fie chapter4

CHAPTER 4

ALLOCATION OF RESOURCES IN ISLAMIC

ECONOMIC SYSTEM

CHAPTER OUTLINE

1. IMPORTANCE OF RESOURCE ALLOCATION

2. NORMATIVE AND TECHNICAL ASPECTS OF RESOURCES ALLOCATION

3. GOALS AND PRINCIPLES OF ALLOCATION IN ISLAM

4. APPLICATION OF ISLAMIC CONCEPT OF RESOURCE ALLOCATION

TOPIC 1.

IMPORTANCE OF RESOURCE ALLOCATION

SCARCITY AND CHOICE•Concept of needs, wants and scarcity

•Needs: what people require•Wants: normally more than what is being required•Scarcity: Unlimited wants, with limited resources

•Scarcity•Absolute: when there are shortage in absolute terms (non-renewable resources)•Relative: resources available to satisfy the unlimited wants; resources can be used for different alternatives; need to make choices

•Islamic perspectives•Do not support the concept of absolute scarcity

•All resources from Allah; has promised sustenance for His creation. There are alternatives (gases instead of coal)

•Accept relative scarcity

RESOURCE ALLOCATION

•Resource allocation decisions•Consumption (what to produce)•Production (how to produce)•Distribution (for whom to produce)

•Scarcity demands us to choose the best alternatives•Need to sacrifice lower ranking alternatives-forgone-opportunity costs•Rational: opportunity cost is always lower than choices made

TOPIC 2.

NORMATIVE AND TECHNICAL ASPECTS OF RESOURCE

ALLOCATION

NORMATIVE ASPECTS•“What ought to be”; deals with rules of the game; which technical decisions are made

•What ought to be produced•How it ought to be produced•For whom it ought to be produced

•Derived from a vision: set boundaries and parameters that limit/guide decision making process

•In Islam, derived from Quran and sunnah•Important ones: concepts of halal (lawful) and haram (unlawful)•Clear injunction from Allah to use good things that He has provided and do not trangress boundaries that He has set

NORMATIVE ASPECTS

•Due to relative scarcity, need to make choices about utilization of resources

•Choices made under Islamic economic system different from conventional:

•Islamic rules of the game guided by Islamic worldview•Result in economic activity falling under fard, sunnah or mubah•Should not embrace makruh, should not include haram

TECHNICAL ASPECTS

•Deals with the constrained decision-making within the normative framework

•Include tools and methods for precise solutions to constrained optimizations

•Example: in conventional economics: MR=MC

TOPIC 3. PRINCIPLES OF RESOURCE

ALLOCATION IN ISLAM

PRINCIPLES

1. Mechanism: Could be market signals, or plan directives

2. Agents of decision making: Individuals; government may intervene so that no transgression of limits set by Islam

3. Rules of the game: •Derived from vision: individual ultimately responsible for failure of community’s collective effort

•Prices are determined by market forces are just prices

PRINCIPLES

4. Market structure•Market preferred, not laissez faire•2 components:

1. Freedom: -individual bears ultimate responsibility for collective actions of society-free entry-exit, market information, no monopolistic element

2. Cooperation: -freedom expressed more in cooperation rather than competition-concept of fard kifayah and establishment of income re-distribution institution ensure justice and cooperation

PRINCIPLES

5. Role of State

•Play positive and complementary role to ensure rules of the game prevail

•Act as regulator to ensure adl (justice) and ihsan (benevolence)

•Ensure minimum standard of living (fulfillment of basic needs)

•Reduce concentration of wealth through zakat and fara’id

Al-Hisbah

•The Islamic state is in charge of responsibility of making arrangements to oversee the implementation of this institution

•An institution which promotes the proper and forbids the improper (amr makruf nahi munkar)

•Discharges obligations relating divine rights and those relating to rights of the creation

•Muhtasib (head of al-hisbah) responsibilities:•Facilitate the performance of ibadah: maintenance of mosque, punishing non-observance of shari’ah obligations

