Economics Chapter 17 Economic System

Economics Chapter 17 Economic System Class 12 notes for fa fsc. what is capitalism? discuss its merits and demerits.

Q.1) What is capitalism? Discuss its merits & demerits.

Table of Contents

Answer:

Capitalism

(Free market economy)

Capitalism is the economic system based on the principle of private ownership of economic resources and individual freedom in all economic matters. nder this system, all farms, factories, transport and other means of production are the property of individuals and firms. They are free to use them any way they like and earn income. There is freedom in all spheres of economic activity, e.g., freedom of occupation and freedom of contract. The government has a minimum role in this system. Capitalism is sometimes called a free enterprise system or market economy.

Merits

Capitalism has the following merits.

1. Automatic Working: Capitalism works automatically without any direction or control by the real planning authority. If a disturbance occurs somewhere, it automatically gets corrected through changes in prices. Suppose in some year, production of potatoes falls short of existing demand. The price of potatoes will rise. At a higher price of potatoes, people will start consuming more of some other vegetables and will reduce demand for potatoes. On the other hand, growers of other commodities will be attracted to grow and supply more potatoes. Thus, equilibrium in the market will be reached without-using any force. (Similarly, if more people become doctors than needed, their wages will fall. Then fewer new persons will come to this field).

2. Optimum utilization of resources: In order to maximize their profits, every producer and entrepreneur tries to use his resources in the most economical way. People avoid waste and do not want to keep their resources idle or underutilized. For example, the owner of a house will try that his house never remains vacant. A factory owner will never like to unnecessarily close his factory and a worker will not like to remain out of work. Thus, self-interest under capitalism ensures optimum use of resources and time. For example, if a private bus has some trouble, the owner tries to get it repaired at the earliest white if that is some government vehicle, it may remain In the workshop for weeks.

3. Incentive for hard work and higher efficiency: Under capitalism, more efficient producers get higher profit and expert workers receive higher returns, so people are tempted to work hard and improve efficiency. They are induced to use the latest machinery, learn new technologies and get training to increase their earning capacity. A private producer does his best to minimize cost of production. Nowadays, everybody is trying to learn and use computers in their business since computers increase efficiency.

4. Rapid economic development: Due to the right of private property, people are induced to save a part of their incomes and invest it. This increases the rate of capital formation. And because human or material resources remain unnecessarily idle, the rate of economic development remains high. The entrepreneurs in order to earn profits take risk. They innovate and accelerate the improvement in technology.

5. Democratic: There is freedom to produce or to consume anything. There is no interference by the government in consumer’s choice and the selection of professions. Since the tastes and choice of millions of consumers form the basis of the working of the system, it is democratic in nature.

6. Adaptability: Due to complete freedom, competition and self-interest, there is struggle for survival. The rule, ‘survival of the fittest’ prevails. As conditions change, everybody tries to adapt to the new situation as early as possible. As a result this system has a remarkable capacity to adapt to new circumstances.

Demerits

Capitalism has many drawbacks as discussed below.

1. Concentration of Wealth and Economic Power: Due to freedom of enterprise and absence of perfect competition, monopolies start merging and national resources get concentrated in fewer hands. Big business controls the market and small producers are eliminated Prices are unduly raised and consumers are exploited. Those who already have a lot, get more chances to increase their wealth.

2. Wasteful competition: Instead of perfect competition, imperfect competition with all its shortcomings exists in capitalism. Huge resources are wasted on advertisement and publicity to eliminate the rivals, the resources of those who lose in this race also go waste Too many varieties are produced, which are not only wasted, but also raise per unit cost of products

3. Human welfare ignored: Since goods are produced for profit and since profits are greater in production of those goods which are used by rich people, the entrepreneurs are more interested in production of luxuries than goods used by- common man in this way, general human welfare is neglected.

4. Exploitation takes place in different forms: Labour is exploited by giving lower wages, consumers are exploited by providing them inferior quality goods at higher prices, and weaker sections of society are exploited by denying them opportunities for a reasonable life. Wealthy people buy goods in too much quantity of goods that nothing is left for the poor.

5. Malpractices: In order to increase profits, all kinds of malpractices are resorted to. Tax is evaded. Hoarding and speculation continue in the name of trade. Black money is used to live a luxurious life at the cost of national interest.

