There are Alternatives to Free Market Capitalism!
13-10-08
The collapse of the Soviet Union in 1990 was heralded as a landmark event in
history; it was considered the wholesale rejection of a way of life and end of
Communism. The post – WW2 world was dominated by the competition between the
Capitalist free market led by the US and state intervention led by the Soviet
Union. Francis Fukuyama considered one of the most important living public
intellectuals considered the development of ideas to have ended in his ‘end of
history’ thesis as there was no meaningful debate left between Marxism and the
market.
The Global credit crunch more then a year on shows no sign of slowing down and
has now reached boiling point due to the number of banks that continue to
collapse. Comparisons continue to be made with the great depression of the
1930’s, as many of the conditions present in the current crisis were also
present on the eve of the great depression.
Prior to the collapse of many of Wall streets titans in September 2008 various
thinkers and free market ideologues continued to argue just as their free market
ancestors did in the 1930’s and against mounting evidence to the contrary, that
time and nature would restore prosperity if governments refrained from
manipulating the economy. Western governments have been forced to throw their
Capitalist free market blueprint out of the window and intervene in the economy
like never before. Over $5 trillion in total market capitalisation has been
wiped out since October 2007, with over a trillion of this accounted for by the
unravelling of Wall Street’s financial titans.
This crisis is much more then a financial crisis, this has now been accepted by
free market ideologues that played down the prospects of a recession and
labelled those who did as doomsayers,
talking themselves into a recession. Such thinkers are now
in hiding with very few economists prepared to remind the world of Capitalisms
principled argument, as the
Economist reminded us all: “excess and calamity are part of the
package of Western finance. And still it is worth it.” With consumer
deposits, savings and jobs all at stake this crisis has well and truly brought
into question the suitability of the free market and as one
geopolitical expert put it: “as the details of the
present crisis reveal, there are huge ideological fault lines making for chaos
and a potential meltdown of the Laissez Faire financial system.”
There are three reasons why the credit crunch crisis occurred:
1. The financial industry created complex financial contracts like derivatives
that would securitize and make money from all forms of risk, this included
exotic instruments such as credit default swaps and subprime loans. Banks
continued to sell debt to customers with little ability to repay them, August
2007 was the point when such debt reached bursting point.
2. The speculative frenzy that gripped both the American market as well as
Europe in the purchase of real estate which continued to send real estate prices
to astronomical levels.
3. Greed played a direct role in the crisis as it led to predatory lending to
people that had little means to make repayments. It also led to credit ratings
agencies to rate investments less risky than they really were.
The events of September 2008 have for most brought to the forefront the
potential demise of Capitalism as we know it and a discussion on potential
alternatives. Like all previous crises any debate on
alternatives is usually reduced to one of Socialist government
intervention or to tinkering with regulation and transparency rules, there a
number of reasons why the global credit crunch crisis represents a much deeper
crisis at the heart of capitalism which was outlined by world renowned
speculator
George Soro’s: ‘what we are going through is the crisis
of the gigantic circulatory system of a global capitalist system that is…coming
apart at the seams.’
1. The periodic crash and crises as well as the boom and bust phenomena
capitalism continues to historically descend into whether it is in Dutch tulips,
the South sea bubble, the technology bubble as well as the dot.com crash and now
the sub-prime crisis are fundamentally down to the aims Capitalism attempts to
achieve with the economy. Perpetual economic growth (increasing GDP) will always
lead to the development of a bubble in the economy as some section of the
economy will always be needed to stimulate the remainder of the economy to
ensure the economy keeps growing. The current crisis has at its heart the bubble
in the housing market, the recession of 2001 across the Western world was due to
the bursting of the dot.com bubble. The cyclical recession free market
ideologues continue justify is something which proves the failure of Capitalism
to maintain stability and is in no way due to seasonal trends.
2. The greed shown by speculators is not something isolated that has occurred
for the first time in Capitalist history, it is something that forms the
cornerstone of Capitalist belief and thought. The founding fathers of Capitalism
concluded that if all consumers in society followed and acted upon their
self-interests and greed then the right goods would get to the right people in a
free market, it would lead to innovation as society competed to make items
better and cheaper. Economists since then have continued to argue that greed
goes hand in hand with the free market as it is necessary for consumers to
pursue their greed for wealth to distribute around the economy. This has led to
the current situation where hedge fund managers and company CEO’s have earned
bonuses in the millions to the detriment of wider society. Greed is from the
Capitalists belief; legislation and regulation in no way can curtail actions
built upon values which are the foundations of the Capitalist belief.
