Chapter- One

Introductory to Economics

The English term ‘Economics’ is derived from the Greek word ‘Oikonomia’. Its meaning is ‘household
management’. Economics was first read in ancient Greece. Aristotle, the Greek Philosopher termed
Economics as a science of ‘household management’. But with the change of time and progress of
civilization, the economic condition of human being changes. As a result, an evolutionary change in the
definition of Economics is noticed

Economics is an important branch of knowledge which growth of economy in the world , eradicate
poverty, unemployment, wants etc. The importance of economics as a social science that studies the
production and distribution of wealth, business, trade, consumption of goods, services, eradication of
poverty and overall human welfare.

Resource of the economy is limited but the wants of human being is unlimited . It shows how scarce
resources can be used to increase wealth and human welfare. The central focus of economics is on
scarcity of resources and choices among their alternative uses. The resources or inputs available to
produce goods are limited or scarce. This scarcity induces people to make choices among alternatives,
and the knowledge of economics is used to compare the alternatives for choosing the best among them.
So how this limited resource will meet the unlimited demands is the subject matter of economics

The Classical View

The classical economists beginning with Adam Smith defined economics as the science of wealth. Adam
Smith defined it as the “An Inquiry into the nature and causes of wealth of nations,” whereby it “proposes
to enrich both the people and the sovereign.”

2. Among his followers, J.B. Say in France defined economics as “the study of the laws which govern
wealth;” whereas to-

3. F.A. Walker in America, “Economics is that body of knowledge which relates to wealth.”

According to J.S. Mill, “Writers on Political Economy profess to teach the nature of wealth and the laws
which govern its production, distribution and exchange.”

To J.E. Cairnes, “Political Economy is a science…it deals with the phenomena of wealth.”

Adam Smith a reputed English scholar and economist who presented economics as separate science and
separate discipline of study for the first time in his book namely“ An Enquiry into the Nature and Causes
of the Wealth of Nations” in 1776
According to him the main purpose of all activities of human being is to collect wealth or resources. He
explained how a nation’s wealth is created. He considered that the individual in the society wants to
promote only his own gain and interest and in this, he is led by an “invisible hand” to promote the
interests of the society though he has no real intention to promote the society’s interests. Smith claims
that economics studies behavior of those human beings who have only one objective. That objective is the
earning of more and more wealth at any cost by any means. Human being of such nature in the words of
Smith is an "Economic Man". Production of wealth and its process of consuming is the dominant subject
matter of economics.

Criticism

Smith defined economics only in terms of wealth and not in terms of human welfare. At the beginning of
19th century some reputed philosopher ( Karlylal, Ruskin) severely criticized the definition of Smith
and condemned economics as a ‘dismal science’, as it taught selfishness which was against ethics.
However, now, wealth is considered only to be a mean to end, the end being the human welfare. Hence,
wealth definition was rejected and the emphasis was shifted from ‘wealth’ to ‘welfare. He defines
economics is “ Science of wealth” and undue emphasis on wealth producing activities And in this way he
narrowed down the scope of economics.

Unnecessary Emphasis on Wealth

The main drawback in wealth definition of economics had been its undue emphasis on wealth-producing
activities. Wealth was considered to be end in itself. Smith highly emphasized the importance of wealth in
economic life rather than human beings. He assigned primary objectives to wealth and only secondary
place to mankind. On the contrary, the critics pointed out that human life cannot be sacrificed for wealth
rather wealth should be used for the betterment of mankind.

Single Source of Wealth

In the view of A. Smith, the amount of wages that is earned by employed labors could be the only one
source of wealth of nation. The critics of the definition are however of the view that natural resources,
human resources, physical resources and capital resources also as sources of wealth. All these resources
put together can be utilized to earn maximum wealth by a nation.

Assumption of economic man is wrong

Smith assumed that every human being who wants to earn money by hook or crook is known as economic
man. The critics is that besides earning money, all human beings also own the qualities of human life
such as feelings of love, respect, dignity, self-esteem, sympathy, co-operation, friendship, trust which
might provide greater satisfaction rather than wealth in their lives.

Narrowed down the scope of economics

By stressing on the word ‘material wealth,’ the classical economists narrowed the scope of economics by
excluding all economic activities which are related to the production of non-material goods and services,
such as of doctors, teachers, etc.

The Neo-Classical View: Marshall’s Definition:

It was, however, the neo-classical school led by Alfred Marshall which gave economics a respectable
place among social sciences. Marshall laid emphasis on man and his welfare. Wealth was regarded as the
source of human welfare, not an end in itself but a means to an end.

At that time there was an identity crisis of defining economics. Alfred Marshall rescued it from this
identity crisis and provide a new dimension of economics. Alfred Marshall (1842 - 1924) wrote a book
“Principles of Economics” (1890) in which he defined “Political Economy” or Economics is a study of
mankind in the ordinary business of life; it examines that part of individual and social action which is
most closely connected with the attainment and with the use of the material requisites of wellbeing”.
Certain logical inferences can be drawn from Marshall’s definition. First, economics is concerned with
man’s ordinary business of life. It is related to his wealth-getting and wealth-using activities.

