Purposes of Resources

• Production involves human activity to manipulate resources on earth and transform them into final goods and services for human consumption.
• Production requires human effort to harness resources that are not originally owned by humans—raising the question of who has the right to manipulate them.
• Islamic worldview:
  • Allah (SWT) is the One and Only God, the True Master of the universe. This is the tawhid al-rububiyyah (Unity of Lordship).
  • He alone possesses the authority to create and to command His creatures (Qur'an: e.g., "He created the sun, moon and stars to be subservient to His command; all creation and command belong to Him. Exalted be God, Lord of all the worlds!" Qur'an, 7:54).
  • Other verses indicate that all creations submit to Him (Qur'an, 3:83; 45:13).
• Main Qur’anic basis for humans’ right to use earth’s resources:
  • "It is He who created all that is on earth for you" (Qur'an, 2:29). This supports the permissibility of using resources for human benefit.
  • Humans have been granted the privilege to satisfy needs and pursue development and prosperity (Qur'an, 7:10).
• Taskhir (the subservience of nature to humans): Allah has subjected His creations to serve humankind, including sun, moon, stars, time, seas and rivers (explicitly mentioned in the text).
• The fundamental idea from the verses above:
  1) Creation of heavens, earth, and resources is to facilitate human life on earth.
  2) All other creatures have been made subject to human authority.
  3) The sustenance provided through resources is infinite—more than enough for human life on earth (also see Qur'an, 45:12-13).
• The concept of taskhir shapes producer behavior in Islamic economics: production actions affect the environment (mineral depletion, terrain transformation, energy use, even killing for food). These actions are acceptable only under taskhir, i.e., within Allah’s law and permission.
• The role of responsibility in production is to use resources wisely and ethically, aligning with Shari’ah.

Producers as Khalifah of Allah (SWT)

• Khalifah literally means successor; most scholars interpret it as the authority to manage the earth as a representative or vicegerent of Allah (SWT).
• Allah has granted humans the ability to command and use resources on earth (Qur'an references):
  • "He will make them successors to the land, as He did those who came before them…" (Qur'an, 24:55).
  • "And it is He who has made you successors upon the earth and has raised some of you above others in degrees (of rank) that He may try you through what He has given you" (Qur'an, 6:165).
• From these verses, humans are created in different socio-economic statuses to complement each other in production across stages—from resource identification and extraction to manufacturing and final goods.
• The production process is multi-stage and requires ongoing effort across all stages until final goods/services are produced.

Resources Entrusted as Amanah

• Amanah (trust) denotes the obligation to obey Allah (SWT). The Trust was offered to the heavens, the earth, and the mountains, but they refused; mankind accepted it (Qur'an, 33:72).
• Amanah implies freedom of choice and responsibility: righteous actions earn reward; wrongdoing earns punishment. It covers both religious duties and economic activity (production).
• Allah is the absolute owner of all resources; humans hold them in trust (amanah).
• Ownership is conditional, contractual, and usufructuary: resources must be managed in permissible ways to fulfill the trust.
• Amanah defines the ethical foundation of market transactions: trust is essential for exchange and market functioning. Cheating is condemned (Qur'an, 83:1-6; 26:176-183).
• The Prophet Muhammad (SAW) praised honest traders: "The truthful, trustworthy merchant is with the Prophets, the truthful and the martyrs" (al-Tirmidhi, hadith no. 1209).
• Trust in factor markets underpins an honest and reliable incentive system for owners of factors of production and supports principals–agents relationships in markets.
• Despite efforts in modern governance, malpractices persist (illustrated in Case 8.1). Islamic ethics and values should underpin production choices (refer to Chapter 4 for ethics and values).

Case 8.1: Corporate Responsibility Exemplars

• Toyota Car Recall (2010): Safety concerns ignored or delayed recall investigations to save costs—after reports of faulty brakes and sticking pedals in 2009.
  • Claimed that side airbags and delaying tougher door lock requirements saved money (USD 124 million and USD 11 million, respectively).
  • Faced Congressional scrutiny for delaying recalls.
• Apple and Foxconn (2010s): Reports of harsh working conditions, long hours, and use of child labor in some facilities; anti-suicide nets installed after incidents.
  • Living quarters described as cramped; long hours, strict discipline, and workload pressures.
• Ethical takeaway: Large companies must align profits with ethical practices and social responsibility; misalignment harms stakeholders and undermines Amanah.

