The Prophet as an Economist

In today’s world, where economies are measured by GDP, stock indexes, and consumer sentiment, it’s easy to forget that economic systems are, at their core, human systems. They are shaped by values, choices, and structures of justice or injustice. Most modern economic models claim objectivity, yet they often serve the interests of the powerful. They swing between extremes. Some worship free markets, others cry out for regulation, and many remain trapped in the cycle of inequality.

Now imagine a leader, not from Wall Street or an Ivy League think tank but from 7th-century Arabia. He reformed the economic system of his society not by imposing ideology, but by embedding ethics into commerce, taxation, and wealth distribution. That leader was Prophet Muhammad ﷺ. By any historical or analytical standard, Prophet Muhammad ﷺ was one of the most transformative figures in human civilization.

While he is most commonly recognized for his spiritual and theological contributions, very less attention has been paid to his work as an economic reformer. An objective analysis of his policies and decisions as a state leader in Medina reveals a sophisticated economic framework. His principles reshaped a fragmented and unjust society into a community grounded in fairness, productivity, distributive equity, market efficiency and social responsibility.

The Pre-Islamic Economic Landscape:

Understanding Prophet’s economic philosophy necessitates a grasp of the prevailing conditions of 6th and 7th-century Arabia. The economy was predominantly tribal, unregulated, and heavily reliant on trade and informal finance. Wealth was concentrated among merchant elites in Mecca, with minimal institutional support for the economically vulnerable. Practices such as riba, ihtikar, and exploitative debt arrangements were widespread. This contributed to systemic inequality and social stratification. There were no concepts of economic justice and welfare. In short, it was an unregulated and morally hollow capitalistic society.

Prophet’s economic reforms did not emerge in a vacuum. They were calibrated responses to these structural injustices. He himself having worked as a merchant, understood both the promise and the perils of the market. He didn’t reject economic activity rather he elevated it. He did so by realigning it with principles that protected the weak and ensured dignity for all.

Eliminating Exploitation

One of the Prophet’s most consequential economic reforms was the categorical prohibition of riba. Riba, in its broader sense, is defined as any gain that is unjust, excessive, and exploitative. It is capital, used to generate guaranteed returns without any productive risk.

From an economic perspective, riba creates moral hazard. It rewards wealth simply for existing, rather than for being put to work. It favors creditors and entrenches inequality. The Prophet’s ban on riba wasn’t just theological but structural. It compelled a shift from debt-based finance to risk-sharing models such as mudarabah (profit-sharing partnerships) and musharakah (joint equity ventures), where investors have skin in the game. This move anticipated many principles of Islamic finance, which now functions as a global industry with assets exceeding $2 trillion.

“God has permitted trade and prohibited riba.” — Qur’an 2:275

The distinction between trade and riba is crucial. Trade involves risk, effort, and real value creation while riba doesn’t.

Institutionalizing Zakat

While riba targeted unjust accumulation, zakat institutionalizes circulation of wealth. This mandatory alms tax—calculated as 2.5% of idle assets above a certain threshold—is designed to prevent wealth hoarding and ensure that the poor had access to basic necessities.

But zakat isn›t charity in the modern sense. It’s a financial obligation with clearly defined recipients: the poor (fuqara’), the destitute (masakin), those in debt, and others enumerated in Surah Tawbah, verse 60. It’s a redistributive tax, akin to a progressive wealth levy, administered not out of pity but justice.

The zakat system has historically helped circulate wealth back into the economy, increased aggregate demand, and reduced social tensions—an outcome it continues to produce. It ensures that prosperity is not a zero-sum game but a shared benefit.

Market Ethics:

Another important aspect of the Prophet’s economic policy was regulation of the market. It was not through central planning, but through moral and practical constraints.

Upon arriving in Medina, one of his first acts was to establish a free and fair public market. He abolished taxes and tolls that merchants had to pay and declared the new market a public good. It was made open to all and free of manipulation.

He also personally forbade ihtikar and price gouging. In one instance, when prices rose and people demanded he set them by decree, the Prophet refused, saying:

“The market is in the hands of God. I do not want to meet Him having wronged anyone in wealth or blood.” (Sunan Abu Dawood)

His economic model wasn’t about control. It was about transparency, fairness, and discouraging monopoly power. In today’s terms, he favored competitive markets with ethical guardrails.

Dignity of Labor:

The Prophet didn’t build the economic model on finance alone. He placed immense value on labor and production. He personally worked as a merchant and consistently praised those who earned an honest living through their own hands.

“No one eats better food than that which he earns with the work of his hands.” (Sahih al-Bukhari).

He encouraged people not to rely on begging or passive dependency, even saying that carrying firewood on one’s back was better than asking others for money. This teaching remains relevant today, especially in light of economic systems that often devalue manual or low-wage work. In modern economic terms, this promotes productivity, reduces dependency ratios, and upholds the dignity of labor.

But it wasn’t just about encouraging work. It was about protecting the worker, too.

“Give the worker his wages before his sweat dries.” (Sunan Ibn Majah).

This hadith is remarkable in both its human insight and policy relevance. It insists on timely payment—an ethical principle that is relevant today in labor laws and employer regulations. By urging employers to avoid wage delays, the Prophet established early safeguards against exploitation and financial insecurity among laborers.

He also warned against overburdening workers and demanded fair treatment. His guidance anticipated many of today’s labor protections: equitable pay, humane conditions, and respect for labor.

Fiscal Policy and Public Finance

Under Prophet’s leadership, Medina witnessed the emergence of Bayt al-Mal to manage state revenues like zakat, kharaj etc. Funds were used for public welfare, infrastructure and debt relief. The formal institutionalization of Bayt al-Mal took place primarily during the caliphate of Umar ibn al-Khattab (RA).

He maintained strict integrity over public funds. He lived with frugality and never enriched himself from state resources. He once returned dates given in charity because they were of lower quality, insisting that the poor deserved no less than what the donor himself would eat. This fiscal discipline, rooted in amanah, is often absent in modern public finance, where corruption and misuse of state wealth erodes trust in governance.

Sustainability and Resource Justice

Even in natural resource management, he was ahead of his time. He prohibited overuse of communal goods like water and pasture and designated certain areas as protected zones where animals could graze without competition or degradation.

“The people are partners in three things: grass, water, and fire.” (Abu Dawood)

This early recognition of common-pool resources and the need for collective stewardship has become a central issue in environmental economics today.

A Model of Ethical Economy

What emerges from the Prophet’s approach is not a rigid economic doctrine, but a holistic model of political economy grounded in equity, risk-sharing and community welfare. He aligned economic behavior with moral accountability, social justice, and long-term sustainability. These are the dimensions that contemporary models often struggle to integrate.

He was not an economist in the academic sense. But he offered something perdurable: a vision of an economy where ethics, fairness, and public welfare are essential.

At a time when inequality widens, financial systems falter, and sustainability feels out of reach, his economic philosophy invites us to rethink what prosperity really means and who it should serve. In a world hungry for balance, His legacy is not a relic of the past. It’s a framework for the future.

Malik Daniyal is a final year UG student of economics at Delhi University.