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Does ethico-moral coalition


complement to economic
coalition?
A response in the periphery
of Islamic economics

Ethico-moral
coalition

153

Toseef Azid
Department of Economics, Bahauddin Zakariya University,
Multan, Pakistan, and

Mehmet Asutay
School of Government and International Affairs, Durham University,
Durham, UK
Abstract
Purpose To reason whether the ethicalmoral cum economic coalition among the different sets of
economy is more efficient with objectives of Islamic Shariah.
Design/methodology/approach This is a theoretical paper based on the modified model of
layers of economic coalition which was initially developed by W. Leontief and P.N. Mathur and tries to
evaluate the impact of ethicalmoral cum economic coalition among different sets of an economy
within the framework of Islamic political economy system.
Findings This study suggests that endogenoising the ethicalmoral cum economic coalitions will
comparatively enhance the efficiency level of the economy, and will also increase the social welfare
level.
Practical implications A dynamic cum marginal inputoutput table can be constructed on the
basis of this framework.
Originality/value This research is beneficial to the researchers, policy makers and social
scientists for the enhancement of the level of social welfare through this coalition.
Keywords Social welfare, Islam, Social economics
Paper type Conceptual paper

1. Introduction
Coalition of various sets of the economy and the impact of such coalitions on the
economy is discussed in the economic literature. The contenders of this discourse
include Leontief (1982, 1986) and his followers, among whom especially Mathur have
discussed, in a number of studies, the coalition of different sets of the economy and
their potential impact on the economic system. Mathur (1982, 1990a,b) has further
developed a theoretical model based on the coalition of the different sets and then
empirically estimated their impact on the economic system of the concerned economy.
He concluded that economic coalition among the different sets of the economy has a
positive significant impact on the efficiency of the whole system. However, all of these
attempts are limited to the economic coalition, and none of these extended the
framework to include ethical and moral dimensions as parts of this coalition.
The objective of this study is to analyze the state of ethico-moral integrated
economic coalition of different sets of the economy within the Islamic politico-economic
system with the basic assumption that participation and cooperation are important
features of the Islamic system. This system is based on maqasid al-Sharia[1], or the
objective of the Shariah and maslaha, or public good. Ethico-moral cum economic

Humanomics
Vol. 23 No. 3, 2007
pp. 153-173
# Emerald Group Publishing Limited
0828-8666
DOI 10.1108/08288660710779380

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coalition is expected to work in the same direction as required by maqasid al-Sharia


and maslaha. It, therefore, rejects the neo-classical postulate that human beings are in
their intrinsic nature self-interest maximizers. Consequently, maximization of utility, as
an extension of this is rejected as well. In other words, if we suppose that all persons
are egoists they act for personal ends - what sense does it make to speak of ethics?
From this point derives the idea that ethical norms are principally mutually beneficial
accords whose final intent has to do with maximizing individual well being in
situations characterized by interdependence (Zaratiegui, 1999, p. 215). As an ethical
norm, the teaching of Islam necessitates an altruistic attitude by considering the social
outcomes of individual economic decisions. If behaviour is not selfish then why did the
Prophet (pbuh) ask his companions not to approach the traders until they reached the
Madina Market (Tag el-Din, 2002). It is assumed that coalition have different layers and
every next layer is more efficient and enhancing the state of welfare than the previous
one because it is assumed that the older layer has more understanding, knowledge and
training of Islamic teachings. This is known as Integration, Interaction and
Evolutionary (IIE) process (Choudhury, 1989, 1995, 2000).
For the development of an appropriate model it is required to discuss the different
sets of the Islamic economy in short. This study is organized in the following structure:
in section 2 an effort is made for the development of a theoretical framework based on
the ethicalmoral cum economic coalition among the different sets of the economy, and
section 3 discusses the behaviour of different sets under the ethicalmoral cum
economic environment which results from the Islamic system.
2. Theoretical framework for ethicalmoral cum economic coalition
This section consummates how the ethical induced praxis applied to coalition presents
an altogether different meaning to the concept of cooperation and coalition, which is
contrary to the theory and implications of coalition in mainstream economic literature.
A number of layers can be observed in this regard. This process is based on
embodied (exogenous) and disembodied (endogenous) change, which emerges in the
socio-economic set up of the Islamic state through the epistemological sources of Islam,
namely Quran (the Holy Book of Islam) and Sunnah (the sayings and deeds of Prophet
Muhammad, the Prophet of Islam). It is a continuous course of action, as every coalition
has its own layer and each one of these further becomes the cause of the subsequent
layer. Yet it is now important to know how the evolution of coalition from one layer of
coalition formation and its induced forms to subsequent layers of the same kinds of
organisms comes about. The end of any completed coalition layer is immediately
followed by the post-coalition of the actions, policies, programs and inference adopted
in that stage. This coalition is based on an ethical, positive and normative institution
and the degree attained at that stage. The quantitative function for which is called the
social well being function. This function appears in a suitable non-linear multiplicative
form rather than in a linear form. The multiplicative form signifies that coalition
among the different sets takes place between relational systems, agents, variables and
their functional relational relations. Within such coalition domains are the space of
science, technology, institutions, markets, ecology, society, the global order etc. It is the
form the post-coalition layer attained in any given round of ethicaleconomic activity
and its induced forms that a new round of process re-originates. Such a re-origination
marks the emanation of the coalition process and the efficiency system. Relations of the
different sets of the coalition system are almost endogenous, whereas the state and
policy variables are exogenous. We say that the coalition based on this system is one of

