Transcript economic system

ISLAMIC ECONOMCS
IBF 6111
Topic 2
Islam and Other Economic Systems
CONTENTS
•
•
•
•
•
Introduction to Economic Systems
Market system / Capitalism
Socialism / Communism
Other systems (mixed, traditional)
Islam and other “isms”: A Comparative Analysis.
2
ECONOMIC SYSTEM:
THE CONVENTIONAL APPROACH
• Economists have defined economics as a science or a
study of the production, distribution and consumption of
goods and services in an exchange economy and
therefore involves organization.
• An economic system involves a particular set of
institutional arrangements and a coordinating mechanism
to respond to the economizing problem dealing with the
production, distribution and consumption of goods and
services in a particular society.
3
ECONOMIC SYSTEM:
THE CONVENTIONAL APPROACH
• If the economic problem is defined as the efficient
allocation of scarce resources in the presence of
unlimited wants, then the problem is in the area of
production.
• If the economic problem is not in the area of production,
since Allah (s.w.t.) has provided abundant resources and
man has only limited needs, then the problem is in the
area of distribution, which includes ownership.
• As An-Nabhani (2002) argued, Man must own the
benefits from production to satisfy his needs, not merely
be considered as a variable cost within the production
process.
4
ECONOMIC SYSTEMS
• An economic system is composed of people,
institutions and their relationships.
• Every society develops an economic system to
determine how it makes choices - an economic system
reflects an ideology.
• A set of institutional arrangements and a
coordinating mechanism to determine:
– What and how goods are produced, and in what quantity, who
gets them, how to accommodate change & promote
technological progress
• Economic systems differ based on:
– Who owns the factors of production
– What method directs, motivates and coordinates economic
activity, including distribution
5
ECONOMIC SYSTEM
• Choices made by society depends on the type of economic system
in trying to address the economic problem.
• If this is defined as the efficient allocation of scarce resources to
satisfy unlimited wants, the emphasis will be on production:
1. What and how much will be produced? = Production decision;
2. How will it be produced? = Managerial decision.
3. For whom will it be produced? = Distribution decision.
• An economic system is a way of answering these basic questions.
• If resources are abundant, but Man’s needs are not being addressed,
then the economic problem is in the area of distribution.
• For what and how something will be produced involves the
production function, which is an engineering function, and is scientific
in nature, being a function of labour and capital, with labour as a
variable cost.
• For whom production and therefore income will be distributed and redistributed requires a system and an ideology.
6
ECONOMIC SYSTEM
• The economic system is a way of answering basic
questions concerning production, consumption, the
role of capital and labour and the economic problem.
Different economic systems answer them differently
as follows:
• Market System or Capitalism
• Command System or Marxism
• Mixed System
• Traditional System
• Islamic Economic System
7
MARKET SYSTEM CHARACTERISTICS
• Private property: individuals & firms (not the government)
should own resources (land, labour and capital).
• Freedom of enterprise and choice enables owners to
employ or dispose of property and money as they deem fit.
• Self-interest is the motivation as individuals express their
freedom of choice.
• Competition: the market system depends on competition
to pursue a monetary return.
• Markets and prices: supply and demand determines
value or price - the market system is the organizing and
coordinating mechanism that determines efficient
production and distribution.
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MARKET SYSTEM
CHARACTERISTICS
• Technology and capital goods: efficient production
means greater output
• Specialization:
– Division of labor (human specialization) contributes to
output due differences in ability; practical focus (we can
learn to be a good lawyer by studying & practicing law);
saves time (concentrating on one task).
– Geographic specialization (regional & international
differences in agricultural and manufacturing).
• Use of money: medium of exchange
• Active, limited government: but “market failures” can
occur, e.g. through government intervention.
9
MEDIUM OF EXCHANGE
• Money facilitates trade when wants do not coincide (difference
between barter economy & indirect exchange involving a medium
of exchange, i.e. money)
10
MARKET SYSTEM: QUESTIONS
• What will be produced? Those goods and services
produced at a profit rather than those at a loss
(economic profit = total revenue less total cost)
– consumer sovereignty (“customer is king”): customers
determine the types of goods produced depending on their
income and willingness to buy
– customers direct resources to suppliers to meet their wants.
