The Economizing Problem

These Short Essays are partial fulfillment of Paper IE1001 of Part 1 of Certified Islamic Finance Professional (CIFP) [DRAFT V0. 4] INCEIFStudent Name: Mustafa AydemirStudent ID: 1200279 IE1001Assignment in Islamic Economics – Short Essay No 1 by Mustafa Aydemir – Version 0. 4. doc -1- Bismillahirrahmanirrahim The economizing problem – And its direct effect on the economy at large. A short essay from Islamic perspective by Mustafa Aydemir Human beings are greedy by nature and their needs are universally recognized as infinite.A simple prove for this statement is the wish of every person to live forever. The unlimited wants are the main reason that resources are considered insufficient or scarce. This is probably the strongest argument and a good justification to define an entire field of study to explain and solve the resulting economizing problem between unlimited needs versus limited resources. â€Å"Economics is the social science that studies the allocation of scarce resources to satisfy unlimited wants† (INCEIF Lecture Notes1), It is divided into Macro- and Microeconomics.The former is the field of economics that studies the behavior of the economy as a whole, and not just on a singular company, but entire industry sector and markets. Whereas, the latter focuses on supply and demand as well as other forces that determine the price levels seen in the economy. The previous section described the economizing problem, that is the relation between the scarcities or resources relative to ‘needs and wants’. People are self-interested economic agents that maximize their own utility by using goods and services (Williamson, 1985)2.In the capitalistic worldview, people are rational in their choices and would for example prefer a job paying 3000 USD salary over a job with a 1500 USD pay. The individual is looking after his own well-being, which is likely to increase by taking the higher income employment. 1 Title: Overview On Ec onomics; Class: Islamic Economics [IE1001]; Prof: Dr. Magda Ismail Abdel Mohsin; Institution: INCEIF; Date: 8/16/2006 # Of Pages: 28 2 The Economic Institutions Of Capitalism; Firms, Markets, Relational Contracting; Oliver E.Williamson; Yale University IE1001 Assignment in Islamic Economics – Short Essay No 1 by Mustafa Aydemir – Version 0. 4. doc -2- However, the well-being of all people needs to be guaranteed, which is well noted by theological, human and western researchers and recognized by all civilizations in the present and the past (Chapra, 1995)3. With the assumption that resources are limited, the well-being of the entire human race may remain just a dream if the scarce resources are not utilized efficiently and rightfully. In order to achieve this vision, societies develop effective strategies that can be considered as worldviews.For the sake of simplicity the (1) secular and the (2) religious worldviews are the only two that are subject to this essay. The s ecular worldview emphasis the importance of material aspects of well-being and disregards the religious aspect completely. The secularist argue that ‘maximum material’ well-being can be best realized if economic agents are given freedom to actualize their self-interest whatever it may be with regards to taste and preference and the guidance of God in any form is replaced by the help of human reasoning.Moreover, in this liberal view of secularism neither values nor government intervention can play a major role in the fair distribution of resources to achieve the well-being of all people. The liberal view has not succeeded and was overthrown nearly everywhere (Mirakhor, 2012)4. The need of people for social well-being is vital to the happiness of a human being. However, the secular worldview refers to market forces that would ensure social interests because competition will keep self-interest (that may lead to exaggerated greed) under control. 3 4 Chapra, M. Umer. (1995). Islam and the economic challenge.Leicester, U. K. : Islamic Foundation Abbas Mirakhor (2012).Lecture: Macroeconomic Policies & Islamic Finance. Kuala Lumpur, Malaysia: INCEIF IE1001 Assignment in Islamic Economics – Short Essay No 1 by Mustafa Aydemir – Version 0. 4. doc -3- In contrary to the secular or capitalist worldview stands the religious or spiritual worldview. It gives tribute and attention to both the spiritual as well as the material aspects of human wellbeing. In fact, the spiritual worldview does not necessarily reject logical reasoning in human improvement, individual freedom or self-interest (Chapra, 1995).This worldview, however, highlights that moral values and good governance are required as restraining factors for freedom and self-interest in the journey of a reaching a civilization where well-being in ensured to all people and to achieve social harmony and family integrity. The direct effects of the economizing problem to a nations wealth are manif old. Well after capitalism had been established in medieval Europe and the west, its consequences in terms of unemployment and