Introduction

Economic Systems 1. Economic problems of mankind have always been a key issue in the history.
Every nation on the face of the earth irrespective of its belief and ideology

in the World
strives to achieve at least a reasonable level of economic and social well being as
per its ambitions.

Capitalism, 2. This quest to resolve the economic problems have resulted in many economic
systems; but they have either completely failed or partially succeeded in finding
Socialism/Communism an equitable and balanced solution. Islam has also provided an economic system
to keep the economic life of the individual and nation as a whole on the lines of
& equity and prosperity.
Islamic Economic System
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Why Do We Need an Economic System? The existing economic system?

Some of the known economic systems are;
To engage in economic activities peacefully is vital to our survival
Capitalism
To earn the reward of ones labor, expertise, and efforts
A market place that determines our demand and supply phenomenon in a free Socialism
and fair environment Communism
A system that ensures labor rewards and eradicate the curses like slavery and Islamic economic system
victimization
A system that accommodates the innovative ways of doing things (trading over Capitalism
the internet without having sophisticated infrastructure)
To ensure self satisfaction, achievement and security A system based on private ownership of factors of production
To raise the quality of life and living standard to a level where no body would A system based on economic freedom
feel deprived. A free market economy that will determine the demand and supply of the system
and rewards based on individuals skills, ability, and effort.
A system that operates more close to human psychology of ownership and liberty.
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Capitalism 2. Welfare Capitalism
Types of Capitalism Welfare capitalism refers to capitalist economies that include
Degree of competition, role of the government interventions and regulations, comprehensive social welfare policies. Alternatively, welfare capitalism
and scope of public ownership leads towards various forms of capitalism, i.e. refers to the practice of businesses providing welfare services to their
1.Laissez-faire capitalism employees.
2.Welfare Capitalism 3. State Capitalism
3.State Capitalism State capitalism is characterized by the dominance of state-owned
business enterprises in the economy.
1. Laissez-faire capitalism An economic system in which commercial economic activity is
Laisser-faire is an economic environment in which transactions undertaken by the state, with management and organization of the
between private parties are free from government restrictions, means of production in a capitalist manner - maintaining the
tariffs, and subsidies, with only enough regulations to protect conditions of wage labor arising from centralized ownership.
property rights.
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Advantages of Capitalism
Proponents of capitalism argue that it creates more prosperity than any
other economic system, and they claim that its benefits are mainly to
the ordinary person.
World GDP per capita between 1500 and 1998 expressed in the 1990's International dollars
Graph is derived
from data in Table B-
18. (World GDP) and
Table B-10. (World
Population)
published in The
World Economy: A
Millennial
Perspective by
Angus Maddison,
OECD, Paris 2001
ISBN 92-64-18998-X
(http://en.wikipedia.o
rg/wiki/Capitalism)
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Advantages of Capitalism Disadvantages of Capitalism
Increasing GDP per capita has resulted in Disparities in distribution of wealth
Improved living standard
Availability of basic needs of the society, i.e. food, housing, clothing,
and health care.
More opportunities for the entrepreneurs to initiate new business
ventures.
Right to own factors of production
Profit maximization
Economic freedom, free market and competition (if healthy
competition it leads towards economic growth and innovation)
Banking and financial institutions and markets for smooth
international transactions
Actual U.S. distribution of wealth. Data from Holder and Arieli (2011)
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Disadvantages of Capitalism
Unrestricted and uncontrolled economic freedom and uncontrolled right of
private ownership has resulted in exploitation.
Labor is exploited by the capitalist
Farm worker is exploited by the landlord
Poor is exploited by the rich
Servant is exploited by the master
People are exploited by the rulers
Wealth is the objective of everyone through fair or foul means.
Cut throat competition in the market leads towards the mergers of smaller
businesses into big organizations and thus monopolize the market.
Monopoly results in inflation and create obstacles for the new businesses
http://www.taxjustice.net/cms/upload/pdf/The_Price_of_Offshore_Revisited_Presser_120722.pdf
thus leads to unemployment.
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Islamic Economic System Versus Capitalism Islamic Economic System Versus Capitalism
Right to own property Monopoly
Capitalism believes in the private ownership of the means of production, distribution and Under capitalism greed of wealth leads the businesses to monopolize the markets and
exchange which are managed and controlled by individuals or groups of individuals for
private profit. And it leads to the concentration of wealth in few hands. charge higher prices and leads to the destruction of small businesses which result in
unemployment.
Islamic concept of ownership is unique, i.e. Allah is the real owner of everything.
Islam strictly forbids unhealthy competition and monopolies. Prophet (pbuh) said, whoever
Islam allows legal ownership subject to moral obligations.
monopolies is a sinner. Commodities and services of common interest are strictly not
Laws of inheritance also distribute the wealth among the heirs to avoid concentration of allowed to be monopolized.
wealth.
Economic Freedom
In Capitalism Every individual has an unbridled liberty to engage in any kind of profitable Institution of Banking and Interest
businesses moral or immoral such as gambling, prostitution, smuggling, black marketing, Interest based financial institutions are the back bone of the capitalism. Financial
profiteering, hoarding, speculation, fraud, adulteration, etc. Wealth becomes the religion institutions or banks are the sources of capital for all the business activities.
and faith which lead to selfishness, hatred, mistrust, etc.
Islam categorically condemns the interest based businesses and institutions rather it
Islam allows freedom but within the bounds of Shariah. Halal and Haram are made clear in encourages trade.
all economic activities. Interest, bribery, embezzlement, prostitution, sale of wine,
narcotics, short weighing and measuring, gambling, speculation, monopoly, extravagant
spending, etc. are not allowed in Islam. 13 14