the ethical endogeneity by the virtue of the fact that it incorporates the actual guidance
from Allah (swt) through Quran and Sunnah. But note that since the coalition among
the different sets under the guidance of Quran and Sunnah is shown to exist not
simply over human agents limited to political institutions but rather such coalition is
extensive over systems of issues, their variables, the relations between these sets and
variables etc.
The absence of ethical coalition among the different sets of the economy causes
different epistemology for different disciplines to emerge. All such episteme are
described by the competing nature of opposing forms trying to gain definitive power in
the systems pertaining to the theory behind desperate disciplinary lines (Resnick and
Wolff, 1987). So it will lead to a mutual independence, conflict and competition
resulting in individualism. Consequently, all the competing sets, power and preference
determines the marginalized trade-offs between the entities of the competing systems
to gain their survival of the fittest. Complementary relations are lost and replaced by
what is called in neo-classical as the marginal rate of substitution. The state of
optimality marks the end of innovation and learning (Shackle, 1971). In the coalition
system the objective criterion is based on the simulation of social well-being function
over a range of process-based coalition of the different sets. This coalition will become
the medium of learning by doing that helps in organizing the functional capacity of the
system to reinforce the episteme of coalition between various artefacts of the system.
As we have mentioned that there are different layers of coalition in the system based on
the ethical degree of the different segments of the society. All these are complementary
to each other but not substitute. The vector of complementary coalition playing its role
in the total system of endogenous relations denotes the ethical induced layers of
coalition. In these layers of coalition even the least efficient coalition, which plays an
important role in determining the choices and efficiency of the system, is supported by
all other coalition that together play their positive role in diversifying the joint
production systems into layers of productive system. The joint production concept is of
the nature of interrelated system in which technology, inputs, outputs and revenues are
all shared according to the ethical coalition across such production systems; therefore,
a multiplicative type joint production function is in place (Klein, 1946). Although no
particular type of movement in coalition needs to be presumed, yet for mathematically
simplicity alone. We assume that the convergence sets of coalition over subsequent
rounds of discourse move in a stable trend over time with growth rate.
Capital accumulation in the Islamic framework is a process whereby resources are
mobilized in the Shariah recommended directions of spending in the good things of
life. The embodied and disembodied nature of capital investment in human
development, technique and machinery suggests that every bit of output is recycled in
these directions. Nothing is saved in the macroeconomic sense of gaining interest on
idle money capital in banks. The concept of resource mobilization as spending in the
Shariah recommended directions is contrary to the concept of savings as money
capital withdrawn from spending and is held as idle capital by banks in monetary real
sector linkage. It can be shown that because of the nature of complementary nature
coalition of all such sets across the economy, the impact of employment, capital
accumulation (formation), output generation are uniformly reinforced across such
participatory system. But for all such complementary relations to be sustained, their
important relationship with cost and risk diversification exists.
The inter project and inter-sectoral economy wide distribution of investments as a
form of spending is equivalent to the cost of production in the ethical induced

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Figure 1.
Layers of ethico-moral
cum economic coalition

participatory economy. It is noted that the absence of interest rate in a pure Islamic
economy negates the validity of opportunity cost of capital and the valuation of assets
by means of such discount rates. The replacement of discount rates by forward rates of
return in a simulative terminal-value formula of asset valuation means that such rates
are jointly shared among participants in joint venture. Likewise, insurance and freight
costs can operate in the Islamic way by takaful. Such financial costs form part of
investment and capital since financial business are run under the same principle of cost
and profit sharing. Consequently now the notion of opportunity cost of resource
allocation is replaced by cost and revenue (or profit) sharing among an increasing
number of participants and opportunities. In the coalition of different sets the rate of
change in the unit cost of production sharing cost declines as the rate of investment and
production increase together. Due to lower level of asymmetric information the pries
are becoming more stable. The increase in investment signifies diversification of risk
by participation among risk takers. The increase in production signifies product
diversification. Consequently, in the process of coalition the extensive meaning of
participation among different human and economic agents in the light of Shariah and
the simulation of efficiency function, achieve risk diversification through product
differentiation and increased systemic participation.
The relationship of ethical coalition is shown in Figures 1 and 2. In Figure 2,
Cj is j = 1, 2, 3 and denotes as a given set of coalition process, the same layer shift
into higher layer of coalition,
C0 j is j = 1, 2, 3, at the corresponding higher values as shown.
In this way Cj to Cj as ethical change induce improvement in older ethical stage of
the society.
The Islamic system is based on cooperation and participation. All of the dimensions
are based on it. From the above analysis it is tried to prove that cooperative ventures on
which the success of the system is depended. With greater learning in joint ventures
and internal efficiency gains with human resource development and with many
linkages among the economic sets it is possible to shift the interconnected variables.
The impetus working behind all these upward shift that defined the disembodied and

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Figure 2.
Layers of coalition

embodied ethical training in this system is the joint venture (caring attitude)
cooperative program. The old set of coalition is not fully retired. They will improve and
move to newer stages. Thus, a good deal of complementary among diverse number of
ethical injunctions is attained. This helped also in diversifying and reinforcing the
productive inputs and the skill and the human development in the Islamic system. The
increase in efficiency in the system is the result of coordinative and participatory
medium of learning and decision-making through joint ventures that the principle of
complementary promotes. In this mutable ethicaleconomic milieu the equilibrium is
not static it is moving towards the higher level of social wellbeing function.
In the Islamic system because of ethical coalition resource mobilization leads to
productive spending in accordance with the tenets of Shariah, not to financial saving
in financial intermediaries. The result of resource mobilization then is a multiplier
impact on income growth with appropriate products and stable market. Economic
stability is attained as the prices of goods stabilize with expanding supply. The
positive employment effect in this relationship along with machinery, capital and
technology adds to the social and economic gains and sustainability of real income and
output growth.
3. Behaviour of different sets of economy under various ethicalmoral cum
economic coalitions
This section explains the behaviour of different sets of the economy under the umbrella
of ethicalmoral cum economic coalition.

