Islam and Economics – Reviving the “Thought Leadership”

“But seek the abode of the Hereafter in that which Almighty Allah has given you, and do not neglect your portion of worldly life, and be kind even as Almighty Allah has been kind to you, and seek not corruption in the earth. Verily, Almighty Allah likes not the Musfsidun (those who are mischief-makers, corrupted).” [Quran – 28:77]

The central features of an Islamic economy are summarized as the following: (1) “behavioral norms and moral foundations” derived from the Holy Quran and Prophetic traditions (2) zakat tax as the basis of Islamic fiscal policy, and (3) prohibition of interest.

Islamic authors generally describe an Islamic economic system as neither socialist nor capitalist, but as a “third way,” an ideal mean with none of the drawbacks of the other two systems.
To reduce the gap between the rich and the poor, Islam encourages trade, discourages the hoarding of wealth and outlaws interest  (the term is riba in Arabic). Therefore wealth is taxed through Zakat, but trade is not taxed. Profit sharing and venture capital where the lender is exposed to risk are acceptable. Hoarding of food for speculation is also discouraged.
In this article, let us discuss the thought leadership provided by Islamic Economic system.

The Problem:

Today the world economies are troubled with the socio-economical issues like global financial meltdown, inflation, rising interest rates, debt, monetary problem, banking system, poverty, inequality, taxes, etc.  A common man (Aam Admi) has given up the hope of a prosperous and decent life. These issues are witnessing the failure of prevailing economic system in solving the current economical problems. Both urban and rural populace are suffering due to these issues. No comprehensive strategy or a permanent solution to these problems has been drawn by any of the nations so far.
One of the main reasons for the collapse of recent economical theories (Communism, Socialism and Capitalism) is that they were ‘Man-made’ encompassing all the limitations of a human thinking and abilities in them. Islamic Economics on the other hand is unique in this respect, as it is derived from the Quran & Sunnah, the ultimate source of guidance sent down by the Creator (Almighty Allah). This legitimacy of Islamic Economics and Finance minimises the risk of its failure.
However, before introducing the Islamic Economics and Finance, it is worth to have a few words about the philosophy of Modern Economics. The philosophy of Modern Economics is derived majorly from the works of four renowned economists namely Adam Smith , Alfred Marshall , Robbins  and Paul Samuelson . The definitions given by them reveal that this philosophy considers human being as an economic animal (i.e. an economic man). The primary problem of human being according to this philosophy is to satisfy his wants that are backed by selfish desires. The greatest problem of a man is ‘Choice making’, as wants are unlimited and means (resources) to satisfy those wants are limited and also have alternative uses. The life of a man is nothing but to engage himself in maximising the wealth, ignoring the society and its basic values (like morality, ethics, accountability, mutual trust, social responsibility and sacrifice).
This philosophy gave birth to the concept of free market (Laissez fair) that created horrible gaps between the rich and poor. It has changed the nature of money (i.e. from money as a medium of exchange to money as a commodity itself). In the veil of ‘profit motive’, it has created a greedy nature in man, and prompted him to make profits at the cost of the whole society. Moreover, the desire for a maximum wealth was fulfilled by the tool ‘Interest’ that created monopolies for rich persons, and in turn obstructed the natural function of market forces. Further, the lure for easy money (and trade in money) has opened the gates for unnecessary ingredients in trade (and business) like debt-based financial transactions, financial papers and derivatives in the form of options, futures, swaps, etc. These mysterious and frequently traded transactions in the name of ‘financial engineering’ increased the supply of fictitious money many folds more than the collective GDP of entire world. The lack of transparency in trade has created a totally artificial and imaginary mechanism of supply and demand which contributed to the horrible mismatch between money and the real economy.

Capitalist Economic System:

A Capitalist economic system is one characterised by free markets and the absence of government intervention in the economy.

In practice a capitalist economy will need some government intervention, primarily to protect private property. (this is important to distinguish capitalism from anarchism, where there is absolutely no government present)
In the real world, many economies which are viewed to have a capitalist economic system may have government spending taking up 35% of GDP. (Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a year, or other given period of time). This is because the government pays for welfare, health, education and national defence. However, the economy is still viewed as capitalist because in the area of private enterprise, firms are free to decided what to produce and for whom.
Problems of a capitalist economic system
        1. Inequality: Capitalist economic systems invariably lead to inequalities of wealth and income. However, it is argued that this inequality provides an ncentive for wealth generation and economic growth.
        2. Monopoly: In a capitalist society, firms could gain monopoly power over consumers and workers.
        3. Environmental problems: A capitalist society driven by the profit motive may take decisions to maximise economic income in the short term, but at a cost of environmental problems in the long-term.
        4. Immobilities: In a free market, factors of production are supposed to be able to easily  move from an unprofitable sector to a new profitable industry. However, in practice this is much more difficult. E.g. a farm worker who is made unemployed cannot just fly off to a big city and find a new job. He has geographical ties to his birthplace; he may not have the right skills for the job. Therefore, in capitalist societies we often see long periods of unemployment and recession.

