Chapter 3: The Islamic Economic System PDF

Chapter 3: The Islamic Economic System Islamic Economics and Islamic Economic System Economics is a social science studying about how we manage the limited rresources in fulfilling human unlimited wants. Islamic economics is a social science that is based on th...

Chapter 3: The Islamic Economic System Islamic Economics and Islamic Economic System Economics is a social science studying about how we manage the limited rresources in fulfilling human unlimited wants. Islamic economics is a social science that is based on the Islamic worldview and methodology, aimed at achieving al-falah given the available amount of resources. Given our earlier understanding of Islamic economics, this chapter aims to discuss the application of the knowledge into systematic practical economic aspects, hence the Islamic economic system. To develop the modern Islamic economics, we have to consider the rich Islamic turath (heritage) Study of Islamic economics is based on: i. Prophet’s times ii. Era of Caliphs Era of Caliphates Caliphate Time Period Notable Features Rashidun 632-661 CE First caliphate, four "Rightly Guided Caliphs" Caliphate (29 years) Umayyad 661-750 CE Greatest territorial extent, overthrown by Abbasids Caliphate (89 years) Abbasid Caliphate 750-1258 CE Golden Age of Islamic civilization, fragmentation, and eventual (508 years) end by Mongol invasion Fatimid Caliphate 909-1171 CE Ismaili Shia dynasty, centered in Egypt (262 years) Almohad 1147-1269 CE Berber Muslim dynasty, ruled over Maghreb and Al-Andalus Caliphate (122 years) Ayyubid Caliphate 1171-1260 CE Sunni Muslim dynasty, founded by Salah ad-Din (Saladin) (89 years) Ottoman Caliphate 1517-1924 CE Vast territory, caliphate abolished by Mustafa Kemal Ataturk in (407 years) 1924 iii. Modern era - the period following World War II, in the mid-20th century, when rapid technological advancements and globalization began to dramatically reshape society. 48  Periods of Word War I and II War Start Date End Date World War I July 28, 1914 November 11, 1918 World War II September 1, 1939 September 2, 1945 The modern approach to develop Islamic economics needs to consider the facts that: i. the ummah is no longer live under the caliphate system. It had been replaced with the nation-state system. ii. there is a need to re-integrate the Islamic system i.e. the Islamic economics system under the nation-state context. Realize that each Muslim country has its unique historical experience with colonialism. The Islamization process for each country may therefore require its own unique interpretation. For example, consider the process to develop Islamic economics in Malaysia, Indonesia and Turkeya. Definition of Economic System Set of values, mechanism and institutions set up and their implementations concerning consumption, production, distribution and exchange Society organizes itself according to values, cultures and worldview which are derived from the source of authority Institutional priorities and goals differ amongst societies In this topic we will discuss three major economic systems: o Capitalism o Socialism o Islamic economic system 49  Below are several selected definitions of Islamic economics: o Islamic economics aims at the study of human falah achieved by organizing the resources of earth on the basis of cooperation and participation (Akram Khan, 1404) o Islamic economics is the knowledge and application of injunctions and rules of the shari’ah that prevent injustice in the application and disposal of material resources in order to provide satisfactions to human beings and enable them to perform their obligations to Allah and the Society (Hasanuz Zaman, 1404) o Islamic economics is the study of Muslim behavior who organizes the resources, which are a trust, to achieve falah (Muhammad Arif, (1405) o approach to, and process of, interpreting and solving man’s economic problems based on the values, norms, laws and institutions found in, and derived from the sources of Islam” (Aslam) o Economics, from the Islamic (Khaldunian) view point, studies the behavior of men and women, individually and in their association and socialization, in order to understand the patterns and modes of this behavior, its motives and incentives, as well as its goals and objectives, and responses and reactions, with and without being restricted to a specific situation, norms, set of moral values, or legal, political, religious, etc. framework.(Monzer Kahf) Factors that Influence Economic System The type of economic system adopted by a country is an outcome of many factors. The following are four of the main factors: i. Historical and ideological background Brief history of capitalism o Mercantilism (16th to 18th century):** Early form of capitalism, where the economy was largely controlled by the state. Wealth was accumulated mainly through trade and colonization. o Industrial Revolution (18th to 19th century): § Adam Smith (1723–1790): Known as the "father of economics," Smith's work "The Wealth of Nations" (1776) laid the groundwork for free-market economic theory. He proposed the idea of the "invisible hand," in which individual self- interest indirectly promotes the good of society. § David Ricardo (1772–1823): His principle of comparative advantage explained how trade can benefit all parties, even when some are more efficient in the production of all goods. o onopoly Capitalism (late 19th century to early 20th century): Companies began to consolidate and monopolize industries, leading to increased wealth inequality. 