mal-distribution of income and wealth became painfully evident (Haferkamp and Smelser, 1992).Market cycles are considered part of an economy and crisis are accepted as unavoidable. The market itself is the overarching governance frame that determines prices through supply and demand and overrules the social interest of human beings. It is like an autocratic dictator without mercy that supports the rich and the powerful and penalizes the poor and the needy people. Consequently, societies began overtime to assign an increasingly expansive role to the government to correct the shortcomings of capitalism (market capitalism) with billion or even trillion dollar bailout packages for so called ‘to-big-to-fail’ institutions.All paid with tax money. Simultaneously however a contrary view developed objecting to the governments’ involvement in the e conomy on efficiency ground. Anyhow, even after the massive global financial crisis in 2007/2008 the high net-worth individuals are better off (see 5 Haferkamp, H. , & Smelser, N. J. (Eds. ). (1992). Social change and modernity. Berkeley: University of California Press. IE1001 Assignment in Islamic Economics – Short Essay No 1 by Mustafa Aydemir – Version 0. 4. doc -4-Forbes Magazine6) and have more wealth than the middle class and low-income classes, likely due to cost cutting and austerity measures for companies and governments alike. The Islamic economic system is unique and provides a divine solution to the economizing problem this essay has elaborated thus far. It starts with the scarcity of resources that illustrates the issue quite clear. If we assume that resources are available in abundance (INCEIF Lecture Notes7) rather than limited, the paradigm shifts dramatically from strategies to accumulate wealth to strategies of wealth distribution.Wealth in Islam can be distributed by Zakah and Sadaqah but also by introducing a risk-sharing model into the financial system to replace it with interest (Askari, Iqbal, Krichene and Mirakhor, 2011)8. Islam recognizes differences in human potentials because each person is gifted with different skillsets and depth of abilities. Human beings are not identical is proof that no two individuals have identical capabilities. This differences will bring income and wealth inequalities in societies (Chapra, 1992)9. Furthermore, the self-interest and rational human aspects are fully endorsed but to a different end.Choices however are enhanced by ethical values and rules. Consider for example Islamic teachings where there is a sense of duty and obligation to follow rules of behavior and be in full compliance with them, often there are also some ends in view like Jannah (Paradise), the total well-being of society or approval and satisfaction of Allah. Even Allah’s love and mercy or fear of hell are motivato rs of a self-interested spiritual person. To the extent that ends is gaining strength over 6 7 The Worlds Billionaires List http://www. forbes. com/billionaires/ Retrieved on November 12, 2012Title: Overview On Economics; Class: Islamic Economics [IE1001]; Prof: Dr. Magda Ismail Abdel Mohsin; Institution: INCEIF; Date: 8/16/2006 # Of Pages: 28 8 Hossein Askari, Zamir Iqbal, Noureddine Krichene and Mirakhor (2011) Risk-sharing in Finance: The Islamic Finance Alternative; Singapore: John Wiley & Sons 9 Chapra M (1992). â€Å"Islam and the Economic Challenge†, The Islamic Foundation and International Institute of Islamic Thought, London and Herndon. IE1001 Assignment in Islamic Economics – Short Essay No 1 by Mustafa Aydemir – Version 0. 4. doc -5- the obligation and duty.Muslims may think of consequences in the hereafter more than over what was to be material well-being in this world. The position of Quran is in the first instance decoupling of actions from conseq uences, actions are done as a sense of duty to do what Allah teala and his beloved Messenger have ordered. At the same time, however, the Quran itself repeatedly emphasizes the desirable and undesirable consequences of actions (Lecture Notes Prof Mirakhor, 2012)10. In conclusion, Ibadah is the justification for rules. If one adores almighty Allah swt, one does what the creator orders.Hence, peoples unlimited wants are recognized and mentioned in the Quranic verse And ye love wealth with inordinate love: (al-Fajr 89:20)    and following hadith: Narrated Ibn ‘Abbas and Anas bin Malik: Allah’s Messenger said, â€Å"If a son of man had a valley full of gold, he would desire to have two. Nothing can fill his mouth except the earth (of the grave). Allah turns with mercy to him who turns to Him in repentance. †(Al-Bukhari and Muslim) That is why it may seem that Islamic economic system is probably the strongest alternative to greed and unfair markets that have led the world from crisis to crises. At least it is worth a try in the advanced economies. 10 Abbas Mirakhor (2012).Lecture: Macroeconomic Policies & Islamic Finance. Kuala Lumpur, Malaysia: INCEIF IE1001 Assignment in Islamic Economics – Short Essay No 1 by Mustafa Aydemir – Version 0. 4. doc -6