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TOPIC 3
THE ISLAMIC ECONOMIC SYSTEM
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TOPIC OUTLINE
1.ECONOMIC SYSTEM
2.CHARACTERISTICS OF ISLAMIC
ECONOMIC SYSTEM (ES-i)
• PROPERTY OWNERSHIP
• MOTIVATIONS/INCENTIVES
• DECISION MAKING
• COORDINATION MECHANISMS
• ROLE OF GOVERNMENT
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1. ECONOMIC SYSTEM
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WHAT IS A SYSTEM?
•
Definition
•A set or assemblage of things connected or interdependent,
forming a complex unity
•Different entities behaving in a particular way in a
coordinated manner
•A whole composed of parts in an orderly arrangement
according to some plan or a scheme
• Components of a system
•Entities/components/groups that are working together
•Mode of interaction - relationship among components
•Goal/Common objective – basis for interaction that has
been planned, resolve by working together
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WHAT IS A SYSTEM?
•
Society organizes itself according to its
values, culture, worldview and its sources
of authority
•
Institutions, plans and meaning/priorities
of goals differ between societies
•
Societies have legitimate rights to come
up with their own version of systems
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ECONOMIC SYSTEM (ES)
•Definition:
•Any combination of entities that interact with one
another according to a particular plan
•Goal: to fulfill economic objectives of a society
•Different priorities in set of economic goals lead to
different structure of operational principles.
•Approaches to categorize ES
1)Theoretical approach:
-
based on theories that explain the micro-foundation
of economic agents’ activity of consumption,
production, exchange.
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ECONOMIC SYSTEM (ES)

Approaches to categorize ES
2) Sectoral approach:
- based on type of real activities undertaken.
- eg. agriculture, manufacturing, services
3) Comparative/Traditional approach:
- based on the different philosophical foundation
- eg. capitalist, socialist, mixed economy
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COMPARATIVE/TRADITIONAL APPROACH
•Defines an ES in terms of key characteristics or “isms”
•Confined to major common “isms” such as socialism,
capitalism and feudalism. Examples:
•Socialism is defined in terms of public ownership of means of
production
•Feudalism is associated with land ownership
•Analyze different economic systems based on
common characteristics
1.Philosophical foundations: laid down objectives and norms for
economic man
2.Operational principles: Constitute social, legal and behavioral
framework of system
3.Goals
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PHILOSOPHICAL FOUNDATIONS
CONVENTIONAL ES
• Derived from theories developed by
western scholars
•
•
•
•
Adam Smith – ‘invisible hand’
Joseph Schumpeter – ‘creative destruction’
Jeremy Bentham – ‘max. pleasure; min. pain’
Max Weber – protestant ethics in capitalism:
• Pursuit of one’s own utility = a virtue
• Pursuit of wealth is not deviant
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PHILOSOPHICAL FOUNDATIONS
CONVENTIONAL ES
• Specific philosophical foundations:
1.
2.
3.
4.
5.
Concept of scarcity: nature is niggardly
and human wants unlimited
Self-interest: priority to individual goals
Absolute freedom: survival of the fittest
Materialism and utilitarianism
Positivism (science) versus norms
(religion)
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PHILOSOPHICAL FOUNDATIONS
ES-i
• Derived from Quran
•
Prayers, belief & economics: inseparable
• From Surah Hud: 84-87 – story of
Prophet Shu’aib (pbuh):
• dubbed as ‘Prophet of Economics’
• vs. Madyan people who did not:
• submit to Allah
• give full measure & weight
• stop from commiting mischiefs
• do away with corrupt practices
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PHILOSOPHICAL FOUNDATIONS
•
Specific philosophical foundations:
1.
2.
3.
4.
