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The Political Economy Of The Islamic State; A Comparative Study

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The Political Economy Of The Islamic State; A Comparative Study

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Content ALI, A u sa f, 1934-
T H E POLITICAL E C O N O M Y OF THE ISLAMIC STATE:
A COM PARATIVE STUDY.
U n iv e r sity o f Southern C a l i f o r n i a , Ph.D.,
1970
Econom ics, theory
University Microfilms, A X E R O X Company, Ann Arbor, Michigan j
THIS DISSERTATION H A S BEEN MICROFILMED EXACTLY AS RECEIVED
THE POLITICAL ECONOM Y OF THE ISLAMIC STATE
A COMPARATIVE STUDY
by
Ausaf A11
A Dissertation Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(Economics)
June 1970
UNIVERSITY OF SOUTHERN CALIFORNIA
THE GRADUATE SCHOOL
UNIVERSITY PARK
LOS ANGELES, CALIFORNIA B 0 0 0 7
This dissertation, written by
.............................. AH8AE..ALI.................................
under the direction of h.%§... Dissertation Com
mittee, and approved by all its members, has
been presented to and accepted by The Gradu
ate School, in partial fulfillment of require
ments of the degree of
D O C T O R O F P H I L O S O P H Y
(ECONOMICS)
Dean
Date.J.M Z.A 9.70.
DISSERTATION COMM
— , Chairjnan
FOREWORD
The p o litic a l economy of the Islamic sta te is too
serious a matter to be left to the traditional scholars of
Islam--popularly known as uIma . The formulation of the
economic theory of Islam requires the serious attention of
men adequately trained in economics, other branches of
social science, and, obviously, Islam. Barring a man of
encyclopedic learning, scholars from several fie ld s will
need to collaborate to s a t i s f a c t o r i l y resolve the th e o re t
ical and systemic problems of the economic system in the
Islamic state .
The economic organization of the Islamic state is
%
the most important of a l l its organizational problems, as
it is for any state. It a ffec ts the whole spectrum of
l i f e . It draws into consideration issues of religion, law
of human society, and the welfare of the people. Idealiza
tion of the Kh i l a f a t - i-Rash ida (Right-Guided Caliphate)
and/or Islamic orthodoxy will get us nowhere. It can get
us in trouble. Both look back to tribalism . Both offer
an unsatisfactory solution to the economic problems of the
contemporary Islamic society.'*
The best course would be to develop an economics
of Islam suited to the present conditions. It should
consist of:
1. A microeconomics consisting of a theory of a l
location of resources, organization of economic enterprise,
and the equilibrating processes of economic behavior.
2. A macroeconomics consisting of a theory of gen
eral economic equilibrium and growth and development of the
economy.
3. A financial theory (the corner stone of any sys
tem of p o litic a l economy) consisting o f money, credit, and
banking; and taxation, government finance, and f isc a l pol-
i c y .
k. A distribution theory and an income policy.
5. A theory of the international economic r e l a
tions of the Islamic state with the rest of the world.
These seem to be the leading areas in which the
fact that the Islamic economy will be an interest less
*There is no questioning or denying the fact that
the advent of Islam and the foundation of the Islamic state
in Medina brought about an unprecedented improvement in the
s o c ia l, p o l i t ic a l , and economic l i f e o f the seventh century
Arabia. But this in i t s e l f and by i t s e l f is not a proof
p ositive that the proclamation of Sharia as the o f f i c i a l
ideology and constitution would produce a similar result in
twentieth century Pakistan. In other words, the latter
c a lls for both a philosophic j u s t i f i c a t i o n and a reasonable
demonstrat ion.
economy will require a basic rethinking of economic theory
which can help to build an economic society in the image
o f the teachings of Shar i a .
All this has not been done in the present study.
W e have emphasized the fundamental problems connected with
business organization, resource a llo c a tio n , interest, cap
i t a l, and the distribution o f income, only. In some re
spects, the treatment is quite sketchy.
No pretense to o r ig i n a l i t y is made by any means.
Frankly speaking, the project proved to be well beyond the
a b i l i t y of the present w riter. His only hope is that some
one abler and better will soon take up the subject and do
it the ju s t ic e it deserves. Meanwhile, please bear with
the defects and shortcomings of the study in hand. For the
selectio n of the p o lit ic a l economy of the Islamic sta te as
my d issertat ion -SJjJfcy-ect_i--Can only say: "Fools rush in
where angels fear to tread."
li am thankful to the members of my guidance commit
tee, Dr. Spencer D. Pollard (Chairman), Professor of
Economics, and Dr. George 0. Totton, Professor of P olitica l
Science, for the help I have received in writing th is d i s
sertation. Dr. Pollard was unusually kind in allocatin g
considerable time out of his Sabbatical to seeing the d i s
sertation through in time for graduation. I am greatly
indebted for his kindness and valuable suggestions.
TABLE OF CONTENTS
Chapter Page
I. INTRODUCTION . . .............................................................. 1
The Problem
The Importance of the Problem
The Scope and Subject Matter of the Study
Some Relevant Definitions
Purpose of the Study
The Setting of the Problem
The J u s tific a tio n for the Islamic State
Human Nature, Ideal Communities, and
Improvement of Society
Organization of the Study
Sources of Information and Available
Li terature
A Final Comment
II. ISLAM................................................................................................ 42
Introducti on
What is Islam?
The Nature and Conception of God
The Nature and Function of the Prophecy
of Mohammad
The Essential Message of the Quran
Islam's Attitude toward Other Religions
A Concluding Note
III. ISLAMIC SOCIAL PHILOSOPHY .............................................. 67
Introduction
History of Social and P o lit ic a l
Philosophy in Islam
An Interpretation of Islamic Social
Philosophy
The Pakistan Ideology
To Sum Up
v
C hapter
IV. ECONOMIC ORGANIZATION
Page
96
Introduction
Capitalism and Socialism
Economic System of Islam
Economic Organization of Pakistan
National Economic Planning
The Key Problem
Introduction
The Doctrine of Riba (In terest) in Islam
Economics of Interest under Capitalism
The Determination of Interest
Further Considerations
A Summation
The Status of Interest in a Free
Enterprise Economy
Economics of Interest under Socialism
Theory of Interest
VI. CAPITAL ................................................ .............................159
Introducti on
The Essentials of a Theory of Capital
The Place and Scope of Capital Theory
in Economics
Capital Theory under Capitalism
Capital Theory under Socialism
A Restatement of the Salient Features of
the S o c ia list Capital and Investment
Theory
Capital Theory under Islam
The Financial System in the Islamic State
VII. CAPITAL ACCUMULATION ........................................................ 206
V. INTEREST 121
Introducti on
The Weber Thesis
The Weber Thesis and Islam
vi
C hapter Page
VIII. DISTRIBUTION OF INCOME.........................................................220
Introduction
C ap italist Distribution
S o c i a l i s t Distribution
Is 1 amic Distribution
Changing the Distribution of Income
Is There a Sa tisfacto ry Solution to
the Distribution Problem?
IX. IMPLICATIONS FOR THE ECONOMIC ORGANIZATION
OF THE ISLAMIC S T A T E ..............................................................247
X. SUM M ARY AND CONCLUSIONS.........................................................258
Summary
Conclusi on
Policy Implications
SELECTED BIBLIOGRAPHY ............................................................................ 269
vi i
CHAPTER I
INTRODUCTION
The Problem
It is a fundamental b e l ie f of Muslims that, besides
being a religion in the sense of a b e lie f - s y stem, Islam is
a way of l i f e . It has i t s own p o lit ic a l theory, economic
principles, and a well-defined code of individual behavior
in the so ciety . Our problem here is to examine the broad
principles of the system of p o lit ic a l economy which may be
regarded as appropriate for an Islamic state. W e would
conduct our study in a comparative fashion. Capitalism
and socialism will be used to compare and contrast the
«arv
Islamic p o lit ic a l economy. For i l l u s t r a t i v e purposes,
we will draw upon the h is to r ic a l experience of Pakistan.
The Importance of the Problem
The problem deserves analytical study for
h is to r ic a l, th e o r e tic a l, and organizational reasons.
Insofar as Islam is considered a viable alternative to
capitalism and socialism in the Islamic world, i t can
hardly be overemphasized that a workable system of polity
and economy be developed from the basic postulates of
Islam. Obviously an important f i r s t step in this respect
is the formulation of the theoretical system of the
po litical economy of the Islamic state.
The Scope and Subject Matter of the Study
W e must at the very outset clearly understand that
the present study is not, s t r i c t l y speaking, a study of the
"System of the P o li t i c a l Economy of Islam" per s e . It i s ,
on the other hand, a study of the system of po litical
economy and/or economic organization of the contemporary
Islamic state in comparison to the p o lit ic a l economies
and/or economic organizations of capitalism and socialism.
While no particular countries have been selected to be
i ll u s t r a t i v e of the c a p i t a l i s t i c and s o c i a l i s t i c social
economic organizations, we have selected Pakistan (The
Islamic Republic of Pakistan, to be sure) as the particular
country to study as a case in point. This procedure seems
advisable insofar as the systems of the p o litic a l economies
of capitalism and socialism have attained considerable
sophistication and maturation, but that of Islam has not.
Islamic economic thought is yet to be formulated into a
theoretical system. The present position is that the
economic system of the Islamic state is neither a
historical fact nor an actualized r e a lit y . It is in fact
a movement toward a certain type of politico-economic
order.
W e will therefore study the "System of the
Political Economy of the Islamic State" in it s broad out
line through comparing and contrasting the basic
in s titu tio n s and mechanics of an Islamic economy with
those of the archtypes of the economies of capitalism and
socialism.
Some Relevant Definitions
Given below are some of the relevant definitions
of terms used throughout the study.
Political Economy
Joseph Schumpeter defined p o lit ic a l economy in the
following terms:
By a system of p o l i t i c a l economy I mean an
exposition of a comprehensive set of economic
p o licie s that its author advocates on the strength
of certain unifying (normative) principles such
as the principles of economic liberalism, of
socialism, and so o n J
An alternate d e f in it io n has been provided by Oskar
Lange: P o litica l economy, or social economy, is the study
of the social laws governing the production and distribu-
2
tion of the material means of satisfyin g human needs."
In his d e finition of p o l i t i c a l economy, Lange sees an
intimate relationship between production of the material
^J. A. Schumpeter, History of Economic Analysis
(New York: Oxford University Press, 1954), p. 38.
2
Oskar Lange, P o li t i c a l Economy: General Problems,
I (Oxford, England: Pergamon Press, 1963), p. 1.
4
means of l i f e and their d istr ib u tio n . He quotes Karl
Marx:
The relations and methods of distribution
appear, therefore, merely as the reverse sides of
the agents of production. An individual who
participates in production as a wage labourer,
receives his share of the products, i . e . , of the
results of production, in the form of wages. The
subdivisions and organization of distribution are
determined by the subdivisions and organization
of production. Distribution is i t s e l f a product
of production, not only in so far as the material
goods are concerned, since only the results of
production can be distributed; but also as regards
i t s form, since the d e f in it e manner of participa
tion in production determines the particular
form of d istr ib u tio n , the form under which
participation in distrib u tio n takes p l a c e . 3
Lange concludes:
Production relation s are thus the foundation
of the whole of economic r ela tio n s. Man's active
attitude to the material world around him in the
social process of production determines produc
tion r ela tio n s which in turn determine distribution
relations. This is the key to the understanding
of the laws governing the social process of the
economic a c t i v i t y of human beings, the key to the
understanding of the laws, the investigation of
which is the concern of p o l i t ic a l economy.4
The above d e fin itio n s high light the following essential
characteristics of any system of p o lit ic a l economy:
1. a normative-ideological core,
2. a social framework of production,
t
3. in te r r e la tio n s between production and
distribution relations and the predominance of production.
3I b i d . , p. 12. 41 b i d.
5
It must also be pointed out that every system of
p o litica l economy (in fa c t a l l social science) is culture
bound and h i s t o r i c a l l y conditioned. This was true of the
English Classical System of P o litica l Economy, French
Physiocracy, and the German National System of P o litical
Economy. This is true today of American capitalism,
Scandinavian socialism , and Russian communism.
The underlying valuation and ideological character
(in spite of all e f f o r t s to e x ile them from social science)
of economics and, indeed, social theory as a whole, have
by now become a trademark of social science. More than a
hundred years ago, i t was exposed by Marx. Recently,
Professor Myrdal has stated i t in clear-cut terms:
The value premises that actually and of
necessity determine approaches in the social
sciences can be hidden. The student himself may
be unaware of them. In f a c t , most writings,
particularly in economics, remain in large part
simply id e o lo g ic a l. Some two centuries ago, the
modern social sciences branched o f f from the
metaphysical philosophies of natural law and
u tilita ria nism . As our heritage from these
philosophies, we continue to attempt to "objectify"
and "neutralize" the valuation viewpoints and the
value-loaded concepts used in s c i e n t i f i c analysis.
Such attempts are, for instance, plainly v i s i b l e
in the so-c a lle d welfare economics, which has lately
had a new e ff lo r e sc e n c e , but they are a much more
general phenomenon. Throughout the history of
of social studies, the hiding of valuations has
served to conceal the inquirer's wish to avoid
facing real is s u e s . As, for logical reasons, no
one can approach a so cia l problem and analyze i t
without valuations, the resu lt of remaining
unaware of these valuations by leaving them
im p lic itly assumed is a concealed non sequitur,
6
and thus a space for uncontrolled influences from
the valuation sphere. I have seen few e ffo r ts in
recent years by economists to reform themselves
on this score, lea st of all among those devoting
themselves to abstract economic theory.
Efforts to run away from the valuations are
misdirected and foredoomed to be f r u i t le s s and
damaging. The valuations are with us, even when they
are driven underground, and they guide our work.
When kept im p lic it and unconscious, they allow
biases to enter. The only way in which we can
strive for o b j e c tiv ity in theoretical analysis is
to l i f t up the valuations into the full l ig h t ,
make them conscious and e x p l i c i t , and permit them
to determine the viewpoints, the approaches, and the
concepts used. In the practical phases of a study
the state value premises should then, together with
the data--established by theoretical analysis with
the u t iliz a t io n of those same value premises--form
the premises for all policy conclusions. 6
But, after every profundity about economics is said
and done, we must not forget the simple and direct
definition of i t by one of i t s all time greats, Alfred
Marshall. Marshall observed:
POLITICAL ECONOM Y or ECONOMICS is a study of
mankind in the ordinary business of l i f e ; i t
examines that part of individual and social action
which is most closely connected with the a t t a i n
ment and with the use of the material requisites
of wel1 being.
Thus i t is on the one side a study of wealth;
and on the other, and more important side, a part
of the study of man. For man's character has been
moulded by his every-day work, and the material
resources which he thereby procures, more than by
any other influence unless i t be that of his
religious ideals; and the two great forming agencies
of the world's history have been the religiou s and
the economic.6
5
Gunnar Myrdal, Asian Drama: An Inquiry into the
Poverty of Nations (New York: The Twentieth Century Fund,
1968), pp. 32-33.
6Alfred Marshall, Principles of Economics (London:
Macmillan and Co., 1920), p. 1.
S t r ic t ly speaking, economics is economizing in the
application of means to attain given ends. While ends are
random, means have to be selec ted . To be economical, the
selection of means must be made ratio n ally . Thus,
rationality becomes a standard requirement of economic
action. Needless to say, the means at our disposal are
always limited. This lim itation makes i t all the more
necessary that scarce means should be put only to those
uses for which they are considered on rational grounds to
be most e f f e c t i v e . Fortunately, the means can be put to
whatever use we please. This conception of economics
which is most widely acknowledged is attributable to Lord
Robbins. Writing in the early t h i r t i e s , Robbins stated:
Economics is the science which studies human
behaviour as a relationship between ends and
scarce means which have alternative u s e s . 7
Thus conceived, economics becomes a science of
e f f i c i e n t production and as such, s t r i c t l y speaking, has
nothing to do with d istr ib u tio n .
Capi talism
By capitalism is meant a politico-economic
organization of society which allows in d iv id u a lis t ic free
and private enterprise for the pursuit of private gain.
Lionel Robbins, An Essay on the Nature and
Significance of Economic Science (London: Macmi11 an and
Co., 1940), p. 16.
8
The essential features of a c a p i t a l i s t i c system are the
profit motive, the institu tion o f unrestricted private
property, and the ra tio n a lity of the economic process
judged from the standpoint of the individual economic
agent. The essence of capitalism is the c o s t - p r o f it
calculus which also constitutes the heart of the rational
business enterprise. According to Schumpeter:
. . . the c o st-p r o fit calculus . . . by c r y s t a l
lizing and defining numerically, i t powerfully
propels the logic of enterprise. And thus defined
and quantified for the economic secto r, this type
of logic or attitude or method then sta r ts upon
its conqueror's career su b ju g atin g --ratio n a l-
ising--man's tools and philosophies, his medical
practice, his picture of the cosmos, his outlook
on l i f e , everything in fact including his concepts
of beauty and ju stic e and his sp iritu a l
ambitions.8
Thus conceived, capitalism i s not merely an
economic system, i t is a c i v i l i z a t i o n .
Social ism
Narrowly conceived, so c ia lism is a form of
politico-economic organization of soc iety which requires
so c ia liza tio n or c o ll e c t i v e ownership of the means of
production. Socialism should be distinguished from
communism which along with the collective-communal owner
ship of the means of production also requires the
O
Joseph A. Schumpeter, Capitalism, Socialism, and
Democracy (New York: Harper & Brothers, 1950), p. 122.
c o ll e c t i v is a t io n or communisation of consumption and, in
fact, in its extreme form, some sort of community of wives
as wel1.
But, broadly conceived, socialism fundamentally
does not aim at the abolition of private property but an
extension of democracy.* A more complete d e fin itio n of
socialism is provided by the late G. D. H. Cole. Cole
has stated:
By Socialism I mean a form of soc iety in which
men and women are not divided into opposing
economic cla sses, but l i v e together under condi
tions of approximate social and economic equality,
using in common the means that l i e to their hands
of promoting social welfare.
And two of the riders which Professor Cole added
were:
.' . . a human fellowship which denies and expels
distinctions of class, and a social system in
which no one is so much richer or poorer than his
neighbours as to be unable to mix with them on
equal terms.*
Thus conceived, socialism stands for equality,
harmony, and humanitarianism.
*Cf. Abba P. Lerner: "The fundamental aim of
socialism is not the abolition of private property but the
extension of democracy." The Economics of Control (New
York: The Macmillan Company, 1961), p. 1.
^Quoted by C. A. R. Crosland in R. H. S. Crossman,
ed., New Fabian Essays (London: Turnstile Press, 1952),
p. 61.
Democracy
A democratic p o l i t i c a l order is one in which all
citizens have or feel they have an equal say in the a ffa irs
of the s ta te . This supposed p o l i t ic a l equality creates
and supports the doctrine of one man-one vote and the
procedure of majority rule. This makes government
responsible and responsive to the people. The important
thing to clearly understand about democracy is that i t is
a flow concept and not a stock concept. Democracy refers
to a process and not to an outcome or a fixed position.
Arthur Schlesinger has stated:
Democracy requires unremitting action on many
fronts. It i s , in other words, a process, not a
conclusion. However painful the thought, i t must
be recognized that its commitments are unending.10
Thus conceived, democracy implies or in fact pre
scribes a procedure or a process to be observed in order
to hire and fire governors (or r u le r s), determine rational
p o lic ie s, and resolve c o n f lic t s in the so c ie ty .*
^°Arthur M . Schlesinger, J r., The Vital Center
(Boston: Houghton Mifflin Company, 1 962), p. 254.
*J. A. Schumpeter expounded and defended "Another
Theory of Democracy" of which the formula is: "The demo
cratic method is that in s tit u tio n a l way for arriving at
p o litic a l decisions in which individuals acquire the power
to decide by means of a competitive struggle for the
people's vote." ( Capitalism, Socialism and Democracy (New
York: Harper & Brothers, 1950), p. 269.
Again, to Professor Robert Dahl, democracy is
neither rule by the majority nor rule by a minority, but
rule by m in o r it ie s . "Thus, the making of governmental
decisions," in his words, "is not a majestic march of great;
Sharia
By Sharia is meant Islamic Law. Sharia consists
of 1) the Quran, i . e . , the revealed Book of Islam, and
2) the Sunnah, i . e . , the tr a d itio n s of b e l i e f and action
established by the Prophet and considered to embody the
interpretation of the revelation contained in the Quran.
Islamic State
Any state which proclaims and promulgates Sharia
as the fundamental law of i t s land, i . e . , the Constitution,
is an Islamic state.
Purpose of the Study -
The sp ecific purpose of the present study is
wholly expository. The study is in fact a t h e o r e tic a l/
intellectua l enterprise. It is not proposed to recommend
the establishment or otherwise of an Islamic economy in
one, or some, or all the Islamic countries. Also, no
attempt will be made to either presuppose or demonstrate
the moral, theoretical, or practical superiority or
in fe r io r ity of the Islamic economy to c a p i t a l i s t i c or
s o c i a l i s t i c economies.
It is, however, sin cerely hoped that this study
majorities united on certain matters of basic policy. It
is the steady appeasement of r e l a t i v e l y small [pressure]
groups." (Preface to Democratic Theory (Chicago: Chicago
University Press, 1961), p. 146.)
12
will suggest certain broad principles of economic organiza
tion that characterize Islamic so c iety and point out some
of the theoretical problems and practical d i f f i c u l t i e s in
the economic reorganization of the Islamic Republic of
Pakistan along with what may be regarded as the "System of
P o litica l Economy of the Islamic State."
The general purpose of this study is to i n i t i a t e
the discussion upon the secularization of Islam. The
contention here is that in order to serve as the o f f i c i a l
philosophy and/or ideology of a modern s ta te , say Pakistan
with her nearly 130 million people, not only will Islam
have to be radically reinterpreted, but a whole new social
science consisting of the principles of State, Society, and
Government, social and economic arrangements, and ind ivid
ual psychology, morality, and motivations will have to be
developed. In other words, before an Islamic State can be
established, Islam must undergo secu la riza tio n . In the
A
absence of such a secular development of Islamic thought,
any move, policy, or action toward the creation of the
Islamic state is unthinkable, unwise, and, in fa ct,
i r r a tio n a l, and may perhaps turn out to be a regression to
the primitive forms of l i f e . Chances are that such a
social policy w i l l , in all probability, f a i l . Anyone who
hopes to, or promises to, deliver a State based on the
Quran and Sunnah without a fa irly cle a rly thought out and
preplanned blueprint of i t s Society, P o lity , and Economy
13
is either living in a fo o l's paradise or wants to make
p o lit ic a l capital out of Islam, or both. The need for
formulating the theoretical systems of the s o c ia l, p o l i t i
cal, and economic organization of the Islamic State can
therefore hardly be overemphasized.
A word about what is meant by secularization is in
order here. A d e fin itio n of secu la rizatio n is:
Secularization is conceived here as a complex process
including three basic modifications of the social
structure: (1) type of social action: from
prescriptive to e le c t iv e action; (2) acceptance of
change: from i n s t i t u t i o n a l i z a t i o n of tradition to
in s tit u tio n a liz a tio n of change; (TJ i nsti tuti onal
sp ecialization : from a r e l a t i v e l y undifferentiated
complex of in s t i t u t i o n s to a higher degree of
institu tio n a l d if f e r e n t ia t io n and s p e c i a l i z a t i o n . l 3
It should be clearly understood that: "Growth in
r a tio n ality (esp ecia lly instrumental r atio n a lity ) is
usually considered one of the main t r a i t s of se cu la riza
t i o n . " ^ Instrumental r a tio n a lit y demands a radically
different attitude toward sc ien ce , technology, and
economic a c t i v i t y , i t also demands new orientations in
and new organization of the s o c i a l , p o l i t i c a l , and cultural
in s tit u tio n s . Secularization is however a means to an
end--modernization and eventually potential development--
l ^
Gino Germani, "Secularization, Modernization,
and Economic Development," The Protestant Ethic and
Modernization: A Comparative View, ed. S . N. Eisenstadt
(New York: Basic Books, Inc. , 1 967), p. 345.
141bid. , p. 346.
and not an end in i t s e l f .
14
The Setting of the Problem
The settin g of the problem is contemporaneous.
This is because our central aim is to study the p o lit ic a l
economy of the contemporary Islamic s t a t e . As such, the
form of the Islamic state during the early days of Islam,
i . e . , the prophecy of Mohammad and the caliphate of his
immediate successors, or the h istorical evolution of the
state and Government of the Muslim Empires is not germane
to the present study. Besides i t s contemporaneity, the
other essential feature of the se ttin g of our study is the
phenomenon of Westernization in the present day Muslim
society. Thus, when we examine the problems and prospects
of the Islamic economy, we have in mind a Westernized
economy and society already in existence. No contemporary
Islamic society has escaped Westernization to some degree.
One should not also ignore the fact that no nation today
can afford to l iv e in is o la t io n from the larger family of
nations. It holds true for an Islamic state too. Beyond
survival, i t can, at best, only hope to co -ex ist with other
s t a t e s - - C h r is t ia n , Jewish, and secular.
Probably, the most potent challenge to the idea of
the Islamic state is the phenomenon of Westernism and the
trend toward Westernization. But i t must be realized that
this challenge does not at present or will not in the
foreseeable future come from the West in the form of an
external pressure and resistance to social change. To be
sure, the h isto rica l origin of Westernization throughout
the non-Western world is the West i t s e l f . By now, however,
the phenomenon of Western c i v i l i z a t i o n has taken so firm
root in the underdeveloped countries in general, and the
Islamic countries in particular, that i t has gathered a
momentum of i t s own. Thus the phenomenon of Westernism
has become part and parcel of the national l i f e of these
s o c i e t i e s . It has attained the status of a social fact
and an autonomous force with i t s own countervailing power.
The presence of sizeable sections of population in the
midst of the Islamic s o c i e t i e s with vested interests in
the Westernized i n s t i t u t i o n s , systems, and culture is
highly in h ib itin g. It is this factor which is capable
of frustrating all e ffo r ts toward building a genuine
Islamic sta te .
H isto rically speaking, the impact of Western
c iv iliz a t io n upon the Islamic society has been so great
that it dominates the whole spectrum of l i f e tpday. It
has permeated all walks'1 of 1 i f e - - s o c i a l , p o l i t i c a l ,
cultural, and economic. It has changed all i n s t i t u t i o n s - -
schools, hospitals, courts, and markets. It has influenced
tastes, manners, and dress. It has introduced new
technology, new languages, new v isions, and new motives.
In fa ct, history has transplanted a whole new c i v i l i z a t i o n
16
in the body p o l i t i c of the Islamic s o c i e t i e s over the l a s t
couple of centuries. This transplantation has by now
become so well received and accepted that Islamic so ciety
considers i t i t s very own. It is no longer a foreign
element.
Sir Hamilton Gibb of Harvard University (formerly
of Cambridge University in England) has described the
nature and consequences of the impact of Western culture
upon Islamic so ciety in the following terms:
To demonstrate that what is termed the impact
of Western c i v i l i z a t i o n on the countries of the
Middle East is something quite diffe re n t from
the thrust which Muslim thought had to withstand
in the Middle Ages from Greek and Persian culture,
i t is s u f f i c i e n t to draw up a simple l i s t , omitting
all d e t a i l s , of the main influences which have
impinged on the ancient in s titu tio n s of Muslim
society:
Economic A f f a i r s . (1) In agriculture,
s p e c ia liz a tio n in industrial cultures, and the
extension of permanent irrigation; (2) in industry,
the introduction of modern techniques; state
support for new manufacturing industries; (3) in
transport and communications; (4) as a consequence
of the development of oil resources, the immediate
a v a i l a b i l i t y of considerable revenues, and, at the
same time, a future solution to the problem of
providing power for heavy industry.
Social A f f a i r s . (1) In the sphere of public
order, the reorganization of the armed forces, and
of m ilitary techniques and d is c ip lin e ; the reform
of the police; (2) in the sphere of the administra
tion of j u s t i c e , the introduction of Western legal
codes, and of courts of law and legal procedure
copied from Western models; the creation of bars
of professional lawyers; the assertion of the right
of the sta te to make laws; (3) in education, the
very idea of a system of public education main
tained by the state and subject to i t s control;
the creation of elementary and secondary schools,
and of Western-style u n iv er sitie s; the adoption
17
of compulsory primary education for all children,
boys and g irls alike, and at the same time the
neglect of technical education--a neglect which
i s , however, being slowly remedied nowadays;
(4) in social organization, the replacement by the
Western concept of individualism of the ancient
corporate groups to which the populations of
towns, v illa g e s , and regions belonged; the relaxing
of social and family traditions; the freedoms
which women and young people of both sexes are
beginning to acquire in social and economic l i f e ,
and to demand in po litical l i f e ; (5) as far as the
population as a whole is concerned, the rapid,
continuous and even excessive increase in the
birth rate, favored by the organization of public
health services, improved sanitation in the towns,
and precautions against fatal epidemics, as a
resu lt of which there is even a problem of over
population (especially in Egypt, where the number
of inhabitants doubles every f i f t y years); ever-
increasing mobility and density in the large towns
and the widening of the social gap which has always
existed between town and country; also the special
case presented by the accumulation of large numbers
of workers in towns where there are heavy
industries, and the impulse given to the setting-up
of syndicates or trade unions; (6) the creation of
middle-class professions and the various influences
thus created and maintained; above a l l , journalism,
the influence of whose output is sometimes
exaggerated by those with no knowledge of the inner
powers of resistance of oriental peoples, but which
has incontrovertibly widened the general social
outlook; (7) recreations, sports, and amusements,
fo o tb a ll, the scout movement, radio, and above ail
the cinema, which has proved to be one of the most
far-reaching of all Western influences.
P o litical A f f a ir s . (1) The adoption of forms of
constitutional machinery which evolved in Western
Europe under the pressure of liberal and French
Revolutionary philosophy, and of other concepts
originating from the same sources, e sp e c ia lly the
idea that all citizens have an equal share in both
rights and duties, without regard to their religious
b e lie f s and communities, and of their equality before
the law; (2) nationalism, i . e . , the concept of the
sovereign and independent nation state which enjoys
absolute supremacy within defined boundaries, and
which claims authority over all i t s inhabitants
18
as of right.
It is not, then, the i n s t i t u t i o n s and techniques
borrowed from the West, however massive such
borrowings may be, nor yet the external evolution
shown in the la s t century, which will be of final
sig n ifica n ce , but the inward reaction towards the
cultural values which are seeking to find their
place within Muslim society under cover of these
borrowings. Everything depends on the capacity
of Muslim society to defend and protect i t s values
and cultural traditions against the Western
invasions. If i t f a i l s in this task, i t is l o s t
as a Muslim society; it w ill inevita b ly become a more
or less faithful copy of Western so c iety with
secondary characteristics peculiar to the d ifferent
countries and languages.‘5
The question remains to be asked: What are the
chances of Islamic revivalism? Rather s l i g h t i f we were to
take Professor Arnold Toynbee's thesis se r io u sly . Accord
ing to him, Islam is one of the five liv in g c i v i l i z a t i o n s .
But i t is a dying c i v i l i z a t i o n . In due course, i t is
l ik e ly to disappear as a vital a lter n a tiv e. The historical
trend is in the universal acceptance of the Western
c i v i l i z a t i o n throughout the world. W e have already seen
the extent of Western influence upon the Islamic society.
Professor Toynbee has stated:
If we now glance at the group of livin g
c i v i l i z a t i o n s that are in process of being
assimilated by our own Western C iv i li z a t i o n ,
we shall find that the process is proceeding
at d ifferent paces on different planes.
On the economic plane every one of these
s o c i e t i e s has been caught in the network of
relations which our Modern Western Industrialism
15H. A. R. Gibb, Studies on the C iv iliz a tio n of
Is!am (Boston: Beacon Press, 1947), pp. 320-324.
19
has spread all over the habitable world.
Their wiseacres have seen
The e l e c t r i c lig h t i' the West, and come to worship.
On the p o litic a l plane, also, the children of all
these apparently moribund c i v i l i z a t i o n s have been
seeking admission to membership of the Western
comity of states through various doors. On the
sultural plane, however, there is no uniform
corresponding tendency. In the main body of
Orthodox Christendom the former r a 1 i.yeh (human
flock) of the Ottoman Empire--Greeks, Serbs,
Rumans, Buigars--appear to have welcomed the pros
pect of cultural as well as p o l i t ic a l and economic
Westernization!! with open arms; and the present
leaders of their former lords and masters, the
Turks, have followed their example. But these
cases seem to be exceptional. Arabs, Persians,
Hindus, Chinese and even Japanese are accepting
our Western culture with conscious mental and
moral reservations, in so far as they are accepting
i t at a l l .* 6
With regard to the Islamic world, Toynbee remarks:
In the Islamic world, on the other hand,
Westernization gained the upper hand before any
Islamic universal state was in sig h t, and its
various member s ta te s--P e r sia [Iran], Iraq,
Saudi Arabia, Egypt, Syria, the Lebanon and the
rest [Pakistan, Indonesia]--are making the best
of a rather bad job as "poor relations" in the
Western community of nations. *'
A word about what is our conception of Western
c i v i l i z a t i o n seems to be in order. The history of the
West is the history of the progress of C hristianity,
Constitutionalism, and Capitalism (in c lu siv e of i t s la st
stage, Imperialism). It is in the s p i r i t u a l ,
1 fi
Arnold Toynbee, A Study of History (London:
Oxford University Press, 1947), pp. 166-67.
171bid ., p. 271.
20
philosophical, and historical in te rr ela tio n s between these
18
three that we have to look for the dynamics of Western
so c iety. It is probably the combination of these three
elements in the Weltanschauung of Europe, as nothing e l s e ,
which has been responsible for the humanistic, s c i e n t i f i c ,
and technological developments which, in recent history,
have been so d is t i n c t l y an achievement of Westerners
alone. Their military conquests, colonial expansion, and
1 fi
Cf. Carl J. Friedrich: Probably the most d i s - ;
t in c t iv e religious root of modern constitutionalism is the
Christian b e lie f in the dignity and worth of each person,
each human being, no matter how lowly. For i f we ask
what is the p o litic a l function of a c o n stitu tio n , we find
that the core objective is that of safeguarding each
member of the p o litic a l community as such a person. Each
man is supposed to possess a sphere of genuine autonomy.
The constitution is meant to protect the s e l f ; for the
s e l f is believed to be the (primary and ultimate) value.
This preoccupation with the s e l f , rooted in Christian
b e l i e f s , eventually gave rise to the notion of rights
which were thought to be natural. Hence the function of a
constitution may also be said to be the defining and
maintaining of human rights. The c o nstitutio n is to pro
t ec t the individual member of the p o l i t ic a l community a 2»i
against interference in his personal sphere. Among these
r ig h ts, that of each person's right to his own p o lit ic a l
conviction was and is paramount.
Inquiries into the economic settin g of modern
constitutionalism have led to the assertion that i t is
associated with capitalism and imperialism. This is not
merely a coincident in time, i t is held; the more
thoroughly constitutionalized countries are also those
which have advanced farthest in the direction of either
capitalism or imperialism or both. Great Britain would,
of course, furnish the outstanding example. ( Constitu-
tional Government and Democracy: Theory and Practice in
Europe and America (Waltham, Massachusetts: Blaisdell
Publishing Company, 1968), pp. 7-8.)
imperial rule in the lands of Asia, Africa and America
may be regarded as flowing from, to a s i g n if i c a n t extent,
that unique consciousness which the combination of
C hristianity, Constitutionalism, and Capitalism were able
to create. In fact, i t will not be an exaggeration to say
that neither before nor since has the world produced a more
powerful combination of sp ir it u a l, p o l i t i c a l , and economic
forces than the one brought into existence by Christianity,
Constitutionalism, and Capitalism from the seventeenth
century on. It is this combination of these three which we
mean by Western c i v i l i z a t i o n .
Broadly speaking, Western c i v i l i z a t i o n also includes
socialism and communism. In fact, capitalism and communism
are like Siamese twins. This should be no surprise i f one
r ea liz es that the basic elements of so -c a lle d s c i e n t i f i c
socialism are none other than German philosophy, French
sociology, and British economics. There is nothing Eastern
(considering the popular 1abeling) about the communism of
Russia or Eastern Europe, or for that matter the People's
Republic of China and the other Eastern countries.
Whatever the va lid ity of Toynbee's t h e s i s , the
ubiquity of Western c i v i l iz a t io n is a fact of contemporary
l i f e . The whole world seems to be under i t s sp ell.
Whether i t is Western Christendom, or liberal democracy,
or socialism , or communism, the crux of th«e^a»tter is that
nobody seems to have an alternative to i t . Even such
ancient s o c i e t i e s as those of China and India with their
rich cultural heritages had to seek their worldly salvation
in the philosophies and systems of the West. Can Islam
contend with the forces of Westernism? The present author,
for one, does not think i t can. In f a c t, Islam cannot hope
to fare better than Christianity.
The J u s t if ic a t io n for the Islamic State
An obvious question is this: Why should a Muslim
country--Pakistan, for example--bui1d an Islamic State at
all? Especially: Why, i f i t already has a Western sty le
democracy (precariously functioning, to be sure) going for
i t s e l f ? Or: Why should i t not endeavor to build a
c a p i t a l i s t or a s o c i a l i s t state instead? To formulate the
question in s p e c if ic and direct terms: What is the
j u s t i f i c a t i o n for the Islamic State in the contemporary
setting?
The traditional answer is that i t is the Will of
God which He revealed in the Holy Quran--the Precious Book
of Islam. Thus i t is the duty of true believers that they
must establish the rule of the Quranic law and the
Prophetic Sunnah. The establishment of the Islamic State
is therefore not a matter of choice but of obedience to
Allah, the Omnipotent, the Omniscient, the Omnipresent.
Islam being eternal and universal, the questions of
h isto r ica l time, geographical space, and all other
23
circumstances are unimportant, immaterial, and irrelevant.
In one word, Divine Will is the j u s t i f i c a t i o n for the
Islamic state .
But is this j u s t i f i c a t i o n enough? Probably not.
For states are not ruled by Prayer Books alone, even i f
the book be the Holy Bible or the Holy Quran. Nor are
sta tes ruled by Authority alone, even i f the authority be
that of the Pope or of the Caliph. This is so because
obedience is not the greatest virtue of mankind. By his
nature, Man yearns for freedom--freedom to choose anything
he w i l l . As the great Indian poet, Ghalib, once wrote:
I have man's nature, I am born of man
And proud that I commit the sins I c a n . ' 9
The question then is: Why do men choose one thing
or the other--one type of State over another? Or: What
would make Muslims, Pakistanis, for example, choose an
Islamic state? Not a c a p i t a l i s t sta te ! Not a s o c i a l i s t
s t a t e !
By whatever name we may designate it--0rthod oxy,
Traditionalism, or Idealism--no amount of canonical
dogmatism can provide a strong and long la sting foundation
for the Islamic state in the contemporary s e t t in g . Whether!
i t is so due to the infirmity of the convictions of the
present day Muslims or due to the untenability of orthodoxy
^The translation is Professor M . Mujeeb's. See
his The Indian Muslims (London: George Allen & Unwin,
1966), p. 472.
is neither important nor relevant here. What is of p r a c ti
cal consequence is that a sta te founded on nothing but
dogma would have a very precarious e x is t e n c e , i f i t did
not simply f a i l . The conclusion is almost inescapable that
the Islamic sta te will have to be j u s t i f i e d in terms other
than the b e l ie f in obedience to God.
The shortcoming in the i d e a l i s t i c point of view
is that i t looks at people in i d e a l i s t i c terms. It
presupposes a s p i r i t of idealism in men, which empirical
human nature (or such knowledge of i t as e x i s t s today)
does not confirm. Men are not always, in f a c t rarely, i f
ever, moved to action by idealism of any kind unless they
also find in i t something for themselves in a very
pedestrian sense. People are se lfish by nature. They can
be, and are, unselfish but not e n t i r e ly - - n o t even for God's
sake. While people may feel human sympathy, good w i l l ,
and a sense of brotherhood for others, i t must not be
ignored that there is many an actual or potential heartless;.
i l l - w i l l e d , and bloody-minded man in every s o c ie ty .
Professor Lucas of Oxford University has stated:
Human beings, as we know them, are often s e l f i s h ,
but sometimes unselfish; their judgement is
f a l l i b l e , but sometimes in the course o f argument
d ifferen t people come to hold the same view, which
i s , as far as we can see, reasonable and right;
they are i n f in it e in their complexity and
aspirations, but f i n i t e in their c a p a c it ie s and
achievements; they occupy the same public external
world, but are each the centre of a private
perspective, not necessarily shareable with others;
they have values, which are neither necessarily
the same for a l l , nor actually diffe re n t for
each; they can help one another, and need to, but
can hurt one another, and often d o .20
The i d e a l i s t i c theory places a heavy emphasis on
ideational and normative factors to the neglect, i f not
complete exclusion, of the given concrete conditions and
situation s which obtain in the real world. In doing so,
i t ignores the means-ends relationships and standards of
r a tio n a lity . As Professor Talcott Parsons has remarked:
While the voluntaristic type of theory
involves a process of interaction between normative
and conditional elements, at the i d e a l i s t i c pole the
role of the conditional elements disappears, as
correspondingly at the p o s i t i v i s t i c pole that of
the normative disappears. In an i d e a l i s t i c
theory, "action" becomes a process of "emanation,"
of "self-expression" of ideal or normative facto rs.
Spatiotemporal phenomena become related to action
only as symbolic "modes of expression" or
"embodiments" of "meanings." The s c i e n t i f i c
standard of r a tio n a lity becomes irrelevant to the
subjective aspect of action. The means-end schema
gives way to a meaning-expression schema. Non-
normative elements cannot "condition" action, they
can only be more or less "integrated" with a
meaningful system.21
An e f f e c t i v e j u s t i f i c a t i o n of the Islamic state
is to be found in the promise which Islam holds for the
improvement of l i f e . W e think of l i f e here in i t s very
down to earth form. The improvement of l i f e therefore
20J. R. Lucas, The Principles of P o l i t i c s (Oxford,
England: The Clarendon Press, 1966), p. 1.
P l
Talcott Parsons, The Structure of Social Action
(New York: The Free Press of Glencoe, 1964), p. 82.
26
means the meeting of the material conditions of human
l i f e . The meeting of the material conditions of l i f e
concerns i t s e l f with the a v a i la b i li t y of an adequate
quantity and quality of food, clothing, and housing;
eradication of disease, ignorance, and poverty; assurance
of health, education, and opportunities for the develop
ment of personality and realization of human p o s s i b i l i t i e s .
No society which f a i l s to provide these amenities of l i f e •
can be decent or free, equal, or just. Nor will i t s
members be able to develop themselves as individual human
beings. The a l le v ia tio n of l i f e ' s problems would require
the integration of society, reorganization of sta te and
government, development of the economy, and i n s tit u tio n
of social j u s t i c e . If Islam--the Islamic state--can
tackle all this and more, there is every reason that i t
should be, and ought to be, established. But i f i t
cannot, there seems to be l i t t l e j u s t i f i c a t i o n for the
Islamic state in a contemporary society lik e that of
Paki s t a n .
To put the matter in worldly and m a t e r ia lis t ic
terms is not to minimize the more sublime goals of Islamic
individual life--m o ra l, s p i r i t u a l , and other-worldly
pursuits. All that is intended here is that the j
improvement of the so c ia l, p o l i t i c a l , and economic l i f e is
a perfectly legitim ate goal in i t s e l f and can be j u s t i f i e d
on i t s own merit. Sound education, social equality,
27
p o l i t ic a l freedoms, and economic prosperity are worth-
.......
while ends in themselves. If they can also contribute to
the moral and spiritual development, which they no doubt
do, then more power to them.
Human Nature, Ideal Communities, and
Improvement of Society
Professor Lucas has drawn up five ch a r a cter istics
of human nature which fa ll into two groups:
F ir st,th e two general conditions, which are
necessary i f there is to be any p o s s i b i l i t y of
communal co-existence at all:
A( i ) Some Interaction.
A( i i ) Some Shared Values.
Second, three conditions of imperfection, or,
to use a more neutral word, limitation:
B(i) Incomplete Unselfishness.
B (ii) F allib le Judgement.
B ( i i i ) Imperfect Information.22
Some form of interpersonal interaction is a
prerequisite for any society to come into and stay in
J. R. Lucas, The Principles of P o li t i c s (Oxford,
England: The Clarendon Press, 1966), Compare the
characterisation of human nature given by H. L. A. Hart in
The Concept of Law (Oxford, 1961), Ch. IX, 2, pp. 189-95,
which can be summarised again under five heads, namely:
(i) Human Vulnerability.
( i i ) Approximate Equality.
( i i i ) Limited Altruism.
(iv) Limited Resources.
(v) Limited Understanding.
Hart's condition ( i i i ) corresponds to B(i) above; his con
dition (v) to B (ii) and B ( iii) together. His condition
(i) sta te s the most important part of what is covered by
A(i) and A( i i ) together. His condition (iv) is important
for a lawyer or an economist developing the concept of
28
existence. Again, for social l i f e to sustain i t s e l f and
for a common consciousness to develop, the members of
society must have certain commonly shared basic values
among themselves. There is thus no disputing the f i r s t
two ch a r a cter istics of human nature as stated above.
But differences of opinion (based on empirical
observation or moral and ethical valuation) are possible
in the case of the la s t three cha r a cter istics. On the one
hand, i t is possible to postulate that men are completely
u n selfish , capable of i n f a l l i b l e judgment, and possess
perfect information. On the other hand, however, i t is
also possible to postulate that men are t o t a l ly s e l f i s h ,
capable of wholly erroneous judgment only, and possess no
information. Between these two extremes any number of
imperfect combinations are possible. In a theoretical
sense, i t is the magnitude and quality of the above
properties of human nature which determine the character
of the so ciety . As put by Professor Lucas:
If human nature were d iffe re n t, human society would
be d iffe r e n t also. The f i r s t two c o n d itio n s--A (i),
that human beings inhabit the same public, external
world, in which they can interact with one another,
and A( i i ), that they have values which are neither
property, but does not hold in his sense of all
communities--for,example, in t e lle c tu a l or religious ones. !
His condition ( i i ) is better expressed by saying that
human powers are comparable.
29
necessarily the same for a l l , nor actually d ifferen t
for each--cannot be other than they are i f communal
l i f e is to be possible at a l l . The three principles
of imperfection, however, could be d iffe re n t, and i f
they were, communal l i f e would be very d ifferent
also. Many p o lit ic a l ideals have drawn their
strength from some variant view of human nature.23
Professor Lucas presents the following conceptions
of ideal communities:
I. Hobbes' Philosophy
1. Some Interaction
2. Some Shared Values
3. No Unselfishness ( i . e . , Total S e lfishn ess)
4. F a llib le Judgment
5. Imperfect Information
II. Actual Human Society
1. Some Interaction
2. Some Shared Values
3. Incomplete Unselfishness
4. F a llib le Judgment
5. Imperfect Information
III. Heaven
1. Some Interaction
2. Some Shared Values
3. Complete Unselfishness
4. I n f a ll i b l e Judgment ( i . e . , Total
Reasonableness)
^ I b i d . , p. 5.
30
5. Perfect Information
In the above ideal communities, we can see that
the f i r s t two conditions are universally true. But an
important difference can be seen in the Hobbesian society
in which men are t o t a l l y s e l f i s h . Thus:
It is a pessim istic denial of B (i), denying that
men are ever the lea s t bit un selfish, that under
l i e s the p o l i t i c a l pjilosophy of Hobbes. Hobbes
misconceived human nature as being entirely
s e l f i s h , and therefore altogether precluded the
p o s s i b i l i t y of moral government freely supported
by reasonable men, and made government out to be
necessarily a tyranny, only tolerable in that the
se lfis h n ess of tyrants was lik ely to be less
obnoxious than the law of the j u n g le .24
The community of Heaven is completely a l t r u i s t i c ,
free from error in Judgment, and is perfectly informed of
the truth.
Let us attempt a description of the Islamic state.
The Islamic State
1. Some Interaction
2. Total Concord ( i . e . , No Divergence of Values)
3. Incomplete Unselfishness
4. I n f a l l i b l e Judgment ( i . e . , Total
Reasonableness)
5. Perfect Information
In the ideal community of Islam, there will be
total concord on the commonly shared values. For these
24Ib id . , p. 6.
