Does Islam favor a socialist or capitalist economy?
Before Muhammad became a Prophet at 40 years old, he was a businessman – a trader who worked caravans. The Prophet Muhammad was a successful businessman, as were several of his companions and successors. One of Muhammad’s companions, Umar ibn al-Khattab, the second caliph, is said to have claimed: “Death can come upon me nowhere more pleasantly than where I am engaged in business in the market, buying and selling on behalf of my family.”
Trading was in the blood and the DNA of the Arab entrepreneur. The Islamic Empire had one thing going for it – location. First, there was Mecca, the spiritual capital of Islam. Mecca was on the caravan trail through the Arabian Peninsula, where it split to either continue to Persia or Egypt. It was enhanced further by the Zamzam water well, which made Mecca a convenient stop throughout antiquity. These locational advantages allowed Muhammad and the caliphs that followed in the seventh and eighth centuries to expand the influence of Islam. From the ninth century through the twelfth century, Islam flourished as Egypt, Persia, and Rome declined as world powers. During the early Middle Ages, a Pax Islamica was the cornerstone of a marketplace economy.
Consistent with this ideological framework, Islamic law, or sharia, governed both private and public affairs. While managing all aspects of an individual’s life, these laws also ruled the mechanisms of the Islamic marketplace. One dynamic of sharia not mentioned before is that it focuses on creating a unified society by regulating the economic currents that flow through the social order.
The other side of sharia discourages the consolidation of capital via its wealth-splintering principles; it diminished the investment capabilities necessary for keeping pace with the progressively capital-intensive modes of trade. A stable and prosperous commercial class emerged in New York, London, Paris, and Rome from the transatlantic trade between North America and Europe. Bankers and industrialists were able to turn the political scene in its favor. They limited their kings and rulers' absolute power and fought for the rise of a constitution and other democratic institutions. In summary, the Islamic economic principles that allowed the Muslim world to escape from constant feuding and flourish in the pre-industrial era also limited their growth potential in industrial markets starting in the eighteenth century. As we will see, the Protestant acceptance of usury led to large-scale shipping trade and capital-based industrialization.
The Islamic business model is based on both distributive and commutative justice. Distributive justice is concerned with the norms of resource allocation and the perception of fairness by the recipients. Aristotle equates distributive justice with a proper ratio of contribution to reward. In other words, people should receive returns commensurate with their investment, be it capital or labor. The Islamic version of distributive justice includes the following three elements:
1. Guarantee the fulfillment of the basic needs of all.
2. Equity, but not equality in personal incomes; and
3. The elimination of extreme inequalities in personal income and wealth.
From the Muslim perspective, Islam stands for social cohesion, mutual love, affection, social harmony, and brotherhood. Therefore, it strives to rid Muslim society of those inequalities, which can cause hatred, malice, and ill-feeling among individuals.
Commutative justice refers to that which is owed between individuals, such as in conducting business transactions. Commutative justice calls for fundamental fairness in all agreements and exchanges between individuals or private social groups. Sharia finance is a spiritual framework that values human relations above material possessions. It places a balance between individual self-interest and the social good. Maximum profit and maximum efficiency are not the sole objectives. Private property rights are recognized and protected, and reciprocity is encouraged.
Islamic doctrine has several remarkable features, including a dynamic set of re-distribution and wealth-fragmenting principles. Indeed, Islam prescribes detailed rules limiting the accumulation of private wealth. Two of the most well-known rules are those governing inheritance and usury. Regarding the inheritance laws, the Qur’an allows for the allocation of two-thirds of one’s wealth to various family members, including very distant relatives making it a somewhat equal distribution system. Distributive inheritance laws, coupled with the fact that more wealthy individuals are allowed to have more wives and, consequently, children, were an additional force against wealth concentration.
Business and society leaders are aware of behaviors and actions that result in unjustified and malicious opportunities. For that reason, it is the responsibility of the business community and the social environment to implement policies that remove opportunities for malicious activity. In the Islamic community, usurious interest is recognized as the most well-known irritant to cause friction in the social order.
Commutative Justice in Islamic parlance deems that interest accrual is not an equitable feature and will not be accepted. There are numerous reasons for this; the first and most important reason is that it was communicated to Muhammad by Allah and written in the Qur’an. The angel Gabriel was specific that Muslims conduct trade without interest. While there are several verses in the Qur’an about interest earnings, the one below is probably the most relevant (3:130):
You who believe, do not consume usurious interest, doubled, and redoubled. Be mindful of God so that you may prosper – beware of the Fire prepared for those who ignore [Him].
There are eight verses in the Qur'an which condemn taking interest. In hadith, Muhammad is said to have compared taking interest to committing adultery 36 times as well as to committing incest with one's mother, which demonstrates the intensity and seriousness of the issue in Islamic thought.
After reading this blog, the reader might find it interesting to compare socialism and Islamic economic principles. In Islam, the goal of narrowing income inequality was pursued through wealth fragmenting policies and wealth redistribution, all the while encouraging a market economy along with individual property rights. The purpose of socialism is also to narrow income inequality. Socialism is a system that owns the factors of production and operates a command economy with limited property rights for the individual.
Under capitalism, the production factors (capital, labor, land, and the entrepreneur) each share part of the profit from producing a product. Capital gets interest payments, workers are paid wages, landowners are paid rent, and the entrepreneur is paid a profit for his risk. There are no limitations as to the industries and types of speculation that can be undertaken. Under socialism, the capital and the land are provided by the state, there is no entrepreneur, but workers do receive a wage. Under Islam, capital does not receive interest but can receive some profits, landowners receive rent, workers receive wages, and entrepreneurs receive profit. However, there are limitations on the type of product sold and the type of speculation one can invest in. On the surface, capitalism and Islamic economics may be similar, but Islam requires mandatory expenditures called zakat that distribute wealth to the poor and needy. There are other wealth fragmenting policies in inheritance laws and marriage allowances. These are mandatory rules resulting in legal action that can be taken against you if you don’t comply. In a final analysis, successful capitalism pays profits consummate with the risk that entrepreneurs take. Islamic economics is linked to social outcomes more so than capitalism while incorporating some entrepreneurial incentives. For example, many Islamic governments have bloated bureaucracies just to provide jobs for their constituents. Bloated bureaucracies are highly inefficient and require onerous taxes to support them. While socialism provides equality of society’s output, there is little entrepreneurial incentive to produce.
In conclusion, most capitalists are familiar with Adam Smith’s “invisible hand” of the marketplace. A similar anecdote is credited to the Prophet Muhammad when asked to raise market prices because some vendors were selling products too competitively. His reply was, “Only Allah governs the market.” While Islam is socially conscious, it is not a socialist economy. Islam is a quasi-socialist religion in the nature of its beliefs. In the same breath, you could say that it is a quasi-capitalist system also.
To find out more, this topic and others can be found in the soon to be published book, Muslim Mechanics.