50  This period also saw the rise of finance capitalism, where investment and banking activities played a major role in the economy. o Keynesian (mid-20th century): John Maynard Keynes (1883–1946):** Following the Great Depression, Keynes advocated for state intervention in the economy to achieve full employment and economic stability. His work "The General Theory of Employment, Interest and Money" (1936) influenced the adoption of demand- side "Keynesian economics. § Neoliberal Capitalism (late 20th century to present): Friedrich Hayek (1899–1992) and Milton Friedman (1912–2006):** Key figures in the revival of laissez-faire economics, promoting deregulation, privatization, and free markets. Hayek's "The Road to Serfdom" (1944) and Friedman's "Capitalism and Freedom (1962) and "Free to Choose" (1980) have been highly influential in this era. Brief History of Socialism o Utopian Socialism (early 19th century): Early socialist thinkers, like Robert Owen and Charles Fourier, proposed small-scale communities based on cooperative living and shared wealth. o Marxism (mid-19th century): Karl Marx (1818–1883) and Friedrich Engels (1820– 1895):** Developed a theory of socialism as a stage in societal development, following capitalism and leading to communism. Their works "The Communist Manifesto" (1848) and "Das Kapital" (1867–1883) have been foundational to socialist and communist thought. o Leninism (early 20th century): Vladimir Lenin (1870–1924): Adapted Marx's theories to suit the conditions of Imperial Russia, leading to the Bolshevik Revolution and the formation of the Soviet Union. His work "State and Revolution" (1917) is a key text of Leninism. o Maoism (mid-20th century): Mao Zedong (1893–1976):** His variant of socialism emphasized the role of agrarian peasantry, rather than the urban proletariat, in revolution. Mao's "On Practice and Contradiction" (1937) outlines his political philosophy. o Democratic Socialism (late 20th century to present):** Emphasizes a democratic political system alongside a socialist economic system. Advocates for political democracy, social ownership, and a self-management economy. ii. Political system iii. Size and geography iv. Level of development Comparative Analysis: Islamic and Conventional Economic Systems To understand how the Islamic economic system is different from the conventional economic system, we will consider the following criteria for the comparison. 51  i. Property ownership ii. Incentive mechanism iii. Organization of decision making arrangement iv. Market activities Property Ownership Property ownership refers to the legal right to possess, use, control, enjoy, transform, and transfer real or personal property according to the principles and regulations established in a particular jurisdiction. Mal/amwal: The Arabic term "Mal" (singular) or "Amwal" (plural) refers to property, wealth, or assets in Islamic jurisprudence (Fiqh). These terms encapsulate various forms of ownership and are subject to a wide range of regulations as per Sharia law. "Mal" can include both movable and immovable assets—ranging from land and buildings to livestock, money, and even intangible goods like intellectual property. Milkiyyah => to possess, control, have power/authority over. Usually referring to God. ١٢٠ ‫ﺷْﻰٍۢء ﻗَِدﯾٌۢر‬ ِ ‫ت َوٱْﻷ َْر‬ َ ‫ض َوَﻣﺎ ِﻓﯾِﮭﱠن ۚ َوھَُو َﻋﻠَٰﻰ ﻛُِّل‬ ‫ ُﻣْﻠُك ٱﻟ ﱠ‬p ِ ‫ﺳَﻣٰـَٰو‬ ِ‫ِﱠ‬ To Allah ˹alone˺ belongs the kingdom of the heavens and the earth and everything within. And He is Most Capable of everything. (5:120) Categories of properties/goods in economics Excludable Non-excludable Private property Common property Rivalrous food, clothing, cars, personal fish stocks, timber, coal electronics Club property Public property Non-rivalrous cinemas, private parks, free-to-air television, air, national satellite television defense 52  We can also divide the ownership of properties as shown below: Ownership Private Public property property Natural Common State wealth resources property and assets Both private and public ownerships can be divided into complete and incomplete ownerships: o Complete ownership § Involves owning both the asset (object) and its benefits (usufruct). § Grants the owner full control and utilization rights. § Allows for transfer, sale, or alteration of the asset and its benefits. o Incomplete ownership § Entails ownership of either the asset or its usufruct, but not both. § May grant the right to use the asset without owning it (e.g., leasing, renting). § Could involve owning the asset but not having the right to its benefits (e.g., a trust property where benefits go to a third party). § Islamic jurisprudence recognizes various forms of incomplete ownership, such as Ijarah (leasing) and Waqf (endowment), where ownership conditions are specified. Public property 53  ‫ َﻋِن اْﺑِن‬،‫ َﻋْن ُﻣَﺟﺎِھٍد‬،‫ب‬ ٍ ‫ﺷ‬ َ ‫ َﻋِن اْﻟﻌَﱠواِم ْﺑِن َﺣْو‬،‫ﻲ‬ ‫ب اﻟ ﱠ‬ ‫ﺷْﯾﺑَﺎِﻧ ﱡ‬ ٍ ‫ﺷ‬ َ ‫ ْﺑُن ِﺧَراِش ْﺑِن َﺣْو‬p ِ ‫ َﺣد ﱠﺛَﻧَﺎ َﻋْﺑد ُ ا ﱠ‬،‫ﺳِﻌﯾٍد‬ َ ‫ ْﺑُن‬pِ ‫َﺣد ﱠﺛَﻧَﺎ َﻋْﺑد ُ ا ﱠ‬ ُ ‫ﻺ َواﻟﻧﱠﺎِر َوﺛََﻣﻧ ُﮫ‬ ِ َ ‫ﻛ‬ ْ ‫ﻟ‬ ‫ا‬‫و‬َ َ‫ء‬ ِ ‫ﺎ‬‫ﻣ‬‫ﻟ‬ْ ‫ا‬ ‫ﻲ‬‫ﻓ‬ِ ‫ث‬ ٍ َ ‫ﻼ‬َ ‫ﺛ‬ ‫ﻲ‬‫ﻓ‬ِ ‫ء‬ ‫ﺎ‬ ُ َ‫ﻛ‬َ ‫ر‬ ُ ‫ﺷ‬ ‫ن‬َ ‫و‬ ‫ﻣ‬‫ﻠ‬ِ ُ ُ ‫ﺳ‬ ْ ‫ﻣ‬‫ﻟ‬ْ ‫ا‬ " ‫م‬‫ﻠ‬‫ﺳ‬‫و‬ ‫ﮫ‬ ‫ﯾ‬ ‫ﻠ‬‫ﻋ‬ ‫ﷲ‬ ‫ﻰ‬ ‫ﻠ‬‫ﺻ‬ p ِ ‫ﱠ‬ ‫ا‬ ‫ل‬ ُ ‫و‬ ُ ‫ﺳ‬ َ َ‫ ﻗَﺎَل ﻗ‬،‫َﻋﺑﱠﺎٍس‬ ‫ر‬ ‫ل‬ َ ‫ﺎ‬.‫ي‬ ‫ر‬ ‫ﺎ‬‫ﺟ‬ َ ِ َ َ َ ْ ‫ﻟ‬ ‫ا‬ ‫ء‬ ‫ﺎ‬ ‫ﻣ‬‫ﻟ‬ْ ‫ا‬ ‫ﻲ‬ ِ ْ َ ِ َ ‫ ﻗَﺎَل أَﺑ ُو‬. " ‫َﺣَراٌم‬ ‫ﻧ‬ ‫ﻌ‬ ‫ﯾ‬ ‫د‬ ٍ ‫ﯾ‬‫ﻌ‬‫ﺳ‬ It was narrated from Ibn 'Abbas that the Messenger of Allah (‫ )ﷺ‬said: “The Muslims are partners in three things: water, pasture and fire, and their price is unlawful.” Sunan Ibn Majah 2472 o Access or control is under the authority of the state. The utilization of public property is determined by the strategic importance, need and public interest (maslahah). o The state has the right to decide on the use of the property for the interest of the public i.e. privatization, nationalization. o The common property should be accessible to the people i.e. public park, lake, forest etc. Private property o There is no ruling in the Qur’an and hadith that prohibit private property ownership. Therefore, this type of ownership is permissible. o Conditions to maintain ownership: i. Permissibility ii. Proper utilization iii. Constant utilization iv. Meet obligation o Three crucial components that dictate the process of acquiring ownership: i. Object § Corporeal or incorporeal: The object in question can be either a physical item (corporeal) or a non-physical item like intellectual property (incorporeal). § Must