• How will goods be produced? Production will be
organized, combining resources and technology, that
minimizes the cost per unit of output
– available technology to produce desired results
– resource cost: the price of needed resources (land, labour
and capital).
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ORGANIZATION OF PRODUCTION
(3 techniques for producing $15 worth of soap)
• Competition will dictate that producers will adopt Technique 2, thus
goods (soap) will be produced in a least cost way, being economically
the most efficient because it is the least costly.
• The production function is an engineering relation that defines the
maximum output (Q) from a given set of inputs, namely capital (K) and
labour (L): Q = f (K, L). Production is a scientific process.
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MARKET SYSTEM: QUESTIONS (Cont.)
• Who gets the output?
– Products will be distributed to consumers on the basis
of their ability (depends on income) and willingness to
pay the existing market price
• How is change accommodated?
– self-interest in directing prices and profits
• How is progress promoted?
– technological advance
– capital accumulation
• Capitalism is primarily concerned with capital, which
generates a fixed return (interest) without risk, thus overvaluing capital and under-valuing the role of labour, which is
a variable cost.
13
THE “INVISIBLE HAND”
• In the Wealth of Nations written in 1776 by Adam Smith
(1723-1790) he discussed the “invisible hand” of the
market system;
– Unity of private and social interests: products produced
profitably also increase society’s well-being (but are we
economically better off?)
• Characteristics of the market system / capitalism;
– Efficiency (to maximize satisfaction with available
resources: Islamic efficiency is to maximize the
fulfillment of needs with available resources)
– Incentives (profit-maximization or profit-sharing?)
– Freedom (free to engage in business without capital or
collateral?)
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WEALTH OF NATIONS
• According to Adam Smith, deemed the father of
modern economics, the participants of a decentralized market economy are motivated not by
mutual love and kindness, but by self-interest
and that the “invisible hand” of the market-place
guides this self-interest into promoting general
economic well-being
(Wealth of Nations: Bk.2, Ch.2, Para.2 & Bk.4, Ch.2, Para.9)
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MARKET SYSTEM OR CAPITALISM
• Motivation – Each participants act in their own selfinterest. Sellers are to attain profit maximization
whereas buyers are to seek wants satisfaction.
 Edgeworth stated “the first principle of economics is that every
agent is actuated [activated] only by self interest.” (1881:16)
 Friedman declared that the social responsibility of business “it
is to increase its profit” (1962:133)
• Ownership - private enterprises own all property and
resources.
• Decision making - every decision is made by buyers
and sellers through market.
• Role of government - to protect private property and
enhance the environment for market system.
• e.g. US, European nations, Asia, North America, and
South America.
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MARKET SYSTEM AND
CIRCULAR FLOW
Resource
Market
Businesses
Households
Product
Market
17
COMMAND SYSTEM
• Command system as reflected in communism or socialism
involves a centrally planned economy and developed
primarily by Karl Marx (1818-1883). Born in Prussia in
1881, he moved to London in 1849 where he died.
• Marx & Engels wrote the “Articles of Confession”,
renamed the “Communist Party Manifesto” in 1848.
• The theory of communism can be summed up in one
sentence: “abolition of private property” (1848:18).
• Prevailed in the Soviet Union, Eastern Europe, China (prior
to its market reforms).
• System was a failure
– The coordination problem: Set output targets for all goods
– The incentive problem: No adjustments for shortage or surplus
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THE COMMAND SYSTEM
• Communism involves measures to entirely revolutionize the mode of production
(1848:25-26);
1. Abolition of property in land and application of all rents of land to public
purposes.
2. A heavy progressive or graduated income tax.
3. Abolition of all right of inheritance.
4. Confiscation of the property of all emigrants and rebels.
5. Centralization of credit in the hands of the State, by means of a national bank
with State capital and an exclusive monopoly.
6. Centralization of the means of communication and transport in the hands of the
State.
7. Extension of factories and instruments of production owned by the State; the
bringing into cultivation of waste-lands, and the improvement of the soil generally
in accordance with a common plan.
8. Equal liability of all to labour. Establishment of industrial armies, especially for
agriculture.
9. Combination of agriculture with manufacturing industries; gradual abolition of the
distinction between town and country, by a more equitable distribution of the
population over the country.
10.Free education for all children in public schools. Abolition of children's factory
labour in its present form and combination of education with industrial production.