Ultimate Objective of Production: Prosperity of the Earth

• From nomadic life to complex modern economies, mankind has developed through resource use and labour specialization.
• Humans are endowed to appropriate earth’s contents and make it prosperous; imran is a mandatory assignment (Islamic tradition).
• Hadith:
  • "If the Final Hour comes while you have a palm-cutting in your hands and it is possible to plant it before the Hour comes, you should plant it" (al-Albānī, hadith no. 479).
  • Another hadith: "He, who has surplus land in his possession, should cultivate it, or lend it to his brother for benefit; if he refuses, he should retain it" (Muslim, hadith no. 3717).
• Land and resources should be fully utilized; do not leave resources idle when production opportunities exist (Qur'an, 57:25 mentions iron as a resource).
• Prophet Dawood (AS) story: Allah taught him to make coats of armor for the benefit of people; gratitude is expected (Qur'an, 21:80).
• Obedience to Allah and justice lead to blessings: more abundant crops, rain, peace, and social order (Ibn Kathir, 1999).
• Qur’anic support for prosperity in agriculture, construction, and development within Shari’ah boundaries (e.g., Qur'an verses such as 11:61; 30:9; and references to maqasid al-Shari'ah).
• Producers should enjoin what is right and forbid what is wrong by aligning production with the promotion of good; God fulfills promises to the righteous (Qur’an references: 7:128; 21:105; 40:51).
• Aggregate outcome: obedience to Allah leads to balanced, sustainable development and a prosperous economy; righteous producers eventually inherit the earth.
• Core implication: production must be guided by revelation, not merely profit; use of resources should align with maqasid al-Shari’ah (objectives of the Shari’ah).

Theory of Production

• Theory of production (producer behaviour) analyzes how a rational producer, given state-of-the-art technology, combines inputs to produce a given output efficiently (Ferguson, 1972).
• It describes the transformation of inputs into outputs for a given technology as reflected by the production function.
• In principle, the Islamic firm faces a similar problem to conventional economics: optimize an objective function subject to constraints; the Islamic version embeds Shari’ah-based restrictions and priorities.
• Three key areas in the theory of production:
  • Factors of production
  • Production function
  • Production cost

Factors of Production

• There is no universal consensus among Muslim economists on the division of factors; different classifications exist.
• Some scholars classify factors into three: (i) al-mal (capital); (ii) al-‘amal (labour and entrepreneurship); (iii) natural resources.
• Others separate into al-mal and al-‘amal only.
• Given the principle of permissibility and lack of explicit Shari’ah injunction on factor classification, any division is acceptable.
• The four-category framework commonly used in standard economics includes: land, labour, capital, and entrepreneurship.
• Land
  • Includes soil and natural resources (forests, water, minerals, oil, wind, solar, arable land).
  • Natural resources are renewable or non-renewable; used as production inputs.
  • Landowners earn rental income as factor payments.
• Labour
  • Human contribution (physical and mental) that adds value to production; wages/salaries are factor payments.
  • Examples: construction workers, farmers, professionals, etc.
• Capital
  • Intermediary goods used to produce other goods/services (factories, transportation, tools, machines).
  • Distinction: physical capital (production) vs financial capital (money). In Islamic finance, interest is not used as a proxy for the return to capital; alternatives include rate of return on bank equity shares held by the central bank, mechanisms like profit-sharing, and other compliant financing.
  • The simplest proxy for return to capital in many contexts is rent (return to capital).
• Entrepreneurship
  • The coordinating and risk-bearing element; entrepreneurs bear profits or losses as returns to their efforts.

Production Function

• A production function describes how inputs are transformed into outputs, given technology.
• General form for four inputs (land, labour, capital, entrepreneurship):
  • $y = f(x<em>1, x</em>2, x<em>3, x</em>4)$
• A commonly used specific form is the Cobb-Douglas production function, exemplified (in the text) as a simple case; the original garbled expression appears, but a standard representation is:
  • $y = A \, x<em>1^{\alpha} \ x</em>2^{\beta} \; (\text{for two inputs, or extended to four inputs as } y = A \prod<em>{i=1}^4 x</em>i^{\alpha_i})$
• In Islamic economics, the production function must satisfy:
  • Only permissible factors of production are used.
  • Resources must be of pure origin and acquired via lawful means.
  • Compensation to owners must be by mutual consent and comply with contract law in Shari’ah.
  • Technology must not harm the environment; aim for productive efficiency and minimize wastage.
  • Strive to use a minimal number of factors to preserve resources for other production and overall welfare.

Cost of Production

• The cost of output is the sum of expenditures to acquire required factors of production.
• Short run vs long run:
  • Short run: at least one input is fixed while others are variable.
  • Long run: all inputs are variable.
• Notation:
  • Total Cost: $TC = TFC + TVC$
  • Total Fixed Cost: $TFC$
  • Total Variable Cost: $TVC$
• Per-unit cost measures:
  • Average Fixed Cost: $AFC = \frac{TFC}{q}$
  • Average Variable Cost: $AVC = \frac{TVC}{q}$
  • Average Total Cost: $AC = \frac{TC}{q} = \frac{TFC}{q} + \frac{TVC}{q} = AFC + AVC$
  • Marginal Cost: $MC = \frac{\Delta TC}{\Delta q}$
• Short-run cost behavior:
  • TFC is constant as output changes; hence, AFC declines with increasing output.
  • TVC increases with output due to more labour input required with fixed capital.
  • Law of diminishing returns: marginal productivity of labour falls as more labour is added to a fixed capital stock.
  • Consequently, TVC increases at first at a decreasing rate, then at an increasing rate.
  • The total cost curve is the vertical sum of TFC and TVC at each output level.
• Long-run cost behavior:
  • All costs become variable; TC = TVC and AC = AVC.
• The average and marginal cost curves typically exhibit a U-shape due to the law of diminishing returns and the increasing marginal costs at higher output levels.
• The cost curves are essential for analyzing profit-maximising behavior; Islamic perspectives adjust cost concepts to reflect ethical constraints and maqasid al-Shari'ah.