6. Economic instability and unemployment: Economic fluctuations are part of capitalism. Since there is no coordination among producers, sometimes there is overproduction of goods in the market. Stocks accumulate. As a result, the producers reduce their output, which results in unemployment.

7. Social injustice and income inequalities: Few rich capitalists enjoy all kinds of luxuries while millions of wage earners live in poverty, struggling for minimum necessaries of life. There is great inequality in opportunities for various groups of people. This situation gives rise to class conflict. The poorer sections think that the root cause of their miseries are the capitalists.

8. Incentive to work may suffer: Under pure capitalism, the gap between the rich and the poor widens. The poor lose incentive for hard work since they find no hope of improvement in their condition. On the other side, the rich have less incentive to struggle because they already enjoy a lot.

Q.2) What are the characteristics of Socialist Economic System?

Answer:

Socialism

The idea of socialism was developed by Kart Marx in the 19th century. It was put forward as a reaction to the evils of capitalism. Socialism has special appeal for the working classes in 1917, Russia adopted socialism and soon it spread to a large part of the world. However within a few decades, people got disappointed with the poor performance of this system and almost all countries abandoned It in its original form. Yet it is a fact that Socialism has left a deep impact on human thinking. Many characteristics of socialism have been adopted in capitalist countries giving them a new form as mixed economies. Now mixed economies are the fashion of the day.

Meaning

Socialism does not have a common meaning. Different people include different things in it. However, the basic thinking is the same, i.e., the government must have control over economic activities. Private ownership of land and capital is abolished or put under tight restrictions. Thus, we can say that,

Socialism is a system under which all capital and natural resources are owned by the state and all production is centrally planned as if the whole economy is one big firm.

Features

1. State ownership of means of production: Private ownership of means of production is abolished and lands, factories, mines, etc. are state owned. The profit goes to the government treasury which is used for the benefit of the whole society. Sometimes, instead of direct control, cooperative societies are formed.

2. No private enterprise: All production is under state control and private individuals have no right to establish a business of their own.

3. Economic equality is the basic slogan of Socialism. All means of production are used for collective interest of the people. In the absence of earning opportunities, except as a government employee, inequalities of income and-wealth remain within narrow limits. Since the system of inheritance is not there, accumulation of wealth does not take place.

4. Equal opportunities: Socialism provides equality of opportunity. Every young person has the same opportunity to receive education and training according to his aptitude and strive to rise in life.

5. Economic planning: Economic planning is inevitable in socialism. When means of production are under the control of the government, they have to be utilized according to a plan so that only those goods are produced which are needed by the people. A central planning authority is set which determines the objectives and priorities for national output. For example, after taking into consideration all cultivable land, the planning authority decides how much land is to be used for wheat growing and how much for rice.

6. Social welfare and social security: The guiding force behind socialism is social welfare and not the profit motive. State prepares a plan for the benefit of the whole community. It is the duty of the government to provide social security to every person and arrange for his education, health and recreation. The government also ensures job security. There is no concept of unemployment in socialism.

7. Classless society: Socialism strikes at the root of the class system. There is no landlord or tenant and no capitalist or labour. The gap between the rich and the poor is narrow and it is not hereditary. The children of today’s highly paid persons may be poor tomorrow, if they cannot compete with others through education and hard work.

Q.3) What are the merits and demerits of Socialism?

Answer:

Merits

1. Social justice: Socialism brings social justice and equitable distribution of income. Exploitation of weaker sections of society is stopped and equal economic opportunities exist for all. Everybody can find a place in life according to his aptitude, education, struggle and mental and physical faculties.

2. Better allocation of resources: Productive resources are used in the best interest of the nation. Because of absence of monopolies and vested interests, only those goods are produced which have maximum benefit for the largest number of people. Balance is maintained between consumers’ preferences and social welfare. Production of luxuries is discouraged.

3. Rapid economic development: In the initial stages of development, when a country is poor, state control of economic activities accelerates development. This is what happened in Russia, China etc. Under socialism, human and material resources are used according to a plan. Rates of saving and investment are kept high. Since profit is no consideration, basic industries producing capital goods are given preference.

4. Social security: It is a great merit of socialism that everybody is assured of food, basic education, medical care and job. These are the problems which make the life of a poor man miserable under capitalism. The overall standard of living may be lower under socialism, but there is security of income and job.

