The Capitalist Theory:
Capitalism claims,“The only way of [establishing an] economic system is by giving every single individual in society total freedom to earn a living, so that they might exert their efforts to acquire as much profit and wealth as possible. When we do this those four problems will naturally solve themselves, and an economic system will automatically come into form.”
To elaborate, in accordance with what the capitalist’s have determined, there are two natural forces upon which an economic system is founded: supply and demand. Supply is the merchant carrying his product to the market to be sold, and demand is the purchaser coming to the market to buy it. One of the well known economic rules is that whenever supply outstrips demand the price drops and whenever supply falls short of demand the price raises.
Now, if there are a thousand clothes of one kind in the market, for example, and you can only find seven hundred buyers, then of course the price of the cloth will lower because the supply is enormous and the demand is scarce. However, if the consumers are more than a thousand the price of the cloth will naturally raise due to the demand being more than the supply.
Thus, whenever a human being is given complete freedom to earn a living only that which is most in demand will be supplied to the market so that they will achieve the maximum [amount of] profit, because if they supply the market with such goods, the need and demand for which is scarce, it will not be possible for them to sell it at a high price and consequently their profit will dwindle. This is why every person is compelled to produce things that society needs and to refrain [from providing] that which they have no need of. [All of this] is due to the natural force of supply and demand.

The capitalists claim that these two forces regulate all economic activities, and solve the issue of preference and resource exploitation. So, when an issue of preference arises, for example, a man who has complete freedom to acquire as much profit as possible will only give preference to producing those things that are in high demand and the need for which is excessive. When it comes to the issue of resource exploitation this individual will only exploit his resources to produce that which has the greatest profit, [which is dictated by overwhelming demand, which in turn is dictated by the needs of society].

If, for instance, more shoes than demanded are manufactured its price will drop, and may even drop below the cost of production. When such a state is reached some of the manufacturers will halt production due to which supply will dwindle and the price will begin to rise. If a large number of manufacturers suspend production the price may raise to such an exorbitant level that it compels some manufacturers outside of this industry to enter into a second field. This type of experience will continue until a period of balance is achieved where the supply of shoes in the market is only to the extent of demand, which is what is desired.
[With respect] to the issue of the distribution of wealth, the twin forces of supply and demand also regulate this distribution, according to the capitalists. That is, only elements of production such as: land, money, labor, and investment deserve wealth, because land can be leased, money can acquire interest, labor deserves wages, and a profitable investment merits financial gain.
The rate of leasing, interest, wages, and profit are only fixed by the forces of supply and demand. If the demand for land is more than its supply the rent will increase, but when the demand lessens the rent will [also] decrease. Likewise if the demand for money is more than its supply the amount of interest will raise, and when things are the other way around the amount will drop. Analogous conclusions are drawn from this for labor as well, thus if the demand for labor, by which we mean the demand for wages, is more than the number or employees present wages will increase, and if it decreases the wages will drop.
This is how the forces of supply and demand regulate the distribution of wealth.
In the case of economic prosperity, it is solved in this way that when every human being is free to achieve as much profit and wealth as possible, they will make all out effort to invent new items and tools so that the desire for [these things] will increase and its price will raise. [In this manner] the objective of economic prosperity will be achieved.
This is the basic philosophy of capitalism. If you wish to summarize the principles of this philosophy it will become clear that it is founded on the following basis:
1- Freedom to own property: That is, individuals own all commercial articles and commodities whether they be that of production or consumption free of any obligation or coercion.

2- Economic freedom: Thus people establish their own laws and benefit from their wealth without state interference. The market, then, is the factor which regulates and rules. Competition between the forces of production and its components on one side and consumers trying to acquire commodities which they want on the other is, apparently, the distinguishing factor of free economics, which at the present time is responsible for structuring the market and fulfilling the needs of human society.

3- Freedom [to earn] profit: In capitalism, profit is the just reward of the employer and entrepreneur in the face of their efforts and planning, hence it is impossible to restrict this freedom by the government. Due to this, capitalism deems the system of cost and the twin forces of supply and demand to be like sovereign agents who direct the economic activities automatically, there being, therefore, no need for government intrusion.
The Theory of Socialism:
Socialism has taken the opposite stance, claiming, “It is unbefitting to entrust the economic structure to the forces of supply and demand which possess no intellect nor discernment. They are blind forces, through which we will only achieve a period of balance after economic crises and abundant harm. These two forces do not have in their hands an electronic button which will stop production or begin it anew when it is pressed. Indeed, changing the manner of production is such an activity that will take a long time, during which resources will be wasted in things that are not needed.
Therefore, if we want to arrange the economy in a manner consistent with society, we must not allow any single individual to be in control of the means of production. these should only be in the hands of the state which will use economic planning to establish the needs of society and the extent to which those needs exist, then it will regulate the means of production to stop up those [areas] of need.”
All activities of production will, then, be in accordance with this plan. The state will be the one to decide preference. It, [alone], will regulate resources and fix the wages of workers, because when all the resources are controlled by the government the only [thing] that remains with the people is their effort.
[Thus] they are given wages commensurate with their efforts, and there is no need for profit, interest, and leasing. Wealth is distributed among the people in the form of wages. Profit, interest, and leasing are unlawful according to the philosophy of socialism since the price of a commodity, in their eyes, is solely that of labor. As for the excess which sellers and employers in capitalist markets seek beyond the value of labor in the form of profit, interest, or leases, they term this ‘surplus value’ and it is utter oppression according to them.

