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Graduate School of Business, Islamabad

Islamic Perspective of Business

Ijaz Hussain Bajwa Muhammad Ali Abbas Muhammad Waseem Muhammad Farooq
Course Instructor: Naveed Khan Advocate.

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Capitalism
Capitalism is an economic system in which wealth, and the means of producing wealth, are privately owned. Through capitalism, the land, labor, and capital are owned, operated, and traded for the purpose of generating profits, without force or fraud, by private individuals either singly or jointly, and investments, distribution, income, production, pricing and supply of goods, commodities and services are determined by voluntary private decision in a market economy. A distinguishing feature of capitalism is that each person owns his or her own labor and therefore is allowed to sell the use of it to employers. In a "capitalist state", private rights and property relations are protected by the rule of law of a limited regulatory framework. In the modern capitalist state, legislative action is confined to defining and enforcing the basic rules of the market, though the state may provide some public goods and infrastructure. Some consider laissez-faire to be "pure capitalism." Laissez-faire (French, "leave to do (by itself)"), signifies minimizing or eliminating state interference in economic affairs and the competitive process, allowing the free play of "supply and demand." Laissez-faire capitalism has never existed in practice. Because all large economies today have a mixture of private and public ownership and control, some feel that the term "mixed economies" more precisely describes most contemporary economies. In the "capitalist mixed economy", the state intervenes in market activity and provides many services. During the last century, capitalism has often been contrasted with centrally planned economies. The central axiom of capitalism is that the best allocation of resources is achieved through consumers having free choice, and producers responding accordingly to meet aggregate and individual consumer demand. This contrasts with planned economies in which the state directs what shall be produced. A consequence is the belief that privatization of previously stateprovided services will tend to achieve a more efficient delivery thereof. Further implications are usually in favor of free trade, and abolition of subsidies. Although individuals and groups must act rationally in any society for their own good, the consequences of both rational and irrational actions are said to be more readily apparent in a capitalist society. Capitalistic economic practices incrementally became institutionalized in England between the 16th and 19th centuries, although some features of

capitalist organization existed in the ancient world, and early aspects of merchant capitalism flourished during the Late Middle Ages. Capitalism has been dominant in the Western world since the end of feudalism. From Britain, it gradually spread throughout Europe, across political and cultural frontiers. In the 19th and 20th centuries, capitalism provided the main, but not exclusive, means of industrialization throughout much of the world.

Political advocacy
World's GDP per capita shows exponential acceleration since the beginning of the Industrial Revolution. Many theorists and policymakers in predominantly capitalist nations have emphasized capitalism's ability to promote economic growth, as measured by Gross Domestic Product (GDP), capacity utilization or standard of living. This argument was central; for example, to Adam Smith's advocacy of letting a free market control production and price, and allocate resources. Many theorists have noted that this increase in global GDP over time coincides with the emergence of the modern world capitalist system. While the measurements are not identical, proponents argue that increasing GDP (per capita) is empirically shown to bring about improved standards of living, such as better availability of food, housing, clothing, and health care. The decrease in the number of hours worked per week and the decreased participation of children and the elderly in the workforce have been attributed to capitalism. Proponents also believe that a capitalist economy offers far more opportunities for individuals to raise their income through new professions or business ventures than do other economic forms. To their thinking, this potential is much greater than in either traditional feudal or tribal societies or in socialist societies. Milton Friedman has argued that the economic freedom of competitive capitalism is a requisite of political freedom. Friedman argued that centralized control of economic activity is always accompanied by political repression. In his view, transactions in a market economy are voluntary, and the wide diversity that voluntary activity permits is a fundamental threat to repressive political leaders and greatly diminishes power to coerce. Friedman's view was also shared by Friedrich Hayek and John Maynard Keynes, both of whom believed that capitalism is vital for freedom to survive and thrive.

Austrian School economists have argued that capitalism can organize itself into a complex system without an external guidance or planning mechanism. Friedrich Hayek coined the term "catallaxy" to describe what he considered the phenomenon of self-organization underpinning capitalism. From this perspective, in process of self-organization, the profit motive has an important role. From transactions between buyers and sellers price systems emerge, and prices serve as a signal as to the urgent and unfilled wants of people. The promise of profits gives entrepreneurs incentive to use their knowledge and resources to satisfy those wants. Thus the activities of millions of people, each seeking his own interest, are coordinated. This decentralized system of coordination is viewed by some supporters of capitalism as one of its greatest strengths. They argue that it permits many solutions to be tried, and that realworld competition generally finds a good solution to emerging challenges. In contrast, they argue, central planning often selects inappropriate solutions as a result of faulty forecasting. However, in all existing modern economies, the state conducts some degree of centralized economic planning (using such tools as allowing the country's central bank to set base interest rates), ostensibly as an attempt to improve efficiency, attenuate cyclical volatility, and further particular social goals. Proponents who follow the Austrian School argue that even this limited control creates inefficiencies because we cannot predict the long-term activity of the economy. Milton Friedman, for example, has argued that the Great Depression was caused by the erroneous policy of the Federal Reserve. Ayn Rand was a prominent philosophical supporter of laissez-faire capitalism; her novel Atlas Shrugged was one of the most influential publications ever written on the subject of business and continues to be a best-seller. The first person to endow capitalism with a new code of morality (Rational Selfishness), she did not justify capitalism on the grounds of pure "practicality" (that it is the best wealth-creating system), or the supernatural (that God or religion supports capitalism), or because it benefits the most people, but maintained that it is the only morally valid socio-political system because it allows people to be free to act in their rational self-interest. These thinkers have had a substantial influence on the Libertarian Party. The Libertarian Party strongly advocates the elimination of most, if not all, state involvement in the marketplace. The Republican Liberty Caucus is the libertarian branch of the Republican Party.