5. Economic stability: Socialism brings economic stability. Unlike capitalism, where fluctuations in prices, incomes and employment level occur regularly in the form of a business cycle, economic conditions under socialism remain stable. There is no fear of overproduction, unemployment or inflation.

Demerits

1. Loss of economic freedom: Everybody has a natural love for freedom of action. They cannot join a profession of their choice. Jobs are allotted according to the scheme of the planning authority. A person may be unsatisfied with his job but cannot easily shift to some other occupation.

2. Loss of consumer’s sovereignty: Under socialism, the quantities of various goods to be produced are decided by the central planning authority. Consumer’s choice is given less preference. So the consumer loses freedom of choice. This fact decreases people’s welfare and satisfaction. A person who likes brown shoes, if offered black ones, cannot feel satisfied.

3. Lack of incentives: Self-interest is a natural instinct which is a motive force in capitalism. A person puts his best efforts only if he feels that the fruits of his labour will come to him. But under socialism, people are expected to work for collective welfare. They show less interest in the job. Their productivity remains low.

4. Complete economic equality is not possible: A basic slogan of socialism is economic equality. But experience has shown that socialism fails to bring equality. The difference between the rich and the poor continues and the goal of classless society is not achieved. Only new classes emerge. In place of conflict between capitalists and labourers, a new kind of conflict and inequality appears i.e. between powerful factory managers and workers or between bureaucrats and lower office workers.

5. State too powerful: There is too much concentration of power in the state. And when absolute political and economic power is held by the state, individuals are reduced to cipher. Due to loss of personal liberty, there is degradation of human personality and his capabilities deteriorate. Under too many controls and limited opportunities, even a dynamic personality becomes a dull and routine worker.

6. Maladjustment in demand and supply: Since no indicator exists in the form of price, the changes in demand and supply are not noticed in time. A chronic maladjustment demand and supply develops. The central planning authority may try to adjust supply to demand but due to fixed prices in the market, it is difficult to correctly record changes taking place in consumers’ preferences

7. Bureaucracy and red tapism: In all spheres, bureaucratic attitude and excessive bossism develops. Duties are performed as a routine. Prompt decisions are not taken, so inefficiency prevails all round. Civil servants are always unsuitable for business decisions. The conditions and considerations are quite different in business than in Govt, offices. The initiative, enterprise and risk-taking attitude needed for business cannot develop in secure government jobs.

Q.4) Give main features of Islamic economic system.

Answer:

Islamic Economic System

Islam is a complete code of life and perfect guidance in all human activities. There are many Islamic teachings relating to the economic life of the people. These teachings form the basis of what we call Islamic Economic System. This system is quite different from capitalism and socialism. Islam has its own peculiar approach to solution of various economic problems. Basic structure of Islamic economic system is found in the Holy Quran and Sunnah.

Islamic economic system is that part of the Islamic way of life which relates to the economic activities of the people. Its essential elements are eternal as revealed by Allah in the Holy Quran and clarified and exemplified by the Messenger through his Sunnah. It is flexible in details of economic institutions, formed in response to the needs of a particular period of human civilization.

Features

1. A part of overall philosophy of life: Islamic economic system is not an independent system like capitalism, it is a part of a life system called Islam. Its full benefits are reaped when the society becomes Islamic in all respects. Its successful implementation requires practice of Islamic values in political and social fields also.

2. Objectives: Islamic system has some clear objectives to achieve. These objectives are broader than those of socialism and capitalism. Moreover, conscious efforts are made by the people in their individual capacity and by the state in this direction. The system is not automatic. Its main objectives are:

i. General welfare of the people Islamic concept of ‘Falah’ includes the welfare in this world as well as welfare in the world hereafter. Islamic state is essentially a welfare state.
ii. Basic needs of the people should be met on priority basis.
iii. Ail efforts should be made to establish social justice.
iv. No exploitation of any kind to be tolerated.
v. The economic and social life of the people will be organized in a peaceful, smooth and harmonious way. Conflict should be avoided.

