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Humanomics
A Critique of an Interdependent Welfare Function in an Islamic
Society
Mohammad I. Ansari
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Mohammad I. Ansari, (1991),"A Critique of an Interdependent Welfare Function in an
Islamic Society", Humanomics, Vol. 7 Iss 2 pp. 71 - 81
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Humanomics Volume 7 Number 2 1991
71
A Critique of an Interdependent Welfare Function in an Islamic
Society
Mohammad I. Ansari, Alhabasca University, Alberta, Canada
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I. Introduction
The emphasis on the concept of 'economic man' for a long period of
time has led to important outcomes each of which has serious welfare
implications. First, there has been a relentless glorification of the principle of pursuit of self-interest. It is only now that all the negative spillover effects of our wealth creating and consuming activities are being
acknowledged and evaluated. Since most of these costs are costs to
society rather than to a particular individual, these costs do not play any
role in our production or consumption decisions. As a result, quality of
life has not improved as much as the recent rise in per capita real income suggests. Second, for a long time welfare has been treated as a
monotonically increasing function of the amounts of goods and services
consumed. There has been a total disregard for the fact that at a given
point in time an individual can afford only a fraction of the total amount
of goods and services available in the society. This explains at least in
part why even in the most affluent societies people are no happier today
than they were in the past. And third, although the idea of interdependent welfare is not new in economics as evidenced by relative income hypothesis which shows that present consumption and hence welfare is
also a function of one's past consumption and consumption of others
in the society, economic analysis by and large has been carried out on
the assumption of independence. Feelings like envy, jealousy, and
avarice are real and powerful and play an important role in the way
people perceive their welfare. Just because they cannot be conveniently incorporated in simple analytical model is a poor excuse for neglecting them.1
This paper defines, first, an interdependent welfare function and
shows that welfare implications of such a function in modern societies
can be quite perverse. Second, it examines the welfare foundations of
an Islamic society. This is accomplished by developing a simple model.
Such a society is shown to provide an atmosphere in which individual
action is consistent with social objectives. It also provides an effective
mechanism to control and regulate desired level of consumption by controlling and regulating human aspirations. And if all else fails, such a so-
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Humanomics Volume 7 Number 2 1991
ciety seems to provide the least cost solution to some of the socio-economic ills which may arise from a large gap between actual and desired
levels of consumption.
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II. Adaptive Aspirations and Interdependent Welfare:
In order to facilitate our analysis, we define the following. First, actual
per capita income is defined as some imputed level of income in real
terms (net of all costs), and adjusted for externalities. An individual can
either consume this income or save or both. Assuming a perfectly competitive market, prevailing interest rate is then a measure of both one's
time preference and discount rate. Thus, an act of saving brings about
exactly the same amount of satisfaction as the actual consumption (at
zero inflation rate). Hence, the entire income of an individual can be
treated as consumption. In other words, net per capita real imputed income (Y) is equal to net per capita real imputed consumption (C). Second, desired per capita consumption (C*), corresponding to desired per
capita income (Y*j, is defined as that level of consumption which if
achieved instantaneously, would bring about a point of bliss, or so the
individual thinks. In this sense, Y* is an index of individual's level of aspirations.2
This paper makes the following propositions. First, the reference
point that really matters is the desired level of consumption and not 'unlimited wants', found in economics. This reference point, although finite,
is also dynamic because it is influenced by human aspirations which
themselves are adaptive in nature. For instance, desired consumption
is influenced by the past consumption of the individual on the one hand,
and by the consumption experience of others in the society, on the
other.3 For exactly this reason, C* is asymmetric in its behaviour in that
it has a high speed of upward adjustment while showing a significant
downward rigidity. Second, it is proposed that individual welfare (W) is
a function of the ratio of actual to desired level of income (Y/Y*), with a
value range of 0 and 1. That is,
W = f(Y/Y*),
with
(1)
0 < (Y/Y*) < 1
Such a welfare function is depicted in Figure 1.
Third, following Kahneman and Tversky (1979,1982, and 1984) and
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Humanomics Volume 7 Number 2 1991
73
Thaler (1980), the value function is assumed to be asymmetric in gains
and losses. Furthermore, the loss function is steeper than the gain function, i.e., losses loom larger than the gains. In other words, dissatisfaction from not being able to afford the consumption of a given amount of
goods and services exceeds the satisfaction from being able to afford
the consumption of the same.
III. An Overview of Socio-economic Implications:
The general discontent in the present day affluent societies is perhaps
no less than a puzzle to the people living in the third world. 4 After all, the
growth in per capita income over the years has been no less than spectacular. Why then, is this discontent? First of all, the actual rise in income
as reflected in most national account statistics is misleading because
this does not reflect the enormous costs in terms of externalities which
until recently have not been taken seriously. Some of these costs are
beginning to manifest themselves in problems like greenhouse effects,
air and water pollution etc. Second and more important, any rise in Y
has to be evaluated with reference to Y*. This is specially important because the relationship between Y and Y* is very unstable. For one thing,
Y must grow to keep the ratio, Y/Y* from declining over time. But the
more Y grows today, the more it would be necessary to grow tomorrow.5 Thus, the present discontent may be reflecting the constancy of
the ratio Y/Y*. implying that welfare is neutral in growth. And in the absence of a mechanism to control Y*. there may even be an actual decline of the ratio.
