1. Topic 2 Islam and Other Economic Systems
ISLAMIC ECONOMCS IBF 6111
Topic 2
Islam and Other Economic Systems

2. CONTENTS Introduction to Economic Systems Market system / Capitalism
Socialism / Communism
Other systems (mixed, traditional)
Islam and other “isms”: A Comparative Analysis.

3. 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.

4. 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.

5. 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

6. 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:
What and how much will be produced? = Production decision;
How will it be produced? = Managerial decision.
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 re-distributed requires a system and an ideology.

7. 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

8. 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.

9. 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.

10. MEDIUM OF EXCHANGE
Functions of money: (1) Medium of exchange (2) unit of account (3) standard for deferred payments (4) store of value
In order to justify a theory of interest, many economists describe money as a commodity that can be bought & sold at a price (interest) just like any other commodity, rather than taking the medium of exchange function of money to its’ logical conclusion, that money is just an instrument of transfer that should not be traded in.
Money facilitates trade when wants do not coincide (difference between barter economy & indirect exchange involving a medium of exchange, i.e. money)

11. 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).
Economic profit = TR - TC, where TC includes cost or payments made to the entrepreneur.

12. 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.

13. 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 over- valuing capital and under-valuing the role of labour, which is a variable cost.

14. THE “INVISIBLE HAND”
In the Wealth of Nations written in 1776 by Adam Smith ( ) 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?)

15. WEALTH OF NATIONS
According to Adam Smith, deemed the father of modern economics, the participants of a de-centralized 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)
“But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them…It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest” (Adam Smith, Wealth of Nations, 1776, Bk.1, Ch.2, Para.2)
“Every individual…neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it” (Adam Smith, Wealth of Nations, Bk.4, Ch.2, Para.9)

16. MARKET SYSTEM OR CAPITALISM
Edgeworth, F.Y. (1881). “Mathematical Psychics: An Essay on the application of Mathematics to the Moral Science”. London: C.Kegan Paul & Co .(1881:16)
Friedman, M. (1962). “Capitalism and Freedom”. Chicago: Chicago University Press, 2002:133
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* F.Y. Edgeworth, mathematical Psychics: An Essay on the Application of Mathemtics to the Moral Science (1881)
MARKET SYSTEM OR CAPITALISM
Motivation – Each participants act in their own self-interest. 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. 16

17. MARKET SYSTEM AND CIRCULAR FLOW
Resource
Market
Money Income
Costs
Input Factors
Resources
Both Flows
Are Equal
Businesses
Households
The circular flow diagram, resources flow from households to businesses through the resource market, and products flow from businesses to households through the product market.
In opposite to these real flows are monetary flows. Households receive income from businesses (their costs) to households through the resource market, and businesses receive revenue from households (the expenditures) through the product market.
Resource Inputs = resources = factors of production: land, labour, capital & entrepreneurial ability
Business costs = wages, rent, profit = money income
Business goods & services sold (business revenue) = goods & services bought (household spending on consumption)
Goods & Services
Goods & Services
Product
Market
Consumption
Revenue

18. COMMAND SYSTEM
Command system as reflected in communism or socialism involves a centrally planned economy and developed primarily by Karl Marx ( ). 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

19. THE COMMAND SYSTEM
Communism involves measures to entirely revolutionize the mode of production (1848:25-26);
Abolition of property in land and application of all rents of land to public purposes.
A heavy progressive or graduated income tax.
Abolition of all right of inheritance.
Confiscation of the property of all emigrants and rebels.
Centralization of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.
Centralization of the means of communication and transport in the hands of the State.
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.
Equal liability of all to labour. Establishment of industrial armies, especially for agriculture.
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.
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.

20. 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.

21. 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 under-values the role of capital.

22. 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

23. 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)

24. 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: )
Al-Sadr, “The Islamic Economic Doctrine, A Comparative Analysis”, London: MECI, 2010
Al-Sadr, “Iqtisaduna (Our Economics)”, Vols.2, Tehran: WOFIS, 1982
An economic science does not involve an ideology but the technical management and creation of wealth (production), but this is different from managing distribution. The fluctuations of wealth do not affect the form of the economic system and thus the way in which wealth is distributed will not change. Islam does not interfere in the production of wealth or define the manner of managing the quantity of production (An-Nabhani, 2002:22-23,47,49,51)
Wealth is a function of property and the effort man has made in securing it. Needs are a function of property and man’s effort to possess it, in order to satisfy those needs. Hence property is a function of needs and wealth, and benefits are derived from property: the means to produce a benefit (production) is distinct from possessing the benefit (ownership), so property and effort (labour) are components of wealth, and they are the means to produce benefits (An-Nabhani, 2002:47,48,102).
Hence 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 (An-Nabhani, 2002:48): the problem is in the ownership of those benefits, a problem of distribution, rather than production.

25. 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).
An-Nabhani, “The Economic System in Islam”, New Delhi: Milli, 2002
The economic problem is in the ownership of those benefits, a problem of distribution, rather than production.

26. ISLAMIC ECONOMIC SYSTEM
How the Islamic Economic System view the following?
Motivation
Ownership
Decision making
Implementation

27. 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.

28. 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).
Al-Zuhayli, W. (2003). “Financial Transactions in Islamic Jurisprudence”. Vols.2. Damascus: Dar al-Fikr.
Zakat: the 8 recipients (asnafs): (1) amil (collectors), (2) muallaf (converts), (3) fakir (poor, <50% of basic needs), (4) miskin (needy, >50% but <100% of basic needs), (5) riqab (salves), (6) gharimin (debtor), (7) ibn us-Sabil (wayfarer), (8) fi Sabilillah (in the way of Allah)

29. 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.

30. 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).

31. 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 ): 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 an-nuqud (gold and silver coins), or immovable (ghair manqul) such as landed property (‘aqr).

32. 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)

33. 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.

34. 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.

35. 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.

36. 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.

37. CONCLUSION (Cont.)
The Islamic economic system of distribution and re-distribution 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.

38. COMPARISON OF ECONOMIC SYSTEMS
Capitalist Market Economy
Socialist Command Economy
Islamic Economy System
Motivation
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.
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 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.

39. COMPARISON OF ECONOMIC SYSTEMS
Capitalist Market Economy
Socialist Command Economy
Islamic Economy System
Ownership
Private individuals and enterprises own all property and resources
All resources and property owned by the state
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.” (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). 

40. COMPARISON OF ECONOMIC SYSTEMS
Capitalist Market Economy
Socialist Command Economy
Islamic Economy System
Decision-making
Every decision is made by buyers and sellers through markets, and the price mechanism governs distribution
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)

41. COMPARISON OF ECONOMIC SYSTEMS
Capitalist Market Economy
Socialist Command Economy
Islamic Economy System
Implementation
To protect private property and enhance the environment for the market system.
Requires a central bank and a conventional banking system based on usury, and man-made common law.
Production, market forces and business firms are state-controlled. Marx & Engels wrote the “Articles of Confession” renamed the “Communist Party Manifesto” in1848: involves measures that revolutionize the mode of production (1848:25-6);
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.
5. Centralization of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.
Based on Shari’ah, which is Divine (not man-made law).
Emphasis should be on distribution involving Islamic partnerships based on profit-share.
And re-distribution according to the bayt al-mal (involving taxes prescribed by Islam: c.f. Ibn Khaldun and discussion on taxation and supply economics).

42. Capitalism Makes the Majority Poor…

43. …And So Does Socialism…

44. THANK YOU