Salman Ahmed Shaikh
In economics, the four broad categories of resources include land, labor, capital and entrepreneurial ability. It is the entrepreneurial ability which helps in capital formation with improvement in quality and quantity of capital which in turn also enhances the productivity of land as well as labor. In an Islamic economic framework, the institutional and structural impetus to entrepreneurial ability comes from the prohibition of earning through lending of money and by banning other means of earning money where the resource or asset that is the subject of trade either does not have any intrinsic value or the mode of earning involves no risk taking.
With the institution of Zakat and prohibition of interest, the households with surplus investible income have no avenue to expand their wealth other than by putting their wealth in entrepreneurial pursuits or by investing in productive and scarce resources, i.e. land and capital. They can earn income by transferring the use of these productive resources to some other entrepreneur. In line with the natural observation and evidence that not all people have same preferences with regards to risk, there remains a risky way of earning income, i.e. entrepreneurship with higher expected returns and less risky way of earning income by providing one’s labor and productive assets in ownership on lease to the other entrepreneurs.
Islamic injunctions put huge emphasis on making best use of the resources provided by Allah. Cultivating barren land and dignity of labor is given significant value and regarded as virtues. In an Islamic economic framework, the demand for economic resources, i.e. land, labor and capital is driven by the interest free and productive asset/activity based voluntary exchanges in a market economy.
Thus, the market economy with these unique characteristics has desirable balance of equity and efficiency.
Efficiency: There is inbuilt control mechanism to efficiently use resources as both the firms and the households receive divine encouragement and admonishment to make the best use of resources and refrain from waste and extravagance. Moreover, using economic theory, we know that efficiency without hurting equity is achievable in relatively more competitive markets. Competition is achieved in an Islamic economic framework by banning the potential barriers to entry through disallowing arbitrary compensation to money capital and encouraging capital formation through productive investments and entrepreneurship.
Equity: In an Islamic economic framework, it is ensured through encouraging: 1) circulation of wealth by banning risk-free income on lending money, 2) levying direct wealth Zakat and production Zakat, 3) instituting intergenerational transfer of inherited wealth and 4) inculcating ethical checks in a person’s overall conduct which encompasses economic as well as non-economic choices.
Categories: Articles on Islamic Economics