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Economic System and its Analysis
The existing financial system is based on the principles of market economy which claims
to resolve the below mentioned economic problems.
What to Produce? That is , Determination of Priorities
As we know that human wants are unlimited but the resources are scares, so the problem
of making choice between alternatives arises. Which want has to be satisfied first and
which has to be deferred is the problem of making choice. For example, I have got $50 to
purchase flour or cloth, fruits or vegetables or simply spend my $50 on dining out. So, I
have got these five options available and choose the one among these five is called
“Determination of Priorities”.
The problem of determination of priorities is not restricted to the micro level (humans
only) but also encompasses the Macro level (The whole nation). Every country has got
limited amount of resources for example, human resource, mineral resource, and
monetary resource. Alternatively, the requirements and want of the whole nation is
almost near to infinite. Now to determine what to produce by utilizing these limited
resources and which product should be given preference over the others is called the
problem of “Determination of Priorities”.
How to produce? Allocation of Resources.
The second problem is the allocation of resources (land, labor and capital). What and how
much of the resource is allocated to produce what and in how much quantity of the
products. For Example, we have got land available to us, now how many acres of land
should be allocated for the cultivation of wheat, and how many acres of land should be
allocated for cotton production. Similarly, we have got the capability to develop
production units (factories). Now how many factories should be leather producing
factories, and how many of cement producing or food and beverage factories. This
problem of allocation of different resources for the production of different product is
called the problem of “Allocation of Resources”.
For Whom to Produce? That is Distribution of Income
The third problem is “Distribution of Income”. That is, how and on what basis to
distribute production or income among the different units of society which was generated
after utilization of above mentioned resources. This problem is called the problem of
“Distribution of Income in Economics”.
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Note:- For the students’ facilitation translation in English language is done from the book
“Islam aur Jadeed Maeeshat” written by Maulana Taqi Usmani Sahib. In case of any
disagreements/errors and for the true translation of verses of the Holy Quran and
Hadiths’ original book should be referred.
The last problem the countries face is problem of development.
Development
Fourth problem is “Development” i.e. How to improve our economic conditions? So that
the resulted production will be of high degree in terms of quality and quantity. How to
innovate new things, improve technology and develop new products so that society as a
whole gets the benefit and achieve higher income levels and opportunities to improve
their economic well being. This problem in economics is called the problem of
“Development”..
To solve these economic problems the market economy suggest the following,
Market Economy /Capitalism

First, understand philosophy of market economy on the basis of which it claims to
resolve the four basic economic problems.
Market economy or capitalism suggest that the one and only solution to these problems
is to get every individual free for business and commercial activities and to give him right
to choose any method of making maximum profits as he thinks best. By giving this
liberty to the individuals, these economic problems would be resolved themselves.
Because if everyone intends to make maximum profits then he will work that is most
wanted by the society and this way aforementioned problems would be resolved
automatically. But the question arises here as to how these economic problems be solved
themselves? To answer this question, some explanation is required.
1. Factually, this universe is made on different natural principles and laws that
results the same every time they are applied. One of these laws is the “Law of
Supply and Demand”. Supply is the quantity of goods and services that the
seller is willing and able to sell in the market whereas demand is the quantity of
goods and services that the buyer is willing and able to buy from the market.
The law of supply and demand says that whenever there is an excess of supply
over demand, price will go down and wherever there is shortage of supply
compare to demand, price will rise. For instance, in extremely hot and sunny
weather, there are more people who demand ice that is demand for ice increases.
If supply of ice remains the same, price of ice would get increased.
Nevertheless, price will not increase if percentage increase in supply is exactly
the same as percentage increase in demand. Likewise, in winter season, demand
for ice goes down and keeping supply constant, price of ice will go down. This
law is known as law of Supply and Demand.
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2. Philosophy of market economy says that this basic natural law of supply and
demand helps farmers determine what to produce. This law also helps
industrialists, manufacturers, and sellers determine what to sell in the market
place and in what quantity. This way aforementioned basic economic issues
would be resolved easily.
3. Supply and demand analysis answers the basic question of determination of

priorities in a way that the seller will bring the commodity to the market that is
most demanded by people so that he can receive higher prices. Likewise,
farmers and industrialist will produce and sell the product which is in high
demand. Because if they bring less demanded commodity in the market they
will receive less price. Resultantly, although everyone acts for his own self
interest, supply and demand forces bound them to fulfill supply and demand of
the society. Producers will keep on producing and selling commodity in the
market as long as there is excess demand over supply and stop bringing the
product in the market when supply equates demand. That’s why there is always
a production of that product which is demanded by the society. Moreover,
quantity of produced goods would be as same as needed by the society.
4. Allocation of Resources
Allocation of resources is a function of determination of priorities; one allocates