•Implementation of adl in the society

Al-Hisbah•Responsibilities:

•Checking of weights and measures: stop widespread fraud/deep-rooted malaise in society

•Ensuring availability of essential goods and services

•Correcting market imperfections and ensuring just prices

•Checking illegal and fraudulent practices

•Public utilities: muhtasib could compel the rich to contribute; open to all

•Ensuring fair wages: employer-employee relationship; ensure sufficient wages to fulfill basic needs; working conditions

•Checking corruption

TOPIC 4.APPLICATION OF ISLAMIC

CONCEPT OF RESOURCE ALLOCATIONS

RESOURCE ALLOCATION-CONSUMPTION•Normative aspects

•Derived from Quran and sunnah

•Expected behavioral norms of individuals so that it will be in line with shari’ah rulings

•Nature of man: greedy and caring; physical and spiritual

•Rizq / Godly sustenance mentioned in Quran 120 times, provided by Allah is halal (good) and taiyyibat (pure)

•Provided by Allah, but man must work to obtain rizq

RESOURCE ALLOCATION-CONSUMPTION

•Normative aspects (continued)

•A means to achieve falah•Reward depending on intention, knowledge and action•Adhere to principles of moderation: avoid extravagance, wasting of resources

•Basic principles in consumption•Basic needs must be satisfied•Not be dependent on others for need fulfilment•Needs are not fixed; changing due to environment and time

•Once we are independent, we must sacrifice our own consumption for the sake of Allah- zakat and sadaqah

RESOURCE ALLOCATION-CONSUMPTION

•Technical aspect•Developed by Anas Zarqa: A Partial approach to utility maximization

•Utility function includes considerations

•Moderation

•Rewards in the after life

GROUP DISCUSSIONMr. Kapluk (MK) earns Rp. 25 million monthly income, consists of salary, bonuses, house rental income, and profit from investment. MK faces difficulty in allocating his income to buy good and services in order to fulfill his daily needs. As an Islamic Economist, you are asked to help MK by giving him some advises, suggestions and recommendation on the allocation of income (consumption) from a Shari’ah perspective. How MK should allocate his income so that he could fulfill his daily needs satisfactorily based on the Islamic perspective?

RESOURCE ALLOCATION-PRODUCTION

•Normative aspect

•How Islam views producer/firm

•Production as a means to achieve falah•An amanah to be utilised efficiently•Production behavior must be within limits set by shari’ah

•An important tool for individual development and preservation

•Includes framework of organisation and management principles

RESOURCE ALLOCATION-PRODUCTION

•Normative aspect (continued)

•What to produce: determined by al-Ghazali’s hierarchy of needs:•Darruriyyat - basic needs•Hajiyyat - complements•Tahsiniyyat/Tarafiyyat/Kamaliyyat – refineries/luxuries

•What to produce?•Prohibited goods cannot be produce•More resources diverted to production of basic necessities/comforts•Divert resources away from luxury goods

RESOURCE ALLOCATION-PRODUCTION

•Normative aspect•Efficient production techniques

•No extravagance, using resources efficiently•Non-productive intermediary eliminated•Speculation is restricted, Interest/guaranteed source of income prohibited•Privately owned land not in use usurped by state, while public resources may be given under private ownership in accordance to their capacity utilization•Justice in production

•Renumeration to factors of production•Organization•Decision making must follow shari’ah rules

RESOURCE ALLOCATION-PRODUCTION

•Technical aspect

•How choices are made•Choice of production•Techniques of production•Choices of management styles

•Basic needs fulfillment through minimum wage or through government subsidy

RESOURCE ALLOCATION-PRODUCTION

•Goals of firm

•Maximization of utility - goal of firm in Islamic economy

•Not just profit maximization, includes also rewards in the hereafter due to extended time horizon

•Entrepreneur must comply with adl and ihsan

•Making rational production decision confined by limits set by Islamic rules of the game

•A general maxim: higher level output is better since it results in more employment