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CHINA: CLOSED ECONOMY?
• Selected Current Account, Exports and GDP data (2007): as a
ratio of exports to GDP, China is 1st and the U.S. 181st (last).
• America borrowing from China (with sale of U.S. Treasuries) to
consume Chinese goods.
20
COMMAND SYSTEM
• Motivation – according to individuals, “reaping the
fruits of your own endeavor”. The profit motivation in
the capitalist system is absent in communism.
• Ownership - government owned all property and
resources.
• Decision making – central economic planning by
government.
• Production, market forces and business firms are
state-controlled.
• e.g. former Soviet Union, China & Cuba
• Socialism/communism over-values labour and undervalues the role of capital.
21
MIXED SYSTEM
• Mixed system includes both the private and state sectors
in directing the economy, and involves characteristics of
both market and planned economies: thus a mix of
socialism and capitalism.
• Governments exert extensive control over resource
allocation decisions, primarily involving key industries
such as transportation, energy production,
communication, and health care.
• However, it promotes private ownership and decision
making.
• e.g. many countries operate through a mixed economy,
e.g. Sweden, Japan
22
TRADITIONAL SYSTEM
• A traditional economy is any economic system
involving extensive subsistence agriculture.
• Production methods, exchange of goods,
distributions of income are sanctioned by custom,
heritage or caste.
• Factors that may affect a traditional economic system
are religion, cultural values, historical background,
customs etc.
• e.g. certain developing countries (India)
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ISLAMIC ECONOMIC SYSTEM
• One could define the science of economics as a field of
study “attempting to explain and economic phenomena”
(Al-Sadr, 2010:27) involving the management of production
and distribution, but “Islamic economics is not a
science” as in the case of Marxism and capitalism, it is
a religion (Al-Sadr, 2010:162)
• Man’s ability to produce in abundance is constrained
due to Man’s negligence involving a mal-distribution of
resources associated with the structural injustice of
distribution derived from the economic system (Al-Sadr,
1982, Vol.1-2:110-116)
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ISLAMIC ECONOMIC SYSTEM
• An-Nabhani separates economic science without an ideology
involving the management and creation of wealth through
production, and the distribution of that wealth which involves an
Islamic economic system derived from the ideology of Islam as
a religion. Managing the quantity of production and the level of
wealth will not change the system or its ideology (An-Nabhani,
2002:22-23,46-47).
• Man is driven to produce and possess property or its benefits
in order to satisfy his needs. Wealth is a function of property
and effort being the means to produce benefits. The
economizing problem lies in the possession of wealth and not
the creation of wealth, from the ill-disposition of ownership and
mal-distribution of wealth. Islam does not interfere in
production but only the utilization of certain properties deemed
unlawful.The means to produce a benefit (production) is
distinct from possessing the benefit (ownership). (An-Nabhani,
2002:47-49).
25
ISLAMIC ECONOMIC SYSTEM
• How the Islamic Economic System view the
following?
• Motivation
• Ownership
• Decision making
• Implementation
26
MOTIVATION
• In Islam, man is motivated to work (i.e.: to pursue
economic activities) because he is entrusted by God
as the khalifah (vicegerent) on this earth and to obey
the will of Allah (s.w.t.).
• The primary motivating factor is man’s desire to
return to his-self by holding to the covenant (mithaq)
in order to attain the ultimate happiness (sa’adat
haqiqiya).
• Unlike capitalism where the primary motivating factor
is more materialistic in nature. Islam equally respects
both the contribution of labour and capital, which
must involve risk to obtain a lawful reward.
27
OWNERSHIP
• Private property is allowed in Islam
• “To man is allocated what they earn, and to woman what they
earn.” (An-Nisa’ 4:32 and 4:33, 57:7, 71:12, 24:33, 4:6,
9:103, 2:279, 9:24, 92:11)
• Allowing private ownership (milkiyyah) is important in Islam
as this allows sales (bai’) and commerce (tijarah), also
private partnerships (musharakah, mudharabah).
• Public property is derived form the hadith:
• “People are partners in three things namely water, fire and
pastures” (Al-Zuhayli, 2002, 2:427) which may included
common property includes natural resources such as mines
and energy resources.