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3.1 Production set


The production set is very much important for the growth of an economy. This set has
some basic assumptions under the umbrella of neo-classical model, i.e. convex set,
convexity, concave function, homogeneity and homotheticity. Different types of
production functions exist in the literature, for example, classical, neo-classical and
Leontief type. However, some occupied more room in the empirical literature, i.e. CobbDouglas Production Function, CES and VES. In conventional economics, there are
three major standards of the theory of firm: (i) the neo-classical theory; (ii) managerial
theories and (iii) behavioural theories. It should be stated that one thing is common in
all these theories that decision makers try to maximize their own utility, the ultimate
objective of the producer is to earn the maximum profit, minimizing the cost in the
given constraints. Entrepreneur is the leader of the firm, manages risks and his role is
as innovator in the process of production.
The production units at time t from a set Z(t), consisting of units producing all the
commodities in the economy. A production unit can either produce nothing or work at
full capacity, since it is guided only by the decentralized signals of price structures,
wages, and interest rates in the economy. It will produce to its full capacity if the output
price can meet its prime costs, otherwise it will not produce at all. Each modern
working production unit requires working stocks and also has to enter into a coalition
with a set of labourers, stockholders, banks and so on. The residual income of a unit at
time t is then:
ckj bt kj ckj ptj  fP t Akt wt lkj r t Rt Skj g
Superscripts give the period of residual income, wage and interest rates, and prices;
subscript j refers to the commodity; and k in brackets refers to the unit of production.
The production unit produces zero if the residual for it at time t is less than zero;
otherwise it produces to the full extent of its capacity. In the equation, c(kj) denotes the
capacity of the firm, bt is the balance left after the prime costs per unit output are met,
P t price vector, A is the input vector per unit of capacity, l(kj) is labour coefficient, wt is
wage rate, r t is rate of interest and S(kj) is working stock vector per unit of capacity.
The set Z(t) consists of subsets Z(tj) produces a net output of the jth commodity. To
keep the exposition simple, we shall assume that each production unit produces a net
positive quantity of one commodity only. Given prices and the wage and interest rates,
the production units in the set Z(tj) can be ordered in accordance with the decreasing
per unit value of the residual. It will be seen that the set Z(tj) is a convex set. This
implies that global decreasing returns to scale prevail for the set Z(tj) as a whole,
though the individual production units have only the alternatives of producing to their
full capacity or not producing at all[2]. It is clear from the above equation that all of the
economic agents, human and non-human are participated in the process of production.
Consequently, the production set is becoming more important because it comprises
labour, capital and material inputs, all of these inputs have their share from the process
of production i.e. wages, rate of interest and value of the material inputs (Mathur, 1982,
1990a,b).
The main objective of all these agents is to maximize their own utility. However, the
present scenario of capitalism does not allow meeting the targets. For example, if we
will see at global level, the poverty level is complementary set of the current promising
growth pattern of the world. It implies that other sets of the economy are not accruing
the just benefit of the growth even they are fully participating and even cooperating in

the process of production. Why has this phenomenon occurred in the real world? Most
probably the answer is because of unjust prevailing in the society, community and in
the economy, i.e. the most powerful agent is taking more part of the residuals than
other economic agents (normally that is the producer). It is consensus among the
experts that the economic coalition not only leads towards optimality of the system but
there is also a need of ethico-moral cum economic coalition. Currently it is advised that
economic growth models should also include variables of nations culture, moral and its
ethical norms because it is assumed that religious beliefs tend to stimulate economic
growth also. (Barro, 2000; Tag el-Din, 1996; Zaman, 1992 ).
The Islamic system directly and indirectly refers to a number of economic activities
at are productive in their nature, the prohibition of abstention from production even for
the sake of extra worship or meditation and the prevention of laziness and idleness[3].
Islam does not recommend the deprivation of moral value, desiring increase in
welfare, endorses taking the benefit from Allahs gift in this world. In most of these
cases, reference is made with a tone of approval. For example, these activities include
agriculture, trade, fishing, industry, craftsmanship, weapon manufacturing,
shipbuilding and construction. Islam also recommends precision in workmanship. It
treats loss in production as a loss of inputs. Quranic verses describe facts, causes and
process associated with making a product lead us to infer these factors are productive.
The most significant of these factors are land and labour. Other factors, which can be
inferred, are raw material, capital, and entrepreneurial risk. The factor of land includes
all the natural resources like mountains, wood, minerals, streams and flowing water,
and animals and their produce. There is also a mention of environmental factors that
are conducive to production; examples of this are rain-bearing clouds, daylight, peace
and security. Islam recognizes the fact that the process of production is characterized
by uncertainty. To some extent there is a trade off between risk sharing and individual
incentives. In the Islamic sense a producer must display cooperative and collective
economic behaviour with regard to redistribution and resource allocation. There are
some altruistic considerations, which may enquire the firm to produce goods and
services which may not enable it to maximize profits or sale. Pareto optimal condition
is not fulfilled in the system where producers are caring for the poor and not for their
own profits, given demand is also not acceptable under the umbrella of altruism
(Bashar, 1997; Kahf, 1992; Mannan, 1992; Zaman, 2000).
The motives of the producer can be underlying as: s(h)e has to earn profit but as a
human being. However, other objectives are also important, such as looking after the
interest of others, improvement in the material, moral and aesthetic terms of the
society, production of the essential goods and services (duty), and provision of
employment and as a trustee motive of profit maximization is not so important
(Quran, 18, p. 46).
Without any hesitation one can say that the source of motivation central to the
psychology and sociology of workers and organizations. Experts have the consensus
that the goals of the organizations are not only to maximize the profit or sale as we
mentioned elsewhere. It is also to create the environment of social justice and especially
good relations between entrepreneur and workers as assumed by corporate social
responsibility. Literature of sociological economics emphasized more on the sense of
identity of the worker within an organization and his attachment to an organization is
critical to well-functioning enterprises (Akerlof and Kramtoz, 2005; Granovetter, 2005).
In the above mentioned state of art, the organization and workers should behave in a
different manner, only then it is matter that when, where, how and between whom

