Section 1 Introduction: Economics is a science, and the subject matter or philosophy of Economics is concerned with the study of wealth. Different economists have, however, perceived the concept of wealth differently. For example, according to Mercantilists, gold and silver (precious metals) were considered wealth, whereas Physiocrats did not subscribe to the assertion of the Mercantilists and instead, classified nature, i.e., natural resources of an economy as wealth. Subsequently, Adam Smith in his book, "An Inquiry Into The Nature And The Causes Of Wealth Of Nations" published in 1776, dealt exclusively on the subject matter of wealth and as such, deduced that labor was wealth. This notion was then later upheld by the Classical and Marxian school of thought. By considering labor as wealth, the subject matter of Economics then becomes a study of human behavior, i.e., Economics, then basically becomes a behavioral science which constitutes a study of the behavior of people as agents of consumption and production. Since it is a study of human behavior, each agent, whether treated as a consumer or producer or both, would then act and behave under the ambit of the theory of moral sentiments or the concept of an 'invisible hand.' In order to maximize his or her utility, any agent would, in principle be working for self interest and value free, probably faced with only budget constraints. In other words, according to this theory of 'invisible hand,' an agent becomes an 'Economic man’, who indulges in his personal preferences motivated by his self interests. The utility function of such an 'Economic man' would, thus primarily be independent[1]. (Kahf) has termed such a utility maximization as "homo-economicus"; whereby the sole objective of an economic agent is to "achieve the largest level of economic acquisition and whose only stimulus is the sense of money[2]." However, the assumption of independence of utilities is not valid in an Islamic economic system that is guided by the teachings of the Quran and the Sunnah. The 'Islamic man' would, thus differ from the 'Economic man' in a sense that the former acts in light of ultimate ethical and moral values and behaves rationally within the permissible limits drawn by Islam. The 'Islamic man',— an agent of consumption or production does not violate the conventional tools of economic analysis, but the difference lies in his behavior that is non-neutral and value oriented in light of Islamic teachings. The utility function in an Islamic economic framework would thus be dependent in a sense that human life is conceived as one whole, oriented towards one ultimate goal, i.e., serving Allah, entering paradise, passing the trial on the day of judgment etc., The acts of life of a Muslim are subjected to Divine Will. The aggregate behavior of the agents would, thus be subjected to Islamic Laws, and as such dependent on permit of God's blessings e.g. the concept of wealth and income (Al Maal) is unique in Islam and 'Maal' is not to be accumulated or spent lavishly, but should be a source of charity, i.e., welfare of the needy and deprived. The utility function of the rich and the poor then became interdependent. Optimality in Islam, therefore, is not based upon Pareto distributive justice, according to which one is to be made worse off for the benefit of others. Rather, this is too restrictive to be a guide for redistribution mechanism in an Islamic economic system, which governs the concept of mutual help and inter dependency. The Islamic economic order would, thus only be for Pareto improvement, rather than Pareto optimality. More precisely, the concept of Pareto optimality would not hold in an Islamic order as the utility functions in such a system are interdependent. The principal focus of this study would, thus be the development of a social welfare function based upon the inter-dependent utility functions, and to evaluate how it differs from the traditional social welfare function. In Section 2, we shall analyze the different welfare criteria propounded by secular economists. Section 3 would envisage the social welfare function of an Islamic economic system. In Section 4, some conclusions would be drawn to highlight the philosophical aspects of the Islamic social welfare function. Section 2 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. Though the economist may not always be able to prescribe a method by which one state of the economy can be transformed into another, however, policy measures are available for changing an existing situation[3]. In order to evaluate alternative economic situations, economists have given some criteria of welfare. A description of some of these criteria is subsequently given in the following paragraphs, and then we will evaluate their acceptability in an Islamic economic framework. Initially, Adam Smith propounded that economic growth increases social welfare due to growth in employment and consumption. Smith, however, ignored the distributive and allocative aspect of resources, assuming that efficiency is directly linked to growth, and that in case growth takes place, efficiency was imperative, and hence the attainment of Pareto optimality a must consequence. However, it can be inferred that growth may not maximize social welfare, as equitable distribution of resources may not take place in the process of growth and in consequence, inequality of wealth distribution may well materialize[4].
