fie chapter3

CHAPTER 3

THE ISLAMIC ECONOMIC SYSTEM

1/03/2009 FOUNDATIONS OF ISLAMIC ECONOMICS

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CHAPTER OUTLINE

1. ECONOMIC SYSTEM

2. CHARACTERISTICS OF ISLAMIC ECONOMIC SYSTEM (IES)• PROPERTY OWNERSHIP

• MOTIVATIONS/INCENTIVES

• DECISION MAKING

• COORDINATION MECHANISMS

1/03/2009 FOUNDATION SOF ISLAMIC ECONOMICS

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1. ECONOMIC SYSTEM

1/03/2009 FOUNDATION S OF ISLAMIC ECONOMICS

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WHAT IS A SYSTEM?• Definition“Any aggregation or assemblage of economic institutions that interact with one another according to a particular plan to direct the economic forces of society for the fulfillment of economic goals and objectives”

• Components of a system •Entities/components/groups that are working together•Mode of interaction - relationship among components•Goal/Common objective – basis for interaction that has been planned, resolve by working together

•Society organizes itself according to its values, culture, worldview and its sources of authority

•Institutions, plans and meaning/priorities of goals differ between societies


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ECONOMIC SYSTEM (ES)

•Approaches to categorize ES

1.Theoretical approach: consumption, production, distribution, market structure

2.Sectoral approach: agriculture, manufacturing, services

3.Comparative/Traditional approach: capitalist, socialist, mixed economy


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COMPARATIVE/TRADITIONAL APPROACH

•Defines an ES in terms of key characteristics or “isms”

•Confined to major common “isms” such as socialism, capitalism and feudalism. Examples:

•Socialism is defined in terms of public ownership of means of production•Feudalism is associated with land ownership

•Analyze different economic systems based on common characteristics

1.Philosophical foundations: laid down objectives and norms for economic man2.Operational principles: Constitute social, legal and behavioral framework of system3.Goals

PHILOSOPHICAL FOUNDATIONS

CONVENTIONAL ES

• Derived from theories developed by western scholars

• Specific philosophical foundations:

1. Concept of scarcity: nature is niggardly and human wants unlimited

2. Self-interest: priority to individual goals3. Absolute freedom: survival of the fittest4. Materialism and utilitarianism5. Positivism (science) versus norms (religion)


PHILOSOPHICAL FOUNDATIONS

ISLAMIC ES• Derived from Quran

• Specific philosophical foundations:

1. Tawhid: Accepting Allah as the only sovereign power2. Ibadah: Any act must be within shari’ah boundries to

seek Allah’s pleasure3. Khilafah: Vicegerency, man recognizes his duty as servant

of God4. Tazkiyyah: Process of economic activity must be seen as a

process that purifies soul


OPERATIONAL PRINCIPLES

ISLAMIC ES• Philosophical foundations to a set of operating principles

• Specific operational principles:

1. Adl/Ihsan: adl means giving what is due, Ihsan giving more than what is due

2. Takaful/Taawun: cooperation3. Responsibility/accountability: individual is responsible to

society, but ultimately to Allah4. Moderation: in consumption, production, distribution


GOALS

ISLAMIC ES• Value loaded

• Directed towards achieving maqasid al-shariah• Promoting virtues and preventing harm• To achieve public welfare (maslahah)• Socio-economic justice• Economic development



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ISLAMIC ECONOMIC SYSTEM

WV

SUB-ST

Phil Op-P Goals

-Tawhid- Ibadah

- Khilafah- Tazkiyah

-‘Adl/Ihsan- Takaful- Resp’ty- Accnt’ty

-S-E Justice- Econ Dev- Efficiency- Stability

EP S

2. THE ISLAMIC ECONOMIC SYSTEM (IES)


CHARACTERISTICS OF IES

•Components, relationship and goals must be based on sources of Islam

•Most economic systems have structurally changed entirely due to history and ideologies

•IES has permanent and changing features•Permanent institutions and elements are meant to preserve essence of al-Din•Changing features reflect dynamism of Islam

•Distinct characteristics with respect to1.Property ownership2.Motivation3.Decision making4.Coordination mechanisms5.Role of government


1. PROPERTY OWNERSHIP

•Definition• Involving a system of rules of access to and control of resources•Ownership of property; rights•Rights that affect object’s disposition/utilization

•Varies according to society, worldview, situations•Market economy features private enterprise•Planned economy is characterized by public ownership•IES is mixed: Private and public (natural resources, common and state)


1. PROPERTY OWNERSHIP

•Components1. Object: anything that can be owned; something of value

permissible and capable of being possessed. Can be corporeal (having a physical dimension) or incorporeal (such as intellectual property)