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transaction take place. In this similar scenario social categories play an important and
remarkable role, utility depends on social identity, internalize norms guide their
behaviour. It is admitted in the literature that four components are very much
important in the structure of any organization, identity, social category, norm and ideal.
If workers have their own identity then monetary incentives are complements rather
than substitutes. The position of the workers as insider or outsider has a remarkable
impact on the growth of the firms. In this advance stage of economy, most of the firms
are investing on it to turn the outsider in to an insider. Training programs are
organized, the motives are to avoid ridicule of his peers, increase the extrinsic and
intrinsic motivation, to enhance the self-image and so on (Akerlof and Kramtoz, 2005;
Granovetter, 2005). This also follows from the teachings of Quran (see for instance
Quran, 49:11).
Granovetter (2005) also emphasized on the network density, where complete
information prevails and no one is a free rider. He further added that non-economic
activity affects the cost and the available techniques of economic activity, i.e. social and
ethical embeddedness. For example, corruption has a high economic cost where as
honesty, fairness, reliability and loyalty enhance the efficiency of the economic agents,
the by-product of the social behaviour[4].
Under the umbrella of Islam this aspect has its own particular dimensions. The
sociology and psychology has the orientation towards the development of ethico-moral
setup. It is very much significant in the Islamic environment that the entrepreneur/
producer is not the owner, he is the trustee and according to the spirit of Islam he is the
brother of the workers[5].
If a worker has this identity in the organization then his efficiency is greater than if
he has the monetary compensation. His feelings are as an insider in the organization
and have positive impact on the efficiency. If it is analyzed in the periphery of Islamic
norms it is already available in this system. This has a different setup of the
organizational norms. In the environment of brotherhood the scenario will be different,
a self-training program which is already built in. Another factor which is very much
important for the workers if firms are not cutting the wage rate even low pay workers
are available and supervision is not considered as loose or tight if that is a symbol and
sign of brotherhood.
Islam promotes a universal approach that considers all human beings as single brotherhood,
and encourages peace, tranquillity and the welfare of all . . . Islam enjoins justice and fairness
in all human dealings. It places a high value on individual freedom and human dignity. . . . In
addition, Islam grants certain inalienable rights to individuals. These fundamental human
rights include: the right to life, the right to equality before law, the right to privacy, the right to
protest, the right to justice and the right to participate (Ahmad, 2000, p. 89).

The Prophet (pbuh) said: All people are the dependent of Allah, and the most beloved
among them are those who are most benevolent to his dependents including those who
put his resources to proper use (Ibn Kathir, 1980, p. 287).
Muslim producers should be concerned with the malnourishment, reduction in life
expectations, and other biologically and medical conditions of their workers as well as
other members of the society. This is another aspect of the identity of the workers in the
Islamic system, which provides a pleasant and honourable environment to the workers
and makes them proud when they show their attachment with the firm having this
behaviour.

In resultant, creation of more jobs in this environment even with low wage rate, but
the focal point is the identity of the workers and their feelings about themselves as
insiders. Which ultimately makes them more productive and efficient. It implies large
scale of output and lower level of prices. The producer, may care for each and the other
members of the society, i.e. labourers, other producers, the consumers, etc. at least what
result could be achieved in the ethico-moral cum economic state of economy:
(1) may be increasing return to scale;
(2) producers may be paid more;
(3) consumers may be paid more because of higher wage rate and higher level of
returns; and
(4) in a good environment, producers reinvest the profits and create more jobs.
Here the question arises about the structural requirement of the ethico-moral cum
economic state of the economy in the Islamic periphery, which can be ascribed as:
(1) production of haram goods and services is zero;
(2) production of needs is higher and of luxuries is lower; and
(3) following the Islamic principles the profit maximization should be lower.
As mentioned previously interest has a negative impact on the productive economic
activities. This is evident from the commonly observable fact that when rate of interest
is low, economic activity increases and people are willing to start and expand
businesses, which adds positively to the economy. In contrast when interest rates are
high, people tend to be discouraged from making real investment and are more
interested in saving that money and earning interest on it. This cannot be considered
good for the economy, because when a small entrepreneur gets discouraged from
borrowing money and starting or expanding his business due to high interest rates, the
country loses out.
However, in the Islamic economics the rate of return on the equities, which is not
pre-determined, plays its role in the determination of the residuals, and therefore in the
days of economic expansion it would be higher than during the period of recession. It is
determined by the type of the project and therefore it varies from one project to another.
Furthermore, the institution of partnership (Shirakah or Mudhrabah) will also
accelerate the economic activities of the economy, as it involves productive economic
activity. There is still an inevitable share of the risk. In the partnership contract, the
share of the partners in profit is agreed in advance. Projects of trade and production
generate an income. A moneylender may be entitled to a share of this income, but only
if he enters into a partnership with the entrepreneur. By entering into a partnership, the
lender shares in the risk of the enterprise. And by sharing the risk, the lender is directly
involved in the enterprise and may receive a share of the profits. This partnership
model should be contrasted with the lender as a creditor, in which case the lender is not
directly involved in the project, and therefore has no right to any share of its profit, as
in Islamic system most of the business ventures are based on partnership. The income
of entrepreneur could be characterized as profit and return to capital as profit share.
However, in an interest free economy there are two contractual ratios of profit sharing:
the one between the depositor and the bank and the other between the bank and the
entrepreneur and also the contract among bank and other sets, i.e. stockholders,
producers and consumers. Over and above the above mentioned coalition have

