Re-Thinking Economics Part 10

A Toothless Government?

It seems that Shariah-based economy system is vehemently allergic to big government. But does that mean Shariah-based economy is a laissez-faire economy? Are the merchants and companies free to operate without any regulation?

Supreme Court Building
Supreme Court Building by Jeff Kubina

Well, not really. Keep in mind that Shariah-based economy system already curtailed large concentration of wealth and power. Thus it is unlikely for the merchant class to do as it please with impunity. Not only big government is unfavorable, mega corporations are also suspect.

The life of Muhammad in Medina provide some clues as to which extant regulatory powers a government should have. In a hadith, the Prophet went to the market and inspected the quality of goods. He queried a fruit seller why he hid the defective fruits behind the good ones.

In another hadith, strong condemnation had been made on those who made false claims in order to sell his goods. This is in line with the prohibition of gharar (uncertainty) in Islamic transaction rule. In other words, Shariah-based economy demands transparency.

Not only that, sellers must also be forthcoming when he’s selling something at loss. It must be for a genuine reason. (Eg; Keeping the unsold stocks cost him significant amount of money) Perhaps this is to prevent price war tactic to pressure a smaller competitor out of the market.

Speaking of competition, there’s a story of Ali asking a seller to dismantle his stall that has advantageous position at the market. He said that the market is like the mosque, no one can reserve a spot. Those who want a coveted spot must come early.

In a similar vein, the Quran also specifically mentioned about willing buyer and willing seller. It can be interpreted in several ways, one there shouldn’t be any undue influence to conduct a transaction. The image of rich people forcing poor people to sell their land readily comes to mind.

Secondly will buyer also implies that the buyer must have a choice of sellers. There can’t be any choice if there’s monopoly in place. Thus we can reason that the government must have the power to enforce effective anti-monopoly laws.

The government must also be able to crack down on hoarding of essential goods — which make sense in a market with derestricted prices. If hoarding is allowed, price of commodities can easily go up due to artificially low supplies.

There’s no contest that the government must ensure safety of people from external threats. But how about internal policing? Here the shariah criminal code come into play — although now usually erronously equated with hudud alone. It actually encompasses qisas, hudud and takzir.

The punishment under hudud are severe but the the conviction is also exceptionally strict. It is designed more of a deterrent rather than a penal code to control the society. Punishment are handed out publicly to instill fear from committing crime but not fear to the government. Better to punish very few, letting most of criminals get away than committing injustice or stuffing lots of criminals in jails.

One implication of implementation of shariah criminal code is that crime rate is reduced. With reduced crime rate, the cost of using the market is also lower. One does not have to worry about theft and murder so there’s no need to spend of guards, locks, security sytem, CCTV, etc. Heck, even POS for that matter!

Beware that shariah criminal code, especially the hudud is not a magic bullet. It can only be implemented after the structural inequality and injustice had been corrected. Hudud in an unjust society could be more of a potential problem leading to abuse of power rather than an instrument of justice.

Another way to look at is that hudud is a capstone to the socio-economic and political reform brought by Islam. The final stick after handing out so many carrots to the people, so to speak.

Thanks for following this article series. We’ll wrap up in the next article by summarizing the key features and patterns of Shariah-based economic system.

Re-Thinking Economics Part 9

Building a Bridge: Big Government vs Small Government

Suppose that both Almayer and Brooks are building a bridge that costs $1 million each. Almayer is governed by a big government while Brooks employs a small government to complement its adherence to Shariah-based economy system.

West Seattle Bridge under construction
Picture from Seattle Municipal Archives

The big government of Almayer do what governments normally do — collecting the fund through tax. But it is impossible to collect $1M in tax without incurring any expenditures. Tax collectors, accountants and record keepers need to be employed.

Just collecting the money already incurr considerable expenses. Yet there’s more expenses coming in spending it. Tender committee need to be compensated, engineer to to set the spec, as well as various government officials to supervise and audit the project.

Even if the tender process goes well, the cheapest bid will not be $1M. The contractor will necessarily inflate the cost to account for late disbursement of fund from the government. Even without that cost, the higher number of stakeholders to be dealt with necessitates higher man hour costs and the inevitable delay costs.

