Introduction
The concept of market in today’s world, with all its advancements and gadgets, has been evolved from a very primitive nature. Mainly, it was related to a common place for exchange of goods and services, commonly associated with open premises reserved for the merchants’ stalls, and buyers gathering around them to buy the items they need. There was no compulsion of a permanent structured locality for the market place; rather, a first mover would have the right to secure his place in a lucrative site and others following him to make a structure of a market. This rudimentary concept of market has not vanished in today’s innovative era; it still can be found in rural or underdeveloped areas of the world.
With this structure of unregulated and unsupervised nature, the market evolved to be being administered and regulated by an authority. In the beginning, this authority is composed of dominant people of the society making up committees to develop the rules of the game and oversee them. With the nascent needs, the committees standardized weights and measures and their practical usage. Subsequently came the need for developing the marketplace in a more orderly and convenient place. Therefore, other municipal facilities were added to the market place to make it a more comfortable place for trading. With the wave of rapid development in education, technology, infrastructure, and all facets of society, this evolution of market also underwent a drastic change in terms of facilities, structures, volume of goods and services, and most importantly the legal structure.
Presently, the word “market” is not even constrained to place or locality; rather, it may connote an altogether virtual marketplace, with buyers and sellers in different continents trading in fractions of minutes, harmonizing the prices throughout the marketplace due to information efficiency and legal proliferation. With incessant development, the transfers of ownership rights and legal frameworks have been continuously enacted by human interaction. The development in technology and automation, transaction efficiency, and infrastructure development have made the trade much more efficient and universal. It is not just the markets of gold and silver, which were harmonized and traded all over the world, markets of every kind of goods and services have been advanced to an extent that the most perishable items are also being transported to the other corner of the world with the least amount of time and resources. From the trade of giant items, like ships and airplanes, to the intangible services of research and innovation, the markets have turn out to be much more across the board.
With the radical development of present markets, we can still bifurcate these markets into two broad categories of those which include real goods and services, and those which aid in trade and settling, like financial tools, e.g., stocks, bills, certificates, bonds, etc.
Generally, Islam is being mistakenly alleged of disapproving advancement and development of present world order, whereas it is not the case in actuality. Islam does not only allow, but rather propagates the private ownership and trade proliferation. None of the Islamic laws place any hindrance in market rivalry or free operation of market forces. However, the market norms should not exploit any of the players in any terms. The market should promote societal well-being and a win-win game for all the players of the society. The market should follow the rules which are “Shari’ah compliant,” and any defiance to the rules should promptly be addressed, as rooted back by the “Sunnah” of Prophet Muhammad (peace be upon him), when the unjustifiable practices of Jews were demonstrated in the pre-Islamic market rules.
Structure of Markets
Markets play the key role as the source of channelizing goods and services across the economy. This phenomenon makes the basis for valuing goods and services, commonly termed as “price” in market terms. Prices valued through free intersection of demand and supply forces are deemed fundamental economic driver of any society. In a free market, the price signals are triggered from buyers to the sellers, rendering it to be more resourceful and regimented. This bottom to top price estimation tends to minimize the market costs with the efficient allocation of scarce resources. This leads to a most ideal market structure, where there are no abnormal profits or any drainage in the form of taxes, tariffs, quotas, and subsidies. These kinds of market discrepancies due to artificial interventions create a deadweight loss in the form of misappropriations and disvalued scarce resources of the society, which may not be the case in the absence of such restraints. A free market with demand and supply valuing the price would render the economy much more affluent and self-regulated than one with artificial intervention.
Above-mentioned economic situation is based upon the condition that the market is perfectly competitive; otherwise, the scenario may not be fruitful as pictured. Assuming that the market has perfect competition requires that the product is a homogenous product, such that consumer may switch from one supplier to another rendering the market perfectly competitive. Another assumption supposed is the number of players in the market. A perfectly competitive market entails large number of buyers and sellers that results no bargaining power at either end and renders the market fully competitive. Another prerequisite is about the factors of production that can instantaneously be portable between any of the substitutes. And lastly the market players have full information about the market. With such set of assumptions, a perfect competition seems to be an experimental utopia which can only be achieved in a laboratory-controlled environment. Even if achieved so, the firms could sell unbarred at market price, few of them readily attain the control of monopoly, and the market would turn out to be imperfect.
