The compatibility of a free market economy and Islam

Edo Omerevi
Center for Advancement of Free Enterprise, Dr. ire Truhelke 10/A, 72000 Zenica, Bosnia and Herzegovina Tel: (387) 62 988 850, E-mail: cpa.bih@gmail.com

Abstract:
The main objective of this study is to review the literature on the compatibility of a free market economy and Islam and discuss how the free market concept fits into the Islamic system of life. The issue of markets, price controls, redistribution of wealth and poverty will be covered as well as the extent of divine instructions to the Muslim population on how to manage their economy by referring to the Quran (Holy Book of Muslims), Sunnah (Practice of Prophet Mohammed) and academic literature. The study will show that Muslims are allowed to manage their economies by means of a free market mechanism and that the practice of Prophet Mohammed supported a self-managed economic system. However, it is also shown that in modern times, the concept of free market is abused, and as a result some of the Muslim scholars express their dissatisfaction with the mechanism of free market.

Key words:
Islam, free market economy, Capitalism.

1. Introduction Free markets are defined or explained as markets in which people buy and sell voluntarily, without legal compulsion. This freedom results also in the liberty to determine the quantity, quality and type of goods and services that are offered in the market, as well as those purchased. Therefore, no one is forced to supply any type of goods and/or services nor is anyone forced to purchase the same. The opposite of the free market concept would be a planned economy, where a central planner, by applying compulsion and coercion, decides who should produce what, how much, and who should receive those goods and services. The matter seems rather simple. However, it becomes more complicated if one takes into consideration taxes, licenses, minimum wages, production quotas, and other tools and policies that are used in modern economies to manipulate the markets for the better; at least that is the claim of those applying the mentioned instruments. Without discussing which of the options are the better performing ones, this paper considers the compatibility of the free market mechanism and Islam, or the religious instructions related to the matter of economic activity and exchange. In line with this objective, the mater of poverty and redistribution of wealth is analyzed as well, referring to the verses in the Quran and the practice of Prophet Muhammad (peace be upon him). The paper also distinguishes between the original idea of the free market, and the concept that includes additional features that may not be in line with Islam and, as a result, might cause Muslims to be averse to a free market economy.

2. The tradition of the free market in early Islam Prophet Muhammad grew up in the era of the Meccan trade, which is described by Dost (2009) as an example of a free market with an almost sacred respect for private property. The Prophet and his wife, Khadija, were both merchants and the Quran is filled with parables using the language of trade. He might actually be described as a person that was almost obsessed with the market. It is reported that when he heard that two individuals bartered dates of different quality, the Prophet disapproved of such a transaction advising them to seek the market, sell one type of dates for money and then buy the other type.1 Thus, justice in exchange is not only

Narrated by Abu Sa`id Al-Khudri and Abu Huraira: Allah's Apostle appointed somebody as a governor of Khaibar. That governor brought to him an excellent kind of dates (from Khaibar). The Prophet asked, "Are all the dates of Khaibar like this?" He replied, "By Allah, no, O Allah's Apostle! But we barter one Sa of this (type of dates) for two Sas of dates of ours and two Sas of it for three of ours." Allah's Apostle said, "Do not do so (as that is a kind of

achieved by mutual acceptance, but also by the determination of a just price by means of the marketplace. His insistence on the marketplace as a place of exchange may actually be extreme even in the eyes of market advocates. We are being told that the Prophet also disapproved of the purchase of goods that on their way to the market. As narrated by 'Abdullah bin Umar, the Prophet said: "do not go ahead to meet the caravan (for buying the goods) (but wait) till it reaches the market."2 In addition, the Prophet disapproved of price-fixing that was demanded by some of his contemporaries. A hadith (a saying or an act from Prophet Muhammad) is reported by Anas that one person came to the Prophet and requested him to fix prices in the market but he refused. Another man came and made the same request; the Prophet said it is Allah who pushes prices up or down, I do not want to face Him with a burden of injustice.3 Trade has been marked in Islam as a way of seeking Gods bounty. Thus when some pious Muslims started considering trade during the Hajj season as inappropriate, the verse There is no blame upon you for seeking bounty from your Lord [during Hajj] was released.4 The importance of trade in the Prophets time as the means of satisfying ones needs was highlighted with an event that happened during one Friday prayer. There was a shortage of means in Medinah and while the Friday ceremony was going on, a caravan reached the city. Many of those present wanted to leave the prayer ceremony to attend to the caravans in order to purchase the needed goods. In line with this event, the verse And when the prayer has been concluded, disperse within the land and seek from the bounty of Allah, and remember Allah often that you may succeed has been revealed.5 Thus, buying and selling, combined with the remembrance of God was the way to solve ones economic problems. Given such strong support for commerce in form of trade via marketplaces, it is very obvious that a free market concept as defined earlier is clearly compatible with Islam. But not only the free market, the concept of private property that the Prophet experienced from his childhood continued to be practiced throughout his lifetime and he tried to promote its continuance at his farewell pilgrimage by declaring to the assembled masses that: "Nothing shall be legitimate to a Muslim which belongs to a fellow Muslim unless it was given freely and

