economics: Less discussed issues
Size of a city has definite economic implications
but has received scant attention of economic managers
By M. Idrees Khawaja
Oct 23 - 29, 2000
Being neither an authority on Islam nor economics, I
do not intend to prescribe, as to what is allowed and what is barred in
terms of Islamic Economics but rather seek to contribute a tiny morsel
to the enormous food for thought that is already available in the form
of books by learned economists. However, the general public, not being
in the habit of reading books, need to be educated through popular print
media, that is newspapers and magazines. Following are a few matters
about which debate shall take place in the aforesaid media.
Price Fixation: The fundamental principle of the
market economy is that, though sale price of a product is essentially
linked to its cost of production, still the market price is determined
by the forces of demand and supply. If there is shortage of a product,
i.e. demand is greater than supply, the demand-supply equilibrium stands
disturbed, however, the balance, is almost immediately restored through
the medium of price. Producers start charging higher price (more than
what is warranted by cost of production plus normal profit.) therefore
demand decreases and the equilibrium is restored. But now the consumers
have to pay more and the producers are earning supernormal profits.
Islam persuades, (if not compel) Believers, to do
their utmost for keeping the prices linked to cost of production. To
achieve the objective, it tries to maintain a balance between demand and
supply without the medium of price. The following substantiates the
1 ) Stockholding. That is, shortage should not
be created to raise prices.
2) Would-be buyers from quoting a price, when
a deal is being negotiated between another would-be buyer and the
seller. The logic perhaps is to obviate the possibility of there being
two buyers for a single commodity i.e. demand greater than supply.
Given the above, perhaps we can infer that if demand
is greater than supply, Islam prefers that the commodity concerned be
sold on a first come first served basis rather than initiating
competition between buyers, leading to price increase. This is in sharp
contrast with capitalist system and has obvious merits. Inflation
remains under control and a poor does not witness, a commodity going out
his reach into lap of a rich. Thus out of the numerous causes of agony
between haves and have-nots, at least one stands capped. Needless to
mention that inter group harmony is the key to peaceful living.
Though, Islam does not fix an upper ceiling on
profit, margin for understandable reasons but it does not imply that,
producers or sellers' are free to charge any price they like. The
Islamic principles of Adal and Ehsaan do not allow a
producer to enjoy supernormal profits at the cost of buyers. Though it
remains to be decided as to what is normal profit, nevertheless it is
obvious that if monopoly and other forms of imperfect competition are
used for earning supernormal profits, than these do not have a place in
Islam. Oligopolies (few producers for a product) quiet often engage in
explicit and implicit collusion, to jointly fix, prices or combined
output level. Governments may have been, to some extent, successful in
curbing explicit collusion by prohibiting the formation of Cartels, but
they have failed at the tacit collusion front. We see similar prices for
Coke & Pepsi etc. It is hard to imagine that, two different
producers having varying level of management capabilities and enjoying
different economies of scale, will have the same cost of production.
Costs are certainly not exactly alike, then why are the sale prices
alike. The answer is, because of tacit collusion. Governments do not
have the means to prove tacit collusion and thereby control it. But the
Islamic principle of Adal enjoins upon Muslims to, voluntarily,
refrain, from charging supernormal profits and therefore from collusion.
It is regrettable that OPEC, whose quite a few members are Islamic
countries, openly colludes, to fix lower than required output leading to
higher price, to the detriment of oil consumers. An edict, from a person
qualified to pass one, is needed on the subject.
Size of a city:
Size of a city has definite economic implications but
has received scant attention of economic managers. Islam calls for
establishment of small towns, but man, being driven by monetary
consideration, tends to accumulate production facilities in cities where
the cost of production is lesser. Karachi is business hub of Pakistan
because it's a Port city and because its population was relatively more
literate in 1947. Let's study Karachi as a test case to determine, what
happens to a society when a city grows in size to a point, where either,
job opportunities are disproportionately higher than neighbouring areas
(cities or countries), or needs of the city cannot be taken care of by
native population, for one or the other reason. Had some of the many
mills that had been set-up from sixties onward in Karachi, had been
established upcountry, what would have been the consequences? Following
are the possible minuses and pluses.
Minuses are; higher production cost, higher prices
and lesser profits for businessmen.
Pluses are; lesser migration from up-country, smaller
multi-ethnic community, lesser expenditure on maintaining law and order,
lesser pressure on civic amenities and possibility of good governance.
Perhaps, the pluses are qualitatively more than the
minuses. In nutshell, what was gained in terms of lower cost has been
offset by abnormally high expenditure on maintaining law and order and
relocation of industry upcountry, after the poor law and order
Besides the monetary aspect, there is a social
contour as well to increasing the size of a city beyond a certain limit.
When a city grows in size, it creates job opportunities not available
elsewhere. This leads to migration. Husbands and sons migrate in pursuit
of monetary benefits, leaving behind young wives and aging parents in
native towns, to face the thin and thick of life all by themselves. This
social aspect has been ably expressed by our men of letters under the
label of Dubai syndrome, but economists having been trained to think in
terms of cost of production, balance of payments, GDP and per capita
income, have remained concerned with remittances part alone.
It is the failure to make social accounting, part of
the economic and financial plans, which turns the plans upside down.
Indicators, which account for monetary as well as social aspects need to
be framed for determining the optimum size of a city and than conscious
efforts, on government's part, are required, for stopping or at least
minimizing growth of cities, beyond the optimum size. If man refuses to
do what is absolutely necessary, then nature does the needful but the
method is more painful and takes the man off-guard.
Non-value added transactions:
It's a common practice in our society that people
purchase residential plots and than sell them after some time when the
prices have risen, thereby making capital gain. Are, such transactions
permissible in Islam? Perhaps the answer is no. The reason being that,
such capital gains, create money however no goods or services are
created there against. Money supply increases and becomes more than the
worth of goods at current prices. There, being no additional supply, the
newly created money is spent on existing goods. Competition among
buyers, increases, hence the prices rise.
That's how inflation starts, (it's one of the many
causes) and then goes on because of wage-price spiral. The individual
gains by way of capital gain, and the society looses by being forced to
put up with enhanced inflation, without being compensated in terms of
overall economic growth. Islam does not allow an individual, to make
gains at the cost of society e.g. an individual, residing in a locality
where all the houses are single storied, is prohibited, by Islamic
injunctions, to construct a second floor without permission of his
neighbours. Why this prohibition, because an additional floor will
effect the privacy of neighbours. Holding the interest of neighbours
supreme, an individual is barred from having more accommodation on the
same piece of land, if the additional construction effects others in
neigbourhood. So, perhaps we can infer, that whenever there is clash of
interest between society and an individual, if the Islamic spirit is to
prevail, then the society stands to win. Going by this principle all
non-value added transactions like speculative trading (for the sake of
moneymaking) in land, foreign currency, shares of companies, gold etc.
are perhaps forbidden or at least not liked by Islam, because, such
transactions are beneficial (due to capital gain) for only individuals
involved, and inimical (due to inflationary impact) for society at
large. However only an expert on the subject, can sound the verdict.