Tawhid: Accepting Allah as the only
sovereign power
Ibadah: Any act must be within shari’ah
boundries to seek Allah’s pleasure
Khilafah: Vicegerency, man recognizes his
duty as servant of God
Tazkiyyah: Process of economic activity
must be seen as a process that purifies soul
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OPERATIONAL PRINCIPLES
ES-i
• Philosophical foundations lead to a set of
operating principles
• Specific operational principles:
1. Adl/Ihsan: adl means giving what is due, Ihsan
giving more than what is due
2. Takaful/Taawun: cooperation
3. Responsibility/accountability: individual is
responsible to society, but ultimately to Allah
4. Moderation: in consumption, production,
distribution
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GOALS
ES-i
• Directed towards achieving maqasid alshariah
•
•
•
•
Promoting virtues and preventing harm
To achieve public welfare (maslahah)
Socio-economic justice
Economic development
• Value-loaded
•
Nature of economic decisions:
•
best vs. better vs. good vs. bad
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ISLAMIC ECONOMIC SYSTEM
WV
SYSTEMS
P
E
S
Phil
Op-P
Goals
-Tawhid
- Ibadah
- Khilafah
- Tazkiyah
-‘Adl/Ihsan
- Takaful
- Resp’ty
- Accnt’ty
-S-E Justice
- Econ Dev
- Efficiency
- Stability
2. THE ISLAMIC ECONOMIC
SYSTEM (ES-i)
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CHARACTERISTICS OF ES
•Philosophical foundations, operational
principles, goals are structured by epistemology
•Most economic systems have structurally
changed entirely due to history and ideologies
•ES-i aim: “Thus, We have made of you an
ummah justly balanced.” (Al-baqarah: 143)
•ES-i has permanent & changing features
•Permanent institutions and elements are meant
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to preserve essence of al-Din
•Changing features reflect dynamism of Islam
DISTINCT CHARACTERISTICS OF ES
Property
ownership
Decision
making
Motivation
Coordination
Role of
government
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ES: THE TWO EXTREMES
CHARACTERISTICS
CAPITALISM SOCIALISM
PROPERTY OWNERSHIP
Private
Public
MOTIVATION
Self-interest
Altruism
DECISION MAKING
Decentralized
Centralized
COORDINATION
Market
Planning
ROLE OF GOVERNMENT
Minimal
Focal
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1. PROPERTY OWNERSHIP
•Definition
•Involving a system of rules of access to and control of
resources
•Ownership of property; a bundle of rights
•Rights that affect object’s disposition/utilization
•Varies according to society, worldview,
situations
•Market economy features private enterprise
•Planned economy is characterized by public ownership
•ES-i is mixed: Private and public (natural resources,
common and state)
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1. PROPERTY OWNERSHIP
•Components
• Object:
anything that can be owned; something
of value permissible and capable of being
possessed. Can be corporeal (having a
physical dimension) or incorporeal (such
as intellectual property)
• Subject:
owner; an individual, state/society
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1. PROPERTY OWNERSHIP
 Components

Content:


Rights-to own, possess, use, priority, exclusion,
income, security, dispose; bundle of rights
differ, either complete ownership or
incomplete
Obligations/duties: not to abuse or misuse, not
to hoard, must meet all obligations, etc. Usually
moderating factor between individual/society’s
right
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1. PROPERTY OWNERSHIP
•Mal/amwal: mentioned 86 times in the Qur’an
•Refers to wealth, property, possessions, whatever one
possesses
•Most versus deal with content aspect rather than the object
•Milkiyyah: To possess, control, have
power/authority over
•Islamic principles:
•
•
Absolute owner of property is Allah: the creator of
everything
Man as khalifah and abd has relative and conditional
ownership: Utilization for betterment of mankind; there
are shares of others
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1. PROPERTY OWNERSHIP
•Islamic principles:
• Man is responsible to society and
accountable to God for his property:
property are trials and man will be
rewarded
• Labor and need are both legitimate bases
for ownership
• Both private and public property are
legitimate kinds of property in Islam
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Ownership
Types
Private
Natural
Resources
Public
Common
State
PRIVATE PROPERTY OWNERSHIP
•No Quranic ayat or hadith prohibiting it; thus,
permissible (ibahah principle)
•Complete or incomplete ownership rights
•Rights to own, possess, utilize, priority, right to
exclude others, income from property, security
of property, compensation if
damaged/purchased, dispose
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PRIVATE PROPERTY OWNERSHIP
•
Completely responsible to
society/state and accountable to God
•
Conditions to maintain ownership are
permissibility, proper utilization,
constant utilization, meeting all
obligations (zakat)
•
Not meeting these conditions could
result in losing some or all rights eg.
land
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PUBLIC PROPERTY OWNERSHIP
•Based on hadith concerning ‘water (oceans),
fire (source of energy), herbage (forests, parks)
and salt (basic needs)’:
•Should not be privately owned
•Access to and control of property is determined
directly by reference to public interest
•Public interest is a major objective of shari’ah,
defined by God but interpreted by man/state
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PUBLIC PROPERTY OWNERSHIP
•
2 categories
•
State-owned:
Has complete rights and can decide use for public
interest, even if it means giving to private sector to
manage
• Example of corporatisation, privatization of
previously public property
•
•
Common:
Must be equally accessible to all members of
society
• Public parks, beaches, etc
•
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2. INCENTIVES/MOTIVATION
•Market economy focuses on material incentives,
while planned economy concentrates on moral
incentives
•Material versus moral; cash versus medal
•Discusses how to make subordinates act in the way
required
•In ES-i, incentives are derived from shari’ah; both
moral and material
•Hadith: “The best that man can earn is that
resulting from his work.”