his resources according to the set priorities. So, supply and demand forces also
allocate the resources like determination of priorities. Resultantly, people
allocate their resources e.g. land, labor, capital to the production and selling of
those products which are high in demand for high profits. So, supply and
demand automatically solve the issue of allocation of resources.
5. The third problem is of distribution of income. According to the market

economy, income should be distributed among the factors of production which
are as follows.
 Land
 Labor
 Capital
 Entrepreneur
Entrepreneur or entrepreneurship is a person or organization that intends to

establish, produce something and arrange to manage the other three factors of
production and takes risk in the business. According to the market economy, rent
is the compensation of land owner or land provider, wage is the compensation of
labor, interest is the compensation of capital provider and profit (if any) will be
given to the entrepreneur.
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Question arises as to what amount of compensation is given to land owner as rent,
to labor as wages, and to capital supplier as interest and who will determine this.
The answer lies with supply and demand forces, the factor which is highly
demanded will be given more compensation.
Suppose Zaid wants to start manufacturing of cloths, as he is responsible for

arranging and managing other three factors of production and undertake to bear
risk of loss. He is called entrepreneur in economics. Firstly, he required a piece of
land to build factory, if he doesn’t own the piece of land then he has to take it on
rent. Amount of rent is again determined by the market force of supply and
demand. If people who want to rent out are more than the people who want to
acquire rented property, rent amount may be low. Conversely, is true for high rent
amount.
Secondly, Zaid requires laborers to work for him in the factory. Compensation of
laborers is also determined by the market forces of supply and demand. If more
laborers are willing to work than demanded, wages may be low and opposite is
true for high wage. Similarly, to purchase capital equipment and/or machineries
Zaid requires funds. The price of money (funds) needed by Zaid is also
determined by the supply and demand forces. If there are more lenders than
borrowers, the price of money i.e. interest rate may be low and conversely is true
for high interest rate. After the land, labor and capital suppliers are paid, the
residual is for the entrepreneur to enjoy.
In this way, problem of distribution of income is also resolved by the market

forces of supply and demand.
6. Development is the fourth economic problem. Every economy needs to grow and
develop its production opportunities. According to the market economy, if every
individual is absolutely free to undertake any economic activity for making profits
then people will produce innovative and quality products to increase their
profitability and the objective of development can be accomplished.
PRINCIPLES OF THE MARKET ECONOMY
There are three basic principles of capitalism.
1. Private Property
In market economy, it is human right to own both consumption and capital goods.
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2. Profit Motive
Secondly, the basic element present in production activities is profit motive.
3. Laissez Faire
One of the principles of capitalism is to restrict Government to interfere in business

and commercial activities. This principle of capitalism is known by the term Laissez
Faire. Infact, it is a French word that means “No Government interference” or “Let
us do”. Government is asked not to indulge and interfere in any commercial and
business activity and let the businesses free from any restrictions, policies,
procedures and laws imposed by the Government. It is absolutely no right of the
Government to ask businessmen and industrialist about production & distribution
activities undertaken by businesses.
Afterwards, this basic principle of Laissez Faire seem to be relaxed in almost all
capitalist countries and practically no Government can absolutely keep itself away
from indulging into businesses and industries. Sometimes Government interferes
through taxing the businesses and industries and sometime provides relief to
businesses by providing subsidies. Today, there is not a single country which has no
Government intervention. Nevertheless, the basic principle of Capitalism was no
Government Interference and give full liberty to businessmen and industrialists. On
the basis of this, it is said that “The best Government is the one which does less
Governance” means no interference.
As the basic element of capitalism is profit motive for capitalist, it is called

Capitalism. Second name for capitalism is Market Economy. That is an economy
based on market. That’s why in capitalism we get help from Market Forces of
supply and demand.
SOCIALISM
Infact, Socialism was born in reaction of Capitalism. Capitalism emphasized on an

absolute freedom of individuals where they enjoy utter liberty for making maximum
profits even at the cost of the whole society. In capitalism, market forces are the only
solution to every economic problem that may arise. Due to this, there had been several
cases reported of abuse of a common man and the gap between rich and poor had
widened. Socialism claimed to resolve these problems. It challenged the concept of
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capitalism and refused to accept the solution given by the capitalism of profit motive,
private ownership and supply and demand forces to resolve economic problems.
Socialism pointed out that capitalism provides the blind and deaf solution of market
forces to resolve every economic problem which purely works for private profit motive
and do not take into account the social welfare and the society at large. Particularly
distribution of income results in inequity. For instance, if supply of labor increases then
wage will decrease. Sometime, laborers are bound to work for lower wages. These lower
wages are insufficient to provide the laborers and their family with food and basic
necessities of life. Industrialist takes undue advantage of increase in supply of labor and
they do not care about the insufficient wage which is paid to laborers. Rather, industrialist
always looks for their own profitability. So, according to socialism, the way given by the
capitalism of distribution of income is absolutely unjust and unfair and the benefits and
profits revolve only within the circle of some industrialists.
Contrarily in socialism, economic problems like determination of priorities, allocation of