Features of Neo- classical school definition led by A Marshall

 Wealth is not an end itself. It is only a means to an end. End is promotion of human welfare.
 Primary objectives of economics is men and his ordinary business of life. And wealth is only the
secondary objectives.
 Economics studies both individual and social actions aimed at promoting economic welfare of
people and is most closely connected the attainment and with the use of material requisites of
wellbeing .
 Marshall makes a distinction between two types of things, viz. material things and immaterial
things. Material things are those that can be seen, felt and touched, (E.g.) chair, bread etc.
Immaterial things are those that cannot be seen, felt and touched. (E.g.) singing talent of a singer.
In his definition, Marshall considered only the material things that are capable of promoting
welfare of people.

Criticism of Marshall

Marshall considered only material things. Economics is not only concerned with material welfare. But
immaterial things, such as the services of a doctor, a teacher and so on, also promote welfare of the
people.
Distinction between material and non material things faulty . Marshall makes a distinction between (i)
those things that are capable of promoting welfare of people and (ii) those things that are not capable of
promoting welfare of people. Economics is also concerned with some harmful activities. But anything,
(E.g.) liquor, that is not capable of promoting welfare but commands a price, comes under the purview of
economics.

c) Marshall’s definition is based on the concept of welfare. Concept of economic welfare vague. But
there is no clear cut definition of welfare. The meaning of welfare varies from person to person, country
to country and time to time. However, generally, welfare means happiness or comfortable living
conditions of an individual or group of people. The welfare of an individual or nation is dependent not
only on the stock of wealth possessed but also on political, social and cultural activities of the nation.

L.Robbins definition of economics

L.Robbins in his books namely “ An Essay on the Nature and Significance of Economic Science “,
published in 1932 where states that Economics is the science which studies human behaviour as a
relationship between ends and scarce means which have alternative uses”

Features of economics ( L.Robbins)

 Economics is relate to human behavior of maximization satisfaction from scarce resources.

 Ends refer to human wants. Human beings have unlimited number of wants. Wants are scarce.
One satisfy, other emerges. So people allocate various resources to meet demands.
 Resources, the time and means available to satisfy these ends are limited and scarce in supply.
There is scarcity of a commodity, if its demand is greater than its supply. In other words, the
scarcity of a commodity is to be considered only in relation to its demand.
 The scarce means are capable of alternative uses. Hence, anyone will choose the resource that
will satisfy his particular want. Thus, economics is a science of choice. Such as land is capable of
being used for growing rice, sugarcane, wheat, maize, etc. Likewise, coal can be made use of in
factories, railways’ for generation of electricity, etc. At a time, the use of a scare resource for one
end prevents its use for any other purpose.
 The ends are of varying importance which lead to the problem of choice and selected the uses of
resources. Economics is related to all kinds of behaviour that involve the problem of choice.

Criticism of Robbins definition

 Robbins does not make any distinction between goods conducive to human welfare and goods
that are not conducive to human welfare. In the production of rice and alcoholic drink, scarce
resources are used. But the production of rice promotes human welfare while production of
alcoholic drinks is not conducive to human welfare. However, Robbins concludes that economics
is neutral between ends.
  In economics, we not only study the micro economic aspects like how resources are allocated and
how price is determined, but we also study the macro economic aspect like how national income
is generated. But, Robbins has reduced economics merely to theory of resource allocation.

 Artificial relations between ends and means: Fails to explain fully the nature of ends and the
difficulties associated with it.
 Difficult to separate ends from means: It is difficult to separate ends from means. Immediate ends
may be the means to the achievement of further ends and means by themselves may be the ends
of earlier actions.

 Economics not neutral between ends: Not possible for economists to dissociate economics from
ethics. Robbins’ contention that “Economics is neutral between ends” is unwarranted. Unlike
physical sciences, economics is concerned not with matter but with human behaviour. It is,
therefore, not possible for economists to dissociate economics from ethics.

 Ignore human welfare. Robbins’s formulation of economizing scarce means in relation to ends
for the solution of all economic problems is simply a valuation problem. This has tended to
narrow the jurisdiction of economics.

 Does not offer solutions to problems of LDC’s. Robbins definition does not cover the theory of
economic growth and development. Neglect the problems of growth and stability.

 Economics not merely a positive but also a normative Science. By concentrating exclusively on
the valuation problem, Robbins, has made economics a positive science.

 Robbins’ Definition too narrow and too wide. Robertson regards Robbins’ definition “at once too
narrow and too wide.” It is too narrow since it does not include organisational defects which lead
to idle resources. On the other hand, the problem of allocating scarce means among given ends is
such that it may arise even in fields which lie outside the jurisdiction of economics.

Samuelson’s Growth-Oriented Definition

Modern age is the age of economic growth. Its main objective is to increase social welfare and improve
the standard of living of the people by reducing poverty, unemployment, inequality of income and wealth,
malnutrition and to increase growth and stability of an economy and of the nation. Hence, economic
growth is the central point of all economic policies. Prof. Samuelson has given a definition of economics
based on growth aspects.

According to Samuelson, “Economics is the study of how people and society end up choosing, with or
without the use of money, to employ scarce productive resources that could have alternative uses to
produce various commodities, over time, and distribute them for consumption, now or in the future,
among various person or groups in society. Economics analyses the costs and the benefits of improving
patterns of resource use.”
Featurs of Samuelson’s Definition:

 Samuelson has emphasized the problem of scarcity of resources in relation to unlimited wants. He
has also accepted the alternative uses of resources.
 Includes time element in his definition when he refers to “over time” which makes the scope of
economics dynamic.
 It is applicable even in a barter economy where money measurement in not possible. A barter
economy has also to face the problem of scarcity or means in relation to ends.
 He gives importance to the problem of distribution and consumption along with that of
production. He emphasises on the consumption of various commodities produced overtime and
on their distribution and for future economic growth.
 By studying the problems of growth, Samuleson also highlights the study of macro-economics
and use modern technique of “cost-benefit analysis” to evaluate the development programme for
the use of limited resources.

