Free Enterprise As An Islamic Tradition

Malaysia in the Era of Globalization #90
Chapter11: Embracing Free Enterprise

Free Enterprise As An Islamic Tradition
By Bakri Musa

There are those who believe that capitalism implies greed, the very antithesis of our core religious value. Nothing can be further from the truth. This misguided notion led many nations to adopt socialism, with its promised egalitarianism.

The Koran explicitly encourages free market. It commands the faithful to venture into the marketplace and earn a livelihood: “When the prayer is finished, then disperse ye through the land and seek the bounty of Allah.” (Surah Al-Jumu’a, 62:10). Earning a lawful livelihood is a duty second only in importance to that of prayer, preached our prophet (pbuh).

In Islam it is better to give than to receive a wage; that is, better be an employer than employee. A businessperson enjoys an exalted position in Islam. Contemplate this hadith: “In the Day of Judgment, the honest, truthful Muslim merchant will rank with the martyrs of the faith; the trustworthy merchant will sit in the shadow of the throne of God on Judgment Day.”

Ibn Khaldun wrote in his Muqadimmah, “Commerce means the attempt to make a profit by increasing capital, through buying goods at a lower price and selling them at a higher price…This may be realized by storing goods and holding them until the market has fluctuated from low to high price…or by transporting goods to another country where they are more in demand.”

Yet today profits are regarded as sinful. In Iran they execute citizens for “profiteering,” as if those in authority know exactly the “right” amount of profit. This from bureaucrats who have never done any trading!

In a free market, trading is voluntary. If the buyer feels that he is being gouged, he can simply deny the seller that profit by not entering into the transaction. Those who feel that there is a “right” price and “appropriate” amount of profit are clearly mistaken if not arrogant.

The market value of anything is what we mortals (seller and buyer) have agreed upon. Only Allah knows the real value of everything. Let me illustrate this. I buy carpets in Afghanistan for $10,000.00 and then sell them in America for $20,000. Assume, to use a favorite term of the economist, that my trip costs $4,000. My profit would then be a straightforward $6,000. Straightforward? Not quite.

First, who is to say that that amount of profit is excessive, modest, or adequate? What is the price tag of the risk I took in going to Afghanistan? The Talibans could have killed me for being a capitalist. Then there is the value of my time away from my family. And if Americans in their dislike for the Talibans refuse to buy my carpets, who will compensate for my loss? Thus the real costs cannot begin to be fully quantified when we consider all the factors.

Second, ponder the benefits of my work. An American family gets to enjoy plush Afghan carpets. More significantly, the Afghan weaver now has a lucrative market for his product. I am in fact providing a living for him. No wonder Islam looks kindly on traders.

A frequent criticism of capitalism is the resultant inequality of wealth and income. In contrast, with communism and socialism, every one is equal. This canard is just that. The communists may be all equal but some are definitely more equal. Besides, as the late development economist Lord Bauer once wrote, “It is by no means obvious why it should be unjust that those who produce more should enjoy higher income.” Bauer, like Hayek, was an early advocate of free trade and a severe critic of central planning. Of special interest is that Lord Bauer spent his formative years as an economist studying the Malaysian rubber industry.

Islam recognizes that in a free economy there will inevitably be differences in the wealth of people. The Koran admonishes against envy, and to respect wealth. In Surah An-Nisa’a (The Women, 4:32), “In no way covet those things in which God has bestowed His gifts more freely on some of you than on others; to men is allotted what they earn, and to women too. Ask Allah for His bounty, for God has full knowledge of all things.” Islam demands justice, not equality.

Central to free enterprise are two related concepts, namely, property rights and contract rights. These too are spelled out in the Koran and hadith. In Surah Al-Baqarah (The Heifer, 2:188), “Do not devour one another’s property by unjust means, nor bribe judges in order that you may wrongfully and knowingly usurp the possessions of others.” Another, “Enter not houses other than your own; until you have asked permission and greeted those in them…If you find no one in the house, enter not until permission is given.” (24:27). A clear affirmation of property rights!

The sanctity of contracts is stated thus, “Keep faith with God when you make a pledge. You shall not break your oaths after you have sworn to them.” (16:91-92). Elsewhere (4:33), “As for those with whom you have entered into agreements, let them too have their due. God bears witness to all things.”

Hernando De Soto, in his book The Mystery of Capital, observes that capitalism fails in the Third World precisely because there is no respect for these rights, especially by those in power. The poor in these countries may have homes and enterprises, but without the sanctity of property and contract rights, they cannot convert their assets into capital. One important component of property rights is the right of the individual to the fruits of his labor. Islam rightly condemns slavery and indentured labor, which are the ultimate manifestations of the loss of this right. As Ibn Khaldun wisely observed over 700 years ago, “One of the greatest injustices and one contributing most to the destruction of civilization is the unjustified imposition of tasks and the use of subjects for forced labor.” Sadly throughout history, the state is the one agency that is responsible for most of the abuses in this regard.

The legitimate role of the state is to ensure that trading is not interfered with and that free trade is indeed free, with minimal or no intrusion by the state in the form of tariffs, quotas, permits, licenses, and other encumbrances. The state must ensure parity of power between buyer and seller. Hence antitrust and other laws to prevent business collusion, price fixing, and other anti-competitive practices. That is, the state must ensure not only a level playing field so the various participants do not have an unfair advantage over their competitors but also the gates to the fields are not unduly restrictive to bar new players from entering. The state will always have an important role, as there is no such thing as the economists’ ideal of a market with “perfect competition.”

Additionally the state must also provide an environment where property and contract rights are enshrined and respected. Lastly, the state has a moral duty to provide for those who are unable to look after themselves: the sick, the aged, and the disabled. Perversely, when the state is consumed with matters that are rightly the purview of business, it is inevitably at the expense of this basic function. The poor and the disabled are much better looked after in capitalist America and Western Europe than in communist China or Russia.

Free enterprise is by no means a perfect system, but despite its defects it has proven to be the most successful and fairest. Capitalism as it exists today is much different from the raw exploitative form during Dicken’s time, and it will again be different a century hence. Critics of free enterprise harp on the shortcomings instead of focusing on the benefits. Besides, these deficiencies pale in comparison to the colossal failures of socialism and communism. And a point worthy of note is that some of the severest critics of free enterprise—like George Soros—are themselves successful capitalists. I am sure communism too had critics amongst its midst, but not many survive.

As capitalism continues to evolve, its imperfections are being remedied or improved. Indeed the 2001 Nobel Prize winners in Economics were awarded to three practitioners who devoted their intellectual pursuits in clarifying real-life imperfect markets, or “markets with asymmetric information.” One of them, Stanford’s Michael Spence, has a special connection to Malaysia as he was an advisor to Mahathir for the Multimedia Super Corridor project. The second, Columbia University’s Joseph Stiglitz, is a strong critic of the IMF over its handling of the Asian economic crisis. In a paper he co-wrote in the early 1980s he found that banks tend to restrict credit in a downturn rather than increase interest rates to compensate for the extra risk (as one would expect) because they know that only companies that are in trouble are likely to seek loans. Thus in a recession banks tend to choke off credit, thus exacerbating the downturn. This was what happened to Indonesia and Thailand with the IMF’s prescription. Mahathir’s policy in handling that crisis by lowering interest rate and loosening credit even at the risk of weakening the currency was well founded as proven by later developments. He restored confidence and allowed the market to function again.

Next: Malaysian Capitalism