Electronic copy available at: http://ssrn.com/abstract=1530092

Economic Welfare from Islamic perspective

By

Mahadzir Ahmad PhD in Islamic Finance candidate,

INCEIF University, Kuala Lumpur, Malaysia. Email: mahadzir_ahmad@yahoo.com

Abstract: As suggested by its title, this paper looks at the subject of economic welfare from the perspectives of Islam. It starts with the definition of economic welfare, and clarifies how this subject is different from “welfare economics”. It further explains that economic welfare means how well people are doing in the economy. And, the Islamic vision is to have a just socio-economic order for society. Using the Quran and Hadith as its main references, three aspects of economic welfare, namely, Eradication of poverty, Equitable distribution of wealth and Environment, are put forward. On the mainstream positions of economic welfare, the paper deduce that the proportion of a nation’s wealth that goes to labour should be the basis of economic welfare, but, the over emphasis on GDP by mainstream economists is not justified. In conclusion, the paper stressed that it is NOT about how-to-achieve the vision but an elaboration of the Islamic positions regarding the well-being of society. Keywords: Economic welfare, Islamic economics, Poverty eradication, Distributive justice, Sustainable development Paper type: Research paper

Electronic copy available at: http://ssrn.com/abstract=1530092

1

CONTENT Page

1. Introduction 2

2. Definition of Economic Welfare 2

3. Scope and Object of Discussion 5

4. The Islamic goal and solutions for society 6

4.1. Eradication of poverty 7 4.2. Equitable distribution of wealth 8

4.3 Environment 11

5. The Mainstream position 12

6. Conclusion 13

Endnotes 15

References 18

Appendices 20

2

1. Introduction

We usually hear of “economic growth” and “social welfare” when discussing

economics. These two phrases mean exactly what they are even for laymen;

and maybe none will even ask their meanings to avoid being labeled as naive.

However, an easy meaning cannot be said of “economic welfare”. We need

to ponder what this phrase means before making any deliberations, especially

so when trying to discuss “economic welfare” from the perspective of Islam.

Knowing exactly what “economic welfare” is important because we do not

want to say something of Islam in relation to something that is not “economic

welfare” as commonly understood.

2. Definition of Economic Welfare

“Indeed, the relationship between the two branches of the subject (i.e. micro

and macro) is so close that the study of micro foundation of macroeconomics

is gaining prominence in modern researches as a separate subject. There

are issues that are studied in both micro and macro economics or lie at the

border line between them. For example, the general equilibrium analysis, i.e.

the study of interactions between all markets simultaneously, is becoming

property of the two branches. So is the case with welfare economics.”[1]

And thus we bring forth “welfare economics” into our study.

3

Given that there is such a discipline of welfare economics and before we bring

Islam into the picture, it is important to differentiate between “welfare

economics” and “economic welfare”. And for this, we will look at one Internet

definition and one scholarly comment for each of the phrases, as follow:

“Welfare economics is a branch of economics that uses microeconomic

techniques to simultaneously determine allocative efficiency within an

economy and the income distribution associated with it. It analyzes social

welfare, however measured, in terms of economic activities of the individuals

that comprise the theoretical society considered.”[2]

The purpose of studying welfare economics is provided by Mohammad Ishfaq

and Dr. Nadeem Inayat as: “The objective of welfare economics is the

evaluation of the social desirability of alternative economic states. An

economic state is a particular arrangement of economic activities and of the

resources of the economy.”[3]

On the other hand;

Economic welfare is defined as: “The level of prosperity and quality of living

standards in an economy. Economic can be measured through a variety of

factors such as GDP and other indicators which reflect welfare of the

population (such as literacy, number of doctors, levels of pollution, etc.)

Economic welfare is a general concept which doesn’t lend to easy definition.

Basically, it refers to how well people are doing. Economic welfare is usually

4

measured in terms of real income, real GDP. An increase in real output and

real incomes suggests people are better off and therefore there is an increase

in economic welfare.[4]

But, a direct meaning of economic welfare is perhaps aptly put by Ravallion

and Lokshin as: “is one person “poorer” than another”. In their own words

when studying the systematic determinants of subjective economic welfare in

Russia, they said: “However, for many purposes, including policy analysis,

one is typically interested in a more narrow concept of “economic welfare”; is

one person “poorer” than another? Possibly subjective assessments of this

more narrow concept will accord better with objective data on incomes.”[5]

To the two researchers, economic welfare is best measured by income and

not by answers to questions related to notions such as “happiness” or

“satisfaction with life” which are subjective in nature, when analysing policy

measures.