resources and development will not be solved by the mere law of supply and demand. In
capitalism, this can be true philosophically that profits motive of the farmer and
industrialist stimulates them to produce and sell unless supply and demand equates each
other and stop producing and selling when supply is about to exceed demand. Practically,
farmers and industrialists have no instruments to have timely information to gauge the
level of supply and demand. So, suppliers sometime makes mistake by underestimating
the market supply figure and thrown more goods to the market. Consequently, excess
supply results in inefficient use of productive resources which then turns into market
downfall and factories shut down. Businesses become bankrupt and number of economic
problems arises. So, mere law of supply and demand cannot determine the priorities as
needed by the society.
Now the question arises as to how these economic problems be resolved? To answer this,
philosophy of socialism is at the point of view that the root cause of this problem is
private ownership of both the consumption and capital goods in capitalism. So, for the
efficient utilization of resources, it shall be in the ownership of one centralized command
i.e. the Government. So that it knows the exact amount of resources and the proper
places where these resources can be utilized. On this basis, allocation of resources ,
determination of priorities and development is the responsibility of the one centralized
command. Distribution of income is also done by the Government because Land and
capital are government owned. Wages of labor is also determined by the government
keeping in view that every labor is getting the true price for their labor.
Capitalism gave the concept of market force and private ownership to resolve these
economic problems. On the contrary, socialism gave the concept of one centralized
command system for resolution of these problems. That’s why , socialism is also called
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“Planned Economic System” which translates in Arabic as Ikhtisaad Mojhath or
Ikhtisaad Mukatat.
PRINCIPLES OF SOCIALISM
On the basis of its aforementioned philosophy, following are the principles of socialism.
Collective Property
The meaning of this principle is that factors of production e.g. land and factories etc
should not be in the private ownership of an individual. Rather, factors of production
should be owned and managed by the centralized planning command of the state.
Consumption and daily usage goods may be owned by an individual but factories, land
and machineries must be in the ownership and under the management of the state. In this
manner, labor is entitled for wages only which is prescribed by the central planning
department of the Government.
Planning
The second principle of socialism is Planning. The meaning of this principle is that the
state’s central planning department is responsible for resolving all the basic economic
problems. In this planning, all the economic resources and expenditures are quantified
first, then decision is made as to what and how many resources are allocated to resolve
which problem. What thing should be produced in what quantity? And what should be
the compensation of labor in different sectors?
Socialism gave the basic concept of state ownership but most of the capitalists countries
started to allow their Government to intervene in the businesses and industries. Reason
being that sooner or later capitalist’s countries were no longer kept their original view of
lasses faire intact. So the new terminology of Mixed Economy came into being, meaning
that economy should be run with the basic principles of market forces but Govt. can
intervene and even own some of the industries based on economic need. In most of the
capitalists economies, Railway, Electricity, Telephone and Air services etc are owned and
managed by the Government, where as privately owned and managed industries have got
little intervention from the Government pertaining to laws and regulations. Former
industries lie under the umbrella of public sector and later in private sector. In mixed
economy, as Government intervention is partial so it takes part partially in planning too.
For instance, Government “Five years plan” etc. Contrarily, socialism gives Government
utter rights for planning.
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Collective Interest
Third principle of socialism is collective interest. In capitalism, every individual works

