President
Harry Truman of the US, in his inaugural speech in 1949 encapsulated
development: "Greater production is the key to prosperity and peace.
And the key to greater production is a wider and more vigorous application of
modern scientific and technical knowledge." He reiterated a concept
that had at the time formed the very basis of national economies for over 200
years.
Classical
economists during the industrial revolution witnessed the structure of European
society completely change from agrarian, self sufficient closed economies to
those which no longer produced for domestic consumption but for trade.
Classical economists such as Adam Smith and David Ricardo concluded that most
of what was produced was being sold rather than consumed. They concluded that
urbanisation would increase society's need for different products and they
envisaged eventually this would outstrip the world's raw materials that could
produce them. The problem of scarcity was coined i.e. due to urbanisation the
needs and wants of society are unlimited and would always grow. However the
natural, raw and mineral resources in the world would eventually deplete.
Ever
since the industrial revolution economic growth has been the key measure of
prosperity in all economies. Every year nations around the world prepare
national accounts from which the growth of their economies is measured and
compared to the rest of the world. Organisations such as the IMF and World Bank
produce annual reports and development indicators looking at the effects of
economic growth which is the increase in the production of goods and services
from the previous year.
Economic
growth has ever since its historical origins become synonymous with success.
This is because if the economy produces more than the previous year many
different aspects in an economy are also stimulated. Companies are producing
more hence they will need to employ more thus creating jobs in the economy. The
profit motive that companies pursue will force them to develop technologies
that will produce goods at a fraction of the cost. Entrepreneurs will enter the
market place due to the potential opportunities. Disposable incomes will
increase as companies produce more to make more profits, hence wages and
salaries will also rise. National incomes will raise giving citizens the
ability to purchase more thus further stimulating the wider economy.
Today
the world economy churns out $54 trillion annually. The world economy has seen
spectacular growth since the industrial revolution, many liberals contend the
number of people in the world who live in comfort and no longer reside in
abject poverty has all been a result of the free markets drive to continually
grow.
Disaster
Capitalism
Capitalist
notions of economic growth have dominated the global economic scene, however
the free market has been unable to deliver sustainable and stable economic
growth and this continues to be its biggest failure. Economic growth has been
achieved with the regular recession, crash, slump and depression. Whilst
Capitalist nations have achieved phenomenal economic growth their economies
continue to self destruct at regular intervals.
Capitalism
may have driven wealth creation like never before; however there are a number
of developments that it should also be certified with. The world economy maybe
generating record wealth with liberal democracies driving this, but half of the
world's population will not have had enough food today as they earn less then
$2 a day - 80% of the world lives on less than $10 a day.[1]
World poverty has in fact accelerated under Capitalism.
Capitalism's
next success has been creating histories greatest ever wealth fault line.
Whilst the majority of the world barely survives on a few dollars, the US has
most of the world's billionaires, in what is mankind's greatest lopsided world
economy. In 2006 the World Institute for Development Economics Research of the
United Nations released the culmination of a global study; a number of its
findings are staggering. By gathering research from countries all over the
world the study concluded that the richest 1% of the worlds own 40% of the
planet's wealth and that only 10% of the world's population owned 85% of the
world's assets.[2]
Richard Robbins in his award winning book ‘Global Problems and the Culture of
Capitalism' confirmed this when he said "The emergence of Capitalism
represents a culture that is in many ways is the most successful that has ever
been deployed in terms of accommodating large numbers of individuals in
relative and absolute comfort and luxury. It has not been as successful,
however, in integrating all in equal measure, and its failure here remains one
of its major problems."
Capitalism
has also created the most indebted world in history, where individuals and
nations have more debt than income. The fact that the world generated $54
trillion is irrelevant when most of this has been funded by debt. The western
world has become obsessed by consuming more then it really needs and most of
this is funded by debt as most of the wealth generated is in the hands of a
few. The USA, the world's superpower, the world's largest economy and for many
a symbol of Capitalism's success is drowning in a sea of debt, which the credit
crunch crisis has brought to the forefront.
The
US generated nearly $14 trillion in 2007, however the national debt - this is
money the central and federal governments owe to the US public and the world
through the bonds they have sold - stands at $9.7 trillion. The US citizenry
have a huge appetite for imports and real estate; as a result consumer debt
stands at $11.4 trillion. The debts of US companies amounts to $18.4 trillion.
This makes the US indebted to the tune of just under $40 trillion - nearly 75%
of what the world produces. 37 million Americans live below the poverty line.
Capitalism's continued endeavour of perpetual economic growth has drowned the
world in money it does not have which makes the prosperity liberals insist on
reminding us, rather irrelevant.
Perpetual
Economic Growth = Mission Impossible
Whilst
it is undeniable that Capitalism has pumped out more wealth than any period in
history, in this apparent success lays its failure. The need for perpetual
economic growth is what causes the regular crash. Capitalist notions of
economic growth require the national economy to continually grow, this in turn
needs consumers to continually spend and the availability of debt allows this
on a massive scale. Once consumers have spent beyond their means a cut in
spending is inevitable - in which case a boom is followed by the inevitable
crash.