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ethico-moral dimensions besides economic ones and basically it is a part and parcel of
the Islamic mission (Bjorvatn, 1998; Siddiqi, 1992a,b).
Up to this stage we did not touch the problem of asymmetric information among
entrepreneur, investor, stockholder and bank, i.e. the moral hazard problem. It is
always assumed that Islamization of society leads to increased awareness of Islamic
values such as honesty; as a consequence of which the moral hazard problem should be
reduced. It is also instructed to believers in the Quran that say the truth and also not to
hide the shortcomings of the traded goods (see Quran, 33; p. 70; 8, p. 27 and 28, p. 77).
However, this is not the main area of discussion, for detail study of asymmetric
information and moral hazards see the literature of Islamic economics.
Metwally (1992) has developed an objective function of the Islamic firm and the
firms aim is to maximize this function subject to minimum acceptable level of profits
to satisfy its owners and maintain its business. According to him that charity is a
substitute for advertisement and will increase the good will of the firm. In addition,
Amin and Yusuf (2003) believe that if we incorporate the Islamic values in the cost of
production then still the firm will be able to maximize the profit.
However, Tag el-Din (1997) developed a theoretical model and incorporating the
mans ethical economic behaviour as a strategic resource in line with other human
behaviour resources, which is a focal point of Islamic economics. His claim is that man
is selfish as well as greedy but human resource strategy based on Shariah softens this
behaviour. After taking the usual simple assumptions, like closed economy, two by two
model, fully employed labour force, fixed capital and constant demand and capital
good industry only supplying replacement capital, so prevailing perfect competition
every where. He discussed the two cases on with the conventional production function
with the growth led strategy by the production function norms. In that way decrease in
prices increase the real income and then there is increase in the utility level of the
consumers. However, for above, environment of without externalities of utility is
prevailing. By the inducement of religious strategy not only the isoquants will shift
downward but simultaneously indifference curves will also shift downward. He further
assumed that there are three income brackets, information about these parameters are
costless. He discussed the generalized utility function. Furthermore, he compared two
approaches, i.e. a conventional one and the other is suggested by this study. The result
was that strategy which combines both production function and utility function norms
is more capable of creating a growth-devoted economy than the conventional one
simultaneously religious human resource development strategy which strongly and
positively correlates growth-devotion and justice-devotion.
In the Islamic system, there is no room for interest instead we have the returns and
these are not included in the cost. Scarcity forces maximization on economic agents for
an efficient use of resources and lends meaning to avoidance of their over or wasteful
use, in consumption as well as spending on the human development (Hasan, 2005).
3.2 Labourconsumer set
This set describes the behaviour of very potent agent of coalition model, i.e. consumer
who is also supplier of labour. The units of labour from another set of economic units
designated as L. Individual labour unit may be attached to individual production units
as workers; when the production unit is producing at a non-zero level, these labour
units earn the prevailing wage rate. Some of these labour units may own a share in one
or more production units and may earn a part of this residual income. Further, some of
them may have savings in the banking units and earn interest on them, or returns on

equity in the Islamic system. However, lack of divisibility, mobility and knowledge are
limitations of this set, whereas more work as well as no work has the disutility. When
each party is mindful of the interest of the other and that of the society in general and
all agree to make decision by mutual consultation, it is easier to achieve industrial
peace. Religion can also increase economic development by promoting a positive
attitude towards honesty. Religion may also increase levels of trust and reduce levels of
corruption and criminal activity, increase a nations openness to outsiders and thus
make the economy more open to foreign investments and employees. Religion may
encourage thrift, which would stimulate saving, investment and therefore growth. At
the same time, religion may lead to better health levels by discouraging harmful or
sinful activities such as drugs, overeating, gambling, alcohol, etc. Better health levels in
the society would raise productivity through labour force efficiency. Members of strict
religious groups seem to enjoy longer lives and lower rates of cancer, stroke,
hypertension and heart disease, because they follow several health-related every-day
restrictions (Bjorvatn, 1998; Mathur, 1982).
Labour units from small consumption coalition called households whose total
income consists of wages earned by its members interest earned on the savings of its
members, and its members share in the residual income of production units. To each
household is attached a utility function, having the usual convenient properties, whose
arguments are not only commodities and monetary balances but also the savings. This
set as a consumer is supplying the funds from its savings to the production set,
consuming its products and a very strong coalition can be seen in any economy in
between these two sets (Mathur, 1982).
Microeconomics is based on the derivation of utility function of the economic
agents. By appending those functions with beliefs, norms and values gives a more
realistic picture of the behaviour of human beings. Religion, moral and cultural affect
economic attitudes and activities but those factors are usually neglected in economic
scrutiny. Economists today are being pushed to accept that they may have to take up
the role of religion if they want to understand the full working of economic system. So,
we can say that Economics is not value-free but contains hidden metaphysics (Nelson,
2001, pp. 205-207).
In the Islamic system, Khan (1992) and Kahf (1992) included saving in the model of
consumer behaviour, on the contrary they only treated savings as the other side of the
coin and modelled only consumption. Kahf considers the spending in the way of Allah
(swt) in terms of maximization of falah (salvation). Kahf (1992) concluded falah as an
ultimate objective of the consumer and his decision about consumption, savings and
investment is dependent on zakah and interest free system. Khan (1992) discussed the
issue in terms of two types of expenditures, one for the worldly affairs and the other for
the life hereafter. In both of the studies they assumed that utility is not only dependent
on the reward in this life but life hereafter is also a very strong component. Actually the
Muslim consumer/worker has a two-dimensional utility function, i.e. pleasure and pain
in this life and life hereafter.
Khan (1992) analyzed and compared the concept of utility with maslahah (public
good). His main emphasis was on the considerations of needs of others. Zarqa (1992a,b)
categorized the consumer goods as dharurah, hajah and kamalah. Khan (1992)
mentioned tahsiniyyat instead of kamalah. Zarqa (1992a,b) has emphasized that
consumers utility function is effected by reward/penalty, life, hereafter, religious
constraint is also an additional part of the usual income constraint. He further added
that consumers do care for the others; basic needs of those not fulfilled are more