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2. INCENTIVES/MOTIVATION
•How to make subordinates follow Qur’an and sunnah
•Stems from Islamic worldview
•Extended time horizon
•Rational action includes spiritual benefits
•Incentives and punishments include those of the hereafter
•How to make one act based on rewards/punishment that he cannot see
•Since one willingly submits to God, one accepts Islamic
worldview and its implications for economic behavior
•Prime objective: Doing it right and to please Allah
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3. ORGANIZATION OF DECISION MAKING
•Decentralized vs centralized (democracy versus
dictatorial)
•Where decisions are made; upper level or lower
level of hierarchy
•How decisions are made:
•Principles (sources, derivation)
•How they are implemented
•To solve the problems in economics of what, how and for
whom?
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3. ORGANIZATION OF DECISION
MAKING
•
Islam talks of shura - mutual consultation
between higher and lower level
•
People voice their views before decision
makings are made
•
Decision must be within limits of shariah
•
Eg. Prophet asked for opinions
•
Peoples’ participation in decision making; no
bias towards extreme
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4. COORDINATION MECHANISM
•Market versus Plan (Decentralized vs centralized)
•How decisions made are implemented, i.e. signal sent to all
levels of society
•Real world always have some degree of planning: central
planning versus indicative planning
• 9th Malaysia Plan (2006-2010)
• RM220bn => construction of infra. (dams & transportation)
• 10 MP (2011-2015) - new economic model
• orientation = ‘green’, innovation & liberalization
• aim = GDP per capita: USD7,000 –> USD12,000
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4. COORDINATION MECHANISMS
•Islam basically supports a market system
•Based on a hadith reported by Tarmidzi and Ibn
Majah
•Market in Islam must be reflecting the norms,
values in consumer and producer behaviour
•Different rules of the game govern supply and
demand
•Central role of state to ensure that rules of the
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game are not violated
4. COORDINATION MECHANISMS
•
To ensure the smooth functioning of
market needs the institution of al-Hisbah
•
Coordination & regulatory roles of alHisbah:
Right weights and measure
• Checking business frauds
• Correcting market imperfections
• Hoarding
• Unfair monopolies
• Information monopoly
• Essential goods supply and price
• Ownership rights
•
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5. ROLE OF STATE/GOVERNMENT
•Other ES: emphasizes on the relative size
of government’s involvement in economy
•ES-i: more concerned about the nature or
suitability of government’s involvement
•ES-i: Neither strictly a guarding state (in
capitalism) nor totalitarian (in socialism)
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•ES-i: Justice for all is the guiding principle
5. ROLE OF STATE/GOVERNMENT
•
Nature of involvement:
•
To create a conducive environment for Islamic
man
•
•
•
Political – instill peace and stability in competition for
power
Economic – support entrepreneurship and efficient
methods of production
Social – avoid social tension and promote harmony in coexistence
•
Religious – promote da’wah , tarbiyyah and ta’dib efforts
•
Moral – recognize & reward respectable icons
•
Legal – introduce preventive rules and punish deserving
parties as a lesson to others
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5. ROLE OF STATE/GOVERNMENT
Nature
of involvement:
 Introduce hisbah org. and ensure its
proper functioning
 Regulator (guiding planner and
supervisor also)
•
Overriding principle : Ensure adl and
ihsan
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ES: THE TWO EXTREMES VS. ES-I:
THE MIDDLE PATH
CHARACTERISTICS ES-i
PROPERTY OWNERSHIP Private & public
(i.e. mixed)
MOTIVATION
‘Self-interest’ &
altruism
(moral & material)
DECISION MAKING
Shura (mainly bottomup approach)
COORDINATION
Market > plan
MECHANISM
ROLE OF GOVERNMENT Facilitating role
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