Economy System

1 Economic System
 Classifying economic systems

Totally Totally
planned free-market
economy economy
 Classifying economic systems

Early 1980s

N. Korea China UK Hong

Cuba Poland France USA Kong
Totally Totally
planned free-market
economy economy
 Classifying economic systems

Early 1980s

N. Korea China Hong

Cuba Poland France UK USA Kong
Totally Totally
planned free-market
economy economy
N. Korea Cuba China Poland France USA
UK China
(Hong
Kong)

Early 2000s
 ⚫ Thereare three economic
systems
– Command economic system
– Free market economic system
– Mixed economic system

5 Economic System
 Capitalist System

⚫ This economic system is known as free-market

system, free enterprise or laissez fair. All
economic decisions are made by each
individuals in the society without/limited
government intervention. Example : Canada,
France, USA and etc

6 Economic System
 Characteristics

⚫ Private ownership’s of resources

⚫ Freedom of enterprise and choice
⚫ Maximizing income, profits and satisfaction are
the driving forces of economic performance
⚫ Perfect Competition in market and industries
⚫ Limited government intervention

7 Economic System
 Advantages of Capitalism (Merits)

⚫ Lots of incentives to consumers, producers and owner

of economic resources to use their resources
efficiently.
⚫ Encourage people to be more innovative and involve in
R & D to reduce cost of production. i.e. Japan -
Robotics
⚫ High degree of efficiency in production of goods &
services. ie High standard of living

8 Economic System
 Disadvantages of Capitalism
(Demerits)
⚫ It may widen the income gap between the rich and the
poor
⚫ It may result in inflation and unemployment rate. i.e.
Unregulated market may lead to inflation and high
unemployment rate.
⚫ There will be an insufficient a location for social goods
and services. i.e. toll free road, hospitals, schools and
etc.
⚫ It may produce undesirable social effects known as
social costs/external costs. As example pollution and
haze.
9 Economic System
 Centrally Planned Economy
(Socialism)

⚫ The centrally planned economy is an economy

where all the economic decisions are made by
government. Russia, and China is practicing
this type of economic system.

10 Economic System
 Characteristics

⚫ The central authority plans the allocation of

resources between current consumption and
future investment
⚫ There is a management body called the
‘central authority’ which is responsible in
making economic decisions for the society
⚫ Limited use of price mechanism to solve the
fundamental economic problems

11 Economic System
 Advantages (Merits)

⚫ Socialism promotes social justice. Where income

differences are reduced to minimum because goods
and services are distributed not on basis of ability to
pay but they are ration out according to family needs,
and individuals’ roles in the government.
⚫ Social just between poor and rich
⚫ Socialism has resulted in advancement in
technological and scientific achievement. i.e. Russia
& China are equally developed in space exploration
and military compared to US and France.
12 Economic System
 Disadvantages (Demerits)

⚫ Not able to provide a high living standard for its

people.
⚫ Lack of incentives results in economic
inefficiency. People are not motivated to work
harder, or to be innovative because they are
not sufficiently rewarded.
⚫ Consumers have no choice but to accept all
the products and services made by the ‘central
planning authority’

13 Economic System
 Mixed Economy System

⚫ These economies have a mixture of

characteristic of both capitalism and socialism.
Government and individuals play their role in
the economy.

14 Economic System
 Characteristics

⚫ There are both private and public ownership of

resources.
⚫ Both play a role to solve basic economic problems. The
private sector is free to conduct and develop any
business as long as it is legal. As for the government
helps and encourages them by providing the
necessary infrastructure and facilities. i.e. High
technology industries
⚫ The fundamental economic problems are solved by
using both the price mechanism and government
economic plan.
15 Economic System
 Advantages (Merits)

⚫ There cooperation between government and

private sector has contributed to the growth of
our economy.
⚫ Government will interfere in the market if price
of a good increase tremendously. For example
if there is a shortage supply of fish in the
market then the government will allow imported
fish from neighboring country to come in.

16 Economic System
 Islamic Economics System

⚫ It is study of man’s activities in line with syariah

to obtain, use and manage the economic
resources for the betterment of oneself and
others both materially and spiritually in order to
achieve the blessing of Allah s.w.t.

17 Economic System
 ⚫ According to Nejatullah siddiqi (1981), the
main philosophic trust of Islamic Economic
system are based on the following:

– the relationship between man and his Creator

Allah s.w.t (Hablumminaan Allah)
– the relationship between man and his fellow men
(Hablumminaanas)
– the relationship between man and the Nature and
his surroundings
the meaning of his living in this world.