for his or her own interest while in socialism central planning authority makes planning
after taking into account the interest of the entire society collectively.
Equitable distribution of Income
The fourth principle of socialism is equitable distribution of income driven from the
factors of production. Shortening gap between rich and poor countries, income equality.
Initially, it was claimed to have equity in all spheres of life including income but contrary
was happened practically.
Analysis of Both Capitalism and Socialism
There had been difference of opinions and quarrels on the subject matter of capitalism
and socialism over more than a century. Both technical and political differences emerged
and booked in such large volumes that one can easily develop a library on this subject.
All of these discussions cannot be presented over here, but for understanding, here are
some points of differences I want to highlight.
Analysis on Socialism
It is reasonable to discuss the traits of socialism first because of its comparative easiness.
Socialism was correct in saying that excess liberty is provided to the individual in
capitalism in a manner that social welfare is lagged behind. Solution provided to this vary
problem by socialism is itself based on extremism. Absolute and unconditional freedom
given by capitalism made the individual free for making profits by what ever source he
thinks best, even at the cost of the society at large. On the other hand, socialism restricted
individual freedom in the way that his natural and physiological abilities were crushed
down. In capitalism, cure to every economic problem is the forces of supply of demand
while socialism refused to accept utterly these natural forces of supply and demand and
made one centralized economic planning unit curable for all economic illnesses. Though
in some of the situations, man made policies become useless, unfavorable, and redundant.
Human often faces many social problems in his or her life but all of these problems may
not be resolved through mere planning process. For instance, when man or woman want
to get wedded, both look for the right person. In certain situations, they take the wrong
decision and realize after the marriage. Some people never find the ideal, and are
deprived of getting married. Instead of having these difficulties in this social problem, no
one can say that this problem should be taken and resolved by the Government or the
State is responsible to make sure that every citizen gets the right match. If any
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Government tries to make the system to solve this social problem, that would be
unnatural and artificial system which does not give fruitful results.
Similarly, the problem that which profession has to be chosen by a person ? What and
how much involvement should be in the factors of production? Or in what manner should
we serve the society? Factually these are the social problems which gives the under
mentioned bad results if solved through dry planning process.
1. Planning is done by the state in socialism, Planners are humans not angels so
there is every probability that they commit mistakes and even do blunders
deliberately or un-deliberately. Some times they may be influenced by their
wishful thought that may be harmful for the society as a whole. It is said that a
man is a social animal and his wants are unlimited. If the entire resources and
income of all the factors of production are given to some people, it is not wise
enough to expect them not to do embezzlement which may result in macro level
disasters. If a very small capitalist having limited resources given absolute
freedom, can harm some people, then it is unwise to think that some people if
given resources and income of the entire economy, don’t do embezzlement. This
will results in phasing out of small capitalist and emergence of one big capitalist
called Socialist who then capture the entire resources and income of the entire
economy.
2. Without centralized, blocked, influential and brutal government, the plan of
socialism cannot be enforced and run. Socialism requires individuals to act in the
manner the state thinks best for them, so without brutal power, it cannot be
enforced. For socialism to be run, political and individual freedom must be
sacrificed.
3. Socialism retards individual’s freedom of profit motive which stimulates people
to work. It creates inefficiency and ineffectiveness because there is no difference
in reward for more or less work and good or bad work. All laborers are paid
equally regardless of their ability, skills and quality of work. Resultantly, people
choose not to work efficiently and by crushing this individual natural freedom,
there capabilities will go in vain.
Aforementioned loopholes are not of ideological differences. Practical

implementation of socialism in Russia for 74 years has proved its inefficiency and
ineffectiveness. Not a long time ago, socialism was in vogue in Russia and no one
could talk about inefficiencies of socialism. If so, is considered to be an agent of
capitalists. But, when Soviet Union wrecked , the president of Russia clearly said
that
“Had the practical experience of socialism be made on a small part of Africa,

instead of the big Russia, it would have not taken 74 years to know its
wreckage.” (News week)
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Analysis on Capitalism
Now, we analyze capitalism. After the failure of socialism , pro-capitalists

authorities were claiming that the only true economic system is Capitalism. In
fact, success or failure of socialism is not a function of success and failure of
capitalism and it is not correlated with the Capitalism. Socialism failed because of
its own intrinsic defects and loopholes. The reason why socialism was collapsed
is that it did not identify, analyze and resolve the flaws in capitalism. Instead
socialism adopted some other wrong ways. So, it is the time to realize and
acknowledge the basic flaws of capitalism.
In fact, the philosophy of capitalism is true as far as private profit motive and the
concept of market forces is concerned because it is close to nature. But
unconditional and absolute freedom of making profit is the route cause which
does not differentiate between what is permitted (Halal) and what is prohibited
(Haraam). It leads to unequal and unjust distribution of income in the society.
Absolute and un conditional right of profit making causes monopoly to exist.
Monopoly means only one individual or group has authority for the entire market
supply. So consumers are bound to purchase the product from that monopolist at
what ever price he sets.
Following are some of the economic ills that are emerged because of the absolute
and unconditional right of profit motive was given more importance in capitalism.
1. As there were no differences between Halaal and Haraam in Capitalism so