31
values will be a u th o rita tively prescribed by the Holy
Quran and the Prophet's Sunnah as a minimum prerequisite
of the society. The judgment about social and communal
matters will be God's, the Prophet's, or the Caliph's and
is therefore to be regarded as completely i n f a l l i b l e and
t o t a l ly reasonable. As regards information, the Muslim's
knowledge of the truth, piety, and the "common good" will
be certain and perfect, for i t will come from the Precious
Book. He would also know that the basic purpose of his
l i f e is to f u l f i l l the Will of God.
It seems doubtful i f any community in it s ideal
form can ever be established. That goes for the Islamic
State also--not excluding the Khilafate Rashida, the
Right-Guided Caliphate immediately after Mohammad. Human
nature being what i t i s , human society can, at best, only
be improved a l i t t l e at a time. Improvement of l i f e and
the a lle v ia tio n of it s problems rarely, i f at a l l , comes as
a result of grand schemes like those of the Kingdom of God
on Earth, the Platonic Republic, the Communist Utopia, or
a wholesale reformation of mankind. On the other hand, a
great deal can be accomplished, has been accomplished,
through an empirically grounded, modestly ambitious, and
pragmatic type of u tilita r ia n ism . Or, what is now known as
"social engineering" may turn out to be more constructive
than many a national perspective plan in some countries.
As Lord R ussell has very a p t l y remarked:
As a result of these differences in approach, the
a priori system, while in i t s e l f co nsistent, will
crumble to dust i f i t s basic tenets are dislodged.
The empiricist philosophy, being based on observed
f a c t, will not collapse i f in some places we find
fault with i t . The difference is as between two
pyramids of which one is b u ilt upside down. The
empirical pyramid stands on i t s base and does not
f a ll i f a slab is removed somewhere. The a priori
stands on i t s head and topples over i f you so
much as squint at i t .
In eth ics, the practical resu lts of this method
are even more obvious. A theory of good worked out
as a rigid system can wreak fearful havoc i f some
unenlightened despot fancies himself designed by
fate to implement i t . No doubt there may be some
who despise u t i l i t a r i a n ethics because i t starts
from the base desire for happiness. It is quite
certain, however, that the protagonist of such a
theory will in the end do more to improve the lot
of his fellow than will the austere and high
minded reformer pursuing an ideal end no matter
what the means. Together with these diffe re n t
points of view in ethics we find correspondingly
d ifferent attitudes in p o l i t i c s developing. The
lib er a ls in the Lockean tradition had no great
love for sweeping changes based on abstract
principles. Every issue must be dealt with on its
own merits in free discussion. It is this piece
meal, tentative and a nti-system atic, rather than
unsystematic, character of English government and
social practice that continentals find so
exasperati ng.
The u t ilit a r ia n descendents of Lockean liberalism
supported an ethic of enlightened s e l f - i n t e r e s t .
This conception may not have called forth the
noblest sentiments in men; but by the same token,
i t avoided the truly heroic a t r o c it ie s committed
in the name of l o f t i e r systems that envisaged more
dignified motives, while ignoring the fact that men
are not a b stra ctio n s.25
25
Bertrand Russell, Wisdom of the West: A
Historical Survey of Western Philosophy in i t s Social and
P o litic a l Setting (New York: Doubleday & Company, Inc.,
1 959) , p. 218.
33
Crusaders for Islam and the Islamic state who
sincerely wish to improve the lo t of their underprivileged
brethren would be well advised to ponder over the words of
Russell. For: "How often has i t not happened that in
regard to social matters urgent reforms have been delayed
2 6
in the name of an immutable divine law?"
Organization of the Study
The study has been organized in ten chapters.
Chapter II provides a short general introduction to the
religion of Islam. Chapter III provides a brief account
of the early Caliphate, an h istorical account of the
development of p o litic a l philosophy in Islam and an attempt
to c r i t i c a l l y interpret some of the central themes in the
Islamic social philosophy. These two chapters constitute
the necessary background for understanding the p o lit ic a l
economy of the Islamic s ta te . They should be read j o i n t l y .
Chapter IV is an overview of economic organization.
It highlights the ubiquitous economic problems of the
social economy. It also provides a description of the
theoretical framework of the c a p i t a l i s t i c , s o c i a l i s t i c ,
and Islamic economies. The economic organization of
Pakistan has also been discussed in an outline fashion. |
i
Chapters V through VII deal with capital theory,
^Martin G. P la t t e l, Soci al Phi 1 osophy (Pittsburgh,;
Pennsylvania: Duquesne University Press, 1965), p. 170.
broadly speaking. W e have already pointed out that at the
core of any system of p o lit ic a l economy i s , has to be, a
rigorously formulated capital theory without which no
economic theory is worth i t s name. In Chapter V are
analyzed the problems of in te r e st under capitalism,
socialism , and Islam. Chapter VI examines the key problem,
i . e . , the allocation of capital under the three systems.
It is contended that the role of in te r e st has, in actual
practice considerably declined under capitalism, almost
wholly disappeared (so we are told) under socialism, and
would of course not e x is t in the Islamic s ta te . But what
ever the capital theory, there is always a residue of
problems, motives, and situation s which economic theory
f a i l s to account for but which are intimately connected
with the process of capital accumulation. These residual
categories can be studied through the sociology of
re lig io n , psychological theory, or the cultural history of
individual s o c i e t i e s . W e have selected the famous Weber
th esis for this purpose. Chapter VII, therefore, presents
an exposition and critique of the same to determine the
role of socio-cultural-psycho!ogical factors in the
phenomenon of capital formation. Another reason for doing
this is the underlying concern of the study to examine the
system of p o litic a l economy of the Islamic state within
the context of an underdeveloped, c apital-short country.
35
Chapter VIII in vestiga tes the nature of the
distributional problems of the society. W e contend that
the d iscip lin e of economics lacks the e f f e c t i v e tools to
s a t i s f a c t o r i l y resolve these problems. In f a c t, i t is
argued that distribution of income is not e s s e n t i a l ly an
economic problem. It i s , on the other hand, a matter of
human in s titu tio n s and social and legal arrangements.
There is nothing particularly economic about any particular
set of in s titu tio n s or arrangements that preside over the
final distribution of social or national income of a given
society at a given point in history. They can be changed
as per the volition of the members of so ciety . Distribu
tion of income in the final analysis is a m oral-ethical-
and-phi1osophical problem.
Chapter IX is an attempt to bring out in sharp
r e l i e f the broad implications of the Islamic social
philosophy and p o lit ic a l economy for economic organization
of the Islamic sta te .
Chapter X presents the summary and conclusions of
the study.
Sources of Information and
Aval table Literature
Works on Islam are not wanting, but a recent !
statement by Professor Grunebaum, Director of the Center
for Near Eastern Studies of the University of California
at Los Angeles, is important to bear in mind.
36
In 1942, H. A. R. Gibb stated regretfully: "I
have not yet seen a sin gle book written by an Arab
of any branch in any Western language that has made
it possible for the Western student to understand
the roots of Arab culture. More than that, I have
not seen any book written in Arabic for Arabs them
selves which has cle a rly analyzed what Arabic
culture means to the Arabs." This statement could
be extended to include the non-Arab Muslim and his
failure to interpret his culture to both himself
and the West. It holds good today as i t did when
it was written, and i t is lik e ly to hold good for
some time to come.
Such fa ilu re on the part of the Muslim world, so
eminently conscious of i t s in d iv id u a lity , to
achieve, and largely even to attempt, an analysis
of the fundamentals of i t s c i v i l i z a t i o n c a lls for
an explanation.
The following f a c t s , singly or in various
combinations, offer themselves as contributory
causes.
(1) The old-school Muslim considers Islam the
final r e lig io n , the ultimate truth, the one road
to salvation. He also is lik e ly to be conscious
of an Islamic way of l i f e . But he will not think
of Islamic c i v i l i z a t i o n as one among several
c i v i l i z a t i o n s , whose differences in structure
result in differences of p o s s i b i l i t i e s and values.
To him, the f i n a l i t y of the koranic revelation
e n ta ils an approach to history that rates the
several relig io n s according to their proximity to,
or remoteness from, the absolute truth as embodied
in Islam. The Muslim scene needs scrutiny with
respect to it s harmony with the unalterable
divine ordinance, but not with respect to i t s
cultural elements and the forces responsible for
i t s birth and growth.
(2) Modern Muslim society as a whole is lamen
tably ignorant of the orig in , development, and
achievements of i t s c i v i l i z a t i o n . This ignorance
is due partly to a defective educational system
and partly to absorption by the adjustment
problems of the moment. Moreover, s c i e n t i f i c
research methods have not yet found universal
acceptance.
(3) The present situ atio n of the Muslim East
stimulates such discussion of religion or
c i v i l i z a t i o n as f a l l s e a sily in any one or more
of these categories:
37
a. Apologetics of one sort or another;
b. Reformist, or "reactionary" theology;
c. Appeals for Westernization;
d. P o litic a l discussion and propaganda.z/
With an awareness of the foregoing, l e t us look !
at the sources used for this study.
The primary source i s , of course, the Holy Quran.
For lack of knowledge of Arabic on the author's part, two
translations have been used. One, by a European scholar,
Marmaduke Pickthal, is in the English language. The other,;
by an Indian scholar, Abul Kalam Azad, is in Urdu, the
author's mother tongue. Both translations are widely
regarded as authoritative renderings of the Quran. In
f a c t, Azad's introduction and commentaries make up the
single most important source of the author's understanding
of Islam. Azad's commentary upon the f i r s t chapter of the
Quran, "The Opening," may very well be the fin e s t piece of
scholarship on Islam in any language. This commentary
has since been translated into English by Dr. Syed Abdul
L a t i f . ... Another primary source is the Traditions (Sunnah)
of Mohammad. W e have used a shorter co llec tio n for our
purpose here.
Among the secondary sources are the works by
Muslim philosophers in the medieval age and those of
I
27
6. E. von Grunebaum, Islam: Essays in the
Nature and Growth of a Cultural Tradition (London:
Routledge & Kegan Faul , 1961), pp. 185-86.
contemporary writers. Almost all of the comtemporary
writings are (for want of a better expression) of a Western
orientation, either by Westerners themselves or, i f by
Easterners, by people who were educated at European or
American u n iv e r s it ie s . While there is ample litera tu re
upon the history, p o l i t i c s , and social structure of Islam,
i t is regrettable that there is hardly any lite ra tu re upon
the economic organization of the Islamic s t a t e . Besides
the available lite ra tu re upon the Islamic s t a t e , we have
made a liberal use of the lite r a tu r e in economics and
related f i e l d s .
A Final Comment
The present study is a comparative one. It
compares the economic s o c i e t i e s of capitalism, socialism,
and Islam. But, in the final an a ly sis, i t must be realized
that economics is a subordinate d is c ip lin e . The funda
mental premises and postulates of economic theory are
always derived from moral, p o l i t i c a l , and social philoso
phy. Thus, a comparison of c a p i t a l i s t i c , s o c i a l i s t i c , and
Islamic economic systems by i t s e l f is of limited validity
only. It can be very misleading also. The true under
standing and appreciation of diffe re n t socio-economic
arrangements under d iffe re n t systems can be possible only
when looked at in the broader moral, s p i r i t u a l , and social
contexts. The basic questions are philosophical, not
economic. In the end, the choice of an .economic system is
a moral choice, not an economic one.
Professor Isaiah Berlin of Oxford University has
observed:
If we examine the models, paradigms, conceptual
structures that govern various outlooks whether
consciously or not, and compare the various concepts
and categories involved with respect, for example,
to their internal consistency or their explanatory
force, then what we are engaged upon is not
psychology or sociology or logic or epistemology,
but moral or social or p o lit ic a l theory, or all
these at once, depending on whether we confine our
selves to individuals, or to groups, or to the
particular types of human arrangements that are
c l a s s i f i e d as p o l i t i c a l , or deal with them all in
one. No amount of careful empirical observation
and bold and fr u itfu l hypothesis will explain to
us what those men see who see the state as a
devine i n s t i t u t i o n , or what their words mean and
how they rela te to r e a lit y ; nor what those believe
who t e l l us that the sta te was sent upon us only
for our sins; or those who say that i t is a school
through which we must go before we are adult and
free and can dispense with i t ; or that i t is a work
of art; or a u t i l i t a r i a n device; or the incarnation
of natural law; or a committee of the ruling class;
or the highest stage of the self-developing human
s p i r i t ; or a piece of criminal f o l l y . But unless
we understand (by an e f f o r t of imaginative insight
such as n o v e lists usually possess in a higher degree
than logicians) what notions of man's nature (or
absence of them) are incorporated in these p o litic a l
outlooks, what in each case is the dominant model,
we shall not understand our own or any human
society: neither the conceptions of reason and
nature which governed Stoics or Thomists or
govern the European Christian Democrats to-day;
nor the very diffe re n t image which is at the heart
of the holy war in which the national-Marxist
movements in Africa or in Asia, are or may soon be
marching; nor the very d ifferent notions that
animate the liberal and democratic compromises
of the West.28
^®Isaiah Berlin, "Does P o litica l Theory S t i l l
It must be understood that the present study will
not be able to provide a d e f in it iv e formulation of the
P o litica l Economy of the Islamic s t a t e . The study may, at
best, be regarded as a f i r s t step, however imperfect,
towards an understanding, appreciation, and enumeration of
the problems and issues which would be involved in the
economic organization of the Islamic s ta te . It may even
have grave errors of argument and judgment. It need not,
however, be regarded as an exercise in f u t i l i t y for that
reason. As Professor Davis Easton has so rightly remarked:
. . . W e would, of course, be in a much stronger
position i f , in the shadows of empirical research,
we could find concealed the outlines of a viable
conceptual framework. But lacking that, the next
best thing is at l e a s t the discovery of some sort
of theory, whatever i t s inadequacies. This may
sound like a deliberate and perverse invitation
to error. But the truth is that, like all other
learning, theoretical development takes place
through tr ia l and error. A poor theory is better
than none at a l l , f i r s t , because i t at least
shows us the paths that ought not to be taken.
This is no mean accomplishment.29
Finally, i t must be realized that the present
study is not simply about Islam or the Economics of
OQ
David Easton, The P o litica l System: An Inquiry
into the State of P o li t i c a l Science (New York: Alfred A.
Knopf, 1963), p. 305.
on
Islam but more generally about what is known as economics
in the ordinary sense.
30
In the same vein, Professor Kenneth Boulding
has remarked: "There is no more reason to suppose a
'C hristian1 economic theory, for instance, than there is
to suppose a 'Christian' mathematics." ( Beyond Economics
Ann Arbor: The University of Michigan Press, 1968, p.
192.)
It is equally true of Islam.
CHAPTER II
ISLAM
Introducti on
It is a basic doctrine of Islam that man stands in
need of divine help to conduct himself during his mortal
existence on this earth. Indeed, only the All-Knowing
Creator can inform man of the purpose behind His creation.
This knowledge alone can be regarded as authentic.
Tributes of th is knowledge started to flow from
God to man with the appearance of the f i r s t man, i . e . ,
Adam, on our planet. Divine guidance to mankind continued
even after Adam, to help i t to conduct i t s e l f and to
f u l f i l l the purpose of i t s creation. The medium of
communication between God and man was the certain men whom
He chose to bring His message to mankind. He called them
His messengers. They were sent to all sections of mankind.
Some listened to them in humility and awe; most mocked at
them in arrogance and j e s t or did something much worse.
But wheresoever, whensoever, or to whomsoever a prophet
was sent, his mission was the same--to inform mankind of
the eternal Will of God. In submitting to His Will lay
mankind's i n t e r e s t , both here and in the Hereafter.
42
43
Who were these prophets--the messenger boys of God
as i t were? One thing is certain: they were men like
us--human and mortal. But since they submitted themselves
to the All-Mighty's Will, they are also models for us of
human beings par e x c e lle n c e . God sent numerous prophets--
equal among themselves--of whom He speaks in the Quran:
Lo, W e inspire thee [Mohammad] as we inspired
Noah and the prophets after him, as W e inspired
Abraham and Ishmael and Isaac and Jacob and the
t r ib e s , and Jesus and Job and Jonah and Aaron and
Solomon, and W e imparted unto David the Psalms;
And messengers W e have mentioned unto thee
before and messengers W e have not mentioned unto
thee; and Allah spake d ir e c t ly to Moses;
Messages of good cheer and of warning, in
order that mankind might have no argument against
Allah after the messengers. Allah was ever Mighty,
Wise. (4:163-165)
What then is this eternal message from God to man?
The message is Islam, surrender to His Will, which found
i t s universalization, completion, and f i n a l iz a t i o n in the
la st of the Scriptures, the Quran. Thus Mohammad became
the la st of the messengers of the Divine Word. With him,
the purpose of Revelation was complete and so was the
mission of prophecy.
Hence, the Quran declared:
He hath revealed unto him [Mohammad] the
Scripture with truth, confirming that which was
(revealed) before i t , even as He revealed the
Torah and the Gospel. (3:3)
And so:
This day (declared God) I perfected your
religion for you and completed M y favour unto
you, and have chosen for you as r eligion AD.-1SLAM.
(5:3)
What Is Islam?
It would greatly improve our understanding and
appreciation of I si 1 am and i t s contribution to c i v i l i z a t i o n
i f we f i r s t fam iliarize ourselves with the histo r ica l
background of the pre-Islamic world. Sir Muhammad Zafrulla
Khan has summed i t up quite succinctly:
When Muhammad, The Prophet of Islam, was born
in August, 570, of the Christian era, at Mecca,
the principal town of Arabia, the c i v i l i z a t i o n s
associated with the names of Egypt, Babylon, and
Greece were already matters of history. They
awaited the researchers of the archaeologists,
the antiquary, and the scholar to be rescued from
obii vion.
Europe was s t i l l largely pagan, devoted to the
worship of Nordic, Teuton, and a host of other
gods. In South Asia, Brahmanism and Buddhism had
long passed their prime and had entered upon a
placid and prolonged old age.
In the Far East, the homely philosophy of
Confucius and the "way" of Lao-Tze pursued a
sluggish and somnolent course. They had e a r lie r
been stirred by the advent of Buddhism into
China, but had fallen back into p a s siv ity , along
with Buddhism. Chinese scholars, feelin g that a
period of decline and decay had set in, made
sporadic e ffo r ts at revival.
The two great empires of Iran and Byzantium
were interlocked in a struggle which ultimately
resulted in death for both. The sudden end of
one and the slow expiration of the other followed
in due course, though the final blows in each
case proceeded from a quarter e n tire ly unexpected.
Religion, philosophy, and learning were at a
low ebb. The s p i r i t , the mind, and the i n t e l l e c t
languished. Mankind had entered upon a decline.
The earth seemed to be dying. It was the darkest
period of the Dark Ages. There was only an
45
occasional glimmer of lig h t here and there. As
the Quran says: "Corruption had overtaken both
land and water,' in consequence of that which the
hands of men had wrought."
In Arabia the gloom was almost unrelieved.
The peninsula was an outlying and neglected region,
i t s inhabitants innocent of learning, philosophy,
and science. Although ind ifferent toward both the
arts of peace and the regulations of war, the
Arabs were good fig h te r s. The hard, unrelenting
struggle for existence in a waste and arid region
l e f t l i t t l e margin for any other pursuit.
Their principal vices were indulgence in
liquor and gambling and promiscuity in sexual
r e la t io n s . Woman was held in l i t t l e honor, and in
certain fam ilies who prided themselves on their
sta tu s, the practice of infanticide was common.
In f a c t , woman was regarded more as a chattel than
as a companion or helpmeet, occupying a position
only s l i g h t l y above that of a slave. When a man
died his sons inherited all his wives, except the
mother of the sons. Each son, however, was
responsible for the welfare of his own mother.
Slavery was a familiar and widespread i n s t i
tu tio n , and there was no lim it to the hardship
and indignity to which a slave might be exposed.
The condition of slaves was a cycle of wretched
ness and misery, terminated only by death.2
The nomadic tribes of Arabia lived a very primitive
l i f e . Their wealth consisted of horses, camels, sheep,
and goats. The economy of the towns consisted of the
production of dates and liquor and trade with neighboring
towns and countries. The p o lit ic a l situatio n was confused
Muhammad Zafrulla Khan, Islam: Its Meaning for
Modern Man (London: Routledge and Kegan Paul, 1962)^
"Land" here s i g n i f i e s peoples who did not profess b e l i e f
in any Divine revelation, while "water" refers to peoples
who professed b e l ie f in such revelation.
^Ibid. , pp. 15-17.
46
and unstable. S t r i c t l y speaking, there was no p o lit ic a l
l i f e . Mecca, the biggest city and a sort of c it y - r e p u b lic ,
was venerated throughout Arabia on account of the Sanctuary
attached to the Ka'aba, the House of God, a pilgrim resort
tr a d itio n a lly b u ilt or rebuilt by Abraham or his eldest
son Ishmael. R e lig io u sly , the Arabs were Pagans and idol
worshippers.
With th is background in mind, l e t us now look at
the teachings of the new r eligion .
L it e r a lly , the word Islam means "peace" and
"submission." "It is interpreted as meaning the attainment
of peace through submission to the Will of God, that i s ,
3
through conformity to Divine Law and Guidance."
In terms of r e lig io n , Islam consists of the
following duties--regarded as the p illa rs ( arkan) of Islam:
1) Testimony of f a it h - - t h e Shahada,
2) Cannonical prayers--the S a la t,
3) Fasting of Ramadan--the Sawm,
4) Payment of the t i t h e - - t h e Zakat,
5) Pilgrimage to Mecca-»the Hajj.
In order to provide a complete code of d isc ip lin e
for the Muslim's l i f e , to the above is also added:
6) Holy war for the defense of Islam--the Jihad.
3 1bid. , p. 164.
47
W e shall discuss here only the f i r s t , i . e . , the
testimony of f a it h . Islam c a ll s for a double testimony in
the words:
There is no God but God, (and)
Mohammad is Messenger of God.
A d iffe r e n tly worded English rendering is as
f o l 1ows:
There is no d iv in ity (or r e a l i t y , or absolute)
outside the only Divinity (or Reality, or
Absolute) [and]
Mohammad (the G lorified, the Perfect) is the
Envoy (the mouthpiece, the intermediary, the
Manifestation, the symbol) of the D i v i n i t y .4
In order to f u lly understand Professor Schuon's
rendering of the Shahada, we must look at his manner of
comprehending Islam. According to him:
Islam is the meeting between God as such and
man as such.
God as such: that is to say God envisaged,
not as He manifested Himself in a particular way
at a particular time, but independently of history
and inasmuch as He is what He is and also by His
nature He creates and reveals.
Man as such: that is to say man envisaged,
not as a fellow being needing a miracle to save
him, but as man, a theomorphic being endowed with
an in te llig e n c e capable of conceiving of the
Absolute and with a will capable of choosing
what leads to the Absolute.
To say "God" is to say also "being,"
"creating," "revealing"-*, in other words i t is
Frithjof Schuon, Understanding Islam, trans.
D. M . Matheson (New York: Roy Publishers, In c., 1960),
p. 16.
48
to say "Reality," "Manifestation," "Reintegration":
to say "man" is to say "theomorphism," "transcendent
in te llig e n c e ," and "free w ill," These are in the
author's meaning, the premises of the Islamic
perspective, those which explain it s every a p p li
cation and must never be lo s t sight of by anyone
wanting to understand any particular aspect of
I si am.
To sum up: Islam confronts what is immutable
in God with what is permanent in man.5
It is quite clear from the above that the key to
understand Islam is to understand the nature of God, and
the prophecy of Mohammad. One is the cause; the other is
the e f f e c t . The purpose is the revelation of the Quran.
In order to look at them, we shall organize our discussion
around three basic questions: What is the Nature and
Conception of the Godhead in Islam? What is the Nature
and Function of the Prophecy of Mohammad? And what is the
Essential Message of the Quran?
The Nature and Conception of God
It must at once be understood that the Quran
declares, with utmost categorical f i n a l i t y the absolute
Oneness and/or the Unity of the Godhead. This we have
already noticed as part of the testimony of f a it h . The
references to i t in the Quran are only too numerous. The
nature of Oneness has been most t e l l i n g l y revealed in
chapter (Surah) 112, e n t i t le d , "The Unity," in the Quran:
51b id ., pp. 13-14.
49
In the name of Allah, Ever Gracious, Most
Compassionate
Say: He is Allah, the One!
Allah, the eternally Besought of all!
He begetteth not nor was begotten.
And there is none comparable unto Him. (112:1-4)
God, therefore, has no equal or partner, and all
adoration, g l o r i f i c a t i o n , worship, and obedience are due
to none other than Him. To him alone we must look for
guidance, grace, and protection. The f i r s t chapter of the
Quran, which indeed not only provides a preview as well
as an overview of the whole but also sums up the essence
of the Quran, e n t i t le d , "The Opening," c lea rly, firmly,
and b eautifully lays down the foundation of the fundamental
philosophy of Islam. It is:
In the name of Allah, the Beneficent, the
Merciful.
Praise be to Allah, Lord of the Worlds,
The Beneficent, the Merciful.
Owner of the Day of Judgment,
Thee (alone) we worship; Thee (alone) we
ask for.h elp .
Show us the straight path,
The path of those whom Thou hast favoured;
Not (the path) of those who earn Thine
anger nor of those who go astray. (1:1-7)
This chapter (Surat al-F a tih a) is also called the
Core of the Quran (Umm-ul-Quran) , The Su ffic ien t (A!-
Kafia) , the Treasure House (A1-Kanz) , and the Basis of the :
Quran (Asasul-Quran). It presents the essential philosophy;
of the teachings of the Quran in terms of:
1. Praise of God (Hamad),
2. Divine Providence (Rububiyat),
50
3. Divine Benevolence ( Rahamat) ,
4. Divine Justice (Adalat) ,
5. Unity of God (Tawhid) ,
6. Divine Guidance (Hidayat) .
The Quran in fact is a detailed exposition of the
divine attributes pointed out in the above senses. It is
for this, reason that the Islamic form of prayers is
incomplete without a repeated rec ita tio n of this chapter
of the Quran. Maulana Abul Kalam Azad has said of it:
Think over. What type of mind does this all
argue or aim to build? Whatever view one may take,
this is clear that the mind which the "Opening of
Quran" (Surat-ul-Fatiha) depicts is a type of
mind which r e f le c t s the beauty and mercy of God
or universal humanity, the mind which the Quran
aims to b u ild .6
The Nature and Function of the
Prophecy of Mohammad
Just as God is all divine, Mohammad is all human.
He lived a mortal existence in time and space. Born in
the year 570 of the Christian era in the city of Mecca, he
died in 632 in the c it y of Medina. Allah chose him to be
His Messenger to mankind. The Quran declares: "Say (0
Mohammad): M y Lord be g lo r if ie d ! Am I aught save a mortal!
messenger?" (17:93). He led his people in prayers. He
governed them as their ruler. He commanded them in war.
fi
Abul Kalam Azad, The Tarjuman al-Quran, Trans.
Syed Abdul Latif (New York! Asia Publishing House, 1962), !
I, p. 194.
He founded the f i r s t Republic of Islam--the c i t y - s t a t e of
Medina. He gave his people law and established order. He
dispensed j u s t ic e . But Mohammad's proudest boast was that |
he was a "slave of Allah," a Muslim, a privilege available
to anyone who should seek i t . The following Quranic verse
makes i t categorically clear:
Say (unto them, 0 Mohammad): I am only a
mortal like you. It is inspired in me that your
God is One God, therefore take the straight path
unto Him and seek forgiveness of Him. And woe
unto the idolators. (41:6)
Mohammad's prophecy began with the f i r s t revelation;
At forty, Mohammad in a state of sleep or in a trance heard
a voice say: "Read!" He said: "I cannot Read." The
voice again said: "Read!" He said" "I cannot read."
A third time the voice, more t e r r i b le , commanded: "Read!"
He said" "What can I read?" The voice said:
Read: In the name of thy Lord Who createth.
Createth man from a c l o t .
Read: And i t is thy Lord the Most Bountiful
Who teacheth by the pen,
Teacheth man that which he knew not. (Quran 96:
1-5)
The revelations continued to the end of Mohammad's
l i f e - - f o r some 22 years.
Prophecy in Islam has been interpreted in various
j
ways. To some, prophecy is an innate faculty of the soul
i t s e l f and does not indicate a state of possession by
super-natural powers. Prophecy has been defined as "a
type of consciousness in which 'unitary experience' tends
to overflow i t s boundaries, and seeks opportunities of
redirecting or refashioning the forces of c o lle c t iv e
life ." ^ Among the Classical Muslim Philosophers, Al-Farabii
looked at divine inspiration (wahy) as the union of the
highest philosophical knowledge, derived from the highest
perfection of the faculty of imagination with the highest
form of prophecy, but the philosophical knowledge being the
superior of the two. Disagreeing with Al-Farabi, Ibn Sina
(Avicenna) sees in the prophet an in te llec tu a l acuteness
of the highest order and c a l l s i t the "holy in tellect"
(aql qudsi). Islam and philosophy being id e n tic a l, for
Avicenna, Islam could be understood in philosophical terms
alone. Al-Ghazzali (A1 Gazal), highly c r i t ic a l of all
philosophy and philosophers, strongly rejected all attempts
toward philosophical and psychological interpretations of
prophecy, nay, indeed, of Islam as a whole. To him,
prophecy, being absolutely singular and utterly unique, is
beyond the reach of all philosophical and psychological
comprehension, hence a ccessib le to the. comprehension and
the spiritual experience of the Muslim mystic ( s u f i ) only.
Iqbal has bea u tifu lly stated the Quranic doctrine
of prophecy in the following words:
Mohammad Iqbal, The Reconstruction of Religious
Thought in Islam (Lahore, West Pakistan: Shaikh Muhammad
Ashraf, 1958), p. 125.
Looking at the matter from this pofnt of view,
then, the Prophet of Islam seems to stand between
the ancient and the modern world. In so far as
the source of his revelation is concerned he
belongs to the ancient world; in so far as the
s p i r i t of his revelation is concerned he belongs
to the modern world. In him l i f e discovers other
sources of knowledge suitable to i t s new direction.
The birth 6f Islam, as I hope to be able presently
to prove to your s a t i s f a c t io n , is the birth of
inductive i n t e l l e c t . In Islam prophecy reaches its
perfection in discovering the need of i t s own a b oli
tion. This involves the keen perception that l i f e
cannot for ever be kept in leading strings; that in
order to achieve full self-consciousness man must
f in a l ly be thrown back on his own resources. The
abolition of priesthood and hereditary kingship in
Islam, the constant appeal to reason and experience
in the Quran, and the emphasis that i t lays on
Nature and History as sources of human knowledge,
are all d iffe r e n t aspects of the same idea of
f i n a l i t y , The idea, however, does not mean that
mystic experience, which q u a lita tiv ely does not
d iffe r from the experience of the prophet, has now
ceased to e x is t as a v ita l fa ct. Indeed the Quran
regards both 'Anfus' ( s e l f ) and 'Afaq' (world) as
sources of knowledge. God reveals His signs in inner
as well as outer experience, and i t is the duty of
man to judge the knowledge-yielding capacity of all
aspects of experience. The idea of f i n a l i t y , there-r
fore, should not be taken to suggest that the ultimate
fate of l i f e is complete displacement of emotion
by reason. Such a thing is neither possible nor
desirable. The in t e lle c t u a l value of the idea is
that it tends to create an independent critica l
attitude towards mystic experience by generating
the b e lie f that all personal authority, claiming
a supernatural o rig in , has come to an end in the
history of man. This kind of b e l ie f is a psychologi
cal force which in h ib its the growth of such
authority. The function of the idea is to open up
fresh vistas of knowledge in the domain of man's
inner experience. Just as the f i r s t half of the
formula of Islam has created and fostered the s p i r i t
of a c r i t ic a l observation of man's outer experience
by divesting the forces of nature of that divine
character with which e a r lie r cultures had clothed
them. Mystic experience, then, however unusual and
abnormal, must now be regarded by a Muslim as a
perfectly natural experience, open to c ritic a l
54
scrutiny lik e other aspects of human experience.
This is clear from the Prophet's own attitude
towards Ibn-i-Sayyad's psycgic experiences. The"
function of Sufiism in Islam has been to systematize
mystic experience; though i t must be admitted that
Ibn-i-Khaldun was the only Muslim who approached
i t in a thoroughly s c i e n t i f i c spirit.®
W e may now sum up the mission of Mohammad, the
Prophet of Islam. In the words of Abul Kalam Azad:
The Quran asks the Prophet to announce to the
following e ff e c t : "I have come to acknowledge
the universal truth given to all prophets. Should
you be a Jew and believe in the Torah, then, I am
here to say that your Book is truly from God.
I have come to endorse i t and revive the truth i t
contains. Should you be a Christian, do I deny
the Evangel? I have come to make you act truly
on the Evangel. If you are a follower of Abraham,
then bear in mind that my mission is wholly his
own. If you are a follower of another prophet or
of the founder of another r e lig io n , then i t is not
my wish to turn you away from him. I should like you
to be more staunchly devoted to Him.9
The Essential Message of the Quran
The Quran, whose l i t e r a l meaning is "The Reading"
or "The Recitation," is the sacred book of Islam. Its
basic elan is moral, whence derives its special stress on
monotheism, accountability, and j u s t i c e . The Quran con
s i s t s of 114 chapters (Surahs) of varying length. The
longest chapter consists of 286 verses and the shortest of j
three. The Quran was revealed piecemeal over a period of
81bid., pp. 126-127 .
q
Abul Kalam Azad, The Tarjuman al-Quran, trans.
Syed Abdul L atif, II (London! Asia Publishing House,
1967), pp. 51-52.
55
some twenty-two years. The arrangement of chapters is not
chronological, as would be normally expected. To quote
the late Marmaduke Pickthal, European convert to Islam and
a life lo n g scholar of the Quran:
All the surahs of the Koran had been recorded
in writing before the Prophets's death, and many
Muslims had committed the whole Koran to memory.
But the written surahs were dispersed among the
people; and when, in a battle which took place
during the Caliphate of Abu Baki— that is to say,
within two years of the Prophet's death--a large
number of those who knew the whole Koran by heart
were k ille d , a c o lle c t io n of the whole Loran was
made and put in writing. In the Caliphate of
Othman, all ex istin g copies of surahs were called
in, and an authoritative version, based on Abu
Bakr's c o lle c tio n and the testimony of those who
had the whole Koran by heart, was compiled exactly
in the present form and order, which is regarded
as traditional and as the arrangement of the
Prophet himself, the Caliph Othman and his helpers
being comrades of the Prophet and the most devout
students of the Revelation. The Koran has thus been
very carefully preserved.
The arrangement is not easy to understand.
Revelations of various dates and Madinah revelations
are found in Meccan surahs; some of the Madinah
surahs, though of late revelation, are placed f i r s t
and the very early Meccan surahs at the end. But
the arrangement is not haphazard, as some have
h a stily supposed. Closer study will reveal a
sequence and s i g n i f i c a n c e - - a s , for instance, with
regard to the placing of the very early Meccan
surahs at the end. The inspiration of the Prophet
progressed from inmost things to outward things,
whereas most people find their way through outward
things to things w i t h i n .10
Sir Muhammad Zafrulla Khan has recently observed:
^°Marmaduke Pickthal, The Meaning of the Glorious
Koran (New York: Alfred A. Knopf, 1930), pp. 18-19.
56
One reason why the present arrangement does not
adhere to the chronological order is that the
revelation came as i t was needed in the contempor
aneous state of the people to whom i t was immediately
addressed--the purpose being, f i r s t , to create faith
in the Existence and Unity of God; then, to lay the
foundations of a beneficent society on those
principles and to train i t in their exercise so
that the people could become the bearers of the
Divine message and i l l u s t r a t e i t in practice in
daily liv in g. This necessita ted that revelation
be vouchsafed stage by stage over a period of years,
reinforcing the cardinal, central doctrine of the
Existence and Unity of God throughout, but working
out the pattern of a beneficent society gradually,
adding new features after those revealed e a rlie r
had been firmly grasped and put into practice. Once
this purpose was achieved, i t was no longer necessary
to have the revelation arranged in that order. It
had then to serve the need of an establish ed , though
constantly growing community. The order to be
followed henceforth was that which was appropriate
to those c o n d it io n s .^
W e already have some idea of the essential message
of the Quran. It has been pointed out that the Quran is
12
the very word of God. Its message is plain, simple, and
direct. It is sacred, etern a l, and universal. It is real,
philosophical, and practical. It is merciful, b e n e f ic ia l,
' and beautiful. It is r ation al, reasonable, and under-
L
stanable.
^Khan, op. c i t ., pp. 83-84.
1 2
There is no point in a controversy over the
contention whether the Quran i s , or is not, the very word j
of God. The Muslims believe that i t is .
The only supporting evidence is of course the word I
of Mohammad. A comparable case is of the Divine character j
of the Ten Commandments. The Commandments are the word of '
God because so declared Moses.
57
It is needless to say that no one ever did or will
understand the Quran better than Prophet Mohammad himself.
It is therefore imperative upon us to take guidance from
him in order to understand the message of the Quran. He
has stated:
The quran consists of fiv e heads, [1] things law
f u l , [2] things unlawful, [3] clear and p o sitiv e
precepts, [4] mysteries, and [5] examples. Then
consider lawful which is there declared to be so,
and that which is forbidden as unlawful; obey the
precepts, believe in the mysteries, and take
warning from the examples.>3
W e shall endeavor here to state the e ssentia l
message of the Quran as contained primarily in what
Mohammad called i t s "clear and p ositive precepts." It is
these Quranic precepts that are the foundation of the
Islamic social philosophy.
It should be clearly understood at the very outset
that the Quranic exposition of Islam is only one of the
many expositions of the natural r eligion of mankind. There
have been e a r lie r expositions of i t . The r elig io n s of the
Jews, Christians, and Sabeans are the ones that have been
expressly mentioned in the Quran. Others have been
implied. Mohammad was not the f i r s t to preach God's
r e lig io n . Others before him had carried His word at
d ifferent times to d ifferent peoples. On Quranic evidence,'
!
^3Abdullah Al-Mamun A1-Suharwardy, The Sayings of ;
Muhammad (London: John Murray, 1954), p. 90.
58
no land or no people passed without a prophet of Islam
with'the message of peace and surrender unto God. The
Quran says:
Nor hath there been a people unvisited by a
warner. (35:23)
Assuredly, Thou (0 Prophet) art a warner.
And every people hath had it s guide. (13:9)
It is in this sense that the statement that the basic
message of the Quran is eternal is to be understood. The
other sense in which i t should be understood is that i t is
also eternal for all future times. The Quran speaks of
i t s e l f :
This is no new tale of f i c t i o n , but a
confirmation of previous scriptures, and an
explanation of all things, and a guidance and
mercy to those who believe. (12:111)
The Quranic message is also universal. It is
addressed not to a particular people, not indeed to humans
only. For, i t is addressed to human beings just as to
ethereal beings. In the scheme of the Divine, i t defined
the proper place of a l l , whether they be angels, humans,
or animals. It is in this cosmic sense that man is the
fin e s t of God's creations and His viceregent on earth.
Man is not simply superior to animals but also to angels.
The Quran speaks of the creation of man in the following
words:
And when thy Lord said unto the angels: Lo!
I am about to place a viceroy in the earth, they
said: Wilt Thou place therein one who will do harm
59
therein and will shed blood, while we, we hymn
Thy praise and sa n tify Thee? He said: Surely
I know that which ye know not. (2:30)
And when W e said unto the angels: Prostrate
yourselves before Adam, they f e l l prostrate, all
save I b l i s . 14 He demurred through pride, and so
became a d is b e lie v e r . (2:34)
Dr. Syed Abdul L atif has stressed the universality
of the Quranic message as follows:
The Unity of man receiving its sustenance from
the Unity of God is in i t s social bearing the lead
ing theme of the Quran. To promote that unity,
the Quran c a l l s upon man f i r s t to develop the
sense of c a t h o l i c i t y in l i f e .
In building up this c a th o lic it y of mind, the
Quran is careful enough not to l e t the Arabic
speaking people feel that the Arabic language in
which the Quranic message is delivered is by any
means e x clu s iv e ly sacrosanct or the exclusive
language of God. God expresses Himself in all
tongues.
So wide is the catholic attitude of mind
intended to be stimulated that the Quran promises
salvation not only to the people of the Quran but
to those also among whom other scriptures have
been delivered--n ot merely to these, but to every
human being not believing in any established Church
but who nevertheless acknowledges the value of
Ib 1 is is the name of the angel universally known
as Satan. He, on his refusal to pay homage to Adam,
requested and was granted God's leave t i l l the day of
Judgment to, shall we say, match his wits with those of
Adam and his progeny. He surely outwitted Adam and Eve.
In the words of the Quran: "But Satan caused them to :
d e flec t therefrom and expelled them from the (happy) state I
in which they were; and W e said: Fall down, one of you a
foe unto the other! There shall be for you on earth a
habitation and provision for a time." (2:36)
60
Divine unity in human l i f e and recognizes
r esp onsib ility for his actions, and liv e s uprightly.
The privilege extends even to those who are
not attached to any established f a ith .
The idea underlying this catholic attitude was
to eliminate f r i c t io n between the followers of the
different faiths and rest their relationship on a
common b e l ie f in the Unity of God consciously
operating for the Unity of man.15
What is the sum total of the essential message of
the Quran? No better summary seems possible than that of
Maulana Abul Kalam Azad. He has concluded:
[The] Quran came forward to re-present to the
world at large the universal truth sponsored by
every relig io n .
(a) It not only stated that all religion s were
divinely revealed and upheld but one truth enjoin
ing b e l ie f in One True God and righteous livin g
in consonance with that b e l i e f . But i t also made
i t clear that their followers had deviated from
that truth and needed to be brought back to i t .
It therefore set i t s face against every form of
sectarianism that had arisen in consequence.
(b) It advanced the view that even as the laws
of Nature regulated and sustained the machinery
of the universe, even so, there was a spiritual
law of l i f e which regulated and governed the l i f e
of man, and that th is law was one and the same for
every one. The greatest error into which mankind
has fallen was to forget and disregard this
spiritual law of l i f e and to divide mankind into
rival camps.
Syed Abdul L a t i f , The Mind AV-Qurari Builds I
(Hyderabad, India: The Academy of Islamic Studies, 1952), j
pp. 12-14.
61
(c) The primary aim of religion was to keep
mankind united and never to promote disunity.
The greatest tragedy of man was that he turned
an instrument of unity into a weapon of disunity.
(d) The Qur'an came to distinguish religion
from i t s outward observance. The former i t
called Din and the la t t e r Shar1 a and M i nhaj. Pin
was but one and the same everywhere and at a l 1
times and was vouchsafed to one and all without
discrimination. In respect of the outward obser
vance of Din, there was variation and this was
in evitab le. It varied from time to time and from
people to people, as seemed pertinent to every
situ a tio n . Variations of this nature could not
alter the character of Pin or the basis of
re lig io n . That was the truth which the Qur1 an J
aimed to emphasize. Its compalint was that Pin
had been neglected and the variation in Shar1 a
and M i nhaj or the outward form of observance
idealized and made the basis of mutual differences
among mankind.
(e) It stated that groupism would not lead
to progress or bring salvation to man. These
group formations were all man-made. The Din
prescribed by God was but one. And what was this Pin
but the way of devotion to one common God and of
righteous liv in g -- t h e law of l i f e from which one
was not to stray?
(f) It is announced in very clear terms that
i t s call was but to proclaim that all religions
were true and that their followers had disregarded
the truth which they embodied. Should they return
to this forgotten truth, the task of the Qur|an
was f u l f i l l e d . The act will be regarded as indeed
the acceptance of the Qur'an. The truth common to
all of them was but what i t c a lls Al-Pin or Al-Islam.
(g) It observed that the Din of God was not
meant to divide man from man, but that, on the other
hand, i t was there to inspire the feelin g of fello w
ship between one and another and le t them all liv e
bound together by the common t i e of devotion to
God. So, when there is one and the same God for
one and a l l , when the purpose common to them all
is nothing but devotion to Him, and when one has
62
necessarily to reap what he sows, since such is the
law of action in l i f e , then the Qur'an asks, "Why
should one fig h t another in the name of God and
religion?
Islam's Attitude Toward Other Religions
In the history of all religions or id eologies, be
they evolutionary or revolutionary, a day, sooner or la te r ,
a r is es , when they have to make their peace with the world
t .
| and look forward to a se ttle d l i f e of peaceful coexistence
with other r eligion s and ide o lo g ie s. It would not be out
of place to look into the attitude and orientation of
Islam toward other r elig io n s.
It has already been pointed out that the Quran
makes repeated references to prophets who preceded
Mohammad. The remarkable thing is that the Quran freely
attaches to the Old Testament (Torah) and the New Testament
(Evangel) the value that i t attaches to i t s e l f . It de
clares :
j
And W e gave him (Jesus) the Evangel with i t s
guidance and l i g h t , confirmatory of the preceding
law (Torah); a guidance and warning to those who
fear God. (5:50)
The Quran also provides testimony to the .
miraculous birth of Jesus in the following words:
(And remember) when the angels said: 0 Mary!
Lo! Allah giveth thee glad tidings of a word
^Azad, op. c i t . , pp. 181-83.
63
from Him, whose name is the Messiah, Jesus, son
of Mary, i l l u s t r i o u s in the world and the Hereafter,
and one of those brought near (unto Allah). (3:45)
She said: M y Lord! How can I have a child
when no mortal hath touched me? He said: So ( i t
will be) Allah createth what He w i l l . If He
decreeth a thing, He saith unto i t only: Be!
and i t i s . (3:47)
W e have also pointed out before that Al-Islam
is the name given to the same, one, and true religion of
God professed and preached by all true prophets. Thusly
conceived, there is no difference between various r e l i -
17
gions, nor is one of them superior to another. There is
thus no c o n f l ic t between the teachings of, say, the Quran
and the Bible. The late Maulana Abul Kalam Azad, one of
the most learned interpreters of the Quran, has observed:
So there is really no difference between the
teachings of the Quran and the teachings of Christ.
The injunctions of both are the same. Only, the
sty le employed in expression and the occasion for
the utterance varies. Christ stressed the need for
Cf. Professor W . Montgomery Watt's conclusion:
VFour points have been considered in which Islam might
seem to be id e o lo g ic a l. With regard to the f i r s t two, the
claim to be parallel to Judaism and Christianity and to be
a continuation of the Judaeo-Christian (or Abrahamic)
prophetic tr a d itio n , i t proved possible to make out a
case for thinking that Islam was not id eolog ical. In the
claim to have revelational knowledge of historical events,
on the other hand, there is an ideological factor; and i t
seems lik e ly that the same is true of the claim to be a
universal r e lig io n , though this point cannot be settled
at the present time." (W. Montgomery Watt, Islam and the
Integration of Society (Evanston, I l l i n o i s : Northwestern
University Press, 1961), p. 277.
64
purification of the heart, and did not attempt to
lay down a law, for, the law of Moses was there, and
he did not choose to a lt e r i t . He merely desired
that this law should be applied to purify the
s p i r i t . The Quran however presents ethics and law
simultaneously. Naturally therefore, i t has had to
assume a s t y le and expression which should create no
doubts as to the purposes served. In the f i r s t
instance, i t c a ll s upon man to develop the talent
for forgiveness, as i t regards i t as the basis on
which all piety and righteousness should rest. In
the second, i t keeps open the door for r eta lia tio n
in unavoidable contingencies. In the third, i t is
careful to make clear that r e ta lia t io n should not
err on the side of excess, as that would be decided
in j u s t ic e . This attitude is common to all r e l i g i o n s . 18
So l e t i t be said to the eternal credit of Islam,
which cannot probably be said of any other r elig io n , that
19
i t declared the truth and unity of all r elig io n s,
informed mankind of i t s common descent, and proclaimed
the unity of God and His Will. It has been emphatically
stated in Surah 5 of the Quran:
Lo! Those who believe (in that which is
revealed unto thee, Muhammad) and those who are
Jews, and Christians, and Sabeans--whoever believeth
in Allah and the Last Day and doeth right--surely
their reward is with their Lord, and there shall no
fear come upon them neither shall they grieve. (2:62)
181bid., p. 82
19
This should be compared and contrasted with the
attitude and teaching of other r e lig io n s . Each not only
claims that i t alone is the bearer of truth and the high
way to salv a tio n , but also that all other religions are
untrue and cause for condemnation. H isto rica lly , i t is
this religiou s bigotry which has been responsible for so
much of the hatred, bloodshed, and holy wars in the name
of God.
