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Islamic economics: Less discussed issues


Information Technology 

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 above.

Islam prohibits;

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 situation.

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.