|Theory of Income Distribution in Islamic Economics|
|Published by Abdul Ghani|
|Tuesday, 28 February 2012 11:27|
Salman Ahmed Shaikh
Islam has distinctive theory of income and resource distribution. In an Islamic economy, we can classify factors of production as follows:
1.Land with natural resources.
3.Physical Capital Stock.
4.Entrepreneur (Working as well as Investing).
Below, we try to present details of our proposed classification.
Land with natural resources – It includes all things of value which are naturally occurring things such as soil, minerals, land etc and that are used in the creation of products. The payment for the use of those resources in fixed supply is rent. When these are sold, their compensation is profit.
Labor – Providing physical or mental exertion by way of contract for consideration in the form of wage or salary. It does not include entrepreneurial labor as the compensation for entrepreneurial labor is the residual outcome of the productive activity and contains an element of risk and uncertainty.
Physical Capital Stock - It includes human-made goods or produced means of production. These are goods which are used in the production of other goods. These include machinery, tools and buildings. The payment for the use of those resources in fixed supply is rent. When these are sold, their compensation is profit.
Physical capital stock and the factor ‘land and natural resources’ are differentiated on the basis of their source and nature of existence. Physical capital stock includes human-made goods or produced means of production, whereas the factor ‘land with natural resources’ is not produced by humans. Both have the same compensation for their use. It is because they share a commonality. When they are used, they do not lose their existence and hence they can be leased and traded in the marketplace.
One could argue that even when a production process hires a natural person providing labor, it does not consume that person and hence wage is basically the rent on human skills used. But, it is worthwhile to classify labor as a separate factor of production due to the following reasons:
1)‘Physical capital stock’ itself is dependent upon labor since it is man-made.
2)The way of termination of physical capital stock and labor from a production process could be different. When a person owning physical capital stock dies, rent will still accrue on assets in his/her ownership as long as the assets are in useful condition and as long as the contract of lease does not end. When a person providing labor dies, the factor payment ends instantly because the utility of labor or the capabilities of labor are intrinsic and are not detachable and transferable.
3)Physical capital stock is saleable and transfer of ownership is possible in them. But, in labor, transfer of ownership cannot happen. Since transfer of ownership is possible in physical stock, they can be recorded as assets.
4)Distinction has far reaching qualitative effects on behavior and management techniques. Expenditure on labor can only provide services or skills owned and possessed by labor which the labor willfully provides. He cannot be subjugated, molded or transformed like physical capital stock or be traded. Only the skills are tradable and the supply of labor is influenced by the discretionary choices made by labor and consideration for the supply rests on factors much different from factors impacting supply of physical capital stock.
The classical economists also employed the word "capital" in reference to money. Money itself has no intrinsic value and is neither a rentable asset nor a tradable commodity as per Islamic principles. If capital is combined with labor, it “could” produce profit, but if money alone is lent, the interest it earns is not permissible as per Islamic principles. Interest is neither a justifiable reward of money nor capital. Money holder/owner has to convert it in one of the other factors of production namely 1) land with natural resource, 2) physical capital stock and 3) or become an investing entrepreneur to have any justifiable compensation out of the production process.
Owner of money has to 1) buy land with natural resource and earn rent on it, or 2) need to buy physical capital stock and earn rent on it, or 3) need to become an investing entrepreneur in an Islamic economy to earn profits through enterprise. Money itself does not have any intrinsic value as per Islamic principles.
Entrepreneur – It refers to an economic entity, natural person or corporation (juristic person), which undertakes the ultimate responsibility for the production process. It undertakes the responsibility to bear losses (if any) and is entitled to the entire residual positive economic outcome after rent on ‘physical capital stock’ and ‘land with natural resource’ and wages have been paid. Entrepreneur could be classified as Working Entrepreneur as well as Investing Entrepreneur. If entrepreneur is defined as an economic entity which is not entitled to a fixed compensation and that his/her compensation is based on the actual positive but residual economic outcome of the production process, then, we can introduce this classification. In Mudarabah, the Mudarib is the Working Entrepreneur and Rabb-ul-Maal is the Investing Entrepreneur.