Market Structures and Market Equilibrium An Islamic perspective

Market Structures and Market Equilibrium: An Islamic perspective. Dr. Seif I. Tag el-Din Markfield Institute of Higher Education

Market Structure & Market Equilibrium An Islamic perspective. • Islamic implications relate primarily to three main profiles of market structure: 1. In terms of the competitiveness (competition / monopoly). 2. In terms of marketable goods ( consumer goods / productive factors) 3. In terms of marketability (scope of marketable services) • Yet, the idea of equilibrium must first be addressed

The Concept of Equilibrium: • • • Equilibrium, in general : the state in which an economic entity (e. g good price, factor price, consumer spending, producer output etc) is at rest so that it has no tendency for change over a given period of time. How equilibrium is achieved: when forces operating on the entity ( e. g supply / demand of a good ) are in balance for that period of time – physics !! Does equilibrium make Islamic sense? Examples from jurisprudence (sarf rate; ‘day price’, ‘equivalence price’, thaman al-mithl) “God permitted sale”. Implications from this verse The ‘just’ market price – the Prophet’s hadith.

The Concept of Equilibrium: Microeconomics • Equilibrium market price of a good : simplest case, where market supply = demand • Ibn Taimiyah’s comparative statics : well before Augustine Cournot (1801 - 1877) • Analysis of market equilibrium : viewed as the stopping rule when consumer decides on the quantity and mix of goods to buy, and producer decides on the level of output to produce. • Therefore, behavioural assumptions are necessary: 1. consumer equilibrium : utility maximization (MRS = Px / Py) 2. Producer equilibrium: profit-maximization (MC = MR).

The Concept of Equilibrium: Microeconomics • Which behavioural assumptions to adopt ? Alternative approaches (e. g revenue maximization), but no definitive ethical impact on the economic order. • Hilbert Simon’s critique of neoclassical theory : the uncertainty element in utility. • How does Islamic moral values affect market equilibrium analysis ? • Origin of Islamic utility theory: e. g Al-’Izz b. A/Salam • ibn Taimiyah: ”Man lives between two movements: one to generate utility and the another to avert disutility” • Islamic scope of utility : embodies the worldview of Hereafter (al-dar al-akhirah) hence, includes moral values and extends beyond pure worldly pleasures.

The Concept of Equilibrium: Microeconomics • Profit maximization: the tendency is to be replaced it by morally modified objective functions for the entrepreneur • However : it is more of a question about economic organization than one about behavioural assumption. • Neoclassical Theory of firm: offers too restrictive a structure of resource markets (labour, capital, land) – why no sharing ! • Dealt with shortly under market structures

The Concept of Equilibrium: Macroeconomics • Macroeconomic entities: Gross national output (GNP), employment (E) , general price level ( P), foreign trade etc, are objects of equilibrium analysis. • GNP, E and P : determined by the interaction of aggregate supply and aggregate demand. • Dynamic disequilbruim analysis: lack of behavioural theory to underlie macroeconomic equilibrium (Keynesians, monetarists , etc)

Market Structures : (In terms of Competitiveness) • What is a [perfectly] competitive market ? How is monopolistic power defined? Standard text book concepts. • Is ‘market competitiveness’ an acceptable Islamic norm? Yes, ‘price-taking’ is a desirable Islamic property – again the Prophet’s hadith. • However, maintenance of ‘market competitiveness’ is not purely mechanical ! • ‘Market competitiveness’ cannot exist independently of a conscious ethical commitment by producers. Supervision is necessary (hisba) - cooperative competitiveness

Market Structures : (In terms of Competitiveness) • Focusing more closely on the Prophet’s tradition: • Hadith: “ This is your market with no kharaj imposed on you” • Choice of a large market place in Medina makes up for two conditions: – large number of buyers/ sellers – Maximum information efficiency • No-tax policy ( i. e kharaji in the hadith ) this makes up for – free entry and exit. • Reference : A/ Rahman Yusri (in Arabic, 1998).

Market Structures : (In terms of Competitiveness) • • Ihtikar (monopoly) in Islamic jurisprudence: Different jurist views in the major schools ( Ref: al-Duri, 1964) Can we compare Ihtikar with the economic concept of monopoly? Two important considerations: 1. Jurist ruling is a policy matter (comparable to antitrust law) not an analysis of markets. 2. Ihtikar relates to goods’ distribution not productivecapacity utilization. • What about theoretical monopolist? Idle capacity is non-Islamic economic waste.

Market Structures : (In terms of : consumer goods / productive factors) • Productive Factors: Labour, Capital, Land – factors with fixed market prices • Marginal productivity theory: entrepreneur has no market price as he is the employer (profit maximizing agent). • Market equilibrium : VMP = Factor Price, where entrepreneur minimizes costs/ maximizes profit. • Factor prices: wage rate (labour), interest rate (capital), Rent ( land). • Demand/Supply analysis: Downwards demand curve / upwards supply curves for factors

Market Structures : (In terms of : consumer goods / productive factors) • “God permitted sale” : sale’ covers all valuable assets – including corpus and usufruct. • Productive resources: Labour, Capital, Land, and Entrepreneur ( Management) • Economic organization: Involves the profit sharing option - profit-maximizing entrepreneur is not the fixed rule. • Labour : wage rate (khas)/ mushtarac) or profit sharing • Land : fixed rent or profit sharing (jurist controversy) • Management: fixed salary or profit-sharing – note the jurist difference between Labour and Management • Capital: The most significant point of departure.

Market Structures : (In terms of : consumer goods / productive factors) • Lending : applies only to fungibles as a means of ownership transference (all jurist schools). • Money : is a fungible object, therefore, borrower is entitled to all the profit (al-kharaj bi al-daman). • General principle: return of a factor goes to its owner– should also apply to capital. • How capital participates in production: through renting of real asset ( sale of usufruct ) or supplying one’s money while maintaining ownership. • Therefore : the interest rate is not a return on capital mudarabah is the logical alternative.

Market Structures : Scope of marketable services • Non-marketable services: guarantee (kafalah), money, wet nurses, biological human parts (refer to last fatwa by Sheikh Abdullah al-Mutlaq). • Guarantee : no price on kafalah (jurist discussion) – Hadith : Azza’im Gharimun • Money: recall previous discussion • Role of custom (‘urf) • Rationale: create a scope for human benevolence beyond market dealings. • Example : blood donation experience in U. S / U. K systems – paper by Titmus (1971) and discussion by Hausman and Mc. Pherson (2000).

The End Many Thanks