Market Mechanism

In the Islamic economy, other things remaining the same, prices are determined by free operation of market forces. The Holy Prophet (Sall Allah-o-alaihe wa sallam) discouraged any interference in the process of price determination by the state or individuals. Besides refusing to take any direct action, he prohibited those business practices which could lead to market imperfections. Consequently, stock-holding, specula­tion oligarchic collusions, concealment of vital information about the product and selling by false vows (which could be compared to mis­leading advertisements of the present day) were prohibited by the Holy Prophet (Sall Allah-o-alaihe wa sallam). Thus the Holy Prophet (Sall Allah-o-alaihe wa sallam) nullified the influence of economic power on price mechanism. Simultaneously, he discounted exploitation of the ignor­ant by the informed. In the contemporary society these instructions could be made a basis for a voluntary code of conduct for the business community. Besides legal injunctions there are a number of moral principles. The business community has been instructed to be honest, truthful and magnanimous in mutual dealings. Instead of damaging each other, they should evolve a social system of mutual help and coopera­tion.

Besides a completely free market, the Holy Prophet (Sall Allah-o-alaihe wa sallam) provided a framework for a reliable and smooth opera­tion of commercial dealings. The society required rules for contracts, rights and duties of partners, debts and their collection, rights and obligations of buyers and sellers and legality or otherwise of various forms of business dealings. Without such a framework, the society could not maintain a free and open market mechanism. The laissez-faire of capitalism also required a normative role for the state to lay down a basic framework. We have enlisted a set of traditions which explain salient features of the Islamic commercial framework. The apparent similarity of free market in Islam and capitalism may be misleading. The Islamic framework ensures free flow of supply and demand by regulating individual behaviour in an ethico-legal frame­work.

The behaviour of the business community has been tied to the principles of justice, fairness, equitability, cooperation, mutual help, and magnanimity. It is in contrast to capitalism where utilitarian criterion of pleasure and pain operates at the core of the market mech­anism. Islam allows free operation of demand and supply forces by regulating probable sources of interference and educating the business community in a code of conduct. This code provides viability to the legal framework.

Source: Economic Teachings of Prophet Muhammad (peace be upon him): A Select Anthology of Hadith Literature on Economics, Muhammad Akram Khan. Republished with permission.