Criticism of Socialism from the Standpoint of Islām:
At the outset of its cogitation socialism has erred. Social issues like these are not solved by the planning of governments, and entrusting them to government plans is outside the realm of human nature. The choice of an individual in any field of economics is something which is attached to his natural affinity and connection, which, if we placed it under the sway of governments, would become artificial and foreign to his natural disposition and character.

[This is similar to how] we see in every country large numbers of young men and women between whom marriage occurs in accordance with their natural suitability and the connection some have with others. At times we see that this automatic arrangement of marriages causes disputes between [these youth]. However, no sane person would imagine that [the means of] blocking these disputes would be planning by the government, so that the government specifies that so-and-so young man should only marry so-and-so young women, [and vice-versa]. If the government did that it would be alien to the natural disposition of humanity. This system only operates on the basis of appropriateness and affection [in which] there is no room for the government nor outside planning.
The organization of economics, essentially, should be conducted in a similar manner, and shouldn’t be subordinate to outside planning because that would be the cause of a great deal of corruption:
Firstly: That would necessitate that all means of production should be in the hands of [a] government which is not made up of angels, nor [even] infallible humans. It is merely a small group of people who have the same sympathies, desires, and goals which are found in other humans. Thus, if this small group wanted to use those abundant resources to pursue its own desires and stopped considering what was best for the people massive corruption would appear in the land.
Secondly: This [type of] planning, no matter how minute and innovative its procedures and methods, will never be able to ensure [that] the actual needs of human society [are met]. [Those] needs change day by day, and planning will only occur once or twice a year, therefore, how will this planning guarantee the fulfillment of those needs which pop up during the remainder of the year? Knowledge of these fluctuating needs and acting in accordance with them will also require a large [quantum of] time, thus the very objection socialism has with capitalism rebounds [on itself].
Thirdly: This type of regulated planning cannot, and will not be able to, progress without the most extreme governmental coercion since it may entail an individual imposing unpleasantness on the individual, and forcing him [or her] to perform a service which they are not suited to. Due to this, a battle between the interests of the individual and that of the plan will arise.

The Criticism of Capitalism:
Even though it is correct in its fundamental principle, its has erred in its application of that principle. This foundational principle is that the economic system does not exist by means of planning, rather it is only due to the natural forces of supply and demand. This is something innate which we do not reject, however the application of this principle by giving the individual absolute freedom to acquire as much profit or wealth as they can without conditions or restrictions, while [simultaneously] ignoring the fact that this freedom is ultimately [under the] limitations of supply and demand, has led to the perversion of the natural order which they affirm as their basic principle.

To elaborate, if every individual is completely free to acquire as much profit and wealth as they can, [it will be] permissible for them [to engage in] interest, gambling, monopolizing [commodities], speculation, and every methodology leading to the most profit. Thus, it will be possible for the rich to control the market and the prices [therein]. Consequently, there will be no price except the one these wealthy individuals consent to, nor any wage for the workers, save the one they fix, because they will be the monarchs and arbitrators of the market on the basis of their riches and will render the forces of supply and demand a semi-paralyzed [mess].
These two forces only operate in a free market where the merchants compete with utter freedom, the consumer having a choice between purchasing these goods or those. When a single individual or corporation dominates the market the consumer can [not avoid him/her/it], and [they] will arbitrarily [fix] prices in such a manner that will cause the forces of supply and demand to be superfluous.
That will only occur due to absolute freedom, the flag of which, capitalism proudly raises. In this sort of free [environment] a person may earn tremendous [amounts] of wealth by whatever [means] they wish, whether it be interest, gambling, monopolizing, or speculation, and on the basis of these massive riches they will acquire enormous factories and workshops through which [they] will seize the market.
[Furthermore] they will not allow any of the smaller merchants to reach [their level], and if anyone else does they will make a business agreement with them so that the businessmen of a particular product will only have one voice. [That being the case] no [power] will remain for the buyer and consumer to use demand as a tool to [influence] prices. So where is the free market in the capitalist system? Where is supply and demand? In the capitalist theory, these have become mere words consigned to the pages with no practical effects being seen or heard.
Hence, it is clear that capitalism has actually applied its foundational principle in such a manner that annihilates this very principle, and makes supply and demand so paralyzed and weak that it only has a small sphere of influence. This causes the following problems:
Firstly: A modicum of humans will become the sovereigns in the circulating wealth. This small quantity of people will not remain restricted to their [own] locality, they will move to become a worldwide force whose stocks will flow from foreign banks and international corporations. By means of these corporations and the monetary power which they possess, this minority will interfere in the administration of the state, just as they have assumed authority over the various media resources and supported their financial tyranny by affecting intellectual trends and promoting the interests of capitalism.
Secondly: Individual freedom in this system has become a right of the employers alone, and the poor can do nothing but humbly submit to the laws of these employers.
Thirdly: Production in this system is not directed towards the greater good of society, but rather it is solely directed towards that which will acquire massive profit. Therefore, if great profit existed in building theaters and ballrooms preference in the utilization of resources would be given to that, irrespective of whether some indispensable needs were neglected [as a result].