Ethico Moral Economic - Islamic Economic by Tozeef 2006

8/9/2019 Ethico Moral Economic - Islamic Economic by Tozeef 2006

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Humanom

Vol. 23 No. 3, 2

pp. 153

# Emerald Group Publishing Lim

0828-8

DOI 10.1108/08288660710779

Does ethico-moral coalitioncomplement to economic

coalition?A response in the periphery

of Islamic economics

Toseef Azid Department of Economics, Bahauddin Zakariya University,

Multan, Pakistan, and

Mehmet AsutaySchool of Government and International Affairs, Durham University,

Durham, UK Abstract

Purpose – To reason whether the ethical–moral cum economic coalition among the different sets of economy is more efficient with objectives of Islamic Shariah.Design/methodology/approach – This is a theoretical paper based on the modified model of layers of economic coalition which was initially developed by W. Leontief and P.N. Mathur and tries toevaluate the impact of ethical–moral cum economic coalition among different sets of an economywithin the framework of Islamic political economy system.Findings – This study suggests that endogenoising the ethical–moral cum economic coalitions willcomparatively enhance the efficiency level of the economy, and will also increase the social welfarelevel.Practical implications – A dynamic cum marginal input–output table can be constructed on thebasis of this framework.

Originality/value – This research is beneficial to the researchers, policy makers and socialscientists for the enhancement of the level of social welfare through this coalition.

Keywords Social welfare, Islam, Social economics

Paper type Conceptual paper

1. IntroductionCoalition of various sets of the economy and the impact of such coalitions on theeconomy is discussed in the economic literature. The contenders of this discourseinclude Leontief (1982, 1986) and his followers, among whom especially Mathur havediscussed, in a number of studies, the coalition of different sets of the economy andtheir potential impact on the economic system. Mathur (1982, 1990a,b) has furtherdeveloped a theoretical model based on the coalition of the different sets and then

empirically estimated their impact on the economic system of the concerned economy.He concluded that economic coalition among the different sets of the economy has apositive significant impact on the efficiency of the whole system. However, all of theseattempts are limited to the economic coalition, and none of these extended theframework to include ethical and moral dimensions as parts of this coalition.

The objective of this study is to analyze the state of ethico-moral integratedeconomic coalition of different sets of the economy within the Islamic politico-economicsystem with the basic assumption that participation and cooperation are importantfeatures of the Islamic system. This system is based on maqasid al-Sharia[1], or theobjective of the Shari’ah and maslaha, or public good. Ethico-moral cum economic

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coalition is expected to work in the same direction as required by maqasid al-Shariaand maslaha. It, therefore, rejects the neo-classical postulate that human beings are intheir intrinsic nature self-interest maximizers. Consequently, maximization of utility, asan extension of this is rejected as well. In other words, ‘‘if we suppose that all persons

are egoists – they act for personal ends - what sense does it make to speak of ethics?From this point derives the idea that ethical norms are principally mutually beneficialaccords whose final intent has to do with maximizing individual well being insituations characterized by interdependence’’ (Zaratiegui, 1999, p. 215). As an ethicalnorm, the teaching of Islam necessitates an altruistic attitude by considering the socialoutcomes of individual economic decisions. If behaviour is not selfish then why did theProphet (pbuh) ask his companions not to approach the traders until they reached theMadina Market (Tag el-Din, 2002). It is assumed that coalition have different layers andevery next layer is more efficient and enhancing the state of welfare than the previousone because it is assumed that the older layer has more understanding, knowledge andtraining of Islamic teachings. This is known as Integration, Interaction and Evolutionary (IIE) process (Choudhury, 1989, 1995, 2000).

For the development of an appropriate model it is required to discuss the differentsets of the Islamic economy in short. This study is organized in the following structure:in section 2 an effort is made for the development of a theoretical framework based onthe ethical–moral cum economic coalition among the different sets of the economy, andsection 3 discusses the behaviour of different sets under the ethical–moral cumeconomic environment which results from the Islamic system.

2. Theoretical framework for ethical–moral cum economic coalitionThis section consummates how the ethical induced praxis applied to coalition presentsan altogether different meaning to the concept of cooperation and coalition, which iscontrary to the theory and implications of coalition in mainstream economic literature.

A number of layers can be observed in this regard. This process is based onembodied (exogenous) and disembodied (endogenous) change, which emerges in thesocio-economic set up of the Islamic state through the epistemological sources of Islam,namely Qur’an (the Holy Book of Islam) and Sunnah (the sayings and deeds of ProphetMuhammad, the Prophet of Islam). It is a continuous course of action, as every coalitionhas its own layer and each one of these further becomes the cause of the subsequentlayer. Yet it is now important to know how the evolution of coalition from one layer of coalition formation and its induced forms to subsequent layers of the same kinds of organisms comes about. The end of any completed coalition layer is immediatelyfollowed by the post-coalition of the actions, policies, programs and inference adoptedin that stage. This coalition is based on an ethical, positive and normative institutionand the degree attained at that stage. The quantitative function for which is called the

social well being function. This function appears in a suitable non-linear multiplicativeform rather than in a linear form. The multiplicative form signifies that coalitionamong the different sets takes place between relational systems, agents, variables andtheir functional relational relations. Within such coalition domains are the space of science, technology, institutions, markets, ecology, society, the global order etc. It is theform the post-coalition layer attained in any given round of ethical–economic activityand its induced forms that a new round of process re-originates. Such a re-originationmarks the emanation of the coalition process and the efficiency system. Relations of thedifferent sets of the coalition system are almost endogenous, whereas the state andpolicy variables are exogenous. We say that the coalition based on this system is one of


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the ethical endogeneity by the virtue of the fact that it incorporates the actual guidancefrom Allah (swt) through Qur’an and Sunnah. But note that since the coalition amongthe different sets under the guidance of Qur’an and Sunnah is shown to exist notsimply over human agents limited to political institutions but rather such coalition is

extensive over systems of issues, their variables, the relations between these sets andvariables etc.

