IRTI Working Paper Series

WP# 1432-01

The Economic Problem: Can Islam Play an Effective Role in Solving it Efficiently as well as Equitably?
M. Umer Chapra

Shaban 12, 1432H | July 13, 2011

Islamic Economics and Finance Research Division

IRTI Working Paper 1432-01 Title: The Economic Problem: Can Islam Play an Effective Role in Solving it Efficiently as well as Equitably? Author(s): M. Umer Chapra Abstract The generally recognized economic problem of mankind is how best to satisfy the basic needs of all people around the world in spite of the prevailing scarcity of resources. Since this is not happening, the paper argues that the primary reason is the secular worldview which has weakened the social and ethical foundations of human life and placed primary reliance on the market mechanism to ensure efficiency as well as justice in the use of resources. This has inadvertently ended up providing sanctity to the social-Darwinist principles of struggle for existence and survival of the fittest. The result is that the concepts of economic man and the serving of self-interest by maximizing wealth and want satisfaction have gained supremacy. In sharp contrast with this, the worldview of most religions, and particularly that of Islam, emphasizes the concepts of human brotherhood and the well-being of all and provides certain moral restraints on the serving of self-interest. While it recognizes the important role of the market mechanism for this purpose, it does not consider it to be sufficient. It provides a moral orientation to all human activity, including the market mechanism, so that they operate within the framework of moral principles emanating from Divine revelations which treat all human beings as brothers and the resources at their disposal as a trust from God. The whole paper hovers around a discussion of how such a worldview can help solve the economic problem efficiently as well as equitably.

IRTI Working Paper Series has been created to quickly disseminate the findings of the work in progress and share ideas on the issues related to theoretical and practical development of Islamic economics and finance so as to encourage exchange of thoughts. The presentations of papers in this series may not be fully polished. The papers carry the names of the authors and should be accordingly cited. The views expressed in these papers are those of the authors and do not necessarily reflect the views of the Islamic Research and Training Institute or the Islamic Development Bank or those of the members of its Board of Executive Directors or its member countries.

Islamic Research and Training Institute P.O. Box 9201, Jeddah 21413, Kingdom of Saudi Arabia

THE ECONOMIC PROBLEM: CAN ISLAM PLAY AN EFFECTIVE ROLE IN SOLVING IT EFFICIENTLY AS WELL AS EQUITABLY?

M. Umer Chapra, Ph.D. Adviser Islamic Research and Training Institute Islamic Development Bank Jeddah, Saudi Arabia

The author registers his grateful thanks to Dr. Lamine Doghri, Director General of the Islamic Research and Training Institute, Islamic Development Bank, for the support he provided to enable him to write this paper. He is also thankful to Shaikh Muhammad Rashid for the efficient secretarial assistance rendered by him in the preparation of this paper.

** UChapra@isdb.org

The generally recognized principal economic problem of mankind is how to adequately satisfy the basic needs of all people around the world. Even though the effective solution of this problem is one of the essential requisites for ensuring general human well-being, it does not seem to have been satisfactorily solved anywhere. The consequence is that, as well articulated by The Economist (2009), life is becoming a dismal slog in an ugly world.1 Why is this the case? One possible reason may be that the resources at the disposal of human beings are scarce and not sufficient for fulfilling the needs of all. The acceptance of this reason would be tantamount to justifying the status quo and exonerating ourselves of any responsibility for our failure to remedy the situation. In addition, it would also fail to explain why there is abundance, waste and conspicuous consumption in some places while there is poverty and hunger in others. The real fact, however, is that the resources at the disposal of humanity are scarce only in a relative sense. If they are used efficiently as well as equitably, it should be possible to fulfill the needs of all. This, then, raises the crucial question of what is the cause of the failure to use these resources efficiently as well as equitably. It may not be possible to answer this question satisfactorily without finding an effective mechanism for answering the three familiar questions of what, how and for whom to produce. This makes it imperative to decide how much of which alternative goods and services should be produced, who will produce them most efficiently at the lowest possible cost, and who will enjoy, to what extent, the benefit of the goods and services produced. The answers to these questions in any economic system depend essentially on its vision and strategy. The vision as well as the strategy are, in turn, outcomes of the systems worldview or underlying philosophy about the origin of the universe, the meaning and nature of human life on earth, the real ownership of the resources at the disposal of individuals, and the goals that need to be realized with these resources. Such a philosophy serves the same purpose for the economic system as the foundation does for a building. When the whole building is completed, the supporting masonry is often invisible and unmentioned. It has, however played, and continues to play, a determining role in answering these questions. THE UNDERLYING PHILOSOPHY OF CAPITALISM AND MARXISM The underlying philosophy of capitalism, which developed in the 18th and 19 centuries, tried to answer these questions under the influence of the prevailing zeitgeist, which was, and continues to be, secular and materialist. It arose in Europe as a reaction against the domination and corruption of the Church. The reaction, as is often the case, took an extreme form and, instead of getting rid of just the corruption and domination of the Church, it went to the extreme of shaking faith in the metaphysical foundation and values that the Church stood for.2 Consequently, in sharp contrast with the religious worldview, the whole universe came to be considered as having come into existence through the operation of random forces in a self-designed and self-propelled evolutionary process without any planning and design by a Supreme Creator.
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If the universe was the product of random forces in such an automatic evolutionary process, then the human being, who is an integral part of it, could not have been different. He also, therefore, began to be considered as a product of the same random forces. There was, then, no reason to assume that there would be any purpose behind his creation. Human purpose accordingly became, in the words of Bertrand Russel, a concept which was scientifically useless.3 In spite of resistance from religious forces, secularism began to gradually strengthen its roots in not only the Western societies but also the rest of the world. In the process of this drift towards secularism, there was a substantial weakening of the social and ethical foundations of human life? 4 The vacuum left by the weakening of these foundations began to be filled by concepts like the struggle for existence and survival of the fittest5 under the influence of what came to be termed in the late nineteenth century as social-Darwinism. Another concept which also tried to fill the vacuum was utilitarianism which tried to determine the values of good and bad or right and wrong in relative terms by the measurable criteria of pleasure and pain6, instead of the absolute principles of morality.. The human being thus became denigrated to a covetous machine interested primarily in maximizing his wealth and want satisfaction. This gave birth to the concept of economic man, which has served as the kingpin of modern economics in spite of several protests against it. The primary well-spring of the economic mans life became the serving of self-interest. His behaviour was supposed to be in conformity with what Jevons called the mechanics of utility and self-interest.7 This may not have deserved censor because it is also possible for a person to serve his/her long-run self-interest by serving social interest. However, the Nobel Laureate, Prof. Milton Friedman, specified it more clearly by saying that the economic mans one and only one social responsibility was to increase his profit.8 In a human society which was influenced so far by the humanitarian moral values, even though not fully, the undue emphasis on maximizing profit naturally led to the crucial question of how would social interest be served if everyone was concerned only with the serving his own self-interest? In reply to this vitally important question, it was argued that competition would help create the needed harmony between private and public interests. In a perfectly competitive economy, the Invisible Hand of market forces would exert a restraint on self-interest and, thereby, promote the interest of the whole society.9 The answers to the three questions of what, how and for whom to produce would be provided by the Invisible Hand of market forces in a way that would serve the interest of all. There was no need for any socially agreed values or of government role for this purpose. Self-interest, competition and profit motive thus became the pillars of the capitalist philosophy and gave primacy to material acquisitions, consumerism, and the growth mania. It was not realized adequately that there are several clandestine ways of avoiding and curbing competition, and benefiting at the expense of others. If the inner goodness of human nature along with moral values, even though weakened, had not exerted a restraining influence on this mania, the condition of the world might perhaps have been worse than what has been actually experienced. Marxism is just an extension of this same secularist philosophy of capitalism. In fact, it has played a greater role in undermining the authority of morals as a result of its antagonism towards religion. The major difference between 2