An English economist Jeremy Bentham argued that welfare is improved when "the greatest good is secured for the greatest number." According to this criterion, welfare of an economy is measured by aggregating the utilities of the individuals; W = (u1 +u2+ u3) However, after a change U1 + U2 > U3.
Such that utility of 1 and 2 has increased, but U3 has decreased, then W will increase, but with a decrease in U3 Their analysis, therefore, again ignores the distributive justice of the mechanism[5]. Similarly, the Cardinalistic approach to welfare has serious flaws. Their criterion is based on the law of diminishing marginal utility assuming constant marginal utility of money. Since, in reality individuals differ in their attitudes towards money, thus this assumption tends to become naive, in a sense that constant utility of money is analogous to assuming equal distribution of wealth. Italian economist Vilfredo Pareto (1848-1923) argued that any change that makes at least one individual better off and no one worse off, is an improvement in social welfare. According to Pareto, a situation is efficient or optimal if it is impossible to make one person better off except by making someone else worse off. However, in a real world situation, the criterion is of limited applicability, because there are certain policies that involve changes that benefit some, and harm others. Therefore, a situation may be Pareto optimal without maximizing social welfare. Accordingly, any point on PPG (Production Possibility Curve) represents a Pareto efficient situation, but does not necessarily imply maximum social welfare[6]. Hicks and Kaldor, however, brought the concept of Pareto optimality and social welfare together, and propounded that if gains by virtue of a change can compensate the losers in the process of the change, then it constitutes an improvement in social welfare. This criterion evaluates alternative situations on the basis of just monetary valuation of different persons, ignoring the income distribution. Different persons have different utility for money, so it is not just to compensate individuals in only monetary terms[7]. It was Bergson who developed a social welfare function analogous to consumers' utility function. Bergson who developed a social welfare function analogous to consumers' utility function. Bergson's social welfare function ranks alternative situations in which different individuals enjoy different
utility. . . Bergson's social welfare function is a helpful device to examine the conditions of social welfare maximization. For this purpose there is another tool; — grand utility frontier, derived by different optimum conditions where MRS = PRT. The grand utility frontier is combined with the social welfare function and the "point of bliss" is attained where the social welfare function is tangent to grand utility function, thereby evidencing welfare maximization.
BERGSON'S WELFARE CONTOURS/MAX. OF SOCIAL WELFARE The above mentioned economic welfare criteria have not dealt with the equitable income distribution that is particular in the essence of the Islamic economic order. Though implicitly Pareto has discussed allocation of resources and distribution of income, but his criterion is too restrictive to be a guide for redistribution, and cannot provide a practical policy guide for any social system. Owing to deficiencies in the welfare criteria; in particular to equitable wealth distribution, a humble effort is being made in the next section to develop a unique approach by reflecting upon an Islamic social welfare function. Section 3 The economic law of Islam is based on the Quranic philosophy of creation; the Almighty has created the World as a trial and test for man, therefore, every person has been made to depend on others for his living. No one can live independently as regards his needs and requirements. Every individual is an integral component of the society and contributes to its formation, according to his abilities[8]. According to the Quran, We have apportioned among them their livelihood in this world (in such a manner that) we have exalted some in ranks above others so that they can mutually serve each other. And better is thy Lord's mercy than what they are amassing[9]."
