Lecture:The theory of production in Islam

3. The theory of production in Islam

Objectives of production:

 There are 3 Objectives of production in an Islamic economy. These are following…

1. Improves the material condition of an individual
2. His Morals or Morality
3. It also a way of attaining his goal in hereafter life

Implications of these Objectives:

There are 3 Implications of these Objectives. These are following…

1. The products which deprive the human being of his moral values are strictly prohibited. The industrial activity related to those products and all types of relationship with that product is also strictly prohibited.

Example:

ü      Prostitution and income generated by its.

ü      Cinema hall to show obscene movie

2. Social aspects of production are emphasized and highly related to the production process. the aim of this process are :Distribution of benefits among the large number of people and Ensure the highest level of equity

Example:

ü      Rice production versus Tobacco production

ü      Airbus production versus War materials production

3. Scarcity is not the only problems in relation to needs but also the laziness and negligence of human being in the extraction of natural resources is another problem. The term ‘laziness and negligence’ is also called as oppression or cruelty in the Holy Qur’an.

The Holy Prophet (peace be upon him) says, Ask ALLAH to help you and don’t feel incapable for nothing is impossible.

Goals of the Firm:

Maximization of utility is the Goal of the Firm in an Islamic economy

More specifically, M.N.Siddiqi explains 5 Goals of the Firm in an Islamic economy. These are following…

a)      The fulfillment of one’s own needs in moderation instead of miserliness and extravagance

b)      Meetings the needs of one’s family

c)      Provision for future contingencies or unforeseen event

d)      Provision for prosperity

e)      social service and contribution for the sake of ALLAH

Difference between Islamic firm and Non Islamic Firm:

Objectives or constraint on business behavior:

Firstly: The degree of interference of interference of law is indisputably greater in the Islamic society

Secondly: The lack of any effective control on non-legislated ethics in a capitalist society as compared with the Hisba agency in the Islamic society

Profit and Profit share in Islam:

An organization or an entrepreneur or an enterprise faces risk and earns profit or loss by running its business. As like proprietorship or partnership, there are different types of business structure is available in Islam. Such as:

1. Mudaraba
2. Musharaka

1. Mudaraba:Under Mudaraba arrangement, the entire capital is provided by one party and the other party bears only the managerial costs and share profit according to the agreed ratio

2. Musharaka: Under Musharaka arrangement, the capital is provided by both the parties and proportion of capital provided shares the profit.

Islamic perspective on market price and allocation:

Objectives: There are 3 Objectives:

1. Provide Islamic perspective on prices and allocation through critique of the market mechanism
2. Develop an understanding of the Islamic theory of demand and supply in an Islamic framework
3. Identify the problems and issues, thereby facilitating the decision making process in search for an Islamic alternatives to market price where ever it is needed

Islamic approaches to market prices:

Determination of price in other economies:

1. In traditional societies, market price is determined by the convention of the past, based mainly on the principle of reciprocity

2. In command economies, the division of social product is primarily carried out by the state management and administered prices

3. In market ecoomies, price is determined by the forces of demand and supply in the market.

Determination of price in Islamic economies:

To determine price, firstly Islamic economics evaluate the process of production, distribution and consumption, in the light of the principles of Islamic economic behavior

Secondly, in this process, Islamic economy must go deeper and ask what is the meaning of market price? What do they represent? Does it reflect poor consumer’s ability to pay? Does it mean that this market price is equivalent to the social value? Since, in most cases, the rich and poor have clear difference in ability to pay. The market price is then not a good guide to social welfare as it includes the influence of income distribution on the prices offered.

Thirdly, consider the market price for a consumer and consumer’s surplus: consumer surplus is the difference between the willingness to pay of the consumer and the actual market buying prices

Here, CD-demand curve B- Market prices OC- willingness to pay of the consumer S- Consumer surplus

S-is the consumer surplus at market prices B, this is the welfare of the consumer. But one problem is that, there are many consumers still exist in the market, they have no ability to pay the prices B.so their demand is not included in this market prices. Islamic economics is concerned about these consumers in setting market prices

Again, consider the market price for a producer and producer’s surplus: producer’s surplus is the difference between the willingness to sell a good by a producer and the actual market selling prices

Here, AC-supply curve B- Market prices OD- willingness to sell by a producer P- Producer’s surplus N-new price

This market does not consider the price’N’.this is the price of those producer whose cost to produce the same good is ON, which grater than OB.so they cannot enter into the market. Islamic economics is concerned about these producers in setting market prices

Three policy option:

An Islamic economy may face the following three policy option:

a)      Eliminate the market mechanism and control price

b)      Allow the market mechanism to operate freely, market directs transfer payments to the poor, so that they can enter into the market

c)      Allow the market mechanism to operate through necessary control and corrective measures in providing effective needs to the community, not necessarily providing goods and services beyond the basis needs.

Which one  is feasible?

ü      The option (a) is not feasible and is clearly not permissible in Islam, as it is against the principles of basic economic freedom f the individual which Islam seeks to preserve.

ü      The option (b) is not feasible for several reasons:

Firstly, it is based on assumption that the market mechanism will automatically ensure equitable redistribution of good and services through the invisible forces of demand and supply. But reality is that, it is not actually possible

Secondly, ‘effective need’ is much broader concept than ‘effective demand’. the market is either inefficient or ineffective or indifferent in providing all aspects of basic needs

Thirdly, there is no guarantee that, transfer payment will be made available  to the poor on a permanent basis. or poor may not benefited fully. for instance, lower food prices benefiting the urban customer

ü      The option (c) is feasible because it provides a pragmatic alternative to achieve the goals of an Islamic economy.