Criticism
Prominent leftist critics have included socialists (like Karl Marx, Friedrich Engels, Vladimir Lenin, Mao Zedong, Leon Trotsky, Antonio Gramsci, Rosa Luxemburg, Slavoj Zizek, Che Guevara, Fidel Castro) and anarchists (including Benjamin Tucker, Lysander Spooner, Pierre-Joseph Proudhon, Mikhail Bakunin, Peter Kropotkin, Emma Goldman, Murray Bookchin, Rudolf Rocker, Noam Chomsky, and many others). Movements like the Luddites, Narodniks, Shakers, Utopian Socialists and others have opposed capitalism for various reasons. Marxism advocated a revolutionary overthrow of capitalism that would lead eventually to communism. Marxism also influenced social democratic and labour parties, which seek change through existing democratic channels instead of revolution, and believe that capitalism should be heavily regulated rather than abolished. Many aspects of capitalism have come under attack from the relatively recent anti-globalization movement. Some religions criticize or outright oppose specific elements of capitalism. Some traditions of Judaism, Christianity, and Islam forbid lending money at interest, although methods of Islamic banking have been developed. Christianity has been a source of both praise and criticism for capitalism, particularly its materialist aspects. The first socialists drew many of their principles from Christian values (see Christian socialism), against "bourgeois" values of profiteering, greed, selfishness, and hoarding. Christian critics of capitalism may not oppose capitalism entirely, but support a mixed economy in order to ensure adequate labor standards and relations, as well as economic justice. In addition, there are many prominent Protestant denominations (particularly in the United States) who have reconciled with or are ardently in favor of capitalism, particularly in opposition to secular socialism. However, in the U.S. and around the world there are many Protestant Christian traditions which are critical of, or even oppose, capitalism. Another critic is the Indian philosopher P.R. Sarkar, founder of the Ananda Marga movement, who developed the Social Cycle Theory as a solution to the problems of capitalism called the Progressive Utilization Theory (PROUT).[120][121] Some problems said to be associated with capitalism include: unfair and inefficient distribution of wealth and power; a tendency toward market monopoly or oligopoly (and government by oligarchy); imperialism and various forms of economic and cultural exploitation; and phenomena such as social

alienation, inequality, unemployment, and economic instability. Critics have maintained that there is an inherent tendency towards oligolopolistic structures when laissez-faire is combined with capitalist private property. Because of this tendency either laissez-faire, or private property, or both, have drawn fire from critics who believe an essential aspect of economic freedom is the extension of the freedom to have meaningful decision-making control over productive resources to everyone. Economist Branko Horvat asserts, "it is now well known that capitalist development leads to the concentration of capital, employment and power. It is somewhat less known that it leads to the almost complete destruction of economic freedom." SMU Economics Professor and New York Times #1 best-selling author, Ravi Batra, has long maintained that excessive income and wealth inequalities are a fundamental cause of financial crisis and economic depression in the capitalist economy. Near the start of the 20th century, Vladimir Lenin argued that that state use of military power to defend capitalist interests abroad was an inevitable corollary of monopoly capitalism. This concept of political economy concerning the relationship between economic and political power among and within states includes critics of capitalism who assign to it responsibility for not only economic exploitation, but imperialist, colonialist and counter-revolutionary wars, repressions of workers and trade unionists, genocides, massacres, and so on. Some environmentalists argue that capitalism requires continual economic growth, and will inevitably deplete the finite natural resources of the earth, and other broadly utilized resources. Such thinkers, including Murray Bookchin, have argued that capitalist production externalizes environmental costs to all of society, and is unable to adequately mitigate its impact upon ecosystems and the biosphere at large. Supporters maintain, however, that it would be imprudent for capitalist societies to deplete resources to such an extent. Some labor historians and scholars, such as Immanuel Wallerstein, Tom Brass and, latterly Marcel van der Linden, have also argued that unfree labor the use of a labor force of slaves, indentured servants, criminal convicts, political prisoners, and/or other coerced persons is compatible with capitalist relations.

Socialism

Socialism in political thought refers to economic theories of social organization advocating collective ownership and administration of the means of production and distribution of goods, and a society characterized by equality for all individuals, with an egalitarian method of compensation. Modern socialism originated in the late 19th-century intellectual and working class political movement that criticized the effects of industrialization and private ownership on society. Karl Marx posited that socialism (the disappearance of class and therefore state) would be achieved via class struggle and a proletarian revolution after a transitional stage from capitalism called the dictatorship of the proletariat. The utopian socialists, including Robert Owen, tried to found socialist factories and other structures within a capitalist society. Henri de Saint Simon, the first individual to coin the term socialism, was the originator of technocracy and industrial planning. The first socialists predicted a world improved by harnessing technology and combining it with better social organization, and many contemporary socialists share this belief. Early socialist thinkers tended to favor more authentic meritocracy, while many modern socialists have a more egalitarian approach. Socialists mainly share the belief that capitalism unfairly concentrates power and wealth among a small segment of society that controls capital, creates an unequal society, and does not provide equal opportunities for everyone in society. Therefore socialists advocate the creation of a society in which wealth and power are distributed more evenly based on the amount of work expended in production, although there is considerable disagreement among socialists over how and to what extent this could be achieved.

Socialism is not a concrete philosophy of fixed doctrine and program; its branches advocate a degree of social interventionism and economic rationalization, sometimes opposing each other. Another dividing feature of the socialist movement is the split between reformists and the revolutionaries on how a socialist economy should be established. Some socialists advocate complete nationalization of the means of production, distribution, and exchange; others advocate state control of capital within the framework of a market economy. Socialists inspired by the Soviet model of economic development have advocated the creation of centrally planned economies directed by a state that owns all the means of production. Others, including Yugoslavian, Hungarian, German and Chinese Communists in the 1970s and 1980s, instituted various forms of market socialism, combining co-operative and state ownership models with the free market exchange and free price system (but not prices for the means of production). Social democrats propose selective nationalization of key national industries in mixed economies, with private ownership of property and of profit-making small business. Social Democrats also promote tax-funded welfare programs and the regulation of markets. Libertarian socialism (including social anarchism and libertarian Marxism) rejects state control and ownership of the economy altogether and advocates direct collective ownership of the means of production via co-operative workers' councils and workplace democracy.