3. Basic Values: All economic activities are based on certain moral values and economic problems are to be solved in the light of these values. The conduct of every Muslim consumer, producer or a person in any other capacity must conform to these universal values of Islam.

a. Halal Haram: Halal activities are those which are desirable and have been permitted by Islam. Haram activities are harmful for society and have been forbidden. For example, production of wine, gambling, hoarding, under-measuring etc. are not halal.

b. Justice: It means that everybody must get his due. Rights of the people are to be protected through justice (even at the cost of annoyance of one’s relatives).

c. Equality Islam preaches equality: But perfect economic equality is unnatural and impossible to achieve. Some inequalities are inevitable because of differences in capabilities of human beings. Islam preaches social and human equality. In many respects, a slave is also equal to his master, e.g., he must be given the same food. Everybody has equal right as for as basic necessities of life are concerned 1

d. Cooperation: People must cooperate with others for common well-being. They should develop a helpful attitude towards fellow beings.

e. Brotherhood: All Muslims must behave to each other as if they are brothers. They must share the sorrows and happiness of other Muslims, rich or poor.

f. Moderation: Islam believes in moderation in all economic activities such as the use of resources, consumption of goods, work and leisure.

g. Benevolence: People are enjoined to treat others with benevolence i.e. to make others pleased, they may sacrifice and give them more than their due right or share.

Man is only a trustee. He must not misuse this trust by using his property and resources against the teachings of Islam, e.g. A person cannot rent his house as a gambling den. Similarly a car owner, whose car gives excessive smoke, must be stopped to create trouble for the health of otters. Property should not be used against public interest. Nobody can keep the property unused permanently. A land permanently kept uncultivated must be resumed by the state and distributed among farmers.

5. Circulation of wealth and equitable distribution: Islam is against concentration of wealth in few hands and aims at its wider distribution. The situation where some roll in millions while some starve is against the spirit of Islam There are many verses in the Holy Quran which stress the importance of circulation of wealth. Islam teaches its followers that if they have surplus wealth and property, they should give it to other deserving persons such as orphans, destitute, widows, poor neighbors and the disabled. Distribution of wealth is made equitable through Zakat, laws of inheritance and abolition of interest.

6. Zakat: In Islamic economic system, Zakat has a great role to play. Zakat is the right of the poor in the wealth of the rich, it is an effective means for transferring a part of wealth from the rich to the poor, it cures many evils which arise in a society’ where there is concentration of wealth and great social inequalities.

7. Prohibition of interest is distinctive feature of Islam, in fact, interest is the greatest source of economic exploitation. It supports a rich idle class on the labour of the poor. Interest is unearned income and is the basis of many social evils.

8. Role of government: An Islamic state is a welfare state. The government is responsible not only to maintain law and order but also to ensure that everybody has the opportunity to earn a respectable living through lawful means. The government has to eradicate social evils and malpractices such as corruption, nepotism, drugs, monopolies and black marketing. An Islamic state is expected to implement policies and plans which regulate the economy and bring prosperity and progress for society.

9. No class conflict: Islam creates a society where brotherhood, benevolence and cooperation prevail. Nobody is subjected to exploitation. Employers are bound to pay just and due wages to labour. Labourers have to perform their duties honestly, in a society where the rich are duty-bound to help the poor, there can be no question of conflict between them.

10. Dignity of labour: Islam firmly believes in dignity of labour. No profession is to be degraded. A labourer must be given due honor and be paid wages without delay.

11. Fair market practices: All transactions in markets and dealings should be fair and just. Malpractices such as hoarding, speculation; under weighing, adulteration, artificial monopoly are not to be allowed. Selling through deceit or misleading advertisements is not permitted.

12. Public and private sectors: An Islamic economy is a kind of mixed economy. The relative importance of public and private sectors will vary according to circumstances. The government can undertake any productive activity and can nationalize any enterprise in the common interest. Equality of opportunity In Islamic economic system, steps will be taken to create equality of opportunity for all. Restrictions will be put on “haves” and support will be provided to “have knots” to narrow the gap between them. The Govt, must spend huge amounts on public utilities, education, health and highways.

13. Nature of freedom: Islam allows freedom in economic activities. But this freedom is not absolute and must be enjoyed within limits prescribed by Islam to protect the rights of others.

14. Balance between individual and state: Neither individual freedom, desires and efforts are completely sacrificed for the state nor state is weak or ineffective so that it cannot ensure social justice and implement policies for general welfare.

Q.5) Compare the main features of capitalism, socialism and Islamic economic system.