the two is that under Marxism the answers to the three questions of what, how and for whom to produce were to be provided by collectivization and central planning, while they are provided by private property and market mechanism under capitalism. This proved to be worse than capitalism as a result of a built-in flaw in its very foundation. Its fundamental philosophy did not contain anything that would help reform the individual who is at the core of decision making related to private as well as collectivized property. If the individual is considered to be incapable of managing private property within the constraints of social interest, how would he be able to manage collectivized property in a way that would serve social interest when he has greater power to benefit himself at the expense of others? The system accordingly failed. THE UNDERLYING PHILOSOPHY OF ISLAM The underlying philosophy of Islam is fundamentally different from the secularist approach of both Capitalism and Marxism. It aims at creating a balance between the material and the spiritual needs of human beings and between selfinterest and social interest. While there is nothing basically wrong in serving ones self-interest there has to be some kind of a mechanism to ensure that the individual does not cross the limit and transgress the rights of others. The primary mechanism generally considered sufficient for this purpose in a secularist environment is perfectly competitive market system with some government intervention in the economy. Marxism relied excessively on the government but did not succeed in creating a better society. Capitalism, initially considered perfect competition to be sufficient for safeguarding the social interest and was, therefore, in favour of only a minimum role for the government in the economy. However, social unrest, economic fluctuations and financial crises have led to the recognition of a much larger role for the government in the economy. While increased role of the government has been beneficial, it has also led to an unhealthy expansion in government budgetary deficits and public debt. This has worsened the economic fundamentals in favour of greater economic and financial instability. The economic problem, thus, continues to remain unresolved and leads one to reflect on the real cause of the inability to solve the problem. Is it just the size of the private or public sectors in the economy or is it the human factor which plays a central role in both of these? It is often not realized that the common element in both the public and private sectors is the human being. If he is not right, the public sector may also fail to solve the economic problem in the same way as the private sector has. It may, in fact, be worse because of the greater power in the hands of bureaucrats. It is well-known that power corrupts and absolute power corrupt absolutely. Therefore, reform of the human being and the institutions that affect his behaviour need to be given a prominent place in any effort to ensure the safeguard of social interest. Accordingly, the crucial ingredient of the Islamic philosophy is reform of the individual human being himself as well as the institutions that affect his outlook and behaviour. While he is, directly or indirectly, the end of all socio-economic and political activity, he is also the means and, unless he is reformed, it will be difficult to solve the problems faced by human beings. For the reform of the human being, the building blocks of the Islamic philosophy consist of three interrelated concepts. These are: Tawhid (Oneness of 3