This assumes the contractor play nice and follow the due process. If he bribes the committee then the cost must be passed somewhere. It can be either through reduction of quality or cost inflation. Even worse, he’ll do both!

Meanwhile in Brooks, the government announce that a bridge need to be built. Brooks hardly collects any taxes so the merchants and investors have lots of money. One merchant steps up to pledge the bridge as a waqf. He paid a professional contractor to build the bridge. He just shell out the cost at market price without the added bureaucratic cost?


Hold on, this is an utopian dream! Is it possible to have such an egalitarian society?

If the government is too small, how is it able to provide security to its people? How could it enforce any laws if it can’t pay a single police or prosecutor?

But then, this has happened before. Medieval Islam embraced the law but government is deemed as a necessary evil. In fact, they were slow to have a standing army — the usual required accessory of the state.

Government is kept at arm’s length from the merchants and common people. Many things are decentralized — infrastructures are built by the people for the people. Be it schools, universities, libraries, hospitals, roads or water works. With the nature of Islam that lacks any formal priesthood order, there’s also no big religious institution that have monopoly on people’s life either.

The same people who hopes for an Islamist president or PM also usually hope for price control on essential items. But they’ll be surprised to learn that the Prophet refused to clamp down food price when there’s a food shortage in Medina. He even went as far as declaring that it is irreligious to do so.

It is perplexing when encountering this fact as many collective vision of Islamist social justive includes low prices of essential items — be it wheat, rice, petrol, sugar, etc. Usually this is achieved through subsidies — both during production and distribution. It can also be in the form of guaranteed purchase of produce by the government.

But this have several implications. Most glaringly, this strategy necessitates a big government. Only such institution are able to collect large amount of tax required to fund the subsidies.

Subsidies then introduce distortions to the market. In the case of food, our food is rich in carbohydrate, fat and sugar because it is artificially cheap. It also caused many perfectly edible crops being dumped after being overproduced to stabilize the price.

Again, having big government is too much of a risk — even in the face of a very real risk of hunger. Prudent management of the environment, reduced consumption and strategic stockpiling is deemed as a better alternative. It is even better to hope for the rich to endow their plantations as waqf or give away food as sadaqah.

Some might be wondering that the ideal government seems toothless. Is it really the case? We’ll look into this matter in the next article.

Re-Thinking Economics Part 8

On Government & Politics

In the current bleak outlook of the world, quite a number of Muslims romanticize the return of the Caliphate. Some went as far as resorting to militant actions to realize their dreams. If not, many yearn for an Islamist to become a president or prime minister.

Photo 13-10-15 8 03 04 PTG

The idea is as if a benevolent leader or government will solve all the socio-economic problem overnight. All people needing help will get assistance from the government and all infrastructure people wished for will be built.

Is that the reality or just a fantasy?

Shaykh Abdal Hakim Murad points out that the role of the government is not to provide welfare directly to the people. Instead the leader encourage citizens to help one another.

Contemporary government usually is set up like this; the government collects tax from wealthy individuals and companies. Then the tax collected is used to provide welfare and build infrastructure for the people. In effect, it is a cross-subsidy.

Ideally, that should be the set up. But then tax collected were never enough and usually governments will resort to debt through sovereign bonds. The idea is to borrow money and use it to stimulate the economy. With that, hopefully the economy will expand and the government will have more revenue.

Why tax are not enough to fund welfare and infrastructure for the people? Most famously, we know how the wealthy cook up creative ways to legally avoid paying tax. ‘Double Dutch’ and ‘Irish Sandwich’ are some of the tactics. If that is not enough, they lobby for tax breaks, rebates and reduction of rates.

Let’s rewind all the way to the early days of Muhammad in Medina. After establishing a mosque, he created a new market. At that time, there were four other markets.

The key feature of this market is that there’s no tax imposed and there’s no price control.

If that is the ideal, then how government get anything built? Sure, there’s zakat but it’s only 2.5%. The rate of 20% is only reserved for mineral wealth. That is assuming the people will pay to the government’s Baitulmal.

What if the people choose not to? Then the government will not have any money to spend at all. Does this mean the poor will be left unsupported and no infrastructures will be built?

