Islam & Economic Equilibrium

Economic equilibrium is one of the objectives of the Islamic state. We have seen earlier that Chapra considers price stability as one of the objectives of the Islamic welfare state. The effort of the state to achieve and maintain economic equilibrium implies fighting two economic evils: inflation and recession. Among the tools suggested to achieve and maintain general equilibrium, two relate to fiscal policy: a general equilibrium tax, and the management of the degree of monetization of Zakah.

M. M. Metwally suggests a variable rate of Zakah whereby variations are done by the state for equilibrium purposes. Later, he substituted the variation of the rate of Zakah, by Zakah with a constant rate plus a variable-rate-general-equilibrium tax, because a variable rate of Zakah, was considered a violation of Shari'ah by many Muslim scholars. Kahf proposed the variation in the degree of monetrization of Zakah, as a leverage in equilibrating the economic activity. Zakah, according to Shari'ah, may be collected and distributed in money and in kind. Thus, variations in the proportion of Zakah collected (distributed) in money would affect the quantity of money in the market as well as the quantity of consumer’s goods available.

The general equilibrium tax is of special importance to this paper because of the theoretical foundation underlying it. According to its advocates, this tax is justified by the need for equilibrium and since equilibrium is good, then a means that achieves good is considered good too.

Source: Fiscal Policy and Resource Allocation in Islam, Ziauddin Ahmed, Munawar Iqbal and M. Fahim Khan. Republished with permission.