Topic 6: Islamic economics approach to economic functions

1. Topic 6: Islamic economics approach to economic functions

2. IE approach to economic functions

3. Production

4. Learning outcomes At the end of the lessons, students should be able: • To explain capital as accumulated labour. • To describe what is the price of capital? • To analyze the right of ownership in Islamic economics. • To derive goals of production in Islamic economics.

5. Factors of production

6. Capital as accumulated labor • Capital is stored labor embodied in a commodity and used in the process of producing other commodities. • Labor is the only factor of production which deals in economic terms with the gift of Allah, the natural resources, to create value and equipment. • Islamic economics emphasis on “claim of ownership” than value as a result of the economic labor applied to nature. • Economic labor is defined as the labor applied to nature in order to extract the consumer’s utility or create a productive opportunity from the natural resource.

7. Capital as accumulated labor • The claim of ownership is only on the opportunity created and not on the natural resource itself. • For instance, a person who applies his labor and seeds to a piece land which is already in economic use has a claim on the output but not on the land, and he is required to compensate the owner for the use of the land. • The claim of ownership on the product is shared between the labor that created the opportunity of extracting benefit and the societies that exercises its right of controlling the natural resources.

8. What is the price of capital? • The answer which can be obtained from almost every intermediate textbook on economics is interest. • However, little reflection on the elementary concepts in economic theory will change the reply to the above question. • Capital is defined as “only the accumulated stock of plant and equipment held by business – it consists of durable goods which are used in producing other goods and services. • This definition does not fit with the use of the term in usual jargon, in which capital is meant to include money which can be borrowed in the finance market.

9. What is the price of capital? • But, the fact that money can buy machinery does not imply that both are the same because money can also buy any other goods, whether used in production, such as land and labor, or in consumption, such as food or clothes. • The price of capital, assuming homogeneity, is the rent per machine, and the price of loan is the rate of interest per unit of loan. • Hence, we do not need to downgrade the role of capital goods in production in order to justify the prohibition of interest in Islam. • Capital which participates in production has its reward which is a personal claim on the owner of the material.

10. The right of ownership • Property is a trust. • The true owner being Allah s.w.t himself. • Man’s right to dispose of worldly goods is in the capacity of a vicegerent and a trustee. • Hence, the property is not absolute but limited and qualified. • Wealth is means to the end of living a life in accordance with Allah’s guidance and of earning the reward in the Hereafter.

11. The right of ownership • Resources should be accessible to all men. • The idea of oneness of mankind requires that the bounties of nature and worldly goods be accessible to all men. • It should not become the monopoly of the few.

12. The right of ownership • Opportunity of economic utilization. • The object of the right of property is the opportunity of economic utlization. • If this opportunity is not attended to or the utilization is diverted to non-economic purpose, the right will be reduced to the limit of zero. • As a result, foregoing the entire right in case of losing the opportunity or the deprivation of control over one’s property in case of misuse.

13. The right of ownership • Opportunity of economic utilization (ctd). • The owner should not commit any oppression with the property right granted. • It also implies that there should no excessive penalty for the violation – “there should be no harm neither injury”. • It is on this basis that social welfare contributions are collected by the power of law in Islam.

14. The right of ownership • The right of ownership is limited by the life of the owner. • The owner does no have any authority over his wealth after his death. • Hence, the inheritance law of the Qur’an gives details concerning the distribution of the estate. • Death is considers as natural end of one’s property rights. • This is echoed the Islamic conception of the right of property, which is more a limited vicegerency rather than an absolute claim.

15. Objectives of production in Islamic economics • Three objectives of production in Islamic economic are as follows:- • Products which deprive the human being of his moral values as established in the Qu’ran, are prohibited. • Also prohibited are all types on industrial activity and relations which degrade the human being or make him party to vices for the sake of economic gain. • Thus, Prophet (PBUH) prohibited curtains forms of economic activity such as prostitution and the income generate from it.

16. Objectives of production in IE • The social aspects of production is emphasized and intimately related to the production process. • Distribution on the benefits of production among the greatest number of people and in the most equitable manner is among the prime objective of production in Islamic economic. • Extract the full benefits of Allah’s gift in terms of both human and natural resources. • In other word, the resources should be used in efficient manner.

17. References • Distributive Justice in Islam, Mohammad AnasZarqa.

18. Next class • Read on consumption.

19. THANK YOU…

20. Consumption

21. Learning outcomes At the end of the lessons, students should be able: • To re-visit the concept of rationalism in western economics. • To explain the concept of Islamic rationalism based on the following discussion:- • The concept of success. • The time scale of consumer behavior. • The concept of wealth. • The Islamic concept of goods. • To describe ethics of consumption in Islam.