It is true that the evolution of various forms of social assistance in
these societies has helped in preventing this ratio from deteriorating, but
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Humanomics Volume 7 Number 2 1991
the costs of such measures have been exorbitant. In the absence of selfdiscipline, such measures always lend themselves to widespread
misuse. Third, too much emphasis on the pursuit of self-interest for
augmenting Y/Y* through increasing Y can lead to a society in which
getting rich by fair or foul means becomes a norm. All property-related
crimes in present day societies can be seen as a quick way of enhancing Y. All the drug-related crimes too seem to fit this explanation. Too
many young people are succumbing to the lure of easy money in drug
paddling. Then there are those who become drug addicts in an attempt
to dampen Y*. Not to mention tens of thousands of those who lose selfesteem and simply become destitutes.
IV. The Welfare Foundations of an Islamic Society:
The fundamental teachings of Islam based on the Qur'an, the Hadith,
and the Sunnah (Prophetic traditions) seem to provide an appropriate
framework for resolving some of the issues raised above. In order to understand this framework, it is necessary to analyze the behaviour of an
individual in an Islamic society with respect to Y, Y*, and Y/Y*.
Let us suppose for simplicity that Y* as defined earlier in the paper
is influenced by levels of past consumption (C), avarice (A), and envy
(E) of an individual. Thus, we can write
Y* = g(C, A, E)
(2)
It means that the higher the level of each one of C, A and E, the higher
will be the desired level of income (Y*) that the individual would ideally
want to have. Therefore, it follows that
The welfare function (W1) in an Islamic society would therefore resemble
the following
Letting Y/Y* = t and differentiating the function with respect to Y
we have
Humanomics Volume 7 Number 2 1991
75
where, ∂f/∂t > 0 by Figure 1, and at/a Y = 1/Y* >0, since Y* >0. Therefore, ∂W1/ ∂Y > 0.
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Now differentiating the function with respect to C we have
∂W1/∂C = ∂W1/∂t . ∂t/∂Y* .
∂Y*/∂C
(6)
From eq(3) we know that ∂Y*/ ∂C > 0. We also know that ∂W1/ t ∂ > 0.
The term at/ ∂Y* =
(7)
Therefore, ∂W1/ ∂C <0. Similarly, it can be shown that ∂W1/∂ A < 0 and
∂W1∂/∂E< 0.
Therefore, all the signs of the derivatives are as expected. First, even
though theoretically, welfare may be neutral in growth, welfare in Islam
is considered a positive function of economic growth. Earning a living
through hard work in Islam has been elevated to an act of worship. Thus,
hard work bestows both wealth and blessings upon the individual. Although agriculture is considered both noble and essential, Islam warns
against confining all efforts to agriculture alone and urges Muslims to
engage in other industries for prosperity and strength of both the individuals and the nation. Thus, Islamic teachings clearly recognize what
in modern economic theory have come to be known as scale economies
and the law of diminishing returns. Similarly, Islam recognizes the importance of human capital and urges Muslims to acquire knowledge and
skill. The Prophet Muhammad said, 'seeking knowledge is a must on
every Muslim'. He also said, 'seek knowledge from cradle to grave'. According to both Bukhari and Muslim (books on Prophetic traditions) the
Prophet Muhammad urged Muslims to seek knowledge even if it means
going to China. One has to examine this Hadith in the context of the 6th
century when horseback riding was the fastest means of transportation
available.
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Humanomics Volume 7 Number 2 1991
Second, Islam recognizes the role of Y* in welfare because no matter how fast Y grows, it may not have any positive welfare effect if Y* is
left uncontrolled. Thus, Islam puts a strong emphasis on an effort to control Y* largely by self-discipline. Islam teaches people to stay away from
feelings like avarice, envy and jealousy. Both extravagance and niggardliness are undesirable qualities in human behaviour. Although after
marriage, the Prophet (pbuh) became one of the richest men in Makkah, his lifestyle resembled that of an ordinary man both in what he ate
and what he wore. On one occasion the Prophet (pbuh) was seen wearing a robe made of expensive fabric given to him as a gift by a foreign
dignitary. The robe was mended with patches of ordinary cloth. This was
his way of showing how to dampen one's Y*.
Thus, Islam shows ways to improve Y through hard work and
through acquiring knowledge and skill on the one hand, and regulate
Y* through self-discipline, on the other. Furthermore, Islam teaches how
to improve the ratio Y/Y* through collective efforts of all in society. Islam
has an efficient social apparatus to ensure equity and social justice. The
institution of Zakat (mandatory wealth tax) is used for achieving this objective. It is incumbent upon every Muslim with means to contribute a
portion of his income to be used for distribution among those with little
means. Individually, it is a duty of every Muslim to ensure that none of
his neighbours goes to bed with an empty stomach.6 The prophet is
known to have shared his camel with his servant while in travel. Then
there is provision of Sadaqah (voluntary alms) to further strengthen
equity and social justice. While giving charity in Islam is regarded as
trade without a loss, all able-bodied individuals are forbidden from accepting charity.