The absence of ethical coalition among the different sets of the economy causesdifferent epistemology for different disciplines to emerge. All such episteme aredescribed by the competing nature of opposing forms trying to gain definitive power inthe systems pertaining to the theory behind desperate disciplinary lines (Resnick andWolff, 1987). So it will lead to a mutual independence, conflict and competitionresulting in individualism. Consequently, all the competing sets, power and preferencedetermines the marginalized trade-offs between the entities of the competing systemsto gain their survival of the fittest. Complementary relations are lost and replaced bywhat is called in neo-classical as the marginal rate of substitution. The state of optimality marks the end of innovation and learning (Shackle, 1971). In the coalition

system the objective criterion is based on the simulation of social well-being functionover a range of process-based coalition of the different sets. This coalition will becomethe medium of learning by doing that helps in organizing the functional capacity of thesystem to reinforce the episteme of coalition between various artefacts of the system.As we have mentioned that there are different layers of coalition in the system based onthe ethical degree of the different segments of the society. All these are complementaryto each other but not substitute. The vector of complementary coalition playing its rolein the total system of endogenous relations denotes the ethical induced layers of coalition. In these layers of coalition even the least efficient coalition, which plays animportant role in determining the choices and efficiency of the system, is supported byall other coalition that together play their positive role in diversifying the jointproduction systems into layers of productive system. The joint production concept is of the nature of interrelated system in which technology, inputs, outputs and revenues areall shared according to the ethical coalition across such production systems; therefore,a multiplicative type joint production function is in place (Klein, 1946). Although noparticular type of movement in coalition needs to be presumed, yet for mathematicallysimplicity alone. We assume that the convergence sets of coalition over subsequentrounds of discourse move in a stable trend over time with growth rate.

Capital accumulation in the Islamic framework is a process whereby resources aremobilized in the Shari’ah recommended directions of spending in the good things of life. The embodied and disembodied nature of capital investment in humandevelopment, technique and machinery suggests that every bit of output is recycled inthese directions. Nothing is saved in the macroeconomic sense of gaining interest on

idle money capital in banks. The concept of resource mobilization as spending in theShari’ah recommended directions is contrary to the concept of savings as moneycapital withdrawn from spending and is held as idle capital by banks in monetary realsector linkage. It can be shown that because of the nature of complementary naturecoalition of all such sets across the economy, the impact of employment, capitalaccumulation (formation), output generation are uniformly reinforced across suchparticipatory system. But for all such complementary relations to be sustained, theirimportant relationship with cost and risk diversification exists.

The inter project and inter-sectoral economy wide distribution of investments as aform of spending is equivalent to the cost of production in the ethical induced


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participatory economy. It is noted that the absence of interest rate in a pure Islamiceconomy negates the validity of opportunity cost of capital and the valuation of assetsby means of such discount rates. The replacement of discount rates by forward rates of return in a simulative terminal-value formula of asset valuation means that such rates

are jointly shared among participants in joint venture. Likewise, insurance and freightcosts can operate in the Islamic way by takaful . Such financial costs form part of investment and capital since financial business are run under the same principle of costand profit sharing. Consequently now the notion of opportunity cost of resourceallocation is replaced by cost and revenue (or profit) sharing among an increasingnumber of participants and opportunities. In the coalition of different sets the rate of change in the unit cost of production sharing cost declines as the rate of investment andproduction increase together. Due to lower level of asymmetric information the priesare becoming more stable. The increase in investment signifies diversification of riskby participation among risk takers. The increase in production signifies productdiversification. Consequently, in the process of coalition the extensive meaning of participation among different human and economic agents in the light of Shari’ah and

the simulation of efficiency function, achieve risk diversification through productdifferentiation and increased systemic participation.

The relationship of ethical coalition is shown in Figures 1 and 2. In Figure 2,C j is j = 1, 2, 3 and denotes as a given set of coalition process, the same layer shift

into higher layer of coalition,C 0 j is j = 1, 2, 3, at the corresponding higher values as shown.In this way C j to C j’ as ethical change induce improvement in older ethical stage of

the society.The Islamic system is based on cooperation and participation. All of the dimensions

are based on it. From the above analysis it is tried to prove that cooperative ventures onwhich the success of the system is depended. With greater learning in joint venturesand internal efficiency gains with human resource development and with manylinkages among the economic sets it is possible to shift the interconnected variables.The impetus working behind all these upward shift that defined the disembodied and

Figure 1.Layers of ethico-moralcum economic coalition


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embodied ethical training in this system is the joint venture (caring attitude)

cooperative program. The old set of coalition is not fully retired. They will improve andmove to newer stages. Thus, a good deal of complementary among diverse number of ethical injunctions is attained. This helped also in diversifying and reinforcing theproductive inputs and the skill and the human development in the Islamic system. Theincrease in efficiency in the system is the result of coordinative and participatorymedium of learning and decision-making through joint ventures that the principle of complementary promotes. In this mutable ethical–economic milieu the equilibrium isnot static it is moving towards the higher level of social well–being function.

In the Islamic system because of ethical coalition resource mobilization leads toproductive spending in accordance with the tenets of Shari’ah, not to financial savingin financial intermediaries. The result of resource mobilization then is a multiplierimpact on income growth with appropriate products and stable market. Economicstability is attained as the prices of goods stabilize with expanding supply. Thepositive employment effect in this relationship along with machinery, capital andtechnology adds to the social and economic gains and sustainability of real income andoutput growth.

3. Behaviour of different sets of economy under various ethical–moral cumeconomic coalitionsThis section explains the behaviour of different sets of the economy under the umbrellaof ethical–moral cum economic coalition.

Figure Layers of coaliti


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3.1 Production set The production set is very much important for the growth of an economy. This set hassome basic assumptions under the umbrella of neo-classical model, i.e. convex set,convexity, concave function, homogeneity and homotheticity. Different types of

production functions exist in the literature, for example, classical, neo-classical andLeontief type. However, some occupied more room in the empirical literature, i.e. Cobb-Douglas Production Function, CES and VES. In conventional economics, there arethree major standards of the theory of firm: (i) the neo-classical theory; (ii) managerialtheories and (iii) behavioural theories. It should be stated that one thing is common inall these theories that decision makers try to maximize their own utility, the ultimateobjective of the producer is to earn the maximum profit, minimizing the cost in thegiven constraints. Entrepreneur is the leader of the firm, manages risks and his role isas innovator in the process of production.