In terms of this verse, it does not mean that in implementing the Islamic economic welfare criteria, we need to equalize all in terms of resources/ income endowment, but what in actual sense is required, is equitable distribution of income and wealth. On the other hand, irrespective of wealth that one possesses, one is free to choose for consumption or investment to maximize his utility, but within the permissible limits accorded by the Quran and Sunnah. Thus, the concept of welfare in Islam does not differ from the economics of individual consumer or producer behaviors as propounded by secular economists, except for being consistent to the Quran and the Shariah. Hence, in light of the above, it can be asserted that the criteria of Pareto optimality which is based upon the concept of maximizing utility of a free 'Economic man,' does not hold valid in the Islamic economic order. The Pareto criterion does not solve the basic social issue of redistribution, with which Islam is very much concerned. In this aspect, it is brought to light that the concept of 'free market,' now getting in vogue again, is the foundation of the Pareto optimal criterion, and, therefore, quite inconsistent with the Islamic economic setup, as it would not solve the basic problem of redistribution, which, consequently can, and will lead to social and economic imbalances. The only way out of the problem is the formulation of a social and moral welfare function of Islam, which would enable the analyst to evaluate the problem of allocation, production and distribution, in terms of Islam. Many Muslim thinkers and jurists, e.g., Al-Ghazali[10] and Al-Shatibi[11], formulated the welfare function. According to them, all matters (be they activities or things) that help in achieving social welfare are called 'Masalih' or utilities. It is true that there are certain subjective or intangible factors which will enter in the utility function and it is difficult to take all into consideration, however, they are extremely important, and we evaluate these factors in terms of the inter dependent utility functions. For simplicity let us deal with a community where there are two persons (A and B), two commodities (X and Y), two producers (I and II). Assuming that there exists a social welfare function of the general form; W = W(UA,UB)... (i) where UA is the utility index of A UB is the utility index of B
The corresponding utility functions are; UA=UA (XA,YA,XB,YB) UB = UB (XB YB,XA YA) Assuming that communities' production function is
F(X,Y) = 0... (ii) where X = XA+XB and Y = YA+YB such that; X = X(L,K) and Y = Y(L,K) The objective of society is to maximize the welfare function, subject to the constraint. This is a formalization of the typical choice situation in economic analysis. The composite function is; w* = w[UA (XAYA XBYB), ub (xb yb, xa ya)] +λ. [f(xa +xb, ya + yb)] Setting partial derivative equal to zero; ∂.W* = WA ∂.UA + λFA = 0..(3) ∂.XA ∂.XA ∂.W* = WB ∂.UB + λ FA = O…(4) ∂.XB ∂.XB
∂.W* = WA ∂.UB = λ FA =0…(5) ∂.YA ∂.YA
∂.W* = WB ∂.UB + λ FB = 0…(6) ∂.YB ∂.YB
∂.W* = F(XA + XB, YA + YB) = 0…(7) ∂.λ
From (3), (4), (5) and (6) it can be verified that; ∂UA -λFA = WA ∂XA -λFB WB ∂UB ∂XB
FA = WA ∂YA FB WB ∂UB ∂YB
∂UA ∂UA FA = ∂XA = ∂YA FB ∂UB ∂UB ∂XB ∂YB The rate of commodity substitution are the same for both consumers, and this proves Pareto optimality. The satisfaction of the Pareto conditions is considered the welfare target towards which society should move, but as earlier said, such a welfare function is inconsistent to an Islamic Economic System. It may occur that one or more Pareto condition can not be satisfied because of Shariah guidelines and, at best, welfare position is unattainable in this case. Then, we may take Shariah guidelines in various ways as a condition preventing the attainment of Pareto optimality. A simple assumption may be taken as; KF(X,Y) = O...K# 1 where ‘K’ represents Shariah guidelines. It is not necessary that 'K' be constant, however, it is assumed to be constant in the present analysis and K # λ The condition for welfare optimum is now of ‘Second Best Solution’. Forming the Langrangian function; L = W [UA(XAYA,XBYB), UB(XBYB,XAYA)] + λ [F(XA+XB,YA+YB)] + ג [KF(XA+XB,YB+YB)] Solution for this system cannot have ג = O[12] The partial derivative implies that ∂.UA The preceding analysis highlights that welfare criteria are essentially based on conventional economic tools, but Islam refuses to accept the Pareto optimality criterion on which the whole secular theory is virtually built. ∂.X A = λ. FA + ג . KFA … (9) ∂.UB λ . FB + ג. KFB ∂.XB
The criterion may come in conflict with equity and if the Pareto conditions cannot be fulfilled somewhere in the economy, then the best that which can be attained would be the second best, or third best, involving a violation of some of the welfare conditions. The fact is that the welfare criterion in Islam is quite different from other criteria, and is based on the social and moral functions of Islam. In the next section, we shall highlight the philosophical aspects of the Islamic social welfare function. Section 4 The philosophical foundation of Islamic social welfare function suggests that the attainment of Paretian optimum is not possible. The introduction of an additional constraint prevents the attainment of the Paretian conditions. Hence, the situation finally attained in our maximization problem of social welfare function may be termed as second best optimum, because it is achieved subject to a constraint which prevents the attainment of a Paretian optimum. The capitalist theory defines economic efficiency in terms of Pareto optimality, but here this criterion contributes little to solve the problem of welfare maximization. In Islam, Shariah guidelines constitute the basis of the welfare function, and hence, Paretian criterion lacks a valid basis for welfare economics. We believe that in a situation in which there exists an additional 'moral constraint' preventing Paretian optimum condition, may affect welfare by raising it. The simple underlying logic behind this philosophy is that in Islamic economics, social and moral considerations are intimately inter-linked in such a way that it must encompass the Quranic value judgments. These judgments constitute justice and virtue in allocation, production and distribution. Islam refuses to accept the Pareto optimality criteria and Islamic Economics has its own internal logic and criteria of welfare emerging from the Islamic value system[13].