have value, be permissible under the law or ethical guidelines, and be capable of being possessed or controlled. ii. Subject § Can be individual, state or society iii. Contract 54  § Ownership usually confers a range of rights on the subject, including tights to own, to possess, to use, to prioritize, to exclude, to derive income, to secure and to dispose. Islamic Vision on Property Ownership: In Islam, property ownership is often seen as a form of divine trusteeship rather than absolute control, adhering to the core belief that all resources are a trust from Allah. Deriving on that understanding, the followings are the Islamic visions on property ownership: i. Absolute ownership belongs to Allah ii. Man as trustee with relative and conditional ownership iii. We are accountable for all our wealth and possessions before Allah iv. Work/labor and welfare/need are both legitimate bases for property ownership v. Private and public property ownerships are both allowed and recognized in Islam § To allow both the individuals and the state the benefits of ownership with no supremacy to either party. § The ownership of economic resources does not give the owner the right to misuse them. § A misuse of economic resources by individuals may give the state a legitimate reason to step in and rectify the situation – advise, assistance, penalty. § The state has the duty to provide assistance to those in need of help to utilize the economic resources they control. The role of the state is that of a facilitator and watchdog that aims to assist and educate on the one hand and to prevent waste and misuse on the other hand. Property Ownership in Capitalism In capitalism, private ownership is emphasised. One of the arguments for the focus on private ownership in capitalism is that it serves as an incentive for individuals to innovate and generate wealth, as they get to keep the fruits of their labor. Private ownership often confers almost absolute rights over property, including the right to sell, lease, or transform it, as long as they are done within the legal context. 55  While some regulations exist, the state generally minimizes its interference in property rights under capitalism, except in cases of public necessity like eminent domain. The focus on private ownership often leads to the concentration of wealth, which can result in socioeconomic disparities within society. The system upholds the freedom of choice concerning the acquisition, distribution, and disposal of privately-owned resources, arguably contributing to economic efficiency. Property Ownership in Socialism In socialism, public ownership is emphasised. Socialism underscores the importance of public or collective ownership over means of production and resources, often regulated or managed by the state or the community. The state plays a pivotal role in the allocation of resources, economic planning, and the redistribution of wealth to ensure social and economic equality. Socialism embeds ethical values like social justice and sustainability directly into economic decision-making processes. In the Islamic economic system, both private and public ownerships are crucial to ensure just allocation of resources and just distribution of wealth and income. How? Comparison of Property Ownership Criteria Islamic Economic System Capitalism Socialism Ownership Trust from the Absolute Individual right; Collective ownership; Rights Owner (Allah); private and accumulation of private limited private property public property with property ethical use Wealth Encourages wealth Functional distribution. More equal distribution Distribution distribution through zakat, Determined by market through state intervention sadaqah, waqf, and forces; wealth may not be inheritance laws etc. evenly distributed Role of the Ensures social welfare, Limited role; enforces Central role in planning State justice, and proper wealth property rights and and controlling the distribution contracts economy Social Emphasizes social Not a central tenet; wealth Inherent in the system; Responsibility responsibility and ethical accumulation can benefit promotes social welfare wealth usage society indirectly through equal distribution of resources Incentive Mechanism in the Economic system Incentive is anything that provides a motive for a particular course of action to be taken e.g. What drives people to work? 56  Incentives can be divided into four catefories: o Material/remunerative incentive – This exists when one can expect some form of material rewards in exchange for acting in a certain particular way. o Moral incentive – This exists when a particular choice of action is regarded as the right thing to do, or admirable, or the failure to act in a certain way is condemned as indecent. A person acting on a moral incentive can expect a sense of self-esteem, and approval or admiration from the community. A person who acts against moral incentives can expect a sense of guilt, condemnation or even ostracism from the community. o Spiritual incentive – This incentive is derived from one’s belief, faith, religion or anything that relates to the fulfillment of soul’s tranquility. o Coercive incentive exists when a person can expect failure to act in certain course of conducts will result in physical force being used against him/her e.g. imprisonment, confiscating property etc. Capitalism rewards people on the basis of their contributions in the economic activities (functional distribution). Here, material well-being is the motivating factor for people to work. Furthermore, the enormous freedom that bias towards private ownership in the system stimulates higher desire for material gains and consumerism which then, drive people to work hard to achieve those objectives. In socialism, state ownership of all factors of production and equality in the distribution of wealth and income requires proper moral incentive towards desirable behavior by appealing to the people’s responsibility to the society. Many times in the histories of socialism, coercive incentive was used