The Solution:

Islam as the system of life gives clear guidelines towards the economic behaviour of an individual and society. All these guidance presented in the Quran and in Sunnah is known as Islamic Economics. The philosophy of Islamic Economics can be derived from the verse in which Almighty Allah (SWT) says: But seek, with that (wealth) which Allah has bestowed on you, the home of the Hereafter, and forget not your portion of legal enjoyment in this world, and do good as Allah has been good to you, and seek not mischief in the land. Verily, Allah likes not the Mufsidun (those who commit great crimes and sins, oppressors, tyrants, mischief-makers, corrupts). (Quran – 28:77)

In the light of above referred verse, it can be said that “Islamic economics is the study of the means of acquisition, utilisation and distribution of the wealth potentially bestowed by God (Almighty Allah) on man, as His (Almighty Allah’s) vicegerent in this world, through economic activities performed under divine guidance, in order to seek the best here and in the hereafter”.Now let us discuss the benefits of Gold Standard, system of Zakath and charitable Assistance in Islam which brings enormous economic benefits and justice to the society.
The points that can be drawn from the above definition are: Islamic Economics is based on the moral and spiritual aspects of the human life. It states that man is not an animal but a vicegerent  sent down by God (Almighty Allah) on this earth with purest nature . God (Almighty Allah) has created abundant resources (both actual and potential resources) that support man’s existence on this earth. The resources are unequally distributed all over the globe  with wisdom to create a strong relationship among the human beings . It also states that the surplus of a man must go to his fellow beings as an ‘Economic Trust’

Benefits of the Gold Standard

If the benefits of the gold standard were to be compared with the fiat (paper currency) standard and other standards, it would be inevitable that the monetary gold standard would become a global standard. These benefits would not allow any other monetary standard to become established. Throughout the history of money and up until the First World War, the whole world operated the gold and silver standards. No other standards were known to the world until then. However, when the colonialists mastered the various styles of economic and financial imperialism, and began using currency as a means of colonialism, they established different monetary standards. They considered bank deposits and non-exchangeable banknotes, which had no reserve of gold or silver, as money, along with gold and silver.

Therefore, it is necessary to explain the benefits of the gold standard, the most important of which are:

        1. The gold basis necessitates the free circulation, import and export of gold, which leads to monetary, financial and economic stability. In this case, transactions of exchange would only originate from foreign payments to meet the cost of commodities and the salaries of workers.
        2. The gold standard ensures the stability of exchange rates between various countries, and the stability of the exchange rates in turn leads to a boom in international trade, for traders would no longer fear the expansion of foreign trade, and the uncertainty of exchange rate instability.
        3. If the gold standard was employed, central banks and governments would not be able to expand the issuance of banknotes, for as long as the banknote remains non exchangeable with gold at a fixed rate, the authorities concerned would fear that if they exceeded limits in issuing banknotes, the demand for gold would increase and they would not be able to meet this demand. Therefore, they would always tend to maintain a reasonable ratio between what they issue in terms of banknotes and gold reserves.
        4. Each of the currencies used all over the world would be fixed by a specific amount of gold. As a result, the movements of commodities, money and people from one country to another would be easier, and the problems of hard currency would disappear.
        5. The gold standard would help each country preserve her gold, for there would be no gold smuggling from one country to another, and countries would not need to exercise control in order to protect their wealth, for gold would only leave the country for legitimate reasons i.e. as prices for commodities or salaries for workers.
These are some of the benefits of the gold standard, and they all make it necessary that the world operates this standard. Therefore, it comes as no surprise to learn that the whole world up until the First World War was indeed operating the gold standard.

System of Zakath (Charity)

1. Zakat is one of the basic principles in the Islamic economics, based on social welfare and fair distribution of wealth. Islam has made zakat a compulsory obligation on every Muslim (Al-Baqarah: 83). Scholars infer that zakat purifies a Muslim’s wealth and also suppresses ego, jealousy, greed and miserliness. It is not a form of tax but rather a divine duty and considered as a right of the poor over the rich, not a charity.

        2. As zakat is imposed on wealth, it makes wealth circulate in the body of the nation, which acts a powerful inducement to invest capital in productiveenterprises thus, helps to encourage growth.
        3. In the current situation, the gap between the rich and the poor is getting wider. Even the United Nations has recognized that a small fraction of the wealth can alleviate the poverty of the poor since even now the rich countries struggle to give 0.3% of their GDP as charitable aid. We should not therefore underestimate the potential of zakat to transform the lives of the poor.
        4. In Islam, Zakat is one of the five pillars of faith. It is a unique, spiritually charged filtering device primarily designed to cleanse one’s possession or wealth necessary to protect the owners of wealth against spiritual poverty. While protecting the rights of “haves” and “have nots,” its main objective as an act of worship are: (1) the promotion of stable economic growth through investments, employment and balance consumption, and (2) the achievement of greater income equality through an equitable distribution of wealth, thereby eliminating poverty and extreme disparities of wealth between the rich and the poor.
        5. The institution of zakat is the cornerstone of the Islamic economic system. The Qur’an emphasizes zakat as a critical component of socioeconomic justice. The institution works to ensure an equitable distribution of wealth and establishes a safety net for needy members of society. Both the sources and disbursement categories of zakat are specified in Islamic doctrine. The Qur’an identifies eight categories of disbursement, each of which carries clear social benefit. One positive economic effect of zakat is an increase in the moneysupply and a consequent increase in the demand for goods and services. Zakat also provides debt relief and enhances price stability. If accumulated in times of prosperity, zakat funds can aid society through times of depression. Though zakat has widely fallen out of use in modern times, it can have great economic impact if properly reestablished. The following Harvard publication explains in detail the Zakath system and its benefits to the society
Charitable Assistance

