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 Series

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.

Islamic Research and Training Institute

P.O. Box 9201, Jeddah 21413, Kingdom of Saudi Arabia

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

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Research and Training Institute or the Islamic Development Bank or those of the members of its Board of

Executive Directors or its member countries.

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

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1

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 system‟s 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

19th

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 fittest‟5 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 „pain‟6, 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 man‟s 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 man‟s “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

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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 self-

interest and social interest. While there is nothing basically wrong in serving one‟s

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

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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 God‟s 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.

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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-Qur‟an, 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-Qur‟an, 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

God‟s 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-Qur’an,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-Qur‟an,

2:30), created with the purpose of being a blessing for all of God‟s 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

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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 God‟s family, is not „might is right‟, struggle to serve just one‟s 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

Qur‟anic 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 Qur‟an 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-Qur‟an, 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-Qur‟an, 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-Qur‟an, 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

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Day of judgment”17

. 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 man‟s 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 everyone‟s equitable

right of access to God-given resources and the absence of anyone‟s 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 Qur‟an urges Muslims to “Withhold not things justly due to others”

(al-Qur‟an, 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

everyone‟s 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 being‟s status as God‟s

vicegerent. Adequate income from work should be the primary basis of his well-

being. 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 family‟s 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

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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 everyone‟s 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.

9

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,

10

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 borrower‟s

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

11

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-Shari’ah.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

12

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 society‟s 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 self-

policing 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 Shari’ah, 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 medium-

sized. 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.

13

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 God‟s 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 profit-

and-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

14

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 self-

interest 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

15

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.

16

FOOTNOTES

1. The Economist, “Onwards and Upwards: Why is the Modern View of Progress so

Improvised?”, 19 December,2009, pp. 35-38.

2. See Edwin A. Burtt, The Metaphysical Foundations of Modern Science (Garden

City, New York, Doubleday, 1955.

3. Bertrand Russel, The Impact of Science on Society (New York: Simon and

Schuster, 1953), p. 6.

4. 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.

5. Barzun, 1950, op. cit., p. 92.

6. 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. Jevons, W. S. The Theory of Political Economy (Reprint of the 1871 edition,

New York: A. M. Kelly, 1965).

8. 8 See, Milton Friedman, Capitalism and Freedom (Chicago: The University of

Chicago Press, 1972), p. 133.

9. 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 Qur‟anic exegesis by al-Qurtubi (1952), Al-Jami‘li Ahkam al-Qur’an

(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-Qur’an, 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).

17

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 al-

Halabi, 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 Qur‟anic 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, 11th

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-Shari’ah 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-Shari’ah

(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 world

‟s 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.

18

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 al-

Din al-Khatib, 2nd ed., 1379 A.H.), p. 52: 112.