The production units at time t from a set Z ( t ), consisting of units producing all thecommodities in the economy. A production unit can either produce nothing or work atfull capacity, since it is guided only by the decentralized signals of price structures,wages, and interest rates in the economy. It will produce to its full capacity if the outputprice can meet its prime costs, otherwise it will not produce at all. Each modernworking production unit requires working stocks and also has to enter into a coalitionwith a set of labourers, stockholders, banks and so on. The residual income of a unit attime t is then:

cðk jÞbt ðk jÞ ¼ cðk jÞ½ p

t j f P

t Aðkt Þ þ wt l ðk jÞ þ r

t R t S ðk jÞg

Superscripts give the period of residual income, wage and interest rates, and prices;subscript ‘‘ j’’ refers to the commodity; and k in brackets refers to the unit of production.The production unit produces zero if the residual for it at time ‘‘t ’’ is less than zero;otherwise it produces to the full extent of its capacity. In the equation, c( k j ) denotes the

capacity of the firm, bt is the balance left after the prime costs per unit output are met, P t price vector, A is the input vector per unit of capacity, l ( k j ) is labour coefficient, w

t iswage rate, r t is rate of interest and S ( k j ) is working stock vector per unit of capacity.

The set Z ( t ) consists of subsets Z ( t j ) produces a net output of the jth commodity. Tokeep the exposition simple, we shall assume that each production unit produces a netpositive quantity of one commodity only. Given prices and the wage and interest rates,the production units in the set Z ( t j ) can be ordered in accordance with the decreasingper unit value of the residual. It will be seen that the set Z ( t j ) is a convex set. Thisimplies that global decreasing returns to scale prevail for the set Z ( t j ) as a whole,though the individual production units have only the alternatives of producing to theirfull capacity or not producing at all[2]. It is clear from the above equation that all of the

economic agents, human and non-human are participated in the process of production.Consequently, the production set is becoming more important because it compriseslabour, capital and material inputs, all of these inputs have their share from the processof production i.e. wages, rate of interest and value of the material inputs (Mathur, 1982,1990a,b).

The main objective of all these agents is to maximize their own utility. However, thepresent scenario of capitalism does not allow meeting the targets. For example, if wewill see at global level, the poverty level is complementary set of the current promisinggrowth pattern of the world. It implies that other sets of the economy are not accruingthe just benefit of the growth even they are fully participating and even cooperating in


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the process of production. Why has this phenomenon occurred in the real world? Mostprobably the answer is because of unjust prevailing in the society, community and inthe economy, i.e. the most powerful agent is taking more part of the residuals thanother economic agents (normally that is the producer). It is consensus among the

experts that the economic coalition not only leads towards optimality of the system butthere is also a need of ethico-moral cum economic coalition. Currently it is advised thateconomic growth models should also include variables of nation’s culture, moral and itsethical norms because it is assumed that religious beliefs tend to stimulate economicgrowth also. (Barro, 2000; Tag el-Din, 1996; Zaman, 1992 ).

The Islamic system directly and indirectly refers to a number of economic activitiesat are productive in their nature, the prohibition of abstention from production even forthe sake of extra worship or meditation and the prevention of laziness and idleness[3].

Islam does not recommend the deprivation of moral value, desiring increase inwelfare, endorses taking the benefit from Allah’s gift in this world. In most of thesecases, reference is made with a tone of approval. For example, these activities includeagriculture, trade, fishing, industry, craftsmanship, weapon manufacturing,

shipbuilding and construction. Islam also recommends precision in workmanship. Ittreats loss in production as a loss of inputs. Qur’anic verses describe facts, causes andprocess associated with making a product lead us to infer these factors are productive.The most significant of these factors are land and labour. Other factors, which can beinferred, are raw material, capital, and entrepreneurial risk. The factor of land includesall the natural resources like mountains, wood, minerals, streams and flowing water,and animals and their produce. There is also a mention of environmental factors thatare conducive to production; examples of this are rain-bearing clouds, daylight, peaceand security. Islam recognizes the fact that the process of production is characterizedby uncertainty. To some extent there is a trade off between risk sharing and individualincentives. In the Islamic sense a producer must display cooperative and collectiveeconomic behaviour with regard to redistribution and resource allocation. There aresome altruistic considerations, which may enquire the firm to produce goods andservices which may not enable it to maximize profits or sale. Pareto optimal conditionis not fulfilled in the system where producers are caring for the poor and not for theirown profits, given demand is also not acceptable under the umbrella of altruism(Bashar, 1997; Kahf, 1992; Mannan, 1992; Zaman, 2000).

The motives of the producer can be underlying as: s(h)e has to earn profit but as ahuman being. However, other objectives are also important, such as looking after theinterest of others, improvement in the material, moral and aesthetic terms of thesociety, production of the essential goods and services (duty), and provision of employment and as a trustee motive of profit maximization is not so important(Qur’an, 18, p. 46).

Without any hesitation one can say that the source of motivation central to thepsychology and sociology of workers and organizations. Experts have the consensusthat the goals of the organizations are not only to maximize the profit or sale as wementioned elsewhere. It is also to create the environment of social justice and especiallygood relations between entrepreneur and workers as assumed by corporate socialresponsibility. Literature of sociological economics emphasized more on the sense of identity of the worker within an organization and his attachment to an organization iscritical to well-functioning enterprises (Akerlof and Kramtoz, 2005; Granovetter, 2005).

In the above mentioned state of art, the organization and workers should behave in adifferent manner, only then it is matter that when, where, how and between whom


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transaction take place. In this similar scenario social categories play an important andremarkable role, utility depends on social identity, internalize norms guide theirbehaviour. It is admitted in the literature that four components are very muchimportant in the structure of any organization, identity, social category, norm and ideal.