1.        It is an obligation on a Muslim to offer assistance to those who needs it according to his means. This can involve financial assistance (sadaqa), public service or any other action to provide help to those in need. Charity purifies the human personality by removing selfishness, greed and materialism. It creates compassion, care, love and kindness among people and it makes a person more thankful to Almighty Allah.

The view of Islam towards wealth differs from its view of utilising it.

2.        Islam considers the means that produce a benefit a subject different from the subject of possessing the benefit. So property and human effort are the components of wealth, and they are the means which produce benefit.

3.        Their position in the view of Islam regarding their existence in life and in regard of their production differs from the question of using them and from the method of possessing this benefit.

4.        Islam interferes directly in the question of utilising some properties. So it prohibits the use of some commodities such as wine and dead foodstuffs. Similarly, it prohibits benefiting from some of man’s actions, such as dancing and prostitution.

5.        It also prohibits the trade in commodities that is forbidden to be eaten.

Almighty Allah, Our Creator says the following in Holy Qur’an:

*        “It is He who created for you all that exists on earth.” [Al-Baqarah: 29]

*        “Almighty Allah is He Who put at your disposal the sea so that the ships may sail by His command, and so as you may seek His bounty.” [Al-Jathiyah: 12]

*        “He put at your disposal that which is in the heavens and that which is in the earth, all from Him.” [Al-Jathiyah: 13]

*        “Let man consider his food. How We pour water in showers. Then split the earth in fragments. And cause the grains to grow therein. And grapes and fresh vegetation. And olives and dates, and enclosed gardens, dense with lofty trees. And fruits and grazes. Provision for you and your cattle.” [‘Abasa: 24-32]

*        “And We sent down iron, in which is great might, as well as many benefits for mankind.” [Al-Hadid: 25]

In the above verses Almighty Allah orders, that He created property and created man’s efforts, and He did not discuss anything else that may be linked to them, which indicates that He did not interfere in the property or in man’s effort, except that He showed that He created them for people to utilise. He also did not interfere in the production of wealth; there is no Shari’ah text (divine legal text) which denotes that Islam interferes in the production of wealth.
It was narrated that the Prophet (pbuh) said in the issue of manual pollination of date trees: “You are more aware of the routine issues of your daily life (amr dunyakum).” It is also narrated that the Prophet sent two of the Muslims to Jurash of Yemen to learn weapons manufacturing. These examples indicate that the Shari’ah has left the matter of production of wealth to the people, to be produced according to their experience and knowledge.
From all of this, it is apparent that Islam focuses upon the economic system and not economic science. It makes the use of wealth, and the method of possessing its benefit as its subject. 
Therefore, Islam urges people to earn, seek the provision and strive. And it made striving to earn the provision compulsory.
Almighty Almighty Allah said: “So walk in the paths of the earth and eat of His sustenance which He provides.” [Al-Mulk: 15]
However, this does not mean that Islam interfered in the production of wealth, or that it demonstrated the technical matters related to increasing production, or the amount of production, because it has nothing to do with production. Rather it only encourages on working for the earning of property. Many Ahadith came to encourage the earning of property. In one Hadith, the Prophet Muhammad (pbuh) shook the hand of Sa’ad ibn Muadh (ra) and found his hands to be rough.When the Prophet asked about it, Sa’ad said: “I dig with the shovel to maintain my family.” The Prophet (pbuh) kissed Sa’ad’s hands and said: “(They are) two hands which Almighty Allah loves.” The Prophet (pbuh) said: “Nobody would ever eat food that is better than to eat of his own hand’s work.”
It is clear in Islam that wealth is created for human beings, and human beings are not created for wealth.  Towards the activity of the production the Islamic Economics is not averse but makes condition that there should not be exploitation of the weak and the interest of the society should not be on risk. It allows the trade and industry by mutual consent without harming one another . It suggests a moderation and self control and exhorts the consumers to avoid luxuries and wastage in consumption . Islamic Economics restricts hoarding of wealth in few hands  and encourages flow of wealth from one hand to another. It proposes a just distribution system. It states that whatever produced should be divided among the factors of production according to their share without any deception.