The Four Basic Problems of an Economy

Basic Problems of an Economy – #1 – What to Produce?

What does a society do when the resources are limited? It decides which
goods/service it wants to produce. Further, it also determines the quantity required.
For example, should we produce more guns or more butter? Do we opt for capital
goods like machines, equipment, etc. or consumer goods like cell phones, etc.? While
it sounds elementary, society must decide the type and quantity of every single
good/service to be produced.

Basic Problems of an Economy – #2 – How to Produce?

The production of a good is possible by various methods. For example, you can
produce cotton cloth using handlooms, power looms or automatic looms. While
handlooms require more labour, automatic looms need higher power and capital
investment.

Hence, society must choose between the techniques to produce the commodity.
Similarly, for all goods and/or services, similar decisions are necessary. Further, the
choice depends on the availability of different factors of production and their prices.
Usually, a society opts for a technique that optimally utilizes its available resources.

Basic Problems of an Economy – #3 – For whom to Produce?

Think about it – can a society satisfy each and every human wants? Certainly not.
Therefore, it has to decide on who gets what share of the total output of goods and
services produced. In other words, society decides on the distribution of the goods
and services among the members of society.

Basic Problems of an Economy – #4 – What provision should be

made for economic growth?
Can a society use all its resources for current consumption? Yes, it can. However, it
is not likely to do so. The reason is simple. If a society uses all its resources for
current consumption, then its production capacity would never increase.

Therefore, the standard of living and the income of a member of the society will
remain constant. Subsequently, in the future, the standard of living will decline.

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Hence, society must decide on the part of the resources that it wants to save for future
progress.

Method of solving the economic problems in Mixed Economy

In the mixed economic system, there are two methods to solve the basic problems of
the economy. The first is to use the price mechanism (as in the free market system)
and the second by the direct intervention by government in offering goods and
services (such as the planned economy system). Divided between the two methods of
solution is dependent on the type of goods and services produced. In the event that
the goods produced are personal or economic goods, which for these goods
consumers are willing to pay, the goods and services of this nature will be removed
by using the price mechanism. Second, if the goods and services that are classified as
public goods, which consumers cannot pay any benefits produced by the item, the
goods and services shall be issued by the government. For example, defense and
security services, roads and so on.

Characteristics of mixed economy system.

There are some features of this mixed economic system. Among these are;
a. Users have the ownership on the factors of production.
b. Users make economic decisions on purpose to maximize satisfaction.
c. Operators for the purpose of making economic decisions to maximize profitability.
d. There is government intervention in the economy, namely in the form-impose
taxes on consumers and producers. -To provide subsidies to consumers and the
manufacturers are involved in the supply of goods and services-Providing control
over the private sector through legislation.

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 ISLAMIC ECONOMIC SYSTEM
Capitalism, Communism and Mixed Economics system has purely a materialistic
approach in which human social life has no importance. But in Islamic System, the
followers of Islam are required to lead a material life in such way that it becomes a
source of happiness and respect of others in this world for making secure himself
for next world.
Islamic Economic System consist of institutions, organizations and the social
values by which natural, human and man made resources are used to produce,
exchange, distribute and consume wealth? Goods and services under the guiding
principles of Islam to achieve "FALAH" in this world and also other it.
Salient Features of Islamic System

Main characteristics of Economic System of Islam are.

1. The Concept of Private Property

2. Consumption of wealth

3. Production of wealth

4. Distribution of wealth

5. The concept of Zakat

6. Interest free Economy

7. Economic Growth

8. Responsibilities of the Government.

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1. The Concept of Private Property

Basic Principles in Islam for Consumption or Investment of private property are:

 Concept of "HALAL" and "HARAM" for earning or in production and

consumption of wealth.
 A property cannot be used against public interest.
 Show much as you have something.
 Real/money Capital cannot be used for gain.
 Payment of Zakat is compulsory.

2. Consumption of Wealth

In Islamic System uses of luxuries are not allowed because it against the concept of
"TAQWA" should have distinguish between "HALAL" and
"HARAM"."BUKHAL" and "ISRAF" are to be avoided.

3. Production of Wealth

Price mechanism plays a key role in carrying out the production process in an Islamic
Society. As Price system results in the expectations of workers and consumers the
Govt. Interferences with the price mechanism to over come the problem. These
things are not allowed in Islamic System.

 Production of drugs, gambling, lotery, music, dance etc.

 Lending and borrowing on interest
 Black marketing, Smuggling etc.

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4. Distribution of Wealth

Islamic Economics System favour fair (not equal) distribution of wealth in the sence
that it should not be confined to any particular section of the society. For fair
distribution of wealth Islam gives following steps

 "BUKHAL" and "ISRAF" are to be avoided.

 Payment of Zakat
 Interest not allowed
 Monopoly of Private firm not allowed
 Earning from Black Market.

5. The Concept of Zakat

Zakat is a major source of revenue the government in an Islamic state. It levy on all
goods and money or on wealth if have to pay yearly on the month of RAJAB or
RAMADAN.

6. Interest free Economy

The whole financial system the bank structure in particular is run on the basis
"SHARAKAT" and "MUZARABAT" in Islamic state. Therefore, Islamic
economics is an interest free economy.

7. Responsibility of the Government

Responsibility of the Islamic Government are

Should check un-Islamic activity like gambling, smuggling, black marketing etc.

Should secure poor people by giving them necessity of life i.e. food, clothing, health
etc.

Should provide equal employment opportunity.

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Social and Economic Security is required to guaranteed by the Govt.

Conclusion

An Islamic Setup provides a graceful economic and social life. it distribute the
wealth in all family.

Comparison of Islamic Economic System with other Economic System

Islamic Economic System possesses the character of both capitalism and socialism
and it is free from their evils. Following are the comparison of Islamic state with
others.

1. Distinguishing Characteristics

Capitalist says "Economic Freedom" to producers and Consumers.

Communism says Economic Equality achieved through state ownership of the

means of production.

The distinguish characteristics of an Islamic System is "Economic and Social

Justice" so that every body gets his / her due.

2. The Concept of Private Property

In a Capitalist system unlimited liberty and right of ownership for private property
is given which has resulted in the capitalist exploitation of workers. Islam allows the
right of private ownership and freedom of enterprise in limited capitalism but not
leave the property for the long period.

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3. Consumption of Wealth

In Capitalism any thing can be consumed while a communist society only consumer
goods and services which are allowed to be produced in the country. In Islamic
Country only "HALAL" are allowed to be produced and consumed "HARAM"
goods and services are not allowed to be produced and consumed.

4. Production of Wealth

Capitalism motive is only profit they produced goods for only profit. In communist
society central plan authority made decision what to produce and how much to
produce. But in Islamic System only have to produce "HALAL" goods and
"HARAM" goods like alcohol drink, drug etc are not allowed.

5. Distribution of Wealth

In Capitalism concentration of wealth is goes on few hand due to unlimited right of

ownership and free competition. In communism system dicta for ship is created due
to concept of private property. In Islamic System, Due to "ZAKAT" and "SADQAT"
automatically wealth transfer to poor from rich.

6. The Role of Interest

The interest made brings equal between saving and investment to promote, capital
formation in a capitalist society. In communism, interest does not pay any role for
saving and investment. In the Islamic system interest based economic activities are
strictly banned. Hence interest is not a source of capital formation in an Islamic.

Conclusion

We conclude that Capitalist and communist are materialistic in nature and they only
looking for to satisfy the material wants of the people. But Islamic economic system
provides a fine blend of materialism and spiritualism.