Market structures and market equilibrium an islamic perspective
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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:

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Market Structures and Market Equilibrium:An Islamic perspective.

Dr. Seif I. Tag el-Din Markfield Institute of Higher Education

Market Structure & Market EquilibriumAn 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 oftime.

  • 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”

  • Islamicscope 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 participatesin 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

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