Chapter 20: Fundamentals of Islamic Economic System by Dr. Muhammad Sharif Chaudhry



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Fundamentals of Islamic Economic System

By Dr. Muhammad Sharif Chaudhry



  1. Islam and Capitalism

  2. Islam and Socialism

The most dominant economic systems in the modern world at present are capitalism and socialism. The capitalism is the dominant economic philosophy in the western world mainly comprising Western Europe and Northern America under the leadership of United States. The socialism has been dominant economic ideology in USSR, Peoples Republic of China and some countries of Eastern Europe. Although socialism, with downfall and dissolution of its former leader Soviet Union, has received a great setback, yet it still holds a lot of relevance as an economic philosophy.

However, before comparing Islamic economic system with capitalism and socialism, we would briefly introduce these two systems to our readers and then we shall make comparison.

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I- Islam and Capitalism

What is Capitalism? Capitalism, as defined by the Collins Dictionary, “is an economic system based on the private ownership of the means of production, distribution and exchange”. Broadly speaking, capitalism is the name given to the economic system in which the principal means of production, distribution and exchange are in private (individual or corporate) hands. The profit motive constitutes the prime stimulus to productive exertion and the ‘price mechanism’ determines what things shall be made in what quantities and what conditions.

It is a type of economy in which capital is privately owned and may be freely used by the owners as they wish in attempting to make profits from their economic enterprises.

Thus in this system of economy production and trade are organised on individualistic basis. Private individuals or private firms and corporations with the help of previously accumulated capital, but more often utilising money borrowed on interest, earn profits and build up business or industrial empires for themselves by employing the mass of human labour for wages.

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Features of Capitalism: Chief features of capitalism include : existence of unrestricted private ownership of means of production, exchange and distribution; economic freedom; profit motive as incentive for productive activity; free market and competition; existence of monopolies; banking and institution of interest; wide disparities in distribution of wealth; economic exploitation of the weak by the strong, etc.

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Comparison with Islam: Capitalism and Islam are compared in respect of their basic economic concepts as under:

1.  Right to ownership: The existence of right of private ownership of property is the hallmark of capitalism. It gives unrestricted and unencumbered full rights of ownership to the individual. The individual may acquire, own or alienate his property in whatever manner he likes. The system believes in the private ownership of the means of production, distribution and exchange which are managed and controlled by individuals or groups of individuals for private profit. The unrestricted right to own property and earn profits leads to concentration of wealth in few hands. This necessarily disturbs the balance of distribution of wealth and income in society. The economic disparities and the ever-increasing gulf between the rich and the poor sows the seeds of discord and destruction in the capitalist society.

Islamic concept of ownership is unique one. Ownership, in reality, belongs to God while some rights only vest in man so that he may fulfil the purpose of God, that is the purpose of community by acting as a trustee for those in need. In other words, what Allah has created for benefit of and service to man belongs collectively to the whole humanity. Legal ownership by the individual is recognised in Islam but it is subject to the moral obligation that in all wealth all sections of society have the right to share. Thus private or individual ownership in Islam is not unlimited or unrestricted. All the means of production are not placed under private ownership as public ownership of certain things of common utility exists side by side with it in an Islamic state. Islamic state has also the right to nationalise certain things which are under private ownership for the benefit of the community. In this way the limited right of private ownership with law of inheritance which distributes the estate of the deceased among fairly large number of heirs averts concentration of wealth in few hands and thus prevents class-conflict.

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2. Economic Freedom: Unrestricted economic freedom and non-interference of the state in such freedom is another feature of capitalist economy. Every individual is at liberty to initiate, organise and establish any enterprise, business, trade, profession, etc. He has full freedom to earn as much income as he can and spend his wealth in whatever manner he likes. This unrestricted economic freedom generally leads to earning of wealth through foul means such as gambling and prostitution. It also encourages business malpractices such as smuggling, black marketing, profiteering, hoarding, speculation, forward transactions, fraud, exploitation, adulteration, etc. Thus a mad-race for earning wealth becomes order of the day and high social and moral values such as fraternity, brotherhood, mutual help, love, benevolence, truthfulness give place to selfishness, callousness, hatred, falsehood and mistrust. Capitalism, in fact, has come to signify a religion of money or dollar dictatorship.

