Economics
Question:-
How would an economic system based on Islamic principles differ from existing systems?
Answer:-
There are no existing Islamic economic systems. So it is only possible to describe these differences theoretically, and even this in outline only. Practice seldom coincides with theory because all kinds of factors exist in real situations that have not been taken into consideration in thought. The establishment of an Islamic Economic System will require first a more detailed theory and then an experimental implementation somewhere so that the practical problems can be identified and solved. And only when this has been successfully done can it be applied more universally. But it will still need adaptation to suit different places.
An Islamic Economic system should be based on certain fundamental principles:-
(1) Islam recognises the supremacy of Allah, the creator of the Universe and all its aspects things in it. This in effect means that human affairs should be controlled by objective principles and values, such Truth, Compassion, Justice in thought, motivation and behaviour.
(2) The notion of Tauhid, (Unity) is all important. This implies that there are no isolated things, but all things and all aspects of life interact and are inter-dependent. No absolute distinction is made between the physical and the spiritual, idealism and materialism, religion and politics or economics or science and so on. But there are differences in degrees and levels.
(3) Islam recognises the autonomy of human beings and the right to self-determination. This excludes the control and coercion of people by each other. There are several aspects to this:- (a) As human beings live in communities with which they are inter-dependent they must control their affairs through mutual consultation. Islam favours contracts and partnerships, not servitude. (b) People are equal in Justice, but they are obviously different, horizontally as well as vertically. That is, they have a variety of characteristics and talents, these are not only to be tolerated but are a blessing as they widen the range of capabilities. (c) But there is also a range of levels of intelligence, wisdom, virtue, knowledge and capabilities. Those better endowed in these respects are regarded as closer to Allah, and should help and advise those less well endowed, because it is advantageous for the community and their own development. The latter should consult and follow the former also for their own and the community's sake. (d) Whereas Islam recognises the right to privacy, all affairs that involve the public have to be conducted openly. No secrecy and conspiracies can be allowed. (e) A person cannot knowingly harm others, claim the rewards of the work of others, unload the bad consequences of his work on others, restrict the rights of others, or increase his own. But a person can voluntarily bestow benefits on others or receive voluntary benefits. This has relevance to patent rights.
(4) Human beings are part of the created world, are interdependent with their environments, interact with it and have a function with respect to it. This implies that they need an input from the environment, transform it and produce an output into it. These processes are interdependent. The output by human beings is an input for the environment which also transforms this. There are feed-back cycles between man and the environment. Human Economics can be seen as part of the Universal Economics.
(5) This also implies that human beings require resources and have needs. The environment can also be regarded as requiring resources and having needs. This creates the difference between facts and values. Economics can be defined as the bridge between resources and needs, or in more general terms, between truths (that is dealt with by Science) and Values (that is dealt with by Ethics).
(6) The resources can be physical (material, energy, space and time), human (labour, health, skill, enterprise, creativity) or concerned with general conditions such as the climate and weather, the state of development of people, the existing ideas, sciences, arts, organisations and structures (cities, parks, roads, communication networks, mountains, rivers, forests etc.) All these are interdependent.
(7) Economics is a relationship - Resources and Needs are connected by Work, the effectiveness of which depends on skills, abilities, intelligence or ingenuity. These three are interdependent. Things that are not needed or cannot be used are not resources. Human ingenuity can find uses for things that had no use before, thus creating resources. New materials can also be invented. On the other hand, things that were not needed before can become needs, and things that were needs can become redundant. Value systems can also change. Certain skills can be useful and needed while others are not and this can change. Ingenuity can depend on opportunities and education and these can depend on resources available.
(8) Owing to the fact that they have a mind that can obtain and process data both from outside and from within themselves, Human beings can invent. A distinction arises between (a) what is objectively real, (b) what they have created or changed (c) what is wholly subjective and mistaken for real. There is, therefore, a difference in wants between needs, desires and values. Needs are built-in strivings. Desires may arise from habits, fixations, addictions and obsessions. Greed refers to desires that go beyond need and do harm either directly or by sacrifice of what is beneficial. Values refer to what is consciously held motives and recognised as producing real benefits. A distinction has to be made between Illusory and Real Resources, between Illusory and Real Satisfaction, and between Illusory and Real Work.