• State property involves revenues collected by the state:
•
Includes fai’, kharaj, jizya, ‘ushur, and acquired from inheritance
when a Muslim has no beneficiaries, such revenues are for the
state to decide its expenditure; however, zakat must be
distributed to the 8 categories of recipients (asnafs).
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OWNERSHIP
• Muslim have a right to possess any amount of wealth
or property with the following conditions:
• His acceptance that his ownership is temporary and
not absolute.
• It is acquired by lawful means.
• His responsibility towards his society through zakat
and other voluntary deeds.
• In the event that his ownership is in conflict with
legitimate social interest, governments may
intervene, since common interest has greater priority
than self interest.
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OWNERSHIP
• In terms of ownership (milkiyyah), the Majallah
defines owned property (mulk) as “anything owned
by a human being, be it a specified property (‘ayn),
or usufruct of a property (manfa’ah)” (Majallah
no.125).
• According to Hanafi and Maliki jurists ownership is
“an exclusive association of the owned item with its
owner, which gives the owner the right to deal in
what he owns in any way that is not legally
forbidden” (Al-Zuhayli, 2003, 2:417).
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OWNERSHIP & PROPERTY
• The acquisition of property is for consumption, utilization,
usufruct, and the possession of a benefit resultant from
human effort (An-Nabhani, 2002:48)
• Majallah (art. nos.126-130): mal is owned & acquired
property whose benefit is lawful (mal mutaqawwim), as
opposed to property that has not or cannot be acquired
[river, public property] or is unlawful [alcohol, pork] (ghair
mutaqawwim); can be movable (manqul) such as annuqud (gold and silver coins), or immovable (ghair
manqul) such as landed property (‘aqr).
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DECISION MAKING
• Islam gives priority to the role of individual decision
making, which is also tied to the concept of
accountability.
• “On that Day, will men proceed in companies
sorted out to be shown the Deeds that they had
done, then shall anyone who has done as atom’s
weight of good, see it and anyone who has done
an atom’s weight of evil, shall see it”. (Az-Zalzalah,
99:6-8)
32
DECISION MAKING
• The above ayat shows that man is responsible for what
he has done. Thus, individual are free to choose what
they desire since Allah has given them the intellect
(‘aql) to differentiate between the good (ma‘aruf) from
the evil (munkar).
• Individuals are also encouraged to make ‘shura’ (a
collective of individuals, consulting and making
decisions) on important issues that affected larger
number of people.
• In this case the role of the government is to establish a
good society with peace, justice and security.
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IMPLEMENTATION
• Man economic existence is to achieve ultimate
success (falah) and happiness (sa’adat
haqiqiya).
• How can man achieve falah & sa’adat haqiqiya?
 Excellence of soul (knowledge and faith)
 Excellence deep-rooted in human nature ( follow
the guidance from the Creator, proper manner)
 Excellence from the environment (wealth,
position, religious family)
• Thus in Islam, implementation should be guided
by Shari’ah.
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SUMMARY
Motivation
Fulfilling al-mithaq to achieve the
ultimate success & happiness
Ownership
Individual means through work,
trade, inheritance, bayt al-mal, gifts
Decision Making
Individual accountability.
Collective of individual through
shura (consultation).
Implementation
Driven with Shari’ah-linked
government support.
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CONCLUSION
• An-Nabhani and Al-Sadr argued that Islam is primarily
concerned with mans’ preferences and needs. Man
strives to produce but to satisfy his needs.
• The economic problem is Islam revolves around man’s
needs, the problem of owning and distributing the
benefits from production: the economic problem is not in
the area of production but in distribution.
• The Islamic economic system is centred around
distribution, equitable ownership, recognizing the equal
importance of labour and capital (partnerships and profit
& loss sharing), and recognizing the important role of
sadaqah in economic development and welfare.
36
CONCLUSION (Cont.)
• The Islamic economic system of distribution and redistribution of income and wealth is based on an
ideology, Islamic economics is not a science but a
religion, and is distinct from the science of production, or
the management and creation of wealth. The quantity of
production will not change the system.
• The Islamic system differs from Marxism and capitalism
involving the management of production and distribution
as a science.
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COMPARISON OF ECONOMIC SYSTEMS
Motivation
•
•
•
•
Capitalist Market Economy
Socialist Command Economy
Participants are more
materialistic and act in their
own self-interest. Sellers try
to attain profit maximization
and buyers seek
maximization of satisfaction
of wants.
