Zakat effect on demand,supply and re-distribution of wealth

According to Choudhury, Islamic economic system is a resources economy and that the currency does not have a value but it is a medium of exchange.

 This agrees with ‘Jean Baptiste Say’ an economist who states that, effort and work placed in something to change it form will create an added value for the good and will be sold for a higher value which in turn increases the wealth of both the seller and the buyer. This will result  in that people will not save money as it does not have value according to Say’s theory and Islam, and a creation of demand on other goods in line with the amount earned.

However, to apply Say’s law and ensure the money cycle continues, the inflation and interest was created by current economic systems. But inflation will reduce both the wealth of both seller and buyer since the value of money reduces by time. In contrast, Islamic system imposed ‘Zakat’ which is 2.5 % (1/40) of the wealth taken from the zakat payer every year as per Qur’an. Hence, it encourages people to spend money and look for increasing wealth rather not seeing  money reducing and it keeps the economy moving. The difference here is that zakat reduces the amount of money held not the value of money. It encourages consumer to consume more and supplier (Inevestor) to produce more since the value of money does not change but the money amount reduces.

The above graph illustrates that increasing both the consumption and the supply will eventually increase supply and demand of goods but not the price because it will move to a new balanced level which supply equals demand.

 Hassouna, claims that the increase in production level needs workers, which automatically will create working opportunities for people. With-out inflation and interest the production will increase with no change in prices level. Hence, Zakat transfers and re-distributes the wealth between people.