Islam and Economics

Islam and Economics

Written by

Dr. Waquar Anwar

Published on

July 21, 2022

At the outset it should be understood that Islam has not provided any detailed set of rules that can be clubbed as Islamic Economics and applied for all human beings of all times and all places. In that sense no Islamic Economics as such exists! This is true about almost all other branches of Islamic studies; be they Islamic Politics or Islamic Science or Islamic Social System. The sole exception where Islam has not left any scope for innovation and experimentation is faith which has been fully described in all possible details and it remains relevant for every human being or society of past, present and future of all places.

Islam has provided basic principles relevant to specific branches and provided a list of things that have to be avoided, say a negative list. Equipped with the all embracing and fully described faith and the above referred to principles and negative list, man has been left free to experiment and arrive at most suitable methods of doing things, that may be called systems, suitable to his times and places.

In other words, Islam has total faith on a willing and positive person and his society that they will devise the best methods keeping in minds the principles and negative list provided by Islam. The system so prepared and applied by men of a particular time may only be specific to them for their time and place. It may not be advisable for all times and for all places at the same period of time. This may be understood as a phenomenon of faith on human intellect and scope for its continuous application.

So, when we talk about Islamic Economics, we refer to the teachings of Islam relevant to Economy of man. Our endeavour is not to delineate any new branch of economics christened as Islamic Economics, as no such thing is in existence and there is no need to invent one such exclusive subject. The correct approach is to study the system in vogue at a particular place and time and apply the litmus test of relevant Islamic principles including the negative list, referred to above. The aberrations, if any, have to be corrected and things have to be set right accordingly.

There are many aberrations and humanity is suffering a lot because many things in the economic life of man in our times are moving in the right direction. The human economic train has derailed and there is need to look afresh on many things which are considered essential facts of life that are in fact wrong facets.

Islam desists from reinventing the wheel. There is no need to erase everything from the board and then write, or rewrite, afresh. The Islamic approach is that everything that is in existence is basically correct provided that does not trespass any Islamic principles and fall within the Islamic negative list relevant to the subject. The approach is not to assess whether something is Islamically correct or not. The test is that it should not be Islamically incorrect. If it is not infringing upon any Islamic principle and is not falling within the negative area, it is in order. Islam has not listed all correct things. It has not provided a plethora of principles or a long list of forbidden and undesirable things. The beauty of this litmus test of verifying only the undesirability with reference to a very small list of don’ts is that the vast majority of human developments get the green signal, leaving a minuscule to be corrected.

Hence the starting point for reviewing the economic system from Islamic point of view will be the economic theory that is practised today. The next step will be to see what has gone wrong from the viewpoint of Islam. Finally we shall come to the point of studying the required corrective and adaptive methods.

 

ECONOMICS AS ON TODAY

Modern economics is based on the concept that man needs resources to satisfy his urge for maximising utility. Every person and group of persons like a society, a corporate entity, a nation, a country or a region is struggling to get as much resources as possible so that his/their desire of optimum utility may be fulfilled. In this struggle for acquiring the maximum unit of resources those who are more efficient get more and such distribution of goods and services is justifiable. The points of contention for the individuals and group of individuals are resources in the form of factors of production that can be produced in the form of goods and services that are distributed according to the contributions severally made by those factors. The problem that an economy encounters is that such resources are scarce and these have alternative uses too.

 

SCARCITY

Scarcity of resources is the basic problem of economics. Unlimited human needs and wants are to be satisfied with the limited resources. This concept has emanated from the famous article of Lionel Robbins published in 1932 that has defined economics as the study of “relationship between ends and scarce means which have alternative uses.”

A fallacy in the above mentioned definition is that it ignores human resources that cannot be said to be scarce at most of the places of the earth. A human being is considered merely to be the user, the consumer, of goods and services produced, ignoring, perhaps, his role in producing them.

An individual or a group of individuals desires to get more and more goods and services. In the parlance of economics it will be described as the human behaviour of maximising utility. In other words, consumption of goods and services satisfies the need of increasing one’s utility. This would mean that economic planning of any society should aim at maximisation of utility in that economy. There is a tag of morality attached to this holy idea of ever increasing possession of goods and services by an individual or a group of individuals. This is the doctrine of utilitarianism.

The reason behind the scarcity of resources has also been discussed in the literature of the economics. David Ricardo in 1817 described this as the result of “niggardliness of nature.” Ricardo discussed this idea with reference to agriculture. It means that nature is tight-fisted and is not generous towards human beings. Had it provided more there would not have been any scarcity and there would have been no need to study a subject like economics! As there is paucity of resources, so there is the need to study how to utilise the scarce commodities in the best possible manner.

 

EFFICIENCY

Competition for better share of resources will lead to ensure that the economy that is successful in allocating more efficiently its scarce resources will be relatively in a better position. Within an economy it is also true about individuals. One who is more efficient will get more and the one who is relatively less efficient will suffer. This concept provides a justification for higher and lower allocation of resources.

But things do not move in a simple linear equation. Other factors are bound to affect. One such problem is that individuals function in different situations. The same person who is a consumer for one item seeking maximum utility may be a producer of another commodity seeking maximum profitability. They may have conflicting interests. Private interest may be quite different, if not at loggerheads, from group interest, so on.

Classical economists have tried to resolve such problems with a number of concepts like Say’s law, perfect competition and rational economic man. Say’s law highlights that supplies create their own demand and so a perfect symmetry exists between private and public interests. Perfect competition implies a market without any outside interference, wrong practices and corruption where the consumer is a rational person with full knowledge about the market. In this ideal situation, the hidden hands of market will do the corrective action. Such interplay of the hidden hands of market forces is known as ‘Invisible Filter Mechanism.’

In real life situation ideal conditions do not exist. Mere invisible filter mechanisms do not succeed in bringing in the much desired equilibrium in the economy. Recourse to Visible Filter Mechanism like central planning, fiscal and monetary methods, particularly taxation, become necessary for smooth functioning of the market and the economy.

 

ECONOMIC ACTIVITY

An economy grows in the cradle of a properly structured economic activity. An economic activity comprises four things: (I) Production; (II) Exchange; (III) Distribution; and (IV) Consumption.

Goods and services produced have to be traded based on some medium of exchange. Production is the beginning of the economic activity. The item produced can be supplied only if it has a demand. The supply and demand is based on their trading. In olden days the basis of trading was commodity against commodity, that is, the barter system. Precious metals took their place. Now we have paper or plastic currencies of different countries that serve as the medium of exchange. Goods and services so demanded have to be made available to the consumer through distribution for consumption. The consumption creates new demand for which fresh economic activity beginning with production commences. This goes on and on.

As the purpose of our discussion of these concepts is to shed light from the Islamic point of view we need not go into greater details. We shall keep our attention focussed only on certain aspects of economic activity.