Islamic Economic System Versus Capitalism

Exploitation
Socialism and Communism
In a capitalist society every dominant part of the society (with few exceptions) exploit the
poor or weak in the society.
Characteristics of Socialism and Communism
Islam strictly prohibits every tool of exploitation such as usury, bribery, gambling, etc. The 8. Political Structure
1. Definition
weaker classes of the society like women, orphans, slaves, laborers, tenants, consumers,
etc. have been protected against their exploiters through legislation by Islam. 2. Ideas 9. Social Structure
3. Philosophy 10. Free Choices
Distribution of wealth 4. Religion 11. Way of Change
In capitalism polarization into rich and poor takes place in the society. People are divided 5. Economic Coordination 12. Private Property
into different classes based on the wealth they possess. It can result into chaos and riots 13. Ownership Structure
among the people in the society. 6. Economic System
7. Key Elements 14. Discrimination
Islam ensures fair and equitable distribution of wealth and economic resources. System of
Zakat and Sadqat is in place, hoarding of wealth is prohibited 15. Means of Control

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Definition Philosophy
Communism Socialism Communism Socialism
A theory or system of social A theory or system of social From each according to his ability, From each according to his ability,
organization based on the holding of organization based on the holding of to each according to his needs. to each according to his
all property in common, with actual most property in common, with Free-access to the articles of contribution. Emphasis on profit
ownership ascribed to the actual ownership ascribed to the consumption is made possible by being distributed among the
community or state. workers. advances in technology that allow society or workforce in addition to
for super-abundance. receiving a wage
Ideas Socialism
Communism
All people should be given an equal
Religion
Human societies have always been Communism Socialism
divided into warring classes. The opportunity to succeed. Workers
should have most say in their factory's Abolished Freedom of religion
Industrial Revolution has enriched the
wealthy and impoverished the poor. management. The free market suffers
The workers must overthrow the from problems like tragedy of the
bourgeois. commons. Government regulation is
necessary.
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Economic Coordination Key Elements