With the differentiation above, we now continue confidently that in our

discussion, economic welfare means how well people are doing in the

economy.

The need to be precise on the meaning of economic welfare is mainly

because of and being consistent with the call by senior Islamic economists, as

highlighted by Abbas Mirakhor in A Note on Islamic Economics: “At the

present, the most important function of Islamic economics, as a discipline, is

to develop a language with enough precision that can lead to a consensus

5

amongst researchers regarding the meaning and function of terms, ideas,

rules and norms.”

3. Scope and Object of Discussion

Issue: Does Islam specify the measure of how well the Muslims must be? Is

there an indicator to measure the well being of a Muslim as individual or for

the society as a whole?

A quick answer to the issue is that there is no well being measurement at all

for the individual Muslim. This is because there is no way we can quantify the

spiritual aspect. A Muslim’s well being consists of both, material (all worldly

possessions) and spiritual (closeness to Allah, His blessings and divine

assistance) aspects.

However, we cannot apply the same argument for the society. This is mainly

because the well being of the society does not have the spiritual aspect. Allah

does not judge the society as a whole in the hereafter; for man stand before

Allah as individuals.

The society is the place where the Muslims plant his righteous deeds to earn

Allah’s pleasure.[6] The well-being and prosperity of the society must be

measured to track its progress over time and to tell how well the Muslims are

doing in managing the scarce resources. Everything of this worldly affairs

aspect is quantifiable in monetary terms or statistically, and thus an index

should be established.

6

However, before embarking to develop the index, we need to understand

better the Islamic goal and solutions for society. As such, this deepening of

understanding is the scope of this paper. Along the way, we shall look at the

mainstream positions as well. And, our object is none other than to

present the Islamic position of economic welfare.

4. The Islamic goal and solutions for society

Without a doubt, the Islamic goal for society is to have a just socio-economic

order. Ziauddin Ahmad in his book, Islamic Vision of a Just Socio-Economic

Order, said, “The Islamic vision of a just socio-economic order can be

deduced with reference to these basic teachings (of the Quran and Sunnah)

and the historical records of the early Islamic period.”

In this just order, the resources used in the economic progress is made on a

sustainable basis and the wealth created in the progress be distributed

equitably amongst the members of the society.[7]

Just how the above vision can be achieved and how do we monitor its

development and progress is the practical issue thus faced by the Muslims.

However, in keeping with the scope of this paper, we will not dabble in the

how-to-achieve the vision. Rather, we shall focus on three aspects that are of

high importance to Islam for society and for society itself to monitor.

7

It is important to monitor because economic progress are primarily pursued by

the bourgeoisie class of society[8] who may not be acting in the best interest

of society – to say the least. Some businessmen may not have any societal

interest at all.

Perhaps, it is in this shallow nature of the bourgeoisie class that the following

famous quote of Adam Smith should be properly understood: “It is not from

the benevolence of the butcher, the brewer, or the baker that we expect our

dinner, but from their regard to their own self-interest. We address ourselves,

not to their humanity but to their self-love, and never talk to them of our own

necessities but of their advantages.”

At any rate, the well-being of the people is invariably jeopardised if there is no

monitoring. The three aspects for society to monitor are as follow:

4.1. Eradication of poverty

From the point of view of society, poverty is the number one enemy of Islam,

because “poverty is nearer to disbelief (kufr)”, says the Prophet, peace be

upon him (pbuh). When a person is poor, he will do all sorts of things to fill his

stomach or feed his family without regard to morality. The poor is bitter with

Allah in most of the times, for putting him in this world and not providing him

with sustenance. This bitterness is the thing that will slowly drive the poor into

disbelief. It is in this way that eradication of poverty thus becomes the most

important agenda of the just socio-economic order.