3. The market has been sold to the world as the best method for sellers and
buyers to conduct transactions and the most efficient way to distribute wealth
around an economy. For years both the IMF and World Bank forced open economies
in effect using the stick to ensure government intervention was completely
removed from the economy. Academic textbooks in schools and colleges argued free
markets mean competition will do away with companies that make any product
inefficiently and it was the best way for all to partake in the wealth
generation process as any individual with an innovation can meet any demand in
the economy. The free market apparently got the right goods to the right people.
In reality however the market works much differently, with little regulation
sub-prime mortgages were created as well as derivatives. Short selling is a
direct result of the free markets removal of regulation which resulted in
speculative betting on the collapse of companies. The free market in the US
which was for long America’s symbol of success has in affect brought the nation
to its knees, this was
outlined by John Gray former London Schools of Economics
political philosopher: ‘the American free-market creed has self-destructed
while countries that retained overall control of markets have been vindicated.
In a change as far-reaching in its implications as the fall of the Soviet Union,
an entire model of government and the economy has collapsed.’
The Alternative: Islam
The current financial crisis has seriously eroded confidence the Western world
had in the suitability of the free market. However the Western world when
looking at alternatives only see remnants of Socialism or some state
intervention in economy as feasible and workable systems. It is also this reason
that allowes free market ideologues to continue citing more regulation,
transparency i.e. more capitalism with some tinkering as solutions. This crisis
represents an opportunity for all Muslims to present the Islamic alternative. It
is important to show Islamic economics as much more then Islamic finance and
Banking. This is exactly what Adnan Ahmed Yousif, CEO of the Bahraini-based
Albaraka Banking Group and chair of the Union of Arab Banks
outlined in an interview with the Middle East’s Asharq Al-Awsat
when asked about the global financial crisis: ‘The success of Islamic
banking will lead to serious consideration of Islamic economics, which continues
to realize numerous achievements, as a viable alternative to the current global
economic system which continues to be hit by these crises.’ With this in
mind the following points should be borne in mind and when presenting Islam:-
1. The Islamic economy follows a philosophy which is very different to
Capitalism, as a result the end objectives both economies attempt to achieve,
widely differ and thus it would be invalid to measure one against the other as
they both have different foundations and aims. Islam has detailed laws on the
distribution of wealth and this is its ultimate aim with the economy – to ensure
wealth circulates around the economy so all can share in the wealth that is
generated.
2. Because all economic systems aim to address the same issues, there are many
peripheral similarities between Islam and the free market. At a doctrinal level
however Islam and Capitalism are two distinct systems. The Islamic economic
system is fundamentally about people and their needs, this is the fundamental
principal the Islamic economy is built around. In a narration from prophet
Muhammad (peace be upon him) it was said that "The son of Adam has no better
right than that he would have a house wherein he may live and a piece of cloth
whereby he may hide his nakedness and a piece of bread and some water" (Tirmidhi).
The Islamic economy is geared towards fulfilling the basic needs of its citizens
and these in origin were defined as food, clothing and accommodation. This forms
the basis of the Economic system of Islam, all policies and rules are geared
towards achieving such ends. Islam focuses on the needs of the people which the
hadith outlined and not merely increasing Gross Domestic Product (GDP).
3. Islam does not view the human as an economic unit and then look to find the
most economically viable solution thus viewing all problems, whether from
marriage to pensions to drugs to education, from the angle of the economic
effect and cost. Neither does Islam view the human the way the Communists did
which is that people are simply matter, just one aspect of nature, nothing more.
Islam views the human as being composed of organic needs as well as instincts,
all of which requires answers on how to satisfy them. So Islam organised these
instincts and needs in a way that ensures the satisfaction of them all, such as
the need to eat and the need to reproduce and others. However, this organisation
is not arranged in Islam by satisfying some of them at the expense of the
others, nor by suppressing some of them, setting others loose, or setting all of
them loose. Instead, Islam has co-ordinated the satisfaction of all of them in a
way to ensure comfort, preventing conflicts and a lapse to a primitive level
through the anarchism of instincts.
4. Through its own
economic system, Islam laid down rules for the means to
acquire wealth and commodities, how they can be utilised and their manner of
disposal. It certainly did not make freedom of ownership the basis of the
economic system or even the socialist principal of ‘from each according to his
ability, to each according to his needs’. It did not define the basic problem as
‘unlimited wants, limited resources’. Islam views the resources to be ample
enough to completely satisfy the basic needs of all. Therefore, amongst a host
of other detailed rules, one will find the Shari'ah aims to secure the
satisfaction of all basic needs (food, clothing and housing) completely for
every citizen of the Khilafah State.
