A Healthy Market, A Truly Free Market
In a previous article, “Business Competition from an Islamic Economic Perspective” (CNBC Indonesia, 2 March 2026), we discussed how Islam explicitly prohibits practices that distort healthy market mechanisms. However, behind these prohibitions lies a dimension often overlooked: the constructive dimension. This time, we discuss not only what must not be done, but what Islam offers affirmatively—an ethical infrastructure that enables markets to operate systemically, efficiently, and justly.
Our guide is five principles of mabadi’ khaira ummah, or “best community”, as outlined in the book Business Competition Jurisprudence published by the KPPU and Lakpesdam PBNU (Ahmad et al., 2019).
Why Does Ethics Have Economic Value?
Once, questioning the relevance of ethics in economics sounded naïve. Since Adam Smith’s era, classical economics rested on the assumption that self-interest is the sole motor sufficient to drive markets optimally. However, this paradigm has shifted. Leading economists now demonstrate that efficient markets cannot stand without a strong moral foundation.
Oliver Williamson, Nobel Prize winner in Economics 2009, showed that a nation’s economic efficiency depends heavily on “transaction costs”—the energy expended on negotiation, monitoring, and contract enforcement. In a market full of suspicion, agreements become slow and expensive. All these costs are deadweight—resources wasted merely to protect oneself from opportunism with guile, cunning behaviour for self-interest. Within this framework, Islamic business ethics serves as an institutional mechanism that dampens opportunistic tendencies from within—far more efficient than external regulation.
Elinor Ostrom, Nobel Prize winner 2009, demonstrated that communities successfully managing shared resources—forests, water, fisheries—do so not because supervisors force them, but because norms are genuinely internalised. Without such norms, resources always end up in a tragedy of the commons: depleted by competing individual interests.
Francis Fukuyama (1995) concluded that a nation’s prosperity depends on the breadth of its society’s “radius of trust”. Trust is the economic lubricant enabling large-scale transactions to proceed without paralyzing verification bureaucracy.
Nevertheless, Knack and Keefer (1997) remind us that the quality of trust is crucial. Institutional trust open to all promotes growth far more than narrow trust risking clientelism and corruption. Therefore, Islamic principles encourage trust transcending community boundaries, not merely strengthening closed internal solidarity.
From this, one thing becomes clear: Islamic business ethics is not spiritual decoration at the margin of market competition. The five principles of mabadi’ khaira ummah constitute an institutional architecture—a system of values that, if truly internalised, will build a broad “radius of trust” and reduce transaction costs, making the market ecosystem far more efficient.
From Religious Norms to Systemic Solutions
The five principles of mabadi’ khaira ummah are not merely standalone moral values. Each responds to concrete market failures—and Islam formulated them before major world economists reached the same conclusions.
First, Ash-Shidqu: honesty as remedy for information asymmetry. George Akerlof (1970) explained through his revolutionary “market for lemons” model: one seller’s dishonesty in hiding product defects can trigger a chain of distrust that collapses an entire market. Buyers become hesitant, prices fall, quality sellers withdraw, and only poor products (lemons) remain until the market collapses. The cure is not merely more physical inspections. Within Islam’s framework, ash-shidqu is a theological imperative. Prophet Muhammad was called Al-Amin long before becoming the Messenger. A reputation for honesty is the strongest market signal that cannot be forged—a concept later formalised by Michael Spence (1973) in signal theory.
Second, Al-Amanah: trust as the foundation of unwritten contracts. Jean Tirole, Nobel Prize winner 2014, devoted his academic career to the principal-agent problem—the gap between owners of interests and agents who often act according to their own interests. Tirole relied on contract design but acknowledged that not all trust dimensions can be contractualised. Here al-amanah enters. When an executive internalises amanah as a theological imperative—that a position held is a trust, not a right—monitoring costs drop dramatically. Oversight originates principally from within, not from external auditors.
Third, At-Ta’awun: collaboration that expands markets. Adam Brandenburger and Barry Nalebuff in Co-opetition (1996) demonstrated through game theory that the most productive markets are not zero-sum arenas but positive-sum ecosystems—when competition and collaboration operate alongside each other. Islam formulated this through at-ta’awun centuries before modern game theory existed.
William Baumol et al. (1982) added that the most innovative markets are contestable markets. Large businesses genuinely practising at-ta’awun do not create artificial barriers for small enterprises—rather, they maintain market contestability that benefits the entire ecosystem.
Fourth, Al-’Adalah: justice transcending mere distribution. Amartya Sen, Nobel Prize winner 1998, reminds us that economic justice is not merely about income distribution.