Islamic Economic System, Capitalism and Socialism

PROJECT IN BRIEF PROJECT PROJECT TITLE: TITLE: Islamic Islamic Econom Economic ic System, System, Capitalism and Socialism SUBMITTED TO: Sir Naveed Khan

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Kira Kiran n Afsh Afshan an Huma Naz

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Kiran Kira n Afshan and Huma Naz

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Islamic Economic System, Capitalism and Socialism August 13, 2009 CHAPTER 1.................................................................................................................3 1.................................................................................................................3 ISLAMIC ECONOMIC SYSTEM...................................................................................3 SYSTEM ...................................................................................3 CHAPTER 2...............................................................................................................11 2...............................................................................................................11 CAPITILISM ECONOMIC SYSTEM.............................................................................11 SYSTEM.............................................................................11 CHAPTER 3...............................................................................................................19 3...............................................................................................................19 Socialism...............................................................................................................19 Socialism ...............................................................................................................19 Chapter 4.................. 4..................................... ....................................... ........................................ ........................................ ..................................... .................23 23 COMPARISON BETWEEN THE ISLAMIC ECONOMIC AND OTHER ECONOMIC SYSTEM COMPARISON ....................................... ........................................................... ....................................... ....................................... ................................. ............. ...............23 ........... ....23 DIIFFERENCE BETWEEN ISLAM AND CAPITALISTM: .............................................24 THE DIFFERENCE BETWEEN ISLAMIC AND COMMUNIST SYSTEM OF ECONOMY: .25











Islamic Economic System, Capitalism and Socialism August 13, 2009

CHAPTER 1 ISLAMIC ECONOMIC SYSTEM











Islamic Economic System, Capitalism and Socialism August 13, 2009 Islam is an entire way of life, and Allah's Guidance extends into all areas of our lives. Islam has given detailed regulations for our economic life, which is balanced balanced and fair. fair. Muslims are to recognize that wealth,earnings, and material goods are the property of God, and we are merely His trustees. trustees. The principles of Islam aim at establishing a just society society where in everyone will behave responsibly and honestly. The Arabic words Ma'eeshat and Aish share the the same same root root.. Ma'eeshat also also me mean ans s "eco "econo nomy my"" and and " Aish" me mean ans s "ple "pleas asur ure e and and happiness". There is no doubt that if the economy of a nation is good, it will have a life of pleasure and happiness. In other words, if Ma'eeshat of a country is good, the nation will have Aish. In 20:124, Allah says, "Those who will disregard my Message [ZIKR], their economy will be in dire straits and they will be resurrected blind on the Day of Judgment" [20:124].

4 Key Aspects of an Islamic Economic System 1. Need Fulfillment.

Respe ctable source of earning: ear ning: 2. Equitable distribution of income and wealth. 3. Growth and stability. Islam - Places a greater greater emphasis on duties than on rights. rights. Under Islam, the criteria criteria for determ determini ining ng a man's man's worth worth are not his race, race, family family,, positio position n or wealth wealth but rather rather his character (which is a reflection of his faith and practice) and service to humanity. Lifestyles that reflect arrogance, pomp, grandeur or moral laxity lead to extravagance and waste and result in unnecessary pressure on resources, reducing societies' ability to satisfy the needs of all. They also promote promote unscrupulous ways ways of earning and generate inequalities of income beyond the normal distribution that is warranted by differences in skill, initiative, effort and risk. risk. The The adoptio adoption n of Islam Islam protec protects ts societ society y form form going going to excess excess in lusts, lusts, luxury luxury and pleasure, equally, in following restraint and privation. A 'real' Muslim is he whose goodness and efforts are directly aimed to benefit the community. community. All values conceived on the basis of utilitarianism and self-interest can be disputed, whereas human society needs to be based on values of/on (for) 'good' or 'evil,' and 'right' or 'wrong' which are not disputed even if they benefit the 'have-nots' 'have-nots' at the expense of the 'haves.' 'haves.' Without Without the feeling feeling of Moral obligation to make sacrifice, what is it that can motivate a rich man to forgo his luxuries and economic resource use for the need satisfaction of all. Neoclassical, Keynesian & Socialist Economics are all secularist in their approach to the realization of human well-being and analys analysis is of human human proble problems. ms. They They all place too much much emphas emphasis is on consum consumptio ption n and material material possessi possessions ons as a source source of human happiness. happiness. Equitable Equitable distribution distribution requires requires a motivation to serve social interest i nterest even if this involves sacrifice of self-interest.

