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Risk Assumption by Employees

Capital theory provides an adequate framework within which the effects of a shift in risk-taking on to employees as a consequence of profit-sharing can be analyzed. In dealing with the role of human capital, this theoretical approach suggests that future income flows from human capital should be treated analogously to the income flows from non-human capital, and therefore, may also be applied in the field of income distribution. Profit-sharing is seen as the use of human labour in exchange for a claim to uncertain income. From the workers’ point of view, bargaining about profit-sharing can be interpreted as an act of choice between the wage, which is guaranteed income for a specific period, and a claim to an uncertain future income, the expected value of which is higher than the wage due to risk factors. The other party to the contract, i.e. the shareholders of an enterprise, now find that the risk is shared, but as a consequence their return on risk-taking is lower.

In the Western industrialized countries, readiness to undertake risk is a function which, over a long period of time, has been transferred from the company owners to joint-stock corporations with limited liability, namely the shareholders of corporations. This separation of management and liability has resulted in the enormous expansion of the capitalistic system. In principle, such a functional division facilitates the efficient allocation of resources to their most productive use. However, as long as the option between secure and risky income is confined only to the owners of capital, opportunities of improving the allocation and utilization of productive resources are not fully exploited since the distribution of non-human wealth is very unequal. The owners of only human wealth are restricted in their choice of risk-taking as far as their income is concerned. Thus, in the possibility of obtaining additional income, they can only invest their human wealth on labour on the basis of “fixed income and the risk of redundancy”. In the present institutional framework of human capital the rank and file of the workers are underprivileged in two ways:

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  1. All capital assets are more favourably placed to exploit any advantage by the means of risk-diversification; and
  2. But it is not so easy to raise funds on the strength of human capital as security for the simple reason that potential creditors are restricted in enforcing their claims.

The potential scope of optimal risk allocation could, therefore, be extended if access to risk income would be more easily available to those who only possess human capital. Mobilization of resources of any scarce factor, such as the readiness to undertake risk, obviously is an advantage. This ultimately explains why distributional effects are expected from workers’ profit-sharing. There are additional reasons for urging the mobilization of such reserves if the aim is to build a just Islamic Order:

  1. As a consequence of increased investment in education human capital can gain increased significance in a society. In a given institutional framework this may lead to an increase in labour’s share of income.
  2. A change in social behaviour and attitude coupled with progress in the area of social legislation, e.g. the protection against redundancy, would increasingly transform the factor labour into a social overhead capital.
  3. As economic development continues the workers’ demand for participation in economic decision-making becomes more and more socially and politically important. In the introduction of workers’ co-determination with management it would be necessary to reward their risk-taking by combining co-determination with profit-sharing.

The'traditional concept of direct profit-sharing was developed from political ideas and systems. Starting from the question as to who is entitled to own a jointly produced good, this concept essentially includes the demand for a new industrial constitution which is a step in the direction of workers’ self-management (von-Weizsacker, 1972). The basic idea is to take measures which enable workers to borrow against their human capital for investment purposes. In this way workers would have the option of choosing between secure and uncertain income.

Borrowing against human capital enables the workers to choose according to their individual risk preference between secure and uncertain claims to income. However, the concept of workers’ direct profit-sharing treats them collectively. This is so whether profit-sharing is granted on a patriarchal basis by the individual firm or according to schemes instituted through some legislation.

The basic obstacle in borrowing against human capital on a large scale probably lies in the incompatibility of interests, the desire of workers for a specific limitation of liability and the interest of the banks to obtaining the safeguard of possible unlimited liability. It is imperative that the possibility of achieving income advantages by undertaking income risks is tied for good reasons to the ownership of capital. The question, then, arises whether the introduction of profit- sharing schemes has the potential of extending the limit of borrowing against human capital. Specifically, are the firms willing to reward workers’ participation on more favourable terms than the existing banks could provide?


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