working conditions; discrimination by race, religion, age, and sex; unsafe foods and medicines; harmful spillovers or externalities (such as environmental degradation that is not cleaned up by those responsible); information that is not shared (asymmetric) with all market participants; and broken social systems. In others words, there could indeed be market failure in a number of areas with adverse social consequences. Adam Smith, the champion of free enterprise and limited government intervention, still acknowledged as fact that businessmen left to themselves could not be trusted and that they might take advantage of consumers through collusion or natural monopolies.
Because our description of the “real” Adam Smith may not be familiar to most, it may be helpful to give an extensive quote from his other book —The Theory of Moral Sentiment. Smith expresses his remarkable insight regarding rules of conduct, which he believed were:
the ultimate foundations of what is just and unjust in human conduct…Those general rules of conduct, when they have been fixed in our mind by habitual reflection, are of great use in correcting the misrepresentations of self-love concerning what is fit and proper to be done in our particular situation. The regard to those general rules of conduct is what is properly called a sense of duty, a principle of the greatest consequence in human life, and the only principle by which the bulk of mankind are capable of directing their actions…Without this sacred regard to general rules, there is no man whose conduct can be much depended upon. It is this which constitutes the most essential difference between a man of principle and honor and a worthless fellow…Upon the tolerable observance of these duties depends the very existence of human society, which would crumble into nothing if mankind were not generally impressed with a reverence for those important rules of conduct. This reverence is still further enhanced by an opinion which is first impressed by nature, and afterward confirmed by reasoning and philosophy, that those important rules of morality are the commands and Laws of the Deity, who will finally reward the obedient, and punish the transgressors of their duty…The happiness of mankind as well as of all other rational creatures seems to have been the original purpose intended by the Author of Nature when he brought them into existence. No other end seems worthy of that supreme wisdom and benignity which we necessarily ascribe to him; and this opinion, which we are led to by the abstract consideration of his infinite perfections, is still more confirmed by the examination of the works of nature, which seem all intended to promote happiness, and to guard against misery. But, by acting according to the dictates of our moral faculties, we necessarily pursue the most effectual means for promoting the happiness of mankind, and may therefore be said, in some sense to co-operate with the Deity, and to advance, as far as is in our power, the plan of providence. By acting otherwise, on the contrary, we seem to obstruct, in some measure, the scheme, which the Author of Nature has established for the happiness and perfection of the world, and to declare ourselves, if I may say so, in some measure the enemies of God. Hence we are naturally encouraged to hope for his extraordinary favor and reward in the one case, and to dread his vengeance and punishment in the other…When the general rules which determine the merit and demerit of actions comes thus to be regarded as the Laws of an all-powerful being, who watches over our conduct, and who, in a life to come, will reward the observance and punish the breach of them – they necessarily acquire a new sacredness from this consideration. That our regard to the will of the Deity ought to be the supreme rule of our conduct can be doubted of by nobody who believes his existence. The very thought of disobedience appears to involve in it the most shocking impropriety. How vain, how absurd would it be for man, either to oppose or to neglect the commands that were laid upon him by infinite wisdom and infinite power. How unnatural, how impiously ungrateful not to reverence the precepts that were prescribed to him by the infinite goodness of his creator, even though no punishment was to follow their violation! The sense of propriety, too, is here well supported by the strongest motives of self-interest. The idea that, however, we may escape the observation of man, or be placed above the reach of human punishment, yet we are always acting under the eye and exposed to the punishment of God, the great avenger of injustice, is a motive capable of restraining the most headstrong passions, with those at least who, by constant reflection, have rendered it familiar to them.2
As we shall see through this volume, Smith's deist views, the sacred rules of nature, the required legislation, and the well-functioning market system converge with what we visualize as an “ideal Islamic system.” Viewed in this light, Smith's thoughts then become systematic and complete in the sense that the Moral Sentiments covers the first part, his Lectures on Jurisprudence covers the second part, and The Wealth of Nations, the third part. This view holds the promise of opening a line of communication between Islamic economics and conventional economics to illuminate how the original visions of Islam and Smith converge. Our position in this regard is of course diametrically opposed to the position held by most that the two disciplines have nothing in common and that the only way to define Islamic economics is to jettison conventional economics: throw the baby out with the bathwater.
Because of market failures and social considerations, truly pure market economies do not exist today. Instead, market or capitalist economies are mixed systems, with the word “mixed” referring to government participation and intervention. Crucially, the questions have become: How much government intervention is acceptable? In what areas?
Mixed Market (Capitalist) Economic System
A number of the shortcomings of a pure market economic system have been noted. We also should add that markets need a “referee” to make sure that important market rules are respected and negative fallouts are contained and limited. Markets are the medium for effective economic performance; they are not an ideology to be placed on a pedestal and untouched, as some would have it.
Private property rights and secure contracts are essential features of a market economy. Property rights give individuals the right to own property and to use that property as they wish. Property rights, in turn, are of no value unless they are secure and legally enforced. Similarly, most economic transactions that are outside the simple retail sphere rely on contracts that must be secure and enforced. In other words, business development needs security and confidence. Without government intervention as the referee, business conditions could become problematic. Moreover, in the absence of business regulations, supervision, and enforcement, businesses could collude and fix prices to the detriment of consumers and society at large. Even without price fixing, monopolies could develop to the detriment of society. At the same time, there are a number of areas where there are natural monopolies, such as defense and some areas of infrastructure. Again, we see a role for government. Most important, even if markets are self-regulating and operate smoothly without government intervention, (namely, how market output is divided among members of society) they may yield results that are socially abhorrent – a few wealthy individuals alongside mass poverty. And most practically, governments needing revenues have to collect taxes to provide even the minimum level of public and social services.
Mixed Socialist Economic System
In large part because of significant income inequality, poverty, human dissatisfaction, and increasing social concerns, some mixed market economies adopted a socialist mantle as an offshoot of Marxism. In Western Europe, socialist parties emerged as strong political contenders to nurture key nationalized industries and expand the available welfare programs. Some countries adopted limited industrial plans. Key sectors, such as banking, telecommunications, railroads, energy, healthcare, and education, were nationalized. The provision of social benefits was expanded to include free education and healthcare, extended unemployment benefits, early retirement for those in hardship industries, minimum retirement benefits, and reduced working hours. These programs increased the role and economic contributions of the state while reducing the role of markets. In the 1980s, the United Kingdom reversed a number of earlier socialist decisions, denationalized some industries, and reduced a number of social programs. This reversal of socialist policies and programs spread to a number of other countries in Western Europe. It was adopted by the International Monetary Fund as the recommended policy prescription and was even forced on some countries during the financial
Smith (2006, pp. 186–198).