God, the Creator of this universe), Khilafah (Vicegerency of human beings), and Adalah (The central role of justice in all aspects of life). All these three concepts are interrelated and are together intended to change the worldview of the individual and his outlook towards life. These concepts can together help reform him in three ways, firstly, by adjusting his attitude towards himself in the light of accountability before God for everything that be does; secondly, changing his relationship with other human beings on the basis of brotherhood and mutual care; and lastly, reorienting his outlook towards all the resources at his disposal, including the environment, as a trust from God to be utilized in a way that would ensure the well-being of all. This raises the question of what is Tawhid and why is it necessary to have belief in an abstract other-worldly concept like this to solve the economic problem in this world. Tawhid10, even though it appears to be an other-worldly concept, has a tremendous impact on human attitudes and behavior. It is oriented towards creating a meaningful change in a persons behaviour toward himself, his family, other human beings, the resources at his disposal, and the environment. It essentially implies that the universe which is so vast and complex but which, nevertheless, runs in an orderly and efficient manner, has not come into existence by itself. It has been created by the Supreme Being. Once this fact is accepted, it would be inconceivable to think that the Supreme Being would create the universe as well as the human beings without a purpose. This raises the crucial question of what the purpose is behind the creation of human beings. The purpose, according to the Qur n, is to be a mercy or blessing (rahmah) for everyone and everything created by God (al- lam n) (al-Qur n, 21:107). The word al- lam n is normally translated as mankind. It has, however, a much wider connotation and incorporates everything other than God Himself. It, thus, encompasses not only human beings but also animals, birds, insects, and the entire physical environment.11 How can human beings become a blessing for all of Gods creation? Can this happen automatically by everyone trying to serve his/her own self-interest? If this had been the case, the task would have been much easier. This has, however, not been the case. There has been a great deal of exploitation and conflict in this world along with usurpation of the rights of others. It may not, therefore, be rational to expect the answer to this question to be yes. This is because while the serving of self-interest is sometimes in harmony with social inertest, it is not always so. It is also in conflict at other times. To minimize the chances of conflict, it is necessary to create harmony in human relationships and interactions. How to create such harmony? Market forces can themselves be helpful to a certain extent. They cannot, however, be relied upon fully for this purpose. It is also necessary to have certain rules of behaviour along with a motivating mechanism to ensure abidance by these rules. If certain rules of behavior are needed, then we are faced with the difficult question of who is going to provide these rules of behaviour? It has to be someone who is impartial and has no axe of his own to grind. The only one who is qualified to do this is the Creator of human beings Himself? He does not have any axe to grind and also knows very well their strengths as well as weaknesses. In order to help them, and not to leave them in the dark, He has Himself formulated these rules (called moral values) and sent them to mankind through a chain of His Messengers, the last of whom was Muhammad, peace and blessings of God be on them all. 4

Once it is accepted that there is a purpose behind the creation of human beings and that there are also certain rules of behaviour that need to be observed, then it is necessary to ensure that these rules are observed. It would be to the advantage of human beings themselves to observe these rules, so as to ensure the well-being of all and thus become a blessing for them. However, they may not necessarily do so unless there is accountability along with reward and punishment. Without such accountability and reward and punishment, the rules may be violated and the purpose of making human beings a blessing for all, may not be realized. This accountability can be in this world by the society and the government. However, since it is possible to evade accountability by the society as well as the government and to escape the punishment as a result of influence, wealth or power, it is also necessary to have accountability by someone who cannot be swayed in this manner. The only one who can be relied upon for this purpose is the Supreme Being Himself from whom nothing can be kept hidden and who is also fair and impartial in His judgment. This accountability will take place in the Hereafter where everyone will be rewarded or punished in accordance with the way he has spent his life in this world. To enable the human beings to fulfill the purpose of their creation, the Creator has also equipped them with four indispensable assets. One of these is the best possible physical constitution (ahsana taqwim) (al-Quran, 95: 4). This should enable them to fulfill all their needs and, thereby, make their life more comfortable. The second asset is a clean inner self (fitrah) without any inherent flaw in it. Accordingly, all human beings are good by nature and are capable of preserving this inner goodness if they so desire. If they do not preserve their inner goodness and do things that are in conflict with it, then they will hurt not only their own interest but also that of others and may, thereby become the lowest of the low (al-Quran, 95:5).The third asset is intellect (aql), which distinguishes them from all other creatures. If used properly, it should enable them to use the God-given resources in a way that would enable them to become a blessing for themselves as well as the rest of mankind and the environment. In addition to these three assets, they also have the advantage of having the fourth asset, which is Divine Guidance (huda) sent to them from time to time by their Creator Himself through a chain of Messengers, all of whom were human beings. Their mission was not just to deliver the message like postmen but also to act upon and implement it so as to serve as role models (uswah hasanah) for others. Given these assets, the human beings have not been left alone to grope in the dark. They have rather been well-equipped by their Creator to enable them to fulfill their mission of being a blessing not only for mankind but also the rest of Gods creation. If they do not use these assets in a consciencious and meaningful manner to ensure the well-being of all and, thereby, become a blessing for them, they will also subject their own selves to misery (al-Quran,20:124). It will, accordingly, be in their own larger interest to live up to their mission and to lead their lives in accordance with the Guidance provided by Him. Within the framework of this worldview, the human being is not a born sinner , a pawn on the chessboard of history, a product of chance evolution, or a tabula rasa. He is rather the khalifah or vicegerent of God on earth (al-Quran, 2:30), created with the purpose of being a blessing for all of Gods creation. His designation as the khalifah of the Creator of the Universe does not only accord him an honour and a dignity, but also provides his life with a meaning and a purpose. His enabling physical constitution and his innate good nature (fitrah) along with his intellect and the guidance sent to him by God through His Messengers should 5

enable him to fulfill the purpose of his creation in a meaningful and respectable manner. The concept of khil fah thus involves a number of implications. Some of these are: (1) A conviction in the fundamental unity of the human family and the equality and dignity of all human beings, irrespective of whether they are white or coloured, rich or poor, and male or female. (2) A conviction that the human being, as khalifah of God, is not the primary owner of resources provided to him by God. He is just a trustee.12 He must acquire them only rightfully13 and use them in accordance with the terms of the trust to serve not only his own self but also his family, other human beings, all other creatures, and the environment.14 It is not becoming of him to act in a selfish manner or to use these resources wastefully or lavishly. (3) A conviction that the right attitude towards other human beings, all members of Gods family, is not might is right, struggle to serve just ones own self interest, and survival of the fittest, but rather of brotherhood and equality, love and affection, and mutual care and cooperation with the objective of fulfilling the basic needs of all, developing the entire human potential, and enriching human life in such a way as to become a blessing for mankind in keeping with the Quranic vision. Competition is hence allowed in what is good and noble but not in snobbery, selfishness and mutual destruction.15 (4) A conviction that the human being is born free and is subservient to none but Him. The Quran states that one of the primary objectives of all the Messengers of God, irrespective of when and where they lived, was to release mankind from the burdens and chains that bind them (al-Quran, 7: 157). It is this teaching which prompted Umar, the Second Caliph, to ask: Since when have you enslaved people when their mothers gave birth to them as free individuals?16 According to this conviction, man is independent in his decision making and is himself accountable before God. (5) A conviction that the human being is accountable before Him and must, therefore, lead a life in keeping with his status as khalifah of God. As khalifah of God, man is expected to try his best to satisfy all his own essential material as well as spirited needs so as to be able to remain physically, mentally and spiritually healthy, so as to be able to develop and utilize his full potential, and capable of performing his responsibilities as khal fah. There is no point in shunning the good things that God has provided (al-Quran, 7:32). He must enjoy life. It is not the enjoyment of life that stands in the way of spiritual uplift, it is the way this is done. It is not wealth itself, which is bad; it is the way it is acquired and the way it is spent. There is nothing wrong in enjoying life within the framework of the values for righteous living through which Islam seeks to promote human well-being and to become a blessing for mankind. The belief in vicegerency and universal brotherhood would be of little significance without the prevalence of justice. Therefore, socio-economic justice enjoys paramount importance in the Islamic value system. It has been declared to be nearest to righteousness or taqwa (al-Quran, 5:8) in terms of its significance in Islam. Righteousness is naturally the most important because it serves as a springboard for all rightful activity, including justice. The Prophet (pbuh) warned Muslims to Beware of injustice for injustice will lead to absolute darkness on the 6