for the communist party to fulfill its agenda. In Islam, the incentive mechanism is driven by the combinations of the above four categories of incentiv: o Pleasing Allah for the sake of getting His blessings. A person who achieves this level of iman would do anything even if he or she has to scarify his or her life. ٦٩ ‫ﺻٰـِﻠِﺣﯾَن ۚ َوَﺣﺳَُن أ ُ ۟وﻟَٰـ ِٓﺋَك َرِﻓﯾ ۭﻘًﺎ‬ ‫ﺷَﮭدَآِء َوٱﻟ ﱠ‬ ّ ِ ‫ُ َﻋﻠَْﯾِﮭم ِّﻣَن ٱﻟﻧﱠِﺑ ِﯾّۧـَن َوٱﻟ‬p‫ َوٱﻟﱠرﺳُوَل ﻓَﺄ ُ ۟وﻟَٰـ ِٓﺋَك َﻣَﻊ ٱﻟﱠِذﯾَن أَْﻧﻌََم ٱﱠ‬p ‫ﺻ ِد ّﯾِﻘﯾَن َوٱﻟ ﱡ‬ َ ‫َوَﻣن ﯾ ُِطِﻊ ٱ ﱠ‬ And whoever obeys Allah and the Messenger will be in the company of those blessed by Allah: the prophets, the people of truth, the martyrs, and the righteous—what honourable company. (4:69) o Heaven and hell are the ultimate place of getting rewards and punishments. We are given the freedom of choice to conduct our actions in this world but we must bear the consequences in the hereafter. All of our actions will be evaluated and judged by Allah in the hereafter. َ َ‫ﺻٰـِﻠًۭﺣﺎ ﻓَِﻠﻧَْﻔِﺳِﮫۦ ۖ َوَﻣْن أ‬ ١٥ ‫ﺳﺎ َٓء ﻓَﻌَﻠَْﯾَﮭﺎ ۖ ﺛ ُﱠم ِإﻟَٰﻰ َر ِﺑّﻛُْم ﺗ ُْرَﺟﻌ ُوَن‬ َ ‫َﻣْن َﻋِﻣَل‬ 57  Whoever does good, it is to their own benefit. And whoever does evil, it is to their own loss. Then to your Lord you will ˹all˺ be returned. (45:15) o The people of the paradise are the successful servants of Allah. This manifests the ultimate meaning of falah. ٢٠ ‫ب ٱْﻟَﺟﻧﱠِﺔ ھُُم ٱْﻟﻔَﺎ ِٓﺋُزوَن‬ ْ َ‫ب ٱْﻟَﺟﻧﱠِﺔ ۚ أ‬ ُ ‫ﺻَﺣٰـ‬ ْ َ‫ب ٱﻟﻧﱠﺎِر َوأ‬ ُ ‫ﺻَﺣٰـ‬ ْ َ‫ى أ‬ ُ ‫ﺻَﺣٰـ‬ ٓ ‫َﻻ ﯾَْﺳﺗَِو‬ The residents of the Fire cannot be equal to the residents of Paradise. ˹Only˺ the residents of Paradise will be successful. (59:20) o Good Muslim will always realize that any promising reward in the hereafter by Allah for any good deed is far more greater than any possible material reward in this world. ْ َ‫ﻗ ُْل أَ ٰذَِﻟَك َﺧْﯾٌر أَْم َﺟﻧﱠﺔ ُ ٱْﻟُﺧْﻠِد ٱﻟﱠِﺗﻰ ُوِﻋدَ ٱْﻟُﻣﺗ ﱠﻘ ُوَن ۚ َﻛﺎﻧ‬ ِ ‫ت ﻟَُﮭْم َﺟَزآًۭء َوَﻣ‬ ١٥ ‫ﺻﯾًۭرا‬ َ َ‫ﻟﱠُﮭْم ِﻓﯾَﮭﺎ َﻣﺎ ﯾ‬ ١٦ ‫وًۭﻻ‬‫ﺷﺎ ُٓءوَن َﺧٰـِﻠِدﯾَن ۚ َﻛﺎَن َﻋﻠَٰﻰ َر ِﺑَّك َوْﻋ ۭدًا ﱠﻣْﺳـ‬ Say, ˹O Prophet,˺ “Is this better or the Garden of Eternity which the righteous have been promised, as a reward and ˹an ultimate˺ destination? There they will have whatever they wish for, forever. That is a promise ˹to be sought after˺, binding on your Lord. (25:15-16) o All good deeds in this world are considered as a form of worshipping if they are done correctly with sincere intention for Allah. o There are a lot of verses and hadith that encourage Muslim to strive for excellence (al-Mulk:2, Ali-‘Imran:110) o We must strive for excellence in this life because as Muslims, we are the role model to other mankind. o Islam never prohibits material pursuit The purpose of material pursuit and success are to gain the closeness to Allah (al-Qasas:77): َ َ‫ُ ِإﻟَْﯾَك ۖ َوَﻻ ﺗَْﺑِﻎ ٱْﻟﻔ‬p‫ﺳَن ٱﱠ‬ ِ ‫ﺳﺎدَ ِﻓﻰ ٱْﻷ َْر‬ ‫ض‬ َ ‫ﺻﯾﺑََك ِﻣَن ٱﻟد ﱡْﻧﯾَﺎ ۖ َوأَْﺣِﺳن َﻛَﻣﺎ ٓ أَْﺣ‬ َ ‫ﺎِﺧَرةَ ۖ َوَﻻ ﺗَﻧ‬ê‫ُ ٱﻟد ﱠاَر ٱْﻟـ‬p‫َۖوٱْﺑﺗَِﻎ ِﻓﯾَﻣﺎ ٓ َءاﺗَٰﯨَك ٱﱠ‬ ِ َ‫س ﻧ‬ ٧٧ ‫ب ٱْﻟُﻣْﻔِﺳِدﯾَن‬ ‫ َﻻ ﯾ ُِﺣ ﱡ‬p َ ‫ِإﱠن ٱ ﱠ‬ Rather, seek the ˹reward˺ of the Hereafter by means of what Allah has granted you, without forgetting your share of this world. And be good ˹to others˺ as Allah has been good to you. Do not seek to spread corruption in the land, for Allah certainly does not like the corruptors.” o Apart from the material incentives, Muslim will be rewarded accordingly because: § To give halal supplements (rizk) to one family is wajib as a nafaqah 58  § Muslim also must work to fulfill the obligations which require health financial position such as performing hajj and paying zakat § Abu Musa, may Allah be pleased with him, reported: The Messenger of Allah (may peace be upon him) said: Giving charity is obligatory upon each Muslim. It was asked: What do you say of him who does not find (the means) to do so? He said: Let him do manual work, thus doing benefit to himself and give charity. It was asked: What about one who does not have (the means) to do so? He said: Then let him assist the needy, the aggrieved. It was asked: What do you say of one who cannot even do this? He said: Then he should enjoin what is reputable or what is good. He asked: What if he cannot do that? He (the Holy Prophet) said: He should then abstain from evil, for verily that is charity on his behalf. (Sahih Muslim) Comparison of Incentive Mechanism Incentive Type Islamic Economics Capitalism Socialism Material/Remunerativ Allowed material High emphasis on State ownership of e pursuit but material well-being, production, focus on condemned private ownership, equality in wealth materialism and consumerism and income distribution Moral Encourages ethical Varies; dependent on Appeals to behavior and fairness individual values responsibility to in dealings; pleasing society and collective Allah well-being Spiritual Central to the system; Limited or no role in Limited or no role in pursuit of pleasing economic decisions economic decisions Allah, worship, and the promise of heaven and avoidance of hell Coercive Focus on individual Regulation and legal Strong emphasis on self-regulation and enforcement to state control and spiritual varying degrees enforcement of rules consequences, with and regulations some legal enforcement Organization of Decision Making Here, we want to understand the mechanisms of economic decision influencing the behavior of the economic agents. The market and the government are two main organizations that affect the allocation of resources and the distribution of wealth in the economy. 