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preferred; cannot be analyzed through income and prices only; and thankful to
Allah (swt) after consuming the goods which he provides to human being (Quran, 39,
p. 7).
Biraima (1991) sketched a very comprehensive picture of the believer and nonbeliever in the way shown in Table I.
Zaman (1992) discussed the issue in a different way. He discussed two types of
utility functions, basic (for basic needs) and secondary (for luxuries). After describing
certain axioms he concluded that preferences should be lexicographic if there is
prevailing poverty in the economy. According to him that it is only at low levels of
consumption that the lexicographic structure of preferences can play any role. He
introduced also the externalities in the utility function, i.e. true altruism or nonmaximizing behaviour. In his recent paper Zaman (2005) stated that this type of utility
function is sensitive to certain types of goods (basic needs) and insensitive to other
types (luxuries). He has also shown his concern with the pre- and post- policy utility
function. He says that market mechanism is unfriendly to the poor and will lead to
inferior outcome.
Naqvi (1997) has developed a model in which the needs of the least privileged in the
society are given priority. In his model maximizing the social welfare in this sense
would entail the following:
(1) that the opportunity cost of capital accumulation (a greater inequality of
income and wealth) is reduced by a more egalitarian distribution of income and
wealth (taking from the rich and giving to the poor);
(2) that increase the share of wages; and
(3) that the proportion of wage goods in total production is increased
Qadir (1992) made the proposal more concrete, suggesting that the ethical norms
proclaimed by the society should be built into the social welfare function and the
individual functions should then aggregate to give the required social welfare
functional.
Unemployment of the human resources is not very much appreciated in the system
of Islam. Fear and hunger are not a desirable situation in Islam. These are sometimes
the natural consequences of human actions and unjust behaviour. Thus while
deprivation ought to be treated as a test of patience and perseverance, effort should be
made to eliminate the causes of distress. Poverty should not be made a symbol of
disgrace and disgust. It should also not restrain one from the mission for which the
Messenger of Allah was deputed. Poverty or fear of poverty should not lead to

Table I.
Compansion of believer
and non- believer

Believer (Ibad ur Rahman)a

Non-believer

Wealth and children


The potential of the self for good deeds
Purification of the self
Success due to purification
Good deeds
Thankfulness for Gods bounties
Worship of God
The pleasure of God

Wealth and children


The potential of the self for wrong deeds
Corruption of the self
Failure due to corruption
Bad deeds
Non-thankfulness for Gods bounties
Worship of worldly pleasures
The displeasure of God

Note: aReligious axioms require an individual to be selfless

self-destruction through suicide or infanticide, nor should it induce anyone to pursue


undesirable means of removing poverty. Societies, which have gained wealth through
foul means, cannot be made an ideal for Muslims (see Quran, 10, p. 23).
Furthermore, the Quran states that living in this world is an arduous task as life is
full of drudgery and struggle, earning livelihood demands enterprise and spurs man to
take part in economic pursuits. Physical labour enjoys a place of dignity in Islam. The
natural law of economic return stipulates that labour is productive irrespective of its
purpose and ultimate object. But it does not always guarantee opulence. Persons with
scarce resources should not be oversensitive to their state just as persons with plenty
ought not to be haughty. The labour force also requires rest, which needs to be
guaranteed. It is necessary to ensure that a fair wage is contracted without any
pressure or blackmail on either side. Using labour saving devices is permissible and is,
indeed, a blessing of Allah. National transformation can be brought about only with
will power and effort in the right direction (Azid, 2000; Zaman, 2000).
As mentioned previously the environment of the production set makes the workers
more efficient and also the producers are looking after the agent of this set as consumer
as well as workers. This coalition in between these two sets, which is based on ethicomoral cum economic state will increase the welfare as well as the production status of
the economy.
3.3 Banking set
The Quran treats the act of lending more as a moral phenomenon than purely an
economic activity, as the well-to-do are repeatedly urged to lend money. It asks the
lenders not only to give up the amount of interest but also to reschedule their
outstanding loans to the convenience of the hard-pressed debtor, preferably by
remission of the balance if he is in distress. On the other hand, repayment of anything
less than the amount borrowed is treated to be a wrong doing on the part of the debtor
as much as the charging of interest by the lender.
The terms and conditions involving a contract of debt like scribing a document,
affixing witness, furnishing a pledge etc. as are laid down in the case of credit sale are
also applicable to a contract of debt. In the case of an undercharged deceased person
debt supersedes the right of inheritance.
Banks are another economic unit in the modern economic system. Their primary
function is to take the deposits of savers and pay interest to them. Furthermore, they
advance loans to production units and stockholders for purchasing working stocks, to
new production units for investment, to government and so on. Thus one of the main
characteristics of the monetary-cum-banking system is the provision of credits. The
value of loans advanced need not be less than or equal to the savings deposited but can
be more. How much money should be created depends on the judgment of the
government and the demand and the creditworthiness of other credit receivers, as well
as on the liquidity judgment of the individual banking units (Mathur, 1982, 1990a,b).
The Quran views prohibition of interest in the context of its emphasis on infaq,
sadaqa, qard hasan (virtuous loans) and ordinary trade transactions. The Quran
points out that interest has been prohibited for all followers of the Scriptures. The
injunction on prohibition is made in three different stages; in the first stage interest is
simply denounced and compared with the noble institution of zakah. This
condemnation is also addressed on the Jews who, in spite of interest having been
banned, had been indulging in interest-based transactions. In the second stage
compound interest and interest with exorbitant rates is banned. The third and the last