Islamic Economic Strategy: Consists of reorganizing the entire economic system with a set of four indisputable and mutually reinforcing elements:











Islamic Economic System, Capitalism and Socialism August 13, 2009 3. Restructuring the whole economy, with the objective of realizing the "Maqasid" (see below) in spite of scarce resources. 4. A positive and strong goal-oriented role for the government. This must provide: Fulfillment.. - assure assure everyon everyone e a standa standard rd of living living that is humane humane and 1. Need Fulfillment respectable.

2. Respectable source of earning. - Need fulfillment must be through individuals own effort. 3. Equitable distribution of income and wealth. - $ do not only circulate among the rich. 4. Growth and stability.

Important Importa nt institutio insti tution n of Islamic Islami c economic system s ystem : Most important institution of Islamic economic system are: 

       

Private ownership The system of zakat and usher Khamas and kharaj Law of inheritance Spending and sadqat Sharakat and mazarbat Rule and regulation of commercial dealing Prohibition of interst and gambling State responsibility of providing necessities of life

Goals 1). Achievement of welfare:

The higher goal of Islamic economic system is the achievement of welfare of human beings. As in Islam prohibited prohibited the interestfor interestfor the well beings of people. Muslims are not to deal in interest. "O you who who believe! believe! Devour Devour not usury usury,, doubled doubled and multiplied. multiplied. But fear Allah Allah thatyou thatyou may really prosper." (3:130) This prohibition is for all interest-based transactions whether giving or receiving, whether dealing with Muslims or non-Muslims. It is reported that the Prophet Muhammad (peace be upon him) cursed cursed those those who who pay interes interest, t, those those who receiv receive e it, those who who write write a contract based on it, and those who witness such a contract. It is forbidden to gain property or wealth by fraud, deceit, theft or other falsehoods. 2).Economic development:

For ec econ onom omic ic gr grow owth th to be bene nefi fitt hu huma man n de deve velo lopm pmen entt in a ju just st an and d Is Islam lamic ic ec econ onom omic ic environment, it must contain,  

Full Employment Security of Income











Islamic Economic System, Capitalism and Socialism August 13, 2009 Interest (Riba) is prohibited! The principle is that any profit which we should seek

should be through our own exertions and at our own expense, not through exploiting other people or at their expense. 3).Relief from poverty and starvation:

an important important goal of Islamic Islamic economic economic system is the relief from starvation starvation and poverty poverty.. Zakât and Sadat play an important role in this purpose. "And they have been been commanded no more than this: this: to worship Allah, offering offering Him sincere devotion, being true true in faith. To establish regular prayer, prayer, and to give give zakat. And that is the religion right right and straight." (98:5) Every Muslim who owns wealth, more than a certain amount to meet his or her needs, must pay a fixed rate of Zakât to those in need. Zakâtis a means of narrowing the gap between the rich and the poor, and to make sure that everyone's needs are met. Muslims are encouraged to give constantly in charity. charity. "Your "Your riches and your your children may be be but a trial. Whereas Allah, with Him is the highest reward. reward. So fear Allah as much as you can, listen and obey, obey, and spend in charity for the benefit of your own souls. souls. And those saved saved from the selfishness of their own souls, they are the ones that achieve achieve prosperity." prosperity." (64:15-16). The Prophet Muhammad once said that "nobody's assets are reduced by charity." charity." 4).Economic Well-Being & the Moral Norms of Islam