If workers have their own identity then monetary incentives are complements ratherthan substitutes. The position of the workers as insider or outsider has a remarkableimpact on the growth of the firms. In this advance stage of economy, most of the firmsare investing on it to turn the outsider in to an insider. Training programs areorganized, the motives are to avoid ridicule of his peers, increase the extrinsic andintrinsic motivation, to enhance the self-image and so on (Akerlof and Kramtoz, 2005;Granovetter, 2005). This also follows from the teachings of Qur’an (see for instanceQur’an, 49:11).

Granovetter (2005) also emphasized on the network density, where completeinformation prevails and no one is a free rider. He further added that non-economicactivity affects the cost and the available techniques of economic activity, i.e. social and

ethical embeddedness. For example, corruption has a high economic cost where ashonesty, fairness, reliability and loyalty enhance the efficiency of the economic agents,the by-product of the social behaviour[4].

Under the umbrella of Islam this aspect has its own particular dimensions. Thesociology and psychology has the orientation towards the development of ethico-moralsetup. It is very much significant in the Islamic environment that the entrepreneur/producer is not the owner, he is the trustee and according to the spirit of Islam he is thebrother of the workers[5].

If a worker has this identity in the organization then his efficiency is greater than if he has the monetary compensation. His feelings are as an insider in the organizationand have positive impact on the efficiency. If it is analyzed in the periphery of Islamicnorms it is already available in this system. This has a different setup of the

organizational norms. In the environment of brotherhood the scenario will be different,a self-training program which is already built in. Another factor which is very muchimportant for the workers if firms are not cutting the wage rate even low pay workersare available and supervision is not considered as loose or tight if that is a symbol andsign of brotherhood.

Islam promotes a universal approach that considers all human beings as single brotherhood,

and encourages peace, tranquillity and the welfare of all . . . Islam enjoins justice and fairness

in all human dealings. It places a high value on individual freedom and human dignity. . . . In

addition, Islam grants certain inalienable rights to individuals. These fundamental human

rights include: the right to life, the right to equality before law, the right to privacy, the right to

protest, the right to justice and the right to participate (Ahmad, 2000, p. 89).

The Prophet (pbuh) said: ‘‘All people are the dependent of Allah, and the most belovedamong them are those who are most benevolent to his dependents including those whoput his resources to proper use’’ (Ibn Kathir, 1980, p. 287).

Muslim producers should be concerned with the malnourishment, reduction in lifeexpectations, and other biologically and medical conditions of their workers as well asother members of the society. This is another aspect of the identity of the workers in theIslamic system, which provides a pleasant and honourable environment to the workersand makes them proud when they show their attachment with the firm having thisbehaviour.


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In resultant, creation of more jobs in this environment even with low wage rate, butthe focal point is the identity of the workers and their feelings about themselves asinsiders. Which ultimately makes them more productive and efficient. It implies largescale of output and lower level of prices. The producer, may care for each and the other

members of the society, i.e. labourers, other producers, the consumers, etc. at least whatresult could be achieved in the ethico-moral cum economic state of economy:

(1) may be increasing return to scale;

(2) producers may be paid more;

(3) consumers may be paid more because of higher wage rate and higher level of returns; and

(4) in a good environment, producers reinvest the profits and create more jobs.

Here the question arises about the structural requirement of the ethico-moral cumeconomic state of the economy in the Islamic periphery, which can be ascribed as:

(1) production of haram goods and services is zero;(2) production of needs is higher and of luxuries is lower; and

(3) following the Islamic principles the profit maximization should be lower.

As mentioned previously interest has a negative impact on the productive economicactivities. This is evident from the commonly observable fact that when rate of interestis low, economic activity increases and people are willing to start and expandbusinesses, which adds positively to the economy. In contrast when interest rates arehigh, people tend to be discouraged from making real investment and are moreinterested in saving that money and earning interest on it. This cannot be consideredgood for the economy, because when a small entrepreneur gets discouraged fromborrowing money and starting or expanding his business due to high interest rates, the

country loses out.However, in the Islamic economics the rate of return on the equities, which is not

pre-determined, plays its role in the determination of the residuals, and therefore in thedays of economic expansion it would be higher than during the period of recession. It isdetermined by the type of the project and therefore it varies from one project to another.Furthermore, the institution of partnership ( Shirakah or Mudhrabah ) will alsoaccelerate the economic activities of the economy, as it involves productive economicactivity. There is still an inevitable share of the risk. In the partnership contract, theshare of the partners in profit is agreed in advance. Projects of trade and productiongenerate an income. A moneylender may be entitled to a share of this income, but onlyif he enters into a partnership with the entrepreneur. By entering into a partnership, the

lender shares in the risk of the enterprise. And by sharing the risk, the lender is directlyinvolved in the enterprise and may receive a share of the profits. This partnershipmodel should be contrasted with the lender as a creditor, in which case the lender is notdirectly involved in the project, and therefore has no right to any share of its profit, asin Islamic system most of the business ventures are based on partnership. The incomeof entrepreneur could be characterized as profit and return to capital as profit share.However, in an interest free economy there are two contractual ratios of profit sharing:the one between the depositor and the bank and the other between the bank and theentrepreneur and also the contract among bank and other sets, i.e. stockholders,producers and consumers. Over and above the above mentioned coalition have


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ethico-moral dimensions besides economic ones and basically it is a part and parcel of the Islamic mission (Bjorvatn, 1998; Siddiqi, 1992a,b).

Up to this stage we did not touch the problem of asymmetric information amongentrepreneur, investor, stockholder and bank, i.e. the moral hazard problem. It is

always assumed that Islamization of society leads to increased awareness of Islamicvalues such as honesty; as a consequence of which the moral hazard problem should bereduced. It is also instructed to believers in the Qur’an that say the truth and also not tohide the shortcomings of the traded goods (see Qur’an, 33; p. 70; 8, p. 27 and 28, p. 77).However, this is not the main area of discussion, for detail study of asymmetricinformation and moral hazards see the literature of Islamic economics.