Scope and subject matter of Economics

Like its nature, the scope of economics is a vexed question and economists differ widely in their views.
The continuous growth in the subject matter of economics has led to divergent views about the scope of
economics. A discussion about the true scope of economics includes the subject matter of economics,
whether economics is a science or an art, or is it a positive or a normative science. Economics is a social
science. The subject matter of economics deals with the analysis of economic problems of human being in
the society and the satisfaction of their wants. With the evolutionary changes of the state, society and its
civilization, the subject matter and scope of economics has changed and expanded.

Scope means province or field of study. In discussing the scope of economics, we have to indicate
whether it is a science or an art and a positive science or a normative science. It also covers the subject
matter of economics.

A) Economics is a science: Science is a systematized body of knowledge that traces the relationship
between cause and effect.

Manheim(1977) Science is an objective , accurate , systematic analysis of determinate body of empirical

data , in order to discover recurring relationships among phenomena.

For any discipline to be a science; (i) it must be a systematised body of knowledge; (ii) have its own laws
or theories; (iii) which can be tested by observation and experimentation; (iv) can make predictions; (v)
be self-corrective; and (vi) have universal validity. If these features of a science are applied to economics,
it can be said that economics is a science.

Applying these characteristics, we find that economics is a branch of knowledge where the various facts
relevant to it have been systematically collected, classified and analyzed. Economics investigates the
possibility of deducing generalizations as regards the economic motives of human beings. The motives of
individuals and business firms can be very easily measured in terms of money. Economics is divided into
consumption, production, exchange, distribution and public finance which have their laws and theories on
whose basis these departments are studied and analysed in a systematic manner.

Economics as a Social Science:

In order to understand the social aspect of economics, we should bear in mind that labourers are working
on materials drawn from all over the world and producing commodities to be sold all over the world in
order to exchange goods from all parts of the world to satisfy their wants. In this way, the process of
satisfying wants is not only an individual process, but also a social process. In economics, one has, thus,
to study social behaviour i.e., behaviour of men in -groups.

B) Economics is also an art: An art is a system of rules for the attainment of a given end. A science
teaches us to know; an art teaches us to do. Applying this definition, we find that economics
offers us practical guidance in the solution of economic problems. Science and art are
complementary to each other and economics is both a science and an art.

Positive and Normative Economics

Economics is both positive and normative science. It only describes what it is and normative science
prescribes what it ought to be. Positive science does not indicate what is good or what is bad to the
society. It will simply provide results of economic analysis of a problem. It makes distinction between
good and bad. It prescribes what should be done to promote human welfare. A positive statement is based
on facts. Robbins regards economics as a pure science of what is, which is not concerned with moral or
ethical questions. Economics is neutral between ends. The economist has no right to pass judgment on the
wisdom or folly of the ends itself.

A normative statement involves ethical values. It also suggests how it can be rectified. Economics is a
normative science of “what ought to be.” Marshall, Pigou, Hawtrey, Frazer and other economists do not
agree that economics is only a positive science. They argue that economics is a social science which
involves value judgements and value judgements cannot be verified to be true or false. It is not an
objective science like natural sciences. This is due to the following reasons.

First, the assumptions on which economic laws, theories or principles are based relate to man and his
problems. When we try to test and predict economic events on their basis, the subjectivity element always
enters.

Second, economics being a social science, economic theories are influenced by social and political
factors. In testing them, economists are likely to use subjective value judgements.

Third, in natural sciences experiments are conducted which lead to the formulation of laws. But in
economics experimentation is not possible. Therefore, the laws of economics are at best tendencies.
Therefore, economics is a positive as well as normative science

Scope of economics is discussed below:

1. As social science economics deals with the economic activities of human being. Persons day to
day money earning and money spending related activities constitute the subject matter of
economics.
2. Resources and various inputs are needed to satisfy people's wants and needs. So, the availability
of resources and their various uses are important subject matter of economics. Adam Smith has
termed economics as the “Science of Wealth”.
3. Wants of human being are unlimited. But the resources to satisfy the wants are limited and
scarce. Economics discusses how men can get the maximum satisfaction by using the scarce
means to satisfy wants on the basis of priority. So, as subject matter of economics, the scarcity of
resources is considered very important.
4. People's wants are related to production, exchange, distribution, investment , savings and
consumption. Again, currency, banking system, public finance, trade, market etc is also parts of
economic activities. Economics discuss these issues also. Besides, how economic development of
the country is achieved through the means of economic planning is also included in the subject
matter of economics.
5. Economics discusses the economic problems and economic activities and indicates proper
solution to these problems. Economics also discuses about the value judgment of human actions
and behavior.

Subject Matter of Economics

As discussed in detail above, the majority of economic thinkers from Adam Smith to Pigou have defined
the subject matter of economics as the study of the causes of material welfare or as the science of wealth.

Marshall, in particular, confined it to the consumption, production, exchange and distribution of wealth
by men engaged in the ordinary business of life. Men who are rational beings and act under the existing
social, legal and institutional set up. It excludes the behaviour and activities of socially undesirable and
abnormal persons like drunkards, misers, thieves, etc.