We read in the Quran these verses: “Eat and drink of that which God has provided and act not corruptly, making mischief in the world” (Al-Baqarah 2:60). “O you who believe! Forbid not the good things which God has made lawful for you and exceed not the limits. Surely, God loves not those who exceed the limits. And eat of the lawful and good that God has given you, and keep your duty to God in whom you believe” (Al-Ma'idah 5:87-88). These verses of the Quran, and there are many others like these, strike the keynote of the Quranic message in the economic field. Islam urges Muslims to enjoy the bounties provided by God and sets no quantitative limits to the extent of material growth of Muslim society. It even equates the struggle for material well-being with an act of virtue.“When the prayer is ended, then disperse in the land l and and seek of God’s bounty” (Al-Jumu`ah 62:10). The Prophet Muhammad has also said:"If God provides anyone of you with an opportunity for earning livelihood, let him not leave it unexploited until it is exhausted or becomes disagreeable to him." (Ibn Majah)













Islamic Economic System, Capitalism and Socialism August 13, 2009 suitably high rate of economic growth should be among the economic goals of a Muslim society.

Islam has prohibited begging and urged Muslims to earn their livelihood. From this premise one may infer that one of the economic goals of a Muslim society should be to create such an economic environment that those who are willing to and looking for work are able to find gainful employment in accordance with their abilities. If this is not accomplished then the Muslim society cannot succeed even in its spiritual aims, because those unemployed would be subjected to a life of extreme hardship unless they depend on the dole, or resort to begging or immoral practices, all of which, particularly the last two, would be repugnant to the spirit of Islam. This stress of Islam on economic wellbeing springs from the very nature of its message. Islam aims at making life richer and worth living and not poorer, poorer, full of hardships. 5).Equitable of distribution of wealth:

Zakat and sadqat play an important role for the distribution of wealth. The root of the word Zakât Zakât (t) is Z-K-W Z-K-W (za-kaf-waw (za-kaf-waw), ), which which leads to the following following meanings: To increase, increase, To grow, to thrive, to increase in the purity of heart; to increase in integrity. Zakât means increase or augmentation or growth or development. Sadaqa is what is given voluntarily for the sake of Allah to obtain the recompense from Allah when the person who does so aims at conformit conformity y with the truth in his deed. SADAQA is voluntary while ZAKA is obligatory. For For zakat, zakat, there there are direct direct comman commands ds of Allah Allah in the imper imperativ ative e while while SADAQA is not enjoined in the Quran in the t he imperative.

Some differences between ZAKA and SADAQA: SADAQA: 1. Zaka is obligatory obligatory while Sadaqa is supererogat supererogatory ory or voluntary voluntary.. The money for the purpose of Zaka can be taken by force by the authorities while for Sadaqa, this is not the











Islamic Economic System, Capitalism and Socialism August 13, 2009 





preserve human liberty give to the human freedom to relies his potential in any sphere of his choicegives him complete control over the use and spending of resources earned by lawful mean . This would be the manifestation of a continuous effort to use, through research and improvem improvements ents in technology technology,, the resources resources provided by God for the service and betterment of mankind, thus helping in the fulfillment of the very object of their creation. impose no restriction on him except that he remain within the limits setup by the will of Allah

7). Elimination of waste:

A Muslim should be be responsible in spending spending money. money. Extravagance and waste are strongly strongly disc discou oura rage ged. d. "[Th "[The e Serv Servan ants ts of Allah Allah are] are] Thos Those e who, who, when when they they spen spend, d, are are not not extravagant and not stingy stingy,, but hold a just balance between those those extremes." (25:67). "O Children of Adam! Wear your beautiful apparel apparel at every time and place of prayer. prayer. Eat and drink, but waste not by excess, for Allah loves not the wasters." (7:31)

Function of the Islamic economic system

The decision which the economic system of Islam has to take in the practical field are called its function. function. This decision decision determined determined to what things are produced, produced, for whom they are produced and which mode of production are used. Islamic economic system regulates this whole economic struggle by its i ts moral values. These values are the justice, pity, pity, benevolence and cooperat cooperation ion.. The source source of these these value values s is Quran Quran and tradi traditio tion. n. This This is the main main difference between Islamic economics and other economic system.

