A free and fair market in Zakat
In the name of Allah, the Gracious, the Merciful
The laws of nature can give us key insights for applying Islamic teachings to modern problems. Entropy, for example, dictates that work can only be done when different states of energy exist. Entropy is the most elementary of the laws of nature that we know of and it affects all aspects of life. When related to economic development, we observe that an economy’s health is based upon how many different states exist between people. Those states reflect people possessing different skills, assuming different roles, and having different amounts of wealth.
Because of entropy, we understand that the natural differences between people is crucial for sustaining life as it enables the exchange of goods and services, much like the circulation of blood in the body. If all people were the same, they would not find what they are lacking in others and the process of exchange that brings an economy to life would end.
Allah referred to people being in different states as part of life, but he also highlighted that people will take advantage of this phenomenon to abuse each other:
وَهُوَ الَّذِي جَعَلَكُمْ خَلَائِفَ الْأَرْضِ وَرَفَعَ بَعْضَكُمْ فَوْقَ بَعْضٍ دَرَجَاتٍ لِّيَبْلُوَكُمْ فِي مَا آتَاكُمْ ۗ إِنَّ رَبَّكَ سَرِيعُ الْعِقَابِ وَإِنَّهُ لَغَفُورٌ رَّحِيمٌ
It is He who has made you successors upon the earth and has raised some of you above others in degrees that He may test you through which He has given you. Verily, your Lord is swift in penalty, yet He is Forgiving and Merciful.
Surat al-An’am 6:165
This natural phenomenon, in which life can only thrive when people are in different states, and the paradox it creates, in which people of higher states abuse those of lower states, provokes an ongoing discussion between humans about how to address this conflict. It comes down to the balance and tension between freedom and fairness in the economy.
On one side, capitalism is rooted in the belief that market forces should have control in determining how people move through different classes based upon their performance in an economy. On the other, socialism is focused on resolving the moral paradox by reducing differences between people and moving society towards greater homogeneity.
Many people are familiar with the arguments that socialism restricts people of higher performance and results in less motivation to excel beyond the average. Others are not fully aware of the moral hazard that capitalism exhibits, when every person or corporation only serves their own narrow interests. Each of these paradigms, socialist or capitalist, has its flaws.
In fact, in the 1950’s capitalist scholars were confronted by an argument that left them searching for answers. The argument is based on the idea that the prime movers in a capitalist society in any industry will have an advantage through which they can grow quickly. Once they consolidate their position, it becomes very difficult for a new entity to effectively compete with the established entities and a new aristocratic form of society emerges, an oligarchy or plutocracy in which corporate rights are privileged over individuals.
If we were to restrict profit-making capabilities in a capitalist market to disrupt the bourgeois high class, we would revert back to a socialist system and face another set of problems there. The high degree of artificial economic intervention in socialism, and especially in full-blown communism, hinders society’s ability to grow and develop naturally.
The problem was solved by Harvard professor Joseph Schumpeter. He introduced the concept of creative destruction, better known as economic innovation (not to be confused with religious innovation or bid’ah). He argues that as long as innovation takes place, new ideas will render older models and entities obsolete and thus enable newcomers to compete and overcome established corporations.
Schumpeter’s ideas seemed to work well in the last century as we witnessed an increase in innovation, particularly in technology, with the invention of electricity and the combustion engine. Today, the most valuable company in the world, Apple, is only 40 years old. Facebook, another relative newcomer, is valued at near 100 billion dollars despite being only 10 years old.
However, in The Rise and Fall of American Growth, economics professor Robert Gordon argues that this burst of innovation is an exception and not the norm. He predicts American growth, or global growth, has reached a limit unless new groundbreaking discoveries emerge. His predictions tell of a society that has falling wages and of corporations that are growing in power.
Indeed, the recent upheaval in American politics is due in part to a segment of society feeling left out with declining wages and less available good-paying jobs. These people are left behind despite the fact that the overall American economy is experiencing steady growth with record corporate profits.
As Muslims, can we provide an answer to the economic storm on the horizon?
Zakāt is the solution
In Islam, this dilemma is solved by sustaining a free market society as a general rule, while at the same time restricting the market to a degree by directing parts of the wealth accumulated by the super rich to enable the rise of others. Within this framework, our aim should be to strike a balance between capitalism and socialism, to facilitate a free market that is only restricted by fairness.
The system of Zakāt, or Islamic charity, is aimed at both increasing social mobility and increasing the velocity of money. Velocity of money means the number of times currency exchanges hands over a period of time in an economy. Its increase is an indication of a healthy and vibrant economy. When money is accumulated and hoarded, without spending or investing (notwithstanding reasonable savings), it is like a blood clot in the body that endangers the entire system.
It works like this: the collected alms is distributed immediately to the poorest segments of society who are also poised to spend it immediately to fulfill an urgent need:
مَّا أَفَاءَ اللَّهُ عَلَىٰ رَسُولِهِ مِنْ أَهْلِ الْقُرَىٰ فَلِلَّهِ وَلِلرَّسُولِ وَلِذِي الْقُرْبَىٰ وَالْيَتَامَىٰ وَالْمَسَاكِينِ وَابْنِ السَّبِيلِ كَيْ لَا يَكُونَ دُولَةً بَيْنَ الْأَغْنِيَاءِ مِنكُمْ
Whatever Allah restored to his messenger from the people of the towns, it is for Allah and for the messenger and for relatives and orphans and the traveler, so that it will not be a perpetual distribution among the rich from among you.
Surat al-Hashr 59:7
This process of recycling wealth, but not income, is a taxation on what is being stored rather than on what is being earned. Zakāt money is owed only on what a Muslim has left over after all of his or her obligations such as housing, food, clothing, bills, investments, and others are paid off. Donating a small portion of the surplus money ensures that at least a minimum amount of wealth is being circulated in the economy, regardless of how much wealth was earned in a given year.
Zakāt also rewards those who move wealth through the economy, thus benefiting others, and it taxes those who store it, regardless of their recent income. From an economic perspective, it is aimed at increasing the velocity of money and enabling the disadvantaged to improve their social mobility.
From a social perspective, the accumulation of wealth is only possible by a currency that society accepts. The value of wealth is purely what people are willing to exchange for it. For example, gold is only valuable if people are willing to exchange it for products or services. When people accept it as a form of currency, individuals can then use it to store wealth. Hence, the process of hoarding these valuables is a benefit delivered to the wealthy at the expense of society as a whole.
The Zakāt taxation on their wealth can be viewed as a fee for taking advantage of a currency system that is enabled by everyone else in the economy. Similar to roads and infrastructure, a portion of their wealth is built at the expense of society and, therefore, all people have the right to have access to it. However, unlike communism, in which the wealthy’s assets are seized entirely, Zakāt only mandates 2.5% of surplus wealth; this is not nearly enough to damage the social standing of the wealthy, nor is it intended to do so.
Under the guidance of Zakāt, the reality of different classes of people, which is necessary to sustain life, is mitigated by the moral imperative the high classes have to ensure that the lower classes have a fair and reasonable path to improvement.
What we have described here, though, is simply the bare minimum of what Zakāt can and should do for society. Zakāt, we have noted before, is not merely giving 2.5% of surplus wealth, even though this is the foundation of it. Zakāt is the pillar of Islam and a way of making charity an integral practice in our lives. Every good deed is charity, even smiling at others. So while we ponder the outward mechanics of the Zakāt system and its potential to lift humanity out of economic stagnation, let us also remember that the system must be infused with the spirit of charity, in all of its aspects, if it is to succeed.
Success comes from Allah, and Allah knows best.