3(g) Market Mechanism and Islamic Policy Alternatives

The free-market mechanism is based on effective demand, making resources available to those who can buy them not necessarily to those who need them. As such in an Islamic economy, price offered by the market can not be accepted as a matter of rule. Competition as implicit in the market mechanism needs to be supplemented by conscious control, supervision and co-operation. This is where Islam enters. The key lies in mutual good-will and co-operation, while the market prices emerge from the wholly unsupervised interaction of competing buyers and sellers. Islamic equitable price need to emerge from the supervised competition, conscious control and co-operative interaction of the buyers and sellers. The drive to maximize profits as seen under the market economy is not merely an economic phenomenon: it is also the psychological as well as social phenomenon. It is the social mechanism and economic institution which create the necessary conditions to work in one way or another.

Three Policy Options

Now it can be said that an Islamic economy may face the following three policy options: (a) to eliminate the market mechanism and control price; (b) to allow the market mechanism to operate freely; make direct transfer payments to the poor so that they can enter into the market; and (c) to allow the market mechanism to operate through necessary control and corrective measures practically in providing basic needs to the community not necessarily in providing goods and services beyond the basic needs.
Option (a) is clearly not permissible in Islam, as it is against the principle of basic economic freedom of the individual which Islam seeks to preserve. The economic compulsion can be applied in an Islamic society only as a special case in order to strengthen the collective social and economic responsibility of the individual members.
Option (b) is also not acceptable to the author for several reasons: Firstly, it is based on the implicit assumption that the market mechanism will automatically ensure equitable re-distribution of goods and services through invisible forces of demand and supply. Here reality is far from this theoretical possibility. Secondly, the market is either inefficient, or ineffective or indifferent in providing all aspects of basic needs.

Lastly, there is no guarantee that transfer payments will be made available to the poor on a permanent basis. While the role of direct transfer payments can not be denied for the bottom 10 to 15 percent absolute poor or unemployables, the fact is that market can not always supply wage goods, particularly public services such as education, health care, safe water, sanitation etc. It is essential to expand and redistribute public services so that the poor have access to such services. A part of the income of the rich needs to be transferred to ensure this expanded and equitable redistribution of public services. “There is no rule for the optimum which says that any rich man is permitted to spend his productive income all for himself, or the other way round, a poor individual has only the right to spend as little as his or her low productive income permits”. In view of the above discussions the option (c) provides a pragmatic alternative to achieve the goals of an Islamic economy. In this connection must be noted here that Islamic markets should be free of unsocial monopolies, hoarding, and unlawful speculation and other anti-social business activities that do not fit into the Islamic code of business ethics. It is not out of place to throw some light on the behavior of a firm and its objectives in an Islamic economy.

The Behaviour of the Firm and its Objectives

The behavior of the firm is to be guided by the overriding concern for public interest as viewed by the principles of the Shari’ah. It is relative to social need. It is neither the profit-maximizing nor sales-maximizing behavior of the firm that matters most. What matters is the structure of the decision-making – institutional process that effects the substance of the decisions, so that different decisions will result from different kinds of organization, even if all else is unchanged. In such situations we may reasonably expect the firm’s goal to be not maximizing profits or sales but attaining a target level, or a rate of profit or a certain level of sales or a zero profit level (revenues equal to opportunity cost) or achieving an assigned social profit target. This means that the firm could come to rest in a large number of situations rather than in only one unique equilibrium situation. The main hypothesis is that in an Islamic economic analysis, equilibrium may not be unique. As such different theories may yield different predictions.