Profit maximization and increasing the shareholders’ wealth are the supreme goals of every for-profit organization. The spread between the input cost and the selling price of the end product is the vital part of the firms’ earnings, accumulating to their shareholders’ wealth. Had not the firms face rivalry of competitors, their innate profit-maximizing appetite would stimulate them to increase the prices unbarred. Hence, competition regulates the firms to earn normal profits. To ameliorate, firms try to overpower each other by adopting differentiation strategies in order to distinguish their product compared to their rivals. Branding, trademarking, marketing, and advertising are some of the strategies firms chose to setback their competitors. Apart from these, other strategies such as Cartels, embargos, quotas, tariffs, and taxes, created in order to bar the new entrants into the market, reduce the competition, and hence, markets may evolve to a monopoly in some cases. Henceforth, we experience the markets with the competition leftover by the firms inevitable for them. Issues with traditional market assumptions are discussed in the next section.
Issues with the Traditional Market Assumptions
The markets are constrained to exhibit perfect competition setup due to many inherited imperfections. Individual goals contradicting societal benefits result in market imperfections. With abundance of modern economics literature flooded with the advocacy of free markets, least we can find the shortcomings and failures these confront. Hence, referring here the most pertinent ones to the subject area is the need of the existing literature.
Markets in today’s world, while serving the consumers, often disregard the basic pyramid of human needs. Usually, the upper tier of the hierarchy, pertaining to esteem and status, is addressed more than the basic physiological needs, i.e., food, shelter, water, etc. The higher margin opportunities for producing luxuries and status-oriented products instigate the markets to disproportionate the production of basic necessities of life. Serving the top niche market is more lucrative than producing bread and butter for a big chunk of society and hence shackles the underprivileged class. In a nutshell, the distorted resource allocation results in misappropriation of riches, widening the societal gap among the economies. Hence, there exists a need to probe this notion of modern consumerism.
Another dire issue of today’s production processes pertains to rapid industrialization. The prices labeled on products comprised of the input costs paid by the producer. These input costs are only those which are materialized legally in contracts, and for which payment is made. There are many overlooked inputs, being used abundantly but are not paid for, used in production. These include natural utilities which are being under continuous contamination and depletion, but are still heartlessly exploited and taken for granted because they are not paid for. Had these natural resources be quantified and are added to the cost of production, the environmental scenario may improve. Any phenomenon that can add cost to the scarce resource used by producer may ameliorate the rapid environmental degradation present era is facing. However, a pragmatic framework of this kind has yet to be sorted.
…And all of these (soldiers, taxpayers, judges, administrators and secretaries) have no support but the merchants and the craftsmen through the goods which they bring together and the markets which they set up. These provide for the needs of (these) classes by acquiring with their own hand’s goods to which the resources of do not attain… then make merchants and craftsmen your own concern and urge others to do so, for they are the basis of benefits and the means of attaining convenience. Tabatabai (1982, pp. 10, 14)
The supremacy of business in Islamic social setup can well be assessed through a fact that it has given the rank of “farz-e-kafaya.” A “farz” is solemn responsibility of a Muslim, which is mandatory, whereas “farz-e-kafaya” is a responsibility of Muslims as members of society, which when performed by few of them, exempt others. Hence, joining business not only contributes positively to the economy by boosting the total output, it also serves as a vital means to earn God’s reward. However, these rewards can only be materialized if undertaken with righteousness.
Due to innate voracity of wealth and riches, human being is always prone to overlook the morals and ethics of honesty, especially in businesses.
In Islam, consumer protection is the main focus of Islamic theology. Though extensively asserted by modern economic literature as well, consumer protection notion is a much different approach from implementation point of view. In Islam, morality is being inculcated in human personality, rather than surveillance and forceful imposition. In effect, if the virtue of honesty is not being nurtured by human souls, markets cannot exhibit successful upshots. The key features of Islamic market behavior can be summed up as follows.