it resulted in most of the social and economic ills. The motive of making
maximum profit stimulate inner selves to do wrong acts (wine , gambling,
speculation, uncertainty , interest etc) for making profits. That created
unethical disturbances in the society. This is the one of reasons why
westerns are so bad in there habits. Nude films makes lot of profits at the
cost of the society. Women sells their body and indulge in sexual labor on
certain rates. Recent reports on service industry shows that models are
ahead of everyone in terms of remuneration in the entire service Industry.
The heavy amount paid to them is ultimately be recovered from the
general public as marketing and selling expenses increases which
ultimately results in augmenting the selling price of the product.
2. If there are huge profits in making nude films then why do people
undertake the project of home making for poor that has fewer profit
margins.
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3. In the absence of restrictions on the right of profit making, people are
indulged in the activities which earns higher profits at the cost of harming
the entire society. E.g. ( Interest, gambling , and speculation). Monopoly is
the big example for the inefficient market. Capitalism talks about the free
market forces on the one hand, and create monopoly on the other. In
monopoly, market forces are no more applicable.
Islamic Principles of Economics
After giving brief introduction about Socialism and Capitalism, now I want to
discuss the principles of Islam regarding four basics economic problems. It should
be clear and understood in the very beginning that Islam is not an economic
system. Rather, it is a “Deen” . The principle of which pertains to each and every
course of business. One of them is an Economy. So, there is no particular
philosophy or rule written in Quraan and Hadith. There is no direct discussion
about allocation of resources, distribution of income , determination of priorities
and development in Islamic Fiqh. But, Islam has given some principles regarding
economy like other spheres of life. Out of these principles, we do able to
understand the point of view given by Islam regarding these economic problems.
After reading and analyzing principles of Islam regarding economy, one can
understand that Islam allows market forces of supply and demand.
Under mentioned is the meaning of verse number 32 of Surah
“We have divided the economy among them and made some of them superior
on some others so that they can help each other in doing their work.
Therefore, it is very much clear that the one who provides his services is supply
and the one who takes it is demand. Through interaction of supply and demand,
an equitable economy can be established.
At the time of Hazrat Muhammad (S.A.W) when rural people used to take their
produce to the city in order to sell it, some urban people used to say to the rural
person that don’t sell your produce in the city on your own. Sell your produce to
me first and then I will sell the produce in the city when the appropriate time
comes so that higher prices may be received.
Hazrat Muhammad (S.A.W) said, the meaning of which is as follows.
“Let people be free so that Allah gives some of them food through some other
people”
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So, Hazrat Muhammad (S.A.W) restricted the presence of the third person
between buyer and seller so that the true equilibrium of supply and demand is
established. Logically speaking , if the rural individual sells the products on his
own , he will sell it without storing it. He will have to go back to his village. But,
if some urban person purchase the product and then sell it, there is higher
probability that he will wait for the time at which he draws maximum price. He
will store the goods and create temporary shortage in the market. This disturbs the
basic of market forces of supply and demand.
When the question of setting market prices was asked from Hazrat
Muhammad (S.AW). (He replied, the meaning of which is as follows.)
“Undoubted , Allah is the one who sets market prices. He who reduces supply
and expand it. And He is the best provider.”
Accepting that Allah Tah’la sets prices is the implied acceptance that Allah Tah’la
has set the natural principles of supply and demand which determines the market
prices. Setting artificial prices without taking natural markets forces into account
is disliked.
It is very much clear from the aforementioned sayings of Quraan o Sunnah, that
Islam accepts the market forces of supply and demand utterly. Similarly, right of
profit motive is also acceptable. In Capitalism, there is an absolute and
unconditional right given for private profit and market forces. This is the reason
why already discussed deficiencies are created. Contrarily, Islam accepts the right
of profit motive and principles of market forces. It does not permit someone to
harm the entire society and the system. Islam imposes certain conditions and
stipulations on these rights so that economic and social evils of the society are
eliminated.
Following are the conditions imposed on the profit motive.
Devine restrictions
Islam imposes certain conditions on the economy which can be implemented

irrespective of the society and time. For instance; Interest , Gambling , etc are
strictly prohibited in the Muslim economy. These thing usually creates
monopolies and creates disturbances in the society. Similarly, the things which
are responsible for hurting ethical and moral values are also prohibited.
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It should be very much clear that these prohibitions are from Allah for all
mankind. Islam does not let it on humans to decide whether this is beneficial or
not. Had these decision been made by humans, there would have been
disagreements among different people based on personal traits and geographical
locations. One thing which is true for one person or place may not be true for
another person or place. That’s why , Allah Tah’la knows that these restrictions
are necessary for all the people irrespective of place that’s why Allah made it
concrete through Wahee. So that a man based on his own logic will not let the
society and economy disturb.
So it is very much clear that these conditions and stipulations imposed by Quraan
o Sunnah are practicable whether the rationale of the stipulated principles are
understood by the people or not.
As discussed previously, some of the capitalists nations have imposed certain

