Principles of Islamic banking and finance/PIBF201/Islamic economic environment/Islamic Economy, Capitalism and Socialism

The Role of Market An Islamic economic system would generally allow the markets to work freely. 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. (In late nineteenth century Austrian economist Weiser had raised the issue of exchange value and intrinsic value of a commodity; the former determined by the desire usefulness of a commodity as well as the purchasing power of the person who wants to buy the commodity. On the other hand the intrinsic value of a commodity is its ability to satisfy the desire of a person with no reference to her purchasing power. )

The contribution of neoclassical school in the development of price theory, and how prices are determined under different market structures are important even if there are some unresolved 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. Von Wieser, one of the initial members of the Austrian school, stressed this point long ago. One can further argue that the difference between the two values could be minimized through a proper distribution of income in the economy affecting the purchasing powers of different sections of the people.

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

Private Ownership of Means of Production

Throughout the Islamic history, the sanctity of private property has remained non-controversial. While it is up to the government to make sure that the wealth is not concentrated among the few, as a principle, individuals are free 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 ten years in the 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 is obvious that an Islamic system may be relatively closer to the capitalist system compared to one based on socialist ideals. However, there are some concerns about a capitalist economy from an Islamic perspective largely concerning distribution of income among different factors of production.