First, Islam imposes a number of obligations on the sellers with regard to measurements, quality of goods, their prices, and provision of information to the buyer (Ghazali 1955, p. 75). It obligates Muslims to be extremely cautious while using weights and measures. As evidenced from numerous Quranic verses and Hadiths (sayings of Prophet Muhammad peace be upon him) pertaining to the subject area, honesty in trade is immensely apparent. “And give full measure whenever you measure, and weigh with the balance that is true: this will be (for your own) good, and best in the end (Quran 17:35).” The tradesmen should greatly concern about measuring and weights, and any smallest inevitable discrepancy should always be borne by themselves rather than consumers. “Give full measure, and be not among those who (unjustly) cause loss (to others by fraud) (Quran 26:181).” Apart from weight and measure, the quality of the produce should also meet the stipulated features.
Second, Islam also severely forbids overpricing by any artificial means like hoarding, blocking input materials, or any other means of creating scarceness. Some scholars advocate that margins should be capped and regulated, while others consider it to be the traders’ own choice seemingly because forcing coercively is not as beneficial as self-instilled empathy.
Third, another distinctive feature of Islam in market s is abstaining merchants from unjustified praise of their goods. As narrated by Abu Hurrairah Prophet Muhammad said: “The taking of oaths makes the commodities sell, but it obliterates the blessing (therein)” (Bukhari 34:26). A market where hundreds and thousands of dollars are spent for marketing of products featured as the best and supreme one; Islam insists on disclosing even the minutest of defect of the product before selling it to buyer. This urges the producers to be meticulously careful about the quality of the product along the whole production chain. Right from buying inputs from suppliers, to the last phase of logistics and distribution, quality shouldn’t be compromised at any cost, as any oblivious loss due to smallest defect or shortcoming does not exempt the seller from his responsibility.
This also normalizes the dazzling marketing contest today’s markets are following in publicizing their products, exploiting consumer preferences, and wasting resources in least efficient means. Islam allows sales endeavors but in a realistic, humble, and productive manner.
Government Intervention and Islamic Trading Framework
Markets downturn and severe economic recessions have instigated researchers and policy-makers to conscientiously discover the reasons and remedies for such circumstances. The modern economic philosophies, as based on unrealistic assumptions, turned out to be futile in explaining such failures. Many economic policies were formulated in light of these works undertaken by researchers and policy-makers, aiming to sort out the causes and management of such economic failures, turned out to be unsuccessful in terms of efficient allocation of resources. Rather, some of the government policies aiming to control the circumstances by artificially adjusting the markets by tariffs, quotas, etc., worsened the economic condition with deadweight loss. From Islamic perspective, government plays an altogether distinctively different role from conventional ones discussed above.
Islam does not support the notion of restricted markets with artificial tools; in contrast, it propagates unbridled operations of the markets without defying Shari’ah rules. Any price hike due to scarcity of goods or increased demand should not be manipulated artificially and be treated inevitably. Role of government in an Islamic market is to stably plan, manage, produce and consume, and let the market’s demand and supply intersect freely, rather than intervening and regulating intermittently.
Islamic concept of markets is refuted by some economists as inappropriate for the renowned notion of invisible hand of Adam Smith, i.e., unintended social benefits of an individual’s self-interested actions—the phrase employed by Smith with respect to income distribution. As per Hassan (2008), this complete renounce is ill-considered. Self-interest is an innate weakness of human beings, and at times, setting it all free can lead to unfavorable circumstances. Therefore, free markets, though much required in Islamic system, are not indispensable to the extent that can lead to income inequalities and social disparities. Markets serve with respect to incomes; since the higher income segment tends to be more lucrative, it is served more with greater profit margins that leads to unmet needs of lower income group. Hence, Islamic system allows the government to ameliorate such deprivation of basic needs of people by channelizing, maneuvering, and directing the goods through appropriate strategies.