Origins
The English word socialism (1839) derives from the French socialisme (1832), the mainstream introduction of which usage is attributed, in France, to Pierre Leroux and to Marie Roch Louis Reybaud; and in Britain to Robert Owen in 1827, father of the cooperative movement. Western European social critics, including Robert Owen, Charles Fourier, Pierre-Joseph Proudhon, Louis Blanc, Charles Hall and Saint-Simon, were the first modern socialists who criticized the excessive poverty and inequality of the Industrial Revolution. They advocated reform via the egalitarian distribution of wealth and the transformation of society to small communities without private property. Saint-Simon delineated collectivist principles to reorganize society and build socialism upon planned, utopian communities.

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Linguistically, the contemporary connotation of the words socialism and communism accorded with the adherents' and opponents' cultural attitude towards religion. In Christian Europe, of the two, communism was believed the atheist way of life. In Protestant England, the word communism was too culturally and aurally close to the Papist Roman Catholic communion rite, hence English atheists denoted themselves socialists. In 1847, Friedrich Engels said "socialism was respectable on the continent, while communism was not." The Owenites in England and the Fourierists in France were considered socialists, while working-class movements that "proclaimed the necessity of total social change" denoted themselves communists. This latter branch of socialism was powerful enough to produce the communisms of tienne Cabet in France and Wilhelm Weitling in Germany.

Revolutions of 19171923

Vladimir Lenin (background) and Joseph Stalin By the year 1917, the patriotism propelling the First World War metamorphosed to political radicalism in most of Europe, the United States (cf. Socialism in the United States), and Australia. In February, popular revolution exploded in Russia when workers, soldiers, and peasants established soviets (councils) wielding executive power in a Provisional Government valid until convocation of a Constituent Assembly. In April, Lenin arrived in Russia from Switzerland, calling for "All power to the soviets." In October, his party (the Bolsheviks) won support of most soviets while he and Trotsky simultaneously led the October Revolution. On 25 January 1918, at the Petrograd Soviet, Lenin declared "Long live the world socialist revolution". On 26 January, the day after assuming executive power, Lenin wrote Draft Regulations on Workers' Control, which granted workers control of businesses with more than five workers and office employees, and access to all books, documents, and stocks, and whose decisions were to be "binding upon the

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owners of the enterprises". Immediately, the Bolshevik Government nationalized banks, most industry, and disavowed the national debts of the deposed Romanov royal rgime; it governed via elected soviets; and it sued for peace and withdrew from the First World War. Despite that, the peasant Socialist-Revolutionary (SR) Party won the Constituent Assembly against the Bolshevik Party, who then acted resolutely the next day. The Constituent Assembly convened for 13 hours (16.00 hrs 5 Jan 4.40 hrs 6 Jan 1918). Socialist-revolutionary leader Victor Chernov was elected President of a Russian republic and the next day, the Bolsheviks dissolved the Constituent Assembly. The Bolshevik Russian Revolution of January 1918 engendered Communist parties worldwide, and their concomitant revolutions of 1917-23. Few Communists doubted that the Russian success of socialism depended upon successful, working-class socialist revolutions affected in developed capitalisteconomy countries. In 1919, Lenin and Trotsky organised the world's Communist parties into a new international association of workers the Communist International, (Comintern), also denominated the Third International. In November 1918, the German Revolution deposed the monarchy; as in Russia, the councils of workers and soldiers were comprised mostly of SPD and USPD (Independent Social Democrats) revolutionaries installed to office as the Weimar republic; the SPD were in power, led by Friedrich Ebert, in January 1919. The left-wing Spartacist Putsch challenged the SPD government, and President Ebert ordered the army and Freikorps mercenaries to violently suppress the workers' and soldiers' councils. Communist leaders Karl Liebknecht and Rosa Luxemburg were captured and summarily executed. Also that year, in Bavaria, the Communist rgime of Kurt Eisner was suppressed. In Hungary, Bla Kun briefly headed a Hungarian Communist government. Throughout, popular socialist revolutions in Vienna, Italy's northern industrial cities, the German Ruhr (1920) and Saxony (1923) all failed in spreading revolutionary socialism to Europe's advanced, capitalist countries. In Russia in August 1918, assassin Fanya Kaplan shot Lenin in the neck, leaving him with wounds from which he never fully recovered. Earlier, in June, the Soviet government had implemented War Communism to manage the foreign economic boycott of Russia and invasions by Imperial Germany, Imperial Britain, the United States and France (interfering in the Russian Civil

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War beside royalist White Russians). Under war communism, private business was outlawed, strikers could be shot, the white collar classes were forced to work manually, and peasants could be forced to provide to workers in cities. By 1920, as Red Army commander, Trotsky had mostly defeated the royalist White Armies. In 1921, War Communism was ended, and, under the New Economic Policy (NEP), private ownership was allowed for small and medium peasant enterprises; industry remained State-controlled, Lenin acknowledged that the NEP was a necessary capitalist measure for a country mostly unripe for socialism, thus the existence of NEP businessmen and NEP women (NEP Men) flourished and the Kulaks gained capitalist power as rich peasants. In 1923, on seeing the Soviet State's greatly coercive power, the dying Lenin said Russia had reverted to "a bourgeois tsarist machine... barely varnished with socialism." After Lenin's death (January 1924), the Communist Party of the Soviet Union then controlled by Joseph Stalin rejected the theory that socialism could not be built solely in the Soviet Union, and declared the Socialism in One Country policy. Despite the marginal Left Opposition's demanding restoration of Soviet democracy, Stalin developed a bureaucratic, authoritarian government, that was condemned by democratic socialists, anarchists and Trotskyists for undermining the initial socialist ideals of the Bolshevik Russian Revolution. The Russian Revolution of October 1917 brought about the definitive ideological division between Communists as denoted with a capital "" on the one hand and other communist and socialist trends such as anarcho-communists and social democrats, on the other. The Left Opposition in the Soviet Union gave rise to Trotskyism which was to remain isolated and insignificant for another fifty years, except in Sri Lanka where Trotskyism gained the majority and the pro-Moscow wing was expelled from the Communist Party. In 1922, the fourth congress of the Communist International took up the policy of the United Front, urging Communists to work with rank and file Social Democrats while remaining critical of their leaders, who they criticized for "betraying" the working class by supporting the war efforts of their respective capitalist classes. For their part, the social democrats pointed to the dislocation caused by revolution, and later, the growing authoritarianism of the Communist

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Parties. When the Communist Party of Great Britain applied to affiliate to the Labour Party in 1920 it was turned down.