Professor Robbins, however, finds this subject matter as too restricted in scope to embrace all the facts.
He cites numerous examples to show that certain human activities possess a definite economic
significance but have little or no connection with material welfare. The same good or service may
promote material welfare at one time and under one set of circumstances and not at another time under
different circumstances. Thus economics is not concerned so much with the analysis of the consumption,
production, exchange and distribution of wealth as with a special aspect of human behaviour that of
allocating scarce means among competing ends.

Economics can be studied through a) traditional approach and (b) modern approach.

A) Traditional Approach:

Economics is studied under five major divisions namely consumption, production, exchange, distribution
and public finance.

Consumption: The satisfaction of human wants through the use of goods and services is called
consumption.

Production: Generally production means to create something. But human being can not create anything
or destroy anything. Man can only change the shape of any natural goods and create the utility of these
respective goods. For production, the resources like land, labour, capital and organization are needed.

“If consumption means extracting utility form, than production means putting utility into “ Fraser

“Production is the transformation of inputs into outputs. The inputs are what a firm buys (productive
resources) and output (goods and services produced) what it sells. Production as the creation of utility or
the creation of wants satisfying goods and services.”

Exchange: Goods are produced not only for self -consumption, but also for sales. They are sold to
buyers in markets. The process of buying and selling constitutes exchange.

Distribution: The production of any agricultural commodity requires four factors, viz., land, labour,
capital and organization. These four factors of production are to be rewarded for their services rendered
in the process of production. The land owner gets rent, the labourer earns wage, the capitalist is given
with interest and the entrepreneur is rewarded with profit. The process of determining rent, wage, interest
and profit is called distribution.

Public finance: Government finance is that portion of the economy which is concern with economic
activity of government.

This portion conduct with:

1. Level of government activities and expenditure

2. Means or mechanism by which the funds to carry out this activities arranged.
3. Effects of the expenditure and revenue measure upon the private sector of the economy and also
overall economy directly or indirectly
To Professor Dalton“ Public finance is concerned with the income and expenditure of public authorities
and with the adjustment of one with the other.”

To B.P.Tyagi “ Public finance deals with the income and expenditure of public authorities”

It studies how the government gets money and how it spends it. Thus, in public finance, we study about
public revenue and public expenditure.

B) Modern Approach

The study of economics is divided into: i) Microeconomics and ii) Macroeconomics.

1. Microeconomics analyses the economic behaviour of any particular decision making unit such as a
household or a firm. Microeconomics studies the flow of economic resources or factors of production
from the households or resource owners to business firms and flow of goods and services from business
firms to households. It studies the behaviour of individual decision making unit with regard to fixation
of price and output and its reactions to the changes in demand and supply conditions. Hence,
microeconomics is also called price theory.

Macroeconomics deals with the behaviour of aggregates like total employment, gross national product
(GNP), national income, general price level, etc. So, macroeconomics is also known as income theory.
Microeconomics cannot give an idea of the functioning of the economy as a whole. Similarly,
macroeconomics ignores the individual’s preference and welfare. What is true of a part or individual may
not be true of the whole and what is true of the whole may not apply to the parts or individual decision
-making units.

Importance in studying Economics

Studying economics prepares to deal with issues in a variety of fields, including business, law, politics,
history and accounting. Economics plays a vital role in making modern civilization function, so
studying economics helps experts learn how to prevent problems.

Studying economics also helps when running or managing a business.

Economics is the study of how people decide to use resources on an individual and a collective basis. It
examines the kinds of work people do and how much time they spend doing it. Economics also looks at
production, investments, taxation and how people spend and save money.

Economics provides a mechanism for looking at possible consequences as we run short of raw materials
such as gas and oil.
To what extent should we redistribute income in society? Is inequality necessary to create economic
incentives or does inequality create more economic problems.

Economics assumes people are rational. Economics assumes that people choose the activity which
optimises our utility.

As an economist one can make a living from predicting future economic events.

Economic changes often occur, such as a decrease in unemployment, an upswing in the stock market or a
trend of jobs being outsourced to other countries. During these changes, you can better understand the
events as they happen. When the government announces a change in policy, you’ll have the advantage of
being part of a group of curious people asking questions about current events and how they apply to your
curriculum.

Many benefits can be gained from studying economics:

Economics deals with vital current problems such as inflation, unemployment, monopply, economic
growth, pollution and poverty. Economics is a problem-oriented social science, and the problems with
which it is especially concerned are among the most disturbing of our age. Not only is economics relevant
to the big problems of society, but it also relates to personal problems – wages, unemployment, the cost of
living, taxes and so on.

Economic issues are an ever-present and inherent part of our lives: wealth inequality, globalization, the
impacts of climate change, unemployment and inflation. While many issues are fundamentally economic
in nature, most social, political and environmental problems have important economic consequences. The
social science of economics is our attempt to analyze, understand and solve these problems.