18 Economic System
 Principles of Islamic economic
system

⚫ Most Islamic economist including Ahmad

Muhammad al-Assal, Hamzah Ismail and
Shanbani Salamon have proposed three
principles of Islamic economic system
– A balance between private ownership and public
ownership of resources
– Regulated or limited economic freedom
– A need for government intervention

19 Economic System
 ⚫ In Islam, wealth refers to all kinds of things
created by Allah swt and its belong to HIM.

⚫ Man is given only the temporary ownership of

this wealth.
⚫ As a trustee, man must use and manage this
wealth according to the rules and regulations
of Allah swt.
⚫ Two types of ownership
– Private ownership
– Restricted or regulated economic freedom
20 Economic System
 Private ownership

⚫ Where individuals are allowed to own the

economic resources and wealth personally.
⚫ These resources must be used to produce
goods and services permissible in Islam
according to hierarchy of needs

21 Economic System
 Regulated economic freedom

⚫ Islam does not allowed absolute freedom to

any decision maker and his economic units to
decide what, how and for whom to produce.
⚫ Producers, consumers and owners of
economic resources are fully guided by
syariah in their production, consumption and
distribution activities and decisions.
⚫ They are encouraged to undertake any kind
of permissible activity and avoid any kind of
forbidden activity
22 Economic System
 Government intervention

⚫ Government plays an important role in

providing a reasonably decent standard of
living to every member of the society.
– Who are weak, poor, sick, old and handicapped.
⚫ Government must ensure a more equitable
distribution of income among people in line
with the principle of brotherhood and justice in
Islam.

23 Economic System
 ⚫ Bring more socially desirable fair results in
terms of opportunities, market prices and
output, wages, working condition and
prohibition of riba, corruption and other
forbidden activities through the use of
legislations and punishment.

24 Economic System
 Differences between Islam and
Conventional

⚫ There is no separation between Islamic

economics and Islam religion
⚫ All economic activities and decisions are
made based on the rules and regulations
prescribed by Islam as stated in the Quran
and Hadiths.
⚫ Islamic economics is religiously value loaded
– What is permitted and what is forbidden

25 Economic System
 ⚫ Islamic economics is man centered and not
wealth centered

– Islamic economics focuses on the scarcity of

man’s ability and capability to control, to acquired,
to exploit and to use the plentiful resources
– Wealth is only means to an ultimate end –
happiness in this world and hereafter.
⚫ Rationality in Islamic decision making is to
achieve happiness in this world and hereafter
– Implies in promoting social and economic justice
so that poverty is eliminated, inequalities are
reduced and human relations are more
harmonious and peaceful.
26 Economic System
 ⚫ In an Islamic economic system there is both
private and public ownership of resources
and enterprises.

– The private sector with initiatives and incentives

will work to produce halal goods and services
which contributes to the society’s well being and
maximum profits.
– The public sector will provide an avenue to fulfill
society’s needs on non commercial and non profit
basis
⚫ Associated with maslahah ummah; goods and services
which protect the life, intellect, faith, property and
prosperity of the people.

27 Economic System
 ⚫ The prohibition of riba’ in the Islamic
economic system

– Prohibition of riba’ is to promote social justice and

to uphold the principle of brotherhood.
– Elimination of this and replace it with equity
participation and profit sharing will create a society
free of debt
– It also ensure that capital is really put to
productive use.

28 Economic System
 ⚫ The concept of utility
– Utility is not confined to only worldly fulfillment but
also to include utility in the hereafter.

– Maximizing utility in the hereafter will be more

important economic objective.
– Economic resources will used to produce worldly
needs not for worldly wants and desires.
– Resources will be mobolised to produce goods and
services according to hierarchy of needs –
dharuriyah, hajiyah, kamalia
– No tarafiyat goods and services will be produced
even they are highly profitable.

29 Economic System
 ⚫ The theory of consumption, theory of distribution and
theory of production will change in the Islamic
economic framework

– A firm will not work purely to maximize profits but just for
sufficient profits.
– Paying its employee a just wage and salary, charging just
price for its product so that it is fair to the society as a whole.
⚫ Differences in these economic values, objectives and
principles will require different theoretical analysis
and treatment of Islamic economics
– It is a challenge to economic scholar to develop new
economic models that incorporate with these values,
objectives and principles

30 Economic System