59  The decision-making process in capitalism is decentralized where decisions are primarily made at the lower level of the system. Market allows the economic agents to interact on the basis of rational self-interest and competition. In socialism, the decision-making process is centralized where decisions are primarily made at the upper level. Less freedom are given to the lower level of the system to decide on resource allocation The Islamic economic system makes full use of the best of the centralized and decentralized decision-making process. The ‘Islamic rules of the game’ that governs the market under this economic system allows harmonious interaction between man and his Creator, man and man and man and the universe. In order to ensure all values, norms, laws and institutions are firmly compliant to the shari’ah, state plays a vital role here. All decisions made by the state are done on the basis of consultation (Shura). These are some verses that emphasize on the importance of leader (state) in Islamic system. o "O you who believe! Obey God and obey the Messenger and those from among you who are in charge of your affairs; and if you differ over any matter, refer it to God and the Messenger, if you do believe in God and the last day." (4:59) o "(Believers are those) who run their affairs by consultation among themselves." (42:38) o "And consult them (O Prophet) in matters (of public concern)." (3:159) o "And let there among you be a group of people who invite to all that is good, o who enjoin what is right and forbid what is wrong." (3:104) End of the Caliphate system The caliph is deposed. The office of the Caliphate is abolished, since the Caliphate is essentially comprised in the meaning and signification of the words Government (hukumah) and Republic (jumhuriyyah) - Turkish National Assembly, March 3, 1924. In capitalism, the government plays minimal roles in the economy, such as maintaining law and order, defense, general health, and providing public goods. The government also intervenes in cases of market imperfection or instability. The decision-making process is highly decentralized in the system. 60  In the historical context of Islamic civilization, a caliphate system prevailed. An examination of writings from earlier and medieval Muslim scholars reveals that their conception of the ‘state’ was rooted in the caliphate system. In contrast, today we live under the nation-state system. The table below outlines the key differences between the two systems: Comparison between the Caliphate and Nation-state System Criteria Caliphate system Nation-state System Definition The caliphate is a form of Islamic government A nation-state is a type of political entity led by a Caliph, who is considered a political where a distinct culture, language, or and religious successor to the Islamic prophet ethnicity forms a sovereign state with Muhammad. defined borders. Leadership Leadership is religious and political, with the Leadership is generally secular, with the Caliph being the supreme leader. head of state and head of government often being separate roles. Basis of Unity is based on religious beliefs, following the Unity is based on common cultural, ethnic, Unity teachings of Islam. or linguistic factors, as well as a shared history. Law The primary source of law is the Sharia, derived Law is typically created through a from the Quran and the Hadith. constitution and legislation by elected representatives. Citizenship Historically, the concept of citizenship was tied Citizenship is typically based on being born to the Muslim Ummah (community). Non- in the country, having parents from the Muslims living in the caliphate were "protected country, or naturalization. All citizens subjects" with certain rights and responsibilities. typically have equal rights and responsibilities. Territoriality Historically, caliphates aimed for universal The authority of a nation-state is typically jurisdiction over all Muslims, regardless of limited to its geographical boundaries. location. Succession Succession could vary; it could be hereditary, Succession is usually determined by chosen by the preceding Caliph, or by consensus constitutional law, often through elections. of the Ummah. Religious Non-Muslims under a caliphate had certain Depending on the nation-state, there could be Freedom protections but also restrictions under Dhimmi complete religious freedom, or there could be status. a state religion while still allowing the practice of other religions. Foreign Defined largely by religious principles, aiming Defined by national interests, international Policy for the expansion of the Ummah and defense of treaties, and alliances. the Islamic faith. In socialism, the government assumes a central role. The central planning unit determines what to produce, how and when to produce it, and for whom to produce. Here, the decision-making process is highly centralized. The government decides what, how, and for whom to produce goods and services, replacing market supply and demand mechanisms with planned economic activities to achieve societal goals. Government owns or controls the means of production to prevent wealth concentration and to promote fair distribution of goods and services. In Islamic economic system, the government is part of the integrated economic system of Islam. Islam prefers market as a mechanism to allocate resources and to distribute wealth. However, market alone is insufficient to achieve prosperous and fair levels of 61  well-being. Hence, to effectively play its role, two important institutions to assist the ruler in making decisions are the institution of shura and al-hisbah. Essentially, the state holds three positive and complementary roles: o Establishing and maintaining the "Islamic rules of the game" within the system. o Creating a conducive environment for the Islamic individual politically, economically, socially, culturally, religiously, morally, and legally. o Ensuring al-'adl wa ihsan prevail within the system. Many governments, including the Islamic state would pursue for the following economic goals. However, for the Islamic state, the means to achieve the goals must be in line with the maqasid as-shari’ah and alos shari’ah compliant (e.g. the policy tool must be free from riba) and unethical conducts: o To eradicate poverty by creating conditions for full employment and a sustainable rate of growth o To ensure stability in the real value of money (inflation controlling) o To maintain law and order o To ensure social and economic justice o To