65
To quote Abul Kalam:
It is this Islam so continuously delivered
throughout the ages which is the true religion
(Al-Islam) or way of l i f e as fixed by God, says
the Quran. Everything e lse is man-made, mere
groupism. If you should resolve together to
follow the path of devotion to God, of righteous
l iv in g , and turn away from all aberrations thereof,
the purpose of the Quran is f u l f i l l e d . 20
A Concluding Note
In simple terms, Islam teaches s t r i c t monotheism,
God's a ttr ib u te s , b e l ie f in the Day of Judgement, univer
sal humanity, and equality of man. In Islam, Divinity and
Humamity never mix. For i t s follow ers, i t prescribes a
way of l i f e which is intended to promote spiritual and
moral excellence and human happiness. It emphasized the
need for the c u ltiv a tio n and development of human fa cu ltie s
and in t e lle c tu a l powers. It t e s t i f i e s to the truth of the
teachings of all the prophets who came before Mohammad.
It declares that all r elig io n s are true and equal and that
only a religious bigot would rate one superior or inferior
to the others. It not only teaches peace but also peace
ful coexistence. Islam makes every man personally
responsible for his actions Here and his salvation in the
Hereafter. No one carries an outstanding debt of the
Original Sin for which Adam and Eve, and not mankind as a
20I b i d . , p. 176.
66
whole, are responsible. To use a popular expression,
Islam, the natural r elig io n of man, is s t r i c t l y the system
of private, f r e e , and individual i n i t i a t i v e and enterprise
in the moral-spiritual sense. Between Man and God stands
no power, but God's law. The divinely ordained r ela tio n
ship is God--Islam--Man and not God--Mohammad--Man.
Before His law, the ordinary Muslim and the prophet of
Islam are equally accountable. Praise and punishment
would be awarded according to one's own deserts. God's
scale of j u s t ic e knows no favor. But He would be compas
sionate and m erciful. Not because somebody has paid for
mankind's sins or he can intercede between God and Man,
but because He is the Most Merciful. Not because His
j u stic e is arbitrary, but because He is the Master of the
Day of Judgement. Not because His law is beyond mankind's
reach, but because man is human.
In His r e v e la tio n s , God has provided stra ig h t,
clear, and complete guidance to man to enable him to
conduct himself righteously during his mortal existence on
this earth. Man, of all God's creatures, has however
been allowed the p r iv ile g e to exercise his own independent
choice between surrender unto God's law, i . e . , Islam, and
disregard of His Will.
CHAPTER III
ISLAMIC SOCIAL PHILOSOPHY
Introduction
Now that we have some conception of Islam, we shall
endeavor to develop some understanding and appreciation of
Islamic social philosophy. Social philosophy has to do
with the analysis, evaluation, and j u s t i f i c a t i o n of
so c iety 's basic values, i n s t i t u t i o n s , and directions.
These may relate to s o c i a l, p o l i t i c a l , economic, e t c . ,
spheres of l i f e . Social philosophy is "a philosophic
critique of social process with reference to the principles;
underlying social structure and functions."^
Furthermore:
Robert N. Beck, Perspectives in Social Philosophy:
Readings in Philosophic Sources of Social Thought (New
York: Holt, Rinehart and Winston, 1967), p. 1.
Professor Beck has footnoted his definition: "The
term Social Philosophy was used by Thomas Hobbes for a
general theory of human so c ie ty , i t also appears in the
su b title of J. S. M ill's Principles of P olitica l Economy
(1848). Some related expressions are p o litic a l phi 1osophy j
and philosophy of righ t, which are generally used as
synonyms for social philosophy though some philosophers do !
suggest certain d is tin c tio n s among them." p. 1. !
67
68
As the philosophic critique of the principles
underlying social process, social philosophy seeks
to develop the arguments that j u s t i f y p o litic a l
and social i n s t i t u t i o n s , either as they actually
are or as they are imagined. If the emphasis of
a philosopher is primarily evaluation, social
philosophy becomes for him a branch of eth ics,
which is the inquiry into the good. That is , since
ethics or moral philosophy deals with the most
general considerations of values, social philosophy
is a matter of th e ir application to the moral ques
tions raised by the social order. On the other
hand, i f the philosopher's in terest is in methods
of inquiry and analysis of concepts, his social
philosophy will be neutral toward value and will
be directed rather toward c la r if i c a t i o n of terms
and arguments. More speculative philosophers may
try to combine these two i n t e r e s t s . 2
Social philosophy also concerns i t s e l f with the
fundamental problems of l ib e r t y , equality, and j u s t i c e .
These issues have remained the "great questions" of
p o lit ic a l philosophy for ages. Eminent p o litic a l philoso
phers such as Plato, A r i s t o t le , Hobbes, Locke, Rousseau,
Adam Smith, Hegel, Marx, to mention only some of the most
outstanding and not to mention the medieval thinkers,
adressed themselves to these basic questions.
History of Social and P o litic a l
Philosophy in Islam
P o lit ic a l philosophy therefore suggests philoso
phizing about p o l i t i c s . It poses the fundamental question:
"What constitutes the good l i f e for man?" Muslim p o lit ic a l
philosophers addressed themselves to this question also.
^ I b i d . , p. 3.
69
They are however distinguished from others in that they had
a d is t i n c t l y d iffe r e n t Weltanschauung, and their ideal
state was that of Islam. Since p o lit ic a l philosophy "tends
to remain h i s t o r i c a l , l it e r a r y , and verbal", we shall look
at the work of some of the Muslim p o lit ic a l philosophers,
e specially Al-Farabi, Ibn Sina, and Ibn Bajja. A brief
reference will also be made to the p o lit ic a l theory of Ibn j
|
Khaldun. j
j
Before, however, we can survey the history of I s
lamic p o lit ic a l philosophy, two things seem highly advis
able: f i r s t , to b r ie fly highlight the sa lie n t features of
the Islamic caliphate, e sp ecia lly the caliphate of the im
mediate successors of Mohammad; and second, to provide the
necessary background and orientation of p o litic a l p h ilos
ophy in Islam. To anticipate our future discussion, i t may
be pointed out here that this background is basically
Greek, i . e . , Platonic and A risto telia n .
The Ideal Caliphate
The administrations of the f i r s t four caliphs have
come to be known as the KhiTafate Rashida, the Right -
Guided caliphates. The Khilafate Rashida lasted for some
32 years after the death of Mohammad, with four chief
Eugene J. Meehan, Contemporary P o li t i c a l Thought:
A C ritical Study (Homewood, I l l i n o i s : The Dorsey Press,
1967), p. 35.
70
companions of the Prophet being the ruling caliphs, one
after the other. Supposedly, the succession was through
some form of popular consensus of the community, i . e . , the
democratic prin cip le, but each succession presented a
spectacle of p o l i t ic a l maneuver, party lo ya lty , and eventu
al murder of the three heads of s ta te . Their period is
however regarded as the golden era of Islam. At the eve
of each succession right after Mohammad, the bone of con
tention was that A li, the favorite son-in-law of the
Prophet, was most e l i g i b l e to become the caliph. Ali
fin a lly became the fourth caliph.
The rule of the f i r s t four c a l i p h s - - v i z , Abu Bakr,
Omar, Osman, and A1i - - is widely regarded as the period of
the Right-Guided, true blue Muslims. Indeed, when i t is
said that the Muslim's utopia is in the past, the reference
is to this era of the ideal state of Islam which existed
from A. D. 632 to A. D. 664.
• Professor Manzooruddin Ahmad of the University of
Karachi has carefully studied the (Sunnite) theory of the
Caliphate and says the following on the subject:
(!) The democratic principle is an essential foun
dation of Islam;
( l i ) The appointment of the Caliph is an exclusive
right of the Muslims;
Clii) The Prophet died without nominating anyone as
his successor;
Civ) Th.e Caliphate s i g n i f i e s only the temporal au-
thori ty;
71
(v) In relig io u s matters the Caliph has no function
other than that to lead the public prayers or of d ele
gating this function to another person; and
(vi) The Caliph is only the mandatory of the people
and his authority is limited by the will of the
people.4
The Greek Background
Pondering over p o lit ic a l philosophy in Islam in i t s
e n tire ty , one finds that in it s orientation and objectives
i t is probably more Greek than Islamic. One must however
hasten to add that the Sharia-state (the rule of the Quran
and Sunnah) was for Muslim p o lit ic a l philosophers the
ideal state of Islam, as the Republic was for Plato the
ideal sta te of the philosopher. A model Muslim p o lit ic a l
philosopher was c h a r a c t e r is t ic a lly a Platonic philosopher
constrained/guided by the divine law of Islam.
The influence of Greek p o lit ic a l theory in Islamic
p o lit ic a l philosophy has received much attention. It
would do for us to l is t e n to some of the leading students
of the subject. F ir st, Professor Hourani of Oxford Univer
sity :
From an early period the doctrines of Islam had
been permeated by Greek philosophy; or i t might be
more accurate to say that as the umma (community)
Manzooruddin Ahmad, "The Classical Muslim State,"
The Contemporary Middle East: Tradition and innovation,
eFi with an introduction and notes by Benjamin Rivlin and
Joseph S. Szyliowicz (New York: Random House, 1965), p.
100.
72
expanded, Islam was accepted by men whose minds had
been formed by Greek thought and who therefore thought
about Islam tn terms of Greek philosophy. There grew
up a doctrine of the tmamate interpreted in the lig h t
of Plato's Republic and Laws and A r is t o t le 's Ethics
( i t is not certain that his P o lit ic s was translated
into Arabic). This doctrine tried to answer the
questions, who was the legitimate ruler of the Islamic
community and what should he try to do, in terms of
a general theory of government and s o c i e t y . 5
Second, Professor Walzer of Harvard University:
Islamic philosophy is Greek philosophy, but i t is
not Greek philosophy studied for scholarly reasons
nor for the s a t i s f a c t io n of scholarly curiosity. It
is meant primarily to serve the needs of the new
religion of Islam: It is an attempt at a Muslim
natural theology, and the greatesit representatives of
this t h e i s t i c Islamic philosophy went so far as to
see the only valid interpretation of Islam in follow
ing the ways of the philosophers.6
Third, Professor Landau of P acific University, For
est Grove, Oregon:
Though in i t s origins their philosophy is unmistak
ably Greek, they turned i t into a system that is un
mistakably Islamic, and that is never completely
divorced from the tenets of the Koran. Though neither
p o l i t ic s nor problems of morality preoccupy the Muslim
philosophers to any marked extent, whenever they do
invite examination, i t is within a d is tin c t ly Islamic
framework.7
5
Albert Hourani, Arabic Thought in the Liberal Age:
1798-1939 (London: Oxford University Press, 1962), pp. 15-
16.
6
Richard Walzer, Greek into Islam: Essays on I s
lamic Philosophy (Cambridge, Mass.; Harvard University
Press, 1962), p. 35.
^Rom Landau, Is Tam and the Arabs (New York: The
Macmillan Company, 1959), p. 146.
73
Finally, Professors Mahdi and Lerner of the Univer
sity of Chicago:
What is not clear is ehether the presence or absence
of Plato's Republic and Laws, and of A r is t o t le 's
P o l i t i c s , as the case may be, was due purely to chance.
Was i t the a v a i la b i li t y in Arabic of Plato's p o lit ic a l
writings that gave Islamic p o lit ic a l philosophy it s
decidedly Platonic character? Or was i t the need to
j in vestig a te the Islamic divine Law, revelation, prophe
cy, and so forth, that directed the Muslim philosophers
j to Plato, whose writings in turn proved more pertinent
| and helpful to them in their effo r ts to inquire into
| these Islamic p o l i t ic a l problems.8
j W e will now look at the work of some representative
!
Muslim p o l i t ic a l thinkers.
A1 Farabi
A1 Farabi (ca. 870-950) was a Turk. It is widely
agreed that A1 Farabi is the founder of p o litic a l p h ilo s
ophy in Islam. He i s , from f i r s t to last a Platonic
thinker. A many sided in t e lle c t u a l of the f i r s t rank, he
assigned to philosophy a place superior even to prophecy.-
The central philosophical problem to which A1 Farabi
j
addressed himself is the end of p o l i t ic a l association. The
question being: What constitutes the happy or the virtuous
life? Happiness for A1 Farabi, as forPlato, consists of
moral, in t e lle c t u a l and philosophical perfection. A1 :
ifarabi developed the theory of the prophet-1egislator, a
R. Lerner and M. Mahdi, e d s ., Medieval PoTi tica l
PhiTosophy: A Stiurcebook (New York: The Free Press of
jGlencoe, 1963) , p. 17.
74
variation on the theme of the philosopher-king of Plato,
as the founder and ideal ruler of the Islamic sta te . To
him, the idea of Imam (Caliph), Philosopher, and Legislator
in a sin gle idea. The ideal ruler for the virtuous c it y
j
{therefore has to be a ruler-ph i1osopher-prophet. A1 Farabi
j
(would have the proph et-legislator establish the state under
|
• the guidance of Divine Law but have the phi 1osopher-king
t
j
guarantee i t s survival. Professor Mahdi has interpreted
A1 Farabi in these terms:
The su bstitu tes for prophecy are the preservation
of old laws and the capacity to discover new applica
tions for old laws. To promote the common good and
preserve the regime under new conditions as these
emerge, neither the coincidence of philosophy and prop
hecy in the same man, nor the coincidence of p h ilo s
ophy and jurisprudence, proves to be an indispensable
condition. It is s u f f ic i e n t to have philosophy in
the person of a philosopher who rules j o i n t l y with
another man or a group of men who possess, among other
things, the capacity to put old laws to new uses.
Unlike prophecy, philosophy cannot be dispensed with,
and nothing can take it s place. Unlike the absence of
prophecy, the absence of philosophy is fatal to the
existence of the virtuous regime. There is no sub
s t i t u t e for liv in g wisdom.9
A1 Farabi presents a comprehensive c l a s s i f i c a t i o n
of p o l i t ic a l regimes. Very broadly speaking, there are
two kinds of p o lit ic a l regimes; the one that is virtuous
and the many that are not. The virtuous c ity is the one
founded by the prophet-legislator under the guidance of
9
Muhsin Mahdi, "Alfarabi, " History of P o lit ic a l
Philosophy, ed. Leo Strauss and Joseph Cropsey (Chicago:
Rand McNally & Company, 1966), p. 173.
75
Quranic law and ruled by the phi 1osopher-king. The
c it iz e n s of this city alone can attain happiness, moral
ex ce llen ce , and perfection of the philosophic reason. A1
Farabi l i s t s several q u alification s which a person would
require to be a ruler, philosopher, believer, and warrior.
If no sin g le man should possess all of them, a committee
of rulers can be constituted.
The various p o lit ic a l regimes, v iz, virtuous and
non-virtuous, of A1 Farabi have been described by Professor
Mahdi as follows:
The central theme of A1 Farabi's p o litic a l writings
is the virtuous regime, the p o litic a l order whose
guiding principle is the realization of human e x c e l
lence or virtue. He conceives of human or p o l i t ic a l
science as the inquiry into man in so far as he is
distinguished from other natural beings and from divine
beings, seeking to understand his sp e c ific nature, what
constitutes his perfection, and the way through which
he can attain i t . Unlike other animals man is not
rendered perfect merely through the natural principles
present in him, and unlike divine beings he is not
etern a lly perfect but needs to achieve his perfec
tion through the a c t i v i t y proceeding from rational
knowledge, and of the choice connected with i t , is
man's f i r s t or natural perfection, the perfection
he is born with and does not choose. Beyond th is ;
reason and choice are present in man to use for
realizing his end or the ultimate perfection possible
for his nature. This ultimate perfection is i d e n t i
cal with the supreme happiness available to him.
^Happiness is the good desired for i t s e l f , i t is
never desired to achieve by i t something e l s e ,
and there is nothing greater beyond i t that man
can a c h ie v e ."10
10S t r a u s s and C r o p s e y , op. c i t . , p. 163.
76
Professor Mahdi goes on:
Once the main features of the virtuous regime are
c l a r i f i e d , the understanding of the main features and
the c l a s s i f i c a t i o n of all other regimes become r e la t iv e
ly simple. A1 Farabi divides them into three broad
types. (1) The regimes whose c itiz e n s have had no
occasion to acquire any knowledge at all, about divine
and natural beings or about perfection and happiness.
These are the ignorant regimes. Their citizen s pursue
lower ends, good or bad, in complete oblivion of true
happiness. (2) The regimes whose citizen s possess the
knowledge of these things but do not act according to
their requirements. These are the wicked or immoral
regimes. Their c itiz e n s have the same views as those
of the virtuous regime; yet their desires do not serve
the rational part in them but turn them away to pursue
the lower ends pursued in ignorant regimes. (3) The
regimes whose c itiz e n s have acquired certain opinions
about these things, but fa lse or corrupt opinions,
that i s , opinions that claim to be about divine and
natural Beings and about true happiness, while in fact
they are not. The sim ilitudes presented to such
c it i z e n s are, consequently, false and corrupt, and so
also are the a c t i v i t i e s prescribed for them. These
are the regimes that have been led astray or the erring
regimes. The c itiz e n s of such regimes do not possess
true knowledge or correct sim ilitu d es, and they, too,
pursue the lower ends of the ignorant regimes. The
regimes in error may have been founded as such. This
is the case with the regimes "whose supreme ruler was
one who was under an i llu s io n that he was receiving
revelation without having done so, and with regard to
which he had employed misrepresentations, deceptions,
and delusions." But they may also have been o r ig in a lly
virtuous regimes that had been changed through the
introduction of fa lse or corrupt views and practices.
All these types of regimes are opposed to the v i r
tuous regime because they lack i t s guiding p rincip le,
which is true knowledge and virtue or the formation
of character leading to a c t i v i t i e s conducive to true
happinesss. Instead, the character of the c itiz e n s is
formed with a view to attaining one or more of the
lower ends. These ends are given by A1 Farabi as s i x ,
and each of the general types mentioned above can be
subdivided according to the end that dominates in i t .
Cl) The regime of necessity (or the indispensable
regime) in which the aim of the c itize n s is confined
to the bare n e c e ss itie s of l i f e . (2) The v ile regime
(oligarchy) in which the u l t imate aim of the. c itiz e n s
77
is wealth and prosperity for their own sakes. (3)
The base regime the purpose of whose c itize n s is the
enjoyment of sensory or imaginary pleasures. (4) The
regime of honor (timocracy) whose c itize n s aim at
being honored, praised, and g lo r ifie d by others. (5)
The regime of domination (tyranny) whose c it iz e n s aim
at overpowering and subjecting others. (6) The regime
of corporate association (democracy) the main purpose
of whose c it iz e n s is being free to do what they w ish .''
A Short Comment On Al-Farabi. W e selected Al-Farabi as the
1 ■ i
j
f i r s t p o lit ic a l philosopher in Islam, because he "laid the!
i !
| foundations of Islamic p o lit ic a l philosophy by his accep- j
12
tance and transformation of the Platonic legacy." Farabi j
is thoroughly Platonic. In a ty p ica lly Platonic fashion, J
i
Farabi defines p o l i t i c s as "the royal p o litic a l art" of j
i
leading men into true happiness. Except that his f i r s t
ruler of men is the proph et-legislator, the Farabian ruler
is Plato's phi 1osopher-king. Farabi's original contribu
tion is in the id ea liza tio n of Shari a as the highest law
of the community. His ideal state is therefore the Islamic
s t a t e . Farabi also extends the rule of the philosopher-
king beyond the c it y - s t a t e of Plato and A ristotle to a
n a tio n -sta te, and f i n a l ly to the world-state. The in-
i
fluential factor in Farabi's p o litic a l thinking in respect
11
Ib id . , pp. 165-166.
12
Erwin I. J. Rosenthal, PoTiticaT Thought in Medi
eval Islam (Cambridge, England: Cambridge University Press
1958), p. 119.
78
of the siz e of the sta te was of course the expanding Muslim
empire of his day which had crossed the limits of both the
c i t y - s t a t e of Medina which Mohammad originally founded and
the so-c alle d nation-state of Arabia, Farabi was an arm
chair philosopher, neither much given to practical p o l i t ic s
nor probably to the observance of the religious duties of
Islam. One almost gets the fee lin g that the homages to
Islam which he continually paid was of a lip service
quality and as such not an authentic expression of his
convictions. In f a c t , Farabian p o lit ic a l philosophy would
lose l i t t l e i f the Islamic element were to be dropped
from i t completely. On the other hand, without it s
Platonic charm, Farabi's contributions may amount to very
l i t t l e . The relevance of Farabian p o lit ic a l thought in
particular and his philosophy in general for the present
study or contemporary Muslim thinking is in i t s readiness
to incorporate philosophic and secular ideas into Islamic
modes of thinking.
Ibn Sina |
Ibn Sina (980-1037), known to the West as Avicenna, j
was a Persian. With his encyclopedic knowledge of medicine,'
jurisprudence, and philosophy he is ju stly regarded as the
greatest among the men of learning in the world of Islam.
In his p o l i t ic a l philosophy, he started as a student of A1
Farabi. Ibn Sina did not write any tre a tise s on p o lit ic a l
79
philosophy as such. But his p o l i t ic a l thinking can be as
certained from remarks in his general philosophical works.
Ibn Sina speaks of three practical sciences: Ethics, Eco
nomics, and P o l i t i c s . His conception of these sciences is
roughly identical to that of A r i s t o t le ' s Nichomachean
Ethics and PIato1s Laws.
i
Ibn Sina would have us prohibit "idleness", "gambl- |
!
tng, vih&reby properties and u t i l i t i e s are transferred with-;
out any Benefit rendered in exchange," "professions that j
lead to the opposite of welfare and usefulness," and
"usuary. . . for usuary is the seeking of excess profits with
out practising a craft to achieve i t , even though i t does
render a service in return." Ibn Sina also recommends a
"common fund" in the c ity to meet the "exigencies of the
common good," "the needs of the guardians, " and "those
prevented from earning their livelihood by maladies and
1 3
chronic diseases."
Ibn Sina advocates j u s t i f i a b l e impeachment of and
revolt against the de facto government. To quote him:
The l e g i s l a t o r must then decree in his law that i f
someone secedes and lays claim to the caliphate by
virtue of power or wealth, then i t becomes the duty of
every citize n to f ig h t and k ill him. If the- citizen s
are incapable of doing so, then they disobey God and
13
Ibn Sina, "Healing: Metaphysics," in Lerner and
Mahdi, op. c i t ., pp. 104-105.
80
14
commit an act of unbelief.
A Short Comment on Ibn Sina. Even though not a p o lit ic a l
philosopher in the s t r i c t sense of the word, Ibn Sina has
exerted a great influence on Muslim p o l i t ic a l thought.
This is due to the many remarks about p o l i t ic a l matters
which are to be found in most of his major philosophical
t r e a t i s e s . Ibn Sina is at once philosophic, mystical,
and Islamic in his thinking. He is Islamic because he
i
recognizes the supremacy of Shari a ; philosophic because
he thinks that human perfection comes through the c u l t iv a
tion of the philosophic nature; and mystical because the
highest stage of human happiness can be attained only
through the contemplation of the Reality, or the Truth,
and in mystical union with God.
Ibn Sina divides his practical philosophy into eth
i c s , p o l i t i c s , and economics. He envisions an economic
society wherein people are divided into classes and conduct
themselves responsibly in their appointed social station.
1 R
"For there must be masters and slaves." The major
classes would be the rulers, the a r tisa n s, and the guardi
ans. The guardians are to be provided for, games of
chance and usury will be forbidden. The opponents of the
14
Ibid. , p. 107.
15
R o s e n t h a l , op. c i t . , p. 1555.
81
prophetic law will be prosecuted. "Their property is to
be confiscated and administrated in the in terests of the
1 fi
common weal."
Ibn Sina's work has some direct implications for the
politico-economic organization of the Islamic s t a t e . He
also presents a synthesis of the secu la r-relig iou s-m ystica l
thinking which is not to be found in any other Muslim
philosopher. He is truly a philosopher of Islam.
Ibn Bajja
Ibn Bajja (d. 1138), known in the West as Avempace,
was the f i r s t Spanish-Muslim philosopher. Ibn Bajja demons
strated a sharply different attitude toward Greek ph ilos
ophers. As against the c o l l e c t i v i s t tendencies in A1
Farabi and Ibn Sina, Ibn Bajja's p o l i t ic a l philophy is
characterized by a strong in d iv id u a lis t orientation.
Ibn Bajja's individual, in the pursuit of p h ilo s
ophical perfection and moral excellence (true happiness),
finds himself solitary in the p o l i t ic a l regime of the i g
norant and the immoral. His main concern, therefore, is
the s e l f - r e a l i z a t i o n of the individual who has a p h ilo s
ophic nature. Ibn Bajja's solution is:
In order to achieve i t s highest perfection, the
philosophic nature must, then, act nobly and high-
16
I b i d . , p. 154.
82
mindedly. Therefore, whoever prefers his corporeal
existence to anything pertaining to his sp iritu a l ex
istence will not be able to achieve the final end.
Hence no corporeal man is happy and every happy man
is completely s p ir it u a l. But just as the sp iritual
man must perform certain corporeal acts--but not for
their own sake— and perform [particular] sp iritual
acts for their own sake, sim ilarly, the philosopher
must perform numerous [particular] spiritual acts
for their own sake: the corporeal acts enable him
to e x is t as a human, the [particular] sp iritual acts
render him more noble, and the in te lle c tu a l acts
render him divine and virtuous. The man of wisdom
is therefore necessarily a man who is virtuous and
divine. Of every kind of a c t i v i t y , he takes up the
best only. He shares with every class of men the
best states that characterize them.. But he stands
alone as the one who performs the most e x ce llen t and
the noblest of actions. When he achieves the final
end— that i s , when he i n t e l l e c t s simple e ssen tia l in
t e l l e c t s , which are mentioned in the Metaphysics, On
the Soul , and On Sense and the Sensible--he then be
comes one of these i n t e l l e c t s . It would be right
to call him simply divine. He will be free from the
mortal sensible q u a l it i e s , as well from the high
[particular] spiritual q u a lities: i t will be f i t t i n g
to describe him as a pure d ivinity.
All these q u a litie s can be obtained by the s o lita r y
idividual in the absence of the perfect c it y . By
birtue of his two lower ranks [that i s , the corporeal
and the particular s p ir itu a l] he will not be a part,
the end, the agent, or the preserver of this perfect
c i t y . By virtue of this third rank he may not be a
part of this perfect c i t y , but he nevertheless will
be the end aimed at in this c ity . Of course, he
cannot be the preserver or the agent of the perfect
city while a so lita r y man.17
A Short Comment On Ibn Bajja. As we have seen, A1 Farabi
and Ibn Sina are basically Platonic e s s e n t i a l i s t s . Theirs
is a h o l i s t i c view and a total ideology. The social and
17
I b i d . , pp. 131-32.
83
p o lit ic a l implications of their thought are c o l l e c t i v -
i s t i c . Likewise, in economic l i f e too, the emphasis is
on community in te r e sts and not on individual enterprise.
Ibn Bajja is a break from the c o l l e c t i v i s t i c mode
of thinking. He is the philosopher of individualism in
Islam. He is ready to dispense with society and state
(including the ideal sta te of Islam) and turn to solitude
and even is o la tio n in the pursuit of s e l f - a c t u a l i z a t i o n .
To Ibn Bajja, human happiness and moral perfection are for !
man to seek as a lone individual. He also elevates the
individual above the society as a whole. While he acknow
ledges the need for p o l i t ic a l and social association and
the necessity to care for the common good, Ibn Bajja
"wants to leave his philosopher on the summit of his
b e a t if ic vision and would not bring him down into the
1 8
canve of c iv ic duty and social obligation." S t r ic t ly
speaking, the community and the individual owe nothing
to each other. Theindividual must be able to pursue his
own moral and philosophical ends which alone can bring him
f u l f i 1Iment.
If we were to translate the philosophical thinking
of Ibn Bajja in socio-economic terms, we will find that
only an economic organization which permits the f u l l e s t
18
R o s e n t h a l , op. c i t . , p. 172.
84
opportunity for free and private i n i t i a t i v e and individual
enterprise for the maximization of personal gain, or s e l f -
i n t e r e s t , would meet the criterion of individualization in
the moral-spiritual sphere.
While a highly original solution to the paradox of
the mora'lman in the immoral s o c ie ty , Ibn Bajja's social
thought is not in line with the fundamental teachings of
Islam.
Ibn Khaldun
Ibn Khaldun (1332-1406) was a North African Arab.
He is important to us as histo rian , s o c i o l o g i s t , and
p o lit ic a l th e o rist. For the f i r s t time, Islam was able to
produce a man who would r e f l e c t upon social and p o litic a l
problems with the eye of what we call today the social
s c i e n t i s t . For his day, Ibn Khaldun was remarkably
s c i e n t i f i c . His p o lit ic a l formulations are of three
kinds. F irst, he tried to explain and ration alize the
developments in the history of the Caliphate. Second, he
tried to find a new basis for p o lit ic a l power in the ab
sence of the rule of the Sharia. Third, he formulated a
theory of the secular state (mulk) , ruled by a king who
rules either by man-made laws or simply by his arbitrary
w i l l . In other words, his is the theory of the power-
sta te . The power-state need not be bound either by the
Quran and the Prophetic Tradition or by rationally codi-
85
fied laws. Its goals are to sieze power and retain i t .
Needless to say, the power-state is not the ideal state of
Islam. But i t is powerful. The power-state of Ibn
Khaldun is ty p ica lly Machiavellian.
According to Ibn Khaldun, the power-state is both
necessary and coercive. In his words:
Human association is something necessary. The phi
losophers expressed this fact by saying: "man is
p o lit ic a l by nature." (Dissension) leads to h o s t i l i
t i e s , and h o s t i l i t i e s lead to trouble and bloodshed
and loss of l i f e , which (inturn) lead to the destruc
tion of the (human) s p e c i e s . . . . Anarchy destroys man
kind and ruins culture, since, as we have stated, the
existence of mulk [power-state] is a natural quality
of man. It alone guarantees their existence and
associati on. 19
Ibn Khaldun also paid attention to the secular
functions of the state for the f i r s t time in the history
of p o lit ic a l thought in Islam. According to him no func
tions can be s t a t i c or eternal. The functions of the
State will depend upon time, actual conditions, and the :
level of cultural development in the society. But a
sovereign nation (muTk hagi g i ) as against a part by so
vereign nation (mulk n a g is) will be able to "dominate
subjects, c o lle c t taxes, send out expeditions, protect the
o Q
frontier regions, and have no one over them... u
19
Quoted in Muhammad Mahmoud Rabi, The P olitical
Theory of Ibn Khaldun (Leiden: E. J. Bri1 1 , 1 9 6 7 ) , pp. 137-
38.
20
de S a n t i l l a n a , op. c i t . , p. 286.
86
The powers of the power-state are, however, not
without lim it s . In i t s own in t e r e s t , the power-state
should realize:
that the power of mulk cannot perform it s
functions and is lia b le even to destruction i f no
lim itations are placed upon i t s scope and exercise.
| As far as the scope of power is concerned, Ibn
Khaldun made i t clear that the monarch must not
infringe on the rights of others. For example,
j beyond his traditional right of c o lle c tin g taxes,
j he denied the monarch any power to in terfere in
| the commercial l i f e of his people. This was a
; quite advanced view in the fourteenth century.
| As to the exercise of power, Ibn Khaldun not only
emphasized the in d ispensability of codifying laws
j in order to lim it power, but he also spoke about
! the procedure in which such power should be
j exercised. The mildness and good q u a lities of the
I holder of mulk are fundamental prerequisites to
| mutual understanding between rulers and ruled, 2i
j p o l i t ic a l s t a b i l i t y , and the consolidation of power.
i
In the formulations of Muslim p o l i t ic a l philoso
phers, one element which is to be witnessed throughout
both the Classical period, roughly from the 9th century
to the 14th century (A1 Farabi to Ibn Khaldun), and the
modern period, from the 18th century to the present (Shah
Mali Allah to Muhammad Iqbal), is Islam. The Islamic
state of the Sharia constituted the ideal state to them all,
In this respect they undoubtedly followed in the f o o t
steps of the Prophet of Islam.
As time went on, individual p o l i t ic a l philosophers
21
T b i d . , pp. 157-58.
87
made their own variations on the theme. A1 Farabi was
both philosophical and Islamic, but philosophy got the
better of him. Ibn Sina was a greater philosopher than
Farabi but his Meltanschauung remained predominantly
J Islamic. Ibn Bajja gave .up his crusade to make a virtuous
i society out of the Muslims intent upon making i t other-
!
(wise, and therefore concentrated upon i n d iv i d u a l is t ic
i
| s e l f - r e a l i z a t i o n . Ibn Rushd (Averroes) never tired of tel
ling his co-believers that i t was God's Will that man be
reasonable and rational. During the days of the moral,
i n t e l l e c t u a l , and p o litic a l degeneration of the Muslims,
the great Ibn Khaldun came on the scene. He wrote a
j
|philosophy of history, explained the causes of the decline
i
and f a l l of the Muslims, and unified histo ry , sociology,
p o l i t i c s , and economics into a new science of culture, but
I
I
few read him. Thusly ended the Classical period of
p o l i t ic a l philosophy in Islam. Unfortunately, to this
I day, Muslim scholarship has remained in s ig n if i c a n t ever
si nee.
!
An Interpretation of Islamic
Social PhilosopTTy
Islamic associative l i f e is based on the concept
i of umma, i . e . , the community, The individual is free but
i -------
jonly to order his l i f e in accordance with Quranic injunc
t i o n s and Mohammad's l i f e s t y l e . He is supposed to
88
subordinate his in te re st to the larger in t e r e s t of the
community. The supreme social and p o lit ic a l value of the
community is brotherhood. "A corollary of brotherhood
is equality. Equal before God, the Muslims are equal
among themselves. . . . Equality before the law is a
22
fundamental basis of the whole system." "The Prophet
in his 'Farewell Pilgrimage' address enunciated and
formally pronounced those principles which su ccinctly
summed up all the developments that have underlain the
Islamic movement in its actual progress and towards which
i t had tended as i t s goal. These are the principles of
humanitariani sm, egalitarianism , social j u s t i c e , economic
23
jus ti ce , ri ghteousness , and soli dari t.y. 1 1 To quote
Professor de Santillana:
Islam is the direct government of Allah,
the rule of God, whose eyes are upon his people.
The principle of unity and order which in other
s o c i e t i e s is called c i v i t a s , polis , S t a t e , in
Islam is personified by A11 a hr ATI ah is the
name of the supreme power, acting in the
common in t e r e s t . Thus the public treasury is
"the treasury of Allah," "the army is the army
of Allah," even the public functionaries are
the employees of A ll a h . 24
Non-Muslims are c la s s i f ie d as "people of the
David de Santillana, "Law and Society," The
Legacy of Islam," ed. Thomas Walker Arnold (Oxford: The
Clarendon Press, 1931), p. 286.
23
Fazulur Rahman, Islam (London: Weidenfeld and
Nicholson, 1966), p. 25.
24
de S a n t i l l a n a , op. c i t . , p. 286. _____
89
Scriptures," i . e . , Jews and Christians, and as "infidels,"
i . e . , all others. They have the legal status of Zimmi,
i . e . , the protected. They are exempted from military
duty and pay a special tax, Jaziah, instead. Islamic law
co n stitu tes the primary law of the community. The
Islamic state has the r esp on sib ility to refrain from
l e g i s l a t i n g against the s p i r i t of the Quran and Sunnah.
The sta te must work toward the defense of Islam and see
to i t that every member of the community is cared for.
The only constituted authority in the community is one to
which the majority has consented through mutual consulta
tion. The consensus of opinion is required. Those who
are q u alified are also urged to exercise Ijitihad
( l i t e r a l l y , to e x er t), i . e . , independent reasoning, in
controversial issu e s . But so long as the government acts
in conformity with the Shari a , i t continues to be l e g i t i
mate with an in d efin ite tenure. The citize n has the
p o l i t ic a l obligation to obey the law, because, "The
individual derives what claims and duties he may have,
not from his connection with the community, but from his
f a it h . "2^ The law of the Islamic state is God's law. The
law is not only to maintain order but to establish
individual and social j u s t ic e . The ideal of ju s t ic e in
2 5 1 b i d . , p. 285.
90
Islam is to create and maintain a society whose members
are free, equal, and brotherly.
The Pakistan Ideology
In a manner of speaking, Islam has been the
o f f i c i a l ideology of Pakistan since both before and after
the creation of the state in 1947. But Pakistan has been
id e o lo g ic a lly Islamic only in a manner of speaking. No
more. But also no l e s s . This is an important social and
historica l fa ct.
The Islamic character of Pakistan and of its
social-political-and-econom ic organization have been
emphasized from i t s very inception, both by rulers and
theoreti ci ans.
On July 1, 1948, in his speech on the occasion of
the opening ceremony of the State Bank of Pakistan,
Quaid-i-Azam Mohammad Ali Jinnah, the founder of the
nation and the f i r s t Governor General of Pakistan,
proclaimed:
I shall watch with keenness the work of your
Reserach Organization in evolving banking
practices compatible with Islamic ideals of
- social and economic l i f e . The economic system
of the West has created almost insoluble problems
for humanity and to many of us i t appears that
only a miracle can save i t from disaster that is
now facing the world. It has fa iled to do ju stice
between man and man and to eradicate f r ic t io n from
the international f i e l d . On the contrary, i t was
largely responsible for the two world wars in the
l a s t half century. The Western world, in spite
91
of i t s advantages of mechanization and industrial
e f f ic ie n c y is today in a worse mess than ever
before in history. The adoption of Western economic
theory and practice will not help us in achieving
our goal of creating a happy and contented people.
W e must work our destiny in our own way and pre
sent to the world an economic system based on true
Islamic concept of equality of manhood and social
j u s t i c e . W e will thereby by f u l f i l l i n g our mission
as Muslims and giving to humanity the message of
peace which alone can save i t and secure the wel
fare, happiness and prosperity of mankind.26
The Islamic ideology and i t s implications for
economic organizations were also emphasized by the late
Zahid Hussain, the founder-Governor of the State Bank of
Pakistan (who also la t e r became the founder-Chairman of
the Planning Board of Pakistan and the chief architect of
the First Five Year Plan) at the First All Pakistan
Economic Conference, held at Lahore, West Pakistan, in
April, 1949:
You know that the Objectives Resolution
recently passed by the Constituent Assembly sets
out the objectives with which the framers of the
Constitution have decided to embark on the
momentous work before them of drawing up a constitu
tion for this country. It will be the aim of the
constitution to ensure that Muslims are enabled
to order their l iv e s in accordance with the
principles prescribed by Islam. Our economic, as
other, concepts must now be subjected to c r itic a l
t e s t s in the l i g h t of Islamic principles. In
this f i e l d there is indeed enormous work of a
fundamental nature awaiting the economists. They
have to make their contribution to the creation
of a new social and economic structure based on
Islamic concepts of l i f e and man's destiny. Islam
p c
Government of Pakistan, Speeches of Mohammad
Ali Jinnah as Governor General, 1947-1948, pp. 153-54.
92
is opposed to i n t e r e s t , all forms of speculation
and all concentrations of wealth and power, all
of which are basic features of present day social
and economic order. Interest indeed constitutes
one of the foundation stones on which the e d ific e
of modern economy f e s t s . It is true that the rates
of in t e r e s t have shown a downward tendency during
the la s t 30 years but can we look forward to a
time when i t can be eliminated and can we by
evolving and executing plans of reconstruction
hasten the advent of that time? Here is a problem
to t e s t the analytical and synthetic powers of
the most powerful minds among the economists.
There are many other problems of vital import to
out future but not one of them is so basic or
seemingly so intractable as that of in t e r e st.
It is at once a challenge and an opportunity to
our genius. Must we accept the present form of
social and economic order as final and immutable
and abandon the idea of transforming i t so as to
bring i t into greater and increasing accord with
our own concepts and ideals? I am sure you will
agree with me that marching orders having been
given, we must se t out on our journey with courage
and determination and continue i t until we arrive
at our d e s t i n a t i o n .27
So that is where the matter rests for the moment.
Islam is the o f f i c i a l ideology of Pakistan. Twice i t has
co n stitu tio n a lly declared i t s e l f the Islamic Republic of
Pakistan. Whether or not the third, forthcoming
Constitution of Pakistan again proclaims i t an Islamic
Republic is immaterial. In the lig h t of i t s history, both
as a movement and as a n a tio n -sta te, the idea of an
Islamic state has become the integral part of the Pakistani
2 7
Quoted from Great Britain, "The Commercial
Relations and Export Department," Overseas Economic
Surveys; Pakistan (London: H. M. Stationery O ffice,
19 S1), p . 1.
93
consciousness. Every government of Pakistan must somehow
be Islamic. Islam is the raison d'etre of Pakistan.
Without Islam as i t s ideology, Pakistan has no reason
for being.
To Sum Up
In this chapter we have tried to provide an
exposition, interp retation , and a critique of the social
and p o lit ic a l thought of and in Islam. The four p o lit ic a l
theorists whom we selected for our purpose provide a
representative picture of the philosophic sources of
social thought in Islam. W e can say that in their
theorising, A1 Farabi and Ibn Sina are more true to the
teachings and s p i r i t of Shari a than Ibn Bajja, who is an
in d iv id u a lis t par e x c e ll e n c e , and Ibn Khaldun, who is
more of a h istorical s o c i o l o g i s t , even a social s c i e n t i s t
in the contemporary sense. It is noteworthy that neither
in the p o lit ic a l history of Muslims nor in the history of
philosophy in Islam was there ever a suggestion made that
a state based on any foundation other than the Quran and
Sunnah can be regarded as ideal or perfect. The Islamic
state remains to this day the highest form of p o l i t i c a l ,
s o c i a l, and economic organization for which Muslims
should s t r iv e .
The consensus of opinion, philosophically as well
as h i s t o r i c a l l y , seems to be that the full spiritual and
94
social potential of the Muslim individual can be realized
only within the Islamic community. This implies a
higher valuation of the community and the common good as
compared to the individual. Muslims are duty bound to
obey the laws of Shari a . Through this obedience alone can
the Muslim individual f u l f i l l himself. The late Muhammad
Iqbal, the poet-phi1osopher of the Indo-Pakistan sub
continent and the sp iritual father of Pakistan (for being
the f i r s t to conceive of an independent Muslim state in
the sub-continent), in his Secrets of the S e l f , has
emphasized the sig n ifica n ce of obedience to divine law in
the following verses:
Endeavour to obey, 0 heedless one!
Liberty is the fru it of compulsion.
By obedience the man of no worth is
made worthy;
By disobedience his fire is turned to
ash es.
Whoso would master the sun and star s,
Let him make himself a prisoner of
Law!
The air becomes fragrant when i t is
imprisoned in the flower-bud;
The perfume becomes musk when i t is
confined in the navel of the
musk-deer.
Do not complain of the hardness of
the law,
Do not transgress the statutes of
Mohammad!28
9 8
Mohammad Iqbal, The Secrets of S e l f , trans.
R. A. Nicholson (Lahore: Sh. Muhammad Ashraf, 1944),
p. 7.
95
In return for his surrender to Shari a and the
leg itim ately constituted authority of the day, Islam
obliges the sta te to ensure the equality, security, and
prosperity of all i t s c it i z e n s . The state would also
endeavor to promote social integration and discourage
d if f e r e n t ia t io n . In other words, in the contemporary
politico-economic terminology, i t would seem that the
Islamic sta te is a Welfare State. The implications of
Islamic social philosophy for economic organization would
seem to favor s o c ia liz a t io n and not individualization.
I
CHAPTER IV
ECONOMIC ORGANIZATION
Introducti on
Professor Frank Knight has succinctly stated the
aims and objectives of economic organization:
The general task of organizing the economic
a c tiv it y of society may be divided into a number
of fundamental functions. These are in fact very
much interconnected and overlapping, but the
d istin ctio n is useful as an aid to discussing the
ex istin g economic order both d escrip tiv ely and
c r i t i c a l l y , i t s structure as well as i t s workings.
These functions f a ll into a more or less logical
sequence. The f i r s t is to decide what is to be
done, that i s , what goods and services are to
be produced, and in what proportions. It is the
function of settin g standards, of establishing a
social scale of values, or the function of social
choice; the second is the function of organizing
production, in the narrow sense, of getting done
the things se t t le d upon as most worth while; the
third is d istr ib u tio n , the apportioning of the
product among the members of society; the fourth
is really a group of functions having to do with
maintaining and improving the social structure,
or promoting social progress.!
Capitalism and Socialism
In the c la s sic a l sense, capitalism and socialism
provide the two major types of economic organization.
^Frank H. Knight, The Economic Organization
(New York: Augustus M. Kelley, In c., 1951), pp. 7-8.
96
97
Following Max Weber, we can call them the "Ideal Types"
of the social economy. It should, however, be noted that
in the recent decades, both capitalism and socialism have
lo s t considerable ground and can no longer be regarded as
the major alternatives for the future. Each is w illing
to yield to the other what is i t s due. The reasons are
theoretical as well as h i s t o r i c a l , but especially
h i s t o r i c a l . The twentieth century has seen the singular
failu res of capitalism and the sudden success of socialism.
In due course, capitalism and socialism , i t is suggested,
might even come to converge. With one eye on theory, the
other on history, scores of economists have already
voiced the obsolescence of the c la s s i c debate: Capitalism
versus Socialism.
The c a p i t a l i s t i c and s o c i a l i s t i c models of social
economy, however, have one permanent value. Being "Ideal
Types," they are highly in stru ctiv e as pedagogical
I devices and in te lle c t u a l vehicles to understand the
nature of economic systems. In this l i e s their lasting
| usefulness. W e s h a l l, therefore, present in the later
{
i chapters both the "competitive market model" and its
j an tith esis the "planned s o c i a l i s t model" of the social
economy in order that they may serve as points of refer
ence for our study of the Islamic economy.
The controversy, capitalism versus socialism, is
as old as p o lit ic a l economy_itself. With the progress of
98
economic science and the h isto r ica l development of the
c a p i t a li s t and s o c i a l i s t economies, the debate has by now
become c la s s i c . The pure theoretical models of capitalism
and socialism, however, continue to be an a ly tically
relevant. While we will postpone their detailed d iscu s
sion for later chapters, l e t us look at capitalism and
socialism as described by Professor John E l l i o t t within
his eight c r it e r ia for c la s s i f y in g comparative economic
systems.
The central c h a r a c te r istic s of pure c la s s ic
capitalism may be summarized as follows:
(1) Level of Economic
Development
Developed or developing
economy, with an advanced
or advancing technology.
(2) Resource Base Heavy reliance upon capi
tal and c a p i t a l i s t i c
methods of production.
(3) Ownership-control
of the Means of
Production
Predominantly private and
individual ownership and
control of business
enterpri s e .
(4) Locus of Economic
Power
Relatively large role for
individual units (house
holds and businesses)
and accompanying small
role for large-scale
organizations, e sp ecia lly
government.
(5) Motivational
System
Market-oriented motiva
t io n s, with particular
emphasis upon the profit
motive.
(6) Organization of
Economic Power
99
Decentralization of eco
nomic decisions and wide
areas of discretion for
freedom of individual
choi c e .
Primary reliance upon a
competitive price or
market system.
Distribution according
to market determined
contributions to produc
tio n , with the possibility!
of considerable inequality
in income and p r o p e r t y. 2
Keeping those observations in mind, and remember
ing that no definition will please everyone, we may
designate the major characteristics of pure or c la s s ic
socialism as follows:
(7) Social Processes
for Economic
Coordi nati on
(8) Wealth and Income
Di stri buti on
(1) Level of Economic
Development
(2) Resource Base
(3) Ownership-control
of the Means of
Production
Developed economy, with a
high per capita income
and an advance tech-
nology.
Heavy reliance upon
capital and c a p i t a l i s t i c
methods of production.
Predominantly social
ownership and control of
business enterprise.