Studying economies helps students in following ways:

 Learn how to address complex local, national and international economic problems
 Communicate complex economic issues effectively
 Learn how to apply appropriate quantitative methods to a range of economic issues
 Develop a deep understanding of the economy 
 Develop research, analytical, leadership and creative thinking skills

Economics is about choice and is at the heart of all decision making individuals, businesses and
governments are all faced with making choices in situations with resources and scarce.
Economics is valuable not only for the topics it studies, but also for its methods of analysis.
Economics provides the knowledge and insight necessary to understand the impact of developments in
business, society and the world economy. It enables to understand the decisions of households, firms and
governments based on human behaviour, beliefs, structure, constraints and need. The study of economics
does help to understand various aspects of finance but economics is also about choice, scarcity,
opportunity, and the impact of decision making on aspects of society.

Nature, scope and subject matter of economics in Islam

This very importance of economics resulted in emergence of different economic systems in the world and
all those economic systems claim that they will bring back economic welfare. Today it is the reality that
those prominent and dominating economic systems failed to accomplish economic justice, prosperity,
eradiation of oppression, inequality and poverty from the society.

To give a more professional definition; referring Umar Chapra; ” that branch of knowledge which helps
to realize human well – being through an allocation and distribution of scarce resources that is in
conformity with Islamic teachings without unduly curbing individual freedom or creating continued
macroeconomic and ecological imbalances.” Also according to Chapra and many other Scholars; there
are four sources of Islamic systems; they are; 1

1) Quran, such a divine sources

2) Sunnah, the sayings and practices of the Prophet Mohammed (pbuh)
3) Ijma, the common belief of Muslim scholars
4) Qiyas, the other principles that are compared to those three sources.

Fundamental sources of economy in Islam is the Holy Quran and the Sunnah of the Prophet provide
guidelines for economic behavior. The basic source of the Shariah in Islam is the Quran and the Sunnah,
which include all the necessary rules of the Shariah as guidance for mankind.  The Sunnah further
explains these rules by the practical application of Prophet Muhammad, may the mercy and blessings of
God be upon him.  The expansion of the regulative rules of the Shariah and their extensions to new
situations in later times was accomplished with the aid of consensus of the scholars, analogical reasoning
- which derived rules by discerning an analogy between new problems and those existing in the primary
sources - and finally, through textual reasoning of scholars specialized in the Shariah.  These five sources
- the Quran, the Sunnah, consensus of the scholars, analogical reasoning, and textual reasoning -
constitute the components of the Shariah, and these components are also used as a basis for governing
economic affairs.  The rules which are contained in the Shariah are both constitutive and regulative,
meaning that they either lay the rules for the creation of economic entities and systems, as well the rules
which regulate existing one.

This applied to issues like property, money, employment, taxes, along with everything else. The social
science of economics, on the other hand, studied how to best achieve certain policy goals, such as full
employment, stability, economic growth, and improving productivity, and equity.
1
http://islamiceconomy.net/what-is-islamic-economics/
The Islamic economy is based on The Holy Qur'an and Sunnah of the Prophet (PBUH), which is capable
of solving the economic problems being faced by the world today. Islam consists of a set of beliefs which
organizes the relationship between the individual and his Creator. Islam regulates human behavior, and
one type of human behavior is economic behavior.  Economic behavior is dealt by Muslims as a means of
production, distribution, and consumption of goods and services.  In Islam, human behavior whether in
the economic area or others - is not value free; nor is it value neutral.   It is connected with the ideological
foundation of the faith.

“Islamic Economics” is a term often referred to as a sub – branch of Islamic jurisprudence; fiqh in Arabic.
The term of Islamic Economics literally translated from Arabic word “al iktisat’ul Islam, or rarely “al
fiqh’ul Iktisat.”

In the mid-twentieth century, campaigns began promoting the idea of specifically Islamic patterns of
economic thought and behavior. By the 1970s, "Islamic economics" was introduced as an academic
discipline in a number of institutions of higher learning throughout the Muslim world and in the West.
The central features of an Islamic economy are often summarized as: (1) the "behavioral norms and moral
foundations" derived from the Quran and Sunnah; (2) collection of Zakat and other Islamic taxes, (3)
prohibition of interest (riba) charged on loans.2

Therefore, the values and objectives of all “Islamic” economic systems must necessarily conform to, and
comply with, the principles derived from these fundamental sources. 

Economic activity in Islam

Economic activity in Islam is limited to the following functions:

Production function: 1) Demand/supply of prohibited goods should fall to zero; 2) Production of luxury
goods is checked; 3) Producers should not maximize profits; 4) Competition among producers should be
healthy

Consumption function: 1) Goods cannot be consumed; 2) Consumption can not be extravagant; 3)

Consumption should lead to an efficient and pure life; 4) Every individual should consume enough goods
to lead a reasonable life.

Distribution function: 1) Prices should be reasonable, neither too high nor low; 2) Interest must not be
paid; 3) Wealth concentration should be avoided.

The ideological basis of economic activity

The ideological basis in Islam may be summarized into six basic principles: 3

2
. https://en.wikipedia.org/wiki/Islamic_economics
3
.An introduction to the principles Islam has legislated to guide the economic system of society.  Part 1: The sources from which the laws that
guide economical activity are derived.By IslamReligion.com,Published on 13 Mar 2006 - Last modified on 16 Oct
2011(http://www.islamreligion.com/articles/277/viewall/)
• The cornerstone is that everything has to start from the belief in God as the Creator, Lord, and Sovereign
of the universe.  This implies willingness to submit to God’s will, to accept His guidance, and to have
complete and unqualified servitude to Him. 