Ideological foundation founda tion of Islamic Isl amic economics ec onomics :











Islamic Economic System, Capitalism and Socialism August 13, 2009 6). It creat creates es a sense sense of respon responsib sibilit ility y. Man should should perfor perform m all action action in the econom economic ic struggle and make all efforts to utilized resources.

Fundamental Fundame ntal features feat ures of the th e economic system s ystem of Islam Isl am: 1).Use of lawful means for earning livelihood

It prov provid ides es all all lawf lawful ul me mean ans s for for earn earnin ing g of weal wealth th and and disc discou oura rage ges s wealt wealth h with with out out work."Wealth without work is a deadly sin". According to the Holy Quran, That man can have nothing but what he strives for;

Al-Qur'an, 053.039 Almaysir, Almaysir,

ُ‫ِر‬‫ْي س‬َ‫لم‬‫ ا‬which is usually translated as gambling, but includes any

form of 'easy money', has been forbidden in the Quran (see Al-Quran, Chapter 2 verse 219 and chapter 5 verse 90-91). 2). Prohibition of amassing wealth

The Arabic word " Suht" as it appears in 5:42, 5:62, 5:63, has the following meanings: A thing that is prohibited, forbidden or unlawful. Any money or property that is forbidden, not lawful to be gained or devoured “Suht" in all the above meanings is strictly forbidden by the Quran. In 5:41-42, Allah says that for those who make money by illegal, unlawful, forbidden or prohibited means or trade or by taking bribes, there is disgrace in this world and a great torment in the hereafter. In 5:62, Allah has described it as superlatively evil and bad deed. "Why do not the rabbis and the priests forbid their evil-speaking and their devouring of illicit gain? Verily evil is their handiwork." [5:63] 3). Circulation of wealth

As in Quran Allah says: 

Do not be a spendthrift but feed the indigent, instead [17:26]



Allah commands you to give alms [ sadaqa] to the the indigent indigent [9:60] Do good to the indigent till their economic imbalance is no more [2:83, 2:215, 4:36]











Islamic Economic System, Capitalism and Socialism August 13, 2009 Other important features of Islamic economic system are economic freedom, flexibility and price mechanism of goods.












CHAPTER 2 CAPITILISM ECONOMIC SYSTEM













Islamic Economic System, Capitalism and Socialism August 13, 2009 social, and religious dispersion. The earliest form of capitalism is seen in feudalism, the political and economic system based on the relation of lord to vassal held on conditions of homage and service. The earliest establishment of capitalism originated in Rome through mercantilism. Mercantilism involves the distribution Capitalism, Capitalism, economic economic system system in which which private private individuals individuals and business business firms carry carry on the production and exchange of goods and services through a complex network of prices and markets. Although rooted in antiquity, capitalism is primarily European in its origins; it evolved through a number of stages, reaching its zenith in the 19th century. From Europe, and especially from England, capitalism spread throughout the world. The term capitalism was first introduced in the mid-19th century by Karl Marx, the founder of communism. Free enterprise and market system are terms also frequently employed to describe modern non-Communist economies. Sometimes the term mixed economy is used to designate the kind of economic system most often found in Western nations. The individual who comes closest to being the originator of contemporary capitalism is the Scottish philosopher Adam Smith, who first set forth the essential economic principles that undergird this system. In his classic An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Smith sought to show how it was possible to pursue private gain in ways that would further not just the interests of the individual but those of society as a whole. Society's interests are met by maximum production of the things that people want. In a now famous famous phrase, phrase, Smith said that the combinatio combination n of self-inte self-interest, rest, private property property, and competition among sellers in markets will lead producers “as by an invisible hand” to an end











Islamic Economic System, Capitalism and Socialism August 13, 2009 intensify this competition but also tilt the balance in favour of dominant classes. Moreover hedoni hedonism sm will will provi provide de moral moral justif justifica icatio tion n the exploi exploitati tation on of the upper upper classe classes. s. In the presence of these factors capitalism system can never be free of the evil of exploitation.