Economics
Economically, socialism denotes an economic system of state ownership and/or worker ownership of the means of production and distribution. In the economy of the Soviet Union, state ownership of the means of production was combined with central planning, in relation to which goods and services to make and provide, how they were to be produced, the quantities, and the sale prices. Soviet economic planning was an alternative to allowing the market (supply and demand) to determine prices and production. During the Great Depression, many socialists considered Soviet-style planned economies the remedy to capitalism's inherent flaws monopoly, business cycles, unemployment, unequally distributed wealth, and the economic exploitation of workers. In the West, neoclassical liberal economists such as Friedrich Hayek and Milton Friedman said that socialist planned economies would fail, because planners could not have the business information inherent to a market economy (cf. economic calculation problem), nor would managers in Soviet-style socialist economies match the motivation of profit. Consequent to Soviet economic stagnation in the 1970s and 1980s, socialists began to accept parts of their critique. Polish economist Oskar Lange, an early proponent of market socialism, proposed a central planning board establishing prices and controls of investment. The prices of producer goods would be determined through trial and error. The prices of consumer goods would be determined by supply and demand, with the supply coming from state-owned firms that would set their prices equal to the marginal cost, as in perfectly competitive markets. The central planning board would distribute a "social dividend" to ensure reasonable income equality. In Western Europe, particularly in the period after World War II, many socialist parties in government implemented what became known as mixed economies. In the biography of the 1945 Labour Party Prime Minister Clem Attlee, Francis Beckett states: "the government... wanted what would become known as a mixed economy". Beckett also states that "Everyone called the 1945 government 'socialist'." These governments nationalized major and economically vital industries while permitting a free market to continue in the

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rest. These were most often monopolistic or infrastructural industries like mail, railways, power and other utilities. In some instances a number of small, competing and often relatively poorly financed companies in the same sector were nationalized to form one government monopoly for the purpose of competent management, of economic rescue (in the UK, British Leyland, Rolls Royce), or of competing on the world market. Also in the UK, British Aerospace was a combination of major aircraft companies British Aircraft Corporation, Hawker Siddeley and others. British Shipbuilders was a combination of the major shipbuilding companies including Cammell Laird, Govan Shipbuilders, Swan Hunter, and Yarrow Shipbuilders Typically, this was achieved through compulsory purchase of the industry (i.e. with compensation). In the UK, the nationalization of the coal mines in 1947 created a coal board charged with running the coal industry commercially so as to be able to meet the interest payable on the bonds which the former mine owners' shares had been converted into. Some socialists propose various decentralized, worker-managed economic systems. One such system is the cooperative economy, a largely free market economy in which workers manage the firms and democratically determine remuneration levels and labor divisions. Productive resources would be legally owned by the cooperative and rented to the workers, who would enjoy usufruct rights. Another, more recent, variant is participatory economics, wherein the economy is planned by decentralized councils of workers and consumers. Workers would be remunerated solely according to effort and sacrifice, so that those engaged in dangerous, uncomfortable, and strenuous work would receive the highest incomes and could thereby work less. Some Marxists and anarchocommunists also propose a worker-managed economy based on workers councils, however in anarcho-communism; workers are remunerated according to their needs (which are largely self-determined in an anarcho-communist system). Recently socialists have also been working with the technocracy movement to promote such concepts as energy accounting.

Criticism

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Criticisms of socialism range from claims that socialist economic and political models are inefficient or incompatible with civil liberties to condemnation of specific socialist states. There is much focus on the economic performance and human rights records of Communist states, although there is debate over the categorization of such states as socialist. In the economic calculation debate, classical liberal Friedrich Hayek argued that a socialist command economy could not adequately transmit information about prices and productive quotas due to the lack of a price mechanism, and as a result it could not make rational economic decisions. Ludwig von Mises argued that a socialist economy was not possible at all, because of the impossibility of rational pricing of capital goods in a socialist economy since the state is the only owner of the capital goods. Hayek further argued that the social control over distribution of wealth and private property advocated by socialists cannot be achieved without reduced prosperity for the general populace, and a loss of political and economic freedoms. Hayek's views were echoed by Winston Churchill in an electoral broadcast prior to the British general election of 1945:

Islamic Economic

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Islamic economics can refer to the application of Islamic law to economic activity either where Islamic rule is in force or where it is not; i.e. it can refer to the creation of an Islamic economic system, or to simply following Islamic law in regards to spending, saving, investing, giving, etc. where the state does not follow Islamic law. The former paradigm, particularly as developed by modern Shia scholars such as Mahmoud Taleghani, and Mohammad Baqir al-Sadr, seeks not only to enforce Islamic regulations on issues such as Zakat, Jizya, Nisab, Khums, Riba, insurance and inheritance, but to implement broader economic goals and policies of an Islamic society. It seeks an economic system based on uplifting the deprived masses, a major role for the state in matters such as circulation and equitable distribution of wealth and ensuring participants in the marketplace are rewarded for being exposed to risk and/or liability. Islamists movements and authors will generally describe this system as being neither Socialist nor Capitalist, but a third way with none of the drawbacks of the other two systems. The latter paradigm is of necessity more limited, revolving around a few main tenets of Islam: the payment of zakat charity by believers, borrowing and lending without payment of fixed interest (riba), and socially responsible investing. The key difference from a financial perspective is the no-interest rule since most other religions favor charitable giving and socially responsible investing. The belief that the prohibition of investment with interest charges is essential for an Islamic society is widespread, though liberal movements within Islam may deny the need for this prohibition, since they see Islam as generally compatible with modern secular institutions and law.