(Some s o c i a l i s t s place
greater reliance upon
governmental, others upon
2
John E. E l l i o t t , "Comparative Economic Systems,"
University of Southern California, 1970, pp. 2-12.
(Mimeographed.)
100
(4) Locus of Economic
Power
(5) Motivational
System
(6) Organization of
Economic Power
(7) Social Processes
for Economic
Coordi nation
(8) Distribution of
Income and Wealth
voluntary cooperative
forms of ownership.)
R elatively large role for
social and governmental
organizations in economic
decision-making as
contrasted to individual
choi ce.
Elimination or sharp
reduction of the role of
the profit motive coupled
with supplementation and
modification of market
by non-market motivations.
Greater cen tralization of
economic decisions than
under capitalism (the
extent and d eta ils being
a major point at issue
in centralized versus
decentralized forms of
soci ali sm).
Overall system of public
economic planning for the
entire national economy
coupled with "democrati
zation" or worker control
over industry.
Elimination or sharp
reduction of earnings
from natural and capital
resources coupled with
much greater (although
not necessarily "absolute")
equality in income.3
^I b i d . , p p . 2 - 1 3 .
1 of
Ecdnomic System of Islam
Level of Economic Development
Islam is eternal and universal. It is intended
to be a permanent code of l i f e for a ll mankind for all
times. The economic system of Islam, t h e o r e t i c a l ly /
| s p ir it u a lly speaking, can therefore be no exception to
I
| this general rule. It is argued that the Islamic economy
i
is compatible with all levels of economic developments or
to use Professor Rostow's terminology, stages of economic
growth.
Mr. Asad has observed that:
Man's p o l i t i c a l , s o c i a l, and economic needs are
time-bound and, therefore, extremely variable.
Rigidly fixed enactments and i n s t i t u t i o n s could
not possibly do ju s tic e to this natural trend
toward variation; and so the Shari ah does not
attempt the impossible. Being a Divine Ordinance,
i t duly anticipates the fact of histo r ica l
evolution and leaves a vast f i e l d . . . to the
i j it i h a d (independent reason) of the time con
cerned. 4
Islam, therefore, "requires a new interpretation
C
at every stage of our development" to make i t compatible
with various levels of economic development or the stages
Muhammad Asad, The Principles of State and
Government in Islam (Berkeley, California: University of
California Press, 1961), pp. 22-23.
5
I. H. Qureshi, Pakistan, Islamic Democracy
(Lahore, 1951), p. 2 (an address delivered in 1949).
102
of growth.
A good question can be raised. Is the hypothesis,
that the economic system of Islam is compatible with all
le v e ls of economic development, v erifia b le? Historical
precedents that are available relate to a backward and
primitive era of human development in general and economic
j development in particular. Contemporary Islamic societies,
(
the so-called Islamic s o c i e t i e s , cannot provide a
dependable answer either. On the other hand, i f i t is j
agreed that the p o lit ic a l thought of Islam is authori
tarian and it s economic thought normative (based on
religious value judgments), then i t would be d i f f i c u l t to
imagine how i t s economic system could be compatible with
a highly developed industrial economy of modern times.
The question is e s s e n t ia lly an open ended one. A
theoretical answer can hardly be conclusive.
Resource Base
j i
The resource base of an Islamic economy can be
v a r i e d - - l a n d i s t i c , l a b o r is t ic or c a p i t a l i s t i c . No Islamic
so c iety has so far existed which had a c a p i t a l i s t i c
resource base. The economies of KhiTafat-e-Rashida (the
Rightly-guided Caliphates) 632-661 A.D., being predomi
nantly primitive, had a resource base that was either
la n d is tic or la b o r is tic or both. L i t t le capital was used
in the process of production. C a p it a lis t ic methods and
103
the problems of c a p i t a l - i n t e r e s t , roundaboutness of
production, accumulation of c a p it a l, e t c . , were unknown.
That in terest is expressly prohibited in Islam does not
however imply the im possibility of a c a p i t a l i s t i c resource
base for the Islamic economy. W e have already seen that
i t is wholly within the realm of p o s s i b i l i t y that a
centrally directed and/or controlled economy can replace
| the price mechanism of in te r e st rate with the exercise of
i
state authority to bring about the required capital
formation. A contemporary case is that of U.S.S.R.
While interest has been c o n stit u t io n a lly abolished, the
resource base of the Soviet economy i s , nevertheless,
c a p i t a l i s t i c . The Russian industries are as much
capital-oriented as those of America. The p o l i t ic o -
economic technique used to build a capital base i s ,
however, quite different in the two cases. It is
"authority" in the case of U.S.S.R. and "interest" in the
case of the U.S.A.
What about the Islamic economy? If market price
is to be the rule, the resource base cannot be any other
than landistic and/or l a b o r is t ic . A c a p i t a l i s i t i c
resource base would require, in the absence of in t e r e st,
the wide use of state authority so that the real capital
formation on a large scale would be a matter of government
i n i t i a t i o n , ownership, and control either d irectly through
104
public enterprise or in d ir ec tly through making in terest-
free loans.
Ownership and Control of Means of Production
Islam recognizes the freedom of occupation,
individual enterprise, and the i n s tit u tio n of private
i
! property--means of production included. However, banking,
i
u t i l i t i e s , and international trade might require public
ownership and control. To this l i s t , heavy industries
could also conveniently be added. So the ownership and
control of means production could be public as well as
pri v a te .
Locus of Economic Power
Theoretically speaking, the locus of economic
power would be the individual economic unit. This would
be true in agriculture, d is tr ib u t iv e trades, professions
jand small and medium scale business. The situation may be
d ifferent in the case of large scale industries and
international trade where the sta te would constitute the
locus of economic power.
Motivational Systems
The motivational system of the Islamic economy,
in a theoretical sense at l e a s t , is both moral/ spiritual
and worldly or private p r o fit. The spiritual considera
tions are however overriding. The submission to the Will
105
of God is supreme. Islamic moralism is to be the
foundation of individual as well as social l i f e . But for
these r e s t r a i n t s , the individual is f re e, indeed, i t is
urged upon him to pursue his economic s e l f - i n t e r e s t . He
is free to build legitim ate fortunes.
The Organization of Economic Power: Centralization
versus Decentral i zati orT
The organization of economic power in the Islamic
economy will be of a mixed variety. The lim it to decen
tr a liz a tio n would be the in d iv idu al's own 'economic'
capacity to organizes a b i l i t y to borrow from r e l a t iv e s ,
friends, the State Bank and the Bai t-ul-Mai (the State
Treasury) on an i n t e r e s t - f r e e basis; and economic organi
zation on the basis of partnership and/or jo in t stock.
Because of the absence of i n t e r e s t , in s titu tio n a l loans,
short term as well as long term, will not be so frequent
and mechanical. For one thing, these could be secured
only from the governmentally owned and controlled agencies.
It would not be an unwarranted suspicion, at lea s t con
sidering the present circumstances as they obtain in very
many Muslim countries today, that the bureauacratic red
tape and probably also corruption will all be a necessary
part of nationalized banking. Tb ensure e f f i c ie n c y ,
drastic disciplinary devices will have to be introduced.
In an operational sense, these will have to be similar to
106
those obtaining in socialist/communist s t a t e s . It would
be naive to wholly rely on the forces of Islamic morals
and brotherhood.
Good, bad, or in d iffe r e n t, decentralized organi
zation of economic power in an Islamic economy is
only part of the story--probably an in s ig n if i c a n t part.
| More important will be the centrally organized economic
power. Even in sectors/areas where this may not be the
case, the e f f e c t of central direction would be clearly
f e l t . The economic power in the key areas such as finance
and banking, public u t i l i t i e s , international commerce,
and such basic industries that require long term financing
w i l l , of n e c e s s ity , be vested in the government sponsored
agencies. What is to be noted here is that the nature
and magnitude of the economic power of the sta te sets the
pace and trend of the private organization of economic and
business a c t i v i t y . Centralized direction of economic
a c t i v i t y does hurt the free operation of market mechanism/
forces even though such a direction may be d iv in ely/
s p i r i t u a l l y motivated as is believed to be the case in
Islam. It i s , however, not greatly upsetting to the
economic system of Islam. As one of the fundamental goals
we have already seen that the so c ie t y 's economic in te re st
is supreme.
107
Social Processes for Economic Coordination
With the one important q u a lific a tio n that
in te re st will not be allowed to e x i s t as a price, the
social process for economic coordination will be that of
market price based on the operational mechanism of demand
and supply. This would certainly be the case with
consumers' goods and services. Hierarchy will be used as
a politico-economic technique to resolve the problems of
economic coordination created by the abseqce of an
in te r e st rate mechanism. Such problems will be associated
with all those sectors wherein the production process is
roundabout and, therefore, involves both financial as well
as real c apital. The social processes for economic
coordination in an Islamic economy will be those of
market price as well as hierarchy, particularly the latter.
Distribution of Income and Wealth
The distribution of income and wealth in an
Islamic economy will be e q u a lita r ia n , at lea s t not too
highly unequal. Distributive j u s t ic e in income and
wealth will be a leading goal. Indeed, Islam means nothing
other than social j u s t ic e , which in essence boils down to
economic j u s t ic e . While s t r i c t l y a c l a s s l e s s society is
not the aim, an equalitarian society is ensured by the
Islamic law of inheritance and the taxation of accumulated
wealth. A great reliance will
economic income d istr ib u tio n .
A summary presentation
economic system of Islam can be
Level of Economic :
S
I
development
Resource base
Ownership and Control
of means of production
108
be placed on the extra
of the evaluation of the
as follows:
A nalytically speaking,
primitive. Supposedly,
any-primitive, developing
or highly developed.
A nalytically speaking,
la n d is t ic and/or laboris
t i c . Supposedly i t could be
any-highly c a p i t a l i s t i c
i ncluded.
Mixed. Small scale
business will be privately
owned (in form of individ
ual partnership, proprie
torship, and jo in t stock
company) and controlled.
Large scale business such
as basic industries, u t i l
i t i e s , banking, in t e r
national trade, e t c . , will
Locus of economic power
Motivational Systems
The organization of economic
power: Centralization vs.
Decentrali zati on
109
be publicly owned and
control led.
: Considerable concentration
of economic power in the
hands of governmental
agencies and state enter
prises, e sp ecia lly in large
scale a c t i v i t i e s . Smaller
enterprises being owner
managed.
: Self interest heavily
morally and s p i r i t u a l l y
oriented--Islamic brother
hood.
: Qualitatively speaking,
economic power will be
centrally as well as de-
centrally organized.
Quantitatively speaking,
the lio n 's share of eco
nomic power will be organ
ized around central
authority.
110
: Combination of market
price and hierarchy.
Hierarchy w ill play a con
spicuous role to provide
orientation and direction
toward morally desirable ;
I
goals. j
: Equalitarian distribu tion I
of income and d e c e n tr a li
zation of wealth in the
society. A completely
c la s s le s s so c iety is not
however the goal.
The particular situation of Islam v i s - a - v i s
capitalism and socialism (or communism) has been evaluated
by Professor Jacques Austruy in a series of a r t i c le s
|
published in the Islamic Review in 1967. His conclusions j
a re:
In f a c t, i t must be repeated, i f Islam wishes
to preserve i t s s p e c if ic personality and it s
o r i g i n a l i t y , in a progressive adaptation to the
conditions of the modern world, i t is no more
towards Communism than towards capitalism that
i t must turn.
Louis Massignon has strongly emphasized the
d i s t i n c t i v e character of Muslim c i v i l i z a t i o n .
"From the social point of view, Islam is note
worthy because of i t s pronounced 'equalitarian'
concept of the personal contribution of the |
individual. It is opposed to free speculation J
S o c ia l p r o c e s s of
economic c o o r d i n a t i o n
Distribution of income
and wealth
I l l
on the rise and f a ll of public funds, bank c a p ita l,
State loans and indirect taxes on commodities of
prime necessity. But i t supports the rights of
the father and the husband, private ownership of
property, commercial c a p ita l. It is opposed to
legalized prostitution and alcoholic lib e r t y . It
thus occupies an intermediate position between
the doctrines of bourgeois capitalism and Bolshevist
Communi sm.
There is another aspect under which this
opposition to the two Western systems can be ex-
pressed--today the Western c i v i l i z a t i o n s are the
c iv i l iz a t io n s of those who "have" whereas Islam,
like the real Christianity, can con sist only of
the c i v i l i z a t i o n of those who merely "subsist."
The Qur'anic injunction, "Join yourselves all
together with the rope of God," can be compared
with the Marxist appeal: "Workers of the world,
unite!" Islam, the religion of the d isin herited ,
the "Abrahamic" schism of the rejected (as expressed
by L. Massignon), is well f i t t e d to lead the
crusade of the Tiers-Monde, a crusade which may,
i f the West is not careful, be directed ". . .
against the 'superior' tec h n ica l, financial and
s c i e n t i f i c oppression of a Europe without a
Messiah, and without God."
But this revolt, or rather this awakening, can be
successful i f and when certain tangible results
are achieved in a world which has now become very
largely "Westernized." Such proof must be looked
for in the economic domain, for today i t is the
economic problem which is the most urgent.
Islam will succeed in finding in this domain
the foundations of such an e f f e c t i v e renovation.
It has the desire and possesses the elements which
are necessary.6
^Jacques Austruy, "Islam's Key Problem--Economic
Development," The Islamic Review, October-November,
1967, p. 28.
112
Ectindmic Organizatiori of Pakistan
Pakistan's economy is c a p i t a l i s t i c . In sp ite of
all declarations, there is nothing about the present
economy of the Islamic Republic of Pakistan which can be
considered particularly Islamic. The present economic
trends also seem to be in the direction of capitalism.
The fact that capitalism in Pakistan is s t i l l backward
compelled the government to f i l l the vacuum in areas
where private enterprise was not forthcoming. But the
policy remains to promote private entrepreneurship. With
in the framework of Professor E l l i o t t ' s eight c r i t e r ia ,
the existing organizational structure of the economy of
Pakistan may be described as follows:
1. Development:
1e v e l :
2. Resource base:
Underdeveloped but developing.
In the Rostowian schema, the
economy has supposedly taken-
o f f .
Landistic and l a b o r is t ic ,
e sp e cia lly in agriculture and
cottage-small scale industries.
Industrial sector has begun to
make use of the c a p i t a l i s t i c
techno!ogy.,
113
3. Ownership and control
of the means of pro
duction:
4. Locus of economic
power:
5. Motivational systems:
Private, i n d iv i d u a l is t ic ,
and corporate. Major
industries or enterprises
have mixed government-
private ownership and control
of the means of production.
In due course, even these
jo in tly owned and controlled
enterprises are turned over
to private enterprise.
Private and i n d iv i d u a l is t ic
as well as centralized in
the hands of public o f f i c
i a l s . Decentralized
decision-making in business,
industry, and consumer's
spending. Bureaucratic
decision-making in the
in it ia t io n of state enter
prises.
Market oriented. P rofit
motive is the exclusive
motivation for private
enterprise. Public
114
The organization
economic power:
enterprise is hopefully also
concerned with the broader
needs of Pakistan. But the
policy that governmentally
i n it ia t e d enterprises are
also designed to be turned
over to private enterprise
obliges the government
corporations to demonstrate
the a b i l i t y of th e ir enter
prises to earn a p rofit in
the open market.
of Mixed, but e s s e n t i a l l y and
eventually decentralized
throughout the economy. It
is generally believed that
economic power in fact
resides in some twenty
fam ilies (all of them located
in West Pakistan) who control
the business, industry, and
finance in Pakistan.
7. So c ia l p r o c e s s e s
economic c o n t r o l :
8. Distribution of
income and wealth
115
for Market and government rules
and regulations with regard
to allocation of foreign
exchange, capital issues
within Pakistan, imports
and exports of commodities
and c a p ita l, location of
in d u s tr ie s , etc. National
economic planning and East-
West (Pakistan) power
p o l i t i c s and economic r e a l i
t i e s also play an important
role.
Highly unequal and concen-
: trated in a small minority
of businessmen, landlords,
and highranking o f f i c i a l s of
the government. The concen
tration of wealth and
distribu tio n of a major
share of national income
goes to the ind ustrial,
f i n a n c i a l, and trading class
in rather a conspicuous
116
manner. This makes i t a
target of criticism and
perhaps envy of even the
high government o f f i c i a l s .
Professor Papanek quotes a
Senior Pakistani Civil Ser-
i
vant: "Wealth is concen- j
I
trated in the hands of a i
group which is greedy, a n t i
s o c ia l, uneducated, and
crude. Private industry has
exploited the consumer. Its
e ffic ie n c y is a myth--it has
never been exposed to i n t e r
national competition."^
Nobody knows the extent of
the i ll e g a l distribution and
diversion of income and
wealth which eventually finds
its way to European banks.
Gustav F. Papanek, Pakistan's Development:
Social Goals and Private Incentives (Cambridge, Mass.:
Harvard University Press, 19677., p. 56.
117
N a tio n al Economic Planning
Pakistan has exercised national economic planning
from the very beginning. The pattern has se ttle d down to
a series of fiv e-y ear plans. The f i r s t five-year plan ran
from 1955 to 1960. Its fundamental objectives were:
(a) To raise the national income and the
standard of livin g of the people;
(b) To improve the balance of payments of the •
country by increasing exports and by production
of su bstitu tes for imports;
(c) To increase the opportunities for useful
employment in the country;
(d) To make steady progress in providing
social services: housing, education, and social
welfare; and
(e) To increase rapidly the rate of develop
ment, e sp e cia lly in East Pakistan and other
r e la t iv e ly less developed a rea s.8
The National Planning Board stated:
W e regard private enterprise as an agency
for performing the tasks'which i t can competently
discharge. The need for making rapid advance is
so great in the present stage of development
that we cannot afford to discard any which can
make a useful contribution. Private enterprise is
a desirable agency in this sense. The public s e r
vices cannot perform all the tasks that are f e a s ib le
and needed. If private enterprise in large-scale
industry f a i l s to show signs of its willingness
and a b i l i t y to develop a sense of social
r e s p o n s ib ilit y , the demand for displacing i t to
the needed extent would become j u s t if i e d . With
an adequately sta ffed , better organized and more
experienced public sector there would be no good
reasons, economic or administrative, for r e sis tin g
the demand.9
Q
Government of Pakistan, National Planning Board,
The First Five-Year Plan 1955-60 (Karachi, 1957), p. 13.
9I b i d . , p. 4.
118
The formulators of the First Five-Year Plan of
the Islamic Republic of Pakistan would have fa ile d in
their duties i f they had not pointed out that:
W e believe that the principles which underlie
the social objectives of our po licies are
supported by the teachings of Islam, according to
which man as the vice-gerent of God is granted
a position of high d i g n i t y . 10 j
National economic planning in Pakistan does not !
I
envision a particular type of s o c i e t y - c a p i t a l i s t i c , !
s o c i a l i s t i c , or Islamic--but attempts to solve the various!
problems in an e s s e n t i a l ly pragmatic manner. This was
stated by the Chairman of the Pakistan Planning Commission
as follows:
No doctrinaire assumptions underlie the Plan,
[referring to the Second Five Year Plan], and
neither an exclusively c a p i t a li s t nor an exclu
s iv e ly s o c i a l i s t economy is postulated. The
approach throughout is pragmatic. The fundamental
problem is how, under severely limiting condi
tio n s, to find some way towards the liberation of
the people from the crushing burden of poverty.
Viewed in this context, economic growth becomes
a necessity for sheer survival. The compelling
consideration is that the economy must grow at a
rate which must be faster than the increase in
population; a lso, the pace of future growth must
be such as to lead with expedition towards a
modernized and s e l f sustaining economy. . . .
Progress must, however, be sought mainly through
inducement, less through direction. The creative
energies of the people can best be harnessed to the
needs of development i f po licies of economic
liberalism are pursued.il
101bid. , p. 6.
11
Government of Pakistan, Pakistan Planning
Commission, The Second Five-Year Plan 1960-65 (Karachi,
i9 6 0 ), pp. xi i - x l v . ! “__ _____
119
The underlying motivations are, however, to formulate only
such planning str a teg ies as are within the general frame
work of the existing economic system. In an ideological
sense i t boils down to maintaining the status quo. Now
and then i t is considered p o l i t i c a l l y expedient to offer
homage to Islam. But Islam can in no sense be considered
a relevant factor in the national economic planning of
Pakistan. Things are done, or not done, for reasons other
i
than Islam.
The Key Problem
i
The most fundamental of all sources of economic j
problems is the lack of a national sense of direction.
More than two decades after Pakistan's creation and after
two Constitutions and a third one in the making, the
nation has s t i l l not agreed upon the kind of economy
which Pakistan ought to be striv in g for. The alternatives
before Pakistan are 1) a c a p i t a l i s t i c economy, 2) a
t
s o c i a l i s t i c economy, and 3) an Islamic economy. Sometimes
the issue is further complicated by presenting Islamic
socialism as the natural choice for Pakistan. It creates
confusion, because one never knows whether the proponent
of i t really means Islam or socialism . What is important
to be understood here is that unless a common consensus
c r y s t a l l iz e s i t s e l f and becomes part of the national
120
consciousness, the controversy over the form of economic
organization only adds to the problems of economic
development, which in themselves are a stupendous
problem.
CHAPTER V
INTEREST
I ntroduct ion
By a strange coincidence, in te re st seems to a ttr a c t
the most seriou s a tte n tio n o f c a p i t a l i s t s , s o c i a l i s t s , and
Islam ists a l i k e . But i f in te re st c o n s t it u t e s the corner
stone o f the economic theory of capitalism by its presence,
its id e o lo g ic a l absence is a ls o the d i f f e r e n t i a s p e c if ic a
in the s o c i a l i s t i c and Islamic systems of p o l i t i c a l econ-
only. A careful a n a ly sis o f in te re st is therefore o f
fundamental importance. C a p it a lis t s have worked out a
reasonable, sy stem a tic, and coherent theory of the work
ings o f the economy based on in t e r e s t . S o c i a l i s t s have
done considerable th e o r iz in g about in te re st but have so
far remained unable to develop a s a t is f a c t o r y theory o f a
s o c i a l i s t economy which does not u t i l i z e some notion o f
in te re st for the purposes o f rational c a lc u la tio n s and
economic d e c is io n s . Islam ists have looked at in terest
(the word is riba in Arabic) in ideological terms only.
Somehow the t r a d it io n o f a th e o r e tic a l in v e stig a tio n o f
in te re st and the problems connected with it in r ela tio n to
pooling o f fin a n c ia l resources o f the community in order to
enable the creation o f economic capital was simply not !
121
122
i n i t i a t e d . People, however, never tired o f c i t i n g the
verses o f the Quaran wherein God has forbidden a l l forms
o f i n t e r e s t . In t h is chapter, we propose to analyze the
phenomenon o f in te re st under Islam, capitalism , and
so c ia l ism.
I. The Doctrine o f Riba
( Interest) in Is 1am
Islam e n v isio n s an in te re st less economy. Interest
would th erefo re be abolished on the basis of the Quranic
injunctions against i t . In, fa c t , there is hardly anything
e l s e which has been condemned in harsher terms than Riba,
i . e . , usury and/or in t e r e s t . The underlying causes o f the
prohib ition o f Riba by the Quran may be, in th e ir logical
sequence, c l a s s i f i e d as follow s:
1. To s t a r t w ith, loans are taken arid used
primarily for consumption purposes. The borrower,
having th e re fo re no f e a s i b l e addition to his in
come, is very lik e ly to be in d i f f i c u l t y even in
the repayment o f the p r in c ip a l. Therefore, paying
a surplus over and above the capital would e a s i ly
undermine his economic w e ll-b ein g and force him
down to a submarginal p o sitio n where insolvency
and bankruptcy are in e v ita b le . That is why the
Qur'an e x p l i c i t l y urges, "And i f it be one in
d i f f i c u l t i e s , then wait for easy circumstances"
(2 :2 8 0 ).
2. The lender, on the other hand, instead of
a c tin g in accordance with the above, would con
sid e r him self j u s t i f i e d in charging the highest
p o s sib le in te r e st that would increase at a pro
g r e ss iv e rate (doubly double," to use the words
o f the Qur'an), so as to make up for any loss
incurred because o f the insolvency o f the
borrower.
3. F in a lly , riba is a ls o being spent on con-
sumption rather than for productive purposes, or
to use again the terminology o f the Qur'an,
"Swallowed and eaten up", so that the surplus,
although apparently growing at a progressive
rate, dim inishes and f i n a l l y disappears. And
here again is the Qur'an in p erfect accordance
with what a c tu a lly takes place: "God shall
blot out usury" (2 :2 7 5 ). Translated into the
terminology o f modern economic theory, t h is would
read pretty much as follow s: there is no addition
whatsoever made by usury to the stock o f wealth
and to the productive capacity of the business
community as a whole.
To sum up: we have been d ealin g with a s u r
plus that seems to move in a c ir c u la r flow the
s t a r t and the end o f which tend to the same stage
of unproductive consumption. In other words, a
surplus th a t, w hile consuming i t s e l f , causes in
numerable d i f f i c u l t i e s and f r i c t i o n s . Therefore,
it is q u ite understandable that, as long as the
disadvantages overweigh the prospective b e n e f i t s , ,
such a surplus should be suspended or prohibited.
In the contemporary Islamic s t a t e , the doctrin e o f
Riba in Islam can be interpreted in two ways. F ir s t, we
can trea t the Quranic prohibition in a l i t e r a l sense and
abolish a ll kinds o f in te re st on a l l kinds of loans--con-
sumption, h ou se-b u ild in g, educational, commercial, indus-
t r i c a l , e t c . Second, we can d is tin g u is h between in terest
charged for loans to finance consumption needs and in terest
paid for borrowed c a p ita l u t i l i z e d in financing commercial
and industrial e n te r p r is e s and abolish in te re st on con
sumers' loans but retain it upon commercial and industrial
borrowing.
F. Ulgener, "Monetary Conditions of Economic
Growth and the Islamic Concept o f In ter est," The Islamic
Review. Vol. 55, No. 2, February, 1967, p. 12.
Roughly speaking, the two in terp retation s are ad
vanced by fundamentalist and modernist groups r e s p e c t iv e ly .
Speaking s t r i c t l y in the l e t t e r and s p i r i t of Islam, the
fundamentalist in te r p r e t a tio n - -a b o lit ion o f a l l i n t e r e s t - -
is more in conformity with the teachings o f the Quran.
The modernist in terp reta tio n is motivated with a d e s ir e to
make the best of both worlds. Thus it is suggested that
in keeping with the teachings of Islam, a l l forms o f usury
and in te re st upon s o - c a lle d consumption loans can be a b o l
ished in the contemporary Islamic s t a t e . The r a tio n a le
is that charging of in terest upon these loans w i l l cause
unusual economic hardship upon those who have to borrow to
make both ends meet. Besides, it is a lso agreed that it
would c o n s t it u t e some sort o f (probably economic) e x p l o i
t a tio n o f the needy by the money lenders, which is to be
checked on moral and s o c ia l grounds. Nobody, th e re fo re ,
seems to have any o b jection to a b o lish in g in te re st insofar
as the sanction r e la te s to consumption loans only.
But it should be noted that no in s t it u tio n a l lend
ing for consumption purposes is yet a v a ila b le in the con
temporary Islamic s t a t e , say, Pakistan. Commercial banks
do not loan for consumers' finan cing. Nor does the govern
ment. Private business has yet to develop the c re d it card
system. Whatever moneylending and borrowing that may take
place for consumer financing is between friends and/or
r e l a t i v e s . Rarley ever is a question raised o f the payment
125 !
j
o f in te r e s t upon these loans. One does not have to be a
co n sc ien tio u s Muslim to see that it would be somehow not
q u ite right even on the b asis o f pure common sense and j
ordinary courtesy to extra ct an in terest return over and
i
above the principal amount of a loan made to a needy friend;
or a poor r e l a t i v e . Only a community which has f a l le n
below t h is minimum level o f courtesy and decency would need
to be reminded of the brotherhood in Islam and God's in
ju n ctio n against Riba to keep it from wanting to seek
"doubly double" returns o f petty loans to desperate human
bein gs. There is no reason to b e lie v e that any contempora
ry Islamic community is facin g such an imminent danger.
The modernist in terp reta tion o f Riba is f i r s t o f
a l l modern. There is hardly anything p a r tic u la r ly Islamic
about i t , except that it may be coming from Muslims them
s e l v e s . Anyone with a b a sic knowledge of economics should
be able to formulate the problem in these terms. The in
te r p r e ta tio n is t h i s . Comparatively speaking, the economy
of the contemporary Islamic s t a t e is t o t a l l y d if f e r e n t from
the one o f Mohammad's days. Consumptive loans should be
i n t e r e s t - f r e e because they are not productive. Interest
can be charged upon commercia1 - in d u s tr ia 1 loans because
they are productive, p r o fita b le , and s e l f - l i q u i d a t i n g .
These loans f a c i l i t a t e business and make industrial e n t e r
prise p o s s ib le . Commercial cre d it or fin an cial ca p ita l
enables entrepreneurs to procure factors o f production--
126 j
land, labor, c a p i t a l, organ ization , and management--and
produce goods and wervices which the s o c ie t y needs. All
a gen ts, who provide t h e ir s e r v ic e s to the process o f e c o
nomic production, earn a leg itim a te claim to a compensation
or remuneration. Landlords earn rent, laborers earn wages,
c a p i t a l i s t s earn in t e r e s t , and so on. Thus the modernist
in terp reters equate the borrowed fin a n cia l capital with
land and labor, and j u s t i f y in terest on economic grounds.
In doing t h i s , they a sser t that th eir r e in te rp re ta tio n o f
Riba is correct and in conformity with the e s s e n t ia l s p i r i t
o f the teachings o f Islam.
What can be concluded from the fundamentalist and
modernist in te rp re ta tio n s o f Riba in Islam? Insofar as we
are not concerned here with the th e o lo g ic a l dimensions o f
the Quranic t e x t s with regard to Riba. we must abstain from
making a judgment upon the r e l i g i o s i t y of e ith e r p o s itio n
or i t s proponents. In a c r i t i c a l sense, it can be said
that the fundam entalists completely ignore the sc ie n c e ,
theory, and r e a l i t i e s o f economics. On the other hand,
the modernists pay lip s e r v ic e to the Quranic sanction
a g a in st in t e r e s t in t h e ir pronouncements but disregard it
completely in th e ir examination of the economic problems
and issues of the contemporary Islamic s t a t e . To put it
p la in ly , in t h e ir in terp reta tio n s (or sh a ll we say polem
i c s ) , the fundam entalists are Islamic but unsystematic;
the modernists are sy stem atic but u n -lslam ic. In a psycho-
127 I
lo g ic a l se n se, the conscious or unconscious m otivations
on the sid e o f the fundamentalists are a n o s ta lg ia for the j
ea rly Islamic s t a t e and a lack o f appreciation o f the work
ings of the modern industrial economy with a l l it s complex
ity , in s e c u r ity , and u n certa in ty. On the sid e o f the mod
e r n i s t s , the m otivations are a superior understanding o f
the e x i s t e n t i a l problems o f the day and a keen a p p reciation
o f the Western philosophy, s c ie n c e , and technology, coupled
with a c e r ta in degree o f , conscious or unconscious, con
tempt o f r e lig i o n and h o s t i l i t y toward t r a d it io n a lis m .
The fundamentalist reaches for his Utopia in the past; the
modernist in the future.
i ll. Economics o f Interest
Under Capital ism:
Nature o f In terest and Reasons for its Being
Interest is the consid eration paid by the borrower
of ca p ita l to the lender for its use. Capital is here r e
garded as an economic resource which is scarce and capable
of being used for a lt e r n a t e purposes in the process o f e c o
nomic production. Thus owners o f cap ital are e n t i t l e s to
a share in the output o f the economic process in the same
fashion and for the same reasons as owners o f alnd and sup
p lie r s o f m a te r ia ls, labor, and managerial s k i l l . To the
borrower o f c a p i t a l, in te re st c o n s t itu t e s j u s t one more
cost of doing b u sin ess. Interest in t h is sense is the
price o f c a p i t a l .
128 I
|
Bohm-Bawerk gave three reasons for i n t e r e s t . These!
!
a r e : j
(1) d if f e r e n t circumstances of want and
provision in the present and the future,
(2) under-estim ation o f the future,
(3) the tech n olo gica l su p e rio r ity o f present
over future g o o d s.2
Interpreting Bohm-Bawerk1s thought, Professor Blaug
says :
Bohm-Bawerk’s three grounds together provide
an exhaustive explanation o f the e x is te n c e of in
t e r e s t in a sta tio n a r y as well as in a dynamic
economy. In a sta tio n a r y s t a t e , the presence o f
the second "reason" c o n s titu te s a necessary but
not s u f f i c i e n t condition for the in te re st rate
to be p o s i t i v e . It is not s u f f i c i e n t because
the presence o f the third "reason" might gene
rate enough extra output to s a t i s f y the demand
for present goods; s im ila r ly , the third "reason"
is n eith er a necessary nor a s u f f i c i e n t condition
to cause the in te re st rate to r is e above zero. In
a dynamic economy, on the other hand, the f i r s t
"reason" is not a necessary but it is a s u f f i c i e n t
condition for a p o s itiv e rate of i n t e r e s t . Summing
up, the rate o f in te r e st can only be zero when (1)
the flow o f income is constant through time; (2)
time preference is neutral; and (3) the net product
cannot be increased by postponing consumption for
the sake o f future production.
The in teraction o f the three "reasons" not only
ex p la in s the e x is te n c e o f in te re st but a ls o f ix e s
the length o f the average period of production that
will y ie ld the highest present value. Since any
further roundaboutness always promises a further
increase in the value of the to ta l product, a zero
rate o f in te re st would encourage an unlim ited in
crease in the period of production. This would
mean a sc a r c ity of present goods, leading via the
f i r s t or the second "reason" to the reemergence
o f in te r e st and the reversal to d ir e c t methods of
production. The true function o f a p o s i t i v e rate
o f i n t e r e s t , then, is to act as a brake on the
tendency to neglect present wants by overextending
the period of production. The in te re st rate ration s
129 !
the lim ited supply o f present goods among ind ustries
in accordance with the community's estim ation o f
the r e l a t i v e value o f present and future goods.
If an economy is highly " c a p i t a l i s t i c , " the sto ck
o f consumer goods will be large, the degree o f
roundaboutness will be great, and the increment o f
product yield ed by further extensions o f the
average period o f production will be sm all. Hence
the rate o f in te re st will be low. This is Bohm-
Bawerk' s explanation o f the tendency o f the rate o f
in te r e s t to fall as the c a p ita l-la b o r ra tio r i s e s ,
r e f l e c t i n g the twofold diminution o f the advantages
o f greater roundaboutness and the disappearance of
the premium on present goods.3
Two Rates o f Interest
Economists d is tin g u is h between real and monetary
rates o f i n t e r e s t . The real rate o f in terest refers to
the p r od u ctiv ity o f real or economic capital such as to p is
t
and plant and equipment. It is a lso known as rate o f r e
turn over c o s t , internal rate o f return, and marginal pro
d u c t i v i t y / e f f i c i e n c y o f c a p i t a l. In th is sense, the real
rate o f in t e r e s t is in d ic a tiv e of the p r o fita b len ess o f
investment in c a p ita l goods. It can be used as the d i s
count rate to determine the present value o f the s e r i e s
o f expected future rec eip ts to equate them with the present
replacement cost o f the investment. This will ensure max
imum return over cost and an e f f i c i e n t a llo c a tio n o f cap
ita l into investment channels. The real rate of in te r e st
a lso helps to compute the recoupment or the payoff period
o f various investments.
3 | b ? d .. pp. 508-509.
130 !
The money rate o f in te re st is the rate paid upon j
i
borrowed funds and fin a n cia l c a p i t a l. It r e la te s to shares!
and s e c u r i t i e s , bonds and debentures, bank c r e d it , and so
on. It is purely a monetary phenomenon.
The link between the two rates o f in te r e st is t h i s ,
An entrepreneur borrows funds in the money market or the
ca p ita l market at the given money rate o f in t e r e s t , invests
the funds by buying resources o f production on the fa cto r
market, produces goods and se r v ic e s and sells them on the
product market, and expects to make a p r o fit in the face
of a l l kinds o f risk and un certain ty. Given pure and per
fe c t com petition, the real and money rates o f in te r e st will
be equa 1 .
The Determination o f Interest
Economic th e o rie s of the determination o f in te r e st
rates can be c l a s s i f i e d into two c a te g o r ie s . These are:
(1) Real th e o rie s o f in t e r e s t , and
(2) Monetary th eo ries o f in t e r e s t .
The real th eories o f in te re st can be subdivided
i nto:
(1) Abstinence (from present consumption) theory
of in t e r e s t , and
(2) Marginal productivity theory,
The monetary th eories o f in te re st can be subdivided
into:
131
(1) Loanable funds theory, and
(2) Liquidity preference theory.
The Abstinence Theory
The abstinence theory takes into account the f o r e
going o f present consumption in favor o f saving a portion
o f present income. This involves a real s a c r i f i c e . It
is th erefo re only ration al economic behavior that these
individual savers would want to make t h e ir savings avail
able for investment only if they are paid a compensation
for th e ir foregoing o f present consumption. This compen
satio n is i n t e r e s t . The question o f abstin en ce or time
preference is in fact a cultural phenomenon which will
vary from s o c ie t y to s o c ie ty depending upon the consumption
p a ttern s. Thus, the abstinence theory o f the determination
o f the in te r e st rate is, s t r i c t l y speaking, a s o c i o -
p sy c h o lo g ic a 1 theory o f an e s s e n t i a l l y economic v a r ia b le .
A s o c ie t y which places a high value upon consumption and
comfort and luxurious living will be characterized with a
higher rate o f in te r e st to e n tic e people to save.
The view that abstinence or any other psychic cost
determines the rate o f in te re st is, however, o u tr ig h tly
r e je c te d . Professor Blaugh has sta te d :
The abstinence theory o f in te re st is more than
a piece o f crude a p o lo g e tic s . In e sse n c e , it is
simply a lo gica l deduction o f the view o f c a p ita l
contained in the c l a s s i c a l wages-fund d o c tr in e . If
ca p ita l c o n s is ts principally o f "advances" to workers,
the rate o f in te re st is the reward o f those who can
132 !
afford to lend present wage goods in return for !
future wage and non-wage goods.^
The Marginal Productivity Theory
The marginal productivity theory of in te r e st rate
determination provides an explanation in terms of the mar-
gianl internal rate o f return upon ca p ita l investment.
The market rate o f in terest is determined, like the price
o f any other commodity or factor resource, by the in t e r a c
tio n of the market forces o f demand and supply fun ctions
for cap ital under com petition. Once t h is market rate o f
in te r e s t is determined, it becomes a given datum for the
individual su p p liers (savers) and demanders ( i n v e s t o r s ) .
The follow in g diagram w ill i l l u s t r a t e t h i s .
^ lb id .. p. 196.
133
A B
Margi nal
Product
Y
i
0
C
Margi nal
Product
Y
M RP
K
Capi tal
Economy
Capi tal
Fi rm
134
Diagram A d e p ic ts the aggregative data for the
economy as follow s:
S - S 1 = Supply function o f c a p it a l.
D-D' = Demand function for capital (Marginal social
Product) .
0-C = Equilibrium level of capital investment.
0 -i = Rate of in t e r e s t .
0 - i , i . e . , the market rate o f in te r e s t, becomes
the com petitive price for capital for the individual in v es
to r , the firm. This is shown by a horizontal lin e in d i a
gram B as i - i ' . The firm determines its own marginal rev
enue product which is shown by MRP in the diagram. The
e q u a liz a tio n or the in te r s e c tio n o f i - i 1 and M RP curves
determines the level of c a p it a l, i . e . , OK, which the firm
fina 1 ly employs.
Thus, according to the marginal productivity
t h e o r y :
The rate o f in te re st preva ilin g in the system
as a whole is determined by the highest internal
rate o f return which can be obtained from in v e s t
ments made at "the margin o f growth" o f the system.
As the ca p ita l endowment increases, the in terest
rate f a l l s . The in te r e st rate can however, never
f a l l to zero; it could a tta in that level only if
a l l goods became free g o o d s . 5
'’Friedrich A. Lutz, The Theory of Interest
(Dordrecht, Holland: D. Reidel Publishing Company, 1967),
p. 17.
135
The Loanable Funds Theory j
The loanable funds theory explain s the determina
tion o f the in te r e st rate in terms o f demand for and supply;
o f loanable funds. Loanable funds is a broader category
than savin gs. It includes savin gs, changes in the money
supply, and dishoardings over a given period. Thus, the
supply o f loanable funds w ill be expressed as
The demand for loanable funds w ill c o n sist of the commun
i t y 's desire for money investment and hoarding. The
governing c r i t e r i a in supplying and demanding loanable
funds w ill be marginal produ ctivity o f capital and the
time preference o f income r e c e iv e r s. Both the supply and
demand sid es o f the loanable funds refer to flow v a r ia b le s.
The determination o f the rate o f in te re st can be i l l u s t r a
ted through the follow in g diagram.
136 !
Supply of LF
Rate of
Inter-
es t
Demand for LF
LFO
Loanable Funds (LF)
The equilibrium rate o f in te r e st in the economy
w ill be 0 - i o and at t h i s rate, 0-LF funds w ill be supplied
and demanded.
The major demanders o f loanable funds are business,
industry, and government. The various su pp liers of loan
able funds are:
1. The Central Bank, for example, the State Bank
o f Pakistan,
2. The banking system,
3. Brokers on the money market,
k. Personal finance and savings and loan a s s o c ia -
5. Investment banks and tr u st companies,
6. Industrial and a g r ic u ltu r a l banks,
7. Insurance companies,
8. The reserve funds and un distribu ted p r o fits of
corporat io n s,
9. Private in d ivid u als.
The Liquidity Preference Theory
The liq u id ity preference theory represents the most
developed economic a n a ly sis of the phenomenon o f in te re st
under ca p ita lism . Lord Keynes is credited with the formu
lation o f t h is theory o f in terest determ ination. The
liq u id it y preference theory t r i e s to explain the d e t e r
mination of the rate o f in terest in terms o f the stock o f
money which the community would like to hold in the form of
cash at a given time and the t o ta l supply o f money at the
disposal o f the community at that tim e. It deals with
stock v a r ia b le s. So the problem b o ils down to the d e t e r
mination o f the reasons for wanting to hold hard cash, i . e ,
the demand s id e , and the p o l i c i e s for determining the
q u a n tity -o f money, i . e . , the supply s id e , as con tro lled by
the central bank.
Keynes makes a m otivational a n a ly s is o f the demand
for money in terms of the psychological a t t itu d e toward
liq u id ity or, in other words, the d e s ir e to have ready cash
in the pocket or in the home. Thus, the rate of in te re st
138 |
becomes "the price which e q u ilib r a te s the d e sir e to hold j
wealth in the form o f cash with the a v a ila b le quantity of
£
cash." The motives for wanting to hold cash money are as j
f o 11ows:
(1) The transactionary motive,
(2) The precautionary m otive,
(3) The sp ecu la tiv e motive.
In Keynes' own words:
The three d iv is io n s o f 1iq u id ity -p re fer en ce
which we have d istin gu ish ed above may be defined
as depending on (i) the tra n sa c tio n s-m o tiv e, i . e . ,
the need o f cash for the current tra n sactio n of
personal and business exchanges; ( i i ) the pre
cautionary-motive, i . e . , the d e sir e for se cu rity
as to the future cash equivalent o f a certain
proportion o f t o ta l resources; and ( i i i ) the
sp e c u la tiv e motive, i . e . , the ob ject o f securing
p r o fit from knowing b etter than the market what
the future w ill bring f o r t h . 7
In an a n ly tic a l sense, the precautionary and t r a n s
act ionary demands merge into one category. W e w ill c a ll it
transactionary demand. The tran saction ary demand coupled
with the sp ec u la tiv e demand makes up the t o t a l demand for
money. It can be expressed as:
D m = Lt + Ls
where:
D = Demand for money.
6
John Maynard Keynes, The General Theory of Interest
(Dordrecht, Holland: D. Reidel Publishing Company, 1967),
p. 17.
^ lb id ., p . 170.
139 !
Lt = Money desired for precautionary and tra n s- |
actionary purposes.
Ls = Money desired for s p e c u la tiv e purposes.
in a behavioral sense, Lt is determined by the
level o f income (y) and the general price level (p), and
Ls is a function o f the rate of in t e r e s t (i). The quantity
o f money (M) is an exogenous v a r ia b le and, as such, a
matter o f policy d ecisio n s on the part o f the cnetral bank
and/or the governmental a u t h o r it ie s o f the country. The
equilibrium condition can th erefore be sta te d as follow s:
M = Lpy + L(r)
It must be understood that Keynes's is a general
equilibrium system in which income, employment, and the
rate o f in terest are sim ultaneously determined. But, the
determination of the in te re st rate in terms of liq u id it y
preference can be depicted with the help of the follow in g
d iagram.
Rate of In te r e s t
140
i
o
0
j
L M
Demand for and Supply of Money
141
j where:
0-l_t = Given transact ionary demand for money.
0-M = Given quantity o f money.
M minus O-Lt = Speculative demand for money.
Lt + Ls = Total demand for money.
M = Lt + Ls
The eq u a lity o f the point of in te r s e c tio n between
M and L j- + Ls determines the equilibrium rate o f interest.,
0 - i o . W e have already noticed that the rate o f in te r e st
is the e q u ilib r a tin g factor between s p e c u la tiv e demand
proper for money and amount of money a v a ila b le for t h is
purpose. W e can th erefore drop the tran saction ary demand
from our a n a ly sis without doing any v io le n c e to the liquid
ity phenomenon. The above diagram will th erefore reduce
i t s e l f to the follow ing form:
Y
4 ->
C /)
0)
s-
< u
4 ->
£Z
I—I
O
M
142 |
Quantity of money a v a ila b le for sp ecu lative!
purpose only.
Ls = Sp eculative demand for money.
0 - i o = Equilibrium rate o f in te r e s t .
^s = *-s
The central theme o f the Keynesian liq u id ity p r e f
erence theory o f in te r e st has been stated by Professor Abba
Lerner:
The rate o f in terest is what is paid by the
people who borrow money to those who have the
money to lend. Looked at the other way, it is
what people who have money obtain for lending it
to other people instead of holding it them selves.
All t h i s wealth"-from point o f view of the in d i
v id u a l, it is wealth even if it is only paper
money--does not earn anything for its owners.
Everyone who keeps possession of some money t h e r e
by s a c r i f i c e s the in te re st he could have had by
lending the money to someone e ls e at the current
rate o f i n t e r e s t . N evertheless a ll the money in
e x is t e n c e is always being held by somebody or
o t h e r .
Those who hold the money do so because the
covenience and se c u r ity they d e sir e from holding
it are worth more to them than the interest
s a c r i f i c e d . This d e sir e or need to hold money . . .
is c a lle d liq u id it y p r e fe r e n c e . . . . When the
rate o f in te r e st is low, people will want to hold
more money ( a l l the other factors remaining the
same); and when the rate o f in te re st is high, h o ld
ing money is more c o s tly and people will try to
manage with holding less o f i t .
There is one rate o f in terest at which the t o t a l
amount o f money people wish to hold is ex a ctly
equal to the t o t a l amount o f money a ctu ally in
e x is te n c e .®
w here:
0-M s =
o
°Abba P. Lerner, The Economics o f Control (New York
The Macmillan Company, 1961), pp. 277-278.
143
Further Considerations
In the th e o rie s discu ssed above, in terest has been j
explained in terms of ab stin en ce, time preference, produc
t i v i t y o f c a p it a l, and liq u id it y preference. Economists
such as the late Joseph Schumpeter and Professor Shackle
o f the University of Liverpool, England, have suggested
e n t i r e ly d if fe r e n t explanations for the appearance o f
in t e r e s t . According to Schumpeter, the dynamism o f the
economic system during the course o f economic development
produces i n t e r e s t . Professor Shackle thinks that in te re st
is caused by the phenomenon o f un certain ty .
Schumpeter's p o s itio n has been c le a r ly stated by
Professor Friedrich Lutz. It is:
His famous t h e s i s that in a sta tion a ry economy
there would be no in te r e st need not detain us long.