Answer:

Comparison of Capitalism, Socialism & Islamic Economic System

The three economic systems, i.e., capitalism, socialism and Islamic system have different approaches to solve the economic problems of a society. These have been compared in the following lines.

1. Distinguishing character: if we compare the three systems we find that they stress on different aspects in the economic field.

Capitalism’s main stress is on freedom of action. There is freedom of enterprise, freedom of contract and freedom of using one’s property’. Consumers are also free to buy and consume anything, the role of state in economic matters is kept to the minimum. State undertakes only those activities which are impossible to perform individually.

Socialism stresses on equality. It aims to control all means of production through state ownership. The resources are then used for the collective benefit of the people. Inequalities of incomes and economic opportunities are reduced. The slogan of equality has been so much attractive during the 20th century that many countries went through socialist revolutions.

Islam’s basic theme in economic matters is justice. There should be social justice and everybody should get his due. Some economic inequality between rich and the poor may exist but social injustice or exploitation of the poor is not tolerated.

2. Ownership and use of Productive Resources: Under capitalism people have the right to own property and to use it as they like. They can purchase, sell, hire and transfer wealth and property to anybody. Owners of means of production can use them for their personal gain and earning profit. In socialism all means of production are owned by the state. People are employed in different capacities who earn wages.” There is no question of earning rent, interest or profit.

In Islamic economic system, private ownership of property and means of production is allowed. However, the nature of ownership is different from that under capitalism. A person is not an absolute owner. Neither he has unlimited freedom-to use his property as he likes. He is only a trustee and can utilize his wealth and property according to the injunctions of Islam. The state can also put some restrictions on use of property in the larger interest of society. A person cannot keep his productive property idle for long. If people cannot make use of their lands or property, the government can get it and distribute it among others

3. Objectives: Capitalism and socialism both aim at material well-being of the people. But the Islamic concept of well-being is a blend of materialism and spiritualism. All economic activities under Islamic economic system are to be carried out to increase welfare (Falah) in this world and in the world hereafter. On the one hand, people are allowed to enjoy material facilities and on the other hand, a more satisfied society is created by encouraging spiritual and higher human values.

4. Production (or ‘What to Produce’): This is the first question in any economy, i.e. what goods are to be produced and in what quantities. Under capitalism this problem is solved through a price mechanism. People produce those goods which ensure higher profits. The profits are calculated on the basis of prices of inputs and outputs. Under socialism, the decision about what to produce is done by the central planning authority. The planning authority fixes the priorities and allocates the resources to produce various goods. They decide how much wheat and how much cloth will be produced.

In Islamic system, the decision about production of goods will be taken by private individuals, since they own means of production. However, if the producers want to produce something which is not permitted by Islam, the government will intervene and stop production. If the government finds that some productive activity is against the interest of the people, it will take action, e.g., if a firm produces cars which emit smoke, the government may not allow it to continue its production. The government itself can also set up some factories. Thus under Islamic system, individual firms will decide what to produce on the basis of market prices but they must work within limits. The government will use its authority to ensure that an atmosphere is created in the country where people carry out activities peacefully, honorably and through ‘halal’ and legal methods.

5. Distribution of Income (or ‘For Whom to Produce’): Every system must have set rules as to how the national income will be distributed, i.e., for whom the production will be done. In capitalism, people are free to choose any profession and produce anything in accordance with the trend of prices. So the shares of different owners of factors (capitalists, landlords, labourers and entrepreneurs) are decided by the forces of demand and supply. Price mechanism plays its role and determines rents, wages, interest and profit which is actually the share of these owners of production in national income, in socialism, ail enterprise and means of production belong to government; people get only wages. Ail rent, profit and interest goes to the state. Everybody gets a share in national income according to the decision of the central planning authority.

In Islamic system, most of the decisions about production are taken by private individuals and firms in the light of market prices, so market prices play a major role in deciding about relative incomes of different groups of people. However, if the government feels that labourers are not getting enough wages to meet their basic needs, it can intervene and raise wages. Islamic state ensures that the distribution of income does not become too uneven.

6. Consumption: In capitalism there is no restriction on consumption of goods and services of all kinds. Keeping in view the relative prices of commodities in the market, people decide which commodities they should consume. In socialism, people have to consume those commodities which the central planning authority directs to produce. Individual taste is thus severely restricted.