Day of judgment17. Absolute darkness in the Hereafter will be a reflection of the darkness we have spread in this world by perpetrating injustice. One of the indispensable ingredients of socio-economic justice is the social equality of all, irrespective of whether they are white or black, high or low, rich or poor, and male or female. The only criteria for determining a mans worth are character, ability and service to humanity as the Prophet stressed: God does not look at your body or your wealth; He looks rather at your heart and your deeds.18 The noblest of you are the best in character and the most beloved of you before God is the one who is the most beneficial to others.19 The second ingredient of socio-economic justice is everyones equitable right of access to God-given resources and the absence of anyones monopoly over them or the denial of a fair share to others. One of the ways through which this can be attained is to enable everyone to get his due for his contribution to society or to the social product and to prevent the exploitation of one individual by another. The Quran urges Muslims to Withhold not things justly due to others (al-Quran, 26:183), implying thereby that every individual must get what is really due to him and not be deprived by others of his/her fair share. A third ingredient of socio-economic justice is the fulfillment of everyones basic needs through his own effort and not by begging unless he is constrained to do so because of his handicap and inability to earn. This is the natural implication of the dignity inherent in every human beings status as Gods vicegerent. Adequate income from work should be the primary basis of his wellbeing. Everyone should be able to utilize his time and ability productively and should have a job or an occupation in keeping with his ability to enable him to do so. An important goal of the Muslim society should, hence, be the creation of conditions that would enable a person to earn sufficient income to enable him to realize a standard of living that is adequate for not only his own well-being but also that of his family. However, it is the moral responsibility of the society to fulfill the basic needs of those who are unable to do so because of some handicap. The Islamic economy should hence be organized in such a way that: a) Everyone who is able to work and is looking for a job or a vocation is able to find one in accordance with his ability, and is able to earn a just income which is adequate to satisfy his own as well as his familys fundamental needs; b) No one is able to get an income that is not justified by the services rendered by him; c) There is no concentration of political, financial and/or economic power in a few hands; d) There is a built-in arrangement to provide social security to those who need it in the event of unemployment, sickness, disability, old age and inability to earn an adequate livelihood as a result of circumstances beyond their control; and e) Redistribution of income and wealth to the extent necessary and justified to prevent the concentration of wealth in a few hand, and to meet the genuine needs of all members of society who are unable to do so through their own effort. A balanced and just economic system should be able to help actualize the above goals whose realization is necessary to foster the feelings of brotherhood and 7

cooperation in society and to bring to a readily the Islamic vision of becoming a blessing for mankind. An unbalanced and unfair economic system can, however, create a vast array of unwarranted wants, sharpen the acquisitive spirit in human beings, cultivate in them greed and envy, make them selfish and unscrupulous, and become a major source of injustice and misery for others. The balanced and just economic system that Islam wishes to establish cannot be brought to reality by making marginal adjustments here and there in the prevailing acquisitive system. It would require not only a transformation of the human beings themselves but also a reform of their social relationships and socio-economic institutions. THE THREE QUESTIONS In the light of this underlying philosophy of Islam, and particularly the status of human beings as khalifahs of God, it should be possible to derive the answers to the three fundamental economic questions of what, how and for whom to produce in a way that would help realize the vision of being a blessing for mankind that Islam has set before itself. WHAT TO PRODUCE One of the most important things that fulfillment of the vision requires is the use of scarce resources in such a way that everyones essential needs are adequately satisfied without depleting the non-renewable resources excessively and without deteriorating the environment. Is it possible for the market system operating in a secular framework, where everyone is free to lay as much claim on resources as he wishes in keeping with his income and his tastes and preferences, to answer by itself the crucial question of what to produce, or is it also necessary to complement it by something else? Keeping in view the experience of the market system so far, it may not be possible for the answer to be anything other than no. The system needs to be complemented by something else. Three of the most important of these for creating a just and balanced society where the needs of all human beings are adequately satisfied from the available limited resources are: (i) a set of values or rules of behaviour that would help create an equitable balance in the claims on resources along with (ii) a motivating mechanism to enable people to act upon these values, and (iii) a supporting role of the government. The answer given by conventional economics with its utilitarian philosophy is, however, yes. Sidestepping the crucial questions of ethics, justice and redistribution, it puts excessive emphasis on the serving of self-interest. It therefore considers maximization of total utility by each individual in keeping with his own tastes and preferences to be the sole end of economic activity. It assumes, without any empirical or logical basis, that total human well-being can be maximized by everyone trying to maximize his/her total individual utility through the satisfaction of a maximum amount of wants. The nature and quality of this utility and its distribution among members of the society do not get the kind of attention they need because these involve value judgments and economists are not supposed to make value judgments. The serving of self-interest by the maximization of income and satisfaction of a maximum amount of wants has, thus, become the primary objective of the economic system. Accordingly, the entire machinery of production is directly or indirectly directed toward this objective, irrespective of whether the satisfaction of such wants is necessary for fulfilling human needs and realizing human well-being. 8