ensure social security o To foster equitable distribution of income and wealth o To harmonize international relation o To safeguard national sovereignty Comparison of Organizations of Decision Making Criteria Islamic Economics Capitalism Socialism Primary Mechanism Market Market Government- controlled Government Role Shura (consultation) Limited, mainly in Central authority for & al-hisbah (market regulation and resource allocation regulation) policymaking and wealth distribution Third Sector Role Active in socio- Varies Limited economic development 62 Market Activities The focus of the discussion will be on market activities involving consumption, production, distribution, and exchange. The following verses of al-Qur’an provide us with the normative aspects of various types of market activities: ١٥ ‫ض ذَﻟ ُوًۭﻻ ﻓَﭑْﻣﺷُو۟ا ِﻓﻰ َﻣﻧَﺎِﻛِﺑَﮭﺎ َوﻛُﻠ ُو۟ا ِﻣن ِّرْزِﻗِﮫۦ ۖ َوِإﻟَْﯾِﮫ ٱﻟﻧﱡﺷُوُر‬ َ ‫ھَُو ٱﻟﱠِذى َﺟﻌََل ﻟَﻛُُم ٱْﻷ َْر‬ “It is He who has subdued the earth to you, so walk about its regions (utilise them) and eat of His provisions” (67:15). ‫ﯾَٰـﺑَِﻧٓﻰ َءادََم ُﺧذ ُو۟ا ِزﯾﻧَﺗَﻛُْم ِﻋﻧدَ ﻛُِّل َﻣْﺳِﺟٍۢد َوﻛُﻠ ُو۟ا َوٱْﺷَرﺑ ُو۟ا َوَﻻ ﺗ ُْﺳِرﻓ ُٓو۟ا ۚ ِإﻧﱠﮫ ُۥ َﻻ ﯾ ُِﺣ ﱡ‬ ۞ ٣١ ‫ب ٱْﻟُﻣْﺳِرِﻓﯾَن‬ O Children of Adam! Dress properly whenever you are at worship. Eat and drink, but do not waste. Surely He does not like the wasteful. (7:31) ٨٧ ‫ب ٱْﻟُﻣْﻌﺗَِدﯾَن‬ َ ‫ُ ﻟَﻛُْم َوَﻻ ﺗَْﻌﺗَد ُٓو۟ا ۚ ِإﱠن ٱ ﱠ‬p‫ت َﻣﺎ ٓ أََﺣﱠل ٱﱠ‬ ‫ َﻻ ﯾ ُِﺣ ﱡ‬p َ ‫ﯾَٰـ ٓﺄ َﯾﱡَﮭﺎ ٱﻟﱠِذﯾَن َءاَﻣﻧ ُو۟ا َﻻ ﺗ َُﺣِّرُﻣو۟ا‬ ِ ‫ط ِﯾّﺑَٰـ‬ َ ‫ط ِﯾّ ۭﺑًﺎ ۚ َوٱﺗ ﱠﻘ ُو۟ا ٱ ﱠ‬ ٓ ‫ ٱﻟﱠِذ‬p ٨٨ ‫ى أَﻧﺗ ُم ِﺑِﮫۦ ُﻣْؤِﻣﻧ ُوَن‬ َ ‫ُ َﺣﻠَٰـًۭﻼ‬p‫َوﻛُﻠ ُو۟ا ِﻣﱠﻣﺎ َرَزﻗَﻛُُم ٱﱠ‬ “Believers, do not forbid the wholesome bounties which God has made lawful to you, but do not transgress, God does not like the transgressors. Eat of the lawful and wholesome things which God has given you, and heed God’s orders, in whom you believe” (Qur’an, 5:87–88). In the Islamic economic system, the constraints on an individual's freedom in utilizing economic resources are threefold: in production, one should pursue efficiency; in consumption, moderation is key; and in distribution, the aim should be social justice. Islamic economics prioritizes the market as the primary mechanism for allocating resources. Theoretically, in a pure competition, it posits that a competitive market can lead to efficient resource allocation to a certain extent. The ideal scenario for achieving both productive and allocative efficiencies is a perfectly competitive market, although such a market is non-existent in the real world. Islamic economics acknowledges the necessity of government intervention to remedy market failures. The government's role is crucial in ensuring justice, equity, and adherence to Islamic ethics within the market system. Through regulation and policy implementation, the government can help in addressing the inherent weaknesses of the market. The third sector, also known as the voluntary or nonprofit sector, is considered a backbone in the Islamic economic system. This sector embodies the Islamic values of charity, community service, and social welfare. By fostering a strong voluntary sector, Islamic economics aims to promote social justice and community development alongside market and state operations. 63  In the Islamic economic system, the existence of Islamic man who sincerely submits himself towards the governing laws of Allah automatically ignites man’s self-compliance to any laws. In other words, all the activities are guided by the shari’ah which outlines the limit of human activities so that our actions and their implications are within the fitrah of our llife Evaluation of Economic System Performance Evaluating the performance of an economic system involves several key criteria, each reflecting a different dimension of the system's effectiveness. Here's a brief overview of each criterion: o Moral: This criterion involves assessing how well an economic system aligns with and promotes ethical values and principles. It evaluates the fairness, justice, and ethical soundness of economic activities, including business practices, wealth distribution, and resource allocation. In Islamic economics, for example, the moral aspect of the economy is central and is guided by the principles of Shari'ah. o Economic Growth: This is a measure of the increase in a country's economic output over time, often assessed through Gross Domestic Product (GDP). Economic growth indicates the capacity of an economic system to produce more goods and services, signifying economic progress and improved living standards. o Efficiency: Efficiency evaluates how well an economic system utilizes its resources. It involves measuring the degree to which the system maximizes output given a set of inputs. Economic efficiency can be further divided into allocative efficiency (resources are allocated to their most valuable use) and productive efficiency (goods are produced at the lowest cost). o Income Distribution: This criterion examines how evenly or unevenly income is distributed among the population. It's often measured by indicators such as the Gini coefficient. Systems with more equitable income distribution are seen as more just, but the desired level of equity can vary depending on cultural and political factors. o Stability: Economic stability refers to the economy's ability to maintain steady growth, avoid cycles of boom and bust, and keep unemployment and inflation at acceptable levels. Stability is crucial for maintaining consumer and business confidence and promoting sustainable economic growth. o Development Objectives: This involves evaluating how well the economic system contributes to broader development goals, such as reducing poverty, improving health and education, and promoting environmental sustainability. These objectives are often aligned with initiatives like the United Nations' Sustainable Development Goals (SDGs). o Viability of the Economic System: This refers to the system's capacity to survive and function effectively over the long term. It involves assessing the system's 64 adaptability to changes and shocks, its resilience in the face of crises, and its ability to meet the needs and demands of the population. 