• The second basic principle is that Islam, as a religion, is a complete way of life which includes moral,
social, ethical, economic, political, etc. Islam as a religion guides a person’s life in all its aspects. Qura’n
says,

“…And we have revealed to you in stages this book, a clarification of all things, guidance, a mercy, and
glad tidings…” (Quran 16:89)

• A third principle is that God created human beings on earth as His trustees. Every human being is to
fulfill a certain responsibility on this earth.  God has entrusted human beings with free will in order that
they live their lives according to the moral and ethical values that He Himself provided.  Islam provides
an opportunity in material progress, thereby combining moral, social, and material progress, all
interlinked in harmony.

• The fourth principle is that God, in order to help humankind to fulfill the responsibility of trusteeship,
has made everything in this universe subservient to them. 

“God is He Who made subservient to you the sea that the ships may run therein by His command, and
that you may seek of His grace, and that you may give thanks.” (Quran 45:12)

• The fifth principle is the principle of accountability in the Hereafter. The Day of Judgment Moreover, it
has more than one named, including the Day of Accountability, the Day of Resurrection, the Hour, and
the Last Day. Each of the names of that day highlights an aspect of it. Muslims believe that they will be
resurrected both physically and spiritually and will be asked by God about their lives, after which their
final destination will be determined.

"On the Day when every person will be confronted with all the good he has done, and all the evil he
has done, he will wish that there were a great distance between him and his evil." ( Surat Al-Imran,
Verse 30)

“And then on that Day (the Day of Resurrection) you will be called to account for every comfort and
delight [we bestowed upon you].” (Quran 102:8)

Every soul will taste of death. And ye will be paid on the Day of Resurrection only that which ye have
fairly earned. Whoso is removed from the Fire and is made to enter paradise, he indeed is triumphant. The
life of this world is but comfort of illusion.

• The sixth principle is that the variation in wealth among people in itself does not give a person either
inferiority or superiority. 
Plato divide the state into various classes. Firstly there is a group motivated wholly by appetite or desire.
These can be called artisans and secondly, there is a group motivated by spirit or courage which can be
called warriors or auxiliaries and thirdly, there is the class composed of men outstanding for their
wisdom. But Islam prohibit the class system .

“Indeed God increases provision to whom He pleases and straitens it [in regards to others]…” (Quran
13:26)

Halal and Haram

The business and activities which are prohibited in Islam should be totally banned. And all these
resources should be used for more productive purposes. Some of the industries are as follows alcohol,
liquor and related industry gambling and casinos, film, tobacco, interest . Islam has prescribed laws to
regulate earnings and expenditure. Muslims are not allowed to earn and spend in any way they like. The
must follow the rules of the Qur’an and the Sunnah:

►Any earnings from the production, sale and distribution of alcoholic drinks are unlawful (Haram), as
are earnings from gambling, lotteries and from interest (Riba) transactions (Al-Quran 5:90-91, 2:275).

►Earning by falsehood, deceit, fraud, theft, robbery and burglary is unlawful. Deceitful acquisition of
orphans' property has been particularly banned (Al-Quran 2:188, 4:2, 6:152, 7:85, 83:1-5).

►Hording of food stuff and basic necessities, smuggling and the artificial creation of shortages are
unlawful (Al-Quran 3:180, 9:34-35).

►Earnings from brothels and from such other practices which are harmful to society are also unlawful
(Al-Quran 24:23).

Guidelines for the fundamentals of Islamic Economic concept4

Guideline4 Position of Islamic Economics

Legal framework ▪ Law and the rule of law are important: linking government action to a
superior law – Shariah (which only contains some directly applicable
economic content) and Shariah compliant secular law (the formulation of
which gives great creative
leeway)
▪▪ Concepts of an Islamic economic system are compatible with different forms
of government (democracy, monarchy, etc.)
Property ownership and Legitimacy and protection of private property, even relating to the means of
employment production, positive assessment of entrepreneurial achievement (Prophet as a
role model)
▪▪ One’s own work/achievements should be the primary source of income and
legitimate wealth, assets must be used productively (desired growth and
employment effects)
Competition as a basis Justice is important: price fairness
Fair price = competitive price; state protection of competition against
monopolization; occasional state intervention in the case of “sensitive” prices
4
. Konrad-Adenauer-Stiftung: Guidelines for Prosperity, Social Justice and Sustainable Economic Activity, Berlin 2009.
Application of the Strong emphasis on opportunity and risk (particularly in the financial
principle of liability economy), skepticism towards limited liability legal structures, such as limited
companies (now acceptable), increasing importance of corporate governance
Stability of the economic Monetary stability is important: various models for stability-oriented monetary
environment systems (gold standard, commodity currencies, one hundred percent money,
monetary rules, etc.)
▪▪ Regulation of financial markets (riba ban, linking financial transactions to
the real economy, prohibition of purely speculative trading)
Provision of public Provision of a basic infrastructure (legal system, education, healthcare,
goods by the state mobility) recognized as a legitimate duty of the state; discussion about science
as a public good
▪▪ Correction of market/competitive failure, no structural or procedural
interventionism
Solidarity and social Poverty reduction as a primary economic objective
security ▪▪ Zakat at the core of a social security system that is independent
of the family (claim of the needy in respect of society – state is subsidiary)
▪▪ Calls for international solidarity within the Islamic world (umma)
▪▪ basic principle of insurance that conforms to Shariah Law (takaful):
mutuality, entry into a shared risk community instead of purchasing a risk
coverage
Incentive compatibility Legitimacy of secular taxation (in addition to zakat) is now uncontroversial;
exact structure can be
defined according to time/place/circumstances, considering incentive
compatibility
Sustainability Allah is the ultimate owner, human beings are merely custodians, duty extends
to future generations (idea of sustainability)
Open markets In principle, for all open goods, services, and labor markets, but
reservations with capital markets (issue of interest, speculative capital
transactions)