2. Subject: owner; an individual, state/society

3. Content: •Rights-to own, possess, use, priority, exclusion, income, security, dispose; bundle of rights differ, either complete ownership or incomplete•Obligations/duties: not to abuse or misuse, not to hoard, must meet all obligations, etc. Usually moderating factor between individual/society’s right


PROPERTY OWNERSHIP

•Mal/amwal: mentioned 86 times in the Qur’an•Refers to wealth, property, possessions, whatever one possesses•Most versus deal with content aspect rather than the object

•Milkiyyah: To possess, control, have power/authority over

•Islamic perspective on property ownership:1.Absolute owner of property is Allah: the creator of everything2.Man as khalifah and abd has relative and conditional ownership: Utilization for betterment of mankind; there are shares of others 3. Man is responsible to society and accountable to God for his property: property are trials and man will be rewarded4. Labor and need are both legitimate bases for ownership5. Both private and public property are legitimate kinds of property in Islam


TYPES OF PROPERTY OWNERSHIP

•Three types:

1. Private property

2. Personal property: for consumption; personal belongings

3. Public property


PRIVATE PROPERTY OWNERSHIP•No Quranic ayat or hadith prohibiting it, thus permissible

•Complete or incomplete ownership rights

•Rights to own, possess, utilize, priority, right to exclude others, income from property, security of property, compensation if damaged/purchased, dispose

•Completely responsible to society/state and accountable to God

•Conditions to maintain ownership are permissibility, proper utilization, constant utilization, meeting all obligations (zakat)

•Not meeting these conditions could result in losing some or all rights


PUBLIC PROPERTY OWNERSHIP•Based on hadith concerning ‘water (oceans), fire (source of energy), herbage (forests, parks) and salt (basic needs)’: should not be privately owned

•Access to and control of property is determined directly by reference to public interest•Public interest is a major objective of shari’ah, defined by God but interpreted by man/state

•2 categories•State-owned:

•Has complete rights and can decide use for public interest, even if it means giving to private sector to manage•Example of corporatisation, privatization of previously public property

•Common:•Must be equally accessible to all members of society•Public parks, beaches, etc


Ownership

Private Public

NaturalResources

Common State


2. INCENTIVES/MOTIVATION

•Market economy focuses on material incentives, while planned economy concentrates on moral incentives

•Material versus moral; cash versus medal

•Discusses how to make subordinates act in the way required

•In IES, incentives are derived from shari’ah; both moral and material


2. INCENTIVES/MOTIVATION

•How to make subordinates follow Qur’an and sunnah

•Stems from Islamic worldview

•Extended time horizon

•Rational action includes spiritual benefits

•Incentives and punishments include those of the hereafter

•How to make one act based on rewards/punishment that he cannot see

•Since one willingly submits to God, one accepts Islamic worldview and its implications for economic behavior

•Prime objective:

•Doing it right and to please Allah


3. ORGANIZATION OF DECISION MAKING

•Decentralized vs centralized (democracy versus dictatorial)

•Where decisions are made; upper level or lower level of hierarchy

•How decisions are made:

•Principles (sources, derivation)

•How they are implemented

•To solve the problems in economics of what, how and for whom?

•Islam talk of shura - mutual consultation between higher and lower level

•People voice their views before decision makings are made

•Decision must be within limits of shariah

•Eg. Prophet asked for opinions

•People participation in decision making, no bias towards extreme


4. COORDINATION MECHANISM

•Market versus Plan ( Decentralized vs centralized)

•How decisions made are implemented, i.e. signal sent to all levels of society

•Real world always have some degree of planning: central planning versus indicative planning


4. COORDINATION MECHANISMS•Islam basically supports a market system

•Based a hadith reported by Tarmidzi and Ibn Majah

•Market in Islam must be reflecting the norms, values in consumer and producer behaviour

•Different rules of the game govern supply and demand

•Central role of state to ensure that rules of the game are not violated

•The institution of al-Hisbah•Right weights and measure•Checking business frauds•Correcting market imperfections•Hoarding•Unfair monopolies•Information monopoly•Essential goods supply and price•Ownership rights


5. ROLE OF STATE/GOVERNMENT

•To ensure “Islamic rule of the game”

•To create an environment for Islamic man (political, economic, social, religious, moral, legal)

•Regulator (planner and supervisor also)

•Ensure adl and ihsan


DISTINCTIVE FEATURES OF ISLAMIC ECONOMICS

1. Philosophical Foundation—God is the creator…Falah2. Nature of Human being—self interest should be within 3. The limit of Shari’ah4. Extended Time Horizon—visible & invisible5. Relative ownership of property--Khalifah6. The concept of Shura/mutual consensus7. Al-Hisba Institution8. Zakah9. Prohibition of Riba


fie chapter3

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