In Islamic system, only those commodities which are ‘Halal’ (i.e., permitted by Islam) are consumed. Consumption is mostly decided by prices in the market. However, in consumption, moderation will be observed and ail kind of wastage has to be avoided e g. wastage of electricity or water to impress others or just out of negligence is not desirable in Islamic society

7. Class Conflict: In capitalism, conflict between various classes such as industrialists and labourers or landlords and tenants takes place. In socialism, there are no such classes, so no question of class conflict arises. In Islamic system, although there are different classes but since they cooperate; have respect for the rights of others and help each other, no class conflict takes place. Everybody is a member of Islamic brotherhood, whatever job he may be doing.

8. Interest: In capitalism: the whole system revolves around the institution of interest. In socialism, interest of capital is taken away by the government which is spent for social benefit. In this system, interest does not pay any role in saving and investment activities. In Islamic state interest is completely abolished. In this way a big source of exploitation of the poor classes does not exist. Islam has a greater concern for the ‘interest’ of human labour than the interest of capital.

9. State vs. people: In capitalism the role of state is quite weak and individuals have excessive freedom. In socialism, the state is ail powerful and individual initiative and enterprise is killed. In Islamic system every individual has some basic rights about life, honor and property. At the same time the state can also intervene to ensure economic justice, creating equal opportunities for people to earn a living. If people are starving and there is widespread unemployment, it means that the government is inefficient.

Conclusion

Capitalism and socialism are two extremes. Islamic system is a middle path. Islamic system is a natural system in which self-interest and social interest have a good blend, the private sector and public sector exist side by side. Freedom exists within limits. Basic needs are met on a priority basis. Due to observing both material and spiritual values, people are satisfied and the system works smoothly.

Q.6) Write note on mixed economy

Answer:

Mixed Economy

History

A mixed economy, as is clear from the name, is a mixture of two opposite economic systems i.e. capitalism and socialism. During the nineteenth century, all countries had free market economies and the government intervention was quite small. But, with the passage of time, the evils of capitalism such as unemployment, inequalities in distribution of income and wealth and business cycles became quite clear.

In the beginning of the 21th century, as a reaction to and as a solution to the evils of capitalism, some countries adopted socialism. Under socialism, there was complete control of the state overall economic activities and the whole economy was run and directed through comprehensive planning. Initially, socialism appeared very successful.

Many countries increased the rate of economic growth, ensured jobs for all and reduced inequalities of wealth. It was felt as if the whole world will one day come under socialism. But soon the drawbacks surfaced up. Not only people’s tastes in choice of goods were ignored, but also the promise of quality of opportunities for all did not come true.

The rate of economic development slowed down and people started resenting the loss of their personal freedom. Socialist economists failed to match the rapid progress in technology by capitalist countries. As a result a socialist countries started freeing the economies from state control. Now, at the beginning of the 21th century, we find that neither there is pure capitalism, nor complete socialism anywhere but a combination of the two i.e. mixed economies.

We can define mixed economy as

“Mixed economy is an economic system which is a combination of capitalistic economic freedom and the principles of socialistic control.”

“Mixed economy is an economic system in which private and public sectors co-exist in an economic field.”

Every country has its own variant of mixed economy. We can divide all varieties into two broad categories.

a. The economy where public sector dominates and private sector is weaker

(China)

b. The economy where most economic activities are in private hands. Public sector is limited to only provision of basic infrastructure and some social problems of health, education etc. e.g Japanese and Pakistan economy.

Pakistan’s economy is a mixed economy. In the past, the public sector was quite strong, but now the public sector is limited to only providing basic infrastructure like gas, water, electricity and roads. Our economy consists of;

Public Sector.
Semi-public or Autonomous Sector.
Private Sector Features.

Mixed economy has the following main features:

1. Public and Private Sectors co-exist: Directly productive activities like production of goods are in private hands and the government provides public utilities like water and social overheads like highways.

2. Price mechanism works through forces of demand and supply as in capitalism. However, sometimes the government interferes, to influence some prices to safeguard the interest of the common people.

3. Private Sector is regulated to check monopolies or concentration of wealth.

4. Freedom of consumer’s choice is available to a very large extent.

5. Protection of rights of labour and of weaker classes of society is the responsibility of the government.

6. Planning of the economy is undertaken only in a broad sense.

7. Indirect regulation of the economy through monetary and fiscal policies.

8. Most of the means of production are in private ownership.

Q.7) Explain features of the best economic system.