History
Traditional Islamic concepts having to do with economics included

zakat - the "taxing of certain goods, such as harvest, with an eye to allocating these taxes to expenditures that are also explicitly defined, such as aid to the needy." Gharar - "the interdiction of chance ... that is, of the presence of any element of uncertainty, in a contract (which excludes not only insurance but also the lending of money without participation in the risks)" Riba - "referred to as usury"

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These concepts, like others in Islamic law, came from the "prescriptions, anecdotes, examples, and words of the Prophet, all gathered together and systematized by commentators according to an inductive, casuistic method." Sometimes other sources such as al-urf, (the custom), al-aql (reason) or al-ijma (consensus of the jurists) were employed. In addition, Islamic law has developed areas of law that correspond to secular laws of contracts and torts.
Early reforms under Islam

Some argue early Islamic theory and practice formed a "coherent" economic system with "a blueprint for a new order in society, in which all participants would be treated more fairly". Michael Bonner, for example, has written that an "economy of poverty" prevailed in Islam until 13th and 14th century. Under this system God's guidance made sure the flow of money and goods was "purified" by being channeled from those who had much of it to those who had little by encouraging zakat (charity) and discouraging riba (usury/interest) on loans. Bonner maintains the prophet also helped poor traders by allowing only tents, not permanent buildings in the market of Medina, and not charging fees and rents there.
Capitalist market economy

The origins of capitalism and free markets can be traced back to the Islamic Golden Age and Muslim Agricultural Revolution, where the first market economy and earliest forms of merchant capitalism took root between the 8th 12th centuries, which some refer to as "Islamic capitalism". A vigorous monetary economy was created by Muslims on the basis of the expanding levels of circulation of a stable high-value currency (the dinar) and the integration of monetary areas that were previously independent. Innovative new business techniques and forms of business organisation were introduced by economists, merchants and traders during this time. Such innovations included the earliest trading companies, big businesses, contracts, bills of exchange, long-distance international trade, the first forms of partnership (mufawada) such as limited partnerships (mudaraba), and the earliest forms of credit, debt, profit, loss, capital (al-mal), capital accumulation (nama al-mal), circulating capital, capital expenditure, revenue, cheques, promissory notes,[9] trusts (see Waqf), startup companies,[10] savings accounts, transactional accounts, pawning, loaning,

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exchange rates, bankers, money changers, ledgers, deposits, assignments, the double-entry bookkeeping system, and lawsuits. Organizational enterprises similar to corporations; independent from the state also existed in the medieval Islamic world, while the agency institution was also introduced. Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards. The systems of contract relied upon by merchants was very effective. Merchants would buy and sell on commission, with money loaned to them by wealthy investors, or a joint investment of several merchants, who were often Muslim, Christian and Jewish. Recently, a collection of documents was found in an Egyptian synagogue shedding a very detailed and human light on the life of medieval Middle Eastern merchants. Business partnerships would be made for many commercial ventures, and bonds of kinship enabled trade networks to form over huge distances. Networks developed during this time enabled a world in which money could be promised by a bank in Baghdad and cashed in Spain, creating the cheque system of today. Each time items passed through the cities along this extraordinary network, the city imposed a tax, resulting in high prices once reaching the final destination. These innovations made by Muslims and Jews laid the foundations for the modern economic system.
Classical Muslim economic thought

To some degree, the early Muslims based their economic analyses on the Qu'ran (such as opposition to riba, meaning usury or interest), and from sunnah, the sayings and doings of prophet Muhammad. Perhaps the most well known Islamic scholar who wrote about economics was Ibn Khaldun (13321406), who is considered a father of modern economics. Ibn Khaldun wrote on economic and political theory in the introduction, or Muqaddimah (Prolegomena), of his History of the World (Kitab al-Ibar). In the book, he discussed what he called asabiyya (social cohesion), which he sourced as the cause of some civilizations becoming great and others not. Ibn Khaldun felt that many social forces are cyclic, although there can be sudden sharp turns that break the pattern. His idea about the benefits of the division of labor also relate to asabiyya, the greater the social cohesion, the more complex the successful division may be, the greater the economic growth. He noted that growth and development positively stimulates both supply and demand, and that

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the forces of supply and demand are what determines the prices of goods. He also noted macroeconomic forces of population growth, human capital development, and technological developments effects on development. In fact, Ibn Khaldun thought that population growth was directly a function of wealth. Other important early Muslim scholars who wrote about economics include Abu Hanifah, Abu Yusuf (731-798), Ishaq bin Ali al-Rahwi (854931), al-Farabi (873950), Qabus (d. 1012), Ibn Sina (Avicenna) (9801037), Ibn Miskawayh (b. 1030), al-Ghazali (10581111), al-Mawardi (10751158), Nasr al-Dn alTs (1201-1274), Ibn Taimiyah (12631328) and al-Maqrizi.

Post-Colonial Era
During the modern post-colonial era, as Western ideas, including Western economics, began to influence the Muslim world, some Muslim writers sought to produce an Islamic discipline of economics. Because Islam is "not merely a spiritual formula but a complete system of life in all its walks", these writers believed that it should logically follow that Islam also had its own economic system unique from and superior to non-Islamic systems. To date, however, there have been no agreements as to the methodological definition and scope of Islamic Economics. In the 1960s and 70s Shia Islamic thinkers worked to develop a unique Islamic economic philosophy with "its own answers to contemporary economic problems." Several works were particularly influential,

Eslam va Malekiyyat (Islam and Property) by Mahmud Taleqani (1951), Iqtisaduna (Our Economics) by Mohammad Baqir al-Sadr (1961) and Eqtesad-e Towhidi (The Economics of Divine Harmony) by Abolhassan Banisadr (1978) Some Interpretations of Property Rights, Capital and Labor from Islamic Perspective by Habibullah Peyman (1979).