Islam also allows economic freedom to an individual who is at liberty to earn wealth, own it and spend his wealth at his discretion. But the freedom given by Islam in economic sphere is not unlimited. Islam makes distinction between halal (permitted being lawful) and haram (forbidden being unlawful) in every economic activity embracing vast fields of production, exchange and consumption. Certain means of earning wealth such as interest, bribery, embezzlement, gambling, games of chance, speculation, monopoly, usurpation of wealth of orphans and other weaker persons, prostitution, singing and dancing, sale of wine and narcotics, short weighing and short measuring, trade in haram things, immoral and exploitive methods, etc. are prohibited to a Muslim. Similarly consumption of wealth on luxurious living, haram things and extravagant spending is also forbidden. A Muslim is required to pay Zakat and spend whatever he can for the cause of the poor and the destitute. All these regulations promote moral values in Islamic society and eliminate mad-race for wealth and material gains.

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3. Monopoly: Competition, which is another feature of capitalism, leads to the destruction of minor enterprises and firms. This encourages merger of smaller business organisations into major ones and thus monopolies or cartels are established. Monopolies kill free competition, cause inflation in prices and ultimately result into unemployment. Thus labour and consumer are both exploited in such a situation. Morever, trade-cycles, unplanned production, over-competition, increasing accumulation of capital upsets the balance between production and consumption which sometimes leads to economic depressions.

Islam forbids unhealthy competition and bans all the ways which lead to it. Islam also disallows establishment of monopolies. The Prophet of Islam is reported to have said : Whoever monopolies is a sinner. Especially monopolies over food-stuffs or articles of daily use are forbidden by Islam. Commodities and services which are of the common interest of the community are never allowed to be monopolised. Those essential things which are required by everyone are generally maintained under joint ownership of the community. Thus interests of the consumers and labour are protected and balance between production and consumption is never allowed to be disturbed.

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4. Institutions of Interest: The Institution of banking and interest is the life-blood of capitalistic form of economy. For business, trade and industry especially for big projects and economic ventures, huge funds are required which no individual or firm can arrange. This leads to establishment of banks who borrow capital from depositors and investors on lower rate of interest and lend it to business enterprises on higher rate of interest. Thus the institution of interest has become part and parcel of capitalism.

Islam considers interest as the most exploitive institution for humanity and has abolished it root and branch in its every form and manifestation. According to al-Qur’an taking of interest tantamounts to war against God and His Apostle, while according to Prophet Muhammad (PBUH) interest is worse than adultery. Islam builds its economy on interest free basis and promotes profit and partnership as incentive for saving and investment.

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5. Exploitation: Unrestricted right of economic freedom and uncontrolled right of private ownership has practically resulted into exploitation. Economic exploitation of the weak by the strong is an order of the day in a capitalist society. Labour is exploited by the capitalist, farm worker is exploited by the landlord, poor is exploited by the rich, servant is exploited by the master, people are exploited by the rulers and above all national treasury is exploited and looted by the persons in power. Wealth is the religion of every person (but a few honourable exceptions) and earning of it through fair or foul means is his creed. Consequently, everyone exploits the other economically with a view to gather as much fortune as possible.

Islamic economic system, on the other hand, ensures elimination of exploitation of one man by the other. Many effective measures have been taken by Islam to do so. Riba or usury is one of the worst instruments of human exploitation and this has been abolished in all forms by Islam. Other means of exploitation such as bribery, gambling, speculative transactions, embezzlement, prostitution have also been prohibited. Interests of the weaker classes of the society like women, orphans, slaves, labourers, tenants, consumers, etc. have been protected against their exploiters through legislation by Islam. Islam has given these weaker sections of society many rights which were hitherto unknown in the history of humankind.

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6. Distribution of Wealth: Capitalism does not believe in fair and just distribution of wealth. Since it believers in full economic freedom and private ownership of means of production, wide economic disparities exist in capitalistic economy. Concentration of wealth in few hands takes place while huge majority of the populace is deprived of the very basic necessities of life. The privileged few live in luxury while poverty, ignorance, disease and unemployment is the lot of the multitude. This disturbed balance of distribution of economic resources and unbridgeable gulf between the haves and have-nots ultimately leads to class struggle and ultimate overthrow of the very system.

