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Factors of Production in Islam

To better understand the factors of Production in Islam, we now compare the factors of production in other economic systems including Capitalism and Socialism.

Factors of Production in Islam

The Capitalist View

In order to understand the Islamic point of view fully, it would be better to have a look at the system of the distribution of wealth that is obtained older than the capitalist economy. This theory can be briefly stated like this:

“Wealth should be distributed only among those who have taken part in producing it, and who is described in the terminology of economics as the factors of production.”

According to the Capitalistic economy, these factors are four:

  1. Capital: which has been defined as “the produced means of production” – In other words, a commodity which has already undergone one process of human production, and is again being used as a means of another process of production.
  2. Labor: It is defined as, any exertion on the part of man.
  3. Land: which has been defined as “natural resources” (i.e. those things chic fi are being used as means of production without having previously undergone any process of human production).
  4. Entrepreneur, or Organization: The fourth factor that brings together the other three factors, exploits them and bears the risk of profit and loss in production.

Under The Capitalist economy, the wealth produced by the co-operation of these four factors is distributed over these very four factors as one share is given to Capital in the form of interest, the second share to Labor in the shape of wages, the third share to Land in the shape of rent (or revenue), and the fourth share (or the residue] is reserved for the Entrepreneur in the form of profit.

The Socialist View

On the other hand, under the Socialist economy, capital, and land instead of being private property, are considered to be national or collective property. So, the question of interest or rent (or revenue) does not arise at all under the philosophy of this system. Under the Socialist system, the entrepreneur to is not an individual but the state itself. So profit as well is out of the question here – at least in theory. Now, there remains only one factor namely labor. And labor alone is considered to have a right to wealth under the Socialist system, which it gets in the shape of “Wages”.

Let it be made clear that we are here concerned only with the basic philosophy or theory of socialism, and not with its present practice, for the actual practice in socialist countries is quite different from this theory.

The Islamic View

The Islamic system of the distribution of wealth is different from both the Capitalist and Socialist economic system. From the Islamic point of view, there are two kinds of people who have the right to wealth:

  1. Primary Right to Wealth

The Primary right denotes the right to wealth which is directly in consequence of participation in the process of production. In other words, the primary right is for those factors of production that have contributed in the process of producing some kind of wealth.

  • Secondary Right to Wealth

The Secondary right holders are those who have not directly contributed to the process of production. but it has been made an obligation upon the producers to make them co-sharers in their wealth. e.g. Beneficiaries of Sadaqat-ul-Wajibaat.

The primary right to wealth is enjoyed by the factors of production, but the factors of production as per Islamic theory are not specified or technically defined, nor is their share in wealth determined in exactly the same way as is done under the Capitalist of the economy. In fact, the two ways are quite distinct. From the Islamic point of view, the actual factors of production are Instead of four i.e.

  1. Capital: It is defined as the means of production that cannot be used in the process of production until and unless during this process, it is either wholly consumed or completely altered in form and which, therefore, cannot be let or leased (for example, liquid money or foodstuff, etc). The share of capital is in the form of profit and not interest.
  • Land: That is, those means of production, that are used in process of production in a way that their original and external form remains unaltered, and which can hence be leased (for example, land houses, machines, etc). Its share is in the form of rent.
  • Labor: That is, human exertion, whether of the Bodily organs or mind or heart. This exertion thus includes organization and planning too. ”The share of labor comes in the form of wages. As in the case of Mudarabah (Islamic mode of partnership), the compensation of labor is in the form of profit.

Whatever “wealth” is produced by the combined action of these three factors would be primarily distributed over these three factors.

Socialism and Islam

As we said, the Islamic System of the distribution of wealth is different from both socialism and capitalism both. The distinction between the Islamic economy and the Socialist economy is quite clear. Since Socialism does tot admit the idea of private property, wealth under the socialist system is distributed only in the form of wages. On the contrary, according to the Islamic principles of the distribution of wealth which we have outlined above, all the things that exist in the universe are in principle the property of Allah Himself. Then, the larger part of these things has been given equally to all men as a common trust. lt includes fire, water, earth, air, light, wild grass, hunting, fishing, mines,  un-owned and uncultivated lands, etc., which are not the property of any individual, but a common trust. Every human being is the beneficiary of this trust and Is equally entitled to its use.