Economics and other social Sciences

Economics and Sociology

Sociology and economics as social sciences have close relations. Relationship between the two is so close
that one is often treated as the branch of the other. Economics and sociology are helpful to each other.
Economic relationships bear a close relation to social activities. At the same time social relationships are
also affected by economic activities

According to Thomas, “Economics is, in fact, but one branch of the comprehensive science of sociology
“. In the words of Silverman, “It may be regarded for ordinary purposes, as an offshoot of the parent
science of sociology, which studies the general principles of all social relations” 5.

Economics:

5
. Essay on Relationship Between Sociology and Economics By Pranav Dua(http://www.shareyouressays.com)
Economics deals with the economic activities of man. Dr. Alfred Marshall defines economics as “On the
one side the study of wealth and on the other and more important side a part of the study of man”. It can
also be understood as the science of wealth in its three stages namely: production, distribution and
consumption. Wealth constitutes the central problem of economics. It studies the interrelations of purely
economic factors and forces: the relations of price and supply, money flows, input-output ratios and the
like. Economics deals with the economics activities of man .Economics is the study of production,
distribution and consumption of goods and services. Economics is concerned with material welfare of the
human beings. It cannot go far ahead without the help of sociology and other sciences.

It studies the structure and function of economic organisations like banks, factories, markets, business
firms, corporations, transport, etc. Recently economists have shown more interest in motivation behind
man’s economic action.

Thomas regarded economics as the branch of sociology which is known as economic sociology and is use
to study economic process of the society. Some economist like Sam Bart, Max Weber, Pareto have
explained economic change as aspect of social change. According to them, the study of economics would
be incomplete without understanding of human society. The  society , structure, organization, institution,
strength and witness e.t.c are bound to effect economics activities of it's people. On the other hand,
according to Karl Marx, the social phenomenas are determined by economic forces . And social reality  or
social change can be explained in terms of economic forces.

Social interpretation of economic changes:

Some economists, like Sombart, Max Weber, Pareto, Oppenheimer, Schumpeter have explained
economic change as an aspect of social change. According to them, the study of economics would be
incomplete without an understanding of human society. Economic system is embedded in the social
structure as a part of it.

The society, its structures, its organisations, its institutions, its strength and weaknesses etc., are bound to
affect the economic activities of its people.

Max Weber, a German sociologist, made classical attempt to show how social factors, and particularly,
religious beliefs and practical ethics influence the economic activities of people. His contention is that the
progressive protestant ethic provided the stimulus to the rapid growth of capitalism in the West, whereas
Hinduism and Buddhism, with their so called fatalistic approach, failed to stimulate the growth of
capitalism in the East.

Economic interpretations of social changes:

At the other end, there are environmentalists like Karl Marx and Veblen according to whom social
phenomena are determined by economic forces. According to them social reality or social change can be
explained in terms of economic forces.

Sociologists have contributed to the study of different aspects of economic organisation. Knowl edge of
property system, division of labour, occupations, industrial organisation, etc., is provided by a sociologist
to an economist. Such matters as labour relations, standard of living, employer- employee relations, social
classes, socio-economic planning, socio-economic reforms, etc., are common to both economists and
sociologists.

The area of co-operation between sociology and economics is widening. Economists are now analysing
the social factors influencing economic growth. Economists are working with the sociolo gists in their
study of the problems of economic development in underdeveloped countries. Economists are more and
more making use of the sociological concepts and generalisations in the study of economic problems.

Further, there are certain socio-economic problems of greater importance to be studied by both
economists and sociologists. Such problems like poverty, beggary, unemployment, over-population,
unregulated industrialization have both social and economic implications. Combined studies of both the
experts in this regard may be of great practical help in meeting the challenges.

Economics deals with the economic activities of man. It deals with production, consumption and
distribution of wealth. The economic factors play a vital role in the very aspect of our social life. Total
development of individual depends very much on economic factors. Without economic conditions, the
study of society is quite impossible. All the social problems are directly connected with the economic
conditions of the people. That is why Marshall defines Economics as "on one side the study of wealth and
on the other and more important side a part of the study of man."

In the same way Economics is influenced by Sociology. Without the social background the study of
Economics is quite impossible. Sociologists have contributed to the study of different aspects of
economic organisation. Property system, division of labour, occupations etc. are provided by a sociologist
to an economist.

Economics and Political Science

Political Science is the science of political relations, political interactions and political institutions.
Economics is the science of money, wealth, material resources, economic relations and economic
institutions. Both are social sciences. Both are related and interdependent disciplines. Each affects the
other. Each borrows as well lends information, data and knowledge to the other.

Political science is the study of politics in theory and practice, while economics is the study of how
resources are produced, allocated, and distributed. As well as dealing with subjects that often relate to one
another in everyday life.

Economics deals with how individual consumers and businesses make production, purchasing,
investment, and saving choices. It also looks at how an entire economy works and the way policies can
affect the combined effects of microeconomic decisions.

