) to be negatively related, by, say a simple transformation curve such
as that depicted in the figure below. If you want God’s pleasure and reward, you should
give up some consumption in return. The more you give up, the higher the reward. This
view may be found in some non-Islamic religious doctrines, but is a far cry from the
Islamic view of the matter.
13
Al-Zarqa’, Muhammad Anas, “A partial relationship in a Muslim’s utility function.” Pp.105-111 (Chap
8). This article must be read with the understanding that there are significant problems in the construction
of the graphs and the way concepts have been placed on the x –axis and y-axis.
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A Partial Relationship in a Muslim’s Utility Function
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Since Islam strikes a balance between body and soul it may be concluded that a Muslim
maximises utility subject to constrains in addition to the usual income constrains.
However, this view is not a correct view of the matter for several reasons, most
importantly because it violates the principle that (R) should be the ultimate goal of a
Muslim:
“Seek amidst that which God has given thee, the last abode, and forget not thy portion of
present life.” – Holy Quran
It is also not correct to say that Homo Islamicus maximises (R), subject to constrains in
the present life, because the religious injunctions are not constrains but as a matter of fact
are guideposts that tend to increase utility and welfare in this life.
When a car manufacturer tells one to change the oil after a fixed number of kilometres, is
it proper to view this as a ‘constrain’ on one’s behaviour?
Ž Partial Relationship in a Muslim’s Utility Function
We may look at the relationship between the levels of consumption and their effects in
the reward/penalty in the hereafter, through the model presented henceforth.
Levels of consumption:
Vertical lines, LL’, NN’, SS’, and MM’ in the figure below indicate the various levels of
consumption. These levels are closely linked to the concepts of the five necessities
(daruurriyat), Conveniences (Hajiyat) and refinements (tahsiniyat).
No one could exist to the left of line LL’ as it is the minimum necessary to sustain life.
Line NN’ designates a consumption level required to preserve the ‘Necessities’ other than
life.
The line SS’ may be dubbed the ‘sufficiency threshold’. It delineates a consumption level
which covers important ‘conveniences’ that is sufficient to make a person:
i)
Unlikely to depend on others financially, or better still, able to offer some help
to others. (We may note that even for making pilgrimage, one is not allowed
to borrow nor accept a gift for that purpose if, in one’s judgement, it places
one under an unwanted moral obligation to the donor.)
ii)
Able to remain with one’s lot, hence thankful to God and not envious of
others who are more prosperous materially. Imam Ibn al-Jawzi, for instance
repeatedly emphasised that the view that a Muslim should try to earn an
income that would support this level of material and psychological
sufficiency.
iii)
Able to provide a ‘sufficiency threshold’ for one’s dependents. These include
one’s wife and children, poor parents, and other relatives specified for this
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purpose. It is considered flagrant violation to neglect such duties even when
one is very much occupied with spiritual worship or public Islamic affairs.
Finally, MM’ may be called the ‘prodigality frontier’ as it demarcates a consumption
level that corresponds to maximum permissible ‘refinements’. Beyond it, to the right,
one is indulging in excessive ‘refinements’, the indulgence of which is disapproved
by Islam.
It is clear from the foregoing discussions that the consumption levels, represented by
the vertical lines LL’, NN’, SS’ are not identical for all individuals but depend, inter
alia, on one’s family obligations, health, psychology and self-control. But for each
individual, these levels are rather well-defined.
The choice set facing the consumer
An individual consumer may settle at any point on the heavy lines of the figure, if his
income permits him to do so. But the first striking feature of the figure is that (R) is
not a single valued function of (C), i.e. reward is not uniquely determined by
consumption. Thus consuming at level (C), could result in either zero reward, i.e.
staying on the x-axis or punishment at P4, or reward at R’ or R”. One should not
conclude, however, that R is independent of C, for in several parts of the consumption
choice set, R depends on C – positively in segment F1C3 and negatively in segment
R7C5 and in the curves above R3R7.
The levels of Reward
Reward or punishment in the hereafter in a continuum, but it will facilitate the
discussion to distinguish five levels of reward in relation to consumption, as will be
deliberated in the following sections.
The first three levels are zero reward, the great reward, R’ or Paradise; and the
severe punishment P’ or hell.
What places an individual at zero, R’ or P’ is a combination of two things – belief
and ‘intentions’ (niyah) as regards consumption, and his consumption behaviour. The
following explanation ensues:
Zero Reward: This corresponds to the line segment C1C5. This is where an absent
minded believer will be. He is consuming legitimate (halal) things but has no
conscious intentions regarding his consumption. He receives no reward for his
consumption, neither is he punished since he is not consuming forbidden (haram)
things. But if he exceeds C5, he will be committing a specific and punishable
violation (prodigality).
Great Reward: This corresponds to line segment R1R7. To attain this level, one
need not give up consumption, but he must consciously abdicate his will to God, i.e.;
submit his will and be a Muslim. This is a general Islamic concept which, in terms of
consumption means:
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i)
ii)
iii)
One is quite aware that he is consuming by God’s leave, and he is ready to
refrain from consuming anything that God prophibits. The prayer
(supplications) that the Prophet (saw) recommends for recitation by a Muslim
when consuming or using various things, are meant, among other things, to
create and reinforce this concept in a Muslim’s psyche. Such is the solid basis
on which to build ‘gratefulness to Allah (swt)’ which has many individual and
social consequences.
One is grateful to God and demonstrates this by changing the composition of
his consumption through substituting halal for haram things; and
Sharing some of his consumption with others to the extent that is required
(made obligatory) by Islam, e.g. by paying Zakah. This sharing is required
only if the individual is able to exceed the sufficiency threshold SS’.
