Contemporary Economics and Islamic Economics

The classification of economic activities into the four areas namely production, exchange, distribution and consumption has been done in a broad manner in order to keep the scope of discussion from going array, otherwise there is much scope of further sub-classifications and refinements. We shall proceed by discussing these four activities in brief.

Written by

Dr. Waquar Anwar

Published on

August 8, 2022
The classification of economic activities into the four areas namely production, exchange, distribution and consumption has been done in a broad manner in order to keep the scope of discussion from going array, otherwise there is much scope of further sub-classifications and refinements. We shall proceed by discussing these four activities in brief.
FACTORS OF PRODUCTION
Production refers to process by which value is added to certain input. A set of inputs is put in the production process that results in an output or a set of outputs. The output is a commodity meant for consumption. The set of inputs for production is called factors of production in economics. These are facilitator for production apart and distinct from the basic inputs in the form of raw material.
Economists talk about four factors of production namely Land, Labour, Capital and Entrepreneurship. Other refinements in the discussion like addition of technology as a factor of production is possible. However, the purpose for which we are discussing these concepts can be served by keeping our arguments limited to the four factors.
Land refers to the natural resources that are available on our planet earth. Apart from land itself, this includes minerals, water, air, vegetations, etc. We may include wildlife and ecosystem in this concept. These are gifts of nature to man.
Labour refers to human resources. It encompasses both physical labour and mental work. So it covers manual labour as well as white-collar and blue collar jobs.
Capital basically refers to capital goods. As against the gifts of nature covered under the concept of labour, above, capital goods means human made resources that are used to produce goods. These are themselves manufactured goods of relatively more durable nature. So these are goods used for production of other goods and as against raw materials they are themselves not consumed in the production process. They remain more or less intact. Examples are machines, tools, trucks, buildings, vehicles, etc. Although capital in the form is not included in this list, it is understood that these items are provided by the entrepreneur or are purchased out of cash capital brought in or from loans arranged for the enterprise. So for all practical purposes this factor of production is simply cash capital converted into capital goods.
Entrepreneurship refers to the ability of persons who take risk of commencing the production activity. Production activity is not possible without someone daring to organise all the above mentioned factors and start the enterprise on the expectation that the venture will be profitable. Success of the enterprise cannot be ensured cent per cent. There is no method to guarantee it. Things may not move in the projected direction and failure may be faced. The entrepreneur takes the risks and goes ahead with the production process.
The contemporary economics talks about payments to these factors of production. The resources generated through the production process are distributed to the four factors as under:
Rent paid for land
Wages paid for labour
Interest paid for capital
Profit paid for entrepreneurship
RELEVANT ISLAMIC PRINCIPLES
Islamic principles are basically extensions, applications and offshoots of the Islamic faith of unity of God. As God is one and no one is partner to Him, there is unity of human beings too. All men are created by the same one God and no one is inherently superior to any other person on account of colour of skin or hair, language spoken, place of birth, caste or creed, etc. So there is no scope or justification of discriminations between human beings on account of birth. As a creature everyone has same status.
Man is vicegerent of God on earth and he is not the primary owner of any resource. Man and his possessions are owned by God and whatever has been especially provided for any person has to be utilised in accordance with the will of the Almighty God. Thus man is accountable for the resources made available to him.
SCARCITY OF RESOURCES
The concept popular with the contemporary economists that resources are basically scarce is not true in the sense that God has created man on earth and provided optimum resources. The idea of niggardliness of nature as said by Ricardo is obnoxious. Nature has provided all that is needed. Now if any paucity is felt, it is because of the faults of man like greed, inefficiency, atrocity on fellow human beings, etc.
Prophet Muhammad (May Allah bless and greet him) said that man will not be ever satisfied. If he gets one valley of gold, he would desire another one. There is truth in the statement attributed to Gandhiji that the earth can satisfy the needs of all persons, but not the greed of even one person.
Another aspect relating to this greed is that man on every part of the earth is vying for ever increasing standard of living and is utilising the resources in complete disregard to environmental risks, making the life on earth difficult. God has not made the earth a place where the so-called living standard of everyone will be better every other day from what it was the previous day. What is happening naturally is that those in possession of resources, rightly or wrongly, are able to increase it, by good or bad means, and those who were left behind are getting backlash continuously. The gap between the haves and have-nots is increasing day by day.
There is a question mark on the total justification of distribution of resources based on competition and efficiency, as understood in the contemporary economics. Such distribution will not always entail justice and well being of human beings. In fact, allocation of resources on the basis of mere efficiency leads to many kinds of injustices. There are many persons and societies who are inherently less-able or differently-able. They will not get any share in the economy or they will get less than what is needed for their survival and natural growth. These are not mere conjectures. Rather things are happening this way around the world in almost all societies.
Allocation of resources should be a function of human well beings. This does not mean that the role of competition based on efficiency has to be negated altogether. Rather, there is the need to inject human element in allocation of resources. Justice alone would not suffice. Equity is required along with justice so that no person or society is denied the basic needs for survival and growth on humane basis.
FILTER MECHANISM
From Islamic point of view there is no problem in the concept of visible and invisible filter mechanism. It is true that invisible market forces play their role in bringing some element of equilibrium in the economy. It is also accepted that this invisible hand of market is not sufficient and the state is compelled to use the visible hands of law in the form of planning, trade laws, taxation and the like. Islam would add the third factor of Moral Filter. A set of moral laws of Islam specifically pertains to economics and commerce while overall Islam’s approach towards morality is that it is binding on all walks of life, be they relate to spiritual life of man or his material and worldly life. Morality in Islam is a permanent value de-linked from time and place which have divine sanctions. So no one is allowed to trespass this filter at any part of the earth and in any era.
FACTORS OF PRODUCTION
Islam has a basic problem with the concept of distribution of factors of production whereby interest is considered to be a payment of capital. Islam’s approach towards interest is uncompromising. Interest is forbidden without any qualification. This inhibition and unqualified prohibition is deep-rooted and it merits a full-fledged discussion (that we intend to do at a later stage).
The factors of production and their respective distribution from Islamic point of view are suggested hereunder.
On the utilisation of land and non-cash capital goods rent is payable;
For labour wages is payable; and
For entrepreneur along with cash capital brought in by him profit is payable. The role of cash capital may be to increase the share of profit. For example, if a production unit is owned by more than one entrepreneur, the share of profit of those of them who have brought him cash capital may be more than that of the partner who has not put in cash in the business. In any case there is no justification for interest.
This aspect needs further discussion and we intend to do the same.