Islamic Economic System in Comparison with the Western (Capitalistic) and Eastern (Socialistic) Economic Systems

[1]. Paper presented by Dr. Abdolrahim Gavahi in the Monthly Meeting of E.U. Economic counselors, Embassy of Sweden. Tehran, Iran, Sep. 10, 2009.


Let us begin our discussion with a few necessary introductory comments.

  • Defining Economic System

Samuelson, in his famous book “Economics”, provides some useful definitions for the term; some of which are:

  • Economics is the study of those activities which involve exchange transactions among people.
  • Economics is the study of how men choose to use scarce or limited productive resources to produce various commodities and to distribute them to various members of society for consumption.
  • Economics is the study of men in their ordinary business of life, earning and enjoying a living.[1]

Husain Namazi, a leading Iranian Economist and Professor of Economy at Shahid Beheshti University, defines an Economic system as follows:

“An Economic system is a set of related and ordered elements which actively participate in the assessment and selection of effective factors in production, distribution, and consumption of goods, aimed at the highest degree of success”.[2]

  • Religion and Economy

Generally speaking, great religious traditions of the world, in their worldview and their approach to life, have taken one of the following three positions vis-à-vis the economic issues:

  • A negative and degrading approach (Buddhism, and some branches of Hinduism, Christianity, etc).
  • A neutral approach leaving the matter to the ordinary reasoning of man.
  • A positive and participating approach (Judaism, Islam, … ).

Also, those religious traditions which attend to economic matters, they do so under two different headings:

  1. General principles and guidelines, which we name them the “fixed” or “invariable” economic teachings of that tradition.
  2. Specific rules and regulations appropriate to a certain period of time or a specific location, which we call them the “variable” part of the economic teachings of that tradition.

As an example, in Islamic Economic System, paying retribution or blood-money for someone killed by accident is a religious obligation, but the specific form of its payment is a matter of time and location. At the dawn of Islam and in Arab peninsula it was paid by camel which was then a very precious item, but nowadays it is paid in local currency. Also, paying alms or tithes is an obligatory religious activity in Islam, but on which crops or products you have to pay tithes are a matter of interpretation of religious texts and injunctions.

Confusing the “fixed” and “variable” rules of Islam as a living tradition, or mixing the “Islamic tradition” with “traditional Islam”, is the source of many grave misunderstandings that we should not spare time to discuss at this juncture.


Principal Economic Systems

Although principal Economic Systems are not limited to the two systems of Socialism and Capitalism, and in fact each prominent Economic System contains many sub-systems (like liberal, industrial, business-oriented, and interventionist economic systems under Capitalism), yet, in order to be brief, we limit ourselves to explain only socialistic (Eastern) and capitalistic (Western) economic schools, and refrain from going into more details.

  1. Socialist Economic System
  • Theoretical Foundations

The main tenets of Socialism, at least in its classical form prevailing in the Soviet Union and other Eastern bloc countries, are as follows:

  1. Materialistic philosophy,
  2. Class struggle (war),
  3. Dialectical contradiction,
  4. Labour value,
  5. Governmental (public) ownership,
  6. Centralized economic planning[3].
  • Achievements

On the positive and negative results of the implementation of Socialist Economic System, there is a difference of opinion among scholars. Lack of some negative aspects of Capitalism, such as unemployment, unequal distribution of income, accumulation of wealth by a few people, cruel poverty of lower stratum of society, etc, has led some scholars to believe that Socialism has had its own intrinsic values. Nevertheless, in a balanced assessment of this economic system, following facts and observations appear to be amongst the more negative aspects of Socialism.

  1. Negative economic growth,
  2. Resource squandering and higher production costs,
  3. Lagging behind in science and technology,
  4. Ignoring private (individual) ambitions and desires,
  5. Strict government planning and control (excessive and harmful bureaucracy),
  6. Ignoring consumers[4].

As we all know, adopting these foundations and procedures, finally led to the economic collapse of the Soviet Union and other Eastern bloc countries. Whereas, those states which remained faithful to Socialism, countries such as Cuba and North Korea, are still suffering from its consequences, experiencing apparent under-development vis-à-vis their neighboring, peer countries. Perhaps China is an exception, a country which has kept its political structure, while virtually abandoning its socialist economic system and turning towards Western Capitalism.

