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.
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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:
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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
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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)
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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.
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What about the 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 McPherson (2000).
The End
Many Thanks