Moreover, it is also considered perfectly legitimate to create and multiply wants through advertising, including the promotion of pornography, aimless fashions and unnecessary model changes. This has led to two adverse results. Firstly, there is an excessive strain on scarce resources through the production of goods and services which do not fulfill a genuine human need. Tawney has, hence, rightly stated that a part of goods which are annually produced, and which are called wealth is, strictly speaking, waste, because it consists of articles which, though reckoned as part of the income of the nation, either should not have been produced until other articles had been produced in sufficient abundance or should not have been produced at all.20 Secondly, it has led to living beyond means and an excessive rise in debt, which is generally agreed to have been one of the major causes of international financial crises. The total amount of world debt in the form of bonds more than doubled over the last decade from $18.8 trillion in 2000 to $ 39.5 trillion in 2010, and is expected to rise further to $42.2 trillion in 2011 and $ 45.4 trillion in 2012.21 In spite of this excessive increase in consumption and debt, real well-being has not been actualized.23 Accordingly, the perception, as already quoted from The Economist (2009), is that life is becoming a dismal slog in an ugly world. If resources were unlimited, such an unlimited and unnecessary expansion of wants, even though wasteful and morally questionable, may not have created any serious problem. However, resources available at the disposal of human beings are limited. This raises the problem of how an equilibrium can be brought about between infinite wants and finite resources in such a way that the basic needs of all people are satisfied? One of the ways would be to remove the wants that are not related to need fulfillment. This would naturally require value judgments. Since value judgments are considered to be ultra vires in a secular market system, the inevitable choice of which wants are to be satisfied and what is to be produced has to be made by the invisible hand of market forces through the plebiscite of the price system. Everyone goes to the market and buys whatever he wishes in keeping with his tastes and preferences within the constraints of his income and ability to borrow. Each unit of currency spent by an individual for the purchase of a good or service represents a ballot. If more money is being spent on liquor than on milk, it is because the demand for liquor is stronger and so more of national resources automatically get allocated to the production of liquor. There are, however, a number of flaws in this reasoning. Firstly, the price system assumes that the urgency of wants of different consumers can be compared by the use of prices because each unit of currency represents a ballot. The willingness on the part of two individuals to spend an equal amount of money is assumed to indicate wants of equal urgency. This premise is questionable because, even though the urgency for milk is the same for children irrespective of whether they are rich or poor, the amount of dollar votes that a poor family is able to cast for milk is not the same as that which a rich family is able to cast for liquor or status symbols. Secondly, the free-play of market forces would be able to bring about the desired allocation of resources through such an inter-personal comparison of the urgency of wants expressed via dollar votes only if there existed an equal distribution of income, wealth and bank credit in the economy. This is, however, 9

not the case. It is well-known that incomes and wealth are unequally distributed. The financial system aggravates this further by an unequal distribution of credit. This is but natural because the banks give credit in accordance with the borrowers ability to repay which is determined by his wealth and cash flow. In the absence of this unequal distribution of income, wealth and credit, the richer strata of society having a share of national income and credit significantly more than in proportion to their numerical size, would be able to divert scarce national resources, by the sheer weight of their votes, into products which are socially less desirable. Therefore, the resultant allocation of resources would also be socially less desirable. Thirdly, perfectly competitive market conditions remain an unrealized dream. Innumerable imperfections exist in the market. These thwart the efficient operation of market forces and lead to prices that do not reflect real costs or benefits. Consequently prices of goods and services tend to be far above opportunity costs and payments to resource owners tend to be far above or below the value of their contribution to real output. Fourthly, the aimless pursuit by a number of people to satisfy an endless number of wants puts pressure on individual and national resources and on public and private finances. This contributes to: a) pollution and deterioration of the environment as a result of unnecessary production and excessive use of resources; b) people working much harder than they should to satisfy unnecessary wants in conformity with the culture of consumerism, the result being insufficient leisure for pursuing some essential objectives of life like moral and intellectual uplift, proper upbringing of children, and family and social solidarity; and c) an unhealthy expansion in credit to both the public and the private sectors, contributing thereby to excessive monetary and debt expansion, inflation and financial crises. Since a high rate of expansion in both inflation and debt are both considered undesirable, efforts are then made to reduce aggregate demand in an overall across-the-board manner. This contributes to an economic slowdown or recession and unemployment and adds to human misery, particularly of the lower income people because such an across-the-board reduction affects them more severely. No wonder Samuelson has pointed out that Laissez faire perfect competition could lead to starving couples; to malnourished children who grow up to produce malnourished children; to perpetuation of Lorenz curves of great inequality of incomes and wealth for generations or forever. He further adds that Adam Smith ... had no right to assert that an Invisible Hand successfully channels individuals who selfishly seek their own interest into promoting the public interest... Smith has proved nothing of this kind nor has any economist since 1776.24 The question of what to produce is, hence, not possible to be answered by market forces alone if the desire is to satisfy the essential needs of all individuals in society and to avoid inflationary pressures. What is needed for this purpose is some mechanism to complement the price system with a view to remove the demand for goods and services that does not contribute meaningfully to human well-being. How can this be done? One indispensable way is to inject greater responsibility and discipline into the market system by means of a set of moral values that can help realize the well-being of all individuals in society. The market, as aptly pointed out by Schumacher, is the institutionalization of individualism 10