In the Islamic perspective, it is ethics that dominate economics; not the other way round. Marxists believe that economics is the predominant element conditioning man's ethical behavior. But this does not mean that Islam does not take cognizance of the possessive and materialistic instincts of man; but only that these are re-defined in the Islamic scale of values. "Wealth and children are an ornament of the world; but the abiding things, the deeds of righteousness, are better in thy Lord's sight for reward; and better in hope[14]" In particular, Islam integrates man's economic behavior with his ethical beliefs. Both these aspects of man's life to be one homogeneous whole, since the way to heaven pass through Earth. ‘Our Lord! Give unto us in the world that which is good and in the hereafter that which is good.[15]’ The question is what kind of social justice and social welfare the Divine Vision envisages? In Islam, there is individual liberty (man is free), but this freedom is God given. Absolute freedom belongs to Allah, but in relation to Him, man's freedom is relatively absolute. This thus is the crux of the Islamic social and moral welfare function. REFERENCES 1. Al-Ghazali Abu Hamid, "Al-Mustafa fi Ilm-ul-Usul"Maktaba Al-Tijariah Al-Kubra Volume 1, (1937). 2. Al-Shatibi Abu Ishaq Ibrahim, "Al-Muafiqat fi Usul-ul-Shariah" Volume 2, Cairo. 3. Ghamadi, Javed Ahmad, "The Economic law of Islam", Renaissance, the Islamic Journal. Dar-ul-Ishraq, Lahore, (1993) 4. Hendersen and Quandt, "Micro-economic Theory, A Mathematical Approach" 3rd Edition, (1980).
5. Koutsoyiannis A, "Modern Micro-economics", (1985). 6. Layard and Walter, "Micro-economic Theory" (1988). 7. Manan, M.A., "Allocative Efficiency, Decision and Welfare criteria in an Interest Free Islamic Economy: A comparative policy approach" Institute of Policy Studies, (1986).
[1] . “Islamic Economics: An approach to human welfare”, Zarqa Anas (1986): pg. 11. [2] . “ A contribution to the theory of consumer behavior in an Islamic society”, Kahf Monzer (1986). [3] . For synoptic view please see Hendersen and Quandt (1980) “MICRO Economic Theory; A Mathematical approach”; third edition. [4] . Please see “Modern Micro Economics”, Koutsoyiannis (1985): pg. 524. [7] . “Micro Economic Theory”, Layard and Walter (1988): pg. 30-33. [8] . The economic law of Islam in “Renaissance”; Gharnadi, Javed Ahmed (1993): Islamic Journal, Lahore. Published by Darul Ishraq. [10] . “Al-Mustafa fillm ul Usul”, Al-Ghazali Abu Hamid (1937): Maktaba Al Tijariah Al Kubra, vol. 1. [11] . “Al-Muafiqat fi Usul ul-Shariah”; Al-Shatibi, Abu Ishraq Ibrahim: vol. 2, Cairo [12] . If r = 0, the additional constraint disappears. [13] . Manan, Muhammad Abdul has discussed and given a criterion of Islamic welfare based on the principles of Shariah. For a synoptic view see Manan, M.A; “Allocative Effeciency, Decision and Welfare Criteria in an Interest Free Islamic Economy: A Comparative Policy Approach.” |
