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TOPIC 3 THE ISLAMIC ECONOMIC SYSTEM 1 TOPIC OUTLINE 1.ECONOMIC SYSTEM 2.CHARACTERISTICS OF ISLAMIC ECONOMIC SYSTEM (ES-i) • PROPERTY OWNERSHIP • MOTIVATIONS/INCENTIVES • DECISION MAKING • COORDINATION MECHANISMS • ROLE OF GOVERNMENT 2 1. ECONOMIC SYSTEM 3 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 4 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 5 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. 6 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 <#/3 7> 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 7 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 8 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) 10 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 10 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 12 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 12 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 13 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) 15 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 16 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 18 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 19 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) 19 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 20 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 22 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 22 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 23 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 25 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 27 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 27 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 • 29 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.” 29 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 30 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? 31 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 33 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 33 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 34 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 • 36 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) 36 •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 38 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 39 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 40