Metwally (1992) has developed an objective function of the Islamic firm and thefirm’s aim is to maximize this function subject to minimum acceptable level of profitsto satisfy its owners and maintain its business. According to him that charity is asubstitute for advertisement and will increase the good will of the firm. In addition,Amin and Yusuf (2003) believe that if we incorporate the Islamic values in the cost of production then still the firm will be able to maximize the profit.

However, Tag el-Din (1997) developed a theoretical model and incorporating theman’s ethical economic behaviour as a strategic resource in line with other humanbehaviour resources, which is a focal point of Islamic economics. His claim is that manis selfish as well as greedy but human resource strategy based on Shari’ah softens thisbehaviour. After taking the usual simple assumptions, like closed economy, two by twomodel, fully employed labour force, fixed capital and constant demand and capitalgood industry only supplying replacement capital, so prevailing perfect competitionevery where. He discussed the two cases on with the conventional production functionwith the growth led strategy by the production function norms. In that way decrease inprices increase the real income and then there is increase in the utility level of theconsumers. However, for above, environment of without externalities of utility isprevailing. By the inducement of religious strategy not only the isoquants will shiftdownward but simultaneously indifference curves will also shift downward. He furtherassumed that there are three income brackets, information about these parameters arecostless. He discussed the generalized utility function. Furthermore, he compared twoapproaches, i.e. a conventional one and the other is suggested by this study. The resultwas that strategy which combines both production function and utility function normsis more capable of creating a growth-devoted economy than the conventional onesimultaneously religious human resource development strategy which strongly andpositively correlates growth-devotion and justice-devotion.

In the Islamic system, there is no room for interest instead we have the returns andthese are not included in the cost. Scarcity forces maximization on economic agents foran efficient use of resources and lends meaning to avoidance of their over or wasteful

use, in consumption as well as spending on the human development (Hasan, 2005).

3.2 Labour–consumer set This set describes the behaviour of very potent agent of coalition model, i.e. consumerwho is also supplier of labour. The units of labour from another set of economic unitsdesignated as L. Individual labour unit may be attached to individual production unitsas workers; when the production unit is producing at a non-zero level, these labourunits earn the prevailing wage rate. Some of these labour units may own a share in oneor more production units and may earn a part of this residual income. Further, some of them may have savings in the banking units and earn interest on them, or returns on


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equity in the Islamic system. However, lack of divisibility, mobility and knowledge arelimitations of this set, whereas more work as well as no work has the disutility. Wheneach party is mindful of the interest of the other and that of the society in general andall agree to make decision by mutual consultation, it is easier to achieve industrial

peace. Religion can also increase economic development by promoting a positiveattitude towards honesty. Religion may also increase levels of trust and reduce levels of corruption and criminal activity, increase a nation’s openness to outsiders and thusmake the economy more open to foreign investments and employees. Religion mayencourage thrift, which would stimulate saving, investment and therefore growth. Atthe same time, religion may lead to better health levels by discouraging harmful orsinful activities such as drugs, overeating, gambling, alcohol, etc. Better health levels inthe society would raise productivity through labour force efficiency. Members of strictreligious groups seem to enjoy longer lives and lower rates of cancer, stroke,hypertension and heart disease, because they follow several health-related every-dayrestrictions (Bjorvatn, 1998; Mathur, 1982).

Labour units from small consumption coalition called households whose total

income consists of wages earned by its members interest earned on the savings of itsmembers, and its member’s share in the residual income of production units. To eachhousehold is attached a utility function, having the usual convenient properties, whosearguments are not only commodities and monetary balances but also the savings. Thisset as a consumer is supplying the funds from its savings to the production set,consuming its products and a very strong coalition can be seen in any economy inbetween these two sets (Mathur, 1982).

Microeconomics is based on the derivation of utility function of the economicagents. By appending those functions with beliefs, norms and values gives a morerealistic picture of the behaviour of human beings. Religion, moral and cultural affecteconomic attitudes and activities but those factors are usually neglected in economicscrutiny. Economists today are being pushed to accept that they may have to take upthe role of religion if they want to understand the full working of economic system. So,we can say that Economics is not value-free but contains hidden metaphysics (Nelson,2001, pp. 205-207).

In the Islamic system, Khan (1992) and Kahf (1992) included saving in the model of consumer behaviour, on the contrary they only treated savings as the other side of thecoin and modelled only consumption. Kahf considers the spending in the way of Allah(swt) in terms of maximization of falah (salvation). Kahf (1992) concluded falah as anultimate objective of the consumer and his decision about consumption, savings andinvestment is dependent on zakah and interest free system. Khan (1992) discussed theissue in terms of two types of expenditures, one for the worldly affairs and the other forthe life hereafter. In both of the studies they assumed that utility is not only dependent

on the reward in this life but life hereafter is also a very strong component. Actually theMuslim consumer/worker has a two-dimensional utility function, i.e. pleasure and painin this life and life hereafter.

Khan (1992) analyzed and compared the concept of utility with maslahah (publicgood). His main emphasis was on the considerations of needs of others. Zarqa (1992a,b)categorized the consumer goods as dharurah, hajah and kamalah. Khan (1992)mentioned tahsiniyyat instead of kamalah. Zarqa (1992a,b) has emphasized thatconsumers utility function is effected by reward/penalty, life, hereafter, religiousconstraint is also an additional part of the usual income constraint. He further addedthat ‘‘consumers do care for the others’’; ‘‘basic needs of those not fulfilled are more


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preferred’’; ‘‘cannot be analyzed through income and prices only’’; and ‘‘thankful toAllah (swt) after consuming the goods which he provides to human being’’ (Qur’an, 39,p. 7).

Biraima (1991) sketched a very comprehensive picture of the believer and non-

believer in the way shown in Table I.Zaman (1992) discussed the issue in a different way. He discussed two types of

utility functions, basic (for basic needs) and secondary (for luxuries). After describingcertain axioms he concluded that preferences should be lexicographic if there isprevailing poverty in the economy. According to him that it is only at low levels of consumption that the lexicographic structure of preferences can play any role. Heintroduced also the externalities in the utility function, i.e. true altruism or non-maximizing behaviour. In his recent paper Zaman (2005) stated that this type of utilityfunction is sensitive to certain types of goods (basic needs) and insensitive to othertypes (luxuries). He has also shown his concern with the pre- and post- policy utilityfunction. He says that market mechanism is unfriendly to the poor and will lead toinferior outcome.

