Micro-foundations of God-Conscious Economic Agents in Islamic Economy

This paper discusses Islamic principles and how they can help in achieving efficiency along with equity in a market system. We start with the concept of ‘human welfare’ in Islam and show how it is distinct from the concept of welfare in western social sciences. The difference comes from the worldview. This difference is not trivial. It has important implications on human behavior and choices. Belief in perfect accountability and absolute justice will help in achieving ethical behavior even when it cannot be codified or made compulsory by law. After presenting the basic framework of welfare, we present how Islamic principles can systematically help to achieve equitable distribution of resources within a market system. We discuss the institution of Zakat and how it will incorporate diminishing marginal utility of wealth and also achieve the objective of circulation of wealth and utilization of idle resources. We also present labor market dynamics in an Islamic economy. We show how labor force participation, human capital development and technical progress will be achieved in an Islamic economy. Lastly, we discuss the effects of Zakat on bringing competition, efficiency, investment and employment