Edgeworth stated “the first
principle of economics is
that every agent is actuated
[activated] only by self
interest.” (1881:16)
Friedman declared that the
social responsibility of
business “it is to increase its
profit” (1962:133)
Capitalism tends to over
value capital and under
value labour.
•
•
Absence of profit
motivation, with individuals,
“reaping the fruits of your
own endeavor”.
Socialism tends to over
value labour and under
value capital.
Islamic Economy System
•
•
•
Man is motivated to work (to
pursue economic activities); he
is entrusted by God as the
khalifah (vicegerent) on this
earth and to obey the will of
Allah (s.w.t.), as His servant
and slave (‘abd), in complete
submission.
The primary motivating factor is
man’s desire to return to hisself by holding to the covenant
(mithaq) in order to attain the
ultimate happiness (sa’adat
haqiqiya).
Unlike capitalism where the
primary motivating factor is
more materialistic in nature.
Islam equally respects both the
contribution of labour and
capital, which must involve risk
to obtain a lawful reward.
38
COMPARISON OF ECONOMIC SYSTEMS
Capitalist Market Economy
Ownership
•
Private individuals and
enterprises own all property
and resources
Socialist Command Economy
•
All resources and property
owned by the state
Islamic Economy System
•
•
•
•
•
•
Absolute ownership of everything
belongs to Allah alone (Mannan,
1980, p.88).
Private property is allowed in Islam :
“To man is allocated what they earn,
and to woman what they earn.” (AnNisa’ 4:32 and 4:33, 57:7, 71:12,
24:33, 4:6, 9:103, 2:279, 9:24, 92:11).
Allowing private ownership
(milkiyyah) is important in Islam as
this allows sales (bai’) and commerce
(tijarah), also private partnerships
(musharakah, mudharabah).
Public property is derived form the
hadith: “People are partners in three
things namely water, fire and
pastures” (Al-Zuhayli, 2002, 2:427).
which may included common property
includes natural resources such as
mines and energy resources.
State property involves revenues
collected by the state:
Includes fai’, kharaj, jizya, ‘ushur, and
acquired from inheritance when a
Muslim has no beneficiaries, such
revenues are for the state to decide
its expenditure; however, zakat must
be distributed to the 8 categories of
recipients (asnafs).
39
COMPARISON OF ECONOMIC SYSTEMS
Capitalist Market Economy
Decisionmaking
• Every decision is made by
buyers and sellers through
markets, and the price
mechanism governs
distribution
Socialist Command Economy
Islamic Economy System
• Central economic planning
conducted by the
government (e.g. Soviet
style 5 years plans)
• The government has the right
to intervene and monitor the
market (via al-Hisba), but Islam
gives priority to the role of
individual decision making,
which is also tied to the concept
of accountability.
• “On that Day, will men proceed
in companies sorted out to be
shown the Deeds that they had
done, then shall anyone who
has done as atom’s weight of
good, see it and anyone who
has done an atom’s weight of
evil, shall see it”. (Az-Zalzalah,
99:6-8)
40
COMPARISON OF ECONOMIC SYSTEMS
Implementation
Capitalist Market
Socialist Command Economy
Islamic Economy System
Economy
• To protect private
• Production, market forces
• Based on Shari’ah, which is
property and enhance
and business firms are
Divine (not man-made law).
the environment for the
state-controlled. Marx &
• Emphasis should be on
market system.
Engels wrote the “Articles
distribution involving Islamic
• Requires a central bank
of Confession” renamed
partnerships based on profitand a conventional
the “Communist Party
share.
banking system based
Manifesto” in1848:
• And re-distribution according to
on usury, and maninvolves measures that
the bayt al-mal (involving taxes
made common law.
revolutionize the mode of
prescribed by Islam: c.f. Ibn
production (1848:25-6);
Khaldun and discussion on
• 1.Abolition of property in
taxation and supply
land and application of all
economics).
rents of land to public
purposes.
• 2.A heavy progressive or
graduated income tax.
• 3.Abolition of all right of
inheritance.
• 5. Centralization of credit in
the hands of the State, by
means of a national bank
with State capital and an
exclusive monopoly.
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Capitalism Makes the Majority Poor…
42
…And So Does Socialism…
43
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