On the other hand, there are certain things where the right to private property must be recognized in order to establish a practicable and natural system of economy. If the Socialist system is adopted and all capital and land are totally surrendered to the state, the ultimate result would only be that, we would be liquidating a large number of smaller capitalists and putting the huge resources of national wealth at the disposal of a single big Capitalist – the state, which can deal with this reservoir of wealth quite arbitrarily, thus would lead to the worst form of the concentration on of wealth. Moreover, it produces another great evil. Since Socialism deprives human labor of its natural right to individual choice and control, compulsion and force become indispensable in order to make use of this labor, which has a detrimental effect on its efficiency as well as on its mental health. All this goes to show that the Socialist system injures two out of the three objects of the Islamic theory of the distributor of Health i.e. the establishment of a natural system of economy, and securing for everyone what rightfully belongs to him.

These being the manifold evils inherent in the unnatural system of the Socialist economy, Islam has not chosen to put an end to private property altogether but has rather recognized the right to private property in those things of the physical universe which are not held as a common trust. Islam has, thus, given a separate status to Capital and to Land and has at the same time made use of the natural law of “supply and demand” too in a healthy form. Hence Islam does not distribute wealth merely in the form of wages, as does Socialism, but in the form of profit and rent as well. But, along with it, Islam has also put an interdiction on the category of “Interest”, and prescribed a long list of the people who have a secondary right to wealth. It has thus eradicated the great evil of the concentration of wealth, which is an essential characteristic inherent in Capitalism, an evil, which Socialism claims to remedy. This is the fundamental distribution of the Islamic view of the distribution of wealth, which sets it apart from Socialism.

Capitalism and Islam

It is equally essential to understand fully the difference that exists between the Islamic view of the distribution of wealth and the Capitalist point of view. This distinction being rather subtle and complicated, we will have to discuss it in greater detail.

By comparing and contrasting the brief outlines of the Islamic and the Capitalist systems of the distribution of wealth, we arrive at the following differences between the two systems:

  1. The entrepreneur, as a regular factor, has been excluded from the list of the factors of production, and only three factors have been recognized, instead of four. But this does not imply that the very existence of the entrepreneur has been denied. It does mean is just that the entrepreneur is not an independent factor, but is included in any one of the three factors.
  2. It is not “interest” but “profit” that has been considered as the “reward” for Capital.
  3. The factors of production have been defined in a different manner in Capitalism and Islam. Capitalism  defines “Capital” as “the produced means of production.” Hence, Capital is supposed to include machinery, etc. as well, besides money and foodstuff. But the definition of “Capital” that we have presented while discussing the Islamic view of the distribution of wealth, includes only those things which cannot be utilized without being wholly consumed, or, in other words, which cannot be let or leased – for example, money. Machinery is to be excluded from “Capital”, according to this definition.
  4. All those things which do not have to be wholly consumed in order to be used have been brought under “Land”. Hence, machinery falls under this category.
  5. The definition of “Labor” has been generalized so as to include mental labor and planning.

Let us now go into the details of this discussion. Under the Capitalist system, the most important characteristic of the entrepreneur (which entitles him to “profit”) is supposed to be that he bears the risk of profit and loss in his business. From the Capitalist point of view, “profit” is a kind of reward for his courage to enter into a commercial venture where he alone will have to bear the burden of a possible loss, while the other three factors of production will remain immune from loss, for Capital would get the stipulated interest, Land the stipulated rent and Labor the stipulated wages.

On the other hand, the Islamic point of view insists that the ability to take the risk of a loss should, In reality, is inherent within the Capital itself, and that no other factor should be made to bear the burden of this risk. Consequently, the Capitalist, in so far as he takes the risk, is an entrepreneur too, and the man who is an entrepreneur is a Capitalist as well. Now, there are three ways in which Capital (in general) can be invested in a business venture:

Ways of Capital Investment:

  1. Private business: The man who invests Capital may himself run the business without the help of any partners or shareholders. In this case, the return which he gets may be called “profit” from the legal or popular point of view; but, in economic terms, this “reward ” would be made up of
  2. “profit” in as much as capital has been invested, and
  3. “wages”, as earnings of management.
  • Partnership: The second form of investment is that several persons may jointly invest capital while another manages the business and jointly bear the risk of profit and loss. In the terminology of the Fiqh, such a venture is called “Shifrkat-UI-Aqd” or Partnership in contract.

