In standard discussions (capitalistic economy), business firms and the income distribution property of production factors are dealt with in a manner in which they are independent from each other. and there is no interaction as such between them. Furthermore, no role whatsoever is assumed for externalities. If we accept that there is interaction between production factors, and these 1actors, because of the existence of externalities affects each other, it is only natural to come to the conclusion that both the definition of business firm and the share of production factors should he changed. The proposal developed in this paper is based on this very important consideration.
The profits of Mudareb (in Mudarabah contract) has been used in this paper to cover more general issues, such as labors income share in an Islamic system. The Mudareb’s relative share might he justified on the grounds that he has the appropriate expertise, profession, so to speak. This justification can be extended to he applied to labor” in general, he it in industry, services, and other economic activities. It seems that, it is not only the degree of expertise and skill which determine the labor’s share. hut also the interaction with other expertises which makes one qualified to share part of the profit This interaction provides better results than the same of individual skills.
The application of the proposal not only Increases output and hence the total revenue of a firm, but also help. keep the production cost at Its lowest possible level. Furthermore, It leads one to look at a firm as an interacting body of different
Increase In efficiency together with low production costs are to the mutual benefits of both the workers and the firm. Furthermore, there would not only be zero monitoring cost, but also elimination of shirking while increasing the effort of the workers to the maximum level.