Islam, on the one hand guarantees provision of basic human needs such as food, clothing and shelter to everyone and, on the other hand, ensures fair and equitable distribution of wealth and economic resources among all. It does not tolerate existence of wide disparities among the rich and the poor and tries to eliminate concentration of wealth in few hands. For bridging the gulf between the rich and the poor and for ensuring equitable distribution of wealth, Islam has taken many steps such as Zakat and Sadaqat, laws of inheritance and bequest, voluntary charities and compulsory contributions in the form of taxes and duties. To prevent concentration of wealth in few hands Islamic economic code has taken measures like abolition of interest, prohibition of earning of wealth through haram means, prohibition of hoarding of wealth, etc.

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II- Islam and Socialism

What is Socialism? According to the Collins Dictionary, “Socialism is an economic theory or system in which the means of production, distribution and exchange are owned by the community collectively through the state. It is a transitional stage in the development of a society from capitalism to communism, and is characterised by the distribution of income according to work rather than need”. Advanced Learner’s Dictionary explains socialism as “a political and economic theory advocating that a country’s land, transport, natural resources and chief industries should be owned and controlled by the whole community or by the state and that wealth should be equally distributed.”

Encyclopaedia Britannica writes : “Socialism is essentially a doctrine and a movement aiming at the collective organisation of the community in the interests of the mass of the people by means of the common ownership and collective control of the means of production and exchange.” Encyclopaedia Americana, in its article on socialism, states : “Socialism is a doctrine that espouses public ownership or control of the major means of production. It aims to achieve a more equitable and efficient distribution of social goods and greater economic planning than exist under capitalism. Although the central concerns of socialism appear to be economic, its ramifications extend to the moral, social and political realms.”

Political scientists and scholars do not agree on a uniform definition of socialism. It has been aptly remarked that there are as many types of socialism as there are socialists. Socialism is therefore compared to a hat which has lost its shape because everybody wears it.

Socialism has drawn its strength from the desire of conscientious men is all ages from Plato to Ruskin for a more equitable and fair distribution of the income and wealth. However, the word ‘socialism’ came into general use around 1830. But it was Karl Marx who founded it on scientific lines. Marx is known as father of socialism. He developed the principle of scientific socialism which came to be known later on as communism. Along with his friend Frederick Engels, he wrote and issued the famous communist Manifesto in 1848 calling upon the labour of the world ‘to unite as they were nothing to lose but their chains’. He wrote his famous book Das Capital in 1867 which is considered to be the Bible of socialism. Philosophy of Marx is mainly based upon the following two principles :

1.       Dialectic materialism or materialistic interpretation of history is the most important feature of Marxism. Marx seeks to explain every event in history on economic grounds. All wars, riots and political movements, according to him, have their origin in economic factors. He views history as a class struggle i.e. struggle between the oppressor and the oppressed. Present struggle between the capitalist class and the workers or proletariat class would result into victory of proletariat who would establish their dictatorship, and thus with the liquidation of capitalist class, a classless society shall come into being and state would wither away.

2.       Theory of surplus value is another feature of Marxian teachings. According to Marx, the capitalist gets for his commodity more than he has spent on labour and other costs. The excess of market value over the costs is surplus value. This surplus value, which according to him, is created by labour, is usurped by the capitalist as profit.

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Distinctive Features of Socialism: Distinctive features of socialism, briefly speaking, include : Public or state ownership of all means of production, distribution and exchange and abolition of private property; economic equality and provision of basic necessities of life for every citizen; materialism and emphasis on economic factors; totalitarian state and dictatorship of proletariat; suppression of civil liberties, etc.

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Comparison with Islam: Socialism and Islam are compared in respect of their basic economic perceptions as under:

1. Ownership: State ownership of all property and means of production, as stated earlier, is the most distinctive feature of socialist economy. Private ownership of property and of all the means of production, distribution and exchange is totally abolished. Land, factories, transport, communications, mines, etc are all placed under state control. This leads to management of these means of production by the bureaucracy. Bureaucratic running of economic machinery results into inefficiency, low production and collapse since the bureaucrats lack initiative, follow rigid rules and are not trained to run business.

Islam does not abolish private ownership of property and does not place all the means of production, distribution and exchange in the hands of the state. Although Islam upholds public ownership of some means of production which are the common utility to the people, but it concedes the rights of private ownership of majority of the means of production and distribution. Unlike socialism, Islam gives economic freedom to an individual who can earn wealth, own it and enjoy it within certain limits provided he does not infringe teachings of Islam in the process of earning, owning and consuming it.

