C4 - Production and Distribution PDF

Chapter 4 The Islamic tradition in economic thought (ii): production and distribution Prepared by: Nurul Syazwani Muhamad Saifudin  Production Inspired by the Qur’anic consideration that engaging in lawful economic...

Chapter 4 The Islamic tradition in economic thought (ii): production and distribution Prepared by: Nurul Syazwani Muhamad Saifudin  Production Inspired by the Qur’anic consideration that engaging in lawful economic activities is seeking ‘bounty of Allah’ and inspired by the Prophet’s (peace be upon him) saying that planting a plant is also a good deed, the Muslim scholars gave high value to productive activities. al-Shaybani classified productive activities into four categories: Services Agriculture Trade industry. An eighth/fourteenth century scholar, Muhammad b. Abd al-Rahman al- Wasabi, divides basic sources of earning into three categories: Agriculture Industry trade.  Production Depending upon basic needs of the living entities, al-Ghazali classified them into five categories: farming (food for people) grazing (food for animals) hunting (including exploration of mineral and forest products) wearing (textiles or clothing) building and construction (for dwelling). He suggests another classification of industries quite similar to that found in contemporary discussion, that is, Primary (agriculture) Secondary(manufacturing) Tertiary (services)  Production Traditionally, commerce was assigned high value by the Muslim scholars, because, perhaps, it was once the occupation of the Prophet (pbuh) himself and it was the main source of earning in the Arabian Peninsula. With reference to a hadīth, al-Ghazali says that trade has nine-tenths of livelihood. Another hadith says: ‘A righteous honest merchant will be with the Prophets and truthful ones and martyrs (on the Day of Judgement)’  Production But some other scholars have glorified agriculture such as al-Shaybani, Ibn Abi al-Rabi, Ibn al-Hajj, Najm al-Din al-Razi etc. They generally put agriculture on top of all economic activities because it is a source of industry and commerce as well. Not only does it satisfy the basic needs of the farmers but also benefits other creatures. Ibn Khaldun considers agriculture an important craft although he accepts that it has been a source of livelihood for the weak and poor Bedouins. ‘... Sedentary people, or people who live in luxury, do not practice it’. In his Introduction, he has shed light on some works on the craft of agriculture. ‘One of the Greek works is the Kitāb al-Filāhah which is ascribed to Nabataean scholar Abu Bakr b. Ali Ibn Wahshiyah ‘Ibn al- Awwam presented an abridged edition of the work’. It may be noted that a part of the Greek work on agriculture was related to sorcery. But the Muslim scholars restricted themselves to the part of the book dealing with plantation techniques only.  Production One may not find in the writings of Muslim scholars a description of efficiency- oriented different laws of production, but there are many important production related ideas that are necessary for the continuation and optimization of the production function such as: linkages in production activities division of labor and specialization role of human capital.  Linkages and Interdependence of Industries Linkage and interdependence of industries were first mentioned by al- Shaybani. Al-Ghazali makes it clear when he says: ‘... the farmer produces grains, the miller converts it into flour, and the baker prepares bread from the flour.’ His recognition of interdependence of economic activities is shown in his statement: ‘... The blacksmith makes the tools for farmer’s cultivations and the carpenter manufactures the tools needed by the blacksmith. The same goes for all those who engage in the production of tools and equipments, needed for production of foodstuffs’ We find similar ideas in al-Dimashqi when he says: ‘Industries are interdependent. The builder needs the carpenter who needs the blacksmith. The ironsmiths need mine workers who need builders.’  Cooperation and Division of Labor A natural result of linkages and interdependence of industries was need for cooperation and division of labor. Almost all writers on this aspect of economy mentioned these two subjects. (For example, al- Shaybani, 1986, pp. 75–6, al-Ghazali, n.d.[a], Vol. 4, pp. 118–19; al-Asfahani, 1985, pp. 374– 5, al Dimashqi, 1977, pp. 20–1, Ibn Taymiyah, 1976, pp. 79, 116, Ibn Khaldun, 1967, Vol. 2, pp. 235–8, 271–2, 286, 329.) Al-Ghazali on division of labor Ibn Khaldun on cooperation  Al-Ghazali on division of labor After describing various aspects of production of daily food, al-Ghazali says: ‘A single loaf of bread takes its final shape with the help of perhaps more than a thousand workers.’ He argues further by using the example of a needle. ‘Even the small needle becomes useful only after passing through hands of needle-makers about twenty-five times, each time going through a different process’. One can see how close this is to the classical pin-factory example of Adam Smith seven centuries later in making the same arguments.  Ibn Khaldun on cooperation We find several passages in Muqaddimah of Ibn Khaldun in which he discusses the importance of cooperation and the advantage of division of labor. He maintains that the division of labor is limited to the functioning of the market. Spengler had best summarized Ibn Khaldun’s views on the subject when he said: ‘Perhaps the most important of the form of cooperation or organization into which men entered was division of labour (by craft or profession rather than by task) which greatly increased output per worker, elevated a community’s capacity to produce above that required to supply elemental wants, and gave rise to exchange and commerce in which producers and merchants engaged, with the kind and quantity of what was produced dependent upon the extent of demand and realizable profit.’  ECONOMIC DISTRIBUTION Distribution is one of the two main economic problems of humankind, the other being production. There have been differences of opinion among the economists about which one is most fundamental. Again, distribution is of two kinds: functional distribution that takes place as a result of the production process (initial distribution) personal distribution (redistribution) In an Islamic system, redistribution is much emphasized and a detailed scheme is found in its basic sources. Muslim scholars have also discussed them elaborately. Elsewhere we have given an account of it (Islahi, 1995, pp. 19–35). In the mainstream economics, analysis of functional distribution has been given more importance  Discussion to Muslim scholars’ perception of functional distribution: Profit It may be noted that Muslim scholars excluded interest (a rate charged on capital lent against the time given for use) from the list of rewards for factors. Capital has to come in terms with the entrepreneur as equity participant and share in loss and profit of the enterprise. They always emphasize observation of fair practices and due consideration for weaker players. There seems to be awareness among Muslim scholars of ‘abnormal profit’ when it is said that ‘since profit represents an extra worth’, it should be sought from those types of goods which are not necessary for people. According to al-Ghazali, given the sellers’ benevolence as well as the norms of trading practices and market condition, the profit rate should be around 5 to 10 percent of the price of the goods; ‘One who is content with a small profit has many transactions and earns a lot of profit by large volume of sales and thus he is favored’.  Discussion to Muslim scholars’ perception of functional distribution: Profit Ibn Taymiyah also suggests that entrepreneurs should earn profit in a commonly accepted manner [al-ribh al-ma rūf] without destroying their interest and the interest of the consumers’ He is against the abnormal rate of profit exploitative [ghabn fāhish] of a situation where people are ignorant of market conditions [mustarsil] Thus, he opposes price discrimination to maximize profit. ‘A trader should not charge from an unaware person a profit higher than he charges from others’. ‘A person known to discriminate in this way should be punished and deprived of the right to enter the market’. Similarly exploitation of a needy person [mudtarr] who is bound to buy the good to fulfill the need (in other words, his demand for the good is perfectly inelastic) is condemned. The seller must charge a profit equivalent to the profit charged from a person not so bound’  Discussion to Muslim scholars’ perception of functional distribution: Profit Among other things, profits are related to the risk as is clear from various statements of Muslim scholars. Al-Ghazali says: ‘They (traders) bear a lot of trouble in seeking profits and take the risks and endanger lives in voyages...’. Risk is involved in partnership, trade and traveling ‘Trading risk is to buy goods (at a lower price) to sell it (at a higher price) to earn profit’ (Ibn al- Qayyim, 1982, Vol. 3, p. 263). Entitlement to profit is tied with the exposure to risk. Ibn Qudamah says: ‘A person has the right to share in the profit if he is ready to bear the loss’ While dealing with the partnership business, Muslim jurists have extensively written about the costs that will be deducted from the gross revenue to determine the net profit.  