Islamic economics enables a Muslim society to achieve certain ends. It is not so difficult to understand that material resources are required in order to achieve the objectives or Maqasid of Shariah namely “preservation and protection” of Deen, Life, Family and Intellect. The purpose of Divine Law is to make mankind successful in Akhirah. Therefore protection of the religious and spiritual status of the mankind is the prime objective of Shariah. The remaining objectives are also meant to help toward achieving this bigger goal.
Material Progress and Islam
Allah asks people to use their intellect and exploit the nature’s blessings. Islamic principles neither stop one’s use of intellect in seeking material progress, nor the pursuit of success in life hereafter conflict in any way with success in this world provided that the ethical filters and Islamic injunctions are observed where they have been explicitly given.
Some Observations on User Cost of Capital
Interest based financial system discourages investment in socially optimal profitable projects, but which are not favored because of relative cost comparison from the market interest rate. If sales do not increase, it may lead to business cycle fluctuations with unplanned increase in inventories. With increased pressure to service debt, the environmental degradation and human resource exploitation may become common and secondary concerns.
Behavior of Firms in Islamic Economic Framework
This article takes a brief look at the theory of the firm in Islamic economics and how a firm’s objectives and governing framework is different in Islamic economic framework as compared to the neoclassical and value-neutral economic framework.
Resource Economics: Islamic Perspective
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.
Distribution of Resources in Islamic Economic Framework
Scarcity of resources is the basic premise on which the theories of classical and neoclassical economics are based upon. It implies that resources are scarce relatively as compared to the wants that are unlimited. But, this premise uses the word ‘wants’ in a general sense which includes both necessities and luxuries that people desire to have.
Production Function in an Islamic Economic Framework
With higher levels of investment, circulation of wealth and competitive markets, innovation and quality enhancement will be the only means of sustaining the edge for firms in an Islamic economic framework. Hence, there will be more focus on innovation, customer satisfaction and hence speed of innovation and productivity is expected to increase. The supply side of innovation, which is the human capital, will also be incentivized through employment creation as a result of removing concentration and idleness of wealth.
Negative Effects of Interest Based Loans on Development
Most developing countries are going through a perpetual debt trap which takes away resources that could have been used on development, but instead are used to service compounded debt.
Circular Flow Model: Islamic Economics Perspective
As per Islamic principles, within certain bounds, the market forces can operate and will determine which goods should be produced and offered at what price. The major difference from capitalistic system is that rather than having a fixed compensation, the capital will only earn a share in actual profit/loss out of the production process in which it is used.
Islamic Economics and Consumer Behavior
The idea of material progress and well being enabling the people to forget fear and religion and Question of ‘why we exist’, has failed. Ignoring the purpose of existence and trying to replace it with material self pursuit does not and has not solved the fundamental human quest of ‘why we exist’.