laws and regulations on the market structure but these stipulations are not enough
and lacks with what is actually prohibited by Quraan and Sunnah. For instance,
interest , gambling etc are legally allowed in western nations that creates
economic disturbances.
State Restrictions
In Sharia point of view, it is allowed for the Government to restrict trade

of the goods which are not haram and comes in the category of Mubah but for the
given point in time it create social ills. For instance, govt can restrict the trade of
melon if cholera exist in the society. So, buying and selling of melon is prohibited
in sharia point of view till the restriction of the govt prevails. Exclusive material
on this particular subject matter”Sadd e Zaraae” has been written and booked by
sharia’ scholars.
By this principle , Govt can impose rules and regulations for the welfare of the
Economy or save the economy and society from illness. Once Hazrat Umer (R.A)
saw that one seller is selling the products below the market price. Hazrat Umer
(R.A) said, (the meaning of which is as follows)
“Whether increase the prices or leave the market”
The reason of the above statement is not written in the books. But the
reason why Hazrat Umer (R.A) restricted that person to sell the product below the
market price may be he thinks that low selling price causes harm to other seller at
large. Or may be he was at the point of view that low selling price results in
excessive consumption or storage by the consumers. Basic shariah’ principle
permits the seller to sell the product at whatever prices. Selling on the low
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price in the above case is permissible by shariah’ but Hazrat Umer (R.A)
restricted that person because of the societal issue at large.
Following is the meaning of the verse which permits the Govt to impose
the conditions of this type.
O’ believer, obey Allah, and obey prophet, and who has authority
over you.
In the above mentioned translation of the Aayat, there is a difference

between obedience of Allah and his Prophet and the people of Authority. Only
those orders of the authority should be obeyed which are inconformity of the
Quraan o Sunnah.
It should be clear that this is not an absolute right of the Govt to impose
such restrictions without any limits. Rather, restrictions should be in line with
certain principles laid down by shariah. The details of these principles are not laid
down here but two points are taken into consideration here for the purpose of
discussion. Firstly, the condition or law or principle made by the Govt is only
implemented when it is not contrary to the Shaira rules. Secondly, Govt can
impose such orders only when there is a collective problem of the society as a
whole. A well renowned fiqh book says the following statement in the particular
matter.
Government Authority on the people are subject to the need

So, if the Govt imposes certain law in the absence of societal needs , that
law is prohibited and one can terminate this in the court of law.
Moral Restrictions
As discussed earlier, that Islam is a Deen not a an economic system. Islam

teaches in all sphere of life including economics. Islamic teaching regarding
economics clearly shows that material well being is not an end. Quraan o sunnah
emphasized that the worldly life is a short term life and the life hereafter is
immortal that never ends. Humans should devote their energies for making this
world as a means to achieve a good end. i.e. the life hereafter. So, making more
and more money is not a success. Rather, success lies in the work beneficial for
the life hereafter. The way to achieve this end is the work done in this world most
liked by Allah Tahla’. When this thinking is developed in human mind, then he
will not consider only material things to make money but he will also consider the
acts done for the benefit of the life comes hereafter. There are certain situations
the mandatory orders of which are not exclusively given by the Allah Tahla’ but
benefits of such acts are disclosed. In relation to it, human can impose certain
restrictions to himself.
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One of the simple examples of such situations is as follows. If a person has an
option to develop and construct an amusement park which is more profitable than
the projects of constructing homes for poor people having low profits. Then, a
person of secular mind would choose the project of amusement park while a
person having religious mind will opt for the home construction project for poor
people because he considers the benefits of the life hereafter.
In the aforementioned situations , Shariah allows either projects but the one who
has fear of Allah and belief on the day of judgment imposed moral restrictions on
himself. This moral restrictions helps determining better allocation of resources
and better distribution of income. This was the simple example, if belief on the
day of judgment is strong then it leads to prosperous economic conditions.
I am not opposing the fact that un Islamic societies have moral values which have
positive effects on the economy, but as they are lacking in the faith of the day of
judgment, thus entire benefits of moral values are not achieved. Contrary to it,
Islam with its full implementation has much more positive economic effects. So
moral restriction in Islam pertaining to the economy is not weak rather, it has
much more value.
Generation and Distribution of Income in different economic