Naqvi (1997) has developed a model in which the needs of the least privileged in thesociety are given priority. In his model maximizing the social welfare in this sensewould entail the following:

(1) that the opportunity cost of capital accumulation (a greater inequality of income and wealth) is reduced by a more egalitarian distribution of income andwealth (taking from the rich and giving to the poor);

(2) that increase the share of wages; and

(3) that the proportion of wage goods in total production is increased

Qadir (1992) made the proposal more concrete, suggesting that the ethical normsproclaimed by the society should be built into the social welfare function and the

individual functions should then aggregate to give the required social welfarefunctional.

Unemployment of the human resources is not very much appreciated in the systemof Islam. Fear and hunger are not a desirable situation in Islam. These are sometimesthe natural consequences of human actions and unjust behaviour. Thus whiledeprivation ought to be treated as a test of patience and perseverance, effort should bemade to eliminate the causes of distress. Poverty should not be made a symbol of disgrace and disgust. It should also not restrain one from the mission for which theMessenger of Allah was deputed. Poverty or fear of poverty should not lead to

Table I.Compansion of believerand non- believer

Believer (Ibad ur Rahman)a Non-believer

Wealth and children Wealth and childrenThe potential of the self for good deeds The potential of the self for wrong deedsPurification of the self Corruption of the self Success due to purification Failure due to corruptionGood deeds Bad deedsThankfulness for God’s bounties Non-thankfulness for God’s bountiesWorship of God Worship of worldly pleasuresThe pleasure of God The displeasure of God

Note: aReligious axioms require an individual to be selfless


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self-destruction through suicide or infanticide, nor should it induce anyone to pursueundesirable means of removing poverty. Societies, which have gained wealth throughfoul means, cannot be made an ideal for Muslims (see Qur’an, 10, p. 23).

Furthermore, the Qur’an states that living in this world is an arduous task as life is

full of drudgery and struggle, earning livelihood demands enterprise and spurs man totake part in economic pursuits. Physical labour enjoys a place of dignity in Islam. Thenatural law of economic return stipulates that labour is productive irrespective of itspurpose and ultimate object. But it does not always guarantee opulence. Persons withscarce resources should not be oversensitive to their state just as persons with plentyought not to be haughty. The labour force also requires rest, which needs to beguaranteed. It is necessary to ensure that a fair wage is contracted without anypressure or blackmail on either side. Using labour saving devices is permissible and is,indeed, a blessing of Allah. National transformation can be brought about only withwill power and effort in the right direction (Azid, 2000; Zaman, 2000).

As mentioned previously the environment of the production set makes the workersmore efficient and also the producers are looking after the agent of this set as consumer

as well as workers. This coalition in between these two sets, which is based on ethico-moral cum economic state will increase the welfare as well as the production status of the economy.

3.3 Banking set The Qur’an treats the act of lending more as a moral phenomenon than purely aneconomic activity, as the well-to-do are repeatedly urged to lend money. It asks thelenders not only to give up the amount of interest but also to reschedule theiroutstanding loans to the convenience of the hard-pressed debtor, preferably byremission of the balance if he is in distress. On the other hand, repayment of anythingless than the amount borrowed is treated to be a wrong doing on the part of the debtoras much as the charging of interest by the lender.

The terms and conditions involving a contract of debt like scribing a document,affixing witness, furnishing a pledge etc. as are laid down in the case of credit sale arealso applicable to a contract of debt. In the case of an undercharged deceased persondebt supersedes the right of inheritance.

Banks are another economic unit in the modern economic system. Their primaryfunction is to take the deposits of savers and pay interest to them. Furthermore, theyadvance loans to production units and stockholders for purchasing working stocks, tonew production units for investment, to government and so on. Thus one of the maincharacteristics of the monetary-cum-banking system is the provision of credits. Thevalue of loans advanced need not be less than or equal to the savings deposited but canbe more. How much money should be created depends on the judgment of the

government and the demand and the creditworthiness of other credit receivers, as wellas on the liquidity judgment of the individual banking units (Mathur, 1982, 1990a,b).The Qur’an views prohibition of interest in the context of its emphasis on infaq,

sadaqa, qard hasan (virtuous loans) and ordinary trade transactions. The Qur’anpoints out that interest has been prohibited for all followers of the Scriptures. Theinjunction on prohibition is made in three different stages; in the first stage interest issimply denounced and compared with the noble institution of zakah. Thiscondemnation is also addressed on the Jews who, in spite of interest having beenbanned, had been indulging in interest-based transactions. In the second stagecompound interest and interest with exorbitant rates is banned. The third and the last


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stage of condemnation is made in a very harsh tone and these dealing in transactions

involving any rate of interest are threatened with war from Allah and his Messenger

(Zaman, 2000).

Four roles of the financial institutions are recognized in the literature: financial

intermediation services; other financial services; creates broad array of assets andliabilities; and lastly creates incentives for efficient allocation of resources. It is also

possible that Islamic banking is arranged on a basis of wakalah (agency) principle.Regarding to the moral nature of the banks it is argued that in the Islamic system all

economic agents have to work within the moral value system of Islam. Islamic banks

are no exemption as they cannot finance any project, which conflicts with the moral

value system of Islam. One can say that in this respect Islamic Banks are somewhat

similar to the ethical banks now becoming popular in the western world (Iqbal and

Molyneux, 2005).

The Qur’an states that the practicing of interest-based economy is concretionary incontrast with the economy, which is based on philanthropic spending and generosity.