Al-Sadr in particular has been described as having "almost single-handedly developed the notion of Islamic economics" In their writings Sadr and the other authors "sought to depict Islam as a religion committed to social justice, the equitable distribution of wealth, and the cause of the deprived classes," with doctrines "acceptable to Islamic jurists", while

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refuting existing non-Islamic theories of capitalism and Marxism. This version of Islamic economics, which influenced the Iranian Revolution, called for public ownership of land and of large "industrial enterprises," while private economic activity continued "within reasonable limits." These ideas helped shape the large public sector and public subsidy policies of the Iranian Islamic revolution. In the 1980s and 1990s, as the Islamic revolution failed to reach the per capita income level achieved by the regime it overthrew, and Communist states and socialist parties in the non-Muslim world turned away from socialism, Muslim interest shifted away from government ownership and regulation. In Iran, it is reported that "eqtesad-e Eslami (meaning both Islamic economics and economy) ... once a revolutionary shibboleth, is indubitably absent in all official documents and the media. It disappeared from Iranian political discourse about 15 years ago [1990]." But in other parts of the Muslim world the term lived on, shifting form to the less ambitious goal of interest-free banking. Some Muslim bankers and religious leaders suggested ways to integrate Islamic law on usage of money with modern concepts of ethical investing. In banking this was done through the use of sales transactions (focusing on the fixed rate return modes) to achieve similar results to interest. This has been heavily criticized by many modern writers as a means of covering conventional banking with an Islamic facade. In 2008 an economist and former advisor to Tony Blair, Tahir Iqbal, resolved the existing issues in Islamic economics of both providing a fully shariah compliant Islamic political economy (including the problem of government borrowing and mortgages) in his book "what is the sound of an invisible hand clapping", published by maison mascara books. The foundation of this was the quard al hasana (good debt)which when introduced with zakat on all assets sets in place a new framework that solves boom and bust and implies that poverty itself could be stopped using Islamic economics.

Traditional approach Property while many Muslims believe Islamic law is perfect by virtue of its
being revealed by God, Islamic law on economic issues was/is not "economics" in the sense of a systematic study of production, distribution, and consumption

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of goods and services. An example of the traditionalist ulama approach to economic issues is Imam Khomeini's work Tawzih al-masa'il where the term `economy` does not appear and where the chapter on selling and buying (Kharid o forush) comes after the one on pilgrimage. As Olivier Roy puts it, the work "presents economic questions as individual acts open to moral analysis: `To lend [without interest, on a note from the lender] is among the good works that are particularly recommended in the verses of the Quran and the in the Traditions.`" The Qur'an states that God is the sole owner of all matter in the heavens and the earth. Man, however, is God's viceregent on earth and holds God's possessions in trust (amanat). Islamic jurists have divided properties into three categories: Public property State property Private property
Public property

Public property in Islam refers to natural resources (forests, pastures, uncultivated land, water, mines, oceanic resources etc.) over which all humans have equal right. Such resources are considered the common property of the community. Such property is placed under the guardianship and control of the Islamic state, and can be utilized by any citizen, as long as it does not undermine the right of other citizens over it. Some types of public property can not be privatized under Islamic law. Muhammad's saying that "people are partners in three things: water, fire and pastures", has led some scholars to believe that the privatization of water, energy and agricultural land is not permissible. Other types of public property, such as gold mines, were allowed by Muhammad to be privatized, in return for taxes to the Islamic state. The owner of the previously public property that was privatized has to pay Zakah and, according Shiite scholars, khums as well. In general the privatization and nationalization of public property is subject to debate amongst Islamic scholars. Public property thus, eventually, becomes state or private property.
State property

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State property includes certain natural resources, as well as other property that can't immediately be privatized. Islamic state property can be movable, or immovable, can be acquired through conquest, or peaceful means. Unclaimed, unoccupied and heir less properties, including uncultivated land (mawat), can be considered state property. During the life of Muhammad, one fifth of military equipment captured from the enemy in the battlefield was considered state property. During his reign, Umar (on the recommendation of Ali) considered conquered land to be state property, instead of private property (as was usual practice). The reason for this was that privatizing this property would concentrate resources in the hands of a few, and prevent this property from being used for the general good of the community. The property remained under the occupation of the cultivators, but the taxes collected on it went to the state treasury. Muhammad said "Old and fallow lands are for God and His Messenger (i.e. state property), then they are for you". Jurists draw from this the conclusion that, ultimately, private ownership takes over state property.
Private property

There is consensus amongst Islamic jurists and social scientists that Islam recognizes and upholds the individual's right to private ownership. The Qur'an extensively discusses taxation, inheritance, prohibition against stealing, legality of ownership, recommendation to give charity and other topics related to private property. Islam also guarantees the protection of private property by imposing stringent punishments on thieves. Muhammad said that he who dies defending his property was like a martyr. Islamic economists have classified the acquisition of private property into three categories: involuntary, contractual and non-contractual. Involuntary means are inheritance, bequests, and gifts. Non-contractual is acquisition involves the collection and exploitation of natural resources that have not previously been claimed as private property. Contractual acquisition includes activities such as trading, buying, renting, hiring labor etc. A tradition attributed to Muhammad, with which both Sunni and Shi'ite jurists agree, in cases where the right to private ownership causes harm to others, then Islam is in favor of curtailing the right in those cases. Maliki and Hanbali jurists

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argue that if private ownership endangers public interest, then the state can limit the amount an individual is allowed to own. This view, however, is debated by others.

Market
Islam accepts markets as the basic co-ordinating mechanism of the economic system. Islamic teaching holds that the market, through perfect competition, allows consumers to obtain desired goods, producers to sell their goods, at a mutually acceptable price. The three necessary conditions for an operational market are said to be upheld in Islamic primary sources:

Freedom of exchange: the Qur'an calls on believers to engage in trade, and rejects the contention that trade is forbidden. Private ownership. Security of contract: the Qur'an calls for the fulfillment and observation of contracts. The longest verse of the Qur'an deals with commercial contracts involving immediate and future payments.