and non-responsibility. Neither the buyer nor the seller is responsible for anything but himself.23 How then should the question be answered? It may not be possible to answer this question without first determining the objective of the production process. The main objective should be to produce goods and services which fulfill the genuine needs of all human beings and, thereby, help ensure for them a dignified existence in conformity with the maq id al-Shariah.25 It should not magnify social inequalities and snobbishness by producing goods for conspicuous consumption and creating, thereby, an unhealthy competition to keep up with the Joneses. Accordingly, the social milieu as well as the advertising machinery needs to be reformed with a view to reduce the desire for inessential goods as well as the unhealthy competition for their purchase. Since the use of force is out of question for this purpose, the only other alternative is education that is attuned to change the tastes and preferences of the people in a way that would help fulfill the needs of society and solve its problems. Efficiency, therefore, needs to be defined in the light of this goal. An economy should be termed efficient only if it is able to produce enough of the essential goods and services that are necessary for satisfying the fundamental needs of all its people. The allocation of resources should only then be considered as optimum. If not, then the economy is either inefficient or underdeveloped.26 An economy should be considered as inefficient even if it is rich and highly developed if its wealth and development have not led to the satisfaction of the fundamental needs of its entire people. It is inefficient because of the diversion of resources to the production of inessential goods and services carrying lesser priority on the human needs scale. How can an economy be enabled to satisfy the essential needs of the whole society within the framework just stated. Considering the value attached by Islam to individual freedom, regimentation of the economy is out of the question. The appropriate answer would, hence, have to be found in a goal-oriented market system operating within the framework of spiritual values, moral transformation of society, and complementary role of the government. No hard and fast rules can be laid down for this purpose. What everyone needs to do is ask himself before going to the market: Is this good or service indispensable for me compared with the essential need of someone also who may be deprived of it as a result of my unnecessary claim on scarce resources? In addition to safeguarding individual freedom, such a system can also be more conducive to individual imitative, creativity and efficiency. All the Messengers of God came to this world to establish such a system and their teachings are a part of the heritage of practically all societies around the world to the extent to which these teachings have not been lost or compromised. HOW TO PRODUCE The objective of any rational society should be to combine the factors of production in such a proportion as to minimize wastage and costs, lighten the burden of work and remove drudgery, and get the maximum out of minimum. The costs to be minimized should not however be just private monetary costs; they should also take into account social costs, costs to both the present and the future generations, and costs due to moral degeneration, increase in crime, family and social disintegration, and pollution of the environment. Moreover, the production process or the form of business organization should be such that it does not 11

contribute to concentration of wealth and power in a few hands and does not lead to the exploitation of some individuals by others. In a secular market system, the profit maximizer is the societys agent to determine how goods and services are to be produced. The price system serves as his signaling device. Competition forces him to minimize his costs. He maximizes his profit at the point where his marginal cost becomes equal to the price of the product. Thus, it is argued, self-interest along with competition creates a selfpolicing world where no moral values or government intervention are necessary to ensure order and public interest. While healthy competition is indispensable for not only minimizing costs, but also improving quality and raising efficiency, ruthless competition, i.e. competition which is in conflict with the objectives (maq id) of the Shariah, two of the most important of which are brotherhood and cooperation, needs to be eschewed. Ruthless competition takes root, on the one hand, in consumerism which puts too much emphasis on the acquisition of more and more material goods and the satisfaction of a maximum amount of wants, and, on the other hand, in promoting the psychology of economic man. Both of these behaviour patterns tend to foster aggression and unscrupulousness, and thereby, exact a considerable toll in human well-being through their social and economic costs. It is, therefore, important to inject a moral dimension, along with a positive role of the government, into the market system to ensure that competition is healthy and the market operates not only efficiently but also equitably. Hence, every effort needs to be made in an Islamic economy to encourage healthy competition with a view to reduce the costs of production and improve the quality of the products through greater efficiency, innovation and organizational improvements. Cut-throat competition, which leads to underselling, dumping, falsifying of information, destruction of competitors, economic insecurity and disregard of market externalities and social costs, needs to be curbed. This cannot be done by relying primarily on the price mechanism. It is also necessary to promote reform of the society and greater cooperation among producers and consumers. A constructive role of social and economic organizations as well as educational institutions and the government is also indispensable and cannot be dispensed with. The form of business organization that would be in harmony with the Islamic ideal of socio-economic justice would normally be small and mediumsized. This would be conducive to the equitable distribution of income and wealth that Islam so forcefully emphasizes. It would also help develop the human potential and enable entrepreneurs to contribute their best to the social product. Being generally labour intensive, it would also be more suitable for countries with a relatively large population. This idea gets support even from the general awareness of economists that in many industries the optimum plant size for efficient operations is much smaller than the average firm size.27 Large business should normally be encouraged only where it is necessary. However, when such business is established, it should be properly regulated to ensure that the interests of consumers, equity holders, employees and other stakeholders are adequately safeguarded. Such a mixture of a large number of small- and medium-sized units combined with a few properly regulated large-scale businesses should help in the realization of social justice, greater economic efficiency and more creativity. 12