Communism Socialism Communism Socialism
Government controls all business, Planned-Socialism relies principally on An enhanced form of the principle Economic activity and production
as well as business decisions. planning to determine investment and especially are adjusted to meet human
of Production for use.
production decisions. Planning may be needs and economic demands.
centralized or decentralized. Market- "Production for use": useful goods and
socialism relies on markets for allocating services are produced specifically for
their usefulness.
capital to different socially-owned Political System
enterprises. Communism Socialism
Economic System Socialism No leader, directed directly by the Multiple parties, but the ruling
Communism
Wealth redistributed so that Wealth redistributed so that everyone people. This has never been party usually goes by the name
everyone in society is given equal in society is given somewhat equal actually practiced, and has just "Socialist.
shares of the benefits derived shares of the benefits derived from used a one-party system.
from labor. All means of labor, but people can earn more if they
production are controlled by the work harder. Means of production are
state.
controlled by the workers themselves. 19 20

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Social Structure Way of Change
Communism Socialism Communism Socialism
All class distinctions are Class distinctions are diminished Government in a Communist- Workers in a Socialist-state are the
eliminated. state is the agent of change rather agent of change rather than any market
Free Choice than any market or desire on the or desire on the part of consumers.
Communism Socialism part of consumers. Change by Change by the workers can be swift or
In real communism, where a All choices, including education, government can be swift or slow, slow, depending on change in ideology
leader does not exist, religion, employment and marriage, depending on change in ideology or even whim.
everything is chosen freely. In are up to the individual. All health care or even desire.
those that have been and education is provided free to Private Property Socialism
practiced though, all choices, everybody Communism Two kinds of property, private property,
including education, religion, such as land, houses, clothing, etc.
employment and marriage, Abolished owned by the individual. Public
are controlled by the state. property, factories, and means of
production owned by the state but with
worker control.
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Ownership Structure Means of Control

Communism Socialism Communism Socialism
The means of production are The means of production are socially- Proletariat engages in violent Proletariat engages in taking
commonly-owned, meaning no owned with the surplus value produced rebellions. charge of the factories and means
entity or individual owns productive accruing to either all of society (in Public- of production.
property. Importance is ascribed to ownership models) or to all the Estimated number of victims
"usership" over "ownership". employee-members of the enterprise (in Since these systems are not compatible with the human nature so there was a fierce
Cooperative-ownership models). resistance from the public particularly the capitalists, entrepreneurs, and farmers. In his
Discrimination
Communism Socialism
book The Black Book of Communism Stphane Courtois claims that total death toll
reaches 94 million during its implementation. The breakdown of the number of deaths given
In theory, all members of The people are considered equal, by Courtois is as follows:
the state are considered laws are made when necessary to 65 million in the People's Republic of China
equal. protect people from 20 million in the Soviet Union
discrimination. 2 million in Cambodia
2 million in North Korea
1.7 million in Africa
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Estimated number of victims
1 million in the Communist states of Eastern Europe
1 million in Vietnam
Factors of Production
150,000 in Latin America (mainly Cuba)
10,000 deaths "resulting from actions of the international Communist movement and
in Islam
Communist parties not in power."
Courtois claims that Communist regimes are responsible for a greater number of deaths
than any other political ideal or movement, including Nazism. The statistics of victims Learning outcomes
includes executions, famine, deaths resulting from deportations, physical confinement, or
through forced labor. After this lecture you will be able to
Understand the conventional concept of factors of production, i.e. land, labor,
capital, and entrepreneur.
Understand the concept of factors of production in Islamic economic system.
Role of money as of being a factor of production.

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Factors of Production in Conventional Economic System

Factors of Production in Islamic Economic Framework
First we see what are the factors of production in conventional
economic system:
Factors of production are the Inputs that provide a productive service
in a production process.
Conventional economic theory suggests four factors of production, i.e.
1. Land
2. Labor
3. Capital
4. Entrepreneur

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 Factors of Production in Conventional Economic System

Factors of Production in Conventional Economic System

Name of Owner of Reward of Nature of the

the Factor the Factor the Factor Factor

Land Landlord Rent Natural resources

Labor Laborer Wages Human factor

Capital Money Lender Interest Man made factors

Entreprise Entrepreneur Profit Man made factor

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Factors of Production in Conventional Economic System Factors of Production in Islamic Framework

