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The Economic Role of State

Updated on March 11, 2017

Most of the world economies today are ‘mixed’ in the sense that the private and public sectors go side by side and reinforce each other. A modern state is supposed to perform the following economic Roles:

The Regulation Role:

The long human experience has witnessed the fact that an unbridled freedom of private enterprise leads to certain tendencies that inimical to the fair play of market forces. Perfect competition is only an ideal situation. Due to the existence of externalities and increasing returns to scales, there are possibilities for monopolies and cartels to emerge. Such tendencies result into the exploitation of the low-income groups, the concentration of resources in a few hands and ultimately into socio-political disorders. The state has therefore to check such tendencies, to regulate the markets and to ensure a situation nearer to perfect competition. This function is recognized even by the proponents of the laissez-faire doctrine.

The responsibility of an Islamic state ate more enhanced in this context. It is obliged to check the quality of goods supplied to the market and to abandon the malpractice that inhibits competitive markets like hoarding, black marketing, a creation of artificial scarcities and price hikes, adulteration, smuggling etc. In addition, to that, the state has to abandon strictly the practices of gambling and speculation, interest based transactions, prostitution, the sale of narcotics and other goods prohibited in Shariah. However, direct interference in the price mechanism is not desirable. There used to be a well-developed institution of Ombudsman (Hisbah) in the early Islamic States that was entrusted with the duty of looking after the routine affairs of the market mechanism. It is similar in nature to the institution of magistracy and can easily adopt to ensure the smooth running of the markets effectively and it should work under the supervision of the judiciary.

The Allocation Role:

The provision of social goods, which cannot be made available to the society by the routine market mechanism, is considered as the primary duty of the state. Social or Public goods are meant for collective use and nobody can be excluded from their consumption. Since the property rights are not well defined in this case and the very link between the buyer and seller does not exist, the market (or private sector) fails to provide these goods and services. Therefore, the state has to step forward to provide these goods to the society free of direct user charge. The process due to which the total resources of the economy might be divided among private and social goods is called the allocation function that works through the budget. The familiar examples are defense, police and judiciary services, provision of mass education and public health as well as building of the basic infrastructure etc. This function is also well recognized by societies all over the world.

The earlier Islamic States have demonstrated to fulfill this obligation very effectively. The public treasury was considered as a sacred trust and all the resources available could be dispensed only for the cause of social welfare. Defense of the Islamic ideology and territory, provision of easy and speedy justice, and ensuring peace and tranquility in the society through effective law and order were the primary responsibilities of the state throughout the Islamic history till the end of Ottoman Caliphate in Turkey and Mughal Empire in India. The state was supported by the private voluntary institutions, or the NGO’s called Auqaf, so far as provision of free education, public health and other social services were concerned. Faridi assigns a powerful resources allocating and distribution function for this third sector with reference to historical experience and the ethical values of mutual caring and solidarity within the Islamic society. It can be argued that the burden of the government will be greatly reduced if this sector is promoted and encouraged to play its effective role.

The Distribution Role:

In a competitive set up, the reward to factors of production are expected to equal the value of their marginal product. The positive economics consider such a function distribution to be optimal. In actual practice, however, the distribution of income among different members of the society depends on the state of endowments or factor (resources) ownership. Obviously, an individual owing no resources of land, capital, business or even his labor (due to sickness or disability), is likely to get nothing. Thus, the resulting distribution, although determined in a competitive set up and efficient, may not be fair or just and describe. It may involve a substantial degree of inequality or skewness in favor of capital owners and landlord and against those who possess nothing but merely labor. The normative economics deals with such a situation and the state is obliged to devise appropriate strategies to reduce income inequalities and eliminate the worst forms of poverty. The concept of a ‘Welfare State’ has evolved during the 20thcentury in this background. The fiscal instruments of redistribution include tax and subsidies, transfer payments and food stamps as direct measures. The indirect measures include mass education and skill development, provision of health facilities, drinking water and sanitation, improving the working conditions of labor etc.

It is difficult to answer as to what constitutes a just and fair distribution. The mainstream positive economics bypasses this question and concentrates on efficiency in allocation in terms of Pareto’s standards. This is because equity in distribution involves value judgment and a single criterion is not available for the purpose. The prevailing socio-economic conditions and moral values of the society have to be examined before considering such criteria. Even if a suitable yardstick is found, the question then arises as to what should be the mode of redistribution. The economic policies in democratic countries most often emphasize on fulfillment of the basic needs and poverty reduction, rather than placing ceilings on the level of income, wealth and properties.

Since the social system suggested by Islam is value-oriented, the primary duty of the state is but to promote social justice and to propagate high values and ethical standards in the society. However, the concept of social justice remains incomplete, rather unsubstantial, without distributive justice. An Islamic state has to perform a comprehensive and much enhanced role in this regards as compared to secular societies. Islam adopts a two-pronged strategy to achieve this goal of equity in distribution. On the one hand, it motivates the individual via moral persuasion and proper education, to realize the bitterness of poverty and help the destitute by spending a fraction of his earnings at his sweet will. On the other hand, it devices a permanent solution of the problem in the form of zakah and ushr instrument. The state is obliges to enforce the system in full swing for the welfare of the poor sections. A modern Islamic State can also resort to taxation to carry out its routine functions since the revenues from Zakah are specifically for the poor and destitute.

The Stabilization Role:

In the real world of business, the market system may not be always self-equilibrating after exogenous shocks. It may fail to pass on correct price signals to the agent concerned, which leads to misallocation of resources. The use of budgetary policy as a mean of attaining full employment level is known as the stabilization function. This is a modern element added to the functions of the state due to the Keynesian revolution in macroeconomics after the Great Depression of 1930’s. A market economy is often confronted to severe fluctuations and trade cycles due to imperfections in the system. Keynes emphasized on the short run solution to the problems of unemployment, which may arise due to deficiency of aggregate demand and price rigidities in the factor market. State intervention is therefore considered essential, which implies a skilful manipulation of the economy via monetary and fiscal policies, so as to restore full employment equilibrium. The government in the development countries are further required to devise polices to enhance the rate of investment, to build up the necessary infrastructure, to accelerate the pace of growth and to raise the living standards of masses.

Although relatively modern concepts, the polices directed toward economic stabilization and growth are equally relevant for modern Islamic States. The role of the State in achieving these goals can be rationalized on moral and ethical ground. Inflation erodes the purchasing power of masses. Although it adversely affects all sections of the society in general, the impacts are particular severe for the fixed and low income groups. It aggravates poverty and increases income disparities. On the other hand, the state of depression and unemployment leads to deprivation of poor masses and causes social unrest, corruption, theft, and dacoits etc. Thus both the high inflation and acute unemployment cannot be tolerated in the society since their prevalence goes against social justice. An Islamic State is obliged to take prompt notice of these symptoms and to eradicate the evils responsible for them. An appropriate mix of fiscal, monetary and commercial polices can be formulated to attain these objections.


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    • umairjamal profile image

      umairjamal 4 years ago from Islamabad, Pakistan.

      Yes, you are pretty close to the Idea I will post some books here soon. So you can visit some other time. I appreciate your comment, Thanks.

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      Howard Schneider 4 years ago from Parsippany, New Jersey

      It sounds to me that Islamic states have similar economic management traits compared to Western governments. Both try control excesses of business and ensure that their people are properly cared for. Politics always argues as to what extent, if any, that the government should be involved. Excellent Hub, Umairjamal.