usury) but sell the mixed dates (of inferior quality) for money, and then buy good dates with that money." (Sahih AlBukhari) 2 Sahih Al-Bukhari. 3 Abu Dawud, mentioned by Bashar (1997). 4 Quran, 2:198. 5 Ibid, 62:10.

willingly." God required through the Quran that those who believed, do not consume one another's wealth unjustly but only [in lawful] business by mutual consent6 The fulfillment of contractual obligation is mentioned as a sign of righteousness: Righteousness is not that you turn your faces toward the east or the west, but [true] righteousness is [in] one who believes in Allah , the Last Day, the angels, the Book, and the prophets and gives wealth, in spite of love for it, to relatives, orphans, the needy, the traveler, those who ask [for help], and for freeing slaves; [and who] establishes prayer and gives zakah; [those who] fulfill their promise7 when they promise; and [those who] are patient in poverty and hardship and during battle. Those are the ones who have been true, and it is those who are the righteous.8 In short, Islam defends private property, contract law, and profit through trade and this respect for, what we might describe as features of free market, have been carried on until today. So, when measuring the Economic Islamicity Index of countries in the present day, Rehman, and Askari (2010) include variables like Ease of Doing Business Indicator, Economic Freedom Indicators, and others (shown in Tab. 1), arguing that higher values in these indicators show a higher Islamicity of the countries. Their study, however, reveals due to some reason, it is the Muslim majority countries that are behind in these values that apparently are being promoted by their faith, i.e. Islam. Thus, the top 3 countries in 2010 according to their Islamicity criteria are 1. New Zealand, 2. Luxemburg and 3. Ireland. The first Muslim majority country is Malaysia at place 38.

3. Limitations of Prophethood Prophet Muhammad did not only disapprove of manipulating the price mechanism of the markets, he even criticized the manipulation of nature in the search of better results. Thus, it is reported from Talha:

Ibid, 4:29. YusufAlitranslation:tofulfilthecontractswhichyehavemade 8 Quran,2:177.

7

I was walking with the Prophet when he passed by some people at the tops of their palm trees. He asked: "What are they doing?" They answered: "Pollinating the male into the female." He replied: "I do not think that this will be of benefit." When they were told about what the Prophet said, they stopped what they were doing.9 However, when the trees shed down their fruits prematurely and the Prophet was informed about that, he said: "If it is good for them they should do it. I was just speculating. So, pardon me. But if I tell you something about God, then take it because I would never lie about God."10 Another narrator added that the Prophet said: "You know your worldly affairs better than me."11 This expression of limitation, however, opens the door to considering the Prophets preference of the free market mechanism as simply his own view as a human being, rather than a Prophet, subjecting his choice to critical evaluation and the possibility of error in preference. Since the Quran itself is silent on matters such as price fixing, exchange outside of the market, and other worldly matters, it is of no surprise that many scholars limited the application of free market ideals as practiced and advertised by the Prophet.
Table 1: Some of indicators used to assess the Islamicity of countries

AREA Economic Opportunity and Economic Freedom Property Rights and the Sanctity of Contracts Taxation and Social welfare Corruption Supportive Financial System A) B) C) D) E)

SUB-CATEGORY Gender Equality Indicators Other Non-discriminatory Indicators Ease of Doing Business Indicators Economic Freedom Indicators Business and Market Freedom Indicator Fiscal Freedom Indicator Tax Level Indicator Taxation Level Indicator Freedom From Government Indicator Transparency International Indicator Freedom from Corruption Indicator Investment Freedom Financial Freedom

B C D E
9

A) Property and Contract Rights A) B) C) D) A) B) A)

Muslim. Ibid. 11 Ibid.