This claim r ests on a double assumption: f i r s t ,
that the individuals in a statio n ary economy, b e
cause they expect an unchanging income, will not
value present goods higher than future goods, so
that th e ir time preference will be zero; second,
that there will be no investment opp ortu nities
other than those already r e a lis e d . On these
assumptions Schumpeter's r esu lt is c o rr ec t. Whether
one accepts it depends, th erefo re, on whether one
finds the assumptions to be accep ta b le. Schumpeter,
indeed, was o f the opinion that the f i r s t point
does not c o n s t itu t e an assumption but, rather, that
it follow s from the p o stu la te o f rational behaviour.
He considers it a co ro lla ry o f t h is postulate b e
cause anyone who valued present goods more highly
than future goods and who acted on t h is basis would,
under these circum stances, find "that he had ob
tained a smaller t o t a l s a t i s f a c t i o n than he might
have done". But t h i s conclusion is v a lid only if
it is assumed a p rio ri that the individual does not
value present goods more highly than future goods.
Thus we are indeed d ealin g with an assumption which
may, but need not, be c o rr ec t. The second hypothesis,
144
namely, that no investment o p p o rtu n ities e x i s t ,
is po ssib ly connected with Schumpeter's concept
o f the " s t a t i c manager" ( s t a t i s c h e r Wirt) who
simply does not think o f try in g out new methods
o f production. "Given the necessary q u a n t it ie s
of labour and natural agents, production by th is
method ( i . e . , by the method already in use) w ill
be repeated in d e f i n i t e l y without any e x e r c is e of
choice . . . "
In Schumpeter's p o s i t i v e theory the in te re st
rate is a resu lt o f the dynamic development
caused by the entrepreneurs' attempts to e x p lo it
innovations. These undertakings create "surplus
value", sin ce the value o f the products produced
by the innovating firms w ill be above th e ir co sts
o f production--even i f only temporarily for the
individual firm. Entrepreneurial p r o f it s a r is e
which are always lia b le to be swept away by
competition; but which, so long as the dynamic
development l a s t s , do not disappear in the economy
as a whole sin ce p r o f it s w ill keep reappearing
in ever d i f f e r e n t s e c t o r s . In order to put the
innovations into e f f e c t , the entrepreneurs need
purchasing power because they are not in pos
sessio n of the necessary means o f production.
I n i t i a l l y they obtain t h is purchasing power from
the c r e d it - c r e a t in g banks. Later in the d ev elo p
ment process the purchasing power supplied by the
banks w ill be augmented to a considerable extent
by funds stemming from new saving--which occurs in
the wake of development--and from working cap ital
temporarily lying id le . The p r o f it s the e n t r e
preneurs earn enable them to pay in te re st on the
purchasing power borrowed from the banks.
Schumpeter describ es the demand and supply rela tio n s
in th is market, co n stru ctin g the demand curve for
cap ita l on the basis o f the entrepreneurs' expected
rates o f return and jux tap o sin g it to the lim ited
supply. So far as cred it creation by banks is
concerned, the supply is lim ited by the need o f
banks to stay liq uid, and insofar as savings are
offered on the market, by the in s is te n c e on the part
o f savers to be compensated for the "disturbance"
o f th e ir consumption p l a n s .9
Professor Shackle's p o sitio n has been c le a r ly rep
resented by Professor Keirstead o f the University of
^Lutz, o p . c i t .. pp. 132-13^.
Toronto. It is:
Professor Shackle a ttr ib u te s the occurence
o f in te re st in a dynamic so c ie ty to u n ce r ta in ty ,
and the role o f interest ta te is to a l l o c a t e
c a p ita l supply among d iffe r e n t employments to
the margin where degrees o f uncertainty are
equalized for varying employments over varying
time periods (or investment h o r izo n s).
Risk is d istin gu ish ed from u n certa in ty in
that events involving r isk in a s u f f i c i e n t number
o f . s i m i l a r experiments have been carried through
with known r e su lts to enable an observer to c a l
c u la te the p r o b a b ilit ie s attached to any one
r e s u l t . In gambling games such as d ice and rou
l e t t e , the gambler is dealing with c a lc u la b le
r is k . In poker or bridge, r is k - - t h e p r o b a b i li t i e s
atten ding the f a l l o f the c a r d s - - is combined with
un certain ty , the sometimes in ca lcu la b le s t r a t e g i e s
o f opposing players. In economics a l l r is k o f
loss can be provided against by one form or another
o f insurance. In the case o f loans, the proba
b i l i t i e s o f 'bad d e b t s ' - - o f unrecoverable loans
--a re known for each d iffe r e n t category o f loan.
Thus an actu aria l premium against r is k is a
c o n s t itu e n t , p o ssib ly in some c a te g o r ie s a major
c o n s t itu e n t , o f the rate o f return on loanable
funds. There is a common minimum charge for a ll
loans, i . e . , the opportunity cost of o b ta in in g
funds. On the top o f th is minimum is a premium for
the r is k in e ss attached to the category o f loan plus
an add ition al adm inistration or book-keeping charge.
Thus, on the supply side we b e lie v e that r is k , not
un certain ty , is a determinant o f the rate o f r e
turn on loanable funds. On the demand, or real
investment s id e , we b e lie v e uncertainty to e x i s t
but we b e lie v e th is to be a determinant o f the pro
f i t surplus, not of the rate of i n t e r e s t . 10
A Summat ion
W e have discussed some of the widely acknowledged
explanations o f in te re st rate determ ination. The summum
bonum o f them a ll is that the demand for and supply of
^ B . S. Keirstead, Capital. Interest and P ro fits
(Oxford, England: Basil Blackwe11, 1959), pp. 51-52.
146
c a p ita l are the key f a c t o r s . The motives for lending and
borrowing may be economic and/or extra-econom ic. In very
plain terms, the lenders would not lend unless they saw I
something for them in doing so. Borrowers would not borrow
unless they could get something out o f th e ir indebtedness.
Whether they use the borrowed money to make more money, or
to get married, or to go on a vacation, is beside the point.
The b a s ic fa ct that each on, i . e . , the borrower and the
lender, has something to gain from a loan tran saction is
s u f f i c i e n t to give r is e to i n te r e s t. Thus, we can i l l u
s t r a t e the determination o f the in te re st rate through a
very simple diagram:
Rate of
In te r e s t
+ j
(/>
Q J
S-
o >
+ J
£
O )
4->
C £ .
jO
=3
or
L U
Lending or Saving
i
o
Borrowing or invested
Capi tal
Loaned and Bor
rowed or Saved
and
Ce
Equilibrium Amount
of Capital
Invested
147 1
!
Beyond t h i s , very l it tl e can r e a lly be said with
c e r t a in t y . When a l l is done that is said and said that is j
I
done, the question o f in te r e st determination remains an j
u n se ttle d one. Writing in 187^, John Stuart Mill observed:*
The circumstances which regulate the rate of
in te r e st have usu a lly been treated , even by pro
fessed w r ite rs on p o l i t i c a l economy, in a vague,
loose, and u n s c i e n t i f i c manner. It has, however,
been f e l t that there is some connexion between
the rate o f in te r e st and the rate o f p rofit; that
(to use the words o f Adam Smith) much will be
given for money, when much can be made o f i t .
It has been f e l t , a ls o , that flu c tu a tio n s in the
market rate of in te r e st from day to day, are d e
termined, like other matters o f bargain and s a le ,
by demand and supply. It has, th erefo re, been
considered as an e sta b lish e d p r in c ip le , that the
rate o f in te r e st varies from day to day according
to the quantity o f cap ita l offered or ca lled for
a loan; but conforms on the average o f years to a
standard determined by the rate o f p r o f i t s , and
bearing some proportion to that rate--bu t a pro
portion which few attempts have been made to
d e f i n e . ' 1
Mills' statement is no less true now than it was
a hundred years ago.
The Status o f Interest iri a
Free Enterprise Economy
The in te r e st mechanism is the v e h ic le through which
owners o f c a p ita l receiv e th e ir incomes and entrepreneurs
make t h e ir investments. Thus, in terest plays a crucial
role in the d is tr ib u t io n o f income and the a llo c a tio n o f
resources. Interest is, th e re fo re , an e f f e c t i v e , u s e fu l,
^John Stuart Mill, Essays on Some Unsettled
Questions o f P o l i t i c a l Economy (New York: AugustusM.
K elley, 1968), pp. 106-107.
and indispensable economic instrument insofar as every
economic system has to resolve the d is t r ib u t io n a l and
a llo c a t io n a l problems o f the s o c i e t y j u s t l y and e f f i c i e n t l y
The free and private b asis of the economy will be t h e o r e t
ically impossible in the absence o f i n t e r e s t . Considered
in these terms, the idea o f an i n t e r e s t l e s s economy is
u t t e r l y nonsensica1 - - in a t h e o r e t ic a l sense that is . In
fa ct the concept o f in te re st gives economics a unique
s c i e n t i f i c postulate which other disciplines within the
Social Sciences have been groping for sin ce the beginnings
o f scientific thought. Professor Thorn of the University
o f Pittsburgh has sta ted :
The claim on the part o f economics to be a
q u a n tita tiv e sc ie n c e rests to a considerable
degree on the e x is t e n c e of the concept of the
rate o f in t e r e s t . It is the link between the
flow o f income and the sto ck o f ca p ita l and, as
such, it is of central importance in the calculus
o f economics. This crucial role o f the rate of
in te r e st has long been recognized and co n se
quently has been subjected to searching a n a ly sis
for several c e n tu r ie s. In s p i t e o f this pro
longed examination, our knowledge o f the nature
o f the rete of in te re st and its role in the econ
omy is less developed than that o f many other econ
omic factors which have not had the b e n e fits o f as
long, nor as in te n siv e , an i n q u i r y . 12
A more guarded, yet highly thought-provoking s t a t e
ment has been made by Professor Shackle:
Interest is the most paradoxical of a ll economic
^Richard S. Thorn, (ed.) Monetary Theory and
Policy: Major Contributions to Contemporary Thought (New
York: Random House, 19^6), p. A-13.
149
q u a n t i t i e s . At f i r s t sig h t it seems to present
us with the opportunity o f doing c a lc u la t io n s ,
and o f obtaining in t h i s way r e s u lt s which are
at once q u a n t it a t iv e ly exact, l o g i c a l l y in
escapable and t h e o r e t i c a l ly in t e r e s t in g . It is
one o f the main p i l l a r s o f the claim o f economics
to be Queen of the Social S cien ces, the only one
o f those scien ces reducible to mathematical
statement and a n a l y s is . It runs in an unbroken
thread through the whole theory o f accumulation
o f wealth, both on the saving and on the in v e s t
ment s id e , and thus seems to reign over the
th e o rie s o f employment, of money, o f growth, of
the general price level and of the balance of
payments. It can appear, from t h i s viewpoint
o f pure theory, as the pivot of the e n t i r e system,
the sun in the midst of its p la n e ts. Yet when
examined c lo s e l y , thse claims d i s s o l v e . It has
been admitted from M arshall's time at lea st that
the influence of the in terest rate on saving is
doubtful even as to its a lg e b r a ic sig n . More
recen tly its influence on investment has been
denied on the basis o f businessmen's own t e s t i
mony. Bank rate is s t i l l nominally the Bank of
England's leading-rein for the commercial banking
system, but it has had to be reinforced by "d irec
t i v e s , " sp ecial d e p o s its , hire-purchase regulations
and what not. It seems lik e ly that the in te re st
rate, or the system o f rates, w i l l continue to
receive from th e o r e tic ia n s the homage due to a
ceremonial monarch, without in fa ct counting for
more than such a monarch in the real a f f a i r s of
western n a t i o n s . 13
III. Economics o f In terest
Under S o c ia 1ism:
Should Interest Be Paid?
Along with a denunciation o f ca p ita lism , Karl Marx,
father o f s c i e n t i f i c so c ia lism , posed a fundamental
13
G. L. S. Shackle, "Recent Theories Concerning
the Nature and Role o f In ter est," Monetary Theory and
Policy: Major Contributions to Contemporary Thought, e d .
Richard S. Thorn, (New York: Random House, 1966),
pp. ^ 6 5 -^ 6 6 .
150 |
question: Why should in te re st be paid?
i
W e have pointed out that the phenomena of
abstinence from present consumption with a view to improve j
upon one's chances of a b e tter l i f e in the future, l iq u i d
ity preference with a view to take advantage o f the
sp e c u la tiv e opp ortu nities offered by the stock exchanges
or the horse race clubs for that matter; or of business
uncertainty and fear o f f a i l i n g to make a p r o fit in a
dynamically changing economy are, at bottom, responsible
for the presence and payment o f in te r e st on monetary and
fin a n cia l capital and paper cre d it created and granted by
the banking system with l i t t l e more than a mere stroke of
an accountant's pen. The economic j u s t i f i c a t i o n for in
t e r e s t is sought in the behavior o f the individual consumer
turned saver, the individual sp ecu lato r, or the individual
entrepreneur. Indeed, considering the element o f real or
psychological hardship involved in foregoing comforts and
enjoyments of everyday l i f e in order to be able to save,
o f resista n ce involved in parting with one's hard-earned
money, and o f risk involved in in vestin g one's l if e - t im e
savings into some bu sin ess, it is only too human, and
therefore j u s t and f a i r , to expect and receive a compen
sa tio n in the form o f in t e r e s t . The claim of the i n d iv i
dual economic actor whose l i f e and psyche is characterized
with a ll kinds of a n x i e t ie s , apprehensions, and in s e c u r i
t i e s under capitalism is th erefo re p e r fe c tly le g itim a te .
If the individual is him self responsible for his present
and future and accountable for his unemployment, f a i l u r e s ,
and economic m isfortunes, then nobody, not even the s t a t e ,
s o c i e t y , or government, has the- right to the use o f his
savings without e it h e r his voluntary consent or rewarding
him with a p o s itiv e rate of in terest in the determination
o f which he is to have an equal rig h t. His personal
savings cannot be touched--not even in the name o f Das
Kapita1 or Holy Quran--without in fact v i o l a t i n g his
fundamental human r ig h ts. The payment of in te r e st t h e r e
fore seems to be in order from the standpoint o f the
in d iv id u a l. But is it in order from s o c i e t y ' s viewpoint?
Suppose a s o c ie ty removes the fear o f economic
hardship during sickn ess and old age or the disablement
or death o f the fam ily's breadwinner. Suppose a s o c ie t y
removes the opp ortu nities of "making a k illin g " at the
stock exchange or cornering the market or forward trading
or gambling at the r a c e s . Suppose a s o c ie t y removes unwar
ranted circumstances of loss of job, d e s t i t u t i o n , and s e a
sonal or c y c lic a l v i s i t a t i o n of p artial or t o t a l unemploy
ment; wasteful and j u n g l e - l ik e rivalry and competition;
and a great many risks and u n c e r ta in tie s o f economic l i f e
caused by, to use H. D. Dickinson's statem ent, the
"simultaneous action of a number of entrepreneurs ignorant
o f each others' d e c isio n s" . Suppose a ll t h is and much
more in the same d ir ec tio n can be done (barring p o l i t i c s
152
o f vested in te r e sts and psychological in h ib itio n s and
r e sis ta n c e coupled with a lack of understanding), and
there is no reason to say on an a priori b asis that it can
not be done in a s o c ie ty which wishes to e s t a b l i s h s o c ia l
j u s t i c e . Would such a so c ie ty s t i l l need in te r e st? The
answer seems to be: No, Apparently a l l the facto rs r e
sp on sib le for in terest on fin a n cial ca p ita l under c a p i t a
lism would have been removed. The conclusion seems to be
j u s t i f i c a b l e , not on moral or e th ic a l grounds, but on a
purely economic b a s is . The absence of in te r e st can a lso
bring about a fa ir e r and more e q u a lita ria n d is t r ib u t io n of
income, but that is beside the point for the moment. So
is , a ls o , beside the point whether such a s o c ie t y is d e
scribed as s o c i a l i s t i c . Islamic, or simply sane. Finally
it is again beside the point that many men--Greek
philosophers, Hebraic, Christian and Islamic prophets,
utopian and s c i e n t i f i c s o c i a l i s t s , humanist so c ia l
philosophers, and so o n --a lso envisioned some such s o c ie ty
The th e o r e tic a l p o s s i b i l i t y of an in te re st less economy
must not a lso be allowed to be contaminated by the h is to r i
cal and contemporary r e a lity o f an economy based on
in te r e st which has always been around and, as such, has
become rooted in our unconscious, which makes it v i r t u a ll y
impossible to consciously conceive of the very idea of i t .
153
Theory o f Interest !
Having concluded, only a moment ago, that a s o c i a l- j
i s t s o c ie t y can do away with in te r e s t, it almost seems j
n eed less to d isc u ss the theory o f in te r e st under so c ia lism .!
i
The reason that we propose to do that, n e v e r th e le s s, is
that s o c i a l i s t s do have a theory of in te r e st o f s o r t s . The
f u l l meaning o f it w ill be clear in the next se c tio n when
we w i l l discu ss the theory o f c a p i t a l.
E arlier, in the s o c i a l i s t model o f Oskar Lange, we
saw that s o c i a l i s t s have retained the parametric function
o f com petitive prices under c a p i t a 1ism with the important
v a r ia tio n that the prices w ill be determined by the Central
Planning Board and not the market. This is n e c e s s ita te d by
the fact that a l l means of production under so c ia lism would!
be owned and co n tro lled by the s t a t e . There is therefore
no c a p ita l market in the ordinary sense o f the word. There
being no autonomous demand or supply forces on the ca p ita l
market, the p o s s i b i l i t y of a competitive determination of
the market rate o f in terest is ruled out by d e f i n i t i o n .
But even under d ecen tralized market so c ia lism , a. rate of
in te re st is needed to serve as a d i s c o u n t - c o e f f i c i e n t .
Interest need not be paid, but it has to be accounted for
in economic c a lc u l a t io n s . Thus, in te re st under so c ia lism
becomes, instead o f a market rate, an accounting rate d e
termined by the central authority which is v i r t u a l l y the
s o le supplier o f fin a n cia l c a p i t a l. The determination of
the accounting rate of interest is a very complicated task
indeed. It is , at best, educated guesswork. According to
the Norwegian economist, T. J. B. Hoff, the data required
in determining the in terest rate o f t h is kind are as f o l -
1 ows:
(1) the s iz e o f the increase in the quantity o f
economic goods,
(2) the length of time required before the in
creased quantity is a v a ila b le ,
(3) the people's valuation of the present good,
and
(4) th e ir valuation of the future goods.
Hoff continues:
(1) It is assumed that the ex te n t by which the
quantity is to be increased has been decided on as
an end. This Datum is thus given.
(2) On the face o f it, it would appear simple
to determine the interval o f tim e. If, for example,
the production of bread is to be doubled, so and so
many f a c to r ie s must be b u ilt to produce the machinery
the bakeries need; there must be b u ilt so and so
many bakeries, so and so many new railways and
lo rr ie s for the carriage of the grain and bread,
e t c . and the engineers w ill be able to say that th is
should take such and such a length o f tim e. Let us
assume that a ll the tech n ical data have been correct
and that a ll the f a c t o r ie s are f in is h e d on the date
given, so that spasmodic increases in the s a t i s f a c
tion of the future requirements o f bread are e l i m i
nated. Nevertheless d i f f i c u l t i e s w i l l occur by
reason o f the fact that the interval depends on
which means o f production are used and in what com
bin ation .
This is not merely a tec h n ica l q u estion . For an
in d u str ia liz ed so c ie ty it is in fact not only one
good that is produced, but many, and not only one
particu lar means o f production is used, but se v e r a l,
which to a greater or le s se r exten t can be s u b s t i-
155
tuted for each other. What has to be ascertained
is not simply the combination o f the factors of
production that is t e c h n i c a l ly the b est, but
whether or not these facto rs could have been put
t o a better use in the same or another combination
for another en d .
Though the object is the "maximum production
for needs", the central a u th o rity w ill in practice
have to treat each individual c a p ita l good as if
it were a production factor o f its own and t e s t it
out in every conceivable combination in which it
might, be used. These experiments must be made
sim ultaneously, so as to avoid the various kinds
o f change that the passage o f time introduces.
Once the best combination has been found, that is
to say, best not merely from the tec h n ica l point
o f view but a lso in r e la tio n to the s c a r c it y o f
the capital good concerned, and to the exten t and
in te n sity o f the demand for the fin a l product,
then, but only then, can the interval o f time be
determ i ned.
(3) To obtain accurate data for judging the
people's valuation of the present good, certa in
hypotheses must be s a t i s f i e d , which w ill raise
many d i f f i c u l t i e s in a s o c i a l i s t community. (See
Chapter V.)
(4) The attempt to determine the "value" of
the future good w ill meet with even greater d i f
f i c u l t i e s . If the central au th o rity puts its own
price on the future good, as it can do in its
capacity as the one and only employer and producer
in the same way as it does with the present con
sumer's good, the whole thing becomes arbitrary
and there is no point in our in v e s t ig a t in g it,
sin ce it is the people's v a lu a tio n of the future
good in relatio n to the present good, that we are
looking for.
Nor is it p o ssib le to c a lc u la t e the value o f the
future good on the basis o f the m aterials and means
o f production used. The usual d i f f i c u l t i e s are
met with here: in the s o c i a l i s t community there are,
by d e f in it io n , no markets and th e re fo re no market
prices for means of production. It wouldn't even
help, if there were. What we are searching for are
future prices and, unless forward markets e x i s t ,
these must be determined on the b a sis o f present
prices with interest added. To attempt to make th is
addition brings us back to where we sta r te d , as it
156
is j u s t a rate o f in t e r e s t , or, rather, a discount
fa cto r , at which we are tryin g to a r r i v e . 1^1
Hoff goes into the im plications and consequences
o f the absence o f the market rate o f i n t e r e s t . According
to him there are two major im plications:
The f i r s t is what has ju s t been mentioned,
that the central authority w ill alck a measure
o f the productivity and value o f the d if f e r e n t
concerns. The amount o f ca p ital used w ill vary
from one branch o f industry to another and from
one concern to another. If it does not charge
to annual expenses an allowance for the values
which th ese capital goods represent, the central
authority w ill never know whether the greater or
le s s e r output per labour-hour is due to a greater
or le s s e r employment o f c a p it a l, greater or le sse r
e f f i c i e n c y (on the part of the management and
workers), or to other f a c t o r s . The p rin cip le
remains the same, whatever you reckon as c a p i t a l.
If the origin al factors o f production are put in
a c la s s o f th e ir own, t h e ir use must be counted
as a cost factor o f its own, as a rent. (For
reasons which w ill tran sp ire in the next chapter,
th is method of procedure is adopted h e r e.) Thus
the ca p ita l with which the concern w ill have to be
debited, w ill c o n sist o f manufactured means of
production: f a c t o r i e s , machinery, t o o l s , sem i
manufactured goods and raw m aterials with which
they have been su p p lied . In both cases there
w ill a r is e the d i f f i c u l t y in c a lc u la tio n , that in
the s o c i a l i s t community there are no known prices
for means of production. "Interest" expressed as
a percentage is o f no use as a factor of c a lc u la tio n ,
where in terest must be expressed as a price or an
amount commensurate with the other c o stin g fa c to r s .
The second and more important consequence of
there being no in te re st rates with which to c a l
c u la te , is that the central a u th o r ity 's c a lc u la tio n s
do not autom atically include time as an economic
factor in the form o f annual d e b itin g of in te r e s t.
Its aim of maximum production for needs cannot be
achieved, when in making its d e c is io n s it takes no
^ T . J. B. Hoff, Economic C alculation in the
S o c i a l i s t Society (London: William Hodge and Company,
L imited, 19^9), pp. 108-109.
157
account o f the time it takes to open mines, build
f a c t o r i e s , produce machinery, plant f o r e s t s , drain
land, e t c . If a greater quantity o f the s o c i e t y ' s
resources is used for future ends than it s members
are prepared to s a c r i f i c e for those ends, th is
means reduced welfare for the community.
In a s o c i a l i s t s o c ie ty the people w ill no longer
be able to influence the r e a ltio n sh ip between pro
duction o f future goods and o f present goods. In
a c a p i t a l i s t so c iety the people at any rate have
some means o f influencing the level o f in te r e st rates
(and thus o f investment) through t h e ir monetary
sav in gs, and also by th e ir a b i l i t y to make non
monetary savings, and a lso by t h e ir a b i l i t y to make
non-monetary investments in natura sim ultaneously
with th e ir savin gs. Neither o f these p o s s i b i l i t i e s
w ill e x i s t in the s o c i a l i s t community, sin ce the
s t a t e is by d e f i n it io n the one and only producer and
the only trader, sin ce it does not allow private
individuals to produce or exchange means o f pro
duction for th e ir own account, nor in any other
way permits any private i n i t i a t i v e in investment
m atters. Without an in te re st rate the central
authority w ill be deprived o f a necessary c o stin g
factor and datum for c a lc u la tio n . 15
Hoff a lso makes a comparison between the role of
the market rate o f interest under c a p ita lism and the
accounting rate of in terest under s o c ia lis m . His conclu
sio n s are:
(1) In a c a p i t a l i s t s o c ie ty some individuals
have a propensity to save. (2) There e x i s t
f a c i l i t i e s for individual saving and so for s a t i s
fying t h is propensity. (3) Savings are a n e c e s
sary prereq u isite and basis for investment. (4)
In the c a p i t a l i s t economy there are data in the
shape o f rates o f in terest for various c la s s e s of
loans and d e p o s its . (5) The rate o f in te r e s t is
determined not only by saving and investment, but
a lso by other fa c to r s . (6) Interest figu res
among the costs that are taken into account when
judging whether a business j u s t i f i e s its e x is te n c e
or n o t .1®
15|b ? d .. pp. 112-113. 161bid .. p. 104.
158
Even in the s o c i a l i s t s o c ie t y it is d e sir a b le
that there should be data in the shape o f in te re st
r a te s, but in such a community these in te r e s t rates
w ill r e f l e c t the r ela tio n sh ip between saving and
investment even less than in the c a p i t a l i s t s o c i e t y ,
partly because they do not figure in any market
where lender and borrower compete, and partly be
cause the central authority can a r b i t r a r il y d e
termine both the extent of saving perm issible to
the members of the community and the price that
sh a ll be paid for l o a n s . 17
^ lb id .. p. 112.
CHAPTER VI
CAPITAL
I nt roduct ion
Capital as a factor o f production is d if f e r e n t fromj
land and labor in the sense that it is not an "original" or;
primary fa c to r . Capital is not a bounty o f nature; it is
created by man through s a c r i f i c e and e f f o r t . Technologi
c a l l y , the primary factos of production, v i z , land and
labor, can be brought together in order to produce in a
d ir e c t fash ion . This would happen in an economy whose r e
sources are largely and predominantly l a n d i s t i c and/or
l a b o r i s t i c . On the other hand, the same primary factors of
production, v iz , land and labor can be brought together in
a roundabout fashion through ca p ita l as a d i s t i n c t and
d is tin g u is h a b le factor resource. Thus, land and labor couldi
be u t i l i z e d to produce capital in the f i r s t round of
production and then a l l three (land, labor, and c a p ita l)
combined together in the second and/or fin a l round to pro
duce the fin a l product, the o r i g i n a l l y desired consumption
goods and s e r v ic e s . The economy using such a roundabout
method of production is said to have a resource base which
is te c h n o lo g ic a lly c a p i t a l i s t i c . Why t h is roundaboutness?
Because it is more productive. "That roundabout methods
159
160
lead to greater r esu lts than d ir e c t methods," declares
Bohm-Bawerk, "is one o f the most important and fundamental j
proposition s in the whole theory of production."^ This j
greater productivity is a mixed b le s s in g , because round
about methods are more time-consuming than the d ir e c t ones.'
The needed time has to be secu red --b ou g h t.
In the realm of real a n a ly s is in economics, capital;
means real c a p i t a l. Capital is, as such, accumulated
wealth, stored up production o f labor and land, or goods
and s e r v ic e s withheld from consumption over the p ast. In
substance, th erefo re, ca p ita l is saved-up labor and saved-
up land. From the standpoint o f monetary a n a ly s is , capital
a ls o means fin a n cia l capital--com m ercial borrowings, for
example. In i t s e l f fin a n cia l ca p ita l is not productive.
In a money economy, however, fin a n cial c a p ita l is a means
to an end--the formation of real c a p i t a l. The d i s t i n c t i o n
is of great an a ly tica l s i g n if i c a n c e . And so, to sum up:
Real ca p ital is product ? ve and the true means o f production;
fin a n cia l capital is n e ith e r.
Thus, the theory of capital which we intend to
d iscu ss is the theory o f real, and not o f monetary or
f i n a n c ia l, cap ital which in r e a lit y serves as the means of
I j
production or as a factor resource in the process of
^Quoted by M. Blang, Economic Theory in R etrosp ect.
Homewood, I l l i n o i s : Richard C L Irwin, Inc., 1968, p. 502.
161
economic production.
The E ssen tia ls o f a Theory of Capital
Professor Lutz who was the f i r s t to present his
paper, e n t i t l e d "The E ssen tia ls o f Capital Theory," at the
Round Table Conference on the Theory of Capital held on
the Island of Corfu, September 4-11, 1958 by the Interna
tio n a l Economic A ssociation, began by saying: "To w rite
on the ' e s s e n t i a l s ' o f capital theory, as it unfortunately
f e l l to my lo t, n e c essa rily means making a value judgment."2
For our purpose, Professor Lutz's value judgment w ill
serve as an a u th o rita tiv e statem ent.
Professor Lutz, in d isc u ssin g the n e o - C la s s ic a 1
ca p ita l theory, s ta te s the follow in g two as the " e ssen tia l"
problems o f capital theory:
(1) the determination o f the investment plans
of individual entrepreneurs; and
(2) with the help of the so lu tio n to th is
problem, the determination o f the e f f e c t of the
volume of capital on the in te re st rate and the wage
rate, or more generally on the whole r e l a t i v e price
structure o f the economic sy stem .3
Later in his paper, while d is c u s s in g the macro-
economic ca p ital th e o rie s, Professor Lutz points out two
o
F. A. Lutz and D. C. Hague ( e d s . ) , The Theory of
Capita 1 (Proceedings of a Conference held by the Interna-
tio n a l Economic A ssociation; London: Macmillan and Co.,
Ltd., 1963), p. 3.
3 I b id .. p. 4.
162
more problems:
(3) the measurement of c a p ita l; and
(4) the notion of the capita 1-output ratio.**
In our d iscu ssio n o f the theory o f c a p ita l under
ca p ita lism , we w ill c h i e f ly be concerned with the f i r s t two
only, i . e . , a n a ly sis o f individual investment plans and
general equilibrium a n a ly s is . The measurement o f capital
and the capital output ra tio are e s s e n t i a l l y empirical
problems and therefore not quite relevant to our study.
To be s p e c i f i c , we w ill discu ss (1) n eo-C lassica 1 theory
of c a p i t a l, and (2) the modern theory o f investment.
The Place and Scope of Capital
Theory in Economics
In a sense, the theory o f ca p ita l is the heart o f
the economic s c ie n c e . It is almost impossible to construct
a system of economy without a theory of c a p ita l at the very
core o f i t . In f a c t, it is mainly due to the lack of a
l o g ic a l ly c o n siste n t and a n a ly t i c a l l y rigorous theory of
ca p ita l that no other system of p o l i t i c a l economy ( s o c i a l
ism included) has come anywhere near the s o p h is t ic a tio n of
what may be described as c a p ita lism 's economic theory.
The theory o f ca p ital has not only been highly controver
s i a l but a lso , on.many o cca sio n s, the battleground for the
co n te stin g p o l i t i c a l ideologies and s o c ia l p h ilo so p h ie s.
^ Ibid. , p . 9•
163
According to Professor Robert Solow o f the Massachusetts
In stitu te o f Technology:
One can le g itim a te ly wonder why cap ital theory
lends i t s e l f so e a s i ly to v i o l e n t , unproductive,
and confused controversy. I think there are two
reasons for t h i s , one i n t r i n s i c to the subject and
one in cid en ta l, or at least i n t e l l e c t u a l l y i n c i
d e n ta l. Let me mention the incidental reason f i r s t ,
because we w ill not have to return to i t . It is an
id eological reason. One of the perennial questions
o f 19th century capital theory was: "Why is the
in terest rate p o sitive?" Obviously, t h is is only a
h a ir 's breadth from asking: 'Why do c a p i t a l i s t s earn
an income, and is it j u s t that they should do so?'
In one sense 19th century c a p ita l theory had the
s o c ia l function o f providing an ideolog ical j u s t i
f ic a t io n for p r o f i t . I hope you r e a liz e that th is
remark by i t s e l f in no way impugns the motives of
individual economists and says nothing at a l l about
the s c i e n t i f i c v a l id i t y of t h e ir d o c tr in e s . But it
says something (not everything) about th e ir peculiar
terminology and the r e sista n c e it sometimes arouses.
There is a lso an in t r in s i c reason for the con tro
v e r s ia l character o f capital theory: it is very
complicated and very d i f f i c u l t . I think the Austrian
school overdid the id e n t i f ic a t io n o f cap ita l i t s e l f
(and capital theory) with tim e —but the need for a
theory o f capital does a r is e only when we try to
take account o f production processes which involve
time in some e s s e n t i a l way. I say some e s s e n t ia l
way: the point is that there are many e s s e n t i a l ways
in which time may enter the production p r o c e s s .5
The scope o f ca p ital theory extends from production
to consumption, not excluding d is t r i b u t io n o f course. It
therefore has implications for v i r t u a l l y the whole o f the
economic process. Professor Solow has d e s c r i b e d the proper
scope of capital theory and the real problems on which it
can throw l ig h t . He s t a r t s by posing a question:
-’Robert M. Solow, Capital Theory and the Rate of
Return (Amsterdam: North-Holland Publishing Company,
1963), pp. 10-12.
164
But then what is the proper scope o f ca p ita l
theory, and on what real problems can it throw
1i ght ?
There is a highbrow answer to t h i s question
and a lowbrow one. The highbrow answer is that
the theory of capital is a f t e r a l l j u s t a part o f
the fundamentally microeconomic theory o f the
a llo c a t io n of resources, necessary to allow for
the fact that commodities can be transformed in
to other commodities over time. Just as the
theory of resource a llo c a t io n has as it s 'dual'
a theory of competitive p ricin g, so the theory o f
cap ita l has as its 'dual' a theory o f intertemporal
pricing involving ren ta ls, in te re st r a te s, present
values and the lik e . In both c a ses, a complete
price theory is a lso a theory o f d i s t r ib u t io n
among factors o f production, i f not among persons.
The lowbrow answer, I suppose, is that theory
is supposed to help us understand real problems,
and the real problems that cannot be understood
without capita 1-t h e o r e t ic notions are those
connected with saving and investment. Therefore
the proper scope of ca p ita l theory is the e l u c i
dation of the causes and consequences of acts of
saving and investment. Where the highbrow approach
tends to be te c h n ic a l, disaggregated, and ex a ct,
the lowbrow view tends to be pecuniary, ag gregative,
and approximate.
A middlebrow like myself sees v ir tu e in each of
these ways of looking at c a p ita l theory. I am
personally a ttracted by what I have described as
the lowbrow view of the function o f c a p ita l theory.
But as so often happens, I think the highbrow view
o f f e r s indispensable help in achieving the lowbrow
o b j e c t iv e . In p a rticu lar, the su ggestion that
cap ita l theory is an extension o f ordinary resource
a llo c a t io n and price theory reminds one that modern
microeconomics has two aspects which might be c a lled
the d e sc r ip tiv e and the tec h n o c r a tic or the p o s itiv e
and the normative. Price theory began as an idea
lized d escrip tio n o f how resources are a llo c a te d and
income d istr ib u ted in a com petitive c a p i t a l i s t e c o n
omy. But further a n a ly s is , as you know, uncovered
something remarkable: i f you try to answer not
that d e sc r ip tiv e question but the normative or t e c h
n ocratic one o f how scarce resources should be
a llo c a te d by a so c ie ty anxious to avoid waste, you
rediscover the same theory in the guise o f shadow
p rices or e f f i c ie n c y p r ic e s. This lin e o f thought
orig in a ted a long time ago, but culminates in the
modern work on linear and nonlinear programming
165
and in the paradox that the theory o f p e r f e c t ly -
com petitive cap ita lism is in many resp ects the
theory o f a planned or s o c i a l i s t economy.®
I. Capital Theory Under Capitalism
In t h is se c tio n we w ill d iscu ss the n e o - C la s s ic a 1
theory of capital and the modern theory o f investment.
The N eo-Classical Theory o f Capital
The n e o -C la ss ic a 1 theory o f ca p ita l is e s s e n t i a l l y
the extension of the concept o f marginal produ ctivity to
the theory o f c a p i t a l. It has been formulated in terms of
the individual firm 's equilibrium in the use o f ca p ita l as
a factor of production. The central problem for the theory
o f capital is, th erefore, the determination o f the optimum
level or sc a le o f capital stock for the individual e n t r e
preneur. Thus, it becomes an integral part o f the theory
o f the firm and its equilibrium under perfect com petition.
Given the equilibrium in the ca p ital market, the firm t r i e s
to determine its use of cap ital by equating the e x te r n a lly
determined market rate o f interest with the in tern a lly d e
termined rate o f return. The eq u a lity of the two c o n s t i
tu te s the maximum p rofit p o sition o f the firm. W e can
i l l u s t r a t e the neo-C lassical cap ita l theory with the help
o f the follow ing diagram:
^ I b i d .. pp. 14-15.
166
Volume of Capital C t
P
Capital Market (Economy)
a l a
MFC=AFC
e
ARP
M RP
F
Volume of Capital
Fi rm
Where in the le f t hand diagram:
DD' = Market demand schedule for ca p ita l (derived
by lateral summation o f the marginal produc
t i v i t y functions o f the individual firm s).
S S 1 = Market supply schedule o f ca p ita l (derived
by lateral summation o f the marginal time
preference functions o f the individual
s a v e r s ).
ie = The equilibrium rate o f in te re st in the
economy.
O M = The equilibrium quantity of ca p ital demanded
and supplied in the economy.
And in the right hand diagram:
167
ie , M FC = The given market rate o f in t e r e s t . It
c o n s t it u t e s the average as well as the
marginal fa cto r cost (cost of c a p ita l)
to the firm.
MRP = Marginal revenue product which is equal
to marginal physical product times
marginal revenue (MP'MR), by d e fin itio n .
ARP = Average revenue product which is equal
to average physical product times
average price (AP * AR), by d e f i n i t io n .
OF = The firm 's equilibrium in the use of
c a p ita l as determined by the in t e r
se c t io n o f the marginal factor cost
curve ( i e ) and the marginal revenue
product (MRP). OF is a ls o the optimum
ca p ita l stock for the firm.
It can a ls o be sta te d as fo llo w s:
Given t h a t :
MRP = M FC
MRP = MR*MP
M FC = MC'MP
Therefore:
MR‘M P = MC’M P
M C = M R
The profit-m axim ization behavior on the part of an
individual firm requires rational economic c a lc u la tio n s .
168
The elements o f such a c a lc u la tio n with regard to ca p ita l
are (1) a c q u isitio n cost of c a p ita l a s s e t s , (2) the e x
pected y ield from investment, and (3) the market rate o f
in te re st or the cost of c a p i t a l. The expected y ie ld is
determined or forecasted for each year o f the working l i f e
o f the capital a sset under q u e s tio n . Once these s e r i e s of
expected y ie ld s are known, they can be discounted in order
to determine th e ir present cash v a lu e s . This discounting
c o e f f i c i e n t , when equal to the market rate o f in te r e st,
s a t i s f i e s the c r ite r io n o f economic r a t io n a lit y by maxi
mising the percentage o f internal rate o f return. The
c a lc u la tio n i t s e l f can be made through the follow ing
equat ion :
w i y 2 y 3 yn
C = TTT + ------ + ----------- + . . . + -------
1+m
(1+m)2 (1+m)3 (l+m)n
where C represents the cost o f the c a p ita l a sset and
y 2 , y 3 , and yn represent the p rosp ective y ie ld s for years
from 1 through n and m is the percentage rate of return.
But we have to take a high ly important aspect o f
the above analysis into account. To quote Professor
Gardner Ackley:
However, these p roposition s r e la te to firms
which are in equilibrium with respect to th e ir
use o f c a p it a 1 — i . e ., to firms whose cap ita l
structure has been adjusted to the going rate o f
in te r e st, cost of capital goods, and expected
y i e l d s . None o f the proposition s so far developed
is d ir e c t ly relevant to the theory o f investment.
For investment occurs only when firms are not in
equilibrium with respect to t h e ir c a p ita l str u c tu r e —
169
when they have less (or more) ca p ita l goods than
the optimum. Despite the fact that many econo
m ists have c a r e le s s ly id e n t if ie d the theory of
investment and the theory o f c a p ita l (or have
mixed into a s in g le confused presentation con
sid e r a tio n s relevant to both), it is clea r
that we have not one but two problems: f i r s t ,
to explain the optimum--that is, the e q u i-
1ibrium --stock of c a p ita l for a firm and an
economy; and, second, to exp lain at what rate
investment occurs when the ca p ita l stock is
not at its optimum. What we need is a theory
r e la tin g f i r s t to the s i z e o f the s t o c k - -
ca p ita l--a n d second to the s i z e o f the flo w -- _
investment--by which the sto ck grows or sh r in k s.'
This brings us to our next problem.
The Theory o f Investment
Investment refers to a flow or rate over a period
of tim e. As against c a p i t a l, which is a s t a t i c concept,
investment is a dynamic concept. It must th erefo re be un
derstood at the very ou tset that "considerations outside
the orb it o f capital theory determine the rate o f invest-
o
ment." One more c l a r i f i c a t i o n is fundamental to the in
vestment theory. This is the concept o f the marginal e f f i
ciency o f investment, M E I, as d istin g u ish ed from the
marginal e f f i c i e n c y of c a p it a l, MEC. Keynes had introduced
the concept o f M EC which Professor Lerner la ter refined
i nto M E I .
John Maynard Keynes presented his "new" concept of
^Gardner Ackley, Macroeconomic Theory (New York:
The Macmillan Company, 1967'), pp. 477-478.
8 Ib id .. p. 479.
the marginal e f f i c i e n c y o f c a p ita l in the follow in g terms:
The r e la tio n between the prospective y ie ld
o f a c a p i t a l- a s s e t and its supply price or r e
placement c o st, i . e . the r e la tio n between the
prospective y ie ld of one more unit of that
type of ca p ital and the cost o f producing that
u n it, furnishes us with the marginal e f f i c i e n c y
o f capital of that type. More p r e c is e ly , I
d e fin e the marginal e f f i c i e n c y o f cap ita l as
being equal to that rate o f discount which
vyould make the present value o f the s e r ie s of
an n u ities given by the returns expected from
the c a p it a l- a s s e t during its l i f e j u s t equal
to its supply p r ice. This gives us the marginal
e f f i c i e n c i e s o f p a r ticu la r types o f c a p i t a l - a s s e t s .
The greatest o f these marginal e f f i c i e n c i e s can
then be regarded as the marginal e f f i c i e n c y of
c a p ita l in g e n e r a l.
The reader should note that the marginal
e f f i c i e n c y o f ca p ital is here defined in terms
o f the expectation o f y i e ld and o f the current
supply price o f the c a p i t a 1- a s s e t . It depends on
the rate of return expected to be obtainable on
money if it were invested in a newly produced
a s s e t ; not on the h i s t o r i c a l r e su lt of what an
investment has yielded on its o r ig in a l cost if
we look back on its record a f t e r its l i f e is o v e r.°
Keynes d i f f e r e n t i a t e d his p a rticu la r concept of the
marginal e f f i c ie n c y of ca p ita l from such phrases as
(1) marginal produ ctivity o f c a p it a l, (2) marginal y ield of
c a p it a l, and (3) marginal u t i l i t y o f c a p i t a l. But con
fusion arose out o f the su ggestion on Keynes' part that
M EC declined as the stock o f ca p ita l increased. A more
appropriate d esign ation for the expected or prospective
y ie ld from the investment under co n sid era tio n , according
to Lerner, would be marginal e f f i c i e n c y o f investment, for
g
John Maynard Keynes, The General Theory of
Employment, Interest and Money {New York: Harcourt, Brace
and Company, 1936), pp"! 135-136.
171
that is what Keynes r e a lly meant to d e sc rib e. Thus, from
the point o f view o f the theory o f investment, Keynes'
marginal e f f i c ie n c y of c a p ita l schedule becomes Lerner's
schedule of the marginal e f f i c i e n c y of investment. The
M E I therefore becomes e n t i r e l y independent o f ca p ita l stock
and h is t o r i c a l c o s t s . Instead, it comes to depend upon
replacement cost of a s s e t s , r isk and u n certain ty, and
entrepreneurial e x p e c ta tio n s.
The theory of investment th erefo re u t i l i z e s three
concepts. These are:
(1) Marginal p r o d u ctiv ity of c a p it a l,
(2) Marginal e f f i c i e n c y o f investment,
(3) Rate of i n t e r e s t .
The rate o f investment can be considered in e it h e r
o f two s i t u a t i o n s . F ir s t, w ithin a s it u a t io n where the
capacity to produce c a p ita l goods (socio-econom ic in fr a
str u c tu r e, plant and machinery, b u ild in g s, e t c . ) may be
lim ited . Second, within a s it u a t io n where it is p o ssib le
to produce the desired ca p ita l goods, but only at a higher
c o s t . The supply function of c a p ita l goods in the two s i t
uations may be graphically depicted as follow s:
172
Cost Cost
Capaci ty
Li mi t
Capital Goods Under Capital Goods Under
Limited Capacity F lexib le Limits
If a s o c ie ty should be so fortunate as to have an
abundance of resources, then n eith er would there be an
upper limit to its capacity to produce ca p ita l goods nor
any economic problem even i f add ition s to the stock of
c a p ita l could only be made at a higher (marginal) c o s t . It
is the very sc a r c ity o f these resources which created the
economic problem. Economists, in general, sta r t from the
b asic asisumption that more and. more capital goods can be
produced, but only at a higher and higher cost to the
s o c i e t y .
Now, suppose that the economy is in equilibrium .
Being in equilibrium , the economy as a whole w ill be
characterized with a zero rate o f net investment. In other
words, there would be no p e r io d ic investment beyond that
173
needed for keeping c a p ita l intact by u t i l i z i n g the depre
c ia tio n reserves to make up for the wear and tear (ca p ita l
consumption) o f fixed a s s e t s during the same period. Under
these co n d itio n s, the marginal produ ctivity o f capital
(MP Cap) would be equal to the marginal e f f i c i e n c y of
investment (MEI) by d e fin itio n .^ ®
W e can i l l u s t r a t e the determination o f the rate o f
investment with the help o f the follow in g figu re.
Cf. Lerner: "This approximates the stationary
so c ie ty where the rate o f investment j_s. zero. The mar
ginal produ ctivity o f c a p ita l is therefore measured by, and
can be defined as, the marginal e f f i c i e n c y of investment
when the rate of net investment is zero." Op. c i t . .
p. 335.
M P Cap
174
A B
i , M P Cap
M P Cap
__ £
M P Cap
Cost
Replacement
Level
Output of Capital Goods
175
where:
i = Rate o f i n t e r e s t .
ie = Equilibrium rate o f in terest
M P Cap = Marginal productivity o f c a p i t a l.
MP Capo = Marginal productivity o f ca p ital when
the cap ita l stock is equal to K q .
K = Capital stock.
Ko = Given stock o f c a p it a l.
Ke = Optimum stock of capital when the i n t e r
e s t is ie .
I = Investment.
Ie = Equilibrium rate of investment.
M E I = Marginal e f f i c i e n c y of investment.
S = Supply of ca p ita l goods.
SG = Given supply o f capital goods.
Se = Equilibrium supply of ca p ita l goods.
CQ = Cost o f cap ita l goods when the supply
is SQ.
C e = Cost o f cap ital goods when the supply
is Se .
It w i l l be seen in diagram A that at «o capital
sto ck and ie in te re st rate, the M P Cap schedule would make
it p r o fita b le to invest u n til such time as the stock of
c apital reaches the K e point at which the marginal produc
t i v i t y o f ca p ita l is ju s t equal to the rate of i n te r e s t.