The emphasis on small- and medium-scale business would imply a number of structural changes in the organization of business and industries.28 Some of these are: firstly, the development of technology that is conducive to the realization of this goal; secondly, the establishment of businesses in places where people are living and are, therefore, not obliged to migrate to large metropolitan areas away from their families in search of work; thirdly, the cost of establishing such businesses is reasonably low so as to be within the means of a large number of individuals; fourthly, the creation of a spirit of cooperation among businesses and industries so that they can solve their problems mutually and yet retain healthy competition among them for greater efficiency; and fifthly, the banking system should be so organized and regulated that it is not indulgent to large businesses and difficult with small ones. FOR WHOM TO PRODUCE Conventional economists working under the self-imposed constraint of not making value judgments or interpersonal comparisons have generally taken themselves out of the theoretical-philosophical discussion of how income ought to be distributed. The criterion of Pareto optimality provided the intellectual rationale for the perpetuation of inequitable distribution. This is because any redistribution would make the rich somewhat worse off even though it would make the poor substantially better off and the net gain to society would be substantially positive. Gross inequalities of income and wealth are repugnant to the spirit of Islam and incompatible with its ethos of brotherhood and socio-economic justice. Such inequalities destroy rather than foster the feelings of brotherhood that Islam wishes to promote. This makes it imperative for Muslim societies to have a programme for redistribution that would help make claims on resources within the limits of humanity.29 and also ensure a standard of living that is humane and respectable and in harmony with the dignity of man inherent in his being Gods vicegerent on earth. A Muslim society that fails to guarantee such a humane standard is really not worthy of the name as the Prophet rightly declared that: He is not a true Muslim who eats his fill when his neighbour is hungry.30 In the Islamic system as in some other morally-oriented systems, firstly, all dishonest means of earning and unscrupulous practices (including monopoly, hoarding, dumping, cheating and fraud) to gain an advantage over others through unfair means have been strictly prohibited. The honest implementation of this prohibition should help reduce a major source of inequitable distribution of income. Secondly, exploitation of labour has been condemned and payment of a just wage has been required. What a just wage is would need to be determined in the light of a number of factors, including the output of labor, the income that is needed to support an average family, the extent of economic development of the country relative to the size of its population, and the vocational training facilities available to enable labour to be more efficient and able to earn the necessary wage. Thirdly, return on financial capital without participation in the risk of business has been prohibited. The financier should either participate in the risk through profitand-loss sharing or get no return. This will not only help remove one of the major sources of inequalities of income but also reduce the tendency towards excessive lending which tends to prevail in any system that is not based on risk-sharing. Thirdly, Islam has made it morally incumbent on society to take care of the needs of the poor, that is, those who are unable to take care of their needs themselves as a result of their inability to work or their low productivity. This is an obligation in 13

the form of zakah, which is not a tax but rather a religious obligation on the part of the rich to help the poor. All their essential needs which cannot be met by their own effort must be met by the society out of the proceeds of zakah and sadaqat. If these are not sufficient, a special tax should be levied for this purpose after taking into account its impact on incentives, overall output, and development. CONCLUSION The secularist market system, with its undue emphasis on individual selfinterest and disregard for the healthy role that moral values can play in reforming individual tastes and preferences as well as social norms and attitudes, has failed to bring about an equitable balance between unlimited wants and limited resources. It has inadvertently put the entire burden on the price mechanism. This has tipped the balance in favour of the rich. Critiques of the system have, therefore, rightly indicated that the system has on the whole been highly unjust and has aggravated the inequalities of income and wealth. Its utilitarian philosophy, combined with the enormous power of its advertising machine and the high social status enjoyed by conspicuous consumption, has led to a large-scale multiplication of wants, most of them superficial and unnecessary for human well-being. Credit to both the public and private sectors has risen excessively to satisfy this expansion in wants. This has been the result of a built-in flaw in the interest- based financial system where the banks do not share in the risk and have, therefore, an incentive to lend as much as they can to maximize their profit. The acceleration of demand at a rate far beyond the ability of the economy to supply goods and services tends to generate inflationary pressures. Efforts are then made to reduce aggregate demand in a value-free, across-the-board manner. This leads to recession and unemployment, adding further to the woes of the poor. A role for the government has now become generally recognized under the influence of socialism, the Great Depression, economic downtowns, and financial crises. This is undoubtedly a welcome change in capitalist thinking. However, it has also led to a substantial rise in government spending. Without a corresponding decrease in inessential spending elsewhere, it has led to unduly large budgetary deficits in many countries around the world. The total world debt has consequently risen substantially - a phenomenon which has been generally recognized as one of the major causes of financial crises. Only social health at a deeper level can help bring about a just economic system that is capable of satisfying the needs of all without creating economic imbalances. In the Islamic economic system, the primary emphasis has to be on the difficult but indispensable moral transformation of individuals and society and the establishment of appropriate social and economic institutions to curb inessential spending and improve the condition of the poor. The government should also play an active and constructive role but depend more on the moral reform of society and the development of appropriate social and economic institutions rather than its coercive power which should be used only to the extent to which it is necessary. The government machinery should not be allowed to degenerate into despotism and to perpetuate injustice in the same manner as blind market forces do. The replacement of wants by needs in the private sector and rationalization of government budgets along with application of the means test in government welfare spending should help substantially reduce the imbalances and the rise in 14

debt that has been created by the propagation of infinite wants and indiscriminate government spending. The greater the need fulfillment of the poor and the higher the decline in inequalities, the more effective should be the impact on efficiency and output as well as brotherhood and social solidarity. This should help reduce the gulf between the rich and the poor and, thereby, help extinguish the flames of social tensions and conflict. With wealth being considered only a means rather than an end and with lesser emphasis being put on worldly possessions and conspicuous consumption, more leisure should become available to the operators in the economy for devoting to indispensable social and spiritual pursuits, proper upbringing of children, and social solidarity. This should help restore to life the richness of its meaning, and to human beings the dignity they deserve as vicegerents of the Creator Who is Infinitely Wise and Merciful. The Muslim world, however, is still in the grip of the conventional system and is, besides, suffering from a number of maladies as a result of centuries of decline and lack of proper Islamic education. Reform movements are, however, trying to bring about a change, and authoritarian regimes which serve as the backbone of the prevailing system are also gradually collapsing. Let us, therefore, hope that the Muslim world will be able to reform itself and become able to provide the right kind of model to the rest of the world.