Behaviour of the Producer in Islamic Economics

• Producers behave rationally with the ultimate objective of attaining falāḥ (prosperity and well-being) in this life and the hereafter, aligned with Shari’ah objectives.
• Desired outputs (as per Tahir et al., 1992):
  1) Prohibited goods and services are not produced.
  2) Production of luxury/refinement goods is small; allocate fewer resources to these goods.
  3) More resources are allocated to necessity goods.
• Profit maximisation in Islamic economics is approached with a different normative framework: the rationality is guided by maqasid al-Shari’ah, ethics, and social welfare, and may involve modifying cost and input measures to reflect ethical constraints.
• Rationality and Well-being versus Self-interest and Altruism:
  • Key debate is whether the economic agent is a conventional Homo economicus or an Islamic Homo Islamicus.
  • Rationality, in the conventional sense, means self-interest plus consistency and efficiency.
  • In Islamic terms, rationality is bounded by ethical considerations and ultimate well-being (falāḥ) in this life and the next.

Connections to Foundational Principles and Real-World Relevance

• Tawhid and the stewardship paradigm underpin resource use and production in Islamic economics; humans are trustees (Khalifah) of Allah’s creation.
• Amanah integrates ethics into economic exchange and production; trust reduces market failures and underpins fair contracts and governance.
• The theory of production in Islamic economics aligns with standard economic reasoning but embeds Shari’ah compliance, prohibitions on exploitation, and maqasid al-Shari'ah as guiding principles.
• Real-world relevance includes ensuring corporate responsibility, ethical supply chains, and sustainable development (as highlighted by Case 8.1).

Mathematical and Conceptual Highlights (Key Equations and Concepts)

• General production function (four inputs):
  • $y = f(x<em>1, x</em>2, x<em>3, x</em>4)$
• Cobb-Douglas production function (illustrative form for multiple inputs):
  • $y = A \prod<em>{i=1}^4 x</em>i^{\alpha_i}$
  • For a two-input version: $y = A x<em>1^{\alpha} x</em>2^{\beta}$
• Short-run cost relations:
  • $TC = TFC + TVC$
  • $AFC = \frac{TFC}{q}, \quad AVC = \frac{TVC}{q}, \quad AC = \frac{TC}{q} = AFC + AVC$
  • Marginal Cost: $MC = \frac{\Delta TC}{\Delta q}$
• Long-run cost relations:
  • All costs variable: $TC = TVC, \quad AC = AVC$
• Key Qur’anic references (illustrative):
  • Allah is the Master of the universe; Allah’s creation is for human benefit: Qur'an, 2:29; 7:54; 3:83; 45:13.
  • Trust and accountability: Qur'an, 33:72; 83:1-6; 26:176-183.
  • Prosperity and stewardship: Qur'an, 57:25; 21:80; 11:61; 30:9; 7:128; 21:105; 40:51.
• Hadith references (illustrative):
  • Cultivate if you own land; plant palm trees even near the end of time (al-Albani, hadith no. 479).
  • Land cultivation or lending for benefit (Muslim, hadith no. 3717).
  • Honest traders rewarded (al-Tirmidhi, hadith no. 1209).

Notes on Ethical and Practical Implications

• Production decisions must respect ethical constraints, environmental stewardship, and justice.
• The descriptor amanah integrates trust and accountability into market interactions and production decisions.
• The emphasis on maqasid al-Shari’ah ensures that development remains human-centric and socially beneficial rather than merely profit-driven.
• Ethical case studies (Case 8.1) illustrate the potential divergence between profit-seeking and social responsibility; the Islamic framework calls for balancing both.
• In practice, Islamic production theory supports sustainable development by prioritizing necessities over luxuries and by ensuring that all production activities are within permissible limits and serve broad welfare goals.

Summary Takeaways

• Production in Islamic economics rests on a triad: the purpose of resources, the khalifah role of producers, and the amanah under which resources are managed.
• Resources are created by Allah (SWT) for human benefit, but humans must act as responsible stewards within Shari’ah.
• The theory of production in Islam mirrors conventional theory but incorporates ethical constraints, maqasid, and a focus on sustainability and justice.
• Costs and production decisions are analyzed with attention to short-run vs long-run dynamics, and with a view toward achieving falāḥ for individuals and society.
• Trust (amanah) is foundational to market function and to the legitimacy of production and exchange; dishonesty harms social welfare and violates divine trust.
• Real-world cases emphasize the need for ethical governance and corporate responsibility in global production networks.