Characterist Charac teristics ics of capitalis capi talistt economies economie s: A set of broad characteristics are generally agreed on by both advocates and critics of capitalism. These are a private sector, sector, private property, free enterprise, profit, unequal distribution of wealth, competition, self organization, the existence of markets (including the labor market) and the capitalist class and the proletariat, and the pursuit of self-interest. 1).Private property rights

An essential characteristic of capitalism is the institution of rule of law in establishing and protecting protecting private property, property, including, including, most notably notably,, private private ownershi ownership p of the means of production. Private property was embraced in some earlier systems legal systems such as in ancient Rome but protection of these rights was sometimes difficult, especially since Rome had no police. Such and other earlier system often forced the weak to accept the leadership of a strong patron or lord and pay him for protection. It has been argued that a strong formal property and legal system made possible

I. Greater independence; II. Clear and provable protected ownership; III. The The stan standa dard rdiz izat atio ion n and and inte integr grat atio ion n of prop proper erty ty rule rules s

and and

prop proper erty ty











Islamic Economic System, Capitalism and Socialism August 13, 2009 The notion of a "free market" where all economic decisions regarding transfers of money, goods, and services take place on a voluntary basis, free of coercive influence, is commonly considered to be an essential and exclusive characteristic of capitalism. In systems where individuals are prevented from owning the means of production (including the profits), or coerced to share them, not all economic decisions are free of coercive influence, and, hence, are not free markets. In an ideal free market system none of these economic decisions are decree decreed d by govern governmen ment. t. Instea Instead, d, they they are determ determine ined d in a decent decentral ralize ized d manner manner by individuals individuals trading, trading, bargaining, bargaining, cooperating, cooperating, and competing competing with each other. other. In a free market market,, govern governmen mentt may act in a defens defensive ive mode mode to forbid forbid coerci coercion on among among market market participants but does not engage in proactive interventionist coercion. Nevertheless, some authorities claim that capitalism is perfectly compatible with interventionist authoritarian governments, and/or that a free market can exist without capital ism. 3). Profit

The pursuit and realization of profit is an essential characteristic of capitalism. Profit is derived by selling a product for more than the cost required to produce or acquire it. Some consider the pursuit of profit to be the essence of capitalism. Sociologist and economist, Max Weber, says that "capitalism is identical with the pursuit of profit, and forever renewed profit, by means of conscious, rational, capitalistic enterprise." However, it is not a unique chara characte cteris ristic tic for capital capitalism ism,, some some hunter hunter-ga -gathe therer rers s pract practice iced d profit profitable able barter barter and monetary profit has been known since antiquity. Opponents of capitalism often protest that private owners of capital do not remunerate laborers the full value of their production but keep a portion as profit, claiming this to be exploitative. However, defenders of capitalism











Islamic Economic System, Capitalism and Socialism August 13, 2009 Responsibility of Business is to Increase Profits, as he asserts that business has no social responsib responsibility ility other than to increase profits and refrain refrain from engaging in "deception "deception or fraud." He maintains that when business seeks to maximize profits, while respecting the guidelines of a free market by not defrauding or deceiving, it almost always incidentally does what is good for society. Friedman does not argue that business should not help the community but that it may indeed be in the long-run self-interest of a business to "devote resource resources s to providing providing amenities to community community..." ..." in order to "generate "generate goodwill" and thereby increase profits. Some, including some supporters of capitalism, dislike the focus on self-inte self-interest. rest. For example, example, self-desc self-described ribed "free market market libertarian libertarian"" founder founder and CEO of Whole Foods Market, John Mackey, claims in an article in Reason magazine that he is serving customers and society out of "love" rather than self-interest while he boasts the profitability of his company in that article. (Rethinking the Social Responsibility of Business, 5).Free enterprise