Interference
Islam promotes a market free from interferences such as price fixing and hoarding. Government intervention, however, is tolerated under specific circumstances. Islam prohibits the fixation of a price by a handful of buyers or sellers who have become dominant in the market. During the days of Muhammad, a small group of merchants used to meet agricultural producers outside the city and bought the entire crop, thereby gaining monopoly over the market. The produce was later sold at a higher price within the city. Muhammad condemned this practice since it caused injury both to the producers (who in the absence of numerous customers were forced to sell goods at a lower price) and the inhabitants of Medina. The above mentioned reports are also used to justify the argument that the Islamic market is characterized by free information. Producers and consumers should not be denied information on demand and supply conditions. Producers

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are expected to inform consumers of the quality and quantity of goods they claim to sell. Some scholars hold that if an inexperienced buyer is swayed by the seller, the consumer may nullify the transaction upon realizing the seller's unfair treatment. The Qur'an also forbids discriminatory means of transaction. Government interference in the market is justified in exceptional circumstances, such as the protection of public interest. Under normal circumstances, government non-interference should be upheld. When Muhammad was asked to set the price of goods in a market he responded, "I will not set such a precedent, let the people carry on on with their activities and benefit mutually."

Islamic Insurance
A book by Dr Aly Khorshid "Islamic insurance, with modern approach to Islamic Banking" Some Muslims believe insurance is unnecessary, as society should help its victims. Muslims can no longer ignore the fact that they live, trade and communicate with open global systems, and they can no longer ignore the need for banking and insurance. Aly Khorshid demonstrates how initial clerical apprehensions were overcome to create pioneering Muslim-friendly banking systems, and applies the lessons learnt to a workable insurance framework by which Muslims can compete with non-Muslims in business and have cover in daily life. The book uses relevant Quranic and Sunnah extracts, and the arguments of pro- and anti-insurance jurists to arrive at its conclusion that Muslims can enjoy the peace of mind and equity of an Islamic insurance scheme.

Banking
Interest (Debt arrangements) Most Islamic economic institutions advise participatory arrangements between capital and labor. The latter rule reflects the Islamic norm that the borrower must not bear all the cost of a failure, as "it is God who determines that failure, and intends that it fall on all those involved." Conventional debt arrangements are thus usually unacceptable - but conventional venture investment structures are applied even on very small scales. However, not every debt arrangement can be seen in terms of venture investment structures. For example, when a family buys a home it is not investing in a business venture - a person's shelter is not a business venture.

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Similarly, purchasing other commodities for personal use, such as cars, furniture, and so on, cannot realistically be considered as a venture investment in which the Islamic bank shares risks and profits for the profits of the venture. Money changers Due to religious sanctions against odious debt, Tamil Muslims have historically been money changers (not money lenders) throughout South and South East Asia. Natural capital Perhaps due to resource scarcity in most Islamic nations, this form of economics also emphasizes limited (and some claim also sustainable) use of natural capital, i.e. producing land. These latter revive traditions of haram and hima that were prevalent in early Muslim civilization. Welfare Social welfare, unemployment, public debt and globalization have been reexamined from the perspective of Islamic norms and values. Islamic banks have grown recently in the Muslim world but are a very small share of the global economy compared to the Western debt banking paradigm. It remains to be seen. if they will find niches - although hybrid approaches, e.g. Grameen Bank which applies classical Islamic values but uses conventional lending practices, are much lauded by some proponents of modern human development theory. Islamic stocks In June 2005 Dow Jones Indexes, New York, and RHB Securities, Kuala Lumpur, teamed up to launch a new "Islamic Malaysia Index" a collection of 45 stocks representing Malaysian companies that comply with a variety of Sharia-based criteria. Three variables (the total debt of an indexed company, its total cash plus interest-bearing securities and its accounts receivables) must each be less than 33% of the trailing 12-month average capitalization, for example. Popularity and availability

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Today there are many financial institutions, even in the Western world, offering financial services and products in accordance with the rules of the Islamic finance. For example, legal changes introduced by Chancellor Gordon Brown in 2003, have enabled British banks and building societies to offer so-called Muslim mortgages for house purchase. In 2004 the UK's first stand alone Sharia'a compliant bank was launched, the Islamic Bank of Britain. Several banks offer products and services to its UK customers that utilise the Islamic financial principles; such as Mudaraba, Murabaha, Musharaka and Qard. The Islamic finance sector was worth between 300 and 500 billion dollars (237 and 394 billion euros) as of September 2006, compared with 200 billion dollars in 2004. The number of Islamic retail banks and investment funds number in their hundreds and many Western financial institutions offer products that comply with Sharia law, including Citigroup, Deutsche Bank, HSBC, Lloyds TSB and UBS. In 2008, at least $500 billion in assets around the world were managed in accordance with Sharia, or Islamic law, and the sector was growing at more than 10% per year. Islamic finance seeks to promote social justice by banning exploitative practices. In reality, this boils down to a set of prohibitions--on paying interest, on gambling with derivatives and options, and on investing in firms that make pornography or pork.

Criticism
Its popularity notwithstanding, critics of Islamic economics have not been sparing. It has been attacked for its alleged "incoherence, incompleteness, impracticality, and irrelevance;" driven by "cultural identity" rather than problem solving. Others have dismissed it as "a hodgepodge of populist and socialist ideas," in theory and "nothing more than inefficient state control of the economy and some almost equally ineffective redistribution policies," in practice. In a political and regional context where Islamist and ulema claim to have an opinion about everything, it is striking how little they have to say about this most central of human activities, beyond repetitious pieties about how their model is neither capitalist nor socialist.