8

This subject was thoroughly examined by Ziauddin Ahmad in his Islam,

Poverty and Income Distribution book in which he said, “The most noteworthy

feature of the scheme of distributive justice (being a component of a just

order) as envisaged by Islam is the assurance of the fulfilment of the basic

needs of all, irrespective of the stage of development of a country.”[9]

4.2. Equitable distribution of wealth

Distributive justice is a complex notion. Just what should be distributed justly

i.e. should it be income, welfare or wealth is enough to spur volumes of

literatures. Zubair Hassan wrote extensively about equitable income

distribution in his Distributional Equity in Islam paper. He said, “The Islamic

approach to equity almost exclusively centers around the personal distribution

of income” and went on to discuss income floor and a worker’s “just” wage for

work done, and presented the structure for distributional equity envisaged by

Islam. In fact, Professor Zubair discussed much more on income – but, with

regret, not enough on wealth.

Whilst the present writer is in full agreement with his learned Professor’s

position on how equitable distribution of income should be pursued, he also

wishes to offer some views on equitable wealth distribution, as follow:

Foremost, we should keep in mind that we are investigating the well-being of

the people, and we want to track changes and monitor its progress.

9

The problem with income is that income does not capture the full story of a

person’s well-being. Wealth does; because wealth by definition is income

less expenditure. A wealthy person with no income is better than one with

income but no wealth. The wealthy just have to liquidate some of his assets

to generate the cash flow required.

But, the most compelling reason why Islamic economists should also pay

attention to wealth lies in the manner zakat is calculated. Zakat is obligatory

when the wealth of a Muslim exceeds the nisab (threshold). In case of

monetary assets, the nisab is 85 gram of gold.

We will not discuss nisab in case of agricultural, livestock and Ma’adin

(minerals and extracted underground content) categories because the

majority of people are income earners. Currently, these categories of wealth

are usually pursued by companies where the people work to earn their

income. What we want to know is the well-being of the people and not that of

the companies.

As such, when a Muslim is a zakat payer, he is automatically not a miskin.

Certainly, he is a wealthy person having assets worth at least RM11,050 or

thereabout. (This is based on the nisab valued at RM130/g on 30/11/09.)

The nisab is a matter specified by the Prophet pbuh. The fact that the Quran

is silent on nisab makes it more difficult for Islamic scholars to appreciate the

rationale (i.e. illah and sabab) behind the Prophet’s decision on the type of

10

wealth and the different nisab applicable. Nay, it can never be fully

understood by Islamic scholars.

It is difficult for Islamic scholars because the primary source of Islamic

knowledge is two; the Quran and Sunnah. When the Quran is silent, then the

synchronization between what Allah has set out and what the Prophet pbuh

had executed is, by simple deduction, difficult if not impossible.

Yet, Yusuf Qardawi did write in Fiqh al-Zakah: “The rationale behind this

condition (of nisab for zakatability) is very obvious. Zakah is a due on the rich

to relieve the poor and to share in the expenses for common interest to Islam

and Muslims. It can only be taken from those who can afford it."[10]

We view that if nisab is to separate the rich from the poor of society then the

nisab is the poverty line. As such, the nisab is a better indicator of the

people’s well being. If one’s wealth is below nisab then his well-being is

surely not well, even though he may have an income. It is most likely that the

income is not enough to cover his expenses and he may even in debt. The

person who incurs debt to fulfill his self and family basic needs, i.e. clothing,

food and shelter, is eligible to receive zakat. And, this category of people is

known as gharimin.

In the overall scheme of assisting the needy, the Quran in 9:60 have specified

8 categories of people who can receive zakat: (1) Fakir - One who has neither

material possessions nor means of livelihood, (2) Miskin - One with

insufficient means of livelihood to meet basic needs, (3) Amil - One who is

11

appointed to collect and administer zakat, (4) Muallaf - One who newly

converts to be a Muslim, (5) Riqab - One who needs to be freed from

bondage, (6) Gharimin - One who is in debt to meet basic needs, (7)

Fisabillillah - One who strives in the cause of Allah, (8) Ibn us-Sabil - One who

is stranded in a journey.

The bottom line: a Muslim who pays zakat is far better than the zakat

recipients. It is in the society interest to have all Muslims as zakat payer.

