Abstract
With an objective to curb unfairness, exploitation, inequality, injustice and immorality, Islamic economics proposes an active role of the state in regulating and governing the functions of the market. Since Islamic economics is premised on moral values and ethical considerations, it puts a great deal of emphasis on the formulation and execution of economic policies that may suit both the affluent and the disadvantaged in equal terms. Mohammad Saif Sarwar and Mohammad Abdullah Nadwi break down the Islamic economy.
Introduction
The Islamic economic paradigm subscribes to the worldview that human beings are vicegerents of Allah on the earth, and they have been assigned the task of maintaining equilibrium between the material and spiritual aspects of life. Ideally, an Islamic economy comprises of three sectors: public, private and philanthropic sectors. Compared to the conventional economic paradigm, the philanthropic sector is an integral component of the Islamic economic system. Islam gives due regard to the role of the market and government in running the economy, but considers the philanthropic sector as an essential player for its efficient functioning. The most salient feature of the Islamic economic system is that all its three sectors are governed by the Shari’a. From the Shari’a perspective, there should be no contradiction or conflict between the objectives and goals of the different sectors of the Islamic economy, as the ultimate goal of all three is to bring ease and common well-being for humanity.
In contrast, in the free market economy, it is the self-interest of the economic agent that acquires precedence. Accordingly, it is the advantage of the agent, and not that of society, which dictates his economic decisions in this paradigm.
In fact, the implications of the philosophy of the laissez-faire market economy have been detrimental to the normative goals of micro and macroeconomics, and have proved fatal to the well-being of society as a whole. The theory upon which the very structure of capitalism relies is secular, neutral and value-free. The capitalistic paradigm believes in positive analysis and accords a very marginal weight to normative policies. Moreover, the worldview that it subscribes to is nothing more than the notion that humans are social animals, and the only way to their self-satisfaction is the maximization of their material wealth and utility. This has resulted in the promotion of greed-oriented mindsets, and consequently, has endangered the very fabric of humane, morale and responsibility-oriented behaviour of man in the economic sphere.
Capitalism vs the Islamic Economy: A Moral Aspect
The classical theory of capitalism, which is basically composed of terminologies from the 18th-century moral philosopher Adam Smith such as “free market”, “pure competition”, “ the invisible hand”, and “self-interest”, utterly failed to live up to its own claimed goals. The claim behind the theory was two-dimensional. The first proposition was that this paradigm would effectively lead to market perfection. According to the theory, provision of high incentives to each economic agent to maximize his own profit would culminate inefficient employment of scarce resources. In this way, the theory assumed that the ultimate objective of human prosperity and social good would be automatically ensured. Contrary to the given claim, the so-called market economy has resulted in a selfish and greed-oriented environment and has been reduced to a means of exploitation of the proletariats by the bourgeoisie.
According to the capitalistic theory the forces of self-interest determine an individual’s action; hence, it is senseless to assume that in such a system one would bother to give any consideration to the well-being of the society as a whole. Thus, in the dominant capitalistic order of the current world, the approach of ‘only’ self-interest coupled with the tendency towards profit maximization has enormously aided and abetted in boosting human greed. This, in return, has drastically deprived modern man of morality, ethics, solidarity, altruism, contentment, and consideration of the socio-economic consequences of his actions. In this environment of self-interest, the needs and necessities of the economically less fortunate are overlooked and marginalized.
Contrary to this paradigm, the Islamic economy postulates a system of rigorous checks and balances on all means of exploitation. On one hand, it proposes to inculcate the sense of responsibility in individuals; on the other, it propounds state intervention in ensuring fairness. According to the Islamic viewpoint, it is the responsibility of the state to protect the market from externalities, and monopolies from tempering with the price. However, the state itself is not allowed to fix the prices. When there was inflation in Medina during the time of the Prophet (PBUH), and his companions urged him to fix the prices, the Prophet (PBUH) refused state intervention in this matter, and stated that it is Allah who decides prices, implying that the prices should be left to the market to decide.
Though Islam favors free market interaction, it does not allow strong market forces to suppress weak ones through their dubious means in the name of ‘serving self-interest’. It encourages markets to work freely under the supervision of the state and authorizes it to exercise control only when extremely necessary.
