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1. Introduction
Pareto efficiency, or Pareto optimality, is an important term in conventional economics, particularly when dealing with welfare programs. Pareto efficient allocation does not allow making even one person better off if it involves making any other person worse off. However, if an allocation is not optimum, it will be possible to make a person better off without making anyone else worse off. This is known as Pareto improvement. Pareto efficiency does not refer to equality or overall well-being of a society; it is defined strictly based on efficiency. A free market system is assumed to provide both allocative and productive efficiency in the long run. Therefore, it puts major restrictions on any intervention to the market.
The capitalist free market system uses Pareto efficiency based on its materialistic paradigm, which defines matter and energy as the ultimate reality. It rejects the spiritual realm of human beings and the universe. It considers human pleasure as the ultimate end. It relies on a secular and materialist paradigm. Although it respects spiritual and metaphysical domains of human experiences, it is still secular in terms of seeing this world as the only reality. On the other hand, perceiving both this world and the hereafter as reality, Islam offers a comprehensive paradigm that focuses attention on spiritual, moral, social and material needs in a balanced manner (Aydin, 2012b). Particularly, when it comes to a welfare policy, a major difference exists between capitalism and Islamic economics. Whereas capitalism promotes a secular individualistic society, Islamic economics aims for an altruistic society.
The paper will first outline the welfare axioms of Islamic economics compared to those of capitalism. Second, it will define Pareto efficiency within capitalist and Islamic economic systems. Third, it will compare and contrast the concept in the two systems based on their epistemological and anthropological worldviews. Fourth, it will show how - even under the efficient allocation of material goods - room for Pareto improvement still exists through the redistribution of resources. Finally, it will demonstrate optimum income transfer for social welfare maximization.
2. Welfare axioms in Islamic economics
2.1 Axiom I: the human self is multi-dimensional
Capitalist economic doctrine relies on the concept of self-interest assuming that we have a single-dimensional self or one self. Islamic...