10

For example, there are some who strictly oppose price controls, such as the followers of Imam Shafi'i and Imam Ibn Hanbal, but the Maliki and Hanafi schools argue that price control is legitimate and it does not necessarily amount to meeting injustice on either party to exchange (Bashar, 1997). They basically used the concepts of imperfect markets and market failure as a justification to impose price controls. As Ibn Taimiyah explained, When peoples needs and necessities cannot be safeguarded without a fair price control, then a price control based on justice will be implemented for them - no more, no less (Bashar, p.33). Of course, it is very difficult to define what is a fair price, how much of the increase or decrease in prices is due to market forces and how much to market engineering and manipulations. The resulting question is, if the rise in prices was a result of hoarding or any deliberate attempt of profiteering, would the Prophet also have refused to act? Being something of a gray area, any changes in prices were not welcomed, irrespective if they were going up or down, because it was difficult to define a correct reaction. Thus, it is reported that the second Caliph Umar bin Khattab passed by a trader who was selling dried grapes in the market at a lower price than the others. Umars reaction was to require him either to raise the price or leave the market. This order was, however, canceled briefly afterwards by Umar going to the traders house and telling him that whatever I told you was neither an experts opinion nor a verdict. It was only a personal concern for welfare of people. So, you can sell it at whatever rate you like and wherever you like.12

4. Poverty and redistribution of wealth In a free market place, change, improvements and innovations might lead to workers being laid off in industries or companies that are not able to adapt to the market changes. Inflexibility of labor to adapt to new circumstances, inability to define ones new role in the economy might results with a diminished, or even the total loss of the income level. That is the price of creative destruction, a process of economic development that arises out of the decline of some prior economic order. Those who adapt may even increase their wealth, but those who do not might loose and even become poor (from the materialistic perspective). However, given that material welfare is considered a benchmark of wellbeing, a decrease in the income level combined with the inability to adapt to the new economic order often results with dissatisfaction that calls for redistributive policies, protection of the old economic order, inefficient companies, etc. That was

12

Reported from Dawud bin Saleh at Tammar, mentioned by Bashar.

the case in the non-Muslim world, and certainly the attitude spread to the Muslim world. Hence, poverty became to be seen as a problem requiring systematic, collectivistic solutions instead of individualistic solutions. This is certainly not in line with Islamic values. It is recorded that the Prophet said: "One would rather take a rope and cut wood and carry it than ask others."13 Of course, taking anothers property without consent is even less of an option, as highlighted earlier. Poverty is actually a part of Gods wisdom, at least as explained in the Quran. Thus, God sends us a message: Say, "Indeed, my Lord extends provision for whom He wills and restricts [it], but most of the people do not know."14 At another place, He repeats the same message: Indeed, your Lord extends provision for whom He wills and restricts [it]. Indeed He is ever, concerning His servants, Acquainted and Seeing.15 God even discourages the coveting of other peoples wealth: "And do not wish for that by which Allah has made some of you exceed others. For men is a share of what they have earned, and for women is a share of what they have earned. And ask Allah of his bounty. Indeed Allah is ever, of all things, Knowing."16 Yet, the existence of poverty does not mean that men and women should not act and react against it. Islam has a hint of an institutional redistribution mechanism, in form of Zakat17, that is also defined as the right of the poor to the income of the wealthy. But, one might wonder how this fits into the free market construct in Islam. Some scholars, upon viewing the treatment of charity in Islamic law went even so far as to recognize the possibility of a more socialistic and planned economic agenda in the form of a minimum wage, public expenditure, etc. (Berg and Kemp, 2007). Even though redistribution measures exists, it is the implementation of such measures that should give us an indication of its similarity to a free market or socialist economy. Thus, charity is an instruction to individuals to share their wealth with others, without involving compulsion: And give the relative his right, and [also] the poor and the traveler, and do not spend wastefully. Indeed, the wasteful are brothers of the devils, and ever has Satan been to his Lord ungrateful. And if you [must] turn away from the needy awaiting mercy from your Lord which you expect, then speak to them a gentle

Sahih Al-Bukhari. Quran,34:36. 15 Ibid,17:30. 16 Ibid,4:32. 17 ObligatorypaymentmadeannuallyunderIslamiclawoncertainkindsofpropertyandusedforcharitableand religiouspurposes.

