Macro Consumption Function in an Islamic Framework

Consumer behaviour, i.e., how the consumers allocate their income between different heads and how they decide how much to consume now and how much to save for future is a key topic in modern economic theory. The study of consumer behaviour bears implications for macro economic policies. Many modern economic theories conclude that savings are essential for economic growth. The more people save in a country, the more rapidly it will grow. With this background, modern economists conclude that the level of savings in an Islamic economy will be lower if people have to pay zakah on their savings. While presenting this argument, these modern economists consider zakah as a tax on savings that switches allocation of resources from savings (i.e., future consumption) to present consumption. Also, if we take part of the savings of the rich and give it to the poor, who will obviously consume it all, aggregate savings level in the economy, ceteris paribus, will naturally decline. The conclusion, therefore, follows that Islamization of an economy as it will result in lesser savings will adversely affect its growth