The most prominent link between political science and economics is in the practicalities of government.
There are many topics in which stances can have both a political and economic element, such as whether
a government should attempt to reduce inequalities across society, work towards equalities of
opportunity, or avoid any interference wherever possible.
One of the most common crossovers between these social sciences is rational choice theory. This is the
study of, and attempt to model, the ways in which individuals make choices. It could be argued that
rational choice theory is an economic theory that is contradicted by political reality that is harder to
objectify

Economics is concerned with studying and influencing the economy. Politics is the theory and practice of
influencing people through the exercise of power, e.g. governments, elections and political parties.In
practise there is a strong relationship between economics and politics because the performance of the
economy is one of the key political battlegrounds. Many economic issues are inherently political because
they lend themselves to different opinions.

Political ideology influencing economic thought

Many economic issues are seen through the eyes of political beliefs. For example, some people are
instinctively more suspicious of government intervention. Therefore, they prefer economic policies which
seek to reduce government interference in the economy. On the other hand, economists may have a
preference for promoting greater equality in society and be more willing to encourage government
intervention to pursue that end.

Economics needs political support

However, whether various policies get implemented depends on whether there is political support for
them.

Contribution of Political Science to Economics:

(1) Stable government is a condition of economic development:

The nature, scope and progress of economic development depend upon the stability of government.
Instable government weakens the economic system.

(2) Politics determines economic goals:

The government of a state i.e. the political system selects and defines economic goals which are to be
secured for the people. All economic planning is done by the government of the state. Political leaders
determine economic goals and policy and the economic experts help them.

(3) Political ideology determines the economic system:

The political ideology of the power-holders always conditions the economic system. The economic
system has to work in the environment generated by political relations. Economics has to closely follow
political relations, goals and policies which are studied by Political Science.

(4) State solves economic problems:

No doubt economic problems affect the political system of the society, yet it is the political system which
formulates and implements public policies which are considered essential for solving economic problems.

(5) Budget—the back bone of economy is a political instrument:

Budget always determines the economic policy and economic health of the state. Budget is prepared by
the government. Budget-making and Budget-passing are political exercises and these are the determinants
of the economy of a state. Economics is guided by Politics and Economics always takes the help of
Political Science for securing right economic policies and goals.

Thus, Political Science and Economics are two highly and closely related interdependent social sciences.
The two cannot be separated. Their boundaries overlap and cross.

Economic development of any state depends upon the state affairs.The function of the state is to maintain
relations between labour and owners of industry, resolved conflict between them, to build up new
industries to increase foreign trade and investment etc which is also the indicator of economic
development.

Political situation based on economic structure. Political instability results failure of economic system.
World noted movement, Fascism, socialism, French revolution occurred due to economic and political
reasons.

Economics and Public Administration

The major objectives of administration during 18th and a good part of 19th century were maintenance of
law’and order and collection of revenue. In time of industrial evolution there is a radical transformation of
the concept of the state. This was due to its being compelled to become more responsive to the needs of
the masses, especially the working classes than ever before. Industrial Acts fixing working hours and
minimum wages extended an enormous pressure on the administration. Goals like the establishment of a
socialist society led to the expansion of the role of administration in development. With the industrial
revolution the state has been confronted with the economic and industrial matters for a numbers of
reasons. International economic competitions made it necessary for the state to protect home industries
and encourage foreign trade. The fast growing public sector (i.e. industries directly under the government)
illustrates the relationship between Economics and Public Administration. Indeed, the expanding role of
the public sector and a direct intervention of the government to regulate extreme swings in the economy
place a great burden on public administration.

Today there is a close relationship between Economics and Public Administration. Economic policy is the
greatest task before the public administration to carry out and implement. During the 18th and the early
19th century when the state followed a policy of laissez faire, public administration was not so much
dominated by economic problems as is the case today.

Later in the interest of social justice the state directly entered the field of business and began to run its
own enterprises with the result that it has become one of the foremost duties of an administration to
understand the economic problems of the country fully. Every administrative policy had to be evaluated
in terms of its economic consequences.

Governments are directly responsible for the improvement in the standard of living of the people. The
administration must fight adverse business cycles and depressions, secure employment for all, maintain a
favourable balance of trade and project the financial stability of the country.

The increasing pre-occupation of the state with economic matters has led to the ideas of the economic and
industrial service distinct from the traditional civil service in the methods of recruitment, promotion and
tenure.

There is clamour for introducing more and more business methods in the functioning of the government.
Besides, public finance, budgeting and fiscal administration are topics common to both economics and
public administration.

Planning has been’chosen as the means!to realise the goal of Socialist society, If efficient implementation
of plans ensures goal attainment, the task of the administrators is to choose methods for effective
implementation of plans. The administrators today, have been entrusted with the responsibility of
managing railways, insurance companies and tackling issues concerning agriculture, banking, etc. They,
therefore, have got to have an understanding of the economic problems of the country.

Administrative policy formulated and evaluated through economic consequences. Public administration
houses the implementation of government policy and an academic discipline that studies this
implementation and that prepares civil servants for this work. As a "field of inquiry with a diverse scope"
its "fundamental goal... is to advance management and policies so that government can function." Some
of the various definitions which have been offered for the term are: "the management of public
programs"; the "translation of politics into the reality that citizens see every day"and "the study of
government decision making, the analysis of the policies themselves, the various inputs that have
produced them, and the inputs necessary to produce alternative policies.