14 13

word. And do not make your hand [as] chained to your neck or extend it completely and [thereby] become blamed and insolvent.18 The emphasis is on giving instead of taking. In addition to be instructed to share their wealth, Muslims are also encouraged to give charity by means of a trade of this worlds assets for the assets of the Hereafter: Indeed, the men who practice charity and the women who practice charity and [they who] have loaned Allah a goodly loan - it will be multiplied for them, and they will have a noble reward.19 The poor are even advised how to behave in their situation: Let a man of wealth spend from his wealth, and he whose provision is restricted - let him spend from what Allah has given him. Allah does not charge a soul except [according to] what He has given it. Allah will bring about, after hardship, ease.20 Even those who are not able to afford to pay for such basics as marriage, for example, are not entitled to take the means from others, but are advised to abstain [from sexual relations] until Allah enriches them from His bounty21 The issue of Zakat is different. In this case Muslims are not asked to give, but the Prophet is advised to take it from the wealthy and use it as instructed: Take, [O, Muhammad], from their wealth a charity by which you purify them and cause them increase, and invoke [Allah 's blessings] upon them. Indeed, your invocations are reassurance for them. And Allah is Hearing and Knowing.22 Even though the emphasis here is on taking instead of on giving, the practice of the Prophet shows that individuals still had the choice to refuse the payment of Zakat. There is a story that one of the Prophets companions asked him to pray that would God grant him wealth, promising that in the case of him becoming wealthy, he would pay charity and Zakat. Therefore the Prophet prayed for him, and God granted him great wealth. The companion, however, thereafter withdrew from the community due to the numerous livestock he came to own. He came less frequently to prayers, but more importantly for this paper, it is reported that he refused to pay

18 19

Quran,17:2629. Ibid,57:18. 20 Ibid,65:7. 21 Ibid,24:33. 22 Ibid,9:103.

Zakat. The Prophet did not force him to pay the obligatory charity. Instead, the following verses have been revealed: And among them are those who made a covenant with Allah , [saying], "If He should give us from His bounty, we will surely spend in charity, and we will surely be among the righteous." But when he gave them from His bounty, they were stingy with it and turned away while they refused. So He penalized them with hypocrisy in their hearts until the Day they will meet Him - because they failed Allah in what they promised Him and because they [habitually] used to lie.23 Thus, instead of forcing the companion to pay the charity, the Prophet refused later to accept his Zakat (Rami, 1984). Indeed, the reported approach of the Prophet was very similar to Gandhis nonviolent/passive resistance, but in this case more similar to a nonviolent/passive redistribution of wealth. And yet, exactly this lack of institutionalization and coercion is mentioned by Kuran (1986) as one of the reasons why Muslim majority economies failed to reach the level of development of Western countries, claiming that it is institutions and a certain level of coercion that is required to develop economies. In spite of such a claim, the message of the Quran and the practice of Prophet Muhammad indicates that people are free to choose their actions, that they have no right to use coercion in obtaining other peoples wealth, but are allowed and encouraged to pursue Gods bounties by means of individual effort, much in line with the right of pursuing happiness as mentioned in the Declaration of Independence of the United States of America that reads: We hold these truths to be self-evident, that all men are created equal, that they are endowed by their creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness.

23

Ibid,9:7577.

5. Do Muslims have a problem with the free market or are other issues involved? Despite the free market tradition, claims exist that Capitalism (as the free market equivalent) has failed to solve the economic problems of human beings (Qureshi, 2011). The economic heritage of early Islam, however, makes one question the possibility of such a conclusion if one accepts the divine origins of Islam and that the free market constitutes a building block of an Islamic economic system. Is it really the free market that has failed, or is it something that is being represented as the free market? Figure 1 shows some of the developments that have taken place in the modern era in the name of the free market, or some concepts that have been equated to the free market. For example, interest is one of the key concepts in Classical, Keynesian, but also Austrian economics. However, if one accepts the view that interest is a fundamental part of the free market, than the Quranic prohibitions on usury (interest) can be used as an indicator of anti-capitalist and antifree market sentiment in Islam (Berg and Kemp). In spite of the respect for private property, contract law, and profit through trade, the Quran is, however, clear on the point of interest: O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers. And if you do not, then be informed of a war [against you] from Allah and His Messenger. But if you repent, you may have your principal - [thus] you do no wrong, nor are you wronged.24 Such is the severity of the issue that interest is the only thing on which God threatens the believers with war. Yet, interest is the biggest weapon of Capitalism, to quote Qureshi, even though it has nothing to do with the principles of free market (i.e. people buying and selling voluntarily, without legal compulsion). Hence, if interest is the criteria upon which we have to judge on the compatibility between the free market and Islam, the conclusion might be that it is not. But it might not be reasonable to the idea of the free market to place on it a burden such as the promotion of interest based economy as the ultimate model for the wellbeing of mankind.

24

Ibid,2:278,279.