However, Islam is a practical religion and as such it recognizes the
circumstances in which some members of the society may be tempted
to improve their welfare by unacceptable means. For instance, theft may
be committed as a short cut to improving Y and hence Y/Y*. The social
implications of such activities hardly need any elaboration. Islam makes
every effort to create equity and social justice to minimise the need for
such crimes. But if a theft is committed, then it prescribes a rather harsh
punishment of cutting hands. But if a theft is committed out of necessity
it is not punishable. Moreover, the act must be proven to have been
committed beyond the shadow of doubt, if not lesser punishment is
prescribed. One should also keep in mind the social implications of a
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77
theft. In the absence of an effective deterrent, stealing will become the
most efficient way of improving one's Y until there is nothing left to steal.
This unproductive act will no doubt destroy the socio-economic fabric
of the society and therefore, cannot be permitted. Finally, one finds an
effective rehabilitation in Islam. In the short run, the society assumes full
responsibility of providing him and his family all that is necessary to live,
and in the long run of providing opportunities for rehabilitation. Thus, as
opposed to the practice in modern societies where punishment is hardly a deterrent and where the accused is pushed further towards crime,
Islam provides both an effective punishment and an efficient rehabilitation.
V. Concluding Remarks:
The paper proposed that welfare is a function of a ratio of actual to some
desired level of consumption which itself is a function of level of aspirations. It then examined some of the socio-economic implications of such
an interdependent welfare function. The model seems to provide an analytical framework to explain the growing discontent with the existing patterns of growth and development in modern societies. A rapidly
increasing level of crime can be seen as a desperate attempt to narrow
the gap between Y and Y*. Islam seems to offer a better alternative by
advocating a socio-economic structure based on equity and justice on
the one hand, and by providing a strong code of life for self-discipline,
on the other.
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Humanomics Volume 7 Number 2 1991
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Footnotes
* My thanks to Professor Masud A. Choudhury of Uuniversity College
of Cape Breton who took the time to read the first draft of this paper and
made several useful suggestions. I am also grateful to Abid Saeed
Sheikh of Muslim Association of New Brunswick, Canada, for his help
in clarifying some of the finer points in Islam. Finally, my thanks to Professor Jack Knetsch of Simon Fraser University whose course gave me
the exposure to some of the theoretical elements of this paper. The
author alone is responsible for any remaining errors.
1. Summarizing the issue Frank says, 'The evidence states unequivocally that context matters for human satisfaction. Although importance
of context has been known for a long time, economists have generally
resisted attempts to introduce contextual features explicitly into analysis. One reason is our insistent preference for simple models of behavior. Dealing with context increases complexity, to be sure. But if
simplicity is what we seek, why not adopt a model that asserts that
everyone consumes, say, one apple per day? The obvious answer is
that simplicity is not our only goal. We are generally prepared to accept
greater complexity whenever its burden is clearly justified in terms of increased explanatory power. The addition of simple contextual elements
to standard economic models clearly meets this test" (1989, p. 85).
2. Some of the earlier discussions on this topic were largely in Psychology (Dembo 1931, Hoppe 1930). A good exposition of this idea and its
importance in decision making is found in Siegel (1957). In recent years
the discussion on adaptive aspirations has been in the area of choice
under uncertainty (March 1988, Mezias 1988, and Hilton 1988).
3. Writing about the concept of relative income, Pigou quotes Mill "Men
do not desire to be rich but to be richer than other men. The avaricious
or covetous man would find little or no satisfaction in the possession of
any amount of wealth, if he were the poorest amongst all his neighbours
or fellow-countrymen" (1932, p. 89).
4. Dealing with the subject, Abramovitz writes, "Now a quarter century
later, two things are abundantly clear. First, by all the usual measures,
the growth that was sought was, in fact, achieved - indeed achieved in
unexpected, unprecedented, and overflowing degree. It appears in
broad measures of real national product per head, and it appears in the
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narrowest measures of consumption per head. In the developed countries, at least, the growth was widely shared by all income classes. So
we have had it, and had it in great measure. But, second, the expected
sense of heightened satisfaction, reflecting an appreciation of social
gains and of bettered individual lives, is much less clear. Instead, the
talk is all of 'disenchantment' with growth" (1979, p. 5).
5. Referring to this unstable relationship, Abramovitz writes, "This view
has a further and somewhat disturbing implication. It says that the level
of satisfaction depends not - or at least not only - on the level of income
but on its growth rate. Other things being equal, we should have to grow
faster in order to be happier, and we should have to keep on growing
just to stay in the same place" (1979, p. 11).
6. One can find similar teachings of altruism in other religions as well.
For instance, the Bible teaches, "You shall love your neighbour as yourself (Leviticus 19: 18).
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