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2. Materialism: Socialism, especially scientific socialism or communism rests on a purely materialistic basis. Dialectic materialism or materialistic interpretation of history is the most vital element of Marxism. Marx has sought to explain every event in history on economic grounds. According to him, origin of every activity of man lies in economic factors. Marx does not believe in religion which, in his view, is a bourgeois invention to keep the proletariat under their perpetual control. Engels said : Matter is the only real thing in the world. The communists believe that human reason is just a manifestation of matter and soul has no independent existence of its own but is a product of matter. They hold that all the different stages of human progress are determined by the interplay of conflicting economic forces alone, thus leaving no place for God’s will. So communism is a purely materialistic ideology which ridicules religion, concept of God and all forms of spiritualism dubbing them as unscientific.

Islam is the perfect and final religion revealed by Lord of the universe for the guidance of mankind. Its foremost aim is to ensure ‘falah’ or well-being of humanity in this world and in the Hereafter. It does not give importance to matter only at the cost of spirit as does a secular ideology like socialism. Islam believes in the material as well as moral and spiritual welfare of its followers at micro and macro level. Followers of Islam believe in one God, in all the Prophets and Holy Scriptures, in the Hereafter, in the moral code and in the universal brotherhood of mankind. In an Islamic state there exist no antagonistic classes conflicting with each other, neither all the events in history are determined by interplay of economic forces. Although, in the sight of Islam, welfare of society does not lie in economic prosperity only as moral and spiritual advancement is equally important, yet it does not discourage pursuit of material prosperity through fair means.

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3. Regimentation and Totalitarianism: Communism sets up a totalitarian state in which bourgeois class is liquidated and strong dictatorship of the proletariat class is established. Fundamental rights and civil liberties are crushed and man is rendered merely to the status of an economic animal. In the name of bread he is deprived of freedom of conscience, freedom to think, freedom to speak and freedom to act. In order to achieve economic objectives and in order to work the huge productive machine efficiently, the state becomes all powerful and establishes complete regimentation. Thus the state under communism does not wither away, as predicted by Marx, rather it turns out to be a worst type of totalitarian state.

Islam, on the contrary, believes in democratic form of government as the Qur’an, its revealed book, enjoins upon Prophet Muhammad (PBUH) to conduct public affairs in consultation with his followers. Islam gives all the fundamental rights and civil liberties to the people living in the Islamic state. All the citizens have freedom of person, freedom of religion and conscience, freedom of expression, right to own and alienate property, right to protection of honour, right to criticise the government, right to equality before the law, right to education, right to medical care and above all right to basic human needs such as food, clothing and shelter. Islamic state does not establish dictatorship of any class, neither it is a totalitarian state. The state under Islam does not wither away, rather it becomes indispensible as it discharges all the functions of a traditional state and modern welfare state.

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4.Economic Equality: Economic equality is another claim of communism although it has never been realized so far. In theory at least it is claimed that the rights of the individuals in the economic sphere are governed by the principles of equality. Every individual is provided with the necessaries of life according to his needs.

Islam, unlike communism, recognises that there is no equality among human beings as regards the economic means and possession of worldly wealth. The Qur’an considers these inequalities and disparities in the distribution of wealth as part of Divine economic order and, therefore, does not try to eliminate them by unnatural and artificial means. The existence of economic disparities, in fact, is a test by which Allah tries the human beings how they behave in good and bad circumstances. However, Islam does not permit the differences in possession of wealth to assume such proportions that concentration of wealth takes place in few hands who live in luxury while vast majority of people lead a life of abject poverty, misery and deprivation. Islam does not tolerate the existence of unbridgeable gulf between the rich and the poor, but unlike socialism it does not believe in equal distribution of wealth. Actually Islam believes in fair, just and equitable distribution of wealth and in social justice. For ensuring equitable distribution, Islam has taken many steps such as institution of Zakat and Sadaqat, laws of inheritance and bequest, voluntary alms and levy of compulsory contributions in the form of taxes and duties. In addition to this it has abolished interest, prohibited unfair and unlawful means of earning wealth and banned hoarding of wealth so that wealth should not concentrate in few hands.

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