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Neoclassical growth theories and models help explain the differences in per capita income across countries and conclude that countries with high savings and investment rates, having people spending more time in learning new skills and with better social infrastructure in the form of strong private property rights are able to have more per capita income than countries which lack in these characteristics.
Implicitly, these points argue for a market led economy with strong private property rights and which provides the necessary incentive for potential innovators and entrepreneurs to gain the private benefits of specialized skills they possess and which they develop through education and skills enhancement.
Keeping aside the discussion of whether it is effective and efficient, market mechanism is a “just mechanism in principle”.
O you who believe! Eat not up your property among yourselves unjustly except it be a trade amongst you, by mutual consent.
(An-Nisa: Verse 29)
In an Islamic economy, market mechanism is filtered by divine injunctions. The divine injunctions are binding, but they do not disallow market mechanism to work after following these injunctions.
All that these divine injunctions do is to regulate certain actions, provide broad guidelines and through which certain restrictions are imposed on humans for their own benefit. But beyond that, market mechanism is allowed to work and in fact regarded as a just way of organizing economic exchange in society as explained by the preceding verse.
The distinctive features which enrich the market mechanism in an Islamic economy include:
1) Guiding preferences through divine injunctions. Rather than complimenting humans in their animalistic instincts to keep having one-eyed focus on material well-being only, Islam inculcates piousness, kindness, cooperation and communal responsibility in humans. In some instances, Islam guides explicitly to avoid extravagance, lavishness & using certain products and services which harm a human’s ethical existence and well being either individually and/or harm the society in the process.
2) Inculcating afterlife accountability in all economic agents. With the concept of afterlife accountability, Islam immensely influences intertemporal choice behavior. It helps in private economic agents (consumers, producers etc.) modifying their actions in such a way that takes into consideration externalities and also their own welfare, both in this world and afterwards. Afterlife accountability stimulate positive change in behavior in a much more comprehensive and permanent manner than any regulation or material incentive could possibly do.
3) Complimenting Material Rationality with Spiritual Rationality. Islam does not deny private property rights, private rational choices and individual-specific preferences that do not contradict Islamic injunctions. Islam enriches God given material rationality with God given spiritual rationality. It suggests some institutional changes in economic environment that alter choices for more optimal intertemporal outcome and social welfare. Islam has a very clear view on certain institutions like ‘interest based lending’ which has been chiefly responsible for concentration of wealth, rising inequality and even poverty and is an exploitative form of earning money. Islam by disallowing interest based earnings, exploitative forms of trade and disallowing imposition of excessive taxes from the state beyond Zakah ensures individual freedom and welfare in a much more comprehensive manner.
Islamic Economics Project
Salman Ahmed Shaikh