In summary, more than half a century domination of Socialism over all aspects of economic activities in Eastern block countries eventually led to Perestroika of late 1980’s and the subsequent downfall of communist regimes founded upon this system, even though the role of other (socio-political) factors should not be underestimated.

      2. Capitalist Economic System

  • Theoretical Foundations

Although, as we said earlier, Capitalism – in theory, and practice – does not enjoy a single unified form, and so the capitalist countries, based on their background, priorities, and their politico-social and cultural preferences, each have a modified version of this system and have adopted conditions into it, yet, in a general overview, the principal foundations of this system may be enumerated as follows:

  1. The doctrine of individual freedom[5],
  2. The doctrine of economic man[6],
  3. The doctrine of economic freedom: liberalism,
  4. The doctrine of free competition: market adjustment,
  5. The doctrine of full employment,
  6. The doctrine of automatic economic adjustment,
  7. The principle of government non-intervention (economic decentralization).[7]
  • Achievements

Again, different scholars, inspired by various schools of thought, have expressed different, and at times contradictory, opinions about the achievements of Capitalistic Economic Systems. A balanced, impartial assessment may include:

  1. Unequal distribution of income and an increasing class gap[8],
  2. Unlimited consumption,
  3. Lack of social justice,
  4. Unemployment and poverty,
  5. Constant decline of the share of labor value and incline of the share of capital value in GDP[9].

In our concluding comment about socialistic economic policy, we said that Socialism eventually led to Perestroika and collapse of Soviet Union. Similarly, one may argue that Capitalism has finally ended in the present Economic Crisis of the West, with apparent traits of great economic recession, fall of consumption because of fearing the future, decline of share prices, GDP reduction, unemployment, huge budget deficits, withdrawing deposits from the banks and consequently too many bankruptcies among banks and financial institutions, collapse of housing industry, automobile manufacturing, and other major industries, etc. Furthermore, the whole situation has led to psychological disorder among many individuals and families, as a result of which some have committed suicide.

It is interesting to note that the inevitable coming of this situation had long been anticipated by prominent Western scholars, including many American socio-economists, yet totally ignored by political leaders. As Lester Throw, professor of Harvard and MIT and economic advisor to President Clinton, in his famous book “The Future of Capitalism”[10] openly states: “From its very beginning, Capitalism has been accompanied by an unfair distribution of wealth and income… How far this inequality will go before the whole system is cracked and smashed into pieces?[11]” He then continues by enumerating some more negative traits of Capitalism, including unlimited and uncontrolled consumption and therefore very low amount of national saving (compared to countries like Japan, etc), and concludes by saying that: “the question is not that if an (economic) earthquake will happen or not, that is certain. The question is when it will happen and what will be its magnitude? Will it be a major quake that will destroy everything or a series of smaller ones which is more controllable? When the time comes, economic headaches of U.S., Japan, and the rest of the world will be huge. The center of this economic earthquake will be America, nevertheless, its destructive waves will cross everywhere”[12]. Now, the whole world is witnessing his forecast.

3. Islamic Economic System

  • Sources

Earlier, it was said that Islam, like a few other religious traditions, addresses economic issues in its vast teachings. Islamic economy, like any other branch of Islamic sciences, is driven from the two main sources of Quran and Hadith (Tradition). Though, during the long history of Islam, opinions expressed by Islamic ulama (learned scholars) and fuqaha (jurisprudents) have further expanded and updated these teachings. Also, as we said before, the economic material in all great traditions can be divided into two main categories: a) Fixed general principles and universal tenets, not subject to time and place; and b) Variable precepts and injunctions, subject to proper time and place.

From the early days of Islam, its “economic” teachings have been expressed by the Holy Quran, the Holy Prophet, and the Holy Imams (in Shi’ite tradition) and have been well collected and documented in different juristic (fiqhi) books, including collections of religious laws and precepts.

One of the early compilations of such collections is “Tabserat al- Muteallemin”
(An enlightenment for the educated people) written by Allamah Hilli more than seven centuries ago, in which close to eighty economic subjects are discussed under seven headings in more than three hundreds and fifty pages, or almost forty percent of the whole book[13].

