Principles of Islamic banking and finance/PIBF201/Islamic economic environment/Comparing an Islamic Economy with Capitalism and Socialism

Islamic economists emphasize that in an Islamic economy, markets work freely, to a large extent. Muslim societies have been practicing this since the time of the Prophet (PBUH) whose instruction clearly allowed prices to be determined through markets with the interaction of demand and supply. The Prophet (PBUH) and later Muslim scholars and rulers did emphasize to remove any unwanted and unfair means such as hoarding and other practices that could hinder the fair play of demand and supply.

It could be thus claimed that Islamic economics does not reject the theory of (exchange) value of goods and services espoused by the neoclassical school that provides the theoretical framework for modern capitalism. The contribution of neoclassical school in price theory and how prices are determined under different market structure is important even if there are some unsolved issues. For example, if there is a big difference between exchange value (partially determined by purchasing power) and the use value, then there is a case for government intervention specially to deal with essential commodities. This point was stressed long ago by von Wieser, one of the initial members of the Austrian school. Shamim Siddiqui, an Islamic economist points out that the difference between the two values could be minimized through a proper distribution of income in the economy.

However, when it comes to the pricing of factors of production such as wage and rent, interest and entrepreneurship, like some other heterodox economics, Islamic economics can have serious differences with neoclassical economics.

Throughout the Islamic history the sanctity of private property has remained non-controversial. While government has been assigned the duty to make sure that the wealth is not concentrated among the few, as a principle, individuals are generally allowed to pursue their material struggle without any limit. The government of an Islamic economy, however, will be always looking for the possibility of improving distribution of income as and when appropriate and desirable.

In communism, the problem of distribution of income becomes the cardinal issue of economics. In order to eliminate the exploitation of workers, the process of production is carried out under a different power structure; the state takes over the roles of entrepreneur and capitalists. However, the lack of personal and/or material interest among the bureaucrats who run the enterprises results in serious inefficiencies. The events of last few decades in the so called communist world have decisively demonstrated the inadequacy of socialist or communist systems to solve the problems of a modern economy. They did succeed in reducing income inequalities, getting price stability and eradicating the problem of unemployment. But the cost of this achievement, in terms of the loss in efficiency, was so enormous that the system eventually collapsed.

From these assertions it could be said that an Islamic system may be relatively closer to the capitalist system compared to a socialist system. This could be hardly denied. However, as we proceed and go into the details, we would highlight a number of important differences.