176
The question to be answered is: How fast w ill investment
take place? The diagram B provides the so lu tio n in the
form o f the M E I schedule. It is to be noted that M E I
s t a r t s o f f at M P CapQ level with K q capital sto ck and C Q
cost of ca p ita l goods as shown in diagram C. But as the
flow o f investment increases, the M E I d e c lin e s because, as
already pointed out, the additional output o f c a p ita l goods
is p o s sib le only at a marginally increasing c o s t . This is
shown by the S supply function in diagram C. By d e fin itio n ,
the M E I and S curves are mirror images of each o th er. The
e q u i l i b r i a between the rate of in t e r e s t , the marginal pro
d u c t i v i t y o f c a p it a l, and the marginal e f f i c i e n c y o f in
vestment w ill be reached when the cap ital stock is Ke,
rate of investment le , and the cost o f producing ca p ita l
goods Ce for Se output. Beyond t h i s , the marginal produc
t i v i t y o f capital f a l l s below the rate o f in t e r e s t . The
cost o f ca p ita l is higher than the y ie ld from c a p i t a l .
Further investment is no longer p r o f it a b le .
Let us conclude our treatment of the theory o f
investment with an a u th o rita tiv e statement form Professor
Abba Lerner:
In short-period equilibrium the rate o f in
t e r e s t equals mei . In long-period (sta tio n a r y )
equilibrium the rate of in terest equals both me i
and the marginal productivity of c a p i t a l. The
time it takes to reach an equilibrium , long or
sh ort, depends on the point of view taken. From
the point of view o f the individual the sh o rt-
period equilibrium is reached very q u ic k ly --a s
soon as he has decided the rate per unit o f time
177
at which he w ill acquire a ssets--a n d the long-
period equilibrium does not take very long
e it h e r sin ce it is reached as soon as he has
acquired the quantity o f earning a s s e t s , or
productive equipment, that he considers right
and does not want to increase or decrease it
any further.
The s o c ia l short-period equilibrium is
reached f a i r l y soon--as soon as a l l the firms
have adjusted th e ir rate of investment and
output to maximize p rofit at the current rate
o f in t e r e s t . For the c o l l e c t i v i s t se c tio n of
any economy it is reached when a ll the managers
have adjusted the rate o f investment and output
to the rate o f interest according to the Rule.
In e it h e r case it is further implied that con
sumers have adjusted th e ir consumption to t h e i r
income, reaching the equilibrium consumption.
It is perhaps a matter o f a few months before
mei and the rate o f interest are brought into
approximate e q u a lity .
The s o c ia l long-period equilibrium is reached
when the equipment o f s o c ie ty has been raised
to the level at which no net investment is under
taken at the current rate o f i n t e r e s t . Apart
from the sp ecia l case of general unemployment,
t h i s would not be reached for decades or maybe
cen tu ries even if there were no other changes
(in t a s t e and in techn ical knowledge) to upset
i t . It is only in the so c ia l long-period
equilibrium , when we are a ll dead (or e l s e e c o
nomically prostrated by a depression that reduces
net investment to something like z er o ), that the
so c ia l marginal productivity of capital is equal
to mei and the rate of i n t e r e s t . 11
II. Capital Theory Under Socialism
Int roduct ion
The theory of capital under so c ia lism presents the
same problem which we met in d iscu ssin g the t h e o r e t i c a l
model o f so c ia lis m . The capital theory and the theory of
Abba P. Lerner, The Economics of Control (New
York: The Macmillan Company, 1961), p . 3*f0 .
178
investment in the s o c i a l i s t economy are yet to be worked
o u t. The th e o r e tic a l d i f f i c u l t i e s are caused by the ab
sence o f in te r e s t, ca p ita l market, p rofit motive, private
e n te r p r is e , private ownership o f the means of production,
and the in s t it u t io n a l stru ctu re o f a market economy. The
s o c i a l i s t s o c i e t y , in f a c t, has a very d if fe r e n t price
system than the one we are use to in our everyday l i f e .
Not only that the s o c i a l i s t s o c ie t y does not have a market
determined rate o f in t e r e s t, it a lso does not have market
determined prices o f producers' goods, consumers' goods,
land, or labor. It therefore seems advisable to b r i e f l y
d iscu ss the general nature o f the price system in the s o
c i a l i s t s t a t e before examining the theory of capital and
investment a llo c a t io n under so c ia lism . This is advisable
the more so because the in terest rate f ix a tio n is in fact
a part o f t h is ov erall s o c i a l i s t p r ic e - f ix i n g s t r a t e g y .
The Price System in the S o c i a l i s t State
Every price system should perform four roles of
(1) a l lo c a t io n , (2) e f f i c i e n c y , (3) rationing, and (4) pre
d ic t io n in a dynamic e c o n o m y . ^ However, only in a c a p i
t a l i s t s o c ie ty can the price system perform th ese r o le s .
S t r i c t l y speaking, there does not e x is t a price system in
12D. C. Hague, "The Task of the Contemporary Theory
o f P ricing," Price Formation in Various Economies, e d . D.
C. Hague (London: Macmillan and Company, 1967), p. 4.
179
a s o c i a l i s t s t a t e . The economic system under so c ia lism is
e s s e n t i a l l y p o l i t i c a 1ly-governmenta1ly d ir e c te d . The price
system is no exception to th is p o l i t i c a l intervention and
governmental d ir e c t io n . The extent of intervention is
greatest under c en tr a liz ed s o c ia lis m . But as we saw in the
Lange model o f decen tralized so c ia lism , there does obtain
in it a price system of s o r t s . The price mechanism is
being increasingly used for a llo c a t in g resources in the
East European s o c i a l i s t c o u n tries. A recent restatement
o f the current p osition o f the Polish s it u a t i o n has come
from Professor Jan Lipinski of the Central School o f Plan
ning and S t a t i s t i c s , Warsaw. He defined the stages in
the planning process as:
1. A p o l i t i c a l d e c isio n on the long-run
output o f goods, taking the S t a t e 's preference
function into account:
2. The s e t t i n g of r a te (s ) o f in te re st and
ca p ita l c o e f f i c i e n t ( s );
3. The choice by (d ecen tralized ) production
u n its o f production techniques;
4. The c a lc u la tio n of the t o t a l demand for
investment funds; and
5. If t h i s demand for investment funds e x
ceeded that allowed for by the o r ig in a l p o l i t i c a l
d e c is io n , an it e r a t iv e procedure, which operated
u n til e q u a lity was brought a b o u t .13
Another a u th o r ita tiv e statement o f the s o c i a l i s t
pricin g system in Hungary has been made by Dr. Bela
13H ague, op. c i t .. p. xv.
180
Szikszay o f the University o f Economic S c ie n c e s, Budapest,
Hungary:
Within the sphere of State ownership, the
prices do not primarily perform the fun ction
e it h e r o f income d is tr ib u tio n or o f reg u la tin g
production. Here, the role o f prices is mainly
to e x p r e ss--a s exa ctly as p o ss? b le --th e s o c i a l l y -
necessary labour inputs and, by t h i s , t o o r i e n
t a t e the leading economic bodies in taking
t h e i r economic policy d e c is io n s . This function
o f prices is realized by including in the prices
o f goods remaining within the State s e c t o r the
prime c o sts and a few per cent of gain, the la t t e r
being proportionate to prime c o s t s . Consequently,
p rices r e le c t the level and proportions o f inputs.
In p r a c tic e, t h is p r in c ip le p r e v a ils only during
a r e l a t iv e l y short period follow in g a general
price adjustment. On the occasion of a general
price adjustment, prices are fixed on the b asis of
the labour inputs o f some previous period. As,
however, prices in the State se cto r remain in
v a r ia b le for longer periods (general price a d j u s t
ments take place about every fiv e or s i x y e a r s),
and because during that time the inputs o f products
change considerably and to d i f f e r i n g e x t e n t , it
happens that p rices, in s p i t e of the above tendency,
contain a higher net income for s o c ie t y than the
sum of gains provided for in prices at the general
price adjustment.
Prices function quite d i f f e r e n t l y in the case
o f products consumed by the population. Beside the
s i z e o f income, it is the p r ic e s - - t h e p rice level
and the r e la t iv e prices o f consumers' g ood s--th at
determine how the members o f s o c ie t y share in the
consumption fund. In t h is capacity, p r ice s are a
means for d is tr ib u tin g and r e d is t r ib u t in g national
income in a planned way.
The prices of consumers' goods include, besides
prime c o sts and gain, a turnover tax as w e l l. The
turnover ta x --a s against g a i n - - i s not proportionate
to prime c o s t s . In fix in g it s rate, various con
s id e r a tio n s o f price policy have t h e ir r o le to play
( e . g . points o f view of s o c ia l policy stim u la tin g
the increase o f consumption o f certain products,
e t c . ).
A d if f e r e n t role is played by p rices in the co
o p erative s e c to r . This s e c to r is ch a racterized by
the group-ownership of the means o f production. The
proportion covered by the co-op erative s e c t o r is e s -
181
p e c ia l l y great in a g r ic u ltu r e . In t h is s e c to r
the State does not own the means o f production
and thus cannot issue obligatory in stru ction s
on how to develop production, investment, e t c .
Under these c o n d itio n s, prices play a major
role in the development o f the volume and
pattern o f production. Here, prices f u l f i l
the task o f providing economic in cen tiv e.
In addition to providing an economic incen
t i v e , prices a ls o determine the share o f the na
tio n a l income to be a l l o t t e d to those working in
the co-op erative s e c t o r . The S ta te , by buying
a considerable part o f the products o f c o
o p e r a tiv e s, e x e r c ise s cn influence on the d e v e lo p
ment o f the incomes of t h e ir members and, at the
same time, consumers prices a f f e c t th e ir share in
the consumption fund.'^
Methods o f Investment A llocation; Accounting Rate of
I n te re st
In th e ir ca p ita l theory and a llo c a t io n a l d e c is io n s
about investment funds, the s o c i a l i s t planners use what
may be described as the accounting rate of in te r e st or the
shadow price for c a p i t a l. As theorized in the Lange model
and further elaborated in our d iscu ssio n of the theory o f
in te r e st under so c ia lism , so in actual p ractice as pointed
out above, the accounting rate o f in terest is determined by
the Central Planning Board or some such governmental agency.
Thus, for the s t a t e e n te r p r is e s , the accounting rate o f
in te r e st becomes a cost element, in other words, cost of
c a p i t a l, to be accounted for in th eir economic c a lc u la tio n s
regarding production plans. In th is sense, the s it u a t i o n
l^Bela Szikszay, "The Long-Term In ter re la tio n s of
Pricing and Investment Decisions in S o c i a l i s t Economies."
ibid. p p . 20A-205.
182
in a s o c i a l i s t economy is comparable to entrepreneurial use
of the market rate of in terest as the cost of c a p ita l in a
c a p i t a l i s t economy. The late A. C. Pigou has described the
mechanism o f the accounting rate o f in te re st in very c le a r
cut terms:
There is, however, a device by which it can
meet t h i s d i f f i c u l t y . It is free to construct
for i t s e l f an accounting rate of in te re st on
the same pattern as the accounting rates o f
wages and rents that I described in the previous
chapter; and, subject to intervention by i t s e l f
in p a r tic u la r cases, to instruct the persons in
immediate control of its several ind ustries to
use t h is accounting rate as a guide to action in
the same way that p riv ately co n tro lled industry
under ca p ita lism uses the actual rate. The
accounting rate must be that rate at which the
various in d u stries, a c tin g in accordance with
the rules already described, will e x a c tly clea r
the market, without shortage or surplus, o f that
part o f money income that is on o f f e r for net
in v estm en t--after, of course, the State has a l
ready taken away such part o f the a v a ila b le sum
as it has decided to invest, e . g . in armaments
and so on, without reference to the rate o f in
t e r e s t . With an accounting rate of in te re st
thus arranged the planning authority can place
i t s e l f , for th is sp ecies of a l lo c a t io n , in as
good a p o sitio n as ca p ita lism . The d i f f i c u l t y
is th a t, except by a m iracle, the accounting
rate on which it decides in the f i r s t instance is
c erta in to be e ith e r too low, in the sense th at,
at that rate, there are not enough resources
a v a ila b le for net investment to f i l l all demands,
so that some are u n s a tis fie d and the s e l e c t i o n of
those to su ffe r th is fate is purely haphazard, or
too high, in the sense that there are some r e
sources seeking employment, which, at t h i s rate,
no industry will take. The so lu tio n is to be
found in a s e r ie s of ste p by step adjustments,
accompanied by secondary related adjustments in
the manner described on p. 115. By t h i s process
the planning authority may hope e v e n tu a lly , if
conditions become sta b le , to find the correct
accounting rate o f in terest that is to say a rate
which is neither too low nor too high in the above
s e n s e . But where prospects and expectations are
undergoing rapid change there are bound to be
large errors J 5
But the most widely used method o f investment a l l o
cation is the computation and comparison of the recoupment
periods o f various projects and the s e l e c t io n of the one
with, other things being equal, a shorter period.
The Recoupment Period Method
The recoupment period method, even though refined
to a considerable degree in the s o c i a l i s t economies, is,
in f a c t , a most ancient device which accountants, merchants,
and businessmen have used for ages to utilize t h e ir funds
with maximal p ro d u ctiv ity . This productivity is , however,
defined in a sp ec ia l way. The emphasis is on the return
of. c a p ita l rather than return on. c a p i t a l . S t r i c t l y speak
ing, t h is concept of the productivity o f capital has noth
ing whatsoever to do with e it h e r the produ ctivity of
ca p ita l i t s e l f or the p r o f i t a b i l i t y (expected return over
co st or marginal e f f i c ie n c y of investment) o f investment.
The recoupment period is a lso known as the payback or the
payoff period.
In esse n c e, the recoupment period is the time w ith
in which the pro ject, venture, or e n ter p r ise into which
investment is being made, will recoup (repay, pay out, pay
^ A . C. Pigou, Social ism versus Capitalism (London:
Macmillan and Co., 19o0), pp. 128-130.
1 84
back, or pay o f f ) the t o ta l amount o f initial investment.
The Moscow All Union S c i e n t i f i c and Technical Conference on
Problems o f Determining the Economic E ffe c tiv e n e ss o f
Capital Investments, held in ,1958, adopted the "Recoupment
Period" as the major q u a n tita tiv e c r it e r io n for investment
choice and the evaluation of p r o je c ts. The "Recoupment
Period" was defined as "the period during which the in v e s t
ment pays for i t s e l f ; its reciprocal is the c o e f f i c i e n t of
e f f i c i e n c y . " ^
A very simple example would be this. Assume that
a project requires Rs . 10,000 in initial investment. It
promises an inflow o f cash of Rs. 2,500 per year. The
a s s e t has no salvage or resale value at the end o f its
working life. No depreciation is to be allowed fo r . The
recoupment in th is case will be:
n________^ _____ * __ i Investment Amount
Recoupment p e n o d = AnnUai cash i n f l w
= 10.000
2,500
= b years
It will be seen that the above c a lc u la t io n s provide
no ind ication o f the investment p r o f i t a b i l i t y as such. But
if the a sset were a c tu a lly to cease to function e x a c tly at
16
Haim Barkai, "A'Recoupment Period1 Model o f
Investment and Pricing in a S o c i a l i s t Economy," in Hague,
op. c i t .. p. 185.
185
the end o f 4 years, it is p o ssib le to compute the rate o f
return by taking the reciprocal o f the recoupment period
into account. Thus, the rate of return in the above case
will b e :
~ . i _ Annual inflow o f cash
Recoupment reciprocal investment amount
_ 2.500
“ 10,000
= 25%
It must be understood that the recoupment o f funds
in i t s e l f is no more a productive e x e r c is e for an investor,
c a p i t a l i s t or s o c i a l i s t , than the d e lib e r a te relea se of
prisoners with a view to find how fast they can be recap
tured by a law enforcement o f f i c e r . The investment, to be
economically r a tio n a l, must provide a net return. Assume
th a t, in our given case, the a sset keeps functioning for
3 more years with additional cash inflow of Rs. 7,500
(2,500 per year) before its actual c o lla p s e . W e can now
compute the rate o f return over cost as follow s:
Rate of return over cost = X ? X 100
= 10.7%
Thus, as per the s o c i a l i s t theory o f c a p i t a l, the
percentage rate of recoupment can be regarded as the c o e f
f i c i e n t o f e f f i c i e n c y . This c o e f f i c i e n t based on our
assumed fig u res is 25%. The net rate of return ( a fte r the
investment has repaid itself) is 10.7%. It will be noted
186 !
that a ll our computations are based on h i s t o r i c a l informa
tio n or a s it u a t io n where certain knowledge about the f u
ture is a v a ila b le . Again, we have ignored the calculation s!
o f the present values o f future cash flows which would be
impossible in the absence o f a discou nting f a c t o r , i.e.,
the rate of in t e r e s t .
As noted in the Lange model, the s t a t e e n te r p r ise s
are instructed to obey certain rules in operating the e n
t e r p r i s e . The Moscow Conference formulated the follow in g
rule as the investment c r ite r io n :
T, the period during which ca p ita l investments
pay for them selves, or its c o e f f i c i e n t -L, must be
compared with the standard period e s t a b lis h e d for
the individual branch, say Ts , or the standard c o
e f f i c i e n t of e f f i c i e n c y JL variant s e l e c t e d . ^
Ts
The first function o f the standard for the
period o f the return o f capital is to prevent
in e f f e c t i v e combinations o f v a r ia n ts. Its
second function is the maintenance o f the c o r
respondence (or balance) o f the t o t a l sum o f the
proposed ca p ita l investments to the t o t a l planned
accumulat io n .
A clea r in terp retation o f the mechanism o f in v e s t
ment a llo c a t io n under a recoupment period model has been
provided by Professor Barkai o f the Hebrew U n iversity of
Jerusalem, Israel:
17 Ibid.. p. 190.
1 8 1bid ., p. 193.
A c lo ser look at the workings o f the r e
coupment period model s p e c if ie d above shows
that a way out o f the '>rule o f thumb" impasse j
does e x i s t . The problem under con sid era tio n is
the e f f i c i e n t a llo c a t io n o f resources devoted to
investment. This requires the determ ination of
the equilibrium standard c o e f f i c i e n t . How could
the central planning authority proceed to do
this?
The s iz e o f the 'investment fund1 is, by
assumption, known. What is required is data on
demand. If the technical data on production and
on input and output prices for each o f the r e
sp e c tiv e firms were a v a ila b le at the cen tre, the
planning authority i t s e l f could have derived the
resp ectiv e micro-economic demand r e l a t i o n s . Since
this encyclopedic knowledge is not a v a ila b le in
p r a c tic e , and an attempt to supply it in time will
in any case prove very expensive, the various firms
may be assumed to do the job them selves. The d e
mand schedules, when submitted to the cen tre, are
then sc ru tin ize d and aggregated into the t o t a l
demand rela tio n for the economy. By confronting
the aggregate demand schedule with the supply data,
the planning authority could find the equilibrium rate
o f i n t e r e s t - - t h e standard c o e f f i c i e n t .
This standard c o e f f i c i e n t is now, in turn, used
as a 'cut o f f ' rate by the central a u th o rity . Each
firm will be granted its p a r tic u la r investment fund
according to its submitted and sc r u tin iz e d demand
schedule. Since the firms will be granted a d e
finite fund, they may be expected to implement only
those projects that yield the standard rate or a
higher one. A formal in stru ctio n to this e f f e c t
may be a lso issued.
This procedure means, in e f f e c t , the e s t a b l i s h
ment o f an u n o f f ic ia l market for investment funds.
The lists to be submitted, s p e c if y in g demands for
funds at various rates, are in a sense bids for
funds at these rate s. The matching of demand with
supply at the centre therefore operates as an 'un
official' auction o f these funds. '9
But the recoupment period model provides a so lu tio n
to a llo c a t io n a l problems e s s e n t i a l l y at the microeconomic
l e v e l . There remains the problem o f the rational utiliza-
^ Ibid.. pp. 95-96.
188
t io n o f ca p ita l resources for the economy as a whole.
Thus, from a macro-economic stan dp oin t, the various in v e s t
ment a llo c a t io n s may cause more or less increase in n a tio n
al income, production, and/or p rodu ctivity of labor. Var
ious c r i t e r i a such as e f f i c i e n c y at the en ter p r ise le v e l,
reduction in c o s t s , or some sort of internal rate o f return,
can be used for t h i s purpose. In Hungarian p r a c tic e , the
e f f i c i e n c y of investment at the national level is a s c e r
tained with the aid of the fo llo w in g b a sic indicator:
s = _________ I_____________ #
n M + A-j + A b + L + E h
where
Gn = e f f i c i e n c y measured at the national lev el;
T = production value at world market prices;
M = labour c o sts o f production;
A.j = value o f imported m aterials used;
Ab = value o f domestic m aterials used;
L = allowance for d epreciation ;
Eh = amount invested, m u ltip lied by the
' e f f i c i e n c y f a c t o r 1, namely 0*2.
In the facto r Eh, the amount invested, the working
ca p ita l requirements, and the costs of the connected
investments (fo r example, communal investments,
e t c . ) are taken into account. The m u ltip lie r 0*2
is j u s t i f i e d by economic analyses* according to
which the minimum increase o f national income per
unit o f investment is 20 per c en t. With the aid
o f the m u lt ip lie r the non-recurrent (investment)
co sts of the new establishm ent are reduced to a
common denominator with the current (operation al)
c o s t s . This involves, in other words, that the
e f f e c t figu rin g in the numerator o f the formula--
the production value at world market prices--m ust
189
be achieved so that the amount invested should
be recovered in f iv e y e a r s . 20
A Restatement o f the S a lie n t Features
o f the S o c i a l i s t Capital and
Investment Theory
It is qu estion able that there e x i s t s a s o c i a l i s t
capital and investment theory. To be sure, s o c i a l i s t s
have theorized about, as well as developed, methods to, if
not so lv e , at lea st resolv e the a llo c a t io n a l problems with
regard to cap ita l and investment d e c is io n s . Insofar as
these methods can be accepted as th e o r e tic a l a n a ly sis,
s o c i a l i s t s are to be complemented for formulating the
theory o f capital under s o c ia lis m as contrasted with the
theory o f cap ital under c a p ita lism .
The s o c i a l i s t c a p ita l theory b o ils down to t h i s .
The s t a t e is the only c a p i t a l i s t in the s o c i e t y . It is
the only provider of funds. It is the only user of funds.
It alone is the s o le owner o f the means of production. It
alone has the opportunity, freedom, and power to engage in
economic e n t e r p r is e . Since there is no capital market
which can determine the rate o f in te r e s t, the State de
termines it both for i t s e l f and for the s o c i e t y . It is
c a lled the accounting rate of i n t e r e s t . To avoid the usage
of the term 1 1 in te r e st" , the in te r e st rate, for ideological
reasons, is v a r io u sly known as e f f i c i e n c y c o e f f i c i e n t ,
20
Szikszay, in Hague, op. c i t .. p. 215.
lu crativen ess normative, general economic c o e f f i c i e n t , r e
coupment r ec ip ro c a l, e t c . , e t c .
The government decides upon the proportion of gross
national product which must be devoted to meet the s o c i e
t y ' s cap ital needs. The d e c isio n is based upon s o c i a l,
p o l i t i c a l , and economic c o n sid e r a tio n s. Once the s i z e of
the national investment fund is determined, the a llo c a t io n
is made o f funds to s t a t e e n te r p r ise s in the form o f (1)
non-repayable i n t e r e s t - f r e e grants, (2) budgetary appro
p ria tio n s, (3) p o l i t i c a l expediency, (k) adm inistrative
convenience, (5) investment requests from en terp rise man
agements, presumably based on tech n ica l requirements and
economic c a lc u la t io n s , or (6) a combination o f these and
other fa c to r s .
S o c i a l i s t s o c i e t i e s have been c r i t i c i z e d for i n e f
f i c i e n t a llo c a t io n o f resou rces, e s p e c i a l ly c a p ita l, due
to the absence o f a p rice system. The c r it ic is m , coming
from c a p i t a l i s t s as it usu a lly does, is however based upon
the im plicit value judgment that a com petitive price system
with its c l a s s i c a l i n s t i t u t i o n a l and motivational assump
tions is e s s e n t i a l for an economically e f f i c i e n t a llo c a t io n
of resources including c a p i t a l . Insofar as the capital
markets in c a p i t a l i s t i c economies themselves have become
highly m on op olistic, it is doubtful i f the a llo c a tio n of
capital under c a p ita lism would meet the e f f i c ie n c y c r i t e r i a
suggested by c a p i t a l i s t econom ists. Needless to say, the
191
s o c i a l i s t s o c ie ty has a decided advantage over its c a p i t a l
ist counterpart to appropriate the necessary funds toward
the financing o f projects e s s e n t i a l for s o c i a l , c u ltu r a l,
and c o l l e c t i v e development. T h eo r etica lly speaking, it
must be e a s ie r to correct s o c ia l imbalances in a s o c i a l i s t
s o c ie ty than in the c a p i t a l i s t s o c i e t y . The " In v isib le
Hand" of Adam Smith can provide in d iv id u ally and economi
c a lly p r o fita b le a l lo c a t io n , but that in i t s e l f is no guar
antee against the p o s s i b i l i t y that it would not be a mis-
a llo c a t io n o f resources from the standpoint of the s o c ie t y
as a whole.
Professor Maurice Dobb o f Cambridge U niversity has
commented upon the question of a llo c a t io n in the Soviet
Un ion :
In at least two respects Soviet experience
touches the issue o f which we have spoken con
cerning the nature o f the economic problems
which confront the framers of an economic plan.
In the f i r s t place, it seems to indicate the
prima f a c ie f e a s i b i l i t y o f planning the a l l o
cation o f investment without the device of a
price for ca p ita l as an e x p l i c i t category of
c o s t . In Soviet economy there is a r e ta il
market in which consumer goods are priced, and
there is a w age-structure related both to the
nature o f d if f e r e n t types o f work and to the
r e la t iv e s c a r c i t i e s of d if f e r e n t so r ts of
labour-power, which form the basis for the
c a lc u la tio n of prime c o s t s . But while in t e r e s t -
charges are made on certain types o f bank-
advances, and in te r e st is paid on savings bank
d ep osits and State loans, the bulk o f capital
investment has taken the form o f in t e r e s t - f r e e
grants from the Budget, and c a p ita l charges
other than c a p ita l-d e p r e c ia tio n have not entered
into the c a lc u la tio n o f c o s t s .
Dobb continues:
192
21
It would be utopian to hope that any system
could regularly a t t a in an optimum a llo c a tio n
(however that may be defined) in face o f the
imperfection o f c a lc u la t in g instruments and the
number o f imponderables which in practice w ill
e x i s t . What is needed is that any considerable
departure from an e f f i c i e n t a llo c a t io n of re
sources whould be quickly reg istered and
corrected; and t h i s such a p r i o r i t y - 1 i s t
mechanism, r e stin g on a d ir e c t comparison of
p r o d u c t iv it ie s , seems to be quite capable of
d o in g .22
III. Capital Theory Under Islam
Introduct ion
The question now a r is e s : What is the capital t h e
ory under Islam: Or, how w ill investment d e c isio n s be made
in a s o c ie ty which c a t e g o r ic a 1ly ab o lish es a ll kinds of in
t e r e s t? S t r i c t l y speaking, there is no capital theory in
the economics o f Islam. Probably, the situ a tio n with r e
gard to investment a llo c a t io n s in the Islamic s t a t e w ill
be more confusing than in the s o c i a l i s t s t a t e . Yet, some
way has to be found to so lv e the problems connected with
ca p ita l and its investment, if the in t e r e s t le s s economy as
envisioned by Islam is to become fu n ctio n a l. It is t h is
so lu tio n which we intend to explore in th is se c tio n .
21 Maurice H. Dobb, Soviet Economic Development
S i n ce 1917 (London: Rout ledge & Kegan Paul, 1966), pT ]k.
^ Ibid.. p. 15.
193 |
Let us r e c a p itu la te that our fundamental p o stu la te j
is that Islam forbids in te r e st but commands trade. In '
other owrds, the Islamic economy is in t e r e s t le s s but
p r o fit m otivated. Private property, including that in the
means o f production, family inheritance o f accumulated
wealth, and free and private enterprise w ill be guaranteed
by the C on stitution of the Islamic s t a t e . But the s t a t e has
a ls o to see to it that too highly unequal a d is t r ib u t io n o f
wealth is kept under check and that every member o f the
so c ie t y is provided with a minimum so c ia l standard and
economic s e c u r i t y . In popular terminology, the Islamic
s t a t e is a lso a welfare s t a t e o f s o r ts . On the face o f i t ,
the idea o f an Islamic economy seems to have some inherent
c o n tra d ictio n s almost to a ridiculous e x te n t. From the
standpoint o f a functiong system, it may be questioned
whether an in te r e st less economy along with property and
m otivational sub-systems and/or in s titu tio n s resembling
those o f a c a p i t a l i s t i c economy can c o n stitu te a fun ctional
system without r estr a in in g and constraining the free and
private economic e n te r p r ise in particular and o v e ra ll
economic l i f e in general. To be sure, there is c o n tra
d ic t io n per se in an economy which wants to be both free
e n te r p r ise operated and w elfare sta te orien ted . But the
whole c a p i t a l i s t world seems to be moving in that d ir ec tio n .
There is nothing contradictory about being economic and
humanistic at the same tim e. But then, these s o c i e t i e s ,
194
in sharp contrast to the Islamic s o c ie t y , have no dogma
about t h i s .
The D is tin c tio n between Economic and Financial Capital in
Investment Theory
W e have drawn the d i s t i n c t i o n between the economic
( r e a l) and fin a n c ia l (monetary) p reviou sly. W e wish to
s t r e s s t h is again, because it is in t h is d i s t i n c t i o n that
there seems a p o s s i b i l i t y of a so lu tio n to the problem o f
c a p ita l under Islam.
The d e c is io n a l process in economics, or to be more
0 2
accurate in c a p ita l budgeting, ^ requires two d i s t i n g u i s h
able and d i s t i n c t l y d i f f e r e n t , but c lo s e l y r ela ted , d e c i
s i o n s . They are:
(1) The investment d e c is io n , and
(2) The fin a n cia l d e c is io n .
The investment d e c isio n is the economic d e c is io n
proper. It has to do with real c a p it a l, such as plant and
equipment, b u ild in g s, and roads. The fin an cial d e c is io n ,
on the other hand, has to do with the problems o f finan cing
the investment p r o je c ts. The methods, techniques, and
s t r a t e g i e s o f finan cing are, s t r i c t l y speaking, irr elev a n t :
2 3
In order to further c l a r i f y and i l l u s t r a t e c e r
ta in concepts, c a te g o r ie s , and methods which we have used
in our d is c u ssio n o f capital a llo c a tio n and investment
d e c is io n , we have included an independent chapter on c a p i
t a l budgeting as it is carried on in industry. H opefully,
it w ill make up for some d e f i c i e n c i e s in our d is c u ssio n of
i n t e r e s t , c a p i t a l, and investment.
to the economic r a tio n a lit y of an investment. In a simple,!
t r a d i t io n a l, and prim itive economy, the king can order its :
c it iz e n r y (su b je cts) to d e liv e r th e ir p o s se ss io n s, gold,
s i l v e r , bricks and ston es, e t c . to the kin g's treasu ry.
His o f f i c e r s can a lso herd the able-bodied men and women,
whether they are w il li n g or not, to work on the king's con
str u c tio n p r o je c ts. History is evidence that some such
financing technique was used by the Pharaohs to build th e ir
pyramids and by a Mughal emperor of India to build the Taj
Mahal to the memory of his queen. Their finan cing t e c h
niques were ruthless but e f f e c t i v e , which must not be con
fused with the q u a lity (economic r a t i o n a li t y ) o f th e ir
investment d e c is io n s . Obsessed and irr esp o n sib le as these
kings were, they unquestionably made r u t h le s s , unproductive,
and crim in ally wasteful use of scarce economic resources in
wanting to build monumental tombs upon the dead bodies of
t h e ir loved ones while the whole population starved from
famines for lack o f desperately needed c a p ita l accumulation
in a g r ic u ltu r e , industry, trade and commerce, and human
development. A great number o f past and present wars,
medieval cathedrals and mosques, or e s p e c i a l l y custom -built
C ad illacs for the Muslim Sheiks and princes of the modern
day, o i l - r i c h Middle East can be c l a s s i f i e d under the same
category--uneconomic, unproductive, and ir r a t io n a l.
In a contemporary s o c ie ty (most s o c i e t i e s , at
l e a s t ) , men, m aterial, and cap ital cannot be herded
196 |
j
to g eth er by a decree. The entrepreneur, the prospective
investor, has to buy them for money in the market. If he
does not have money of h is own, he must borrow it from
i
someone. This someone is the f in a n c i e r - - a bank. If the
bank does not have money readily a v a i la b l e , it must create
i t . W e must therefore bear t h is fundamental d i s t i n c t i o n
between investment and finance. Investment is the end.
Finance is the means. Investment problems and c r i t e r i a are
general and u n iv er sa l. Financial arrangements are p a r t i c
ular and c u lt u r a l. Investment is an economic problem.
Financing is a p o l i t i c a l problem. No s o c ie t y can develop
a unique theory o f investment of it s c a p i t a l . But every
s o c ie t y can, and in fact must, develop its unique fin a n c ia l
i n s t i t u t i o n s , techniques, and s t r a t e g i e s su ited to its own
s o c ia l philosophy, cultural valu es, and p eople's tempera
ments. Any fin a n cia l system which meets these requirements
should be regarded as r a tio n a l, e f f i c i e n t , and accep ta b le.
The Investment Decision in the In terest less Economy
Whatever one's th e o r e tic a l conception o f economic
sc ie n c e , whatever one's ideological persuasion, and what
ever one's cultural o rien ta tio n ; it remains a fact that
the economic resources at the disposal o f a s o c ie t y are
scarce and have a lter n a te uses. It is t h is simple fact
which gives r ise to the economic problem o f a l l o c a t i o n .
This fact is a lso so fundamental to mankind's ea rth ly e x -
197 j
istence th a t, not su r p r isin g ly , the problem o f the a l lo c a - j
tio n of resources has co n stitu te d the only legitim ate sub- !
j e c t matter o f economics in the w r itin g s o f an impressive 1
array of economists. Everything eIse--ex ch a n g e, d is t r i b u - j
tio n , consumption, e t c . - - i s in v estig ated because they must
be in order to understand the a llo c a t io n a l mechanism. The
underlying value judgment is that scarce resources must be
r a tio n a lly , e f f i c i e n t l y and productively u t i l i z e d to bring
the maximum economic s a t i s f a c t i o n s to the s o c i e t y . This
value judgment is at the same level as the fundamental
postulate underlying medical th e o ry --th a t l i f e must be
lived h e a lt h ily in order that the maximum enjoyment can be
der ived from i t .
The in terest less economy o f Islam can not be, no,
ought not to be, an exception to t h i s universal need for
e f f i c i e n t u t i l i z a t i o n of its scarce economic resources.
The problems o f a llo c a t io n are th erefore no d if f e r e n t in
the Islamic s o c ie ty from those in the c a p i t a l i s t or the
s o c i a l i s t s o c i e t y . Having said th a t, there seems to be
l i t t l e need to go further, but the absence o f the in terest
mechanism forces us to in v e stig a te beyond t h i s point.
W e have repeatedly seen not only in our d iscu ssion
o f the capital theory under ca p ita lism , but a lso under s o
cia lism , that the investment d e c isio n demands some concept
and measure of the c o e f f i c i e n t of e f f i c i e n c y . Putting t o
gether both the c a p i t a l i s t and s o c i a l i s t terminology, it
198
is amazing by how many d if f e r e n t names t h is simple and
common se n sic a l concept is known. For example, it is
variou sly known as marginal productivity of c a p it a l, mar-
j
ginal e f f i c i e n c y o f c a p i t a l, internal rate o f return, rate
o f return over c o st, p r o f i t a b i l i t y measure, true y ie ld ,
book return on book investment, net income to gross in v e s t
ment r a tio , d iscou nting fa c to r , e f f i c i e n c y standard, c u t
o f f rate, target rate, minimum rate, hurdle rate, recoup
ment r ecip ro ca l, general economic c o e f f i c i e n t , lu c r a tiv e -
ness normative, c o e f f i c i e n t of e f f i c i e n c y , and Heaven knows
what e l s e . Of course, it is a lso known simply as the
in te re st rate or cost o f c a p i t a l . Whether a l l these orsome
o f these names have been coined to provide a b e tter
s c i e n t i f i c d e sc rip tio n or to avoid the rather unpleasant
connotation or the mora1- e t h i c a 1 - id e o lo g ic a 1 overtones and
undertones which may distu rb the equilibrium in the so c ia l
and public r e la tio n s f i e l d which a corporation under c a p i
ta lism or a s t a t e e n te r p r ise under so c ia lism may enjoy is
very d i f f i c u l t to t e l l . But one would suspect that there
is some degree of id e o lo g ic a lly motivated m entality at work
which f a c i l i t a t e s the development o f defense mechanisms to
u t i l i z e more neutral and s c i e n t i f i c terms. Be that as it
may. What is of e s s e n t i a l importance is the concept of
some kind of payoff from the investment o f capital in very
concrete terms. The Islamic economy, too, has to have a
concept o f the same v a r ie t y . It is, of course, p e r fe c tly
199
fre e to c a ll i t , for example, contribution to God's
treasury ( Bait ul Mai), t r ib u te to community (ummah) ,
s o c ia l s a c r i f i c e standard, or simply p r o fit rate.
Presumably, the Islamic s t a t e would not want to let it be
known as in te r e st r a te . Once again, to underscore, we are
ta lk in g about an economic return from real capital and not
a fin a n cia l return from a fin a n cial loan.
Looking at the matter from the point o f view d e
scribed thus far, there would be no v io la t io n o f the
Quranic injunctions against in terest and no d ev ia tion s from
the im plications o f Islamic s o c ia l philosophy i f the
in te r e st less economy o f Islam makes use of devices such as:
(1) The accounting rate of in te r e s t, a ls o known
as the shadow price for c a p i t a l,
(2) The recoupment period method,
(3) The internal rates of return,
(*f) The d iscou nting fa c to r s, and
(5) The e f f i c i e n c y standards, e t c .
It must be c le a r ly understood that these devices
do not involve cash payments. They are, a n a ly t ic a lly
speaking, dev ices to make economic c a lc u la tio n s , to judge
the e n te r p r ise p r o f i t a b i l i t y , and to evaluate managerial
performance. It would be a mistake to confuse it with the
in te re st r a te . The only source of such a mistake would be
a lack o f the b a sic knowledge of economic theory and fa c ts
of economic 1i f e .
200
The Financial System in
The Islamic State
The organization o f the finan cial system in the
Islamic s t a t e creates some d i f f i c u l t problems because o f
the i n s t i t u t i o n a l a b o lit io n o f in terest ( r iba) . The organ
iza tio n o f an e f f i c i e n t l y working network o f banks and
other fin a n c ia l i n s t it u t io n s is p r a c tic a lly impossible
without d e t a ile d and comprehensive governmental ownership, j
c o n tr o l, and coordination o f the fin an cia l resources o f the
country. Insofar as the banking system w ill neither pay
in te r e st upon d ep osits nor can even guarantee the s a f e t y
o f d e p o s ito r s' savin gs, it is hard to see or imagine what
e l s e w i l l m otivate the members o f so c ie ty to want to bring
t h e i r individual savings to any bank. If such be the case,
it w ill make it impossible to pool the community's savings
the very f i r s t ste p in putting fin a n cia l resources toward
economic u s e s . Assuming, for the sake of an argument, that
the community's savings have somehow been pooled togeth er;
the next problem is to put them at the disposal o f e n t r e
preneurs. In the absence o f any cost of ca p ital ( i n t e r e s t -
l e s s n e s s ) , some c r it e r io n or device is to be found to guar
antee that funds w ill be e f f i c i e n t l y used. On what basis
or q u a l i f i c a t i o n s are the funds to be made a v a ila b le to
those who request loans? Will these loans be outright
grants? Will they be equity contributions? Will th ese be
loans to be repaid as and when the borrower can? If the
201 i
borrower loses his capital in business and therefore is un-|
i
able to pay, w ill everybody concerned j u s t forget a l l about!
it and fee l sorry or help him out with some more? Many
more questions can be raised . In the private context of
business l i f e , the problem seems to be in so lu b le. The
fin a n c ia l theory of Islam may have worked in the prim itive
era o f business during the e arly days; it appears to be
a b so lu te ly impractical for the present day corporate econ
omy .
What is the so lu tio n ? Is there any? Some think
there is a c o lu tio n . One o f th e s e , perhaps the most a r tic -:
u la t e , is Mr. S. A. Siddiqui, formerly M ilitary Accountant :
General of Pakistan. His su ggestion s are:
In the present-day world, however, where banks
create money, and are instrumental in financing a ll
the great e n te r p r ise s o f a country, it w ill be f u t i l e
to enter into competition with the modern countries
unless er are sim ila r ly equipped. Yet th is does
not mean that we should adopt banking as it is . It
does mean, however, that we should a ls o evolve a
system which may be in consonance with the s p i r i t
o f Islam and yet be able to stand o f its own against
the present-day system o f banking.
Let us take up th is point d i f f e r e n t l y . If, for
instance, an Islamic State wants to run its finances
on purely Islamic lin e s , what should it do to have
a system which may take the place o f the modern
banking system?
There may be many s o lu t io n s , but let us suggest
one here as an example. Suppose an Islamic State
wants to derive a ll the b e n e fits o f the banking
system without any of its d e f e c t s , the sta r tin g
point w ill be the n a t io n a lis a t io n o f banking so
that there may be only a State Bank with its
branches in a ll important towns o f the country.
The State Bank w ill have to undertake various kinds
202
o f a c t i v i t i e s at present represented by various
kinds o f banks such as Commercial Banks, Traders'
Banks, Industrial Banks, e t c . All such a c t i v i t i e s
will have to be run by the various branches o f
the State Bank. In other words the State Bank will
have to run various other Industrial, Traders and
Cooperative Banks and control them c e n tr a lly . The
S ta te Bank will a lso have to undertake the function
o f issu ing currency notes and other sim ila r functions
performed by, say, the Reserve Bank of India in t h i s
country. In sh o rt, it will be one comprehensive
bank c o n tro lin g a number o f branches both on
functional and regional b a s is . The advantages of
a s in g le State Bank cannot be emphasised too much
as it will avoid a ll competition, which is the
usual source o f c r is e s and crashes in the modern
c a p i t a l i s t i c s o c i e t y . It needs hardly be said
in t h is connection that the most elaborate l e g i s
latio n has f a i l e d to control the d e fec ts of p r i
vate banking which lead every few years to the
cy cles o f booms and depressions inherent in the
e x i s t ing system.
The next point in order of importance will be
the finan cing o f such a bank. As the reader find s,
the Imam o f the Islamic State is empowered to levy
sp ec ia l imposts and fin a n cia l contributions when
a contingency a r i s e s . The s t a t e can e a s i ly levy
an impost on the w e ll- t o - d o part of the s o c ie t y and
issue bonds in lieu which, instead of entitling the
holder to a fix ed in te r e s t, will make him eligible
to share the p r o fit s o f the bank. In fact the
financing o f the bank may be done by the voluntary
con trib u tion s as the prof it-m otive will sti l l be
there, but, i f necessary, the imposition of a
fin a n c ia l co n trib u tion according to the means of
w e ll- t o - d o members o f the s o c ie ty will be per
f e c t l y in order.
The working o f the bank will be more or less :
on the lin es o f the e x i s t i n g banks with the
d if f e r e n c e that the shareholder (i.e., the holder
o f the bonds) will share in both the p r o fit and
the loss of the bank, and there will be no c a l
c u la tio n o f in te r e st on fixed deposits or advances
to individuals and firm s. These will as at pre
sent o f f e r se c u r ity in the shape o f bonds, gilt-
edged s e c u r i t i e s , shares, amchinery, e t c . , and
get the required advances for a fixed period,
a f t e r the expiry o f which the s e c u r i t i e s will be
liable to be sold out if the advance is not re-
203
turned in time, on the lin es as is done at present.
It will be sort of "taqqavi" loan, i n t e r e s t - f r e e
and re-payable a fter a c erta in period.
As has been said above, there will be no in
t e r e s t on the fixed d e p o sits, but it is conceivable
to so arrange things that even the fix e d deposit
holders may share “ in the p r o fit and lo ss o f the
bank on the basis o f partnership.
(a) The State Bank will be r esp o n sib le for
financing heavy industries tran sp ort, mining and
othe a c t i v i t i e s which may be decided upon by the
S t a t e . A share of the p r o fit will n a tu ra lly go
to the bank and be d is tr ib u te d among the bond
holders and others holding fixed d e p o s its in the
Bank.
(b) The State Bank will be the only bank to
deal with foreign exhange and commerce and a ll
p r o fit, in that respect will be retained by the
Bank.24
A Short Comment o f Mr. Siddiqi's Suggested System: W h i 1e
Mr. Siddiqi has not intended to give a "full fledged pro
posal", he thinks an elaborate system founded on the above
premises would provide a fin a n cia l system for the "require-
o
ments o f an ultra-modern State". Mr. Siddiqi has also
cautioned that: "Till, however, the modern system of
s o c i e t y is completely changed, (and a true Islamic so c ie ty
is created) any Muslim State which t r i e s t o adhere to the
ortodox system o f Islamic finance shall have to contend
against heavy odds and shall always be handicapped". 25
Mr. Siddiqi's system boils down t o the follow ing
S. A. Siddiqi, Public Finance in Islam (Lahore,
West Pakistan: Shaikh Muhammad Ashraf, 1952), pp. viii-xi.
2^ |b id ., p. vi i .
204
b a sic fundamentals:
1. N a tio n a lisa tio n o f a l l kinds o f banking.
2. Complete c e n tr a lis e d co n tro l-reg io n a l as well
as fu n ctio n a l.
3. Voluntary, failing which, compulsory fin a n c ia l
contributions (d e p o sits) by thsoe having the capacity to
do s o .
k. I n te r e s t-fr e e loans--persona 1 as well as
commercial.
5. Control and concentration o f a ll foreign trade
in the hands o f government.
There is nothing b a s i c a l ly wrong with the system
excepting that in actual p ractice it will destroy the
"finan cial" freedom o f the individual. On what basis the
State Bank--the only bank in the economy--wi11 evaluate
the com m ercial/ind ustria1 loan a p p lic a tio n s, Mr. Siddiqi
has not pointed out. Probably, need and promise will be
the leading criteria. Probably past h isto ry too. What will
happen to the e n te r p r ise o f a daring, dashing, and heroic
Schumpeterian innovator who may demonstrate neither "need",
nor "promise", nor "history". If his great dreams are d e
stroyed, for the State Bank cannot afford to put huge funds
at his disposal free for experiment, little development
would then take place. Of course, the hope can s t i 11 be
entertained that the s t a t e will be e n te r p r isin g and in
novate. If so, fine. The conclusion seems in evitab le that;
205
s t a t e auth ority will be the c h ief governing fa cto r in the
fin a n c ia l system suggested by Mr. Siddiqi.
CHAPTER VII
CAPITAL ACCUMULATION
Introducti on
The importance of capital accumulation for the
development and growth of a society cannot be over
emphasized. The presence of capital may not perhaps
guarantee economic development, but i t s absence is almost
sure to preclude all p o s s i b i l i t i e s . Capital accumulation
may not prove to be a s u f f ic ie n t condition; i t however
is an absolutely necessary one. The need for capital
accumulation has been emphatically stated in a United
Nations study:
The general rate of development is always
limited by shortage of productive fa c to r s. If
any one scarce factor associated with under
development should be singled out, i t would be
c a p ita l. The final goal of development pro
gramming i s , therefore, to find the best way of
breaking the vicious c ir c le between capital
shortage and under-development and to design the
most e f f i c i e n t and optimum rate of capital
accumulation.
It would be an o v er-sim p lifica tion , of
course, to regard economic development as a
matter of capital accumulation alone. Other
things are needed in addition, such as entrepre
neurship and training of workers and public
206
207
administrators. Yet these are seldom possible
without some increase in the stock of c a p ital.
Therefore capital accumulation may very well be
regarded as the core process by which all other
aspects of growth are made p ossib le.!
