Sample Essay on Islamic Analysis within Comparative Perspective

Determinants of Aggregate Consumption, an Islamic Analysis within Comparative Perspective

            The marginal propensity to consume as it relates to the Islamic community is highly dependent on the traditional values and religious principles. Consequently, this has a greater effect on the aggregate consumption amongst them. In other words, Islamic values and injunctions do have a crucial effect on the general consumption function of the economy contrary to the secular economy (El-Gamal 2006, 51). This therefore, forms the basis of discussion throughout this essay, which seeks to explicate the various key determinants of aggregate consumption in an Islamic economy bearing in mind that there exists a slight distinction between this economy and the secular economy. These determinants include the banning of israf and tabdhir in Islam, which means extravagance or what is referred to as wasteful expenditure and squandering in English respectively (Iqbal 1990, 48). Other determinants include the effect of zakah (form of Islamic tax to aid the poor Islamic individuals) and infaq (charitable spending). Essentially, the aforementioned factors form the major determinants of the marginal propensity to consume in respect to the Islamic community as explicated by various studies in relation to the Keynesian theory of consumption.

As mentioned early, the banning of israf as far as the Islamic values and principles are concerned means that wasteful expenditure is prohibited in the Islamic economy. Unlike a consumer in the secular world, who certainly derives contentment from bountiful spending, a consumer from an Islamic economy jeopardizes his or her reputation and is tantamount to a harsh punishment by committing israf (Malik, Hussain, & Shiraz 1994, 940). Therefore, this effect ensures that vast majority of consumers under the umbrella of the Islamic economy avoid any kind of lavish spending and this undeniably has a significant impact on the total average spending and thus the aggregate consumption in such an economy.

On the other hand, in the secular economy where individual consumers are endowed with the freedom of choosing the amount of expenditure, there is a significant number of consumers who enjoys lavish spending (Malik, Hussain, & Shiraz 1994, 936). As such, this increases the aggregate consumption in the economy compared to the Islamic economy. The requirements under the shariah law clearly denounces lavish spending and warns of the dire ramifications of committing such a “felony”, which certainly ensures that the marginal propensity to consume among consumers under the Islamic economy is kept as low as possible (Yusoff 2006, 23). While the aggregate consumption is kept higher in the secular economy where consumers derive a lot of pleasure from lavish spending, the shariah law against israf ensures that the only pleasure a consumer gains is to live under the limits of israf.

            In addition, tabdhir, which means squandering, is a taboo as far as consumption in the Islamic economy is concerned. While squandering is not a big issue among consumers in the secular economy, the shariah law under the Islamic economy considers this a crime against the will of Allah (God) saying that it encourages expenditure among the Islam community on forbidden commodities. Consequently, this has the effect of reducing the average consumption. Irrespective of how much money is available for an individual to spend, there are certain expenditures that they are prohibited to make and failure to observe the prohibitions; one is subject to specific punishment in a bid to inflict fear among the rest of the consumers to avoid such expenses (Haneef 1995, 102).

Zakah is a form of a compulsory Islamic tax that is imposed on certain rich and wealthy individuals in a bid to help the poor in the Islamic community (Iqbal 1990, 48). The zakah givers and the zakah receivers form part of consumers in the Islamic economy and the effect of this is felt on the aggregate consumption. Certainly, the givers have a higher marginal propensity to save and a lower marginal propensity to consumer compared to the poor, who are the receivers. As such, when they receive the zakah, they tend to spend more because they only think of buying food and other basics rather than the givers who think about saving and investing the same money (Suprayitno, Kader, & Harun 2013, 43). Therefore, the zakah has the effect of increasing the aggregate consumption or the other way round when less zakah is collected and availed to the poor for consumption. Even though the same may apply in the secular economy, tax is not only levied on the rich but also on the poor but with the difference, which is evident in the amount of income they receive.

Additionally, infaq, which simply means charitable spending, is another determinant of the aggregate consumption in any Islamic economy (Alam 2011, 9). This form of spending has the effect of augmenting the overall average propensity to consume among Islamic communities because of the fact that it encourages people to spend more than usual. Infaq ensures increase in consumption because the rich people among the Islamic people will always have the nudge to take care of their brothers and sisters in a bid to remain under the favour of God (Beck & Webb 2003, 52). They certainly believe that the more they give to charity in order to take care of their fellows the more they will receive and this is the promise put forward by Allah. On the contrary, the level of charity in the secular economy is not up to the standards of the Islamic economy. In other words, charitable spending increases the aggregate consumption by encouraging the rich to spend more on not only on themselves but also on those who have the willingness but not the ability to spend on the same (Shaikh 2013, 4).

In conclusion, this essay has explicated the four major determinants of aggregate consumption as it applies in the Islamic economy with a comparative perspective on the secular world. These Islamic injunctions have been said to cause either a decline or an appreciation of the overall aggregate consumption among the Islamic communities. Israf, tabdhir, zakah, and infaq have significant net effect on the average marginal propensity to consume in various magnitudes as far as the Islamic economy is concerned. The essay unveils that a consumer from the Islamic economy is faced with distinct constraints forcing him or her to spend a certain portion of his or her income under the confines of prodigality as spelt out in the shariah law. However, in the secular economy, a consumer is only limited by his or her willingness and ability to consumer and will spend as much as he or she wishes. As such, there will be a higher aggregate consumption in the secular world due to extravagance and squandering of money compared to the Islamic economy where consumers are not limited by their money but by the laws of prodigality. This brings out a clear distinction between the determinants of aggregate consumption in either of the economies.

References

Alam, A., 2011, June. Islam, bread riots, and democratic reforms in North Africa. Retrieved October 25, 2014, from Muslim societies: http://www.muslimsocieties.org/Vol_4_No_1_Islam_Bread_Riots_and_Democratic_Reforms.html

Beck, T., & Webb, I., 2003. Economic, Demographic, and Institutional Determinants of Life Insurance Consumption across Countries. World Bank Economic Review Volume 17 , 51 – 87.

El-Gamal, M A., 2006. Islamic Finance, Law, Economics, and Practice. Cambridge: Cambridge University Press.

Haneef, M A.,1995. Contemporary Islamic Economic Thought: A Selected Comparative Analysis. London: Alhoda UK.

Iqbal, M.,1990. Zakah, Moderation and Aggregate Consumption in an Islamic Economy . JKAU: Islamic Economics , 45-61.

Malik, S J., Hussain, M., & Shiraz, N S.,1994. Role of Infaq in poverty alleviation in Pakistan . The Pakistan Development Review , 935-952.

Shaikh, S A., 2013. Macroeconomic Determinants of Savings in Pakistan. Global Management Journal for Academic & Corporate Studies (GMJACS) , 1-15.

Suprayitno, E., Kader, R A., & Harun, A., 2013. The Impact of Zakat on Aggregate Consumption. Journal of Islamic Economics, Banking, and Finance , 39-62.

Yusoff, M B., 2006. Fiscal policy in an Islamic economy and the Zakat. International Journal of Economics, Management, and Accounting , 20-30.