Islamic system of economics is based on the law (Shariah) created by the evidences from epochs of early Islam. Since monopolies never existed in those times, so does the renounce of them. However, as far as the public welfare is not endangered, there does not seem to be a cogent reason to refute them just because of their size. Rather, economies of scale and a bigger risk appetite may support their existence if the market demands are completely and efficiently met.
Business Ethics in Islam
Every religion in the world propels its followers to inculcate morality, integrity, uprightness, and truthfulness in their lives. Islam as a religion is not just a set of preaching and prayers pertain to individuals’ private relationship with Almighty God; it is the religion encompassing full code of conduct of human’s individual, social, economic, and political setup in holistic terms. This all-inclusive guide was projected at its best pragmatically by Prophet Muhammad (peace be upon him) as his own life, whom was entitled as “truthful” and “honest” even by his stanch opponents, and whose credibility was never challenged. Therefore, Islamic system profoundly emphasizes morality in every walk of life, particularly in trade dealings. Any act of fraud, deceit, and treachery is admonishingly condemned, as Prophet Muhammad (peace be upon him) said: “He who cheats is not of us, deceitfulness and fraud are the things that lead one to hell.” A pertinent ayah in Quran pertaining to fairness and ethics is: “do not devour one another’s property wrongfully, nor throw it before the judges in order to devour a portion of other’s property sinfully and knowingly” (Quran 2:188). Moreover, another chapter of Quran stressing on honesty in trade dealings, among other numerous ones, says: “Woe unto those who give short measure. Those who, when they have to receive their due from (other) people, demand that it be given in full. But when they have to measure and weigh whatever they owe to others, give less than what is due”(Quran 83:1–3).
Picking evidences from Quran and Hadith, we can summarize the crux of Islamic market rules as follows:
Islam necessitates honesty and equity in businesses. It should be practiced holistically in every aspect of life inclusive of business and trade dealings. Pursuing lucrative opportunities to excel is not condemned; rather, toiling to earn within Islamic boundaries is considered “Ibadah” (religious noble deed). However, the lust of worldly riches should not intoxicate a Muslim to compromise his religious obligations of being honest, ethical, and just.
The competition in markets is considered healthy; however, an obsession to rule over the market rendering other players face a complete financial catastrophe is disregarded in Islam. Joining businesses is highly regarded in Islam, but with the role of positive contributor to the society.
In today’s materialistic society, buyer and seller in order to increase their share of wealth may try to exploit each other’s shortcomings. However, in Islam buyers and sellers are brothers to each other in first place, afterward comes the buyer–seller relationship. This builds kindness and goodwill among the market players, a very desirable trait in present markets. Accordingly, a buyer cannot exploit seller’s weak position in terms of forceful transaction. Similarly, a seller should also abstain from misinforming, cheating, and deceit about the goods he is trading. Buyers and sellers can bargain while respecting each other’s due rights.
Another key feature of Islamic market system is prohibition of certain kind of business (termed “haram” in Shariah). These include all forms of businesses that are detrimental to human’s well-being both on individual and collective basis, such as wine, gambling, and pork.
Conclusion
Despite the failures markets have projected, their significance cannot be disregarded. The welfares they have contributed in the economies weighed sufficiently to absolve of their shortcomings. However, these downturns have directed us toward many valuable insights for taking preemptive actions in future. The Islamic economic system entails markets based on strong ethical foundations where every individual’s rights are sufficiently protected. Government’s intervention is needed in dire issues, though not acceptable in form of artificially pampering the markets through tariffs, quota, etc., and creating deadweight loss, but surely in the events of income disproportionality, alarming poverty hikes, unfulfilled public needs, environmental degradation, and the like. Although Islamic market guidelines serve a platform of equity, honesty, justice, and ethical system for common welfare, there is a need for a more focused approach for corporate social responsibility (CSR), an emergent notion in conventional economics. With rapid advancement and competition in the markets, an intensive methodology for instilling a socially responsible behavior among firms is looked-for in Islamic system.