Capital is recognized as money and physical capital. Money as factor of production:
Reward of capital is interest rate which suits the money capital but it is Money is recognized as consumed input and become useful only when
treated as price of the physical capital too. Logic suggest that physical asset converted into consumed input or factor input.
should earn rent per machine or per capital asset. Money itself is not considered a factor of production but it has the potential
to become a factor of production.
Factors of Production in Islamic Framework
All productive inputs are grouped into two categories;
Rewards for the Factors of Production
Hired Factors of Production (HFP): all those factors that earn ujrat (wage or
1.Factor inputs: those inputs that dont get consumed in the production rent), e.g. labor earns wage, land earns rent, machinery earns rent etc.
process.
Entrepreneurial Factors of Production (EFP): the factors that face risk
2.Consumed inputs: those inputs that are consumed during the production instead of earning a fixed wage or rent, e.g. entrepreneur, capital assets
process and lose their original nature and shape, e.g. fuel, raw cotton, plastic, employed in the production process.
etc.
Factor inputs can become HFP or EFP.
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Rewards for the Factors of Production Entrepreneurial Factors of Production (EFP)
For factor inputs that opt to become HFP the reward is ujrat or rent; money not Decision making and risk bearing are two entrepreneurial functions, where
being a factor input can not earn any ujrat or rent (interest). All the consumable decision making is solely upon human resources while the risk bearing can be
inputs can neither be rented nor they can earn any ujrat. done by the human resources and physical or monetary resources as well.
Those factor inputs that opt to become EFP the reward is profit (or loss) against
the risk associated with new business venture.
Entrepreneurship is to visualize an opportunity and decide to initiate a
Entrepreneurial Factors of Production (EFP) productive activity in an innovative way and face all the associated risk with it.
EFP is the combination of human and non-human resources that are willing to
bear risks involved in initiating or participating in a productive economic venture.
An entrepreneur may not be a good manager, so this type of organizational
EFPs are economic resources when confronted with a choice to work for wage or capabilities (managerial, clerical, security etc.) can be hired against an ujrat.
to have their own work, decide in favor of their own work. Sometime economic
resource have no choice but to become an EFP, e.g.
1.A person having money cant earn interest (ujrat) on it. Organizers earn ujrat while entrepreneurs earn profits (face the risk of loss)
2.Sometime wage rate or rent rates are so low that the person prefer not to sell the
labor or rent out the property. 33 34

Hired Factors of Production (HFP) Hired Factors of Production (HFP)

All the resources that offer productive services for a definite reward known in HFPs include land, labor, physical capital good and human capital (monetary
advance are called HFPs. resources are excluded).

All factor inputs can become HFP but none of the consumed inputs can become HFPs are derived from the same resources which can offer themselves as
HFP ("Organization" and "managers" as factors of production too are treated as entrepreneurial resources.
HFPs as long as they are not willing to bear the entrepreneurial risks).
The supply and demand for HFPs thus competes with the supply and demand of
HFPs are employed by EFPs, i.e. employment opportunities will increase with EFPs.
the increase in entrepreneurial activities. Demand and supply of HFPs will
determine the ujrat and rent.
All these resources have to make a choice whether to opt in favor of becoming an
HFP and get an Ujrat or to become an EFP to enjoy the profits.

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 Resources To Satisfy Individual Perspective Major Differences among Socialism / Islamic
Capitalism
Unlimited the Systems Communism Economic
Factors of Production Wants Yes / No & R / NR
Liberty to Earn

Name of the Owner of Nature of Reward of Socialism / Islamic Liberty to Own

Capitalism
Factor the Factor the Factor the Factor Communism Economic
Distribution of Wealth
Natural Reward for Labor
Land Landlord Rent
Resources
Human Innovativeness of System
Labor Laborer Wages
Factor
Social Structure
Money Man made
Capital Interest
Lender Factors Ways of Change
Entreprene Man made
Entreprise Profit Religion
ur Factor
37 38

You are required to fill Slide No. 37 You are required to fill Slide No. 38
Comparison of Economic Systems on Major Differences Among
Factor of Production The Economic Systems

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