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stage of condemnation is made in a very harsh tone and these dealing in transactions
involving any rate of interest are threatened with war from Allah and his Messenger
(Zaman, 2000).
Four roles of the financial institutions are recognized in the literature: financial
intermediation services; other financial services; creates broad array of assets and
liabilities; and lastly creates incentives for efficient allocation of resources. It is also
possible that Islamic banking is arranged on a basis of wakalah (agency) principle.
Regarding to the moral nature of the banks it is argued that in the Islamic system all
economic agents have to work within the moral value system of Islam. Islamic banks
are no exemption as they cannot finance any project, which conflicts with the moral
value system of Islam. One can say that in this respect Islamic Banks are somewhat
similar to the ethical banks now becoming popular in the western world (Iqbal and
Molyneux, 2005).
The Quran states that the practicing of interest-based economy is concretionary in
contrast with the economy, which is based on philanthropic spending and generosity.
Among others Siddiqui (1994), Iqbal and Molyneux (2005) and Iqbal (2001) discussed
the possible impact of the Islamic techniques of financing in the following way:
Banks will work on the basis of loss and profit share, the effect of loss and profit will
be spread throughout the economic activity of the economy, investment under
musharakah and mudharabah finance would always be higher compared to the fixed
interest system, the efficiency of the financial institution will be higher because the
banks will scrutinize the project more carefully (due to the nature of the system), it
increases the number of potential entrepreneurs by eliminating the need for collateral,
the banks would put more emphasis on the integrity, professional competency and
efficiency of the potential borrowers before granting a loan, demand and supply shock
would be automatically absorbed by the economy starting from the adjustments in the
rates of the return to the capitalists and then reverberating throughout the economy,
the distribution of income in favour of the small depositors of the bank will stimulate
effective demand and change the composition in this demand. Siddiqui (1994) further
added that all government expenditures would have to be financed by tax receipts; this
would force the government to be prudent and eliminate all extravagant expenditures.
In the Islamic system the responsibility of the financial institutions is to look after
the falah (salvation) of the society besides the provision of funds for the mutual
economic/business activities. Here is every reason to hope that Islamic Financial
Institutions, including banks, investment companies and finance houses, can play a
very useful role in mobilizing domestic savings for productive investment.
According to Tag el-Din (2004) the bank need not be involved in the istisna contract
to behave artificially as a product maker, since the firm will not seek finance from the
bank on the basis of parallel istisna. He further added that istisna and parallel istisna
will no longer be the firms source of finance. Istisna contract will only serve as a tool
for price hedging for both the producer and the demanders. The alternative mode of
financing will turn out to be a profit and loss sharing (PLS) contract between the
producing firm and the bank, where bank can now seize the opportunity of a closed
position in future market provided by the istisna hedge. By optimally combining a PLS
financing scheme with istisna-based forward contracts, an Islamic bank is able to
participate in almost assured future revenues coming from strictly binding future
volumes and strictly binding prices.

It can be seen here that in the ethico-moral cum economic coalition of two sets,
production and consumption, a new set, i.e. bank evolved, which makes the system
more efficient.
3.4 Autonomous expenditure set
This set consists of those economic units that can purchase commodities without first
earning an amount equivalent to the commodities value. These purchases are paid for
with loans from the banking set or on the basis of philanthropy. The autonomous
expenditure set may comprise government, production units both new and old, and
stockholding units, as well as consumer units that are able to get consumer credit and
the institution of philanthropy. They are a distinctive institution of the market-nonmarket cum-credit economy. The expenditure of this set is not constrained by the
budget constraint, as is that of the labour-consumer set (Mathur, 1982).
In the system of Islam this set plays a very important and remarkable role. It has its
own epistemology and discourse. This set has compulsory and voluntary funds. These
funds as we have mentioned above have pure economic benefits. The spending of this
set is dependent on the degree of God fearing instead of budget constraint. However,
the volume of this set can be estimated from the collection of the government and the
deduction from the banks (as it has been observed in the case of Pakistan or people can
believe on the Islamic government based on its Islamic attitude). The demand of this
sector, which is autonomous, has a positive effect on the employment and negative
effect on the obsolescence.
This sector could be developed through adequate education and training of the
masses in the Shariah. Religion may also increase resource allocation in the way of
Allah (swt) and therefore removing resources from free market activities. Zarqa (1984)
provides a detailed account of irfaq (philanthropy) tools that used to characterize the
Islamic economic system.
Tag el-Din (2002) is in opine that the irfaq (philanthropic) sector is established as the
ethical foundation without which the mechanical removal of interest rate may not
necessarily yield favourable consequences in the distributional context. He further
added that Quranic teachings provide the ethical foundation of riba elimination, which
is the promotion of the irfaq sector. In the case of irfaq sector the element of
distributional sacrifice becomes built in within the social behavioural fabric. He further
added, that currently rising concerns with philanthropy in the west is a definite
recognition of the fact that a stable social insurance system has to be deeply rooted in
humanistic civil values rather than precarious state supported system, the human
resource development strategy is favourable simultaneously for the productive as well
as distributive aspects, i.e. achievements of both targets equity and growth by using
this strategy. It is needed to bear a distributional sacrifice by releasing resources, on a
permanent basis, away from strictly utilitarianist dealing to strictly non-utilitarianist
dealings (Quran, 2, p. 276).
The coalition of this set will fill those gaps, which, due to any lacking, has been
emerged in the system, and if this set will emerge as a significant one then its role
should be very important in the ethico-moral cum economic coalition as it could be
observed in the Islamic system. Almost the objective of this set is not to directly
maximize its own utility; it is based on altruism so indirectly he agents of this set will
maximize their utility through the up-gradation of social welfare function.