The difference between the Islamic approach and laissez-faire is that Islam allows freedom of market under the supervision of the state, in order to make sure that no individual maximizes his/her self-interest at the expense of society. Whereas Adam Smith might have assumed that a rational individual will not hurt the interests of the society, and thus advocated for the absolute freedom of market and its players, he ignored that a rational individual is more than capable of hurting the interests of the society in order to maximize his own pecuniary self-interests. There needs to be accountability.
There is no doubt that laissez-faire capitalism has led to a long period of prosperity, unparalleled high rates of economic growth and a substantial expansion in wealth in the countries that adopted this model. However, it did not succeed in removing or reducing poverty. Inequalities of income and wealth, economic instability and unemployment surged instead of declining, exacerbating the miseries of the poor. The curse of usury and excessive expansion of credit advanced by interest-based financial institutions made the situation worse, putting horrific pressure on scarce resources and giving rise to deficits, inflation, external imbalances and burdensome foreign debts. The claimed harmony between the interests of individuals and society proved to be a mirage.
After two centuries, the limited scope and shortcomings of this doctrine has started to unravel. Market failure, inefficiency, monopolies and other forms of imperfect competition have become common phenomena.
With the failure of a pure market mechanism, increased involvement of the state in economic affairs has become inevitable. A number of scholars have criticized the logic of laissez-faire capitalism. Although their efforts led to a few minor modifications, they have not succeeded in bringing about a significant change. Nevertheless, two significant events brought about the curtailment of laissez-faire capitalism and ushered in the welfare state. These events were the Great Depression of the 1930s and the socialist onslaught.
Islamic Economics and Creation of a Responsible Society
In an Islamic economic system, the role of society is as important as the role played by market or state. Market and government are also part of the Islamic economy but the role of society is vital. Many responsibilities, otherwise borne by the welfare state in the modern context, are envisaged to be shouldered by the philanthropic sector of the Islamic economy. The unbearable burden of the welfare state and the predicament of distributional equity which leads to market and government failure are adequately solved in the Islamic economy by the establishment of a responsible society. A society which proactively bears the responsibility of its weaker section, inspired by the sayings of its Prophet like “He is not a man of faith who eats his full while his neighbor is hungry” and “A locality where a person has to sleep hungry deprives itself of God’s protection”. In fact, the essence of Islamic reform is to establish a society based on equilibrium in which resources flow from the rich to the poor as a tool to achieve its egalitarian objectives.
Islam, since its advent, worked hard to create such a responsible society emphasizing solidarity and be self-sufficiency from within. The Prophet (PBUH) devoted his life in strengthening family ties, forming an interdependent neighbourhood, and brotherhood based on the interests of society by presenting himself as a role model. He taught people to be self-reliant and reminded the rich of their responsibility towards the poor.
The inheritance system of Islam is meant to solve economic problems of society by removing wealth concentration among a few, and by ensuring its flow to the larger extended family of the deceased. The system of Aqilah, by imposing social and financial responsibility on the neighbourhood, is meant to awaken a sense of mutual responsibility and solidarity in the society.
Below, we discuss a few concepts and obligations in detail which are supposed to accomplish the same forgoing objectives.
Zakat and Waqf: Flagship Institutions of the Philanthropic Sector
Zakat is one of the pillars of Islam. It is charitable giving binding on the rich people of society and given to the poor as a gesture of solidarity. It has a potential to resolve the social as well as economic problems of society. Zakat, as a whole, is an essential part of the philanthropic sector because it is collected from society and spent on the society.
Philanthropic sector because it is collected from society and spent on the society.
As a religious obligation, 2.5% of one’s wealth is spent annually on or all the eight categories of people delineated by the Quran. Following these commands can have a spectacular economic impact on society. If it is paid honestly, income support provided to the poor and needy would result in a considerable increase of the money supply in the economy, causing an upwards shift in demand for goods and services, subsequently expanding production and leading to the stimulation of idle capital. To support increased production, the economy would generate more jobs and new employment opportunities. This added employment in turn would generate more demand for goods and services, and more room for additional investments. The growth cycle based on balanced consumption would contribute to steady economic growth.