According to the terminology of Islamic economics, in this case, too all the partners will be entitled to “profit” in so far as they have invested capital and also entitled to “wages” in so far as they have taken part in the management of the business. Islam has sanctioned this form of the business organization too. This form was quite common before the time of the Holy Prophet P.B.U.H until he permitted people to retain it, and since then there has been a consensus of opinion on its permissibility.

  • The co-operation of Capital and Organization {Mudarabah)

The third form of investment is that one person may invest Capital while another may manage the business, and each may have a share in the profit. In the terminology of Fiqh, it is called “Mudarabah”. According to the terminology of Islamic economics, In this case, the person who invests his capital (“Rabb-UI-Mai”) will get his share in the form of “profit”, while the person who has actually managed the business will get it in the form of “wages”. But if the person who has been managing the business (“Mudarib”) eventually suffer a loss in the business, his labor will go wasted just as the capital of the investor would go wasted.

This form of the business organization too is permissible in Islam. The Holy Prophet P.B.U.H made such an agreement with Hazrat Khadijah before their marriage. Since then, there has been a complete consensus of opinion on this among the jurists of Islam.

Money Lending Business

The fourth form of investing Capital, which has ever since been practiced in non-Islamic societies is the money-lending business. As per this business, one person lends out capital in the form of debt, and a second person puts in his labor, if there is a loss, it has to be borne by labor but regardless of profit or loss, interest does accrue to Capital in any case. Islam has interdicted this form of investment.

“O you who believe, fear Allah and give up what still remains of riba if you are believers.”(2:278)

The Holy Quran also says:

“But if you do not (give it up), then listen to the declaration of war from Allah and his Messenger. However, if you repent, yours is your principal. Neither wrong nor be wronged.” (2:279)

In these two verses, the phrases “what is still due to you from the interest” and “you shall have the principal” makes it quite explicit that Allah does not condone the least quantity of interest, that “giving up the Interest” implies that the creditor should get only the principal. Thus, one can clearly see that Islam every rate of interest to be totally inadmissible.

In the pre-Islamic period, certain Arab tribes used to carry on with the help of money borrowed on the basis of interest from other tribes. Islam puts an end to such transactions altogether, Ibn Juraij says:

“In the pre-Islamic period, the tribe of Banu Amr bin Auf used to take interest from the tribe of Banu-al-Mughira used to pay this interest. When Islam came, the later owed a considerable amount of money to the former”. And further on: “The Banu-al-Mughira used to pay interest to the Banu Thaqif”

Let it be understood that the position of every Arab tribe was like that at a joint company, carrying on trade with the joint Capital of its individual members. So, when a tribe would borrow collectively from another tribe, it would usually be for the purposes of trade. The Holy Quran has prohibited even this practice.

Thus, under the Islamic system of the economy, if a man wants to lend his money to a businessman to invest in the business,  he will first have to decide clearly whether he wishes to lend this money in order to have a share in the profit or simply to help the businessmen with his money. If he means to earn the right to a share in the profit by lending his money, he will have to adopt the mode of “partnership” (Musharakah) or that of “Co-operation” (Mudarabah) then, where he too will have to bear the responsibility of profit or loss as well. If there is eventually a proof in the enterprise, he shall have a share in the profit; but if there is a loss, he shall have to share the loss too proportionate to his Investment.

On the other hand, if he is lending his money to another person by way of help, then he must necessarily regard this help as no more than helpful and must forgo all demand for a “profit”. He will be entitled to get back only as much money as he has lent out.

Islam considers it is not only unjust but also meaningless that he should fix a rate of “interest” and thus place all the burden of a possible loss on the debtor.

This discussion makes it clear that Islam places the responsibility of “taking the risk of loss” on Capital. The man who invests capital in a risk-bearing business enterprise shall have to take this risk.

Written by Dr. Muhammad Imran Usmani

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