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3.5 Stockholders set


Stockholders hold the stock of commodities consisting of investment goods,
intermediate goods and consumer goods. However, the fixed capital stock of different
vintages are held only by the production set (due to this reason we differentiate the
stockholder from production set). Whenever members of the autonomous expenditure
set require a commodity it is supplied to them by stockholders. Similarly, whenever
producers or consumers demand a commodity, it is also provided only by members of
the stockholder set. Let us assume that they charge a price that is proportional to the
price they have paid to the producers. However, the particular commodity is not in
stock it must be ordered and the price then charged relates to when the commodity is
actually delivered. Stockholders order from producers approximately the amount of
commodities they are able to sell in the current period (Mathur, 1982). As a good
believer the stockholders will not exploit the consumers and the producers. Hoarding is
not allowed. There will be just price in the situation of excess demand. The Islamic
normative stock market is characterized as a purely equity based market, free from
interest rate financing and carefully guarded against gharar[6]. The contract on the
basis of bai salam, istisna and bai muajjal are allowed. Religious restrictions are on
capital accumulation, profit making, credit markets and interest. Selling what does not
own is sufficient to invalidate sales.[7] In this respect the stockholder set of the Islamic
system is different than the non-Islamic one. This sector is following the norms, which
are guided by the Quran and Sunnah.
Tag el-Din (2002, p. 201) described the behaviour of stockholders as food shortages
are created through monopolistic practices, where profiteering suppliers are tempted to
build up stocks of high demand storable food items to influence market prices and
make large profits. The potential damage becomes even more serious when shortages
are created in staple food, in order to capitalize on its low demand elasticity.
Gharar is tolerated in Islamic jurisprudence, when it is not too serious. Ibn al
Qayyam says if it is allowed to exchange food items against each other for delayed
delivery, this is only done by one who seeks profit. Then, [at the delivery time], he
would sell it spot for the sake of profit, thereby causing food shortages and serious
damages to consumers. . . Thus, riba al nisa is banned, and accordingly, riba al fadl
was prevented prudentially, such that the temptation of immediate profit (riba al fadl)
would not induce people to the postponed profit (riba al nasa) (cited by Tag el-Din,
2002, p. 204). Giving true information about the characteristics of the traded
commodities in the market was emphasized as being closely related to belief. A direct
gain accruing to all people from a just exchange, a matter which would be realized
when they are better informed about the market value of whatever commodity they
have in terms of another commodity. In this way the level of asymmetric information
will reduce.
Emphasis of Islamic Shariah on the importance of knowledge about the subject of
the sale means in other words that it is important that the seller and the buyer know
what they are selling or buying; this knowledge is basic to the concept of the
consumers or producers economic rationality according to economic theory (Tag
el-Din, 2002). So if there is normative market for the stockholders as discussed by Tag
el-Din (1996) and it has the coalition with all the previous sets then this ethico-moral
cum economic state will help the market and economy to become more efficient
through reducing moral hazards as well as the level of asymmetric information, also
caring others and so on.

In the Islamic system with the coalition of stockholders three types of transactions
will take place, either cash, salam or on the basis of istisna. It should be kept in our
mind that this coalition is not a static one rather than it is a moving equilibrium and it
is a continuous process.
4. Conclusion
God conscious and abiding behaviour of the Muslims will alter the utility function of
the income earners. All the earnings considered as (halal), which are permissible under
the principles of Islam. Simultaneously an individual could be worker as well as
entrepreneur. He has to spend (if he is sahib-i-nisab) some portion of his income
(compulsory or voluntary) in the way of Allah (swt). He will earn wages and returns on
his capital. He is allowed to invest his savings in the mode of shirakah/mudarabah.
This study claims that good deeds are complementary to the economic deeds for a
Muslim as an economic agent. His utility is based on the both of them, and when s(h)e
is spending for others actually he is thankful to Allah for his bounties. Either he is
spending for his own needs or caring for others; in both of the situation he is accruing
the pleasure of Allah.
The coalition based on ethico-moral cum economic increases the efficiency state of
the economy. It is assumed that all the agents of the different sets of the economy are
inherently selfish but the religious training makes them soften and the attitude is
changing towards the social and economic benefits through participation and
cooperation. In this situation all the agents would agree to distribute the gains from
cooperation in accordance with a principal of minimax relative concession. This
principal distributes fairly the gains from ethico-moral cum economic coalition relative
to the situation that would prevail in the absence of coalition, i.e. improvement in the
individual and collective well being.
So this is the time of the experts, policy makers and academics to think on these
lines and ignoring the substitution concept of the conventional economics. Over and
above in this mutable milieu, a continuous process of embodied and disembodied
training of the society is required, which is only possible if we have an ideological
system and that should not be biased towards any segment or set of the society and
economy. On the basis of these micro foundations we are able to construct the macro
model for the Islamic economy. However, our postulate is that this coalition is not
absolute, but it is a relative one, and the level of coalition is increasing with the degree
of God consciousness and obedience.
Notes
1. Maqasid al-Sharia, or the objectives of the Shariah aims to fulfil the objectives of human
well-being.
2. If we want an exact solution, strict convexity may have to be assumed. This will not be
seriously wrong if the number of units is large.
3. The Prophet (pbuh) regarded someones working, realizing production, and obtaining
the subsistence of his family as scared as jihad for Allahs approval and as praying in
the form of fasting in the day time and as performing the salah (worshipping) in the
night. and Trying to earn a lawful livelihood is an obligation in addition to the duties
that are obligatory. (Bukhari)
4. Any servant who observes Allahs right and his masters right will get a double
reward. (Bukhari); and A servant is a guardian of his masters property and is
responsible for it. (Quran, 83:1)

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5. For a rich man to crave pretexts to avoid the fulfilment of his commitment towards the
basic rights of worker is oppression (Bukhari); and Take head of (daily) prayers and of
(the rights of) those who are subordinate to you (Ibn Majah); and Your brethren are
your servants whom Allah has made your subordinate. So, the man who has his brother
as his subordinate, should give him to eat what he himself eats, and to wear what he
himself wears. And do not put on them the burden of any labour that may exhaust them.
And if you have to put any such burden on them, then help them yourselves (in his
work) (Bukhari).
6. Gharar is the jurists term for inadequate market information or uncertainty about
exchange objects, particularly when no practical obstacles stand in the way of
furnishing full information to the contracting parties about the objects of exchange (Tag
el-Din, 2005).
7. Religious axioms require an individual to be selfless.
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Corresponding author
Toseef Azid can be contacted at: majidtos@brain.net.pk

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