Nevertheless, in the course of the time and the rise of many new economic issues, there should not only be new subjects added to the old themes (issues like banking, international trade, copyright, etc.), but also the old issues and precepts had to be reconsidered in the light of new scientific discoveries, as well as new circumstances, so that a new set of more scientific, up-to-date, and applicable economic rules and regulations be deducted for modern times; the task well-attended by late Shiite scholar Ayatullah Mohammad Baqir Sadr in Iraq[14], and scholars such as Ayatullah S.M. Taleghani[15], Mehdi Bazargan[16], Sheikh Ali Tehrani[17], Abulhasan Banisadr[18], Ayatullah Morteza Motahhari[19], Husain Namazi[20], Hasan Tavanayan-fard[21], Ayatullah Damad[22], and many others in Iran. These new ideas and precepts have gradually appeared in the juristic collections of modern Grand Ayatullahs such as Sanei, Mousavi-Ardebili, Jannati, etc.

  • Theoretical Foundations and Goals

As we discussed earlier, the most important source of deducting Islamic economic rules and regulations is Quran, the sacred book of Muslims. Following, we will briefly mention some of the more important Islamic economic principles and goals, as derived from Quran and reflected in the Constitution of the Islamic Republic of Iran. These guidelines are discussed in chapter four, article forty-three of the Constitution:

  • Securing economic independence of the society,
  • Securing economic Justice within the society,
  • Eradicating poverty and deprivation,
  • Securing basic needs of citizens (housing, food, health, education, etc.),
  • Providing Job opportunity for everyone (full employment),
  • Preventing wealth accumulation by a few,
  • Preventing the government to become a big employer,
  • Assuring freedom of Job selection for everybody,
  • Preventing any sorts of exploitation,
  • Preventing infliction of loss to others, hoarding and usury,
  • Preventing squandering and extravagance,
  • Utilizing science and technology for economic development,
  • Preventing foreigners to dominate national economy,
  • Attaining agricultural and industrial self-sufficiency.


  • Practical Aspects

In order to attain these goals and objectives, Iranian Constitution has suggested   some means and procedures, one of the most important of which is to run the economy on the basis of three sectors, namely, public, private, and cooperative (article forty-four), and handling all important and large industries such as shipping, oil and gas, airline, communication, banking, energy, railroad, and other similar industries by the public sector. Nevertheless, in recent years, Council of Expediency, has given a new interpretation of the same article of the Constitution and has paved the way for private-sector participation in these areas.

Article forty-five of the Constitution states that all public wealth such as mines, waters, forests, etc. belong to the state and cannot be owned privately. In article forty-seven, private ownership has been recognized by law.


Summary and Conclusion

Vis-à-vis the socialistic economic system which denies private ownership and the relative value of capital, and concentrates all sorts of economic activities in the hands of government-thus extinguishing any sense of private and individual initiative and stagnating the socio-economic growth; and the capitalistic economic system promoting unlimited and uncontrolled economic liberty and absolute laissez-faire, thus creating huge social gap, poverty, and an unfair distribution of income and wealth-thus preventing the establishment of social and economic Justice. Islamic economic system considers itself to be a third way between the two extremes of Socialism and Capitalism, an economic school which, based on the original teachings of Islam, refrains from the two excesses of totally negating private proprietorship or allowing huge accumulation of wealth in the hands of a few.

Nowadays, almost no one questions the deficiency of the socialistic economic system, because its shortcomings are rather obvious and well-discussed. But the pitfalls of the capitalistic economic system have not been so obvious, nor well-acknowledged, at least up to recently. Earlier, we said that according to the information supplied by U.S. Department of Statistics, in 2001, the share of the lower 40% of U.S. population from national wealth has been 0% and that of the higher 40%, 97.3%. Also, in spite of U.S. GDP growth in last decades, the Jinni coefficient, on the distribution of income, is constantly increasing, indicating a growing social gap between the rich and the poor[23]. Furthermore, according to Western economists, including some prominent American scholars, Capitalism, from its very inception, has carried with itself the seeds of unequal distribution of wealth and income[24]. Friedrich Hayek (1899-1992), one of the founders of New-Marginalism and ex-professor at Chicago, Freiburg, and Salzburg universities, states that for more than a decade he has looked for the concept of “Social Justice” in the Western liberal economies and has come to the conclusion that in a society of free men -from the point view of economic liberty-this concept is totally absurd[25]. While, as we said before, the highest goal of the Islamic economic system, and in fact the whole Islamic tradition, is to establish social and economic Justice in the Islamic community, this being an unconditional commandment of God frequently mentioned in the Holy Quran.