Capital is produced means of production brought
into existence by man himself. It neither grows naturally,
nor is i t a free g i f t of nature. Capital accumulation
does not therefore take place automatically. It requires
certain attitudes and environments which induce, promote,
and f a c i l i t a t e i t , as against certain others which
discourage and obstruct the process of accumulation. It
i s therefore important to have some understanding and
appreciation of the motivational and in s titu tio n a l factors
which h i s t o r i c a l l y accompanied the accumlative processes.
Generally speaking, the psychological, r e l i g i o - s o c i o -
cultural, and p o litico-1egal assumptions, presuppositions,
and postulates of capital accumulation have been:
1. An inner conviction that making money i s , i f
not the most, certainly one of the most worth while
pursuits in l i f e and that success in building personal and
family fortunes c a lls for the best and the f in e s t in man
and that only the most capable succeed in i t .
The United Nations, "Capital Accumulation: The
Core Process," Capital Accumulation and Economic Develop
ment, ed. Shanti S. tangri and H. Peter Gray (Boston:
D. C. Heath and Company, 1967), p. 11.
208
2. Permissive attitu din al environments and
r e l ig io - s o c io - c u lt u r a l conduciveness to and approval of
accumulating riches and wealth for their own sake.
3. Maximum safety and security of property rights
and of private fortunes guaranteed by the p o litic o -le g a l
system.
4. Prompt legal transfer of property ownership
as per the free and voluntary will and wishes of the
property owners to their natural heirs and/or beneficiaries
of their choice.
5. A b e l ie f that the achievements of men who
b u ilt personal fortunes and established financial and
industrial empires are no les s symbolic of human ingenuity,
application, and determination than the philosophical,
s c i e n t i f i c , and m ilitary feats of mankind's immortals.
6. Open economic p o s s i b i l i t i e s , p rob a b ilities,
and opportunities to make money through professional,
commercial, and industrial a c t i v i t i e s and freedom from
cultural, p o l i t i c a l , and legal restra ints upon what may be
regarded as e xclu siv e ly money-making a c t i v i t i e s as an end
in themselves.
7. A r ea liz a tio n of the h istorical fact that the
salvation and destiny of the society and of the individual
in the society have been c lo s e ly linked with the amount of
capital accumulation, without which neither national
209
independence, nor individual in te g r ity , nor control over
disease, ignorance, or poverty is possible, and that for
all the foreseeable future, the degree of the accumulation
of the productive powers in the society is to be the f i r s t
prerequisite for material, as well as m oral-intel1e c tu a l-
a n d -sp ir itu a l, progress.
The Weber Thesis
One study which has taken fu ll account of the
motivational and ideational factors behind the accumula
tion of capital and the growth of capitalism as a socio
economic system in certain nations within the European
c i v i l i z a t i o n is the famous th e sis formulated by the German
s o c i o l o g i s t , Max Weber. Weber has tried to examine and
establish a close relationship between a unique religiou s
?
inspiration and economic evolution. In his work, The
Protestant Ethic and the S p irit of Capitalism, written in
the f i r s t decade of the twentieth century, Weber presented
the thesis that the rational ethics of ascetic protestant-
ism played a key role in the promotion and historical
Cf. R. H. Tawney, "The question which Weber
attempts to answer is simple and fundamental. It is that
of the psychological conditions which made possible the
development of c a p i t a l i s t i c c iv iliz a t io n ." (See Tawney's
foreword to Max Weber, The Protestant Ethic and the S p ir it
Of Capitalism (New YorlTi Charles Scribner's Sons, 1958),
p. K b ), j
210
development of an economic s p i r i t , or the ethos of an
economic system, which became responsible for the r is e of
capitalism and economic development under the c a p i t a l i s t i c
form of economic organization. He supported his case by
particu larly drawing upon the English experience during
the early phases of England's c a p i t a l i s t development.
In Weber's interpretation of c a p i t a l i s t develop
ment, the key concepts are those of (1) Calling, (2)
Asceticism, and (3) Rationality. The interplay of these
three leads to personal, professional, and entrepreneurial
excellence in the productive a c t i v i t i e s , saving and
accumulation of wealth, and earning an ever increasing
amount of incomes and p ro fits. All t h r e e - - c a l 1in g ,
asceticism , and r ation ality--have originated from and
grown out of what Weber ca lls the Protestant ethic a 1 a
John Calvin. Thus, in the formulations of Max Weber, the
economic s o c i o l o g i s t , Protestant ethic does not necessarily
mean the teachings and doctrines of the Prophet Jesus,
the Christ, but more narrowly and more important in the
h istorica l context of the rise of capitalism, the reformu
lation and reinterpretation of Christianity by the Swiss
preacher and disciplinarian John Calvin.
Weber's basic purpose was to identify the
histo r ica l influence of Calvinism on the creation and
emergence of the economic s p i r i t of capitalism in a given
situatio n and at a giyen point in history. It had nothing^
211
to do with whether or not or to what extent the Protestant
ethic or C alvinistic teachings are themselves Christian
in l e t t e r and s p i r i t . In a comparative sense, i t would
be lik e conducting a study aimed at tracing the historical
influence of the interpretations and teachings of A1
Ghazzali in the evolution of the so cio-cu ltu ral ethos of
economic l i f e in the Islamic culture. Such a study is to
be distinguished from a c r i t ic a l evaluation of his
formulations to determine whether or not or to what extent
what Ghazzali taught was truly Islamic as per the Quranic
and/or Mohammedian teachings.
Before going further, i t seems advisable to
define the three basic terms.
By a sense of "calling" is meant an inner con
viction or a mental state which induces a man to believe
that what he does or pursues in l i f e is in fact something
which he has elected for himself as God w ille d . Thus, the
pursuit of one's c a l 1i n g - - j o b , profession, business--
becomes one's sacred duty to God, to be performed with
3
utmost a b ility and seriousness. Work becomes worship.
O
The concept of calling should be distinguished
from what is usually described as the caste system. The
concept of a caste is a sociological grouping derived from
the religion or the social order. The concept of c a llin g ,
on the other hand, refers to an i n d iv i d u a l is t ic choice of
a profession or l i f e ' s business. It has nothing whatsoever
to do with one's family or religiou s background. It i s ,
all in a l l , a matter of one's natural aptitude, educational
training, and character tr a it s of the individual himself.
212
Labor and industry are no longer economic means, they
become spiritual ends. In business and economic l i f e ,
pursuit of wealth is no longer an advantage, it is a moral
duty. As Weber remarked:
Not leisure and enjoyment, but only activity
serves to increase the glory of God, according
to the d e fin ite manifestations of His w ill.
Waste of time is thus the f i r s t and in
principle the dead liest of s i n s . 4
It was Weber's contention that of all religious
creeds, i t was Protestant Christianity which was unique
in giving rise to the doctrine of c a llin g . The pursuit
of a calling became notably responsible for the unparalled
dedication, e f f ic ie n c y , and productivity of Western man
in his work, whatever i t was, in the ordinary course of
l i f e .
The relationship between the idea of calling and
the economic s p i r i t of capitalism is clearly brought out
when Weber says:
One of the fundamental elements of the s p i r i t
of modern capitalism , and not only of that but of
all modern culture: rational conduct on the basis
of the idea of c a l l i n g , was born--that is what
this discussion has sought to demonstrate--from
the s p ir it of Christian a s c e t i c is m .5
^Max Weber, The Protestant Ethic and the Sp irit of
Capitalism (New York! Charles Scribner's Sons, 1958), p. 157.
51 b i d . , p. 180.
........................... 213
In addition to i t s implications for individual
members of the s o c ie t y , the doctrine of calling also had
a broader dimension. It concerned the problem of division
of labor in so c iety as a whole. As stated by Weber:
The emphasis on the ascetic importance of
a fixed c a llin g provided an ethical j u s t i f i c a t i o n
of the modern sp ecialized division of labour.
In a sim ilar way the providential interpretation
of profit-making j u s t i f i e d the a c t i v i t i e s of the
business man. The superior indulgence of the
seigneur and the parvenu ostentation of the
nouveau riche are equally detestable to asceticism.
But,on the other hand, i t has the highest ethical
appreciation of the sober, middle-class, self-made
man. "God blesseth His trade" is a stock remark
about those good men who had successfully followed
the divine h i n t s . 6
By asceticism , Weber meant the foregoing of the
worldly and bodily pleasures which squander away wealth or
fortunes, howeverso big or small. Asceticism is to be
distinguished from acute austerity or self-d en ial of what
is necessary to maintain healthy, neat and clean, com
fortable l iv i n g . But i t does look with disapproval upon
conspicuously ostentatious consumption, indulgence in
sensual pleasures beyond what is legitim ately permissible,
and, for example, a so ft l i f e lived upon inherited wealth.
A Christian a sc e tic is duty bound to be tempermentally
sober, e t h i c a l ly principled, and economically productive.
It should be pointed out that a man of limited
6 I b i d . , p. 163.
214
mean is not an a scetic ju s t because he l iv e s a meagre
existence. F irst, because he has probably not worked
hard at his c a llin g . Second, he has not been able, for
that reason, to accumulate wealth. Third, he has no need
to exercise sobriety and moral restraint in his consumption
pattern, for he simply cannot afford the luxuries of l i f e .
Thus, a worldly ascetic is he who can afford a great many
enjoyments and manifestations of wealth in personal l i f e
but who restrains himself from i t a l l . His only s a t i s
factions are to have lived a l i f e productively, to have
responded to his utmost to the call of his duty, and to
have done his job well.
In a manner of speaking, Weber's heroes who pursue
their c a llin g s , lead an a scetic l i f e , build financial
industrial empires and f i n a l l y collapse under the weight
of their own creations are like Hegel's world-historical
individuals who:
. . . attained no calm enjoyment. Their whole
l i f e was labor and trouble, their whole being was
in their passion. Once their objective is
attained, they f a ll off like empty hulls from
the kernel. They die early like Alexander, they
are murdered like Caesar, transported to Saint
Helena like Napoleon. This awful f a c t , that
historical men were not what is called happy--for
only private l i f e in i t s manifold external circum
stances can be "happy"--may serve as a consolation
215
for those people who need i t , the envious ones
who cannot t o le r a t e greatness and eminence.7
Hegel continues:
A w orld-historical individual is not so
sober as to adjust his ambition to circumstances;
nor is he very considerate. He is devoted, come
what may, to one purpose. Therefore such men
may treat other great and even sacred in terests
inconsiderately--a conduct which indeed subjects
them to moral reprehension. But so mighty a
figure must trample down many an innocent flower,
crush to pieces many things in i t s path.8
As Max Weber observed:
In f a c t , the summum bonum of this e th ic, the
earning of more and more money, combined with the
s t r i c t avoidance of a l l . spontaneous enjoyment of
l i f e , is above all completely devoid of any
eudaemonistic, not to say hedonistic, admixture.
It is thought of so purely as an end in i t s e l f ,
that from the point of view of the happiness o f,
or u t i l i t y t o , the sin g le individual, i t appears
e n tire ly transcendental and absolutely irr a tio n a l.
Man is dominated by the making of money, by
acquisition as the ultimate purpose of his l i f e .
Economic a c quisition is no longer subordinated
to man as the means for the sa tisfa c tio n of his
material needs. This reversal of what we should
call the natural relationship, so irrational
from a naive point of view, is evidently as
d e f i n i t e l y a leading principle of capitalism as i t
is foreign to all peoples not under c a p i t a l i s t i c
i n f lu e n c e .9
In a recapitulation of his central theme, the
author of The Protestant Ethic and the Sp irit of
Capitalism states:
G. W . F. Hegel, Reason in History: A General
Introduction to the Philosophy of History, trans. Robert
S. Hartman (New York: The Liberal Arts Press, 1953), p .41.
8 Ibid.., p. 43. ___________91bjd., pp. 13-14. ____
216
This worldly Protestant a sc e tic is m , as we may
r e c a p itu la te up to this point, acted powerfully
ag a in st the spontaneous enjoyment of p o sse ssio n s;
i t r e s t r ic t e d consumption, e s p e c i a l ly of lu x u r ie s .
On the other hand, i t had the psych ological e f f e c t
o f freein g the a cq u isitio n of goods from the
in h ib it io n s of t r a d i t i o n a l i s t i c e t h i c s . I t broke
the bonds of the impulse of a c q u is itio n in that
i t not only le g a liz e d i t , but (in the sense discu ssed)
looked upon i t as d ir e c t ly w ille d by God. The
campaign ag ain st the temptations of the f l e s h ,
and the dependence on external th in g s , was, as
besides the Puritans the great Quaker a p o lo g ist
Barclay expressly says, not a str u g g le ag ain st the
rational a c q u is it io n , but against the ir r a tio n a l
use of wealth.
But th is irration al use was ex em plified in the
outward forms of luxury which th e ir code condemned
as id o la tr y of the f l e s h , however natural they had
appeared to the feudal mind. On the other hand,
they approved the rational and u t i l i t a r i a n uses of
wealth which were w illed by God for the needs of the
individual and the community. They did not wish to
impose m o rtifica tio n on the man of w ea lth , but the
use of his means for necessary and p r a c tic a l th in g s.
The idea of comfort c h a r a c t e r i s t i c a l l y lim its the
exten t of e t h i c a l l y permissible expenditures. It
i s naturally no accident that the development of a
manner of liv in g c o n siste n t with the idea may be
observed e a r l i e s t and most c le a r ly among the most
c o n siste n t rep resen tatives of th is whole a ttitu d e
toward l i f e . Over against the g l i t t e r and
o ste n ta tio n of feudal magnificance which, restin g
on an unsound economic b a s is , prefers a sordid
elegance to a sober s im p lic it y , they s e t the clean
and s o lid comfort of the m id d le-class home as an
ideal . 10
The Weber Thesis and Islam
What sort of conclusion can be drawn from the
Weber Thesis? F irst o f a l l , without any doubt, the
P ro te sta n t eth ic is a prosperity e th ic . It has a high
1 ° I b i d . , p.p.. .170-71,
217
regard for material wealth and i t urges us to get rich.
It demands hard work and r a t i o n a li t y in a c q u is itio n and
prescribes sanctions and r e s t r a in t s in consumption. In
f a c t , a one sentence in te r p r e ta tio n and summation of the
P rotestant eth ic and the s p i r i t of cap ita lism had already
come from a rather u n lik ely source, Karl Marx, before
Max Weber ever formulated his t h e s i s , and whom the l a t t e r
was trying to negate. Marx had spoken of capitalism :
i
"Accumulate. Accumulate. Accumulate. That is Moses and
a ll the prophets." Being Jewish and s o c i a l i s t , he could
not have possibly come down to Christ or Calvin. What,
however, must be acknowledged i s that some such m entality
is almost indispensable for making large fortu n es,
amassing of wealth, and, in economic terms, capital
accumulation. This seems true whether a given so c ie ty is
C h ristian , Islam ic, or Communist. As an exception i t is
p o ssib le for a s o c ie ty to suddenly become rich through
royalty payments from o il e x p lo r a tio n , but the a c q u isitio n
of these riches is no achievement of the people of the
given s o c ie t y i t s e l f . In an economic sense, these riches
are no d iffe r e n t than w indfall income, inh erited wealth,
or, for that matter, simple c h a r ily . In other words,
such wealth represents a tra n sfe r payment and not earned
income.
In the formative years of the individual as well
218
as of the economy, a s c e tic is m , i f not a u s t e r ity , is always
h e lp fu l. All great men and a ll wealthy s o c i e t i e s have to
e x e r c ise a sc e tic is m at some stage of thei l i f e . An
a s c e t ic o r ie n ta tio n leads to greater r e s tr a in t in consump
t i o n , greater sa v in g s, and greater accumulation of c a p i t a l.
Whether or not savings derived from a s c e t ic d i s c i p l i n e
w ill s u f f i c e for the economic development of the s o c ie t y
as a whole i s , of course, a d if fe r e n t is s u e . What an
a s c e t ic o r ie n ta tio n can, however, guarantee is the
economically productive use of scarce resources through
an ever present condemnation of o ste n ta tio u s l i v i n g ,
conspicuous consumption, and ir r a tio n a l expenditures.
Worldly a sc e tic is m thus, becomes an a l ly of economic
r a t i o n a l i t y . Economic r a ti o n a li t y demands e f f i c i e n c y ,
p r o d u c tiv ity , and p r o f i t a b i l i t y . Once the pursuit of
c a llin g in individual l i f e and the conduct of business
and en ter p r ise in the socia l and economic l i f e are placed
upon the foundations of r a t i o n a l i t y , the outcome is none
other but p r o sp er ity , progress, and development.
Looking a t , for example, Islamic culture in a
h i s t o r i c persp ectiv e within the Indo-Pakistan subcontinent,
i t seems as i f i t sin g u la r ly f a ile d to develop and give
currency to the above concepts, i . e . , those of c a l l i n g ,
a s c e tic is m , and r a t i o n a l i t y . Indeed, both the e l i t e and
the masses showed a considerable degree of fa sc in a tio n
219
with and admiration for o sten ta tio u s d isp lay s of wealth
in s t y l e s of l i f e of highly questionable t a s t e and
economic v a l i d i t y . As far as Muslim royalty was concerned,
i t took pride in building mosques, gardens, and tombs;
and also of course palaces and c a s t l e s in t h e ir hundreds
of years of rule in India. In f a c t , i t is doubtful i f a
p a r a lle l can be found in recent times which would match
the ir r a tio n a l and almost crim inally wasteful use of the
scarce resources of poverty stricken India at the hands
of these Great Mughals. What is more tr a g ic and incom
prehensible is that the la te r generations of Muslims
should take d e lig h t and pride in a ll those h is t o r i c a l
monuments--the s o -c a lle d Muslim cultural heritage--w hich
is so monumental a :way mock at th e ir poverty of mind,
body, and s o u l .
CHAPTER VIII
DISTRIBUTION OF INCOM E i
|
Int roduct ion
The received economic theory o f income distribu tion !
is the marginal productivity theory. Its central theme is ;
the concept o f productive contribution to the process o f
economic production. According to the marginal produc
t i v i t y theory o f d is t r ib u t io n , it is o f no importance
whether the agent of production is land, labor, c a p it a l, j
j
organization and management, or entrepreneurship. Their
contrib utions are evaluated by the market through the in
te r a c tio n o f the market forces of demand for and supply of
the given fa ctor o f production. It should a ls o be realized
th a t, s t r i c t l y from the standpoint of marginal productivity,
it is e n t i r e ly irrelevant for the economically determined
d is tr ib u t io n of income whether the contrib ution under
compensation came from a laborer, or an owner of c a p ita l,
or an owner o f an acre of land. Thus, under p e r fe ctly
com petitive market c on d ition s, the lo g ic o f the marginal
produ ctivity theory o f d is tr ib u t io n deals to one and a ll
his deserved, and only his deserved share o f income. Also,|
given lin ear homogeneous production fu n ction s, it is postu-!
lated that no factor w ill be able to claim a share which
220
221
is greater than its o r ig in a l product. When a ll fa ctors j
i
I
have received t h e ir r esp ec tiv e shares in the product, the
i
t o t a l product w i l l be completely exhausted, and there w i l l j
be nothing l e f t over for anyone to claim as a residue. I
There is , however, more to income d is tr ib u tio n
than the dynamics o f the economic system. The economically;
determined d is t r i b u t io n cannot therefore be regarded as
f i n a l . There are other facto rs to be considered. These
other factors r e la t e to the questions o f so c ia l and d i s
t r ib u t iv e j u s t i c e , inh eritan ce, purchasing power, employ
ment, s t a b i l i t y , and growth.
More than a century ago John Stuart Mill d i s t i n
guished between the laws and conditions of the production
o f wealth, which partake o f the character of physical
truths in that there is nothing optional or arbitrary in
them, on the one hand and the laws o f d is tr ib u tio n o f
wealth on the o ther, about which he saw nothing natural o f
in e v ita b le . In his own words:
It is not so with the D istrib u tion of wealth.
That is a matter o f human in s t it u t io n s o l e l y . The
things once th ere, mankind, individually. or c o l
l e c t i v e l y , can do with them as they lik e . They
can place them at the disposal o f whomsoever they
p lease, and on whatever terms. Further, in the
s o c ia l s t a t e , in every s t a t e except to ta l s o l i
tude, any d isp osal whatever o f them can only take
place by the consent o f s o c i e t y , or rather of
those who d isp o se o f it s a c t iv e fo rce. Even what
a person has produced by his individual t o i l ,
unaided by any one, he cannot keep, unless by the
permission o f s o c i e t y . Not only can so c ie ty take
it from him, but ind ividu als could and would take
it from him, i f s o c ie t y only remained passive; if
222
it did not e it h e r in te rfe re en masse, or employ
and pay people for the purpose o f preventing him
from being disturbed in the p o sse ssio n . The d i s
t r ib u t io n o f wealth, therefore, depends on the
laws and customs o f s o c i e t y . The rules by which
it is determined are what the opinions and f e e l in g s
o f the ruling portion of the community make them,
and are very d if f e r e n t in d iffe r e n t ages and
c o u n tr ies; and might be s t i l l more d i f f e r e n t , i f
mankind so chose.
C a p ita lis t Distribution
Of a l l p o ssib le d is tr ib u tio n s , t h e o r e t i c a l as well
as h i s t o r i c a l , it is the opinion o f th is author th a t the
c a p i t a l i s t d i s tr ib u t io n o f income is probably the most just,
or un ju st, o f them a l l . It can be regarded as being the
most j u s t because it can o ffe r the p r in c ip les o f natural
s e l e c t i o n , survival o f the f i t t e s t , and the b a s ic economic
laws in its j u s t i f i c a t i o n . On the other hand, it can be
regarded as being the most unjust because no known c i v i l i
z a tion has ever been plagued by such extreme in e q u a lit ie s
of income and wealth, with a ll its moral degradation,
economic e x p l o it a t i o n , and dehumanization of l i f e , as the
c i v i l i z a t i o n raised and sustained under the impulse of
c a p ita lism . During its h is to r ic a l development, income
d is t r ib u t io n under ca p ita lism has been devoid o f any sense
of s o c ia l j u s t i c e , compassion, or ben eficen ce. The only
c r i t e r io n for its determination has been the promotion of
c a p i t a l i s t i c production in situ a tio n s almost approaching
^John Stuart M ill, The P rinciples of P o l i t i c a l
Economy. (London: Longmans, Green, and Co., 1926), p. 200.
223
anarchy and ju n gle law. Its j u s t i f i c a t i o n has usually come
in the form o f dubious th e o r is in g o f the c h ie f advocates
o f the s o - c a lle d free and private e n t e r p r i s e - - t h e econo-
m is t s - - o r o f l e g i s l a t i o n passed by the friend s o f c a p i
ta lism in those august bodies o f law making which supposed
ly represented the common people but who had to own proper
ty if they wanted to vote in the s e l e c t i o n o f t h e ir
representat i v e s .
The income d is tr ib u t io n under c a p ita lism is not
questionable on moral and e th ic a l grounds only. H i s t o r i
c a lly speaking, it has a lso been resp o n sib le for many an
i l l of the c a p i t a l i s t economy i t s e l f . Some of its l i a b i l
i t i e s have been underconsumption, i n s u f f ic ie n c y o f the
aggregate demand, recessions and d e p r e ssio n s. To quote a
Yugoslav economist:
Privately owned economy generates an irration al
d is tr ib u t io n of income^ It is irra tio n a l because
a more equal d is tr ib u t io n o f income- - p o s s ib le in a
d if f e r e n t in s t it u t io n a l set-up--wouId increase
economic w elfa re. But it is irr a tio n a l for vet
another reason; it lowers the p o te n tia l productive
e f f i c i e n c y o f the economy. The volume of production--
and for that matter o f consumption--depends on an
e f f i c i e n t use o f a ll resources, including labour
resources. Now, labour resources are not given,
they have to be b u ilt up and they can be b u ilt up
in various ways. The most e f f i c i e n t s o lu tio n is
achieved when health, education and c r e a tiv e w ill
to work of the population are maximally enhanced.
Adequate s h e l t e r , proper d ie t and medical a tten d -
ance produce not only healthy b o d ies--a n a s s e t in
i t s e l f - - b u t , as psychological in v e s t ig a t io n s have
beyond any doubt e sta b lish e d , they a ls o f o s t e r the
development o f in t e ll e c t u a l c a p a c i t i e s . More equal
d is tr ib u t io n of income being l ik e ly to increase the
standard of health, it is d e s ir a b le , on economic
224
grounds. The same a p p lies to education. If the
market system is l e f t to operate uncontrolled, it
w ill cause a waste o f t a l e n t s , because not the
most promising children but children of parents
able to pay would get educated. The problem of
education is not exhausted by school attendance.
It has a much broader aspect in sharing the t o t a l
cultural t r a d it io n o f a given s o c i e t y . Again,
greater e q u a lity o f income is conducive to b u i ld
ing up more e f f i c i e n t labour force and, conversely,
inequality reduces s o c ia l m obility which, from the
economic view point, is undesirable lik e any other
reduced m ob ility o f r e s o u r c e s .2
S o c i a l i s t D istribution
The s o c i a l i s t ideal is "From every one according
to his a b i l i t y . To every one according to his need." In
an i d e a l i s t ’c sen se, considering the demands of s o c ia l j u s
t i c e , conditions o f economic production, and d ic t a t e s of
human compassion, it would be, in the opinion o f t h is
author, the u ltim ate which mankind could hope to a t t a in in
the d is tr ib u tio n o f the material conditions of l i f e . Any
ste p forward in the d ir e c t io n o f s o c i a l i s t d is tr ib u t io n is
tru ly a c o n str u c tiv e s t e p . A d is tin g u is h in g feature of
income d is t r ib u t io n under t h e o r e tic a l so cialism is that a l l
incomes, or almost a l l incomes, are compensations for work.
Insofar as p riv ate property in the means o f production
would be elim inated as a matter o f ideology and s o c ia l
p olicy, the phenomenon o f property income would disappear
9
Branko Horvat, Towards a Theory o f Planned Economy
(Beograd, Yugoslavia: Yugosalav In s tit u t e of Economic
Research, 196*0, PP- 2-3.
225
by d e f i n i t i o n . There would be, however, in te r e st payments j
upon the private savings o f the individuals d ep o sited with !
the state-ow ned-and-control led banks. But under the I
s o c i a l i s t forms o f legal and fin a n cia l o rg an izatio n o f
e n t e r p r i s e s , there would be of course no in te re st payments or |
dividends such as there are under c a p i t a l i s t i c forms o f
j o i n t stock -corp orate organization based on contributed
share c a p ita l or borrowing through bonds and debentures,
e t c . Thus we can say that s o c i a l i s t incomes would usually
be in the form o f earned income. Herein l ie s the strong
appeal o f s o c ia lis m . Only under so c ia lism would it be
p o s sib le to e lim in a te claims against s o c ia l income based
on ownership of land by the absentee landlord and o f plants,
f a c t o r i e s , and bonds, and stocks by unproductive c a p i t a
l i s t s and fin a n c ie r s or the private creators o f new money
and c r e d i t , i . e . , the private banks and investment com
panies. In t h i s sense, the s o c i a l i s t economy would be an
in te r e st le s s economy.
The c o n s t it u tio n s o f a ll the s o c i a l i s t s t a t e s sub
s c r ib e to the ideal that it is only through work that a
person w i l l , and ought to , be e n t i t le d to an income. Thus,
the C on stitution of the Union o f Soviet S o c i a l i s t Republics
S ta te s:
Art. 12. Work in the USSR is a duty and a matter
o f honour for every able-bodied c i t i z e n , in acco rd
ance with the p rin cip le: "He who does not work,
n e ith e r sh a ll he e a t." The p rin c ip le applied in the
USSR is that o f socialism : "From each according to
his a b i l i t y , to each according to his work."
226 |
The Constitution o f the Federal Republic o f |
!
Yugoslavia indeed goes a step fu r th e r. It not only pro
claims the "principle o f d is t r ib u t io n according to work"
but makes it the "Right and the Duty o f the working people,"
under its A r tic le 9, "To d i s t r ib u t e the income belonging to
the working organization and to provide for the d ev elo p
ment o f the material basis for t h e ir work . . . ; to meet
the working o r g a n iza tio n 's o b lig a tio n s to the so c ia l
community;" as part o f the (workers') s e 1f-management of
the s t a t e e n t e r p r is e s .
Yugoslavia has so far b u i lt the most novel and a t
t r a c t i v e form of s o c ia lis m . She p r a c tic e s what is d e s c r ib
ed as d e c en tr a liz ed or market s o c ia lis m and worker-
management of industry. If any country deserves the t i t l e
o f "industrial Democracy," it seems to be Yugoslavia. A
penetrating look into its d is t r ib u t io n a l p r in c ip le s , meth
ods, and problems has been provided by the Yugoslav
economist, Radivoj Davidovic. According to him "at the
present phase o f the development o f s o c i a l i s t economics,
the only app licab le prin cip le is the following":^
A system o f remuneration according to labor
which w ill take into account labor time, labor
in te n s ity , s k i l l and economies in the means of
production. And t h is means that everybody's
^Radivoj Davidovic, "D istribution in the S o c i a l i s t
Economy--Some P rincip les and Methods." Yuqoslave
Economists on Problems o f a S o c i a l i s t Economy, e d . Radmila
Stoja n ov ic (New York: Internationa 1 Arts and Sciences
Press, 1964), p. 163.
227
labor is reduced to the s o c ia l norm, to the
s o c i a l l y necessary time, or rather to an ab
str a c t expression o f t h i s tim e --to value, and
that remuneration should be e f fe c t e d according
to the value which a d e f i n i t e amount o f labor
generates, a f t e r the indispensable s o c ia l d e
ductions have been made.^
But Davidovic n o tic e s a propensity among workers,
on account o f h i s t o r i c a l co n trad ictio n s between labor and
c a p it a l, r is in g e x p e c ta tio n s, and op p o rtu n ities to make
d is tr ib u t io n a l d e c is io n s , to "desire to begin to liv e more
richly" and th e re fo re to s t r i v e "to have as much as possible
o f the to t a l product" which "ultim ately leads to e n te r p r ise
or so c ia l funds being d is s ip a t e d , slower or f a s t e r , in per
sonal incomes."'*
Davidovic th erefo re thinks that on account o f th e se
fa c to r s, the s o c i a l i s t income d is tr ib u t io n "Must have a
manifold economic-educational s i g n if ic a n c e and purpose:
1) to stim u la te the development o f personal
working a b i l i t i e s and q u a l i t i e s ;
2) to stim u la te the g r ea test p o ssib le econo
mizing o f the means o f production;
3) to stim u late the best p o ssib le q u a lity o f
production;
4) to develop the consciousness o f c o l l e c t i v e
property
With regard to the macroeconomic aspect of d i s t r i -
^ I b id .
^ Ib id .
6 1b id .
228
but ion according to labor in the s o c i a l i s t s o c i e t y , David
o v ic s t a t e s :
In s o c ie t y as a whole d is t r ib u t io n according
to labor can be e ff e c te d only according to the
p r in c ip le o f value price, i . e . , the p rice which
would comprise the so c ia l average expenditure
o f c a p ita l and labor, so that economic o r g a n i
z a tio n s receive the s o c i a l l y recognized value
o f product, o f which they g e t - - a f t e r the d e
duction o f the value of the resources s p e n t - -
what t h e i r labor has added as new v a lu e . A
general s o c ia l d is tr ib u t io n which did not r e
cognize in the means of production the "right"
to t h e ir share in income d is tr i b u t io n , would
by no means have a d e -stim u la tin g e f f e c t ; on
the contrary, it would in fact provide f u l l
p o s s i b i l i t i e s for implementing the p r in c ip le
o f d is t r ib u t io n according to labor.?
No s o c i a l i s t so c ie ty in theory or p r a c tic e has an
equal d is t r ib u t io n o f income. But every s o c i a l i s t s o c ie t y
t h e o r e t i c a l l y is e s s e n t i a l l y c l a s s l e s s and highly e q u a li-
t a r ia n . The d iffe r e n c e s in income are minimal. There is
a sense o f so c ia l and economic e q u a lity among a l l its
members. In fa c t, the s o c i a l i s t conception o f democracy is
primarily socio-econom ic rather than l e g a 1- p o l i t i c a 1 as
under c a p ita lism . A minimum s o c ia l standard o f liv in g is
a v a ila b le to everyone. A considerably greater range o f
s o c ia l s e r v ic e s is provided by the s t a t e fre e o f any charge.
Prices o f consumers' goods are so planned that various
s e c t io n s o f the population do not su ffe r d is p r o p o r tio n
a t e ly on account o f unchecked in f la t io n as is the case
under c a p ita l ism.
7 Ib id .. p. 165.
229
A comparative e v a lu a tio n o f income d is tr ib u t io n
under capitalism and so c ia lism has been made by Professor
Howard Sherman o f the U n iversity o f C alifornia:
Under p riv ate e n t e r p r is e , there is a very
wide range o f income d i s t r i b u t io n , including
large numbers o f individuals with very low
incomes, and a few with extremely high incomes.
This is condemned by those whose e th ic a l view
point c a lls for a complete e q u a lity of incomes
as a goal in i t s e l f . N ev erth less, from Marx
to Marshall most economists who have thought
and w ritten on the problem would argue that, at
our present level o f economic development and
o f individual psychology, it is necessary to
have a wide range o f income d is tr ib u t io n as an
incentive for the individual to produce more.
The real question comes when we ask e x a ctly how
wide t h is spread must be and what are the
sources and methods o f ob tain in g income by the
d iffe r e n t r e c ip ie n t s .
Under private e n te r p r is e the many small incomes
are earned for the most part by wage and salary
workers, while the r e l a t i v e l y few very large in
comes are received in the form of private p r o fit,
rent, or in te r e st on c a p i t a l . The contention of
Marxists is, of course, that the incomes o f the
holders of c a p ita l and other property are obtained
through the " ex p loita tio n " o f the wage worker,
that is , that the worker produces the product and
the owner o f c a p ita l r eceiv es the income from i t .
No attempt is made to reso lve th is question here.
Under c e n tr a lly planned so c ia lism there is, of
course, only wage income, and no return to private
individuals for the ownership or use o f capital and
property r ig h t s . Although income in the Soviet
Union is almost a l l composed o f wages and s a l a r ie s ,
it is important to note that the income d is tr ib u t io n
among wage earners is probably as wide in the Soviet
Union as in the United S t a t e s . On the other hand,
because of the e x is t e n c e o f property incomes, U.S.
income d is tr ib u t io n as a whole is far less equal
than the whole S o viet d i s t r i b u t i o n .
The wide range o f Soviet wage d is tr ib u tio n was
introduced by S t a lin as a d evice to encourage the
most p o ssib le production by workers. Considering
wages only, one must then compare in terms of one's
e th ic a l values the goal of increased national pro
duction versus the goal o f increased eq u ality of
230
income. S t a l i n ' s successors em phatically claim
to be reducing the amount o f income in eq u ality
both by reducing wage d i f f e r e n t i a l s and by in
crea sin g the percentage o f free public goods
provided by the government. They argue that
t h is is now p o ssib le because o f a higher level
o f economic development achieved in the Soviet
Union. Their announced goal is the free d i s
tr ib u t io n of a l l goods to the consumer, or at
le a s t o f a l l "basic" goods; but they are pro
ceeding in th is d ir e c tio n more than c a u tio u sly ,
at a very slow s n a i l ' s pace.
Yugoslavian market so c ia lism and a l l o f the
new proposals for d ecen tra lized s o c ia lism in
Eastern Europe provided for very wide wage d i f f e r
e n t i a l s , to be based in part upon the p r o f it r e
cord o f the e n t e r p r is e . In the Yugoslav case,
the workers in fa ct have the legal right to d i s
t r ib u t e a l l p r o f it s above taxes in che form of
wage payments. The Chinese, on the other hand,
have strongly condemned such p ro fit-b a sed
bonuses, and have argued for a wider use of
revolutionary id eological and non-material r e
wards. Of course, no one in Eastern European
e n te r p r ise s receives private p r o fit for him self
as a return on a cap ita l investment. On the
other hand, under any system of p ro fit-b a sed
bonuses or p r o fit-s h a r in g by workers, it is true
that two workers with the same occupation and
same s k i l l s may no longer earn the same income,
sin ce t h e ir incomes w ill in part be based on the
p r o f it s o f two d i f f e r e n t l y s itu a te d e n te r p r ise s .°
Islamic D istribution
S t r i c t l y speaking, a f t e r examining the lib er a l
theory o f s o c ia l j u s t i c e , hum anistically inspired d e c la r a
tio n s o f economic r ig h ts, and the s o c i a l i s t ideals of
d i s tr ib u t io n according to need, there seems l i t t l e which
Islamic s o c ia l philosophy can r e a lly add. But i f Islam has
anything o f value to o f f e r , it is e x a c tly in the area of
o
Howard J. Sherman, The Soviet Economy (Boston:
L i t t l e , Brown and Company, 1969), 63-6^.
231 i
d is tr ib u t io n of income and wealth rather than any other
aspect of so c ia l economic o r g a n iza tio n . This is so because;
the concept o f s o c ia l j u s t i c e in Islam is o f paramount
importance and supreme value in the right ordering o f
s o c i a l , p o l i t i c a l , and economic r e la tio n s and the i n s t i t u
tio n s of the Islamic s t a t e . The fin a l aim o f the national
s o c ie ty of the Islamic s t a t e is none other than the
establishment o f s o c ia l j u s t i c e in the comprehensive sense
o f the term. Equity in the d is t r i b u t io n of income is an
integral part of i t .
W e must th e re fo re begin with the concep tu alization
o f s o c ia l j u s t i c e in Islam. Islam prescribes e q u a lity and
fr a te r n ity (brotherhood) as the fundamental values to be
pursued and maximized in the community of Muslims. The
e q u a lity of Muslims d eriv es from the m onotheistic concept
of God. Being equal, Muslims are supposed to be brotherly
and fr a te r n a l. It must, however, be rea lized that behind
th is eq u a lity and brotherhood is the e s s e n t i a l fact o f the
commonality of f a i t h . Whether or not th is commonality o f
fa ith can create a s e t o f commonly shared v alu es, in a psy
chological and p h ilosop h ical sense, powerful enough to
su stain a corresponding system of s o c ia l m orality and
s o c i a 1-p o1i t i c a 1-and-economic in s t it u t io n s remains, at best,
a matter of hope. But ignoring a ll considerations regard
ing its implementation, le t us look into the concept of
Islamic so c ia l j u s t i c e i t s e l f .
232
Very few attempts have been made to t r a n s la t e the
p r in c ip les o f Islamic j u s t ice into its p a r tic u la r iz e d and
concretized forms in the so c ia l and economic spheres e it h e
by t h e o r e t ic ia n s or by adm inistrators. There were, how
ever, some pioneering e f f o r t s made in the very e a rly admin
is tr a tio n s o f the c a lip h s, e s p e c i a l ly o f Omar.
Recently a s i g n i f i c a n t e f f o r t has been made by an
Egyptian scholar o f the name o f Syed Kotb in his Social
Justice in Islam to provide a modern statement o f the
Islamic concept o f so c ia l j u s t i c e .
According to Kotb, "social j u s t i c e in Islam is a
comprehensive human j u s t i c e , and not merely an economic
j u s t i c e ; that is to say, it embraces a l l sid es o f l i f e and
g
all asp ects o f freedom."^ To be more s p e c i f ic :
Islam, then, does not demand a l i t e r a l e q u a lity
o f w ealth , because the d is tr ib u t io n of wealth d e
pends on men's endowments, which are not uniform.
Hence ab so lu te j u s t i c e demands that men's rewards
be s im ila r ly d i f f e r e n t , and that some have more
than o t h e r s - - s o long as human j u s t ic e is upheld by
the provision of equal opportunity for a l l . Thus
rank or upbringing, o r ig in or c la s s should not
stand in the way of any individual, nor should any
one be f e t t e r e d by the chains which shackle e n t e r
p r i s e . J u s tic e must be upheld a ls o by the inclu sion
o f a l l kinds o f values in the reckoning, and by
the fr e e in g o f the human mind completely from the
tyranny o f the purely economic values, and by the
r e le g a tio n o f these to th e ir true and reasonable
p la c e. Economic values must not be given an in
t r i n s i c a l l y high standing, such as they enjoy in
g
Syed Kotb, Social J u stice in Islam, t r . John B.
Hardie (Washington, D. C.: American Council o f Learned
S o cietie s, 1953), p. 24.
233 ;
those human s o c i e t i e s which lack a c e r ta in ty o f J
true va lu es, or which give to them too s l i g h t an
importance; in such conditions money alone be
comes the supreme and fundamental v a l u e . 10
The follow ing are the foundations on which Islam
e s t a b l i s h e s j u s t i c e :
1. Absolute freedom of consicen ce.
2. The complete eq u a lity o f a l l men.
3. The permanent mutual r e s p o n s ib ilit y o f society.^
Kotb's comments upon the last o f the above three
propositions are as follow s:
Thus Islam l e g i s l a t e s for mutual r e s p o n s ib ilit y
in s o c ie t y in a ll shapes and forms; these forms take
th e ir r is e from the b asic prin cip le that there is
an all-em bracing id en tity o f purpose between the in
dividual and s o c i e t y , and that l i f e in its f u lln e s s
is a l l in te r r e la te d . So Islam lays down a complete
lib e r ty for the individual, within lim its which w ill
not injure him and w ill not favor s o c ie t y at his e x
pense. It safeguards the rights o f s o c i e t y , and at
the same time s p e c i f i e s its r e s p o n s i b i l i t i e s on the
„ other sid e o f the balance. Thus it enables l i f e to
progress on a level and even path, and to a tta in to
the highest ends which can be served by the i n d iv i
dual and by s o c ie t y a l i k e . 12
In a manner of speaking, income d i s t r ib u t io n in
Islam w ill be allowed to be determined by the market
mechanism except that no income w ill be permitted to the
owners of capital in the form of in te re st payment. There
w i l l , however, be a return to capital depending upon its
venturesomeness. No fixed income w ill be guaranteed to the
10 Ib id .. p. 28.
^ Ib id .. p. 30.
^^ Ib id . , p. 68.
su p p liers of c r e d it as a p r e fe re n tia l claim . Islam pro
poses no p o s it iv e general theory of income d is t r i b u t io n . ;
S t r i c t l y speaking, it has no concept o f income. It looks i
at income from the standpoint o f stock concept--accumulated;
j
w ea lth --ra th er than flow concept the income stream over a
given period. No w o n d e r ,t h e r e f o r e , that Islam makes usual
references to the d i s t r i b u t io n o f wealth, not of income, ini
i
the s o c i e t y . It is probably on account o f t h is fact that
i
income taxation has not been provided for in Islam. The
singular most important source o f revenue of the Islamic
s t a t e is zakat i . e . , c a p ita l levy. The customary rate is
2-1/2%. Zakat serves two purposes: (1) it provides
revenue to the s t a t e and (2) it f a c i l i t a t e s the r e d i s t r i
bution and d e c e n tr a liz a t io n o f wealth. This is one o f the ;
two important devices which an Islamic economy would employ
to change the d i s t r ib u t io n o f income (wealth) in the
s o c i e t y . The other is Islam's law of inheritance. The
inheritance law o f Islam is regarded as the most j u s t and
progressive by Muslims. F irst o f a l l , it is against the
in s tit u tio n o f primogeniture and that is considered to be
its beauty. Next, those e n t i t l e d to inherit include the
surviving spouse or spouses (remember, a Muslim can have :
i
more than one wife), sons and daughters, parents, and some
other r e l a t i v e s . The a p p lic a tio n o f Law n e c e ssa r ily leads
to d iv isio n and su b d iv isio n o f the family e s t a t e and/or
wealth, funeral a f t e r fu n era l. This again f a c i l i t a t e s
235
r e d is t r ib u t io n and d e c e n tr a liz a tio n o f income (wealth)
over g en era tion s. This a lso keeps.wea1th from concentra- !
I
tin g in a group. i
Zakat and the Islamic inheritance law are therefore!
the c h ie f instruments at the disposal o f the s t a t e to bring;
about an e q u a lita r ia n s o c ie ty --o n e o f the fundamental goals!
o f the economic system o f Islam. To what exten t these
e f f o r t s would meet with success is e s s e n t i a l l y a matter of
an em pirical experiment. A th e o r e tic a l answer cannot be
c o n c lu s iv e .
Changing the D istribution o f Income
Even a t h e o r e t i c a l ly perfect d i s t r i b u t io n o f in- '
come is not n e c e ss a r ily acceptable in actual p r a c tic e . In
view o f the chosen so c ia l philosophy, changes in the
d i s t r i b u t io n o f income may be m o tiv a te d /e ffe c te d by s t a t e
p o lic y . To bring about a change in income d i s t r i b u t i o n ,
various a lt e r n a t e courses of policy and actio n can be
ut i 1ized .
These are:
1. An "organic" change in the fu n ction al d i s t r i
bution o f income.
2. A change in the personal d i s t r i b u t io n o f
i n come.
3. The use o f extra-economic means to o f f s e t a
change in the economic d is tr ib u t io n o f income.
236 !
j
Generally speaking, the correctio n (changing) of j
economic d is tr ib u t io n o f income as c r y s t a l l iz e d by the
market process becomes necessary when it is feared that the|
economic p ligh t of a c erta in s e c t io n o f population is miser
a b le . More so, when it is suspected that th e ir poverty
r e s u lt s from e x p lo it a t io n by other se c tio n s o f the popu
la t io n . In such circumstances, a r e d is tr ib u tio n o f income ;
in favour o f the poor is considered s o c i a l l y j u s t . Among
various d e v ices, taxation o f the rich to finance "wars on
poverty" is recommended as most e f f e c t i v e .
Islam puts a very great emphasis on the u tiliz a tio n !
o f extra-economic means to o f f s e t undesirable d is tr ib u t io n j
o f income in the s o c i e t y . It prescribes Zakat which is
j u s t i f i a b l e as "poor rate" in Islam. In fact a Muslim
would be p e r fe ctly within his r e lig io u s righ ts (payment of
zakat is a r e lig io u s duty of the Muslim next to his prayers
only) to give away to the poor d i r e c t l y the amount o f zakat
(2-1/2% on wealth holdings) instead of paying it to the
s t a t e treasury, sin ce its purpose is to help the poor.
Technically his o b lig a tio n to pay is to God and not to the 1
s t a t e . Besides th is o b lig a to ry and in s titu tio n a l ch arity , ;
a Muslim is urged to be c h a r ita b le to his poor and d e s t i
tu te brethen (remember Islamic brotherhood is a fundamental:
value) in any and every p o s sib le way.
E arlier we noted that s o c ia l j u s t i c e and the
economic se cu rity o f a ll are two o f the fundamental goals
2 3 7 j
o f an Islam ic economy. For t h i s , in the fin a l a n a ly s is ,
it is the r e s p o n s ib ilit y o f Islamic s t a t e to provide the
necessary means o f liv in g to every one. The Islamic s t a t e
is th erefo re a w elfare s t a t e . In a manner of speaking, in
other words, it is kind o f a s o c i a l i s t s t a t e .
The Quid- i-M i1l a t , late Liaquat Ali Khan, f i r s t
Prime M inister o f Pakistan who had a ls o been a great
advocate of the two-nation theory (that the Muslims o f
India c o n s t it u t e d a separate nation independent of se cu la r
India) which led to the p a r titio n of B ritish India, e x
plained the concept o f an Islamic economy "where a man gets
j u s t reward for his t o i l and where there are no p a r a s it e s ."
To that end, a government based upon Islamic p r in c ip le s
should end a l l " e x p lo ita tio n ." This he termed as "Islam ic
so c ia lism " . At a later date, the la te Prime M inister d e
clared: "It sh a ll be our endeavour to continue on these
s o c i a l i s t i c lin e s , for these are the same as Islam has
taught us". He put pa rticu lar emphasis on "food, c lo th in g
s h e l t e r , medical aid and education" to be provided to the
poor and to b e n e fit the common man g en e ra lly .
It is hard to infer from the above whether in the
concept o f Islamic so c ia lism , the s t r e s s is on Islam or on
so c ia l ism. On his part however, Mr. Liaquat Ali Khan b e
lieved in "no other "ism" except s o c i a l i s m . " ^
13
Mr. Liaquat Ali Khan quoted in Leonard Binder,
R eligion and P o l i t i c s in Pakistan.(B e r k e le y . C a lifo rn ia :
U n iversity o f C alifornia Press, l " 9 6 3 ) , pp. 1 o A - - 1 8 5 .
