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: In terms of the competitiveness (competition / monopoly) . In terms of marketable goods ( consumer goods / productive factors) 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: consumer equilibrium : utility maximization (MRS = Px / Py) 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: Jurist ruling is a policy matter (comparable to anti-trust law) not an analysis of markets. Ihtikar relates to goods’ distribution not productive-capacity utilization. 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