Lastly, it is worth mentioning that not only Iran but other Islamic countries as well, are far from the true implementation of Islam teachings within their respective societies. Yet, this is in addition to different, and at times extreme, readings into, or interpretations of, Islam by various leaders, clergies, scholars, and even political groups in the Islamic World.

Obviously, such differences of opinion have long been present in all great religious traditions of the world and sure will continue to be, one good example of which is the difference of opinion between the Christians of Dark Ages and those belonging to Reform (Enlightenment) era.


[1]. Samuelson, Paul A., Economics, McGraw Hills Book Co., N.Y. , 1964, p.5.

[2]. Namazi, Husain, Nezamhaye Eghtesadi (Economic Systems), Sherkat-e Sahami-ye Intishar, Fifth edition, 1387 (2008). P. 37.

[3]. For details see Namazi, ibid., pp. 245-285.

[4]. Ibid., pp. 237-43.

[5]. As stated by John Stuart Mill (1806-1875), who strongly opposed government intervention in economic affairs. For details see Namazi, ibid, p. 66.

[6]. Homo economicus, a doctrine of the classics who believed that human beings, enjoying free will, will demonstrate a rational behavior in economic matters. For details see Namazi, ibid., pp. 55-6.

[7]. For details see Namazi, ibid, 132-72.

[8]. According to economic specialists, unequal distribution of income and wealth has increased class gap in Europe and United States of America (David Kolander, Microeconomics, pp. 390-3). Also, according to Namazi, based on the figures of U.S. Department of Statistics, in 2001, the share of the lowest 20% of American population of national wealth has been – 0.2% and the share of the next lowest 20% has been + 0.2% (thus, the share of lower %40 is only zero percent!) while the share of highest 20% of population has been 84.1% See Namazi, ibid, 19-20.

[9] . For details see Namazi, Present Crisis in Western Economy, Irainian Academy of Sciences, 1387 (2008), pp. 19-20.

[10]. Translated into Farsi by Aziz Kiavand and published under the name of “Ayandeye Sarmayedary”.

[11]. See Thurow, Lester, The Future of Capitalism, p.334; quoted by Namazi, ibid, pp 17-18.

[12]. Lester Throw, ibid., pp.9,247; quoted in Namazi, ibid.,p.21.

[13] . For details see Hilli, Yusif bin Mutahhar, Tabsirat ul- Muteallemin, translated and commented by Allamah Sha΄rani, Islamiyya Publications, sixth edition, Tehran, 2006, pp. 28-102, 207-222, 227-279, 379-89, 621-7, 652-98, 782-805.

[14]. See Sadr, Iqtisaduna (Our Economy), translated by Spahbodi, Islami Publications, Tehran, n.d.

[15]. See Taleghani, Propietorship in Islam, Intishar Publications, Fourth Edition, Tehran, 1965.

[16]. See Bazargan, Work in Islam, Dar ul-Fikr Publications, Qom, 1965.

[17]. See Tehrani, Ali, The Law of non-Injury or Loss in Islam, Ja’fari Publications, Mashhad, n.d.

[18].  See Banisadr, Monotheistic Economy, Hijr Publications, Tehran, 1979.

[19]. See Mutahhari, Morteza, Usury, Bank, Insurance, Sadra Publications, Tehran, 1985.

[20]. See Namazi, Husain, Economic Systems, Tehran, 1995.

[21]. See Tavanayan-Fard, H., Credit Treasury: Banking in Islam, Morvarid Publications, Tehran, 1979.

[22]. See Damad, S.M., Hoarding and Speculation in Islam, Tehran, 1984.

[23]. For details see Namazi, Present Crisis of the Western Economy, pp. 10-11.

[24]. David Colander, Economics, pp. 390-3.

[25]. Imon Butler, Political and Economic Views of Hayek, translated by Fereidoon Tafazzoli, p. 133.

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