Application of Islamic Concept of Resource Allocation

Topic 4: Allocation of Resources in Islamic Economic System

Muhammad Irwan Ariffin

April 14, 2016

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Outline

1 Overview

2 Consumption
Normative Aspects
Positive Aspects

3 Production
Normative Aspects
Positive Aspects

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 Overview

Application of Islamic Concept of Resource Allocation

Overview

We shall discuss the normative and positive aspects of resource

allocation in the two main areas of economics:
1 Consumption
2 Production
We will also look at the application of the principles of resource
allocation in thoese two areas
*Distribution will be covered in the next chapter

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 Consumption Normative Aspects

Consumption
Normative Aspects

Normative aspects of consumption in Islamic Economics based on

the vision build upon revelation: Al-Quran and al-Sunnah
How should an individual behave?
The consumer behavior in Islam: should follow the guidelines from
the revelation
What does the revelation says about consumption and consumer
behavior?
How to allocate resources in consumption?

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 Consumption Normative Aspects

Consumption: Conventional Economics

Consumption: Normative Aspects

Capitalism consumer behavior is determined by two things:

1 Economic rationalism
2 Utilitarianism
Economic rationalism: human behavior is based upon rigorous
calculation, directed with foresight and caution toward economic
success
Economic success: making of money out of man
Utilitarianism: consumers aim to maximize satisfaction
Homo-economicus: the primary objective of consumption is to
achieve the highest level of economic satisfaction where the only
stimulus is the sense of money
Individual choice matters the most regardless of social consideration
Allocation of resources is bias to those with money
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 Consumption Normative Aspects

Guided Rationalism and Consumer

Consumption: Normative Aspects

Revelation: rationalism should be observed in both physical and

spiritual dimensions of human achieve success in both dimensions
Guided rationalism: Foregoes economic satisfaction if it clashes with
spiritual satisfaction based on revelation
Example: drinking wine: economic satisfaction, but spiritual
dissatisfaction
Elements of guided rationalism:
1 Concept of success
2 Time scale of human behavior
3 Concept of wealth
4 Concept of goods
5 Ethics of consumption

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 Consumption Normative Aspects

Guided Rationalism: Concept of Success

Consumption: Normative Aspects

Success is not measured by physical wealth: success lies in being

virtuous
Success is when behavior is in accordance with high moral standards
Human is both greedy as well as caring
Human has two dimensions: physical and spiritual: must be balanced
Human has the freedom of choice but has to be responsible
Individuality of human is emphasized, but human is also responsible
for the collective actions of the society
Pursuit of economic progress is not a vice in Islam it becomes a
virtue if it is balanced and intended for good cause

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 Consumption Normative Aspects

Guided Rationalism: Time Scale of Human Behavior

Consumption: Normative Aspects

Life in the Hereafter: extends time horizon beyond death

Extends utility calculation of an action: present values of immediate
effect in this worldly life and future effect in Hereafter
Number of options (or alternative uses) of resource allocations is
increased by the inclusion of benefits that will be gained in the
Hereafter
Example: providing interest-free loans (qard al-hasan), giving
charities, remembrance of God, propagates truth and goodness, law of
inheritance
Success: consumer behavior must be balanced between material and
spritual matters which embraces the total time horizon: both in this
life and Hereater

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 Consumption Normative Aspects

Guided Rationalism: Concept of Wealth

Consumption: Normative Aspects

Wealth: bounty from God, while Islam disapproves poverty

Miserliness and extravagance are evil: must strike a balance between
the two: be moderate in spending!
Economic analysis should include both material and non-material
gains
Anything that is good do as much of it as possible (maximize)
If two goods contradict sacrifice the lesser goods to promote the
greater good
If bad it is permitted to commit the lesser evil if it could avoid the
greater evil (minimization)

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 Consumption Normative Aspects

Guided Rationalism: Concept of Goods

Consumption: Normative Aspects

Consumption goods bounties from God for mankind:

1 Tayyibat: pure and good consumption goods must be pure and
good, exclude impure and bad
2 Rizq: divine sustenance God is the True Sustainer and Provider
Consumption goods: pure, good, useful items that bring material and
spriritual satisfactions
Although the divine sustenance is provided by God, human needs to
put in effort to obtain it
The effort must follows the hierarchy of needs based on Maqasid
al-Syariah:
1 Necessities (Dharuriyyat)
2 Complements (Hajiyyat)
3 Luxuries (Tahsiniyyat)

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 Consumption Normative Aspects

Guided Rationalism: Ethics of Consumption

Consumption: Normative Aspects

The bounties of God belong to all mankind ownership is a trust,

the poor still deserve their share
Consumption of good things is a virtue since God commanded us to
do so
Consumption and satsifaction are not condemned if they avoid harm
or harmful things
Moderation in consumption between miserliness and extravagance:
1 Miser: underspending, not spending even on ownself and family
2 Extravagance (israf ): overspending (excessive spending) on permissible
things
3 Profligacy (tabzir ): spending on forbidden things
Apart from values, revelation also provides necessary legislative
framework to support and sustain these ideals and prevent misuse

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 Consumption Normative Aspects

Principles of Consumption
Normative Aspects

Basic principles in consumption:

1 Basic needs must be satisfied, then move to higher hierarchy of needs
2 Independent, self-sustenance
3 Needs are flexible, may change subject to environment and time
Once we are independent and able to fulfill our basic needs, we must
sacrifice part of our consumption for others: zakah and sadaqah

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 Consumption Normative Aspects

Moderation in Consumption
Consumption: Normative Aspects

Figure: Surah al-Isra, 17:29

And do not make your hand [as] chained to your neck or extend it
completely and [thereby] become blamed and insolvent.