Among others Siddiqui (1994), Iqbal and Molyneux (2005) and Iqbal (2001) discussedthe possible impact of the Islamic techniques of financing in the following way:

Banks will work on the basis of loss and profit share, the effect of loss and profit will

be spread throughout the economic activity of the economy, investment under

musharakah and mudharabah finance would always be higher compared to the fixedinterest system, the efficiency of the financial institution will be higher because thebanks will scrutinize the project more carefully (due to the nature of the system), it

increases the number of potential entrepreneurs by eliminating the need for collateral,

the banks would put more emphasis on the integrity, professional competency and

efficiency of the potential borrowers before granting a loan, demand and supply shock

would be automatically absorbed by the economy starting from the adjustments in the

rates of the return to the capitalists and then reverberating throughout the economy,the distribution of income in favour of the small depositors of the bank will stimulate

effective demand and change the composition in this demand. Siddiqui (1994) further

added that all government expenditures would have to be financed by tax receipts; this

would force the government to be prudent and eliminate all extravagant expenditures.

In the Islamic system the responsibility of the financial institutions is to look after

the falah (salvation) of the society besides the provision of funds for the mutualeconomic/business activities. Here is every reason to hope that Islamic FinancialInstitutions, including banks, investment companies and finance houses, can play a

very useful role in mobilizing domestic savings for productive investment.

According to Tag el-Din (2004) the bank need not be involved in the istisna contractto behave artificially as a product maker, since the firm will not seek finance from the

bank on the basis of parallel istisna. He further added that istisna and parallel istisnawill no longer be the firm’s source of finance. Istisna contract will only serve as a toolfor price hedging for both the producer and the demanders. The alternative mode of financing will turn out to be a profit and loss sharing (PLS) contract between the

producing firm and the bank, where bank can now seize the opportunity of a closed

position in future market provided by the istisna hedge. By optimally combining a PLSfinancing scheme with istisna-based forward contracts, an Islamic bank is able toparticipate in almost assured future revenues coming from strictly binding future

volumes and strictly binding prices.


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It can be seen here that in the ethico-moral cum economic coalition of two sets,

production and consumption, a new set, i.e. bank evolved, which makes the system

more efficient.

3.4 Autonomous expenditure set This set consists of those economic units that can purchase commodities without first

earning an amount equivalent to the commodities’ value. These purchases are paid for

with loans from the banking set or on the basis of philanthropy. The autonomous

expenditure set may comprise government, production units both new and old, and

stockholding units, as well as consumer units that are able to get consumer credit and

the institution of philanthropy. They are a distinctive institution of the market-non-

market cum-credit economy. The expenditure of this set is not constrained by thebudget constraint, as is that of the labour-consumer set (Mathur, 1982).

In the system of Islam this set plays a very important and remarkable role. It has its

own epistemology and discourse. This set has compulsory and voluntary funds. These

funds as we have mentioned above have pure economic benefits. The spending of thisset is dependent on the degree of God fearing instead of budget constraint. However,

the volume of this set can be estimated from the collection of the government and the

deduction from the banks (as it has been observed in the case of Pakistan or people can

believe on the Islamic government based on its Islamic attitude). The demand of this

sector, which is autonomous, has a positive effect on the employment and negativeeffect on the obsolescence.

This sector could be developed through adequate education and training of the

masses in the Shari’ah. Religion may also increase resource allocation in the way of Allah ( swt ) and therefore removing resources from free market activities. Zarqa (1984)provides a detailed account of irfaq (philanthropy) tools that used to characterize the

Islamic economic system.Tag el-Din (2002) is in opine that the irfaq (philanthropic) sector is established as theethical foundation without which the mechanical removal of interest rate may not

necessarily yield favourable consequences in the distributional context. He further

added that Qur’anic teachings provide the ethical foundation of riba elimination, whichis the promotion of the irfaq sector. In the case of irfaq sector the element of distributional sacrifice becomes built in within the social behavioural fabric. He further

added, that currently rising concerns with philanthropy in the west is a definite

recognition of the fact that a stable social insurance system has to be deeply rooted in

humanistic civil values rather than precarious state supported system, the human

resource development strategy is favourable simultaneously for the productive as well

as distributive aspects, i.e. achievements of both targets equity and growth by using

this strategy. It is needed to bear a distributional sacrifice by releasing resources, on apermanent basis, away from strictly utilitarianist dealing to strictly non-utilitarianist

dealings (Qur’an, 2, p. 276).

The coalition of this set will fill those gaps, which, due to any lacking, has been

emerged in the system, and if this set will emerge as a significant one then its role

should be very important in the ethico-moral cum economic coalition as it could be

observed in the Islamic system. Almost the objective of this set is not to directly

maximize its own utility; it is based on altruism so indirectly he agents of this set will

maximize their utility through the up-gradation of social welfare function.


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3.5 Stockholder’s set Stockholders hold the stock of commodities consisting of investment goods,intermediate goods and consumer goods. However, the fixed capital stock of differentvintages are held only by the production set (due to this reason we differentiate the

stockholder from production set). Whenever members of the autonomous expenditureset require a commodity it is supplied to them by stockholders. Similarly, wheneverproducers or consumers demand a commodity, it is also provided only by members of the stockholder set. Let us assume that they charge a price that is proportional to theprice they have paid to the producers. However, the particular commodity is not instock it must be ordered and the price then charged relates to when the commodity isactually delivered. Stockholders order from producers approximately the amount of commodities they are able to sell in the current period (Mathur, 1982). As a goodbeliever the stockholders will not exploit the consumers and the producers. Hoarding isnot allowed. There will be just price in the situation of excess demand. The Islamicnormative stock market is characterized as a purely equity based market, free frominterest rate financing and carefully guarded against gharar [6]. The contract on thebasis of bai salam, istisna and bai muajjal are allowed. Religious restrictions are oncapital accumulation, profit making, credit markets and interest. Selling what does notown is sufficient to invalidate sales.[7] In this respect the stockholder set of the Islamicsystem is different than the non-Islamic one. This sector is following the norms, whichare guided by the Qur’an and Sunnah.

Tag el-Din (2002, p. 201) described the behaviour of stockholders as ‘‘food shortagesare created through monopolistic practices, where profiteering suppliers are tempted tobuild up stocks of high demand storable food items to influence market prices andmake large profits. The potential damage becomes even more serious when shortagesare created in staple food, in order to capitalize on its low demand elasticity’’.