(9) Human beings have (a) physical, (b) mental and social and (c) spiritual wants. These are not completely distinct but different aspects of the same thing though they may differ in the degree of importance of each aspect. They interact and affect each other but there is an order of urgency and an order of value that is the reverse of this. That is: There is first an emphasis on the satisfaction of physical needs connected with self-preservation to a certain level before the emphasis shifts to the need for social satisfaction connected with reproduction, family, community and cultural life. This must reach a certain level before the emphasis shifts to the satisfaction of spiritual needs. Individuals die, and the physical self-preservation of the individual can only have purpose and value with respect to the community, the human race and life as a whole and that can only have a purpose and value with respect to the fundamental Reality and the realisation and spiritual adjustment to that. However, conditions can be and have been created whereby the lower motives have been strengthened at the expense of the higher and development has been arrested. On the other hand, humanity may not have made any progress had it not been for some people who, in times past, were able to sacrifice the lower motives in favour of the higher. This lifted their consciousness from the purely physical ambitions and allowed them to develop the abilities, ideas, values, arts and techniques that created civilisation.
(10) A certain amount of work has to be done on resources to create the transformation that produces the satisfaction of needs. This constitutes a sacrifice e.g. of energy, effort, attention, time other desires etc. It is the payment for the satisfaction. This work can be physical, mental or spiritual to different proportions and these also interact. It is possible to sacrifice one kind of satisfaction for another - the spiritual or social for the material or vice versa. The effectiveness of work depends on skills.
(11) Possession, property is not a natural right. Human beings come into the world with nothing and leave it with nothing. The only true property consists of the characteristics and faculties that describe them. Human beings are judged by what they do with these. They reap the consequences of what they do according to natural laws. This is because actions modify the person who does them as well as causing effects in the environment that also causes reactions on them. External objects are not true property. Possessions can be given or taken away. Property is the right to use and not a right to possess.
(12) These faculties and laws bestow on them certain authority, responsibility and rights. And these are interdependent. They have limitations owing to the need to interact with others who have the same rights and interdependence with the physical environment and the natural laws. There is no absolute right to property or to make any kind of agreement with others, to sell or buy anything one likes or to earn ones living by any means possible, or to take advantage of the relative disadvantages of others to exploit them. These are to be controlled under the principles of Justice, Compassion and Truth. The physical, mental and spiritual welfare of all concerned, the society as well as the environment is to be taken under consideration.
(13) While on earth, human beings do depend on its resources. The supply of the resources needed depends on having control over it and the territory which produces it, depending on its productivity. Consider a group of people that settles in an empty land. Each person will claim the amount that he can work to obtain his wants. The resources or territory he cannot work has no value to him. He can increase the amount or productivity of the resources he can work by using animals, machinery, his own skills or organisation or other people. Other people will work as much as will satisfy their wants. To profit from their work he will have to force them to work more than will supply their wants or he will have to deprive them of some of their products. This transfer of work from A to B and satisfaction of wants in the opposite direction from B to A by coercion is injustice and constitutes slavery. In order to be able to exert this coercion the notion of rights of possession has been invented. This is a legal notion enforced by force of arms through courts, police and armies. It is this that gives value to formerly valueless resources. The individual now has a limitless right to satisfy desires (whether or not these create real satisfaction or fulfilment) at the expense of others who are deprived. In order that these other people can obtain their needs they will have to agree to do some work or forfeit some products to the owner. In fact, they are paying for the legal permission to make a living not to God but a human being. Part of this goes to pay those who are employed to carry out the coercion and enforce the law. The owner need not employ them. He has control over the lives of other people and can control their actions, behaviour, thoughts, attitudes, and their consciousness, conscience and will. However, there is mutual benefit if a person who can utilise resources better than another has control over these and others work under his directions. This in fact happens when the resources are owned by a family which must utilise them as a group. The children of different ages obviously have different amounts of experience and skills and are also trained and educated by the parents and other relatives. The ties between them combine authority with love. Partnerships and Co-operative communities can do the same.