5. In order to facilitate the acquisition of goods and services Islam put
forward rules related to the manner of possessing wealth without any
complications. Islam defined the legal means of ownership, and it defined the
contracts through which possession can take place. This left humanity free to
develop the styles and means by which they earn, as Islam did not interfere in
the production of wealth.
6. The Islamic economic system has extensive rules for ownership and disposal of
citizen’s wealth and assets. Beyond this Islam recognises a sphere of the
economy as the economic science i.e. through study and research a solution can
be derived. Hence how to develop and economy or to
industrialise, where the factories and the supply lines
should be, how the steel and iron mills should be constructed fall under this
category, however what is produced and how it is distributed falls under the
‘system’ for which Islam has extensive rules.
7. The Islamic economy is based upon wealth generation where participants
partake in investment, employment and trade in the real economy. Islam does not
have a
dual economy where the real economy operates alongside a
financial sector. The Islamic economy focuses all participants on the real
economy, through employment, company profits, utilisation of land (agriculture)
and manufacturing, wealth is generated in only one sector. This brings the huge
benefit of wealth only circulating in one sector – the real economy, where all
can participate. Derivatives would be withdrawn as this type of contract is not
trade in real goods; rather it is betting on the price movements of a commodity
and one must posses what they sell in Islam.
8. The Islamic system does not recognise the financial markets in their current
form. One is able to purchase shares and transfer them without actually
partaking in the running of the underlying company that the shares are meant to
represent. In Islam ownership is a direct role in a company and not just a share
certificate which in effect the stock market allows to be traded and re-traded.
It is this ability to not have a direct role in a company that allows excessive
speculation.
9. The Islamic economic system
does not recognise the financial markets in their current
form and has made the Western style Public Limited company (joint stock (share))
companies haraam for a number of reasons. Fundamentally this type of contract
contradicts the Islamic rules for contracts. The company in the West represents
a particular type of contract - the ‘Solitary Will,’ this is where an individual
agrees to the written constitution of a company by purchasing its shares with no
formal offer from anyone. This has come to be termed as the Individual Will
whereby shares could be exchanged very quickly without the need for two people
to continuously sit down and have a formal offer and acceptance. An example of
this is the take-over bid of the world’s richest football club, Manchester
United FC by Malcolm Glazier in 2005. He imposed his will on the company (i.e.
he brought shares) and even though other shareholders were against such an
action it was a legal form of acquiring ownership even though there was only one
person in the contract. Most contracts involve two parties where one party
offers terms and the other accepts, however under corporate law in the West
setting up a business is a contract of ‘solitary will.’ It is not a contract
between two or more people; rather it is an agreement that stipulates that all
parties agree to it when they subscribe for shares in the company. So an
individual joins himself to the conditions of a company – through purchasing
their shares. This means to become a partner one does not need approval from the
existing owners – this contradicts Islam.
10. Islam’s monetary policy is centred around a legal tender based upon the Gold
and Silver standard and not one based upon interest rates to regulate inflation
and the economy. In Islam when it comes to exchanging a commodity with a
specific monetary unit, Islam has guided Muslims to the monetary unit by which
the exchange is to take place. It has restricted the Khilafah to a specific type
of money, which is gold and silver. The Islamic evidences have designated gold
and silver as the primary measuring unit for prices and labour. This is
understood from the actions of Muhammad (saw) when he collected Zakat, levied
taxes and imposed fines, all were measured according to
gold and silver. This means the notes and coins circulating in the
economy would all be backed by gold and silver. This will no longer make
possible the free printing of currency as the Khilafah would need to increase
the actual holdings of gold and silver. This has a unique effect on Inflation
which free market economies have been unable to contain.
11. Islam contains inflation by changing the role of banks. Currently banks
practice fractional reserve banking whereby they create credit, borrow money
from the financial markets and lend to depositors. This creates a big problem in
the economy as very little equity can be used as collateral to borrow large sums
of money which creates a bubble waiting to burst. Islam strips the ability of
banks to create money and transfers this to the central treasury - bait ul mal.
Money creation will be the sole role of the state.