Fig. 1 Developments in the name of the free market It is also important to take into account the fact that under the wings of the free market and Capitalism, some interest groups are taking over markets in developing countries through questionable means. For example, private equity firm Mid Europa Partners is building a leading multi-country pay TV distribution platform operating in the whole of South Eastern Europe. The strategy includes the merger of Telemach Group (which offers services in Slovenia and Bosnia and Herzegovina) with Serbia Broadband, whereby Mid Europe Partners already hold stakes in cellcos Orange Austria, T-Mobile Czech and Bite (Latvia) as well as in Hungarian broadband operator Invitel.25 This new giant also started purchasing the smaller operators in Bosnia and Herzegovina, a Muslim majority country. Of course, the share price of the Bosnian national company BH Telecom, which is competing in the same market, dropped significantly in light of such a powerful competitor. There is nothing intrinsically wrong with mergers, acquisitions and take-overs by foreign companies and the customers enjoy the cheaper and wider choice of services. Competition is intrinsically good to effect more efficiency in the market as well as the introduction of the most up to date technology. However, the great libertarian, Murray N. Rothbard, argued that it is the principle that matters, not the outcome of the event. Thus quoting him on the defense of the principle of private property:

http://www.telegeography.com/products/commsupdate/articles/2012/12/17/mideuropacombinessbband telemach/
25

That prime reason is moral and is rooted in the natural-rights defense of private property we have developed above. Even if a society of despotism and systematic invasion of rights could be shown to be more productive than what Adam Smith called the system of natural liberty, the libertarian would support this system (1973, p.48). Therefore, is the above mentioned takeover of the market according to the principles of free trade as it is portrayed to be? In order to answer this question, one must first take into consideration that the major provider of the financing used for the acquisition process is the European Bank for Reconstruction and Development (EBRD), officially helping the countries in the region to become open, market economies.26 And the bank is owned by 64 countries, the European Union and the European Investment Bank27, so everything seems to be legitimate, except that this bank is clearly manipulating the market structure in favor of Mid Europe Partners to become the biggest pay TV distribution platform in the region by providing funding that surely other companies would also liked to have received. If one takes into consideration that the money used for the mergers and acquisitions is money created out of thin air, i.e. fiat money [another concept that has nothing to do with the free market and is proven to be an instrument of exploitation and government control (via numerous works of Ludwig von Mises, Murray N. Rothbard, HansHermann Hoppe and others)] then one might be able to develop an understanding why Muslims in Bosnia (but also in the rest of the world where similar activities are taking place) feel that the so called free market and Capitalism do not work for their benefit, irrespective of the Islamic tradition of the original concepts.

Conclusion In this paper, I have attempted to analyze the tradition of the free market concept in Islam and show that the main principles of the free market are actually strong principles as introduced by the Quran and the practice of the Prophet Muhammad (i.e. people buying and selling voluntarily, without legal compulsion, together with full respect for private property, contract

26 27

http://www.ebrd.com/pages/about.shtml Ibid.

law, and profit through trade). However, given that the Prophet himself acknowledged the limitation of his recommendations regarding worldly matters, and given that in the modern era the terms free market and capitalism have been used to spread other constructs that fundamentally are not an integral part of the original concept of the free market, and in some cases are actually against it, some Muslims might feel the need to express their dissatisfaction with Capitalism and free market, given that the results in the economy are not in their favor or are against the principles they believe in. In line with the above conclusion, the right step to be taken might be to distinguish between the idea of free market economy, and what is today put under its banner, acknowledge this difference, preach the problems parallel to the promotion of the free market, and also develop a mechanism of how to protect the principles of the free market in the modern era. In the context of the Muslim world, that should actually be easier, because reference can be made to, what by the majority Muslims is considered to be divine sources, i.e. the tradition of the Quran and the practice of the Prophet Muhammad (peace be upon him).

Selected Bibliography:
Bashar, Muhammad Lawal Ahmad, 1997. "Price Control in an Islamic Economy", JKAU: Islamic Econ., Vol. 9, pp. 29-52. Berg, Chris & Kemp, Andrew, 2007. "Islams free market heritage", IPA Review, March, pp. 11-15. Kuran, Timur, 1986. "The Economic System in Contemporary Islamic Thought: Interpretation and Assessment", International Journal of Middle East Studies, Vol. 18, No. 2, May, pp. 135-164. Qureshi, Abdul Jabbar, 2011. "Econonimical System of Islam", European Journal of Scientific Research, Vol. 58 Issue 1, pp. 103-107. Rami, Jusuf, 1984. Povodi objave Kur'ana. Sarajevo, Bosnia and Herzegovina: Starjeinstvo Islamske Zajednice. Rehman, Scheherazade S. & Askari, Hossein, 2010. "How Islamic are Islamic Countries?", Global Economy Journal, Volume 10, Issue 2, Article 2. Rothbard, Murray N., 1978. For a New Liberty, The Libertarian Manifesto. 2nd Edition. Auburn, USA: Ludwig von Mises Institute.