systems
The discussion has been made yet, was an ideological discussion on

economy. Now, I want to discuss this briefly as to what procedure be adopted by
the different economies for the practical implementation of the basic principles of
the economies already discussed.
1. Production of Wealth.
In this , the subject matter of the discussion is how and in what ways the income
or wealth is being produced in different economic systems? And what is the role
of people, organizations and Government. This subject is named as Intaj ul
sharwah in Arabic.
2. Distribution of Wealth
In this, the subject matter of the discussion is that how to distribute the income or
production which is acquired or produced in different economic units.? This
subject is named as Tozee os sorooh in Arabic.
3. Exchange of Wealth
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In this , the subject matter of discussion is that how to exchange things with one
another. This subject is named as Mubadu us sorooh in Arabic
4. Consumption of Wealth
In this , the subject of utilization of acquired income or wealth is discussed. This

is called Esthelaak us sorroh in Arabic.
As far as exchange and consumption of wealth is concerned, presently, I will
defer it. If Allah permits, this subject will be discussed later in this book.
Although , production and distribution of wealth is the subject matter of
discussion at this point in time in relation with comparative study of socialism,
capitalism and Islamic economic system.
Production and distribution of wealth in Capitalism
The basic concept of the capitalism is based on the following factors of

production. These factors of production is called Aawalm ul Antaaj in Arabic.
1. Land
This factor of production is directly and utterly provided by Allah. Human are not
involved in the production of this factor.
2. Labor
It means the labor of humans used for the production.
3. Capital
It is the produced factor of production. This is not natural but comes into being by
some production process and can be used for further production.
4. Entrepreneur
A person responsible of managing and organizing all of the above factors of

production is called Entrepreneur. He takes the risk of profits and losses. Present
capitalism system is based on the idea that production process is composed of the
combination and usage of all the four factors of production mentioned earlier.
Although, sometimes these four factors are get together in an only one person i.e.
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land is owned by the same person who provides the labor. And the same person is
also responsible for managing the other factors.
But in large scale industries these four factors are provided by the different
people. They all take part in the production process so they are entitled for the
return of the production. About the distribution of income , it is an ideology in
capitalism that the rent should be given to landowner, wages should be given to
the labor, and interest should be given to capital supplier/Financier. Entrepreneur
is entitled for the profit. First three returns of factor i.e. rent, wages and interest is
predetermined and set by the market forces while there is a risk in the return of
entrepreneur in capitalism. Entrepreneur is entitled for the return only when all
the three aforementioned factors are paid.
Production and distribution of wealth in Socialism
According to the socialism, there are two factors of production instead of

four in capitalism. First, Land and second labor. Both these factors take part in
production. As capital is not involved directly in the production and is the result
of other production process. That’s why cannot be regarded as factor of
production. And Entrepreneur is not a part of factor of production because he does
not manage and take risk in the business instead this is done by the Government
itself.
Although there are just two factors of production in socialism , and there is
no private ownership of land by any individuals so factually there is only one
factor remaining that is labor who provides his services and the wages are also
determined by the Government. This is the renowned point of view of Karl Marx
that
Increase in demand of any product is because of labor
So he says that only labor in entitled for the return. Interest on capital, rent of land
and profit for entrepreneur are useless and redundant that are made artificially.
This point of view is called Theory of Surplus value” and named as Nazria tul
Qadr in Arabic.
Islamic Teachings
The subject matter related to Production and Distribution of wealth is not

discussed in Quraan o Sunnah as it is discussed in economic books. But the
principles/law of Quraan o Sunnah related to the economy does not differentiate
between capital and entrepreneur. In capitalism the risk of profit and loss is
burdened on entrepreneur only and the capital supplier enjoys risk free fixed
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___
return called interest. As interest is prohibited in Islam, so the risk of profit and
loss is imposed on capital. In short, if a person making an investment somewhere
he will have to bear the risk of loss in addition to entitlement for the profit.
According to the teachings of Islam, it does not make any difference in saying
that whether both the capital supplier and entrepreneur are two different factors
(as the capital supplier bears the risk of loss like entrepreneur so he can be called
an entrepreneur partially or completely) or both the capital supplier and
entrepreneur are clubbed to become one factor. Unlike the return for laborers and
landlords , interest should not be given to the capital supplier. In Capitalism , land
is regarded as capital. If fixed rent is given to the land supplier then fixed interest
can also be given to the capital supplier. But this point of view is not permissible
in Islam. Following are the differences between land and capital based on which
both cannot be treated as equal.
1. Land itself is for direct consumption and give the user benefits directly
without damaging its existence. Rent is the return of direct benefits acquired by
the person by using it. Contrarily, capital or money does give the person direct
benefits unless spent on the commodity which gives directs benefits. So, the rent
of capital/money is something illogical because rent is given for those goods the
existence of which remains intact after consuming it.
2. Land , machinery and equipment etc are those things the value of which
decreases if it is used. More usage leads to more decrease in value. So, this
decrease in value is taken into account for calculating the value of rent.
Conversely, the value of money does not decrease if it is consumed.
3. If someone takes land, machinery ,equipment, vehicle etc on rent , he has

no risk of this rented asset. Risk is borne by the owner. It means without due
negligence, if rent property is destroyed, it is the loss of the owner not the tenant.
Conversely, if someone is renting money to other, this money does not in his own
risk. It means if due to any reason money is lost, this is the loss of the borrower
not of the lender. Now, borrower has to pay back the lost money which was
borrowed earlier. Lender does not take any risk on lending money so he is not
entitled for the return .
Out of aforementioned discussion, it is clear that there is a difference between