Discussion to Muslim scholars’ perception of functional distribution: Wages In the Islamic system labor has been considered as a service carrying a market price and therefore in normal conditions it will be left to the free play of market forces to determine the wage. Although the question of paying just and fair wages has been frequently discussed in Islamic thought, Ibn Taymiyah has rather detailed reflection on wages, so for our purpose it will suffice to present his ideas. He uses terms like ‘pricing in labour market’ [tas īr fi’l-a māl], ‘wage of the equivalent’ [ujrat al-mithl] analogous to ‘pricing in goods market’ [tas īr fi’l–amwāl] and ‘price of the equivalent’ [thaman al-mithl]. To avoid any disputes, wages like prices should be fully defined. He says: ‘wages and prices, when they are uncertain and indeterminate as is the case when they are not specified, or are not seen, or their kind is not known, there is a case of uncertainty and gambling’. It should be noted that during those days, wages as well as prices were sometimes paid in kind.  Discussion to Muslim scholars’ perception of functional distribution: Wages According to Ibn Taymiyah, the ‘wage of the equivalent’ will be determined by the quoted wage [musammā] if such quotation exists, to which the two parties may refer, just as in the case of sale or hire the quoted price [thaman musammā] will be held as the ‘price of the equivalent’ Again if there is imperfection in the market, the wage of the equivalent will be fixed in the same way as the price of the equivalent. For instance, ‘if people are in need of the services of cultivators or of those engaged in textile production or in construction but these are not prepared to give their services, the authorities may in this case fix the wages of the equivalent’ (Ibn Taymiyah, 1976, p. 34). He makes it clear that the purpose of this wage control is to prevent the employers and employees from exploitation of each other. ‘The just wage will be decided in such a manner that neither employer can reduce the wage of worker from that equitable wage, nor can the worker demand more than that’  Discussion to Muslim scholars’ perception of functional distribution: Wages Ibn Khaldun has also something to say about wages. While giving the substance of his thought, Spengler says: ‘what increases the money cost of the worker’s or merchants’ standard of life is or may be reflected in his supply price’ At this he comments that ‘Ibn Khaldun’s statements suggest, however, that it is usually demand rather than supply that fixes the price of the labour which, though it ought at least to furnish the “necessities of life”, often fails to do so in villages and hamlets where demand for labour is negligible’.  Discussion to Muslim scholars’ perception of functional distribution: Rent Muslim scholars talked more about ‘rental’ than ‘rent’ and mostly of juridical nature. Their statement about economic rent is rare and not very clear. Ibn Khaldun reached very close to Ricardo’s idea of economic rent in his example how real estate forms an ‘unearned income’ for his owner but could not strike it to point the element of rent, ‘... their value (that is, real estates and farms’) increases, and they assume an importance they did not have before. This is the meaning of “fluctuation in (the real estate market).” The owner of (real estate) now turns out to be one of the wealthiest men in the city. That is not the result of his own effort and business activity,...’  Discussion to Muslim scholars’ perception of functional distribution: Rent Similar is the case when he states: The Christian pushed the Muslim back to the seacoast and the rugged territory there, where (the soil) is poor for the cultivation of grain and little suited for (the growth of) vegetables. They themselves took possession of the fine soil and the good land. Thus, (the Muslim) had to treat the field and tracts of land, in order to improve the plants and agriculture there. This treatment required expensive labour (products) and materials, such as fertilizer and other things that had to be procured. Thus, their agricultural activities required considerable expenditures. They calculate these expenditures in fixing their prices and thus Spain has become an especially expensive region, ever since the Christians forced (the Muslim) to withdraw to the Muslim–held coastal regions, for reason mentioned Implicit in his statement is that the inhabitants of the interior Spain, who had fertile land and good location, also received that high price and thus they earned the differential rent. Had he made it explicit, he could be regarded the forerunner of Ricardo’s theory of rent.