Being a zakat payer gives dignity to the Muslim as the Prophet pbuh did say

that “The upper hand is better than the lower hand”. It is certainly preferable

for the Ummah to have 1 billion of zakat payers than to have 10% of the

Muslim population paying 90% of the annual zakat collection. This position

also blends well with the eradication of poverty agenda. When this target (i.e.

all Muslims is a zakat payer) is met, it means that distributive justice has taken

place and becomes the ultimate proof of a just socio-economic order. And

thus, the pursuit of equitable-income-distribution should be viewed as a

means to the equitable-distribution-of-wealth end.[11]

4.3 Environment

Concerns for the environment came into economics at about the same time

when “development acquired the status of a formal discipline essentially after

the Second World War” i.e. after 1945. This was because many countries

were pursuing growth strategies without regard for the environment.[12]

12

In contrast, Islam’s concern for the environment is well recorded more than

1,400 years ago. “And do not do mischief on the earth, after it has been set in

order, and invoke Him with fear and hope; Surely, Allah's Mercy is (ever) near

unto the good-doers” says the Quran in 7:56.

A socio-economic order that is just can only be had when the order in

environment is kept in balance. Meaning – rivers, beaches and lakes are kept

cleaned. No toxic wastes are released into air and earth. And the list can go

on and on. The simple point is: when the environment is messed up, the well-

being of society is worse off. In a just socio-economic order, the environment

must be kept pristine.[13]

5. The Mainstream position

The mainstream position of economic welfare depends on a variety of factors;

depending on when is it being studied or whose view is being read. For

example, if we refer to the times of Adam Smith (died 1790), widely cited as

the father of modern economics, then we can possibly say that he viewed the

well-being of the people as being dependent on the income for labourers.

In An Inquiry into the Nature and Causes of the Wealth of Nations, Adam

Smith found that land, labour and capital were the source of a nation’s wealth.

Considering the majority of the people are of labour – if we add the number of

land-owners and capital providers together, the sum cannot exceed the

number of labourer – then economic welfare should refer to the how much

income they are getting, logically.

13

Alternatively put, economic welfare based on Adam Smith’s position depends

on the proportion of a nation’s wealth that goes to labour.[14]

However, since 1790, many thousands economists have joined the main

stream of economic thoughts – just count the groupings of Classical,

Keynesian, Neo-classical and many other sub-groups such as the Saltwater

or the Freshwater schools[15] – and to investigate every ideas of economic

welfare is not appropriate for the purpose of our present inquiry.

Nonetheless, the preoccupation of many mainstream economists currently

with Gross Domestic Product i.e. the value of output in an economy is worthy

of mention. According to Wikipedia, “GDP per capita is often used as a

measure of a person's welfare”. But the use of GDP per capita as the main

indicator of economic welfare is clearly wrong; because GDP is an aggregate

sum and as such we cannot tell from the figure how much goes to land, labour

and capital. After all, the formula for GDP is C + I + G + (X - M).[16]

6. Conclusion

Recap: The object of this paper is to present the Islamic position of economic

welfare.

In doing so, we have discussed three aspects of Islam that are extracted from

the Quran and Sunnah, the primary source of knowledge of Islam.[17] But,

this is by no means an economic problem solving exercise. The present

14

exposition is no more but an elaboration of the Islamic positions regarding the

well-being of society – or simply, an elaboration of the vision. But again, this

paper is not about how-to-achieve the vision. This task is for the real Islamic

economists.[18] And, the matter of how-to-achieve really belongs to “welfare

economics” in regards to the scope of this paper.

On the issue of an index to measure the well-being of society raised earlier, it

is certainly a necessity to track the progress and any slip-ups. In this regard,

the famous quote of William Thomson (1824-1907) a.k.a. Lord Kelvin, is quite

relevant: “I often say that when you can measure what you are speaking

about, and express it in numbers, you know something about it; but when you

cannot measure it, when you cannot express it in numbers, your knowledge is

of a meagre and unsatisfactory kind”.[19]

Should there be one index or multiple indices, again, is not the scope of this

paper. However, with the exposition of the Islamic goal, it is hoped that

indices reporting on incidence of poverty, wealth distribution and degradation

of environment can be established or developed further. In fact, many of

these indices have been developed by mainstream economists but very

seldom highlighted by governments and media. So, wherever possible,

Islamic economists should not re-invent the indices but used them to draw

policies that would bring society closer to a just socio-economic order.