Rather than forcing the rich to cross-subsidize the poor, Shariah-based economic systems count on the capability of men to be altruistic. The leader points out who need to to be helped and what need to be built. Then the rich contributes directly without government intervention if the form of zakat, sadaqah or waqf. Instead of paying taxes imposed by men, the rich performs an act of worship.

During his life, Muhammad does distributes sadaqah on behalf others but the money are rarely kept overnight. It is usually immediately disbursed to those who need it.

In other words, we can see the pattern fits to the characteristics of a very small government.

Many great institutions and infrastructures present till today in the Muslim world are the result of waqf voluntarily endowed by the rich. It was not a result of government project funded by tax collected from the people. al-Azhar University is one of the prominent example.

This is quite a paradox, earlier on we see who Shariah-based economy is designed to safeguard from human greed. It even went as far as restraining human appetite for consumption. But why when it come to governance and distribution of wealth it expects humans to be benevolent and altruistic?

Through the lens of fragility, perhaps the logic of Shariah-based economy calculated that it is safer this way. It is better to risk the rich being stingy and not contribute to the society than resorting to the formation of a big government.

Collecting tax from the whole country will necessarily lead to the large concentration of wealth. This will also mean large concentration of power which can be easily exploited — both by the elected and those funding the election campaign.

This situation leads to many dysfunctional governments aorund the world. The rich don’t care because they are well-to-do and can lobby the government — enabling them to become ever richer. The poor is too busy struggling to live and can be easily placated with pittance payment from the government.

That leaves the middle squeezed and unable to drive much (if not any) government and societal reform. Shariah-based economy seems keen to stem any sort of government dependancy early on.

There’s also the question of ineffeciencies that besets big bloated governments.

In the next article, let’s return to our example city states of Almayer and Brooks.

Re-Thinking Economics Part 7

Another Dimension of Zakat

Apart from functioning as social safety net, zakat is also instrumental in ensuring redistribution of wealth in the society. After his massive study of inequality in modern economics, Thomas Piketty suggested as wealth tax of 2%.

The current state of inequality and wealth concentration made it hard for the people at the bottom to have socio-economic mobility. A wealth tax of 2% will the hoarded capital and make it available to those who need it the most. They can jumpstart their business once the tax is spent in the form of direct aid or building of infrastructure.


Curiously, the rate proposed is just shy of the zakat rate of 2.5%. The point is, we can see the wisdom behind the injuction of zakat.

There’s also zakat on minerals — defined by those extracted from the earth and seabed. The rate is higher at 20% and due immediately upon extraction instead on annual basis.

Zakat on minerals are rarely enforced — even among oil-rich Muslim countries. Should it is imposed, what are the implications?

First off, it prevents a massive concentration of wealth. Not only the rate is a full one fifith, it also must be paid immediately after surpassing a set minimum amount. The miner can’t keep the zakat portion and pay it at the end of the year.

Mineral wealth and riches are naturally clustered among several areas around the world but zakat ensures that the wealth is spread aounrd. The steep rate and exacting payment schedule will also discourage greed and exploitation. Think about it, how could you exploit laborers if they can get lavish stipend from Baitulmal courtesy of the 20% zakat?

Properly enforced, zakat on minerals is a proactive measure to prevent economic inequality at its roots and ensuring social justice. We can see how oil giants exploit the earth and act with impuntiy. What are the source of their immense power? Quite simply put, lots of money.

A society enriched with the share of 20% of mineral wealth could very well stand up to these oil giants. It will be hard to bully a society that is rich enough to be self sufficient. You can’t easily pay them off to move or silence them with lots of money.

Industrialists will cry out, how could we make money? The zakat on mineral wealth is steep but the derivative products is only subject to annual zakat of just 2.5%.

This will force oil companies (or any mining operation) to hire more people because they can only make more profit with downstream products. Ideally, they also operate within a market that prohibits interest-bearing loans. Thus, they need to resort to mudharabah and musharakah to fund their operations. As such, more wealth will be distributed among the society instead of concentrated to the few.

In coming articles we’ll delve into the issue of governance. Does the return of the Caliphate will really solve our problem?