Answer:

Islamic Economic System

Islamic economic system is that part of Islamic way of life which relates to the economic activities of the people. Its essential elements are eternal as revealed by Allah in the Holy Quran and clarified and exemplified by the Messenger through his Sunnah. It is flexible in details of economic institutions, formed in response to the needs of a particular period of human civilization.

Features

a. General welfare of the people Islamic concept of ‘Falah’ includes the welfare in this world as well as welfare in the world hereafter. Islamic state is essentially a welfare state.
b. Basic needs of the people should be met on priority basis.
c. Ail efforts should be made to establish social justice.
d. No exploitation of any kind to be tolerated.
e. The economic and social life of the people will be organized in a peaceful, smooth and harmonious way. Conflict should be avoided.

i. Halal Haram: Halal activities are those which are desirable and have been permitted by Islam. Haram activities are harmful for society and have been forbidden. For example, production of wine, gambling, hoarding, under-measuring etc. are not halal.

ii. Justice: It means that everybody must get his due. Rights of the people are to be protected through justice (even at the cost of annoyance of one’s relatives).

iii. Equality Islam preaches equality: But perfect economic equality is unnatural and impossible to achieve. Some inequalities are inevitable because of differences in capabilities of human beings. Islam preaches social and human equality. In many respects, a slave is also equal to his master, e.g., he must be given the same food. Everybody has equal right as for as basic necessities of life are concerned 1

iv. Cooperation: People must cooperate with others for common well-being. They should develop a helpful attitude towards fellow beings.

v. Brotherhood: All Muslims must behave to each other as if they are brothers. They must share the sorrows and happiness of other Muslims, rich or poor.

vi. Moderation: Islam believes in moderation in all economic activities such as the use of resources, consumption of goods, work and leisure.

vii. Benevolence: People are enjoined to treat others with benevolence i.e. to make others pleased, they may sacrifice and give them more than their due right or share.

4. Right of private property and concept of ownership: Islam allows the right of property. A person can earn wealth and get property’ through his own efforts or through inheritance. However, the concept of ownership in Islam is different from that in other systems. According to Islamic view, absolute ownership of what we possess belongs to Allah. Man is only a trustee. He must not misuse this trust by using his property and resources against the teachings of Islam, e.g. A person cannot rent his house as a gambling den. Similarly a car owner, whose car gives excessive smoke, must be stopped to create trouble for the health of otters. Property should not be used against public interest. Nobody can keep the property unused permanently. A land permanently kept uncultivated must be resumed by the state and distributed among farmers.

10. Dignity of labour: Islam firmly believes in dignity of labour. No profession is to be degraded. A labourer must be given due honor and be paid wages without delay.

11. Fair market practices: All transactions in markets and dealings should be fair and just. Malpractices such as hoarding, speculation; under weighing, adulteration, artificial monopoly are not to be allowed. Selling through deceit or misleading advertisements is not permitted.

13. Nature of freedom: Islam allows freedom in economic activities. But this freedom is not absolute and must be enjoyed within limits prescribed by Islam to protect the rights of others.

Q.8) Write notes on the following.

i) Production of wealth in Islam.

ii)Consumption in Islam.

Answer:

Production of wealth in Islam

Production function in economics explains the functional relationship between inputs and output. Whatever mathematical form the production function takes, i.e. Cobb Douglas, Constant Elasticity of Substitution etc, the basic ingredients of any production function are inputs and how they relate with output. The most commonly taken inputs are Labor (N) and Capital (K). Total Factor Productivity (TFP) is the summary measure of the impacts of other inputs, social and legal infrastructure and the technological change. Below, we summarize the impact of Islamic Economics principles on the production function in an economy.

Factors of Increase in Capital

1. Ban on interest increases investable capital

Tax on cash and capital at 2.5% will force the people to invest their money capital in productive uses. With prohibition of interest, rational households will use the money capital in their own business or invest with equity participation in Mudarabah and stocks etc.