Islamic principles and capitalism on the basic matter of interest. The return for
capital is predetermined interest in capitalism while in Islam the return for capital
is profit provided that the capital supplier bears the risk of loss. Meaning that, he
has to take part both in profit and loss of the business. Musharakah and Mudarbah
are the ways to it.
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Second differentiating factor is that in both socialism and capitalism income of
factors of production are limited to themselves because they have directly
participated in the production process. But the crux of the Islamic teaching is that
everything eventually be produced by the Allah without Allah’s help no factor can
take part in the production process and cannot produce even a tiny part of the
product. Allah nominated the primary owner of the income for its factors that
produce that production but the there is long list of the secondary factors who
because of the unavailability of the resources does not take part in the production
directly but eligible for the part owner of the income produced by the factors of
production. The distribution of income among secondary factors through zakaat,
usher, sadakat, kifaraat, qurbani, and wirasat. Through these means, a large part of
income is distributed among secondary factors. It is compulsory for the factors of
production i.e. landlord, labor and entrepreneur to give a certain portion of their
income to the secondary factors. This his their duty toward a secondary factors
and not a liability. So, Quran says ( The meaning of which is as follows)
Out of there wealth there is a prescribed portion for needy people.
And says about agriculture products. (The meaning of which is as follows)
Give them their right on the day of harvesting
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Economic System and its Analysis

What to Produce? That is , Determination of Priorities

How to produce? Allocation of Resources.

For Whom to Produce? That is Distribution of Income

Market Economy /Capitalism

3. Supply and demand analysis answers the basic question of determination of

Allocation of resources is a function of determination of priorities; one allocates

5. The third problem is of distribution of income. According to the market

Entrepreneur or entrepreneurship is a person or organization that intends to

Suppose Zaid wants to start manufacturing of cloths, as he is responsible for

In this way, problem of distribution of income is also resolved by the market

PRINCIPLES OF THE MARKET ECONOMY

There are three basic principles of capitalism.

Secondly, the basic element present in production activities is profit motive.

One of the principles of capitalism is to restrict Government to interfere in business

As the basic element of capitalism is profit motive for capitalist, it is called

Infact, Socialism was born in reaction of Capitalism. Capitalism emphasized on an

Contrarily in socialism, economic problems like determination of priorities, allocation of

Third principle of socialism is collective interest. In capitalism, every individual works

Equitable distribution of Income

Analysis of Both Capitalism and Socialism

Aforementioned loopholes are not of ideological differences. Practical

“Had the practical experience of socialism be made on a small part of Africa,

Now, we analyze capitalism. After the failure of socialism , pro-capitalists

1. As there were no differences between Halaal and Haraam in Capitalism so

Islamic Principles of Economics

Under mentioned is the meaning of verse number 32 of Surah

Hazrat Muhammad (S.A.W) said, the meaning of which is as follows.

Following are the conditions imposed on the profit motive.

Islam imposes certain conditions on the economy which can be implemented

As discussed previously, some of the capitalists nations have imposed certain

In Sharia point of view, it is allowed for the Government to restrict trade

In the above mentioned translation of the Aayat, there is a difference

Government Authority on the people are subject to the need

As discussed earlier, that Islam is a Deen not a an economic system. Islam

Generation and Distribution of Income in different economic

The discussion has been made yet, was an ideological discussion on

In this , the subject of utilization of acquired income or wealth is discussed. This

Production and distribution of wealth in Capitalism

The basic concept of the capitalism is based on the following factors of

It means the labor of humans used for the production.

A person responsible of managing and organizing all of the above factors of

Production and distribution of wealth in Socialism

According to the socialism, there are two factors of production instead of

The subject matter related to Production and Distribution of wealth is not

3. If someone takes land, machinery ,equipment, vehicle etc on rent , he has

Out of aforementioned discussion, it is clear that there is a difference between

Out of there wealth there is a prescribed portion for needy people.

And says about agriculture products. (The meaning of which is as follows)

Give them their right on the day of harvesting

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