65 Last Word The Practice of Shura by Tayeb Abedin Although there were small kingdoms in not the actual incidents or events which the Arabian Peninsula, the Arabs did not took place, but the principles which his know of a central government with administration served. That is because complex functions before the Prophet, those principles are the same principles peace be upon him, formed his state at which any Islamic State should fulfil. An Medinah. That state carried functions Islamic State is not required to copy quite different from any previous state exactly what the Prophet, peace be known to us in history. It was an upon him, did, but to try to serve causes ideological state whose primary aim was and principles which the Prophet's to propagate Islam and apply God's law administration set out for us. on earth. In other words, there is no particular fixed At its initial state it was formed according form for the Islamic State but there are to a written constitution which organized certain principles, sometimes detailed, relations between the different which ought to be observed in any state communities at Medinah: Muslims, Jews which claims to be Islamic. Owing to this and Arab pagans. Those communities important fact, lslamic laws (Shari'ah) are accepted the Prophet Muhammad as the flexible to suit any community at any supreme judge of Medinah, and time. accepted God's word as their law. The communities were not to make peace The aims of Shari'ah, are the with those who fought God's mission and preservation of life, of religion, of property God's believers. and of honor. Those aims are to be fulfilled by an Islamic State according to Beside propagating Islam, the Prophet's, certain principles, or more preferably peace be upon him, government carried certain constitutional principles such as other functions of a social, economical sovereignty, justice and equality. One of and educational nature. In fact there was these principles is also that of no aspect of life which escaped the consultation (Shura), and how the Prophet's, peace be upon him,attention. Prophet practiced it during his People's morals and values were administration needs to be considered in considered as the essence of the mission detail. and their social and economical conditions were to be cared for to fulfil The idea of consultation or Shura poses that purpose. Family problems as well as four important questions: individual ones were not outside the state's concern. In fact there was nothing 1. Is Shura an obligatory action, in the which in principle was outside the state's sense that it is a "must" on a Muslim concern. In this respect the concept of Imam (ruler) to consult his subjects? the functions of an Islamic State is wider than any modern welfare state. 2. If it is a must, who is to be consulted- all the people or a section of them? What is important about the Prophet's, peace be upon him, administration are 66 3. In what issues shall people be The Prophet, peace be upon him, consulted? -any issue or specific ones ? practised consultation all through his life in a manner that Abu Hurairah narrated, 4. Is the outcome of Shura binding on the Imam? Is he obliged to follow what most "I have never seen any one more of his consultants agree to, even if it is consultative with his companions than different from what he thinks? the Prophet". I will try to pursue the answers to these So there is no doubt about the obligatory questions from what the Qur'an has said, nature of Shura not only for the government but within the family too. and from what the Prophet actually did during his administration at Medinah. The answer to the second question, "who is to be consulted", is not so clear. The The answer to the first question, Qur'anic verses quoted above indicate "whether Shura is obligatory", is definitely yes. The Qur'an considers Shura a Shura as a distinctive feature of all distinctive feature of a Believer, in a believers, just as zakat and prayer. Once similar manner as Salat and Sadaqat. on a certain issue the Prophet, peace be Qur'an says, upon him, asked the opinion of all the men concerned, after the Ta'if battle "And those who answer the call of their when the defeated tribe accepted Islam. Lord, do their prayers and whose affairs The Prophet, peace be upon him, are by consultations among themselves" thought it unbecoming to take booty after (Shura 38). they had become brothers in faith. He asked his soldiers whether they would A second verse orders the Prophet, like to give back to their brothers what peace be upon him, to consult his they had taken from them. followers, They agreed, but the Prophet, peace be "So pardon them and ask forgiveness for upon him, was not satisfied by the them and consult with them upon the general answer of 'yes' and so he said, conduct of affairs and when thou art resolved, then put thy trust in Allah". ('AI "We do not know who of you has agreed lmran'. 159). and who has not, go back till your heads bring us your answer." The timing of the latter verse is significant. It came after 'Uhud battle One can generalize from this that the when the Prophet consulted his followers ruler should obtain the approval of and they gave him what turned out to be individuals when the issue concerns their a disastrous advice. The verse came to right to property. The Prophet, peace be remind the Prophet that even if upon him, also used to consult the tribal consultation sometimes brings disaster, chiefs, because they represented their it should not in general be abandoned. people. Once when the Muslims failed to The Qur'an also condemns every capture a caravan of Abu Sufian when it despotic ruler: was returning to Makka, the Prophet, peace be upon him, decided to make war "And every froward potentate was against the Quraish who came out to brought to naught". protect it. 67 He asked his followers