And Allah knows best.

15

END NOTES

[1] Zubair Hassan, 2007. Chapter 1, What Economics Is About, Page 16.

[2] Wikipedia, 2009. Welfare economics. Refer to Appendix 1 also.

[3] Mohammad Ishfaq and Dr. Nadeem Inayat, 1995.

[4] Economics Blog, 2009. Economic welfare. Refer to Appendix 2 also.

[5] Ravallion, Martin and Lokshin, Michael, April 1999. Subjective

Economic Welfare.

[6] Refer to Quran, Surah al-Mulk, verse 2: (Allah is) Who has created

death and life, that He may test you which of you is best in deed. And

He is the All-Mighty, the Oft-Forgiving.

[7] This position, namely, on resource sustainability and equitable

distribution is derived from Prof. Zubair Hassan’s class lectures on

Distributional Equity and Islam, and Environment and Islam, and his

Market, Environment and Sustainability chapter, Chapter 12 of his

Introduction to Microeconomics book, notwithstanding the contra-

distinction between income and wealth presented by the present writer.

[8] Refer to Wikipedia’s definition at http://en.wikipedia.org/wiki/Bourgeoisie

[9] Ziauddin Ahmad, 1991. Page 16.

[10] Yusuf Al-Qardawi, 1999. Volume 1, Page 65.

[11] This is the contra-distinction mentioned in Note 7 above.

[12] The quote and this position are deduced from Zubair Hassan, 2006.

[13] Verse 7:56 should be read together with “Disasters have spread

throughout the land and sea, because of what the people have

committed. He thus lets them taste the consequences of some of their

works that they may return (to the right path) (30:41).” The good-doers

16

in 7:56 are those businessmen who pursued economic development

without harming the environment and those who strive with their wealth

and selves to stop the environment from being raped. If they are

believers in Allah then His mercy is always near to them. “Behold!

Verily on the friends of Allah there is no fear, nor shall they grieve.

(10:62)”

[14] The biography and personal character of Adam Smith is an interesting

read. A read of Wikipedia on him and his scholarly works will easily

provide the justification why he is regarded as the father of modern

economics and, probably, why Adam Smith Institute of UK

(http://www.adamsmith.org/) was established.

[15] Refer to http://en.wikipedia.org/wiki/Schools_of_economic_thought

[16] Refer to Wikipedia, Measures of national income and output at:

http://en.wikipedia.org/wiki/Measures_of_national_income_and_output

A better approach is to use Gross National Income or the Income

approach; but, this topic is another area of research altogether.

[17] While this is the technique of usul fiqh – defined as the sciences of

extracting the proofs (dalil) for a ruling (hukm), the present writer did

not employ any fiqh techniques (such as qiyas, ijma’, etc). But,

perhaps more importantly, this going-back-to-the-sources-but-don’t-

limit-yourself-to-the-fiqh-technicalities is the caution meant by

Nejatullah Siddiqi, which Abbas Mirakhor highlighted in his Note as

follow: “It is in the use of fiqh that Dr. Siddiqi not only parts company

with some other scholars’ emphasis, but suggest too strong of a focus

on fiqh has retarded the progress of Islamic economics.” Basically, the

present writer’s understanding of this methodology issue is as follow:

17

economists should not and cannot be tied to any particular ruling of fiqh

or its technique of qiyas – which is predominantly used by the fuqaha,

but instead should do their own digging into the sources to find

solutions for society. Islamic economists are those who use Islamic

sources in finding solutions for society. If the solution has no

grounding in the Islamic sources then it is no more than a mainstream

proposition. And, to all Islamic economists: the object is the realisation

of the maqasid as-shariah for the society, of course.

[18] The present writer is no more but a student of Islamic economics who

has expounded the components of a just socio-economic order,

rightfully or wrongfully. Surely, guidance is from Allah.