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FOOTNOTES
1. 2. 3. 4. The Economist, Onwards and Upwards: Why is the Modern View of Progress so Improvised?, 19 December,2009, pp. 35-38. See Edwin A. Burtt, The Metaphysical Foundations of Modern Science (Garden City, New York, Doubleday, 1955. Bertrand Russel, The Impact of Science on Society (New York: Simon and Schuster, 1953), p. 6. Jacques Barzun, Darwin, Marx,, Wagner (New York: Doubleday, 1950) p. 87. See also the article on Psychology, in the Encyclopedia of Philosophy which says, In the long reductive process man first had lost his soul, then his mind, then his consciousness and finally even his body, which was reduced to a permanent possibility of neutralized sensations (New York: Macmillan and the Free Press, 1967), vol. VII, p. 27. Barzun, 1950, op. cit., p. 92. George A. Miller, Psychology: The Science of Mental Life (New York: Harper & Row, 1962), pp. 230-31. The following passage in which Veblen ridicules the hedonistic concept of man may be of interest to the reader: The hedonistic conception of man is that a lightning calculator of pleasures and pains, who oscillates like a homogenous globule of desire of happiness under the impulse of stimuli that shift him about the area. He has neither antecedent nor consequent. He is an isolated, definitive human datum, in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or another. Self-imposed in elemental space he spins symmetrically about his own spiritual axis until the parallelogram of forces bears down upon him whereat he follows the line of the resultant, when the force of the impact is spent, he comes to rest a self-contained globule of desire as before . (Thorstein Veblen, The Place of Science in Modern Civilization, New York: B.W. Huebsch, 1919), pp.73-4 7. 8. 9. Jevons, W. S. The Theory of Political Economy (Reprint of the 1871 edition, New York: A. M. Kelly, 1965).
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5. 6.

See, Milton Friedman, Capitalism and Freedom (Chicago: The University of Chicago Press, 1972), p. 133. Adam Smith, Invisible Hand in L.S. Stepelevich, ed., The Capitalist Reader (New York: Arlington House Publishers, 1977), p. 20. See also, Wilhelm Roepke, Ordered Anarchy, ibid., p. 32.

10. For a clear presentation of the concept of Tawhid and its implications for the Islamic way of life, see, M. N. Siddiqi, Taw id, the Concept and the Process in K. Ahmad and Z.I. Ansari, Islamic Perspectives (Leicester, U.K.: The Islamic Foundation,1979), pp. 17-33. See also, Bilal Philips. The Fundamentals of Tawheed: Islamic Monotheism (Birmingham, UK: Al-Hidayah Publishing, 2004). 11. See the Quranic exegesis by al-Qurtubi (1952), Al-Jamili Ahkam al-Quran (Beirut: Dar al-Kitab a-Arabi), Vol. 1, p. 138. 12. And believe in God and His Prophet, and spend of that in which He has made you a trustee (al-Quran, 57:7). 13. Do not eat up your wealth among yourselves wrongfully nor offer it to officials with the objective of eating up w r o n g f u l l y and intentionally the wealth of others (al-Qur an, 2:188).

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14. And in their wealth is a known right for the needy who asks and the deprived (al-Qur an, 70:24). And seek, with the wealth that God has given you, the abode of the Hereafter, but do not forget your share in this world. And do good (to others) as God has done good to you, And spread not mischief for God does not like those who do mischief (al-Qur an, 28:77). 15. The Qur an exhorts: Seek to excel each other in all that is good (2:148). The Holy Prophet stressed Do not despise each other, do not turn your back toward each other, and do not vie with each other [in worldly things) but be like brothers, creatures of the One God (Sahih Muslim, Cairo: Isa al-Babi alHalabi, 1955, vol. 4, p. 1986: 31). 16.

Ali al-Tantawi and Naji al-Tantawi, Akhbaru Umar (Damascus: Dar al-Fikr, 1959), p. 268.

17. Sahih Muslim (1955), vol. 4, p. 1996:56, Kitab al-Birr wa al-Silah wa al-Adab, Bab Tahrim al-Zulm, from Jabir ibn Abdallah. The Prophet, peace and blessings of God be on him, has used the word zulumat in this hadith. Zulumat is the plural of zulmah or darkness, and signifies several layers of darkness, leading ultimately to pitch or absolute darkness, as is also evident in the Quranic verse, 24:40. 18. Sahib Muslim op. cit. vol. 4, p. 1987: 34. 19. Sahih al-Bukhari (Cairo: Muhammad Ali Subayhi, n.d.), vol. 8, p. 15. 20. R. H. Tawney, The Acquisitive Society (New York: Harcourt Bran, 1948), p. 38. 21. These figures were retrieved on 24 May 2011 from the world debt clock website (http://ca.gdc.s3.amazonaws.com/index.html). 22. See, Bruno S. Frey and Alois Stutzer, What can Economics Learn from Happiness Research? in Journal of Economic Literature (June, 2002), p.403. The literature on the determinants of human well-being has been growing rapidly. For a survey of this literature, see David G. Myers, The Pursuit of Happiness: Who is Happy and Why? (New York: Avon, 1993). 23. See Samuelson, Economics (New York: McGraw Hill, 11 th ed, 1980, p. 591, p. 591. 24. E. F. Schumacher, Small is Beautiful (London: Blond and Briggs, 1973), p.40. 25. For some further light on this subject in the light of the maqasid al-Shariah as developed by al-Ghazali and al-Shatibi, see Anas Zarqa Islamic Economics: An Approach to Human Welfare in K. Ahmad, ed., Studies in Islamic Economics (Leicester, U.K.:The Islamic Foundation, 1980), pp.13-17.See also, M. Umer Chapra, The Islamic Vision of Development in the light of Maq id al-Shariah (Jeddah: Islamic Research and Training Institute/Islamic Development Bank, 2008). 26. There are a number of western scholars who have expressed the same view. Schumacher, for example, states: An industrial system which uses 40 per cent of world s primary resources to supply less than 6 % of the worlds population could be called efficient only if it obtained strikingly successful results in terms of human happiness, well-being culture, peace and harmony. Schumacher, op. cit., p. 109. 27. Robert L. Heilbroner, et. al., In the name of Profit (New York: Warner, 1973), p. 209. 28. In the writing of this section, the author has benefitted from Schumacher, op. cit., p. 163.

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29. Abdul Hamid Abu-Sulayman, The Theory of the Economics of Islam in Contemporary Aspects of Economic Thinking in Islam (American Trust Publications, 1976), p. 20.

30. Muhammad bin Islamil al-Bukhari, al-Adab al-Mufrad, (Cairo: Qusay Muhib alDin al-Khatib, 2nd ed., 1379 A.H.), p. 52: 112.

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