(14) Products can be made more easily by some people with greater skills or organisation than others or in more productive areas than others. There is, therefore, an advantage in the exchange of goods. This is regarded as just when there is free agreement to exchange because there is perceived benefit to both. The real benefit consists of the increase in the satisfaction or fulfilment or decrease in the sacrifice or Work. Agreement is reached when the perceived benefit is maximised.
(15) Money was invented as means of making exchange easier. It represented any real product. Money did not itself have any value except for what it could buy. But it was symbolised by metal coins. This created the illusion that it was commodity that could be bought and sold. Money became separated from any actual products. This bestowed the possibility of manipulation which made it into a convenient way of accumulating wealth, power and prestige. The Financial world operates by rules and processes that are different from those that operate in real productive industries but affect these nevertheless. Gambling on the Stock Exchange, for instance, produces fortunes or losses that have little to do with production, but cause Industrial and social chaos. It is obvious that some people are paid far more than the effective Work they do or have far more money than the effective Work they have done. The reverse is the case for others. Thus, the gap between the rich and the poor steadily increases. The individual was able to coordinate his Work with his needs and this is also possible for partnership groups. But as money which stands for the relationship between Work and Needs, has become an independent factor, the economic system has disintegrated. There is accumulation of money in banks, goods in shops and needs continue to exist without satisfaction while workers are unemployed. Work is organised but need and consumption is not. It is easy to produce and what is produced has to be sold by pressure tactics. It is not needs and values that determine what will be produced, but production determines what will be sold. There is, therefore, a difference between Consumption and Satisfaction. This creates Illusory Wealth. It creates economic malfunctions, a Diseconomy, a disease that affects the environment, the society and the psychology.
A certain amount of sacrifice in the form of effective work W is required under conditions C(w) to produce a certain amount of real satisfaction of needs and wants, i.e. fulfilment F. And a certain amount of real satisfaction F is required under conditions C(s) to produce a certain amount of work. But, not all of it is effective work. There is also wasted work, which also has consequences. And there is the recognition, ignorance or misinterpretation of the nature and potentialities of resources and the distinction between illusory and real needs.
In general all work produces effects both on those who do it and on the environment and on other people. These three also interact. The effects can be beneficial, neutral or harmful to all three in different proportions. It is beneficial if it creates real satisfaction F. It is harmful if it diminishes F.
Effective work is work that produces the desired effects. The perception of desired effects can be illusory or real. It is illusory if the satisfaction is illusory. It is real if there is real satisfaction F. Effective work should, therefore, create overall greater benefits than harm. This depends on knowledge and ability. Economics can be defined as the method by which the maximum benefit or real satisfaction is obtained from a given amount of sacrifice or work, or a given state of satisfaction is obtained from the minimum sacrifice. The Economy can be said to improve or grow when F is maximised and W is minimised.
Given a certain Human Population, a certain amount of minimum Total Satisfaction will be required for health and this will require a certain amount of Total Work and a certain Total Conditions. Ways of measuring these need to be found.
The human condition remains static when the balance between W and F remains the same. If the population increases or the Work and Conditions decrease, this will lead to degeneration. The reverse will lead to development. The increase in population, the increase in demand per person and the depletion of resources tend to produce stresses that act as stimuli to development of techniques (material, organisational and ideological) to improve conditions or increase effectiveness of work. The changes in values and demand also have their effects in adjustment. But all this depends on knowledge, abilities, the development of ideas and social conditions. If knowledge or abilities are inadequate and the society is trapped in habit and conventionalism then it will not be able to adjust and will certainly degenerate.
The conditions required to produce work C(w) are not the same as the conditions required to produce satisfaction. As Economics is about the use of resources to produce satisfaction of wants (or in a more general sense - a bridge between facts and values), then an economic system that is organised only to produce work, such as Capitalist industries are, is only a one sided economic system that creates distortions.