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Talking finance, although none of the above critics provide empirical evidence on the alleged claims; however, the so far withstanding critic of the Islamic financial practice pertains to its products structure. Interest-bearing (Riba) and speculation-involving (Gharar) trading are clearly prohibited by explicit canonical texts. Therefore presumably all the financial structures of all the Islamic products should be interest and speculation free. Nevertheless, some new empirical studies hypothesize that Islamic finance products structure is based on the Islamic prohibitions; however, these products risk management is still based on revoking the underlying prohibitions. The most promin ent case here is Islamic financial market products such as, inter alia, Salam and Istisna these products are used are hedging methods for the Islamic bonds Sukuk. If Sukuks originator or investors wish to hedge against interest rate or exchange rate risks then they have to use one of the former methods. These methods as they originally mimic the conventional risk management practice, should involve either interest-bearing or speculation-bearing trading or even both. There have been some innovations that try to avoid falling in interest-based and/or speculation based transactions. Parallel Salam and synthetics are the most recent.

Economic System of Islam

(IN SHORT)

Islam views life as a compact whole and does not divide it into many separate and conflicting parts. The economic aspect is one of the most important parts of our life, while not being the whole of it. The Islamic system is balanced and places everything in its right place. Islam has given detailed regulations for the conduct of our economic life which concerns mainly the earning and use of wealth. Man needs bread to live but he does not live for bread alone. This means that earning and spending money is essential for our living, but we do not live only for this. We have a greater purpose in life. We are Allahs agents (Khalifah) on earth. We not only have a body but we also have a soul and a conscience. Without our soul and conscience, we would be considered little more than animals. Everything in Islam is for the benefit and welfare of mankind. The economic principle of Islam aim at establishing a just society wherein everyone will behave responsibly and honestly, and not as cunning foxes fighting for as big

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a share of something as possible without regard for honesty, truth, decency, trust and responsibility. The Islamic Economic System is based on the following fundamental principles:

1. Earning and expenditure by Halal means.

Islam has prescribed laws to regulate earnings and expenditure. Muslims are not allowed to earn and spend in any way they like. The must follow the rules of the Quran and the Sunnah:

a. Any earnings from the production, sale and distribution of alcoholic drinks
are unlawful (Haram), as are earnings from gambling, lotteries and from interest (Riba) transactions (5:90-91, 2:275).

b. Earning by falsehood, deceit, fraud, theft, robbery and burglary is unlawful.

Deceitful acquisition of orphans' property has been particularly banned (2:188, 4:2, 6:152, 7:85, 83:1-5).

c. Hording of food stuff and basic necessities, smuggling and the artificial
creation of shortages are unlawful (3:180, 9:34-35).

d. Earnings from brothels and from such other practices which are harmful to
society are also unlawful (24:23). Islam strikes at the root of the evil and wants to establish a just and fair society. A Muslim must earn his living in Halal ways and he should always bear in mind that what ever he does, it is known to Allah. He will be accountable for his actions on the Day of Judgment. He cannot hide anything from Almighty Allah. Unlawful expenditure is also not allowed in Islam. It does not at all befit a Muslim to spend money irresponsibly. His actions should be responsible and meaningful. Extravagance and waste are strongly discouraged (7:31, 17:26, 19:27-31, 25:68).

2. Right to property and individual liberty

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Islam allows a person to own his earnings. The Islamic state does not interfere with the freedom of speech, work and earnings of an individual provided this freedom is not harmful to the greater good of society. Every individual will be answerable to Allah swt for his or her actions (4:7, 36:71, 16:111).

3. System of Zakah (welfare contribution).

Compulsory payment of Zakah is one of the main principles of an Islamic economy. Every Muslim who owns wealth more than his needs must pay the fixed rate of Zakah to the Islamic state. Zakah is a means of narrowing the gap between the rich and the poor. It helps the fair distribution of wealth. It is a form of social security. The Islamic state is responsible for providing the basic necessities of food, clothing, housing, medicine and education to every citizen. No-one should have any fear of insecurity or poverty (9:69, 103, 98:5).

4. Prohibition of interest (Riba).

An Islamic economy is free of interest. Islam prohibits all transactions involving interest. Interest is neither a trade nor a profit. It is a means of exploitation and concentration of wealth. The Quran says: "They say, trade is like interest and Allah has allowed trade and prohibited interest." (2:275). "Whatever you pay as interest, so that it may increase in the property of (other) men, it does not increase with Allah."(30:39). "O you who believe, do not take interest, doubling and quadrupling, and keep your duty to Allah, so that you may prosper." (3:130). "O you who believe, observe your duty to Allah and give up what remains (due) from interest, if you are believers. But if you do not do it, then be warned of war from Allah and His messenger; and if you repent, then you shall have your capital. Do not exploit and be not exploited." (2:278-279). Interest is the basis of modern capitalism. It is completely opposite to Zakah. Zakah channels wealth from the rich to the poor while interest takes away wealth from the poor and hands it over to the rich.

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Modern economics are so inter-linked with interest that people may think it is impossible to go without it. The situation is really very complex. But, we must aim at getting rid of interest. Unless people fight against the tyrant rulers and establish an Islamic state -the problems will still be there. Further, until Islamic state established, it will make us feel impossible to solve this Riba (interest) problem. Allah swt has not imposed on us something impossible. An interest-free economy will be a boon for all peoples of the world.

5. Law of Inheritance (Mirath).

The Islamic law of inheritance is a wonderful system of stopping the concentration of wealth. It provides very detailed laws regarding the rights of dependents over the property of the deceased person. Suratun Nisa (chapter four) of the Quran deals with the law of inheritance in great detail (4:7-12, 4:176).

Conclusion
In addition to the above basic principles Islam has laid down many more rules about economic life. An Islamic state must bring all productive resources into use, including unemployed man-power, unused land, water resources and minerals. An Islamic stare must take steps to root out corruption and all harmful pursuits even if they are economically lucrative. Individual freedom may have to be sacrificed for the social good. Islam encourages simplicity, modesty, charity, mutual help and cooperation. It discourages miserliness, greed, extravagance and unnecessary waste. Here, we have discussed the main points of the Islamic economic system and we have no scope to go into the details in depth. It would be better for you to study some standard books on Islamic Economic from reliable sources (i.e. Islamic book shop etc.) to have a good grasp of this important aspect of our life .

CONCLUSION:

ISLAM IS THE BEST