Re-Thinking Economics Part 6

Social Safety Net

Zakat might be the main thing that come to mind when we discuss about social safety but there are many other instruments. He we attempt to uncover how its supposed to work together.

But first, let’s define the beneficiaries. Within the framework of Credit-ism economics, there’s only the poor. The belief is that we can’t keep giving fish to them, we must enable them to fish on their own.

At a glance, it sounds noble. Who wouldn’t want everybody on this planet able to feed and clothe themselves? Thinking deeper, it’s actually selfish since if it’s true then no one have to care for anybody else.

Shariah-based economics is more nuanced in this matter. There are two categories — masakin and mustadhafin. Masakin is the poor we normally know, those who can’t generate enough income to cover their bare necessities. They are the the one we can enable to fish on their own, so to speak.

As for mustadhafin, they are the weak. These are the people who can’t work — due to severe disabilities and/or other prevailing life circumstances. Stateless refugees readily qualify for this especially in our contemporary context as they are regarded as persona non grata in the eye of law. This status render them unable to seek employment or business permit.

Underage orphans also qualify. They can’t be expected to fend for themselves even though they inherited large amount of wealth. They can’t manage it well and simply be targeted for exploitation. More so in the case of destitute war orphans.

The beneficiaries had been defined, but how about the benefactors? Is it the government. Shaykh Abdal Hakim Murad argued that the government should just facilitate members of community to help one another instead of directly providing welfate. This might sounds counter-intuitive or downright alien but we’ll examine this logic further in other sections.

For the purpose of this section just keep in mind that the obligation of zakat preceded the creation of Baitulmal or any other formal institution to collect and disburse zakat. Zakat as an act of worship is still valid without Baitulmal as intermediary and many Muslims still opt to do so. Some give zakat directly out out of their own preferences or simply because there’s no Baitulmal since they live in a Muslim-minority country.

Photo by Son of Groucho
Photo by Son of Groucho

Without government intervention and intermediary, who are responsible for whom? It is impossible for one super-rich person to take care of everybody in a city-state or country.

The guideline had been readily outlined in Shariah-based economics. Each person is responsible for his neighbours — defined as those who live within 40 house radius from one’s house.

It doesn’t mean that a poor person must appeal directly to his neighbour when he is in need. Instead, his neighbout must be sensitive enough to know who is poor and render the appropriate assistance.

The assistance can be in the form of zakat, donation/gift or Benevolent Loan. The Benevolent Loan can also readily converted to be a donation/gift should the recepient unable to pay it back and the giver made it halal for him. Speaking of debt, those who are in debt are also eligible for zakat.

But those are reactive measures, money given out when members of community is in need. What instruments are used to proactively uplift the community?

For that we have waqf that usually manifests in the form of public infrastructures. Common example includes schools, libraries, hospitals, universities, and water supply. Water in particular can be as small as a pipe in front of one’s house to public wells to massive aqueducts.

These infrastructures lessen the burden of community members as their basic necessities had been taken care of. They are relieved from the cost acquiring drinking water, educating themselves and healthcare when they get sick.

Waqf acts as common wealth that make it easier for the community members to earn enough for their living. It also can be seen as an equalizing force to the problem of non-working rich yet working poor that is rampant in Credit-ism economy.

There’s more to zakat than just a social safety net. We’ll discover more in the next article.

Re-Thinking Economics Part 5

Historical Figures

Of course it will be inappropriate for us to discuss Islam and economy without mentioning Prophet Yusuf (Joseph). He have a whole chapter describing his life from childhood to adulthood. More importantly, the Quran explicitly mentioned that he is in charge of a nation’s treasury. In other words, his role is similar to a finance minister.
Illuminated fragments of the Quran from the collection of Walters Art Museum

So, what kind of person is fit to be a finance minister? Abandoned by his half-brothers in a dry well, he was later sold into slavery by a passing caravan. He grew up to be a handsome man in the ruler’s household. But later he was sent to jail after refusing the ruler’s wife sexual advances.

In jail, he befriended two inmates. Both conveyed their respective dreams and Yusuf interpreted them. One will be executed while the other will be set free and serve the ruler. Both interpertation turns out to be true.