In capitalist economies, a predominant proportion of productive capacity has belonged to companies, in the sense of for-profit organizations. This include many forms of organizations that existed in earlier economic systems, such as sole proprietorships and partnerships. Non-pr Non-profi ofitt organi organizat zation ions s existi existing ng in capital capitalism ism includ include e cooper cooperativ atives, es, credi creditt unions unions and communes. 6).Economic growth

One of the primary objectives in a social system in which commerce and property have a











Islamic Economic System, Capitalism and Socialism August 13, 2009 Private ownership, profit motive and economic freedom force individuals to exercise their God gifted talent to the full and in the best possible manner. This lead to the maximum utiliz utilizati ation on of human human and natur natural al resou resource rces. s. Goods Goods and servic services es are produc produces es in large large quantity to satisfy consumer needs. Inventions and Technical Advances:

In the presence of profit motivate and competition the entrepreneurs are forever seeking better techniques of production. This motive leads to new inventions and development of new techniques of work and business management which are calculated to facilitate and increase production at reduced cost.

Demerits: Philosophical Errors:

Materialism gives rise to selfishness in the society which eliminates sympathy and kindles the fire of mutual conflict in the society. Makes individual indifferent to collective interest. They indulge in nepotism and become slaves of pleasure. Man loss the ability to see beyond the self interest. A society whose members are self seeking, selfish and self centered can never be free of economic hardship and misery. Callous Competition:

Competition and conflict hold great importance in the capitalist system. The expectations













Islamic Economic System, Capitalism and Socialism August 13, 2009 atmosphere of class conflict. It increases the cost of production, raises the prices, weakens the purchasing power of the people and discourages the investments. Flow of Economic Resources in the wrong Direction:

Under this economic system resources flow in the direction of vocations which promise maximum profit, even if they are inferior on the social scale and spread mischief. Corrupt Business Practices:

This This phil philos osop ophy hy behi behind nd this this syst system em is devo devoid id of mora morall valu values es.. Busi Busine ness ssme men n feel feel no hesitation in resorting to fair or foul means in order to earn maximum profit. The consumers are exploited by creating creating artificial artificial monopolies monopolies and small businessmen businessmen are squeezed squeezed out of the sector of production. Economic Rivalries and Wars:























Socialism: Socialism and communism means an economic system in which the means of production are owned owned by the state. A centr central al Direct Director orate ate the produc productio tion n of goods goods and servi services ces.. The Directorate decides the nature, quality and model of production of goods. The distribution of goods is also directed by this central body. body.

Philosophical Foundations: Materialistic Interruption of History:












Characteristics of Socialism: Abolition of Private property:

An individual can own nothing expect necessaries of life. No one can run private business. Collective ownership of Means of Production:

All the means of production such as factories, farms, land, trade mines and means of transport and communication are under state ownership and control. Central Planning:

The forces of demand and supply are balances by central planning and a balance is not











Islamic Economic System, Capitalism and Socialism August 13, 2009 In this system the provision of necessaries of life to every citizen is the responsibility of the state. state. It is the reason reasonabil ability ity of state state to provi provide de facilit facilities ies like like food, food, clothi clothing, ng, housin housing, g, education and medical care to every individual. Immunity from Economic Crisis:

Good and services are produced according to the demand. Hence there is no possibility of overproduction in this system. The danger of economic depression is completely eliminated. Elimination of Unemployment:

In this system, the process of production is kept going according to a comprehensive plan. This makes it possible to give employment to all capable individuals.

Demerits:
























Islamic Economic System, Capitalism and Socialism August 13, 2009 Capitalism and communism is that the latter systems study analyses and try to solve the economic problem of man by isolating it from the total framework of human life. They do not give much consideration to the effect that their solution of t he economic problems might have no other spheres of collective life. In contrast Islam studies the economic problem of











Islamic Economic System, Capitalism and Socialism August 13, 2009 Hence man should struggle to satisfy these needs. Islam present the concept of higher world which is above this material world. This higher world i s permanent and everlasting. Collective Ownership:

Islamic Economic System, Capitalism and Socialism

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