238
In his careful study o f r e l ig i o n and p o l i t i c s in
Pakistan, Professor Leonard Binder has very pointedly and
probably not without amusement, observed:
"Islamic economics" is one o f the newest
branches o f the lib eral a p o l o g e t ic . When the
lib er a l movement began about a century ago the
one thing Western c r i t i c s of Islam had not
claimed was that C h ristia n ity had produced a
good economic system. As a p o lo g e t ic gradually
became polemic the weaknesses and shortcomings
of uncontrolled ca p italism produced an ever
increasing opposition within i t s own fo ld . The
Russian Revolution and the Great Depression com
bined with the economic grievances of Indian
Muslims to produce a " s e lf - e v id e n t " argument
against capitalism w hile adding ammunition to
those who based th e ir arguments on the su p e r i
o r it y o f ideal Islam over the e v i l s of the real
West. But socialism is as much a product o f the
West as capitalism , and its aims hardly su ited
the needs of the str u g g lin g Muslim middle c la s se s
or the feudally oriented 'ulama1. A d i s t i n c t i v e
economic system was found to be the product o f the
Islamic laws on alm s-giving, inh eritan ce, the
denial o f usury, and the p r o te c tio n of the rights
o f private property. That the Islamic s t a t e was
responsible for the material w e lfa r e o f a l l its
c i t i z e n s was derived from the pension scheme of
Umar I in seventh-century Arabia. The resultant
which Liaqat called Islamic s o c ia lis m was no more
than capitalism plus s o c ia l s e c u r i t y plus God.l^
Later, however, in his inaugural address to the
International Islamic Economic Conference held in Karachi
in 19^9, Mr. Ghulam Mohammad, the then Finance M inister of
Pakistan, was more e x p l i c i t . Islam, he sa id , means,
"nothing other than so c ia l j u s t i c e " . He sta ted ten more
s p e c i f i c p rin cip les of the Islamic s o c ie t y o f which
economically relevant were:
^ Ibid .. pp. 185-186.
239
1. economic j u s t i c e
2. the democratic republican w elfare s t a t e .
3. Discouragement o f feudalism through laws of
inher i t a n c e .
k. the requirement that stockholders share lo sses
as we 11 as ga i ns .
5. the right to p riv ate property and other wealth
(but not too much o f i t ) .
6. public ownership o f u t i l i t i e s .
7. the condoning o f cooperative farming.
All through in Mr. Liaquat A l i 's system o f Islamic
so c ia lism as well as in the democratic repub 1ican w elfare
s t a t e o f Mr. Ghulam Mohammad, the fundamental goal is the
establishment of a w elfare s t a t e . The means recommended
appear to be, in a broad sense, no d if f e r e n t than the ones
fa v o r ite in a s o c i a l i s t s t a t e . These are o f course e x tr a -
economic r e d is tr ib u tio n o f income in the s o c i e t y . Interest
as a payment is to be abolished once for a ll in the Islamic
s t a t e . Those out o f jobs or incapable o f jobs have to be
provided f o r . Paradoxically enough, payment of fixed land
rent would continue in the Islamic economy.
Is There A S a t is fa c to r y Solution
to the D istr ib u tio n Problem?
If demands o f s o c ia l J u stic e or of marginal produc
t i v i t y were the only relevant considerations in formulating
a so lu tio n to the d i s t r i b u t io n problem, the problem would
240
be e a s i e r to handle. But there are other equally important,
in fact more important, c o n sid e r a tio n s. Most cru cial are
the questions of national defense, regional parity within
the nation, economic development, and, sometimes, ideo
lo g ic a l influences from the powerful n a tio n s. As Professor
Lucas has remarked:
Substantial p rin cip les o f D is t r ib u t iv e
J u s tic e cannot be formulated in short compass.
Too many other considerations are r e le v a n t.
M ilita ry e f f i c i e n c y and economic expediency
must bear upon what laws we enact for con
s c r ip tio n or ta x a tio n . The b e n e f it s conferred
by the Welfare State are to be j u s t i f i e d on
grounds o f Humanity, economic expediency, or
Public In terest, rather than o f D is tr ib u tiv e
J u s t ic e . For although we could regard some of
the non-monetary b e n e fits as f a c i l i t i e s analogous
to the maintenance o f law and order, provided by
the S tate and a v a ila b le to a l l , yet it would be
incoherent to regard moneys raised by taxation in
the same light as p r o fits or w in d fa lls to be shared
out among tne members o f the S ta te . Arguments for
the r e d is tr ib u tio n o f monetary incomes must be
arguments of Humanity, economic expediency, or
something e l s e ; but not J u s t ic e . Social Ju stice
is often taken to mean R ed istr ib u tiv e J u stic e :
but i f so, it is a contrad iction in terms. W e
should not attempt to s e t up an a b s o lu te ly j u s t
scheme for d is tr ib u t in g a ll good t h in g s . The
c r i t e r i a o f apportionment are too d iv e r se : and
the compromises required for the sake o f Freedom,
Humanity (in some a s p e c ts ), and other ideals pre
clude our ever achieving an ab solu te J u s tic e in
the d is tr ib u t io n o f goods. All we can say b r ie f ly
is that every apportionment of b e n e f it s and burdens
should be governed by the canon o f L eg a lity , and
should be carried out in s t r i c t accordance with
the l e t t e r of the law, but the content o f the law
i t s e l f is not determined by the p r in c ip le of
L ega lity , and may be c r i t i c i s e d , in another sense
o f J u stic e or Fairness, as being j u s t or unjust,
f a ir or u n fa ir. 15
R. Lucas, The P rincip les o f P o l i t i c s . (Oxford:
The Clarendon Press, 1966), pp. 2^9-250.
241
Somewhat sim ila r views have been expressed by
Professor Kenneth Boulding:
The e s s e n t i a l l y subordinate sta tu s o f so c ia l
j u s t i c e as a goal o f ration al p o l i t i c a l discontent
is illu s t r a t e d by the p r in c ip le that any group
w ill find it ev en tu ally u n p ro fita b le to r e d i s t r i
bute income toward i t s e l f at the cost even o f the
sm allest d e c lin e in the rate o f economic develop
ment. For any group which succeeds in such a
r ed istrib u tio n there w ill be some year in the
future beyond which it w i l l be worse o f f in an
absolute sense because it a f f e c t e d the i n i t i a l
r e d istrib u tio n in it s favor. The general con
clu sion seems to be that s o c ia l j u s t i c e is some
thing that we ought to have but that we should
not want too badly, or e l s e our craving for it
w ill dash it from our lip s and, in our eagerness
to snatch i t , we sh a ll s p i l l i t . 16
The problem o f u ltim a te d i v i s i o n o f income is cru
c i a l , complex, and many-sided. It touches the lives o f .
every man, woman, and ch ild in the s o c i e t y . In the liv e s
o f a very great majority (in fa c t it may very well be im
p o ssib le to find exceptions to t h i s general rule in the
contemporary s o c i e t i e s ) , income has become by far the single
most important fa c to r . The trend is only too lik e ly to
continue as the remaining p r i v ile g e s based on ca ste, creed,
b irth , race, or color p r o g r essiv ely d e c lin e and even tu ally
disappear with economic development, p o l i t i c a l democrati
z a tio n , and arrival of the mass consumption economies. In
the face o f a ll t h i s , it is d isa p p oin tin g to note that
1 c
Kenneth E. Boulding, Beyond Economics: Essays on
S ociety. Religion, and Ethics (Ann Arbor: The University
of Michigan Press, 1968), p. 222.
242 !
n o b o d y - - c a p it a lis t s , s o c i a l i s t s , Isla m ists--h as the f in a l j
so lu tio n to the problem o f d iv is io n of income. But we can :
a l l take heart in what may be regarded as the consensus o f
opinion among most reasonable people with regard to the
d is tr ib u t io n a l problems in the modern s o c i e t i e s on the
follow ing is s u e s .
1. A minimum standard o f food, c lo th in g , and
housing is the f i r s t requirement o f human e x is t e n c e and
th erefo re the right of every member o f s o c ie t y . There is
every basis to b e lie v e that the individual and family needs
in t h is respect can be q u ite accu rately determined.
2. People s u f f e r in g from i l l health through s i c k
ness or d is e a s e , physical in a b ilit y through accid en tal or
other injury, and permanent d i s a b i l i t y through p h y sica l,
p h y s io lo g ic a l, or mental incapacity or d e fe c t, have a moral
claim upon s o c i e t y at large to see that th eir sp ecia l needs
are humanely met.
0
3. The o ld , widows, the orphans, and the generally
unwanted such as the ones born out of wedlock and
abandoned in the s t r e e t , e t c . must be reasonably provided
for by the s o c i e t y if t h e i r own means are in s u f f i c i e n t or
simply n o n -e x is t e n t .
4. It must be rea liz ed and accepted that the un-
employed--hea1 t h y , h e fty , ab le, and w i l li n g - - a r e not always
unemployed because they are incompetent, i n e f f i c i e n t , or
lazy. (History has taught that lesson with cru elty and
243
trea ch ery , lik e everything e l s e she t e a c h e s .) It is there-;
!
fore the r e s p o n s ib ilit y o f the State to see to it that fu lh
employment o b ta in s, which alone can make it p o s sib le for
everyone to find and maintain a jo b .
If our purpose were merely to reproduce human l i f e ,
the a c tu a liz a t io n o f the above in any s o c ie t y would be
enough in i t s e l f to make it s o c i a l l y j u s t and economically
productive. But our goal being to e s t a b l i s h a Platonic
Utopia, or a Kingdom o f Heaven on Earth, or a tru ly
democratic, s o c i a l i s t , or Islamic s o c i e t y , people must be
enabled to do more than to e a t , drink, and be merry. The
r eso lu tio n o f the d is tr ib u t io n a l problems must, th erefore,
be aimed at so much more.
5. Fuller or f u l l e s t o p p o rtu n ities must be made
a v a ila b le for every individual in the s o c ie t y to develop
him self both as a person and as a role player in the s o c i
e t y . This, o f course, b o ils down to making a v a ila b le op
portunity for tra in in g o n e s e lf v o c a t io n a lly , professionally,
and ed u c a tio n a lly with due regard to individual capacity
and standard requirements which must be met to q u a lify
o n e s e l f .
6. A system of d is t r ib u t io n which fully recognizes
greater p ro d u ctiv ity , superior performance, and individual
e x c e lle n c e must obtain . It is necessary to motivate men to
actio n and to make them willing to be e n te r p r isin g to
assume r is k s , and to face u n certa in ty . This o f course
means to reward people unequally. But i f inequality is its
name, inequality we must have.
So far, we have talked about the in d iv id u a l--h is
needs, claims, and rewards--but what o f the so c ie ty ? The
s o c ie t y a lso deserves to remain so lv e n t, independent, and
n a tio n a lly so v ereig n . B esides, it is the Society which we
are holding resp o n sib le for everything stated above and a
lot more. For our purpose, we can equate Society and the
S ta te . W e must th e re fo re consider the claims of the State
upon the body o f in d iv id u a ls.
7. The S o ciety must be empowered to e x e r c is e a
claim upon its national income and wealth, to the exten t to
which it deems it necessary to meet its duty to defend the
country from extern al threat and aggression, its communal
r e s p o n s i b i l i t i e s toward the underprivileged (on moral
grounds), and it s other functions of maintaining law and
order, employment and s t a b i l i t y , the various so c ia l s e r
v i c e s , and development and growth.
One man, Karl Marx, suggested a solution to the
s o c i e t y ' s d is t r ib u t io n problem when he c r i t ic i z e d the
Gotha Programme in 1875. Marx's suggested so lu tio n is
presented here, not as a universal prescription, but as
something containing food for thought.
Marx wrote: I
Let us take f i r s t o f a ll the words "proceeds
o f labor" in the sense o f the product of labor;
then the c o -o p e r a tiv e proceeds o f labor are the
245
t o t a l s o c ia l product.
From t h is must now be deducted:
F ir s t , provision for replacement o f the means
o f production used up.
Second, add ition al portion for expansion o f
product io n .
Third, reserve or insurance funds to provide
a g a in st a c c id e n ts , d is lo c a tio n s caused by natural
c a la m it ie s , e t c .
These deductions from the "undiminished pro
ceeds o f labor" are an economic n e c e s s i t y , and
t h e i r magnitude is to be determined according to
a v a ila b le means and forces, and partly by compu
t a t io n o f p r o b a b ilit ie s , but they are in no way
c a lc u la b le by eq u ity .
There remains the other part o f the t o t a l
product, intended to serve as means o f consumption.
Before t h i s is divided among the in d iv id u a ls,
th ere has to be deducted again from it:
F ir s t , the general costs o f adm in istration not
belonging to production.
This part w i l l , from the o u t s e t , be very con
sid er a b ly r e s t r ic t e d in comparison with presen t-
day s o c i e t y , and it diminishes in proportion as
the new s o c ie t y develops.
Second, that which is intended for the common
s a t i s f a c t i o n o f needs, such as sch o o ls, health
s e r v i c e s , e t c .
From the o u tset th is part grows considerably
in comparison with present-day s o c i e t y , and it grows
in proportion as the new s o c ie ty develop s.
Third, funds for those unable to work, e t c . , in
sh o r t, for what is included under s o - c a l le d o f f i c a l
poor r e l i e f t o d a y . 17
Marx thought the problem o f personal d is t r i b u t io n
in the concrete sense a r is e s only a f t e r the above (or sim
ila r ) deductions have f i r s t been made from the t o t a l so c ia l
income, i . e . , gross national product. Thus labor, the c r e
ator o f v a lu e, is e n t i t l e d to only what is l e f t a f t e r the
economic needs (replacement and expansion o f c a p it a l) and
Karl Marx and F. Engels, Bas ?c W r it inqs on .
P o l i t i c s and Philosophy, e d . Lewis S. Feuer (New York:
Doubleday & Company, 1959), pp. 116-117.
246
s o c i a l- c u l t u r a l needs o f the s o c ie t y have been taken care
o f . As regards the d iv is io n of the remainder among the
workers, there would be in e q u a lit ie s and in ju s tic e s to be
gin w ith. These problems w ill be overcome with the develop
ment o f the true consciousn ess, worthy o f a communist
s o c i e t y . Marx wrote:
But these d e fe c ts are in e v ita b le in the
f i r s t phase of communist s o c ie t y as it is when
it has j u s t emerged a f t e r prolonged birth pangs
from c a p i t a l i s t s o c i e t y . Right can never be
higher than the economic stru ctu re of s o c ie ty
and the cultural development conditioned by i t .
In a higher phase o f communist s o c ie ty ,
a f t e r the en slav in g subordination o f the in
dividual to the d iv is io n of labor, and t h e r e
with a lso the a n t i t h e s i s between mental and
physical labor, has vanished; a f t e r labor has
become not only a means o f l i f e but l i f e ' s
prime want; a f te r the productive forces have
a ls o increased with the all-roun d development
o f the individual, and a l l the springs of c o
op era tiv e wealth flow more abundant1y--only
then can the narrow horizon o f bourgeois right
be crossed in its e n t ir e t y and s o c ie ty inscribe
on its^ banners: "From each according to his
a b i l i t y , to each according to his needs'."18
When a l l is said and done, one wonders i f there
r ea lly e x i s t s a so lu tio n to the d is tr ib u t io n a l problems o f
the s o c i e t y . If it does, it remains to be discovered.
Capitalism, so c ia lism , and Islam are equally w e l l - o f f or
b a d ly -o ff in t h i s resp ect.
18lbi d.. p. 119.
CHAPTER IX
IMPLICATIONS FOR THE ECONOMIC
ORGANIZATION OF THE
ISLAMIC STATE
Now that our comparative study o f the fundamental
a sp ec ts o f the economic systems o f c a p ita lism , so c ia lism ,
and Islam is over, the question which n atu ra lly a r is e s is
t h i s : What broad guid elines can be recommended for
p r a c tic a l so c ia l and economic action in order to e s t a b l i s h ;
an Islamic economy?
In order to answer th is question we w ill f i r s t
s t a t e the d ir e c t iv e p r in c ip les of Islamic s o c ia l philosophy.
These would appear to be:
1. The Islamic s t a t e is a kind o f w elfare s t a t e .
The in s t i t u t i o n of so c ia l j u s t i c e is a major r e s p o n s ib ilit y
of the s t a t e .
2. The Quran lays down the c a te g o ric a l and fin a l
a b o lit io n o f Riba, i . e . , a return upon the lending and bor
rowing of fin an cial cap ita l unless such c a p ita l be sub
scrib ed in the form of share capital with the assumption o f ;
business r is k . The idea is to e s t a b l i s h an i n t e r e s t - f r e e ,
s o c i e t y .
3. The Islamic community, hence the s t a t e , has the;
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248
communal o b lig a tio n to provide for the underprivileged, or !
those unable to provide for themselves on account of phys- ;
ical d i s a b i l i t y , mental in cap acity , old age, e t c .
k. To meet its o b l i g a t i o n s , the Islamic s ta te has
the moral right (t r a n s la t a b le into r a tio n a 1 - le g a 1 author
ity) to subordinate the in te r e st of the individual to that
o f the community. It can a l s o tax ( c o l l e c t the Zakat, etc.)
rich members to secure means to meet the genuine needs of
the less fortunate brethren.
5. The Islamic economy is neither s o c i a l i s t i c nor
c a p i t a l i s t i c in the conventional sense o f these terms. It ;
is therefore a mixed economy. But the prime importance
attaches to .Isla m and not to c a p ita lism or so c ia lism per
s e . As such, Islam permits the mixing o f the in s titu tio n s
o f capitalism and so c ia lism with i t s e l f but only to an e x
tent to which they are compatible with its own concepts.
If we use the above as the imperative conditions o f
the Islamic p o l i t i c a l economy, it can be e a s i ly seen that
there are some radical im plications for the economic organ
ization of the Islamic s t a t e , e s p e c i a l ly in the spheres of
1) d is tr ib u tio n of income, 2) the fin a n cia l system, and
3) organization of b u sin e ss . The idea of communal (sta te )
responr -b i1ity would a ls o suggest the so c ia l se rv ic es as
one more area o f considerable s t a t e a c t i v i t y .
The s t a te will so determine the fin a l d iv isio n of
income as to bring forth s o c ia l j u s t i c e . Unearned incomes
249
w i l l be reduced to the minimum l e v e l. There would be no
in te re st and/or chance earn in gs. There would be property
incomes but mainly from r e sid e n tia l properties and a g r i c u l
tural lands not occupied by the owner h im se lf. These would
be allowed in the form o f rental income.
There is obviously some co ntrad iction in allow in g
rental on the rented out property but banishing in te r e st on
loaned out c a p i t a l . A great deal o f extra-econom ic d i s
tr ib u tio n or r e d is tr ib u tio n would be carried out at the
hands of the s t a t e . L e g isla tio n would be passed in con
formity with the Islamic laws to f a c i l i t a t e the d i v is io n
and d e c e n tr a liz a t io n of wealth through in h erita n ce. A
Muslim is not authorized to determine the shares o f various
b e n e f ic ia r ie s according to his own personal w i l l . A con
sid era b le amount o f his holdings is d is tr ib u te d into the
predetermined proportions accruing to s p o u s e (s ), sons, and
daughters and o th e r s . Ordinarily speaking, the s t a t e , not
even the Islamic s t a t e , cannot l e g i s l a t e contrary to these
p r e s c r ip t io n s . As for example, the share o f a daughter is
supposed to be one half o f the share o f a son. While Islam
does not require e q u a liza tio n o f incomes, given its so c ia l
and p o l i t i c a l outlook, the e x i s t i n g in e q u a lit ie s (say) o f a
c a p i t a l i s t i c s o c ie t y w ill be d r a s t i c a ll y reduced. But the
Islamic s o c i e t y is not the c l a s s l e s s s o c ie t y o f so c ia lism
e i t h e r .
The im plications of Islamic so c ia l philosophy for
the organization o f the fin a n c ia l system are tru ly r a d ic a l.
In the absence of commercial lending (which is for example
done under ca p italism by the commercial, in d u str ia l, and
investment banks and other fin a n c ia l in s t i t u t i o n s ) on an
in terest b a s is, it is hard to see how the needs o f business
and industry can be met through in te r e st less loans between
friends and r e l a t i v e s . For one thin g, friends and r e l a
t i v e s , or for that matter brothers in f a it h , are rarely,
if ever, so loving or brotherly or f a ith fu l as to risk
th e ir savings without the ex p ectatio n of any return to
them. Even if one's friend s and r e la t iv e s were i d e a l i s t i c
enough, they may not be s u f f i c i e n t l y rich. To use
Keynesian language, people must have something (even when
the sa fe ty of funds is ensured) to e n tic e them into parting
with l iq u i d i t y . If t h is "something" is only some sort of
an i d e a l i s t i c sense o f brotherhood, then, to say the le a s t,
it is a very poor m otivation indeed. In a ll probab ility
it w ill f a il to su stain the fin a n c ia l l i f e of an industrial
s o c i e t y . It may very w ell have worked (though it is doubt
fu l) during the caravan economy o f early Islam in Arabia,
but it is wholly irreleva n t in contemporary l i f e .
The only a lt e r n a t iv e to make the in t e r e s t le s s
economy functional seems to be that the s ta te should d e
clare i t s e l f as the lender o f last r eso rt. This would
mean that if a bonafide c i t i z e n o f the Islamic s ta te should
f a i l to secure an i n t e r e s t - f r e e loan from amongst his p r i-
251 i
vate c i r c l e o f f r ie n d s , r e l a t i v e s , and brethren in f a i t h , j
he could e a s i l y go and knock at the doors o f the s t a t e and
be able to o b tain the necessary funds. The far-reachin g
im plications of such a proposition are obvious. To be able
to discharge its o b lig a tio n , the s ta t e , or the government
o f the Islamic s t a t e , w ill have to be v ir t u a lly the s o le
fin a n cia l and monetary in s t it u t io n in the s o c i e t y . It w i l l
o f course control monetary p olicy and credit crea tion
(which every government, d ir e c t ly or in d ir e c tly , does) at
the highest l e v e l . It w ill a ls o control ( p r a c t ic a lly own)
the banking system, sto c k exchanges, and, in f a c t , the
whole spectrum o f fin a n cia l in s tit u tio n s and instruments.
The Islamic s t a t e w i l l have to undertake the w holesale
n a t i o n a l i z a t i o n / s o c i a l i z a t i o n of finance and c r e d it , practH
c a lly as sweeping as that of the s o c i a l i s t , or b e tte r s t i l l :
the communist, s t a t e .
On the f i s c a l plane, the Islamic s t a t e being a w e l
fare s t a t e w ill engage in revenues and expenditures o f
great v a r ie ty and magnitude. The theory o f the Islamic
s t a t e provides the i n s t it u t io n o f the Ba it-a l-M a 1. This
i n s t it u t io n w i l l function both as the s t a t e treasury and
i
what may be described as the Social Fund from which w i l l be;
financed a l l the s o c ia liz e d s e r v ic e s .
The problems connected with finance have some s e r i
ous im plications for the organization of b u sin ess. B u si
ness can be organized a long proprietary, partnership, co-
0
252
o p e r a tiv e , and j o i n t stock lin e s . But j o i n t stock compa
nies and corporations w ill be d r a s t i c a l l y reorganized.
Islam recognizes freedom o f occupation and the
i n s t i t u t i o n o f private property. An individual is, t h e r e
fo re, at lib erty to e s t a b lis h a s e l f owned and co n trolled
s o l e p ro p rieto rsh ip --a so le trading b u sin ess.
A partnership business can be organized in various
ways. F ir s t, one partner may provide c a p it a l; another,
labor and the two may share p r o fits and losses e q u a lly .
Second, a l l partners may subscribe equal or unequally.
Third, partnerships of professional m en--accountants,
lawyers, doctors, e t c . may be formed to practice j o i n t l y .
Again, no partner is to be paid a fixed and predetermined
return on his capital for that would be tantamount to in
t e r e s t payment. Cooperative consumers' sto r es or producers'
undertakings can be organized as usual. But what about
corporations? This is where we have the Gordian knot again.
The Islamic economy would allow the formation o f a j o i n t
sto c k company on one condition alone. No fixed return to
/ |
any provider of c r e d it. The cap ital would s t r ic t ly , be ;
venturesome. In consequence, a public company or a corpo- j
ration could only issue to the general public ordinary
shares--common stock. The idea is that the ordinary/common
stockholders would share both in the p r o f it s as well as the
lo sse s o f the company. They would not be e n t i t l e d to any
fixed return. The company would not be'-author ized to issue
253
any kind of preference shares for they would give pre
ference stockholders a right to claim a fixed return. Nor
could the company issue debentures--return on which would
be the same thing as an in te re st rate and therefore
perm issible in no s i t u a t i o n . The e n tir e capital o f public
companies and corporation would have to be equity c a p i t a l -
owners' contributed and paid-up c a p i t a l. Borrowed funds
would be i n t e r e s t - f r e e loans from the State Bank and/or the
Public Treasury.
T echnically speaking, neither there is a th eoretica l
guide line nor an h i s t o r i c a l precedent to delim it the
boundaries o f the two se c to r s v iz; public and p r iv a te.
Considering however the m o r a lis t ic basis o f production and
consumption, the nature o f the fin a n cia l system, and the
manner o f business org a n iza tio n , it seems highly probable
that most economic and business a c t i v i t y and en ter p r ise of
national or intern ation al dimensions would have to be under
taken by the public s e c t o r . This would c e r ta in ly be the
case for heavy in d u str ies, public u t i l i t i e s , and i n t e r
national trade. Finance would be a nation alized industry.
Other in d u str ie s, too, would be subjected to some degree o f;
s ta te intervention and gu id a n ce/co n trol. Most l ik e l y , the
d i s t r i b u t iv e industry would be le f t to the private se c to r
as a rule. Household h an dicrafts, cottage industries and
a lso some small s c a le industries would be the main o u t l e t s
for free and private individual i n i t i a t i v e and e n t e r p r is e .
254
What about big business? Big business requires big
fin a n ce. In most s itu a tio n s it would require in s ti t u t i o n a l
c r e d i t . Probably the lio n 's share o f it would come e ith e r
from the governmenta1ly owned and c o n tr o lle d State Bank or
the Public Treasury. This would make government a s t o c k
holder, Co-owner, and it seems only too natural to e x p e c t/
fear that government would lik e to play an a c tiv e role in
the management of the business. The march o f management
along its tr a d itio n a l managerial prerogatives would, t h e r e
fore, be c a lle d to a halt which is the same thing as to
r e s t r i c t the freedom and judgement of the private s e c t o r .
It would seem that the Islamic economy has a great
deal in common with both capitalism and s o c ia lis m . With
c a p ita lism it shares the in s tit u tio n of p riv ate property in
the means of production and d is t r ib u t io n , but only at a
moderate l e v e l. W e have already seen that public ownership
and control is almost inevitable in big finance and big
b u sin e ss. With so c ia lism , the Islamic economy shares the
idea o f e q u ita b le and f a ir ly equal d i s t r i b u t i o n , but not
q u ite to the c l a s s l e s s extent of the s o c i a l i s t id e a ls .
There seems to be no basic d iffe r e n c e between the range of
s o c ia l s e r v ic e s o f the Islamic s ta t e and those of the s o
c i a l i s t s t a t e , or, for that matter, a w elfare s t a t e o f the
popular v a r ie ty . The Islamic s t a t e , however, does not pos
se ss the s o c i a l i s t enthusiasm and the crusading s p i r i t to
end a l l " exploitation " through applying the ru le. "From
each according to his a b i l i t y . To each according to his
need" a b o litio n of private property or some such formula.
There is enough o f c a p i t a l i s t i c m en ta lity, or perhaps con
sciou sn ess is a better word, in the system o f the p o l i t i c a l
economy of Islam to preclude a l l the ideolog ical ex cesses
o f s o c i a 1ism.
The Islamic economy is n eith er c a p i t a l i s t i c nor
s o c i a l i s t i c . It is perhaps best described as a "command
economy." The b asic commands are those o f God Almighty.
They are embodied in the Holy Quran. Next are the sayings
o f Mohammad. The two c o n s t it u t e the Shariah--the funda
mental law of the Islamic s t a t e . H i s t o r i c a l s p e a k i n g ,
the p r a c tic es o f Mohammad's f i r s t four successors and later
Muslim j u r i s t s have a lso a tta in ed considerable authority in
the Islamic cu ltu re. In f a c t , at the hands o f these
j u r i s t s , Islam became a closed system with l i t t l e room for
new o r ie n t a t io n s , in te r p r e ta tio n s, and developments. The
harmful e f f e c t of th is i n f l e x i b l e legalism has been the
loss of the dynamic q u ality o f Islam. It is however in the
nature o f legal commands (As someone put it: "The Lord
gave us commandments- -He d id n 't mention amendments.") that
they f a i l to keep pace with the changing r e a l it y o f s o c i a l ,
p o l i t i c a l , and economic fo r c e s . Legal systems (the same in
fact holds for a ll c o n s t it u t io n s ) are invariably (but
j u s t l y ) preoccupied with m aintaining the statu s quo. This
obviously holds back so c ia l progress and h is t o r ic a l develop
256
m ent.
How can a developmental schema be f i t t e d into the
supposedly etern a l commands of Shariah is, in the fin a l
a n a ly s is , the key qu estion . A French scholar has sta te d :
Generally speaking, Islamic m entality is known
to be unfavourably disposed towards the d e v e lo p
ment o f the s p i r i t of e n ter p r ise and the a c t i v i t i e s
o f a category of "go-ahead" business men, which
Schumpeter r ig h tly describes as the basis of the
c a p i t a l i s t system.
In our opinion t h is explains why the entrepreneur
(or "middle-man"), described by Schumpeter as the
moving s p i r i t behind the birth and e v o lu tio n o f
Western ca p ita lism , does not, p r a c tic a lly speaking,
e x i s t in Islam. For up to recent times industry in
Islam has been in great measure in the hands o f
f o r e ig n e r s . And in s p i t e of the e f f o r t s o f d i f f e r e n t
governments, the w e ll- t o - d o Muslims have fought shy
o f in v estin g t h e ir cap ita l in industrial e n t e r p r is e .
But there are other reasons for t h is s t a t e o f a f f a i r s
- - c e r t a in factors in Muslim m en tality.
Thus Islam, which is not very favourable towards
i n d i v i d u a l i s t i c conduct, is d e f i n i t e l y opposed to
the s p i r i t o f cap italism based on the lure o f risk ,
and the d e sir e for monetary gain and power, which
was the b asis of the Western economic r e v o lu tio n .
This op p osition is not only m o r a l--it is inscribed
in the law J
All t h i s seems to imply that economic development
w i l l have to be planned, i n i t ia t e d , and conducted by the
government o f the Islamic s t a t e i t s e l f . There is nothing
p a r tic u la r ly peculiar about th a t. In fa c t, in the con
temporary s e t t i n g , whatever the persuasion o f a s o c i e t y ,
V . Ulgener, "Monetary Conditions o f Economic
Growth and the Islamic Concept of In ter est," The I s 1 amic
Review. Vol. 55, No. 2, September, 1967, pp. 23-2A.
257
governmenta1ly executed development appears to be the only
sure method anyway.
CHAPTER X
SUM M ARY AND CONCLUSION
Summary
In the introductory chapter we stated our problem
as being the examination o f the broad p r in c ip les o f the
system o f p o l i t i c a l economy which may be regarded as appro
priate for the contemporary Islamic s t a t e .
The chapter on Islam presented a d octrin a ire t r e a t
ment of Islam as a r e l i g i o n . It was pointed out that Islam
c o n s is ts of the f iv e b a sic p i l l a r s , i . e . , (1) f a i t h , (2)
prayers, (3) f a s t i n g , (4) t i t h e (z a k a t). and (5) p ilg r im
age. W e discu ssed the a t t r ib u t e s of the D ivinity and the
function of Prophecy in Islam. W e a ls o discussed the e s
se n tia l message o f the Quran and the a ttitu d e o f Islam t o
ward other r e l i g i o n s . It was pointed out that the Quranic
message was e tern a l and universal and that Islam looks at
all other r e lig io n s with a sense of tolerance, e q u a lity ,
and reverance. Insofar as God's true r e lig io n is one, a l l
true prophets--Abraham, Moses, Jesus, Mohammad--have taught
the same re 1ig io n - - I s 1 am. It was, however, pointed out
that D ivinity and Humanity in Islam are so d i s t i n c t l y
unique that they do not mix. This c o n s titu te s the very
basis o f the Islamic conception of monotheism--unity of
258
259
R e a lity . W e a lso pointed out the im plications o f the I s
lamic conception o f monotheism for the s o c ia l philosophy
o f Islam. These implicat ions are unity of mankind, indiv-
i s i b i l i t y o f humanity, community o f b e lie v e r s , e q u a lity ,
f r a t e r n ity , and j u s t i c e .
The chapter on Islamic s o c ia l philosophy presented
the h isto ry and theory of s o c ia l and p o l i t i c a l philosophy
in Islam. The so c ia l philosophy o f Islam, in the later
chapters, provided a basis for the d is c u ssio n of the
p o l i t i c a l economy o f the Islamic s t a t e . It was pointed out
that the Muslim p o l i t i c a l philosophers drew h eavily upon
the Greek p o l i t i c a l thought. But wherever there was a con
f l i c t between Greek philosophy and the injunctions o f the
Quran and Sunnah, the Muslim thinkers always showed a d e
f i n i t e preference for the ideals o f Islam. Thus, the Is
lamic s t a t e always con stitu ted the Ideal S ta te . W e noticed
one exception to the Platonic t r a d it io n in Islamic h is to r y -
the theory o f the power-state as formulated by Ibn Khaldun
in the lig h t of h is t o r ic a l experience and s o c io lo g ic a l
evid en ce. But, for Ibn Khaldun too, the only j u s t and idea
rule was the one based on the Quran and Sunnah and not on
the power element.
In due course, both the p h ilo s o p h ic a lly inspired
and the s o c i o l o g i c a l l y induced s o c i o - p o l i t i c a l thought in
Islam d eclined and even tu ally disappeared by the end of the
14th century. For th is disappearance o f the philosophical
260
■V
thought and s c i e n t if i c t r a d it io n , the r e s p o n s ib ilit y is o f
O
the Mus1im re 1igious culture i t s e l f . It inhibited and
scandalized p h ilo so p h ic sp eculation to a point. where it
could not p o ssib ly su r v iv e . The era o f h isto ry, p o l i t i c s ,
and the "New Science o f Culture" which Ibn Khaldun so b r i l
lia n tly inaugurated with his monumental Muqaddimmah ended
with his own death. The painstaking pursuit o f knowledge
which involved d i s t i l l a t i o n o f wisdom from h is t o r i c a l and
empirical data simply did not s i t well with Ibn Khaldun's
contemporaries or su c c e s so r s. It is doubtful if he was
read in his own day.
In the chapter on economic organization, the arch
types of c a p ita lism and so c ia lism were presented. W e a ls o
provided a sketch of the economic system of Islam by h ig h
ligh tin g it s b a sic fe a tu r e s.
The chapter on in te r e st provided an exp o sition o f
the nature and s i g n if i c a n c e o f interest under Islam, cap
ita 1 ism, a n d " s o c i a T i s m T h e ' doct'ri n'e;'*df,v ri^aj'''(i?-nte*re-S’ tv).:.:-in
Islam, leading economic th e o rie s of interest under c a p i t a l
ism, and the concept o f the accounting rate of interest
under so c ia lism have been d iscu ssed.
The chapter on ca p ita l attempted to describe the
role of c a p ita l in the productive process, the place and
scope of ca p ita l theory in economics, and presented the
capital and investment th e o r ie s under capitalism , s o c i a l
ism, and Islam. An attempt has been made to h ig h ligh t the
problem s0and processes o f capital a llo c a t io n under an in-
t e r e s t l e s s s it u a t io n which is to prevail under the d ic t a t e s
o f Sharla in the Islamic s t a t e .
The chapter on’ cap ita l accumulation pointed to the
h i s t o r i c a l experience of one cu ltu re, i . e . , Western Chris
tendom, in respect of the accumulation o f c a p i t a l, which
has been d ir e c t ly responsible for the m aterial progress of
the West. W e se le c te d a discu ssion of the well known Weber
t h e s i s which attempts to describe the cru cial role which
the Protestant e t h i c has played in the promotion of c a p i
ta lis m inp articu lar and economic r a ti o n a li t y in general.
In the opinion of the present w riter, the Muslim culture
has lacked, in the h is to r ic a l sense, a counterpart to the
C a l v i n i s t i c s p i r i t . The d iscu ssion has been conducted
wholly in h is t o r i c a l and s o c io lo g ic a l terms. It has noth
ing whatsoever to do with the r e lig io u s teachings of Chris
t i a n i t y and Islam per s e . By no means a r e f le c t io n is
intended that the Christian culture is predominantly
m a t e r i a l i s t i c and the Islamic culture i d e a l i s t i c .
The chapter on the d is tr ib u tio n o f income discussed
-the comparative so lu tio n s to the problem of d is tr ib u tio n
under ca p ita lism , socia lism , and Islam. It has been
pointed out that there is no economic n e c e s s ity for a par
t i c u l a r pattern o f d is tr ib u tio n of income and wealth among
c la s s e s or in d ividu als. A so c ie ty has a wide latitu d e in
a r r iv in g at so lu tio n s of its d is tr ib u t io n a l problems. It
is , however, conceded that there is no s a t i s f a c t o r y s o l u
tio n to the problem o f d is tr ib u t ion--at least not y e t.
Conclus ion
The o b je c tiv e o f the study was to provide an expo
s i t i o n of the t h e o r e t ic - s y s t e m ic framework o f an economic
system based primarily on the teachings of Islam. Insofar
as no contemporary economy can be considered an Islamic
economy, we could not possibly draw upon the h is t o r i c a l
experience and/or the empirical data o f such an economic
s o c i e t y . To conduct our inquiry, we adopted the procedure
of formulating t h e o r e t i c a l l y p la u sib le so lu tio n s to the
b asic economic problems within an e s s e n t i a l l y Islamic
framework and comparing and con trastin g them with those of
the economic th e o r ie s of cap italism and so c ia lism .
The c a p i t a l i s t i c economic theory assumes an i n s t i
tu tio n al framework of free and private en ter p r ise in e c o
nomic a ff a ir s and a wide range of individual freedom in
so c ia l and p o l i t i c a l m atters. It therefore produces a
price system which is automatic, spontaneous, and s e l f
regu latin g. The c a p i t a l i s t i c economic system conducts i t
s e l f on the basis o f a price (market determined) for a ll
outputs and inputs. Economic action s need not be d irected
from an external source. Economic d e c isio n s are in d iv id
ual i s t i c a l l y se lf-m o tiv a te d and rep resen tative o f maximiz
ing behavior. This is the essence o f r a tio n a lity under
cap i t a 1i sm.
The s o c i a l i s t i c economic theory assumes the p r io r
ity o f the c o l l e c t i v e good o f the s o c i e t y . The economic
system submits to a "General W ill." The emphasis is on the
s o c i a l i z a t i o n , and not in d iv id u a liz a tio n , of the economic
p r o cesses. The s o c i a l i s t s t a t e may a b o lish or r e s t r ic t
private ownership in the means o f production, payment of
in te r e st on a ll or certain forms of loans, and private con
sumption of goods and se r v ic e s in c er ta in walks o f l i f e .
All t h is and more may have to be accounted for by the
s o c i a l i s t economic theory. But it need not have any "sacred
cows." An economic so c ie ty based on the s o c i a l i s t social
and p o l i t i c a l philosophy can be p e r fe c tly i n d iv i d u a l is t ic
and f a i r l y free of r e s t r a in t s .
The Islamic economic theory has certa in fundamental
p o stu la tes which it cannot v i o l a t e . These p ostu lates are
the Quranic injuctions with regard to so c ia l j u s t i c e . The
most s i g n if ic a n t of these are 1) the c a teg o rica l a b o litio n
o f in te r e s t, 2) p rio rity o f community in te re st over the
in d iv id u a l's and 3) r e s p o n s ib ilit y o f the s ta t e to provide
s o c ia l and economic se cu rity to a ll the members o f the s o
c i e t y .
As compared to the c a p i t a l i s t economy and the s o
c i a l i s t economy, the economy of Islam is under many more
r e s t r a i n t s . The p o l i t i c a l economy o f the Islamic sta te
must develop devices to resolve its a l lo c a t io n a l and d i s -
264
trib u tio n a l problems, e s p e c i a l l y the ones connected with
capital (economic as well as f in a n c ia l) in the i n s t i t u t i o n
al absence of i n t e r e s t . But the lo g ic o f economic decision s
demands the accounting for the cost o f capital both for
e f f i c i e n c y and r a tio n in g purposes. T heoretically speaking,
the only other a v a ila b le so lu tio n s are the techniques which
use the recoupment period and/or an accounting rate of in
terest.. Both methods are much in use in s o c i a l i s t economies
It is only in the sense of a b olish in g interest as a source
of private income that the Islamic economy can function as
an in terest less economy. It seems u n lik ely that a modern
developing economic s o c i e t y can function under these con
dition s without n a t i o n a liz in g , at le a s t, big business and
commercial and in d u strial c r e d i t . The role and p a r t i c i p a
tion of the s ta te would th erefore be on a large scale
indeed i f an Islamic economy is to become a going concern.
Social j u s t i c e in Islam, as under c a p it a 1ism and
socialism , is an e l a s t i c as well as a treacherous concept.
It is, however, c e r ta in that the Shar ?a demands that under
the influence of the Islamic notions of equality and b ro
therhood the community as a whole musit become responsible
for the lot of those who because of physical or so c ia l han
dicaps cannot make it on t h e ir own. Islamic laws are q u ite
e x p l i c i t in respect o f ta x a tio n , accumulation of wealth,
and inheritance. The c h ie f o b je c tiv e is to keep economic
riches from co n cen tra tion . The community's wealth must
265
continuously remain in communal c ir c u la t i o n . All must
share in it in a ju s t fashion.
The s o c ia l philosophy o f Islam e n v isio n s an economic
s o c ie t y based on a wide ranging s t a t e d ir e c tio n o f and par
t i c i p a t i o n in the economic, commercial, and fin a n cia l
sp h eres. The op p o rtu n ities for private e n te r p r ise are open
insofar as and to the extent to which it does not lead to
e x p l o it a t i o n and in ju stic e in the s o c ia l and economic r e
la tio n s of the c itiz e n r y o f the Islamic s t a t e .
In a word, the name of the game ( i f such an e x p r e s
sion be allowed) is j u s t i c e - - s o c i a 1, p o l i t i c a l , and econom
ic . The production r e la tio n , market o r g a n iz a t io n s , and
d is tr ib u t io n a l devices must be so devised and conducted as
to maximize s o c ia l j u s t i c e .
Pol icy Implicat ions
Saint-Simon was right when he said: "The progress
o f economic conditions n e c e s s ita t e s that philosophy pass
into s o c ia l theory; and so c ia l theory is none other than
p o l i t i c a l e c o n o m y . K a r l Marx advised that "the anatomy
o f the c i v i c s o c ie t y is to be found in p o l i t i c a l economy."^
^Quoted by Herbert Marcuse, Reason and Revolution:
Hegel and the Rise of Social Theory. (London: Rout ledge and
Kegan Paul, 1968), p. 330.
^Karl Marx, A Contribution to the Critique of
Pol it ical Economy, tran s. N. 1. S ton e, (Chicago: Charles H.
Kerr and Company, 1904), p. 11.
o
266
Professor Karl Popper o f f e r s a r a d ic a lly d iffe r e n t approach:
A d i r e c t ly op p osite view is implied in the
p o sitio n we have reached in our a n a ly s is . It
considers p o l i t i c a l power as fundamental.
P o li t i c a l power, from t h is point o f view, can
control Economic power. This means an immense
extension o f the f i e l d o f p o l i t i c a l a c t i v i t i e s .
W e can ask what we wish to achieve and how to
achieve i t . W e can, for instance, develop a
rational p o l i t i c a l programme for the protection
o f the economically weak. W e can make laws to
limit e x p l o i t a t i o n . W e can lim it the working
,day; but we can do much more. By law, we can
insure the*workers (or b e tte r s t i l l , a l l
c i t i z e n s ) against d i s a b i l i t y , unemployment, and
old age.- In t h i s way we can make impossible
such forms of e x p l o it a t i o n as are based upon the
h e lp le s s economic p osit ion-of a worker who must
y ie ld to.an yth in g in order not to sta r v e. And
when we are able by law to guarantee a Livelihood
to everybody w i l l i n g to work, and there is no
reason why we should not achieve that, then the
p rotection o f the freedom of the c i t i z e n from
economic fear and economic intim idation w ill
approach com pleteness. From t h is point o f view,
p o l i t i c a l power is the .key to economic p rotection .
P o li t i c a l power and its control is everything.
Economic power must not be permitted to dominate
p o l i t i c a l power; i f necessary, it must be fought
and brought under control by p o l i t i c a l - p o w e r .3
The moral lesso n , if such a phrase can be used, of
the fo lk t a l e s o f the West as 'narrated by men like Simon,
Marx, and Popper, is that the economic questions of any
s o c ie ty are c r u c ia lly important. Any s o c ie ty which neglects
the s a t i s f a c t o r y and sy stem a tic reso lu tio n of its economic
problems runs0 the ev er-p resen t r isk o f c o n f l i c t , chaos, and
in ju s tic e in economic and s o c ia l r e la tio n s h ip s .
^Karl Popper, The Open Society and Its Enemies.
Vol. I I, (London: Rout ledge and Kegan Paul, 1966), p. 126.
267
Just so, the Islamic sta te is no e x c e p tio n . It
must a ls o , somehow, put its economic house in order, unless
0 o f course it wishes to drug its c itiz e n r y with mere th e o
log ical verbiage alone.
Our study seems to o f fe r the follow in g p olicy im
p lic a t io n s for the contemporary Islamic s ta te :
1. A b o lition o f in te re st--b o th in it s usurious and
commercial forms.
2. State ownership, d ir e c tio n , and control o f most
o
la r g e -sc a le economic e n te r p r is e .
3. S ta te monopoly o f big business and c re d it to
e x e r c ise a check over private misuse of economic power.
4. R edistribution o f income and wealth and n a tio n
a l iz a t io n o f the means o f production presently concentrated
in extremely lim ited hands--for example, the s o - c a l le d
twenty fa m ilie s in Pakistan.
c 5. In one word, Implementation of s o c ia l j u s t i c e
a. _[a_ I s 1 am.
Whether or not a l l th is can be done or should be
done in Pakistan or anywhere e l s e , now or in the near or c
d ista n t future, is a very d i f f i c u l t question indeed. The
reason it has not been discussed in the present work is
that it is a matter o f s o c ia l philosophy, p r a c tic a l p o l it ic s
or r e lig io u s conscien ce, but not of economics.
W e may, however, note here p a r e n th e tic a lly that if
a given people, including the community of true b e l ie v e r s ,
should think or feel that they cannot liv e up to the d e
mands and exp ectatio n s o f Sharia in the s o c i a l , p o l i t i c a l ,
and economic walks of l i f e , the only prudent course would
be, as has'been done in the Christian West, to separate,
once for a l l , r e lig io n from p o l i t i c s , economics, and s o c i
olog y. Let Islam then become the private business of
individual men and women. In such a case, we would of
course be doing vio len ce to the s p i r i t o f Islam. But then,
freedom is , in the final a n a ly s is , the app reciation o f the
n e c e s s ity .
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269
I
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Unpublished Material
Ali, Ausaf, "The Economic System of Islam," I n s t i t u t e of
Business Adm inistration, U niversity of Karachi,
1964.
E l l i o t t , John E. "Comparactive Economic Systems,"
University o f Southern C a lifo rn ia , Los Angeles,
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Creator Ali, Ausaf (author)

Core Title The Political Economy Of The Islamic State; A Comparative Study

Degree Doctor of Philosophy

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, theory,OAI-PMH Harvest

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Contributor Digitized by ProQuest (provenance)

Advisor Pollard, Spencer D. (committee chair), Elliott, John E. (committee member), Totten, George O. (committee member)

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