However, Yusuf languished for few more years in the prison. One day the ruler wake up troubled with his dream. However, none in the court are able to interpret it. So Yusuf’s former jailmate went to prison to ask him and later conveyed the meaning to the ruler.

Yusuf interpreted the dream that there will be seven years business as usual followed by seven years of hard time. Only after that there will be one year of abundance. Thus the nation have to stockpile accordingly.

Impressed with the interpertation, the ruler summoned Yusuf to court. He was subsequently cleared of the false charges and declared to be trustworthy. Yusuf then asserted that he should be in charge of the nation’s treasury as he is a skilled guardian.

In a different era, there’s Qarun — his story told among other stories in the chapter of al-Qasas. He is from the people of Moses. He didn’t jsut transform from rags to riches — he actually became mega rich. Simply transporting the keys to his warehouses requires several strong men to lift it.

However, Qarun becomes arrogant and claims that he attains his wealth through his knowledge alone. People admire him for his wealth and he went about in finery. God chided him saying that there are many richer people before him. In the end, Qarun and his wealth was swallowed whole into the earth.

We can see the contrast between these two figures. Yusuf manages a nation with divine guidance from God and the country becomes prosperous. Qarun hoarded riches using his knowledge and end up swallowed by the earth.

In the next article we’ll examine social safety mechanisms provided by Shariah-based economy system

Re-Thinking Economics Part 4

Mindfulness Through Worship

Whatever the feedback system is, human mind tend to tune out after a while — missing the important warning signal that need to be aware of. Stare at the radar screen for hours and soon you wouldn’t be able to separate friend from foe.

The same goes for the market, even though you are having clean signal in the form of profit and loss you still can’t catch the warning sign. It is human nature to forget after all.
Picture by Gaynor Barton

The basic way to gain mindfulness is to step back from whatever you are doing and see it with a fresh set of eyes. But it’s not an easy thing to do when you are absorbed fully engaged with the market. Even more so in the excitement of bull market.

Acts of worships in Islam ‘forces’ all to turn away from worldly affairs at set intervals and in various forms. Chiefly it’s the five daily prayers — Dawn, Noon, Afternoon, Dusk & Night. There’s a long stretch without obligatory prayers from dawn to noon. However, performing Dhuha (mid-morning) prayers are highly recommended.

On Friday, the noon prayer is longer with the inclusion of two khutbah (sermon) and all male are obliged to gather at the mosque. This prayer are not meant to be performed alone. Trade suspens a bit longer but people are commanded to spread upon the earth as soon as it ends.

Furthermore on Friday, Muslims are recommended to read Surah al-Kahf (Chapter 18) from the Quran. The chapter among others tell the story of men giving advice to his friend regarding going to the market after sleeping for 300 and 9 years. It also tell the story of the owner of beatiful orchard who lost it all after he still turned away from God despite the advice of his neighbour.

Annually, Ramadhan obligates every able men and women to fast from dawn to dusk for one month. All things that are usually lawful (eating, drinking, etc) are made unlawful during the days of Ramadhan. Some scholars said it is meant to made the rich empathize with the poor. But it is also can be understood as a way to rein consumption and making one realize they can actually make do with less.

In run up to Eidul Fitri, payment of zakat fitrah is due. Everyone have to give a certain amount of staple food. Be it wheat, barley, oat or rice according to where he happen to be at that time. The food or cash equivalent are meant for the poor and needy.

Eidul Adha several months later in Zulhijjah enjoins people to sacrifice livestock (cattle, sheep, camel, etc). Even better if they choose the best animal they have to be sacrificed. Compared to zakat fitrah, it is not an obligation to all but it is highly recommended to those who can afford it. Those who did the sacrifice are allowed to enjoy a portion of it and distribute the rest.

Meanwhile those who went for Hajj in Mecca find themselves in simple clothing (ihram) similar to everyone else regardless of economic status. At the peak of Hajj every pilgrim cram themselves in Arafah & Mina — staying in tents or out in the open.

Again and again we see a pattern which the acts of worship restricted consumption. Humans are constantly reminded that wealth are not ever rising and he actually need little to be sufficient.

In the next part we’ll look into historical figures in Islam in regard to economics and how it reflects Shariah-based economic system doctrine.