2. No tax beyond Zakah increases investable capital

With a lenient rate of Income Zakat, i.e. Khums (5%) and Ushr (10%), the productive sector is provided with incentive to ensure achieving potential output with lenient fiscal levies and circulation of capital through prohibition of interest. This could bring about increase in output per person in an economy and could bring stability in prices

Besides this, a consistent and credible low Zakat rate policy with a broader Zakat base would ensure: 1) minimum distortions, 2) boost aggregate demand and 3) encourage investment by decreasing costs of doing business. This could also simultaneously solve macroeconomic problems of imperfection in markets by increasing competition and helping to reduce market power.

3. Disallowance of risk free money increases the entrepreneurial culture

Money itself has no intrinsic value and is neither a rentable asset nor a tradable commodity as per Islamic principles. If capital is combined with labor, it “could” produce profit, but if money alone is lent, the interest it earns is not permissible as per Islamic principles. Interest is neither a justifiable reward of money nor capital. Money holder/owner has to convert it in one of the other factors of production, namely 1) land with natural resource, 2) physical capital stock and 3) or become an investing entrepreneur to have any justifiable compensation out of the production process

Consumption in Islam

The basic principles of consumption laid down by Islam are three: Consumption of lawful (Halal) things, consumption of pure and clean things and exercise of moderation in consumption. These principles are briefly described as under:

1. Principle of Halal: A Muslim has been enjoined upon by Islam to eat only that food which is ‘Halal’ (lawful and permitted) and not to take that which is ‘Haram’ (unlawful and forbidden). The Qur’an says: “…….Eat of that which Allah hath bestowed on you as food lawful and good, and keep your duty to Allah in whom ye are believers”.(5:88). In other verse, the Qur’an has mentioned prohibited or Haram items of food and has said: “Forbidden unto you (for food) are carrion and blood and swine-flesh, and that which hath been dedicated unto any other than Allah………”(5:3) The principle of Halal and Haram also applies to items of expenditure besides food. The followers of Islam are required to spend their earnings on Halal or permitted expenses and refrain from spending on Haram or prohibited things such as wine, narcotics, prostitutes, gambling, luxuries, etc. We shall, insha Allah, discuss the Islamic concept of Halal and Haram in detail later on.

2. Principle of Cleanliness and Wholesomeness: The Qur’an enjoins upon mankind: “O mankind ! Eat of that which is lawful and wholesome in the earth, and follow not the footsteps of the devil. Lo! he is an open enemy for you” (2:168). At another place, the revealed book of Islam addresses its followers thus: “O ye who believe! Eat of the good things wherewith We have provided you, and render thanks to Allah…….”(2:172). Again the Qur’an says: “So eat of the lawful and good food which Allah hath provided for you…….” (16:114). Thus the Holy Qur’an impresses upon the people to eat good things which Allah has bestowed upon them. The word used by the Qur’an is ‘Tayyab’ which means anything one finds pleasing, sweet, agreeable, wholesome, pure and conducive to health. The word ‘Khabaith’ is opposite of Tayyab which means things one finds impure, displeasing, bad, and disagreeable in sight, smell or eating. The believers have been exhorted to take for food those things which are Tayyab and avoid those which are Khabaith. Prophet Muhammad (PBUH) in his following Ahadith has stressed cleanliness in food:

(i) Salman reported that the Messenger of Allah said: “The blessing of food is washing of hands before it and washing of hands after it.” -(Tirmizi)

(ii) Abu Qatadah reported that the Messenger of Allah said: “When one of you drinks, he should not blow into the vessel.” -(Bukhari)

(iii) Jaber reported that the Messenger of Allah said: “When you go to sleep, put out the lamp and shut the doors and cover the food and drink.” -(Bukhari)

3. Principle of Moderation: The principle of moderation in consumption means that one should take the food and drinks with moderation and avoid excess because excess of intake is harmful to health. The Qur’an says: “……… and eat and drink, but be not prodigal. Lo! He loveth not the prodigals…..” (7:31). Again the Qur’an says: “O ye who believe ! Forbid not the good things which Allah hath made lawful for you, and transgress not……..”(5:87). Thus overloading of the stomach is prohibited. It is also prohibited that one should adopt self-denying practices followed by ascetics and monks and deprive himself of some foods which Allah has made lawful. The principle of moderation is also applicable to spending. One must not be miser in spending nor extravagant. The Qur’an says: “And those who, when they spend, are neither prodigal nor grudging; and there is ever a firm station between the two”………(25:67)

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