Behavior of Firms in Islamic Economic Framework


Salman Ahmed Shaikh

In this article, we take a brief look at the theory of firm in Islamic economics and how a firm’s objectives and governing framework is different in Islamic economic framework as compared to the neoclassical and value-neutral economic framework.

Amin et al (2003) explains that in the Islamic economic framework, it is assumed that economic agents are guided by Islamic values. Thus, a Muslim producer, being accountable to Allah, treats the resources at his command as a trust and the production of goods as a duty, and he will base his production decisions on the concept of ‘maslaha’. The author opines that a producer in an Islamic market could still be profit-driven; but, being governed by the Shariah, the Islamic producer’s valuation of economic costs will be modified. Hence, the producer will internalize the externalities in its utility and cost functions.

Discussing the goal of the firm in Islamic economic framework, Hasan (2002) argues that it is important to understand what is being maximized, how, and for what purpose. He says that maximizing survival, employment, equity, or the pleasure of God would probably be welcome to most of the people. The author opines that if the firms fulfill their Islamic duties towards the consumers, the employees, and the society in general in arriving at their total revenue curves, then profit maximization is not objectionable. He argues for internalizing social costs and benefits to enable the use of profit maximization with requisite modifications and restrictions.

In exploring mathematical modeling of a firm’s behavior, Metwally (1997) describes an Islamic firm as one that would seek the maximization of utility which is a function of the amount of profits and the amount of spending on charity or good deeds. The author suggests using utility as a broad function which includes net profits as well as charity as parameters. However, the amount of profit would, after the payment of all imposed taxes (Zakat and other dues) be no less than a minimum level which is ‘safe’ to keep the firm in business.

In another mathematical formulation, Bendjilali & Taher (1990) argue that even in imperfect market structure like a monopoly, if the monopolist is concerned about the social welfare, then he will be willing to partially sacrifice his profits in order to attain efficiency and minimize social welfare loss.

Hence, it could be appreciated that several authors have emphasized on the ethical and spiritual rationality in the firm’s behavior. In a value neutral framework, there is no cap or mechanism to solve problem of a human’s greed. In fact, a value neutral framework provides a cover to follow, pursue, harness and practice greed. On the other hand, Islam addresses hearts and first of all, it attempts to purify the heart and encourages compassion and shared responsibility through reminding about afterlife accountability.

References

Amin, M. Ruzita & Yusof, A. Selamah (2003), “Allocative Efficiency of Profit Maximization: An Islamic Perspective”, Review of Islamic Economics, No. 13, pp. 5-21.

Bendjilali, Boualem, and Farid B. Taher (1990) “A Zero Efficiency Loss Monopolist: An Islamic Perspective”, The American Journal of Islamic Social Sciences, 7(1): 219-32.

Hasan, Zubair (2002), Maximization Postulates and Their Efficacy for Islamic Economics, The American Journal of Islamic Social Sciences19 (1), pp. 95 – 118.

Metwally, M.M. (1997) “Economic Consequences of Applying Islamic Principles in Muslim Societies”, International Journal of Social Sciences, 24(7, 8, 9): 941-57.

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About Salman Ahmed Shaikh

PhD Economics, National University of Malaysia. Assistant Professor of Economics and Finance. Author, Researcher, Teacher and Consultant. He can be contacted at: salman@siswa.ukm.edu.my
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2 Responses to Behavior of Firms in Islamic Economic Framework

  1. Mike Venuto says:

    An excellent article on the parameters of profit and accountability to our supreme being and afterlife. Few articles address this aspect of “profit” in a market or capitalist economy. In fact, it is an uncommon discussion, and the one which is needed. Today, the US is plagued by the ravages of “predatory capitalism”. The result was 2008 and the recession that swept much of the developed world. Balance of profit, corporate survival, and social considerations can be balanced and have been over the years. It simply has to be addressed in an a-priori fashion.

    Like

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