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 Consumption Normative Aspects

Moderation in Consumption
Consumption: Normative Aspects

Figure: Muttafaqun Alayhi

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 Consumption Normative Aspects

Moderation in Consumption
Consumption: Normative Aspects

The parable of the miser and the almsgiver is that of two persons
wearing iron cloaks from their chests to their collar-bones. When the
almsgiver gives in charity, the cloak becomes spacious until it covers
his whole body to such an extent that it hides his fingertips and
covers his tracks (obliterates his tracks - or, his sins will be forgiven).
And when the miser wants to spend, it (the iron cloak) sticks and
(its) every ring gets stuck to its place, and he tries to widen it, but it
does not become wide.

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 Consumption Normative Aspects

Moderation in Consumption
Consumption: Normative Aspects

Figure: Surah al-Furqan, 25:67

And [they are] those who, when they spend, do so not excessively or
sparingly but are ever, between that, [justly] moderate

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 Consumption Normative Aspects

Moderation in Consumption
Consumption: Normative Aspects

Figure: Surah al-Araaf, 7:31

O children of Adam, take your adornment at every masjid, and eat

and drink, but be not excessive. Indeed, He likes not those who
commit excess.

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 Consumption Positive Aspects

Consumption
Positive Aspects

Due to limited resources (income, wealth) and the infinite choices

available, consumers have to choose
The choice should be made within the framework described in the
normative aspects
Quantify the qualitative factors
Can apply conventional tools to solve for the optimal solutions

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 Production Normative Aspects

Production
Normative Aspects

How to allocate resources in production?

Conventional: cost minimization, profit maximization
Depends totally on market mechanism
Heavy role of advertisement
1 Psychic dissatisfaction
2 Misleading advertisement deceives consumers wrong judgment
3 Additional cost of advertisement
4 Promote harmful values to the society

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 Production Normative Aspects

Producer Behavior
Production: Normative Aspects

How does Islam view the producer and the firm?

Means of production...
1 Way to achieve falah
2 An amanah to be utilized efficiently
3 An important tool for individual development and preservation
The producer behavior must be within the limits of Syariah, including
organization framework and management principles: observe justice
Want to serve the society considers welfare of the society
Profit maximization within the limits set above

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 Production Normative Aspects

Love God before anything else

Production: Normative Aspects

Figure: Surah Al-Tawbah, 9:24

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 Production Normative Aspects

Love God before anything else

Production: Normative Aspects

Say, [O Muhammad], If your fathers, your sons, your brothers, your

wives, your relatives, wealth which you have obtained, commerce
wherein you fear decline, and dwellings with which you are pleased are
more beloved to you than Allah and His Messenger and jihad in His
cause, then wait until Allah executes His command. And Allah does
not guide the defiantly disobedient people.

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 Production Normative Aspects

Warning against Business Fraud

Production: Normative Aspects

Figure: Surah Al-Muthaffifin, 83:1-4

Woe to those who give less [than due], Who, when they take a
measure from people, take in full. But if they give by measure or by
weight to them, they cause loss. Do they not think that they will be
resurrected?
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 Production Normative Aspects

Warning against Business Fraud

Production: Normative Aspects

Figure: Narrated by al-Tirmidhi, al-Daarimi, Ibn Maajah and Ibn Hibbaan

The merchants will be raised on the Day of Resurrection as evildoers,

apart from those who fear Allaah and are honest.
Al-Tirmidhi: hasan sahih, Al-Albani: sahih

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 Production Normative Aspects

Honesty in Business
Production: Normative Aspects

Figure: Narrated by al-Tirmidhi

The honest, trustworthy merchant will be with the Prophets, siddeeqs

and martyrs.
Al-Tirmidhi: hasan, Ibn Taymiyah: isnaaduhu jayyid (good chain)

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 Production Normative Aspects

Principles of Production
Production: Normative Aspects

Resource allocation in production should be determined based on the

hierarchy of needs:
1 Necessities (Dharuriyyat)
2 Complements (Hajiyyat)
3 Luxuries (Tahsiniyyat)
No production of prohibited goods and services
Focus resources to provide sufficient necessities
Divert resources away from luxuries to necessities and basic comforts

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 Production Normative Aspects

Principles of Production
Production: Normative Aspects

Use efficient production methods: no excess, no idle resources

Non-productive intermediary activities are prohibited
Speculation is prohibited
Interest as a guaranteed source of income is prohibited (riba)
Idle private land may be usurped by the state
Public resources may be awarded to private owners in accordance
with their capacity of utilization
Observe justice: profit and remuneration of factors of production,
rates of return must be reasonable

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 Production Positive Aspects

Production
Positive Aspects

Technical aspects of production how choices are made by the firm:

1 Choice of factor inputs
2 Choice of production mix
3 Choice of production technology
4 Choice of management styles

Economic rationality can be used to make these production decisions

but must be confined within the limits of Syariah rules of the game
Payment for input factors must not include haram transactions:
promote profit-sharing

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 Production Positive Aspects

Goals of Firm
Production: Positive Aspects

Not just pure profit maximization, but utility maximization firm is

an entity where the time horizon of the owner(s) is extended to
Hereafter: needs to consider the expected returns in the Hereafter
Promote justice and benevolence entrepreneurs must comply with
these two components in whatever business decisions
Freedom is expressed in cooperation more than competition
No best level of output: generally, higher output level is preferred
since it leads to higher employment and reduce shortages

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