22. Rationalism in western economics • Consumer behaviour theory is a capitalist economic theory. • It aims to explain consumer behaviour in maximizing utility with the constraint in income. • Basic assumption:- “Consumers choose to use or distribute based on rationality to maximize utility”. • Consumers have to choose because of limited resources and unlimited wants (concept of scarcity).

23. Rationalism in western economics • The theory of consumer behaviour developed in the West after the rise of capitalism is the offspring of a duality namely, economic rationalism and utilitarianism. • Economic rationalism:- “The acquisition of wealth whether in terms of money or commodities, is the ultimate goal of life and at the same time the yardstick of economic success”

24. Rationalism in western economics • Utilitarianism:- “An action is ethical if it results in the greatest benefit for the largest number of people” • Utilitarianism is the source of moral values and attitudes of man in pursuing wealth

25. Rationalism in western economics • From this dual origin emerged the theory of consumer behaviour which considers the maximization of utility as a postulated objective of the consumer. • Hence, the consumer goal is to achieve the highest level of economic satisfaction and whose only stimulus is the “sense of money”.

26. Islamic rationalism • Islamic economics emphasis that rationalism should be consistent with Islamic views which further discuss from the following aspects:- • The concept of success. • The time scale of consumer behavior. • The concept of wealth. • The Islamic concept of goods.

27. Islamic rationalism The concept of success • The concepts of success in Islam is always associated with moral values as pointed by M. Nejatullah Siddiqi:- • Success lies in being virtuous. • The more ethical one is the more successful he is. • A well provided life ensures peace of mind, contentment and sense of security. • Islam does not restrict efforts towards material progress.

28. Islamic rationalism The concept of success • Moral and spiritual encourages and stimulates the entrepreneur’s ambition by:- • Call or claim to establish enterprise • Satisfy his own ambition regarding life in the world and hereafter (Surah Ibrahim:7) • Thus, in Islam material and spiritual are neither separated nor cut off from life. • The pursue of economic progress is not a vice according to Islam. • In fact, it becomes one of the virtues if it is balanced and intended for a good cause.

29. Islamic rationalism The time scale of consumer behavior • Islam associates belief in Day of Judgment and the life in the Hereafter inextricably with belief in Allah. • Life before death and life after death are closely interrelated in a sequential manner. • This has two effects on consumer behaviour:- • Each choice of action is subject to immediate effect and later effect. • One’s income is increased by the inclusion of all alternative uses that will be gained only in the Hereafter.

30. Islamic rationalism The time scale of consumer behavior • In Islam, income has alternative uses such as qardhulhasan, waqf, care of animals, spending for the welfare of future generations, and improvement of community life even when it has no immediate benefit for the individual, promotion of goodness and etc. • Such uses of income are excluded from Max Weber’s rationalism unless they have some immediate utility. • Life of a Muslim is not merely strive of materials (Surah Nuh:10-12). • Hence, Muslim must spend some time in the remembrance of God.

31. Islamic rationalism The concept of wealth • Islam sees wealth is a bounty from God. • Al-Siba’i argues that Islam disapproves of poverty, referring to the saying of the Prophet PBUH:- “Poverty is almost equivalent to denying Islam” • Indeed, the Prophet PBUH used to pray to avoid poverty and give richness. • Nonetheless, Muslim should not be extravagant and miserly in spending of wealth.

32. Islamic rationalism The Islamic concept of goods • In Islam, goods are bounties bestowed by God on mankind. • Qurans always refer consumable goods by using terms that give moral values and appreciation such as:- • Al-tayibat which is defined as good things, good and pure things, clean and pure things, good and wholesome, sustenance of the best. • Al-rizq which is defined as Godly sustenance, divine bestowed, heavenly gifts as God is the provider for all creatures.

33. Islamic rationalism The Islamic concept of goods • These terminologies implies consumer goods are the useful, beneficial consumable materials whose utilization brings about the material, moral and spiritual betterment of the consumer. • Goods must be morally useful and exchangeable in the market in order to possess economic utility.

34. Ethics of consumption in Islam • Consumption of good things is a virtue in Islam. • Consumption should not involve any harmful things. • Over consumption is condemned in Islam. (Surah Al-An’am:141). • Extravagant is condemned in Islam (overspending is condemned even for lawful matters). • Muslims should spend moderately between miserliness and extravagant (Surah Al-Isra:29). • Islam recommend a moderate and balanced pattern of consumption and spending.

35. References • The theory of consumption.

36. Next class • Read on Islamic economic institutions.

37. THANK YOU…