In a particular physical environment with a productivity E=100, and technological condition T=100, and organisational condition O=100, and ideological condition I=100 and level of ability, ingenuity and skill A=100, a certain amount of effective work W=100 is required to produce products, services and facilities P=100 that produce satisfaction or fulfilment F=100.
Not all work is effective in producing products and not all products produce satisfaction. In fact, similar products can produce different amounts of satisfaction. They vary in quality, quantity and relationships. They may be less appropriate or may wear out or break down faster. The quantity may be too small or too great so that each item has less value. In the case of a system of interdependent parts, they must also fit together. In general all human needs are interdependent and their satisfaction or frustration affect the others. A great quantity of goods is not an indication of true benefits and satisfaction. There is a difference between apparent or Illusory Wealth and Real Wealth.
Dissatisfaction and frustration create a great number of other problems in three ways:- (a) It creates negativism, aggression and conflict. The purpose of the behaviour is to destroy the source of the suffering caused by frustration. But this source may be mistaken or the target substituted. (b) When work, energy and effort are spent in the pursuit of things that do not provide real benefits and satisfaction then it is not merely a waste but it is harmful because it depletes. It frustrates causing an increased urgency and efforts to achieve satisfaction of needs. But as these needs are misinterpreted no satisfaction is gained and there is increasing debility and degeneration. (c) Compensation is sought in substitutes and distractions such as wealth, power and prestige for their own sake. There is escapism in alcohol and drugs or in various kinds of excitements and sport that dull consciousness. Pleasures and entertainments are pursued of ever more extreme and bizarre types. Distraction is sought in the pursuit of illusions, futile purposes and goals that produce no kind of benefit but are likely to be harmful. All this not only wastes resources but also produces social conflicts and malfunctions.
It is not difficult to determine that while a large portion of the population of the world is in dire poverty, a smaller section of the population is wasting most of the world's resources. People in the prosperous countries possess from 3 to 50 or more times more than they need or can use, and the goods they accumulate cost less in money terms than the true cost to the environment and the society. That is to say, the cost of clearing up the pollution caused by the manufacture and the cost of dealing with the medical, social and problems that result from the way industry is organised are not added to the price of goods but come out of salaries or taxes. Much cheaper, better and more durable goods can be easily produced and expenditure on wholly useless or harmful goods, services and facilities can be severely reduced were it not for the intensive propaganda to sell goods and the way Profits are made. There is a difference between the Real and the Illusory Cost of things.
We, therefore, have to take into consideration the attitudes and reality orientation, the motives and knowledge, the education and state of people. Objective thinking, values and actions have to be cultivated. All this is included in the Ideological condition I.
In organised communities, an amount of money M=100 is required to pay for the work W and that is also used to pay for the products of the work P. It is a medium of exchange between W and F. Distortions in the economy occur when money is regarded as a commodity that is itself bought and sold with money. It simply adds or diminishes prices and transfers money from the poor (who borrow and pay back with interest) to the rich (who have the surplus to lend). The real price of the product is the proportion of the income that has to be paid to buy the product. The less one is willing to pay out in proportion to one's earnings the greater is the value of the product and vice versa. The perceived value is not necessarily the true value. One may have an addiction or obsession to something that provides no benefit and one may sacrifice something for it that is of greater benefit.
We have altogether 9 factors.
The Conditions C consist of E, T, O, I, A and these mediate between W and F. The products P and the money M also mediate between W and F. These three mediators C, P and F can be regarded as representing each other.
It is clear that if the environment (or any of the other conditions) degenerates so that E=80, for instance, then the same amount of work W=100 will produce less fulfilment, say F=80. Or the same amount of satisfaction F=100 will require greater amount of work, say W=120. Conversely, if the environment (or the other conditions) improve then the same amount of work will produce greater satisfaction. Or less work will be required to obtain the same amount of satisfaction. It is, therefore, economically an advantage to improve conditions.
A certain amount of Work can be used, not to obtain satisfaction directly, but as Capital that is invested in the improvement of the conditions. The physical environment can be improved, technologies can be developed, scientific research can be done and organisation can be improved. In particular education can be used to create better physical and intellectual skills and to create better values and goals so that effort and work is more effective and the products produce real benefits and satisfaction. In particular the truly human faculties, the state of consciousness, conscience and will need to be improved as these are not only the means but also the goals.