12. The role of banks in Islam will be to collect the nation’s deposits and to
also act as a central pool whereby money can be collected and invested in the
economy, with the returns being distributed amongst investors. The banks would
only be able to invest what they have in deposits and cannot create money as
this is the role of the central treasury – bait ul mal. As interest (Riba) is
haraam the main function of banks will become the pooling of wealth which can
then be invested across the economy aiding wealth distribution and economic
growth.
13. The Islamic economy is stripped of ‘interest’ as this is something Islam has
categorically forbidden in the Qur’an. Holding wealth in a bank account will no
longer accrue interest and any unused wealth for a year is liable for taxation.
In this way such wealth is only productive if invested or spent, and this can
only take place in the real economy. The removal of interest in the economy will
act as a multiplier affect circulating wealth around the economy.
14. Islam does not have a concept of income tax; value added tax, excise duties,
nor national insurance contributions. Rather Islam puts the emphasis of
taxation on wealth rather than income. Take the average
salary in the UK of £24,000. At current tax rates the tax burden alongside
National Insurance contributions falls at 33%. This alongside indirect taxation
(that is taxation on spending rather than income) as well as council tax, road
tax and so forth mean that the real tax burden falls at closer to the 40-50%
mark. This means that the average person in UK is losing between £10,000-12,000.
So at higher wage levels, the monetary amounts lost towards taxation is much
greater.
15. In Islam, although simplified, the wealth tax falls at 2.5%. This means that
within one year, on average one can save at least £10,000. Therefore two or
three people could easily enter into a business contract such as Mudharabah (An
Islamic company where one provides the Capital and the second partner works with
it) to supply some of the demand in the economy for consumer or manufactured
goods thereby creating more employment in the economy. With no concept of
interest rates and hoarding forbidden in Islam wealth will circulate quickly
ensuring the public can purchase what they specifically need, creating
employment and giving all more and more disposable income.
16. Islam considers
poverty as one matter for humans in any country and in any
generation. Poverty in the view of Islam is the non-satisfaction of the basic
needs in a complete way. Islam defined these basic needs as three things, which
are food, clothing and accommodation. This is seen from the following evidences
"The duty of feeding and clothing nursing of mothers in a seemly manner
is upon the father of the child." (Al-Baqarah: 233) and "Lodge
them where you dwell, according to your wealth." (At-Talaq: 6).
Specifically Islam made the financial support (Nafaqah) compulsory from the
revenues of the Bait ul-Mal and from Zakah. From a Macroeconomic perspective the
removal of interest, the financial markets and direct taxation allows wealth to
freely circulate around the economy so all citizens can partake in the wealth
generation process.
17. Islam has ordained the state to play a direct role in the economy and does
not leave things completely to the market. Islam lays out three types of
property; state, public and private. It designated any utility regarded as
indispensable for the community, such that its absence would require people to
search far and wide for it, as public property. It would then be publicly owned
and the revenue generates would be administered for the benefit of all citizens.
This is derived from the hadith of the Prophet (SAW) “Muslims are partners in
three things: in water, pastures and fire”. Although the hadith mentioned just
three things we can utilise qiyas (analogy) and extend the evidence to cover all
instances of indispensable community utilities. Thus water sources, forests of
firewood, pastures for livestock and the like are all public utilities as well
as the mosques, state schools, hospitals, oil fields, electricity plants,
motorways, rivers, seas, lakes, public canals, gulfs, straits, dams etc. Islam
would allow ownership if it were not indispensable for the community. This
solution will have a unique effect, as it will ensure all will receive the basic
requirements to live and not be at the will of monopolies or high prices.
Conclusions
The rejected $700-billion and all subsequent buyout of banks’ bad
mortgaged-backed securities is not a strategy but mainly a desperate effort to
shore up confidence in the system, to prevent the erosion of trust in the banks
and other financial institutions and preventing a massive bank run such as the
one that triggered the Great Depression of 1929. Having created the conditions
that produced history's biggest bubble, America's political leaders appear
unable to grasp the magnitude of the dangers they are facing. As the rejection
of the original bailout package showed they are mired in their rancorous
squabbling among themselves.
What has been very clear from the contradictory moves of allowing Lehman
Brothers to collapse while taking over AIG, and engineering Bank of America’s
takeover of Merrill Lynch — there’s no strategy to deal with the crisis, just
tactical responses.
Islam offers the Western world its last salvation from descending into complete
chaos as the Western world’s deposits continue to shrink through further
collapses and the last remaining strategy the Western world has left – the
printing of more money.
By Adnan Khan
Submitted by a Mujahid