[19] Refer to http://www.daviddarling.info/encyclopedia/T/Thomson.html

18

REFERENCES

Abbas Mirakhor, 2007. A Note on Islamic Economics, Islamic Development

Bank, IDB Prize Winner, Lecture Series No. 20, Jeddah, KSA. Available from:

http://i-sie.org/download/note on islamic economics Abbas Mirakhore.pdf

Economics Blog, 2009. Economic welfare, retrieved Nov 25, 2009, from:

http://www.economicshelp.org/blog/economics/economic-welfare/

Mohammad Ishfaq and Dr. Nadeem Inayat, 1995. Welfare Economics: A new

framework, Journal of Islamic Banking and Finance, vol: 12, issue: 2, 1995.

Downloaded 25/11/09 from http://www.financeinislam.com/article/1_36/1/405

Ravallion, Martin and Lokshin, Michael, (April 1999). Subjective Economic

Welfare, World Bank Policy Research Working Paper No. 2106. Available at

SSRN: http://ssrn.com/abstract=569202

Wikipedia, 2009. Welfare economics, retrieved Nov 25, 2009, from:

http://en.wikipedia.org/wiki/Welfare_economics

Wikipedia, 2009. Adam Smith, retrieved Dec 2, 2009, from:

http://en.wikipedia.org/wiki/Adam_Smith

Yusuf Al-Qardawi, 1999. Fiqh al-Zakah, Translated by Monzer Kahf, Edited by

Abdalhaqq Bewley and Mohmed Isa Waly, Dar Al Taqwa Ltd., London, UK.

19

Ziauddin Ahmad, 1991. Islam, Poverty and Income Distribution, The Islamic

Foundation, Leicester, UK.

Zubair Hassan, 1988. Distributional Equity in Islam, published in Distributive

Justice and Need Fulfillment in an Islamic Economy by Munawar Iqbal

(Editor), Islamic Foundation, Leicester, UK, 1988, pages 35-62.

Zubair Hassan, 2006. Sustainable Development from an Islamic Perspective:

Meaning, Implications, and Policy Concerns, J.KAU: Islamic Econ., Vol. 19,

No. 1, pp: 3-18 (2006 A.D/1427 A.H).

Zubair Hassan, 2007. Introduction to Microeconomics – An Islamic

Perspective, Pearson-Prentice Hall, Kuala Lumpur, Malaysia.

20

APENDICES

1. Definition of Welfare Economics

2. Definition of Economic Welfare

Appendix 1: Definition of Welfare Economics

From Wikipedia:

Welfare economics is a branch of economics that uses microeconomic techniques to simultaneously determine allocative efficiency within an economy and the income distribution associated with it. It analyzes social welfare, however measured, in terms of economic activities of the individuals that comprise the theoretical society considered. As such, individuals, with associated economic activities, are the basic units for aggregating to social welfare, whether of a group, a community, or a society, and there is no "social welfare" apart from the "welfare" associated with its individual units.

Welfare economics typically takes individual preferences as given and stipulates a welfare improvement in Pareto efficiency terms from social state A to social state B if at least one person prefers B and no one else opposes it. There is no requirement of a unique quantitative measure of the welfare improvement implied by this. Another aspect of welfare treats income/goods distribution, including equality, as a further dimension of welfare.[1]

Social welfare refers to the overall welfare of society. With sufficiently strong assumptions, it can be specified as the summation of the welfare of all the individuals in the society.

1 I.M.D. Little, A Critique of Welfare Economics (1950).

21

Appendix 2: Definitions of Economic Welfare

From http://dictionary.bnet.com/definition/economic+welfare.html: -

The level of prosperity in an economy, as measured by employment and wage levels

From http://www.economicshelp.org/blog/economics/economic-welfare/: -

Definition of economic welfare: The level of prosperity and quality of living

standards in an economy. Economic can be measured through a variety of factors such

as GDP and other indicators which reflect welfare of the population (such as literacy,

number of doctors, levels of pollution, etc).

Economic welfare is a general concept which doesn’t lend to easy definition.

Basically, it refers to how well people are doing. Economic welfare is usually

measured in terms of real income, real GDP. An increase in real output and real

incomes suggests people are better off and therefore there is an increase in economic

welfare.

However, economic welfare will be concerned with more than just levels of income.

For example, people’s living standards are also influenced by factors such as levels of

congestion and pollution. These quality of life factors are important in determining

economic welfare.