what they thought opinion, whether his action was revealed of fighting the Quraish. Two of the or merely what he thought best for them. Muhajireen -leaders- Abu Bakr al-Siddiq One could say that the Prophet consulted and Al-Miqdad ibn 'Umar, may Allah be his followers on almost all important pleased with them, spoke in agreement, issues, whether they were of a political but the Prophet, peace be upon him, nature or not. He consulted them about repeated his question. One of the Ansar waging war on Quraish, he consulted leaders, Sa'ad ibn Muadh, realized that them on what to do with the prisoners-of- the Prophet, peace be upon him, wanted war after the battle of Badr. One could their opinion. He stood up and said that generalise that every problem which he would speak for the Ansar, and would affect the community as a whole, approved of the idea too. or affect some peoples' property-rights should be the subject of consultation. I On another occasion when the Prophet have not found any evidence to indicate wanted to make a truce with Gatafan, (a that the Prophet consulted his followers tribe living near Medinah), so as to when appointing leaders of armies, induce them not to fight together with the district governors, or judges. Perhaps other pagan tribes, he called for the such, consultation would develop ill- opinions of Sa'ah ibn Mu'adh and Sa'ad feelings in the Muslim community, or ibn 'Aubadh who were the heads of al- possibly it should be a prerogative of the 'Aws and al-Khazraj, the two dominant ruler to choose his subordinates. tribes at Medinah. To come to the last question, "is the In matters which needed special outcome of the consultation binding on experience and knowledge the Prophet, the Imam?" In all the Prophet's peace be upon administration there is not one single case in which he consulted the people him, used to consult those who and did not accept the opinion to which possessed it, irrespective of their they agreed. On the contrary, there are at representative power. In military affairs least three occasions when the Prophet he used to consult Khalid ibn al-Walid, submitted to other Salman al- Farsi and Ali ibn Abi Talib, may Allah be pleased with them all, who were known for their military acumen. people's opinions, which differed from In general matters the prophet, peace be his. On two of these occasions it was upon him, consulted people known for without any indication of his being their wisdom and piety. His favorite convinced by what had been said. The counsellors were Abu Bakr, Omar ibn al- first was when ai-Hubab ibn ai-Munzir Khattab, and All ibn Abi Talib, may Allah told him to change the army- camp be pleased with them all before the battle of Badr. The Prophet agreed and changed the camp. The Thirdly, "What issues are to be put to second case occurred when many consultation?" Here too, there is not Muslims expressed their wish to fight much specification. Theoretically any Quraish outside Medinah at the battle of problem for which there is no 'Uhud. The Prophet's opinion was to wait correspondent revelation could be for Quraish inside the town so that they subject to consultation. The followers of would have cover against them, and that the Prophet, peace be upon him, used to women and youngsters participating in ask him before they expressed a differing the battle could disturb the attackers' 68 approach. But the others gave no other hadith told by Ali ibn Abi Talib, may Allah argument than they would be called enable his countenance, the Prophet cowards if they waited inside the town. ,peace be upon him, was once asked The third situation is when Sa'ad ibn about the meaning of the word 'resolve', Mu'adh and Sa'ad ibn Aubadh opposed which occurs in this ayah. The Prophet the Prophet's decision to make a truce answered that it meant consulting wise with Gatafan. The truce was written but people and following them. So in my view never signed and when the Ansar chiefs the outcome of consultation is binding on opposed it because they would not the imam, whatever his own opinion. accept its conditions, the Prophet told them to tear up the treaty. *Adapted from a Paper presented at a Seerah seminar organised by the London When the Muslims in 'Uhud were Islamic Circle, 28 March 1970. defeated, in order that the prophet and his followers would not regret The Muslim consultation because it resulted in a April 1970 wrong decision, the verse was revealed (Al-Imran 159, quoted earlier) ordering the Prophet to follow consultation. In a 69 Study Questions 4. Centralized decision making, decentralized decision making True/False and Why and the concept of shura. 1. There are institutions in Islamic 5. Private property and public economic systems that regulate property. the market from corruption and fraud. 6. Motivation in an Islamic economic system. 2. The exchange mechanism in an Islamic economy will act as an 7. What are the types of property invisible hand in a capitalist ownership in Islam? Elaborate. system and will lead the Islamic economy to a stable equilibrium and an equitable distribution of Essay income. 1. What are the philosophical 3. In conventional economics, the foundations and goals of an market mechanism will Islamic Economic System? sufficiently allocate resources to produce public goods. 2. Discuss briefly the four characteristics of an Islamic 4. As a ‘moderate’ way, the Islamic economic system. economic system is simply the combination of the good features 3. Compare the features of a of capitalism and socialism. market in an Islamic economic system to that in conventional economics. Short essay 4. “In an Islamic economic system, 1. Economic choice and freedom in the market mechanism is Islam sufficient in allocating resources efficiently.” Critically discuss. 2. Economic role of al-hisbah. 5. The Islamic economic system is 3. Division of property ownership similar to the laissez- fair (supported by one example economic system because both each). are against any form of government intervention in the economy. Discuss. 70