Gharar is tolerated in Islamic jurisprudence, when it is not too serious. Ibn al

Qayyam says ‘‘if it is allowed to exchange food items against each other for delayeddelivery, this is only done by one who seeks profit. Then, [at the delivery time], hewould sell it spot for the sake of profit, thereby causing food shortages and seriousdamages to consumers. . . Thus, riba al nisa’ is banned, and accordingly, riba al fadl was prevented prudentially, such that the temptation of immediate profit ( riba al fadl )would not induce people to the postponed profit ( riba al nasa’)’’ (cited by Tag el-Din,2002, p. 204). Giving true information about the characteristics of the tradedcommodities in the market was emphasized as being closely related to belief. A directgain accruing to all people from a ‘‘just exchange’’, a matter which would be realizedwhen they are better informed about the market value of whatever commodity theyhave in terms of another commodity. In this way the level of asymmetric informationwill reduce.

Emphasis of Islamic Shari’ah on the importance of knowledge about the subject of the sale means in other words that it is important that the seller and the buyer knowwhat they are selling or buying; this knowledge is basic to the concept of theconsumer’s or producer’s economic rationality according to economic theory (Tagel-Din, 2002). So if there is normative market for the stockholders as discussed by Tagel-Din (1996) and it has the coalition with all the previous sets then this ethico-moralcum economic state will help the market and economy to become more efficientthrough reducing moral hazards as well as the level of asymmetric information, alsocaring others and so on.


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In the Islamic system with the coalition of stockholders three types of transactionswill take place, either cash, salam or on the basis of istisna. It should be kept in ourmind that this coalition is not a static one rather than it is a moving equilibrium and itis a continuous process.

4. ConclusionGod conscious and abiding behaviour of the Muslims will alter the utility function of the income earners. All the earnings considered as ( halal ), which are permissible underthe principles of Islam. Simultaneously an individual could be worker as well asentrepreneur. He has to spend (if he is sahib-i-nisab ) some portion of his income(compulsory or voluntary) in the way of Allah ( swt ). He will earn wages and returns onhis capital. He is allowed to invest his savings in the mode of shirakah/mudarabah.

This study claims that good deeds are complementary to the economic deeds for aMuslim as an economic agent. His utility is based on the both of them, and when s(h)eis spending for others actually he is thankful to Allah for his bounties. Either he isspending for his own needs or caring for others; in both of the situation he is accruing

the pleasure of Allah.The coalition based on ethico-moral cum economic increases the efficiency state of

the economy. It is assumed that all the agents of the different sets of the economy areinherently selfish but the religious training makes them soften and the attitude ischanging towards the social and economic benefits through participation andcooperation. In this situation all the agents would agree to distribute the gains fromcooperation in accordance with a principal of ‘‘minimax relative concession’’. Thisprincipal distributes fairly the gains from ethico-moral cum economic coalition relativeto the situation that would prevail in the absence of coalition, i.e. improvement in theindividual and collective well being.

So this is the time of the experts, policy makers and academics to think on theselines and ignoring the substitution concept of the conventional economics. Over andabove in this mutable milieu, a continuous process of embodied and disembodiedtraining of the society is required, which is only possible if we have an ideologicalsystem and that should not be biased towards any segment or set of the society andeconomy. On the basis of these micro foundations we are able to construct the macromodel for the Islamic economy. However, our postulate is that this coalition is notabsolute, but it is a relative one, and the level of coalition is increasing with the degreeof God consciousness and obedience.

Notes

1. Maqasid al-Sharia, or the objectives of the Shari’ah aims to fulfil the objectives of humanwell-being.

2. If we want an exact solution, strict convexity may have to be assumed. This will not beseriously wrong if the number of units is large.

3. ‘‘The Prophet (pbuh) regarded someone’s working, realizing production, and obtainingthe subsistence of his family as scared as jihad for Allah’s approval and as praying inthe form of fasting in the day time and as performing the salah (worshipping) in thenight.’’ and ‘‘Trying to earn a lawful livelihood is an obligation in addition to the dutiesthat are obligatory.’’ (Bukhari)

4. ‘‘Any servant who observes Allah’s right and his master’s right will get a doublereward.’’ (Bukhari); and ‘‘A servant is a guardian of his master’s property and isresponsible for it.’’ (Qur’an, 83:1)


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5. ‘‘For a rich man to crave pretexts to avoid the fulfilment of his commitment towards thebasic rights of worker is oppression’’ (Bukhari); and ‘‘Take head of (daily) prayers and of (the rights of) those who are subordinate to you’’ (Ibn Majah); and ‘‘Your brethren areyour servants whom Allah has made your subordinate. So, the man who has his brother

as his subordinate, should give him to eat what he himself eats, and to wear what hehimself wears. And do not put on them the burden of any labour that may exhaust them.And if you have to put any such burden on them, then help them yourselves (in hiswork)’’ (Bukhari).

6. Gharar is the jurists term for inadequate market information or uncertainty aboutexchange objects, particularly when no practical obstacles stand in the way of furnishing full information to the contracting parties about the objects of exchange (Tagel-Din, 2005).

7. Religious axioms require an individual to be selfless.

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Agil, S. (1992), ‘‘Rationality in economic theory’’, in Tahir, S., Ghazali, A. and Syed Agil, S.O.

(Eds), Readings in Microeconomics in Islamic Perspective, Longman Malaysia, Kuala

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in Tahir, S., Ghazali, A. and Syed Agil, S.O. (Eds), Readings in Microeconomics in Islamic


Al-Masri, R.Y. (2005), ‘‘Are all forms of interest prohibited’’, JKAU: Islamic Economics, Vol. 17

No. 1, pp. 37-41.

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Chicago Press, Chicago.


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Iqbal, M. (1985), ‘‘Zakah, moderation, and aggregate consumption in an Islamic economy’’, Journal of Research in Islamic Economics, Vol. 3 No. 1, pp. 45-60.

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Corresponding authorToseef Azid can be contacted at: [email protected]

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