One of Zakat’s objectives is to ransom those tied in the bondage of servitude. In today’s context it can be used to salvage poor people from economic slavery of their creditors and those who exploit their services for a meager salary. Zakat is meant to remove these shackles, enabling the poor to become economically independent and contribute to the well-being of the society.
Nevertheless, the question here arises whether the aggregate amount of Zakat is sufficient to address all societal obligations in terms of distributional equity and poverty elimination. We have adequate examples from the past proving that it succeeded in doing so. During the caliphate of Umar ibn Abdul Aziz (717-720 CE.) there was a surplus in the Zakat fund but no eligible recipients were available to claim it. If we analyze today’s situation and compare the well-being of Muslims with the poverty among them, we can say that if the rich among them pay Zakat regularly, poverty could be eradicated in the course of a few years.
According to some Islamic scholars, Zakat can be paid on financial assets, business assets, bank accounts, rentable buildings, salaries, professional income, profit, rentals and working capital including stock-in-trade if they are in conformity with the conditions of Zakat. If this opinion is adopted, Zakat proceeds may reach as high as ten per cent of GDP produced by the private sector. If this accumulated amount is redistributed among the poor, it would guarantee the elimination of poverty from society, increasing the demand of goods and services, and giving strong impetus for ongoing economic activity.
Let us analyze the situation from another angle. According to Dr Akram Laldin, Executive Director, ISRA, 1 trillion dollars are annually pumped in the western economy by Saudi Arabia. Given the 10% annual equity return rate on the sum, the annual net profit would be 100 billion dollars. A 2.5% Zakat on this would be 27.5 billion dollars, which is more than the GDP of around 90 countries of the world according to 2010 IMF data. If only this amount is redistributed annually among the poor, it would substantially reduce unemployment, expand the investment base and eliminate poverty and the extreme disparity of wealth between rich and poor.
The legislation that Zakat cannot be transferred anywhere before the needs of the poor from the same area is fulfilled. This solves the problem of immigration from rural to urban areas, which is creating an economic burden for many countries. In brief, Zakat removes major financial burdens from the state, rectifies distortions of the market and ensures distributional equity, the lack of which is a major reason for economic failures.
Waqf
Waqf is an important Islamic institution in which the donor dedicates his personal property or the profit accruing from it, irrevocably and permanently for the welfare of the community, especially for the weaker section of society. It possesses immense potential for the reconstruction of social and economic life by sharing the enormous economic burden and providing services free of charge. Its presence in Muslim-populated countries is formidable. If managed properly, the income of Waqf can considerably help in uplifting the downtrodden. Pre-modern Islamic societies depended a lot on Waqfs showing the potential of a harmonious interrelationship between the aforementioned three sectors. According to Yaakov Lev, “One of the most fascinating aspects of medieval Islamic charity was the possibility of institutionalizing charity through the pious endowment system. If one considers the huge proliferation of Waqfs and Waqf-supported institutions, it can be said that medieval Islam was a charitable society”.
Similarly, in view of the comprehensive socio-economic role of Waqf during the Ottoman era, it has been widely acknowledged that “a person would have been born into a Waqf house, slept in a Waqf cradle, eaten and drunk from Waqf properties, read Waqf books, been taught in a Waqf school, received his salary from a Waqf administration, and when he died, placed in a Waqf coffin and buried in a Waqf cemetery”.
Conclusion
Among the distinctive features of the Islamic economic paradigm is its high emphasis on maintaining equilibrium between the material and spiritual well-being of society. It lays great stress on shaping a need-oriented approach rather than setting wants-fulfilment as an objective of life.
In brief, Islamic economic theory advocates a value-based positive economic paradigm. In addition to the private and public sectors, the philanthropic sector is an intrinsic and essential component of the Islamic economic system. Some secular corporations and organizations also carry out philanthropic activities in the capitalist regime too. However, the ethos and objectives of the two are completely different, as it is not part of their economic system and the motives compelling them to do so are extraneous. Generally, philanthropic activities carried out by the private sector are meant to evade tax, to advertise their firms, or to get its benefit at a later stage, which reflect their natural capitalist mentality and have minimal benefits for the economy as a whole. Whereas the third sector of the Islamic economy is envisaged to reduce wealth concentration, to establish distributional justice, and to awaken the sense of solidarity and communal harmony, which leads to the social well-being of all, and diminishes the chances of economic failure.