Severe Punishment: This corresponds to line segment P1P7. Individuals on this
segment are there not because they are consuming significantly more than in the
sense explained earlier. They may happen to be consuming halal things anyway. But
they are not doing so because God permits such things, nor would they mind
consuming something that has been categorised as haram.
B: PRODUCTION
In this section we attempt to develop and apply our discussion on allocation of
resources to production i.e. to see how the individual firm in an Islamic Economic
System will choose ‘how to produce’. Please refer to any textbook on theory of the
firm, utilising its Total Revenue-Total Cost graph for the following analysis.
Ž Normative Aspects of Production
The normative aspect of resource allocation concerned about production shows how
Islam views the producer, the firm (or Multinational Corporation). The means of
production become a way to achieve falah, is an “amanah” to be utilised efficiently,
and as an important tool for individual development and preservation.
But seek, with that (wealth) which Allah has bestowed on you, the home of the
Hereafter, and forget not your portion of legal enjoyment in this world, and do good
as Allah has been good to you, and seek not mischief in the land. Verily, Allah likes
not the Mufsidun (those who commit great crimes and sins, oppressors, tyrants,
mischief makers, corrupts) Quran 28:77
Here man’s behaviour in relation to production must be within limits set by the
Shar’iah. The normative aspect also includes framework of the organisation and
management principles.
Ghazali’s hierarchy of needs (Darruriyat or basic needs, Hajiyat or complements,
Tahsiniyat or refineries and Tarafiyyat or luxuries; determine resource allocation.
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This implies that the prohibited goods and services cannot be produced, more
resources will be diverted to the production of basic necessities and basic comforts;
and resources will be diverted away from production of luxuries.
Efficient production techniques (no extravagance) will be used since the idea of using
resources efficiently is given in the Sunnah. For instance non-productive intermediary
activities are prohibited, goods and services, which add no value, may not be
produced. E.g. Alcohol and gambling. In an Islamic system, speculation is restricted,
and interest as a guaranteed source of income is prohibited (Riba being made haram).
Privately owned land not in use would be usurped by the state and public resources
may be given under private ownership in accordance with their capacity of utilization.
There must be justice in production – just to self, just to others – remuneration of
factors of production, in terms of rate of return. The organisation structure must be
within the bounds of Shar’iah. Decision making in the organisation must follow
Shar’iah rules.
Ž Technical Aspects of Production (Using Total Revenue-Cost Graphs)
The technical aspect deals with how choices are made: choice of production,
techniques and choices of management styles adopted.
In the conventional market the payment for factors of production is rent on land,
wages on labour, interest on capital and and profit for enterprise. Under the Islamic
system, the payment on land can be in terms of rent, share or crop14 , wages for
labour, profit share on capital 15 , and profit share for enterprise as well. The return on
14
The return on land can be muzaraah (that means that the person owns land and also provides seed and as
a result gets rent and share of crop. This is allowed in Islam. Another alternative not allowed is mukharabah
in which the owner of land own the land but does not put something else and gets share of crop, due to the
inherent injustice to the person working on the land, it is not allowed in Islamic system.
15
Riba being haram does not allow interest in an Islamic Economic System
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physical labour is rent. It is more difficult to arrive at the profit maximising output
under Islamic Economics than under conventional economics as the return on capital
is also uncertain. 16
Factors of Production
Land
Labour
Capital
Enterprise
Islamic Economics
Rent, Share or Crop
Wages
Profit Share
Profit Share
Conventional Economics
Rent
Wages
Interest
Profit
Minimum wage policy is an ideological issue, not purely an economic issue. It
usually results in rising costs. In an Islamic economic system, the basic necessities
must be met, either through the implementation of a minimum wage policy or through
government subsidisation in conjunction with market forces. Flexibility will be
needed. Some recent studies have shown that minimum wage policies may result in
raising morale of workers and provide for them to work harder.
Ž Goals of a firm
The usual goal in conventional economics is to maximise profits subject to certain
constrains (where the slope of the MC curve is equal to the MR curve). However, it is
increasingly being recognised that firms also follow goals other than profit
maximisation, for instance, revenue maximisation, output or employment
maximisation, retaining a certain market share.
Maximisation of utility is the goal of the firm in an Islamic economy. Under Islamic
economics, profit maximization cannot be the ONLY goal, because the successes in
Islamic economy will take into account rewards in the hereafter due to the extended
time horizon.
The entrepreneur must comply with the dictates of ‘Adl’ or justice (which are well
defined) and ‘Ihsan’ or benevolence (which has no limits). When making production
decisions, economic rationality will be confined within the limits set by the Islamic
rules of the game.
There is no ‘best’ level of output, however a general maxim is that higher levels or
output rather than lower levels of output are desirable, as they usually result in more
employment. Satisficing depends on the goals of the firm set by itself. Efficiency
must be traded off with equality.
16
Interest trading entails a certain sure return on capital, by making interest haram Islam ensures that the
lender of money is not certain of a positive return.
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Problem Set:
1) What is the normative framework that governs the allocation of resources in
Islam?
2) Differentiate between the normative and technical aspects of producer/consumer
behaviour in Islam.
3) What are the factors of production and their returns in an Islamic economic
system?
4) The technical aspects of producer in Islam are similar to western economics.
Discuss.
5) What is Al-Hisbah? What are its main economic functions?
6) Islam prefers a market solution to resource allocation. Discuss.
7) What are the goals of distribution in Islam?
8) Islam accepts inequality in income and wealth. Discuss.
9) What are some of the distributive schemes/measures in Islam?
10) What is Zakat? Who qualify to pay and receive zakat?
11) Since everyone deserves ‘what he/she strives for’, Islam does not accept
minimum wage policy. Discuss.
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