The richer the nation the more they have to invest. Therefore, the more do they progress and develop. This in the material direction was the case in the USA, which had vast resources and a relatively small population. It also had the advantage of the mixing and cross fertilisation of a variety of genes, ideas and cultures, and the stimulus as well as freedom to innovate. The reverse is the case with the poor nations, particularly because they, being weak, are also exploited by the rich to the latter's advantage.
The gap between the poor and the rich steadily increases. However, this is only so when there are barriers between nations. It is an overall advantage for humanity that there should be rich persons and communities that can invest in development if they are vigorous, enterprising, able and have a sense of responsible and their this development is allowed to cross all barriers and cause the general development of the global condition.
The poorer a nation (i.e. the less their satisfaction of needs) the less do they have to invest. In fact, the money for investment has to be extracted from the people by either a group of people who hold the power (as in Capitalism) or by governments (as in Socialism), causing them deprivation and suffering. This was the case in the Industrial Revolution in Britain and Europe and later in Russia. Other poor nations will have to undergo the same process if they are to develop. If they do not develop then they will suffer in any case.
There is, however, a third, but much more difficult way by which this can be done, and that is the one compatible with Islam. The people can themselves, individually, collectively and voluntarily, undertake to make the necessary sacrifices of immediate gratification for long term gains. It is based on the assumption of a general respect for the autonomy, self-determination and sense of responsibility of people. It requires an appropriate ideology, value system, educational level and leadership. The establishment of such a system requires the formation of new communities of Muslims.
Life has ups and downs of fortune and misfortune and people do change from dependent childhood to dependent old age. In Islam the insurance is provided by the family, group or by zakat. That is the family takes care of its young and old and all members contribute as they can. The elderly are not useless burdens but can have a guiding role and an educational role towards the young.
As Islam requires freeing of slaves, an Islamic economic system is not built on employer/employee relationship where the employee can be thrown on the scrapheap when he ceases to be useful to the employer. It is based on personal responsibility and it can be based on partnership. In other words companies can be formed that take care of all the needs of the members, including training and education, health and social welfare. This is particularly the case because Islam being a unitary system does not separate the economic, the political, cultural and spiritual aspects into different departments.
Zakat is an obligation for all Muslims. It is charged at 2.5% of all surpluses which consists of anything above a minimum required for living. This can be collected by the State and distributed as needed both to individuals and companies.
As for inflation - that is an effect of Capitalism and should not happen in an Islamic system. Usury causes the interest to be added to the cost of goods and the money so gained is again lent out to produce more interest. As the lenders get rich and the workers poorer they strike for higher pay which reduces the profit of the employers, so they increase the prices. Thus we get an upwards spirals of inflation.
This process is hidden by the fact that research, technological developments and better organisation makes production cheaper. These things are driven by competition and should remain in place even in an Islamic system, though modified by co-operation. Though this diminishes the intensity of competition it is to the advantage of all members of the company that development should take place.
It should be noted that Capitalist competition not only leads to unethical activity which is widespread, but in so far as manufacture becomes relatively easy through technology, it also leads to increasing unemployment or/and pressure salesmanship by which people are persuaded to buy what they do not really need. It creates waste. This puts pressure on resources and the environment and impoverishes other communities.
Unless Capitalism is severely modified, and things continue as they are doing then we will steadily see all wealth and power falling into the hands of a diminishing group of people who will control all things, including resources, behaviour, ideologies, thought, and conscience. There will be global slavery. This is what globalisation means. As it is the creation of international companies that can set up their business wherever most convenient to them, national governments, democratic or not, have little control over them. It is they who dictate national policies.
Islamic reformation would make all employees into partners with the right of having a say in the policy of the company. That is, the profit of the company (Income minus expenditure, P = I - E) is divided by the a D = N x S, where N is the number of workers and S is the total number of shares. The shares per person depends on the work they do i.e. the amount multiplied by value of the work. A x V. This allows differences in experiences and rank etc.
----------<O>----------