The
UK's current economic crisis is a classic example of this. The UK witnessed a
boom for nearly a decade that was driven entirely by financial services and the
real estate boom. Britain like most western economies was driven by a handful
of sectors which was used to stimulate the remainder of the economy. Once the
real estate bubble ran out of steam, the UK's engine packed up and unless
another engine can replace the broken economy the UK economy will seize to
move. The bubble was aided in its expansion due to the ability to print money
at will, the want for consumers to spend beyond their means and the availability
of debt all contribute towards expanding the bubble. In fact one aspect of the
Capitalist economy that will always make all economic growth unsustainable is
the fact that money can be printed at will and will always exceed what is
produced by the economy.
Islam
Produces Sustainable Economic Growth
Free
market economies will always have booms and busts as the need to achieve
permanent economic growth is unsustainable. Any variation of the free market
will have the same outcome. Islamic economics on the other hand has a
different view on the economy and has at its core some fundamental concepts
that create a stable and sustainable economy. This allows for a much stable
economy with sustainable growth and not miracle growth which eventually runs
out steam.
Economic
growth stems from the endeavour of society to produce for consumption, this
endeavour naturally pushes for better technology to produce ‘more'. The
breakthroughs in splitting atoms, cloning cells, manipulating and miniaturising
items or the development of material that absorb light, are all developments
that Islam is not at odds with. Islam permits the adoption of science and
technology as they are universal disciplines that make little difference whether
one is a Muslim or a Christian, these are developments that require the
understanding of the environment and reality. Such facts are the same whether
in China or the US because they are not influenced by any belief. Hence Islam
can adopt developments from other civilisations that are scientific in nature,
Islam would adopt them fully and add to the body of research and develop the
field further. Islamic economics in no way is a step backwards and will adopt
all the 20th and 21st century technological and
scientific developments. The key distinguishing feature between all economic
systems is how wealth, resources and goods are circulated around the economy.
Sustainable
economic growth is achieved in an Islamic economy through a number of ways:
1. The Islamic economy is built upon
the real economy with agriculture and manufacturing the key sectors in the
economy that generate wealth. Islam does not recognise the interest-based
financial markets in their current form as seen in the west. The Islamic
economy creates wealth through the manufacturing of real goods and the value
added at each stage of production. This in no way means Islam is against a
service sector, in an Islamic economy the emphasis is upon the real economy.
2. By removing the role dubious
financial asset markets in an economy, their remains the real economy where
trade, investment, salaries and wealth is generated and circulated. This
creates the much needed stability absent in free market economies as
speculation has been effectively removed. The $500 trillion derivatives market
allows speculation upon events in the real economy on a huge scale, the ability
to make money in such a manner means it ceases to be in the real economy
creating a duel economy. The Islamic economy in effect only has the real
economy, hence all participants engage in the same sphere.
3. The Islamic prohibition of interest
frees up idle wealth. Allah (swt) said:
"That is because they say:
Trade is just like riba, whereas Allah permitted trade and forbade riba." [Al-Baqarah: 275]
The existence of interest causes wealth to remain in banks
in order to accrue interest rather than remain circulating in the economy. In
free market economies all banks use most of their customer deposits to
speculate on the financial markets which is a double whammy as money again is not
circulating in the real economy. The removal of interest removes the incentive
to deposit excess wealth in banks for long periods. The only way to increase
wealth is through investing it across the economy in projects or entering into
business. In this way an Islamic economy will grow and it will be real growth
built upon wealth which is invested in the economy rather than debt, unhindered
wealth circulation is what primarily will lead to economic growth in the
Islamic economy.
4. The removal of direct and indirect
forms of taxation leads to economic growth. The level of taxation in any nation
will affect people's behaviour, including their choices with regards to working
patterns, saving and investing. Taxation in the west has created a number of
problems in wealth distribution where the burden falls heavily upon the poor
with the rich utilising tax loopholes and tax havens. In most developed
countries, individuals pay income taxes when they earn money, consumption taxes
when they spend it, property taxes when they own a home or land, and in some
cases estate taxes when they die. Consumption taxes symbolise the west, such
taxes are levied on sales of goods or services. The most important kinds of
consumption taxes are general sales taxes, excise taxes, value-added taxes, and
tariffs.
Those who pay taxes based on such a framework generally lose
50%-60% of their salary to taxation, on top of this if one was to spend they
would be liable to a general sales tax. Such a taxation regime actually affects
spending patterns and forces people to not invest across the economy but
actually save their earned wealth. The Islamic economy removes such forms
of taxation and as a result citizens will have much more wealth to invest and
spend. In comparison Allah (swt) ordained Zakat, a wealth ‘tax':
"Give the Zakat" [Al-Muzzammil: 20]
Zakat is liable on citizens at the end of the Islamic tax
year. Hence the removal of direct and indirect taxation and the implementation
of a wealth based taxation system aids wealth circulation.
5. The Islamic ruling on a
multi-metallic currency creates a stable economy allowing long term decisions
to be made. In Islam when it comes to exchanging a commodity with a specific
monetary unit, Islam has guided us to the monetary unit by which the exchange
is to take place. It has restricted the state to a specific type of money,
which is primarily 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. Having
a gold and silver backed currency will bring the much needed stability to the
economy by containing inflation. Currently the world is plagued by the spectre
of inflation as governments across the world continue to print money at will.
Islam solved this problem by pegging the currency to metal; this essentially
restricts the state as any increase in money supply requires more gold and
silver. As a result the state will need to very carefully plan increases in
money supply as it will need more metal each time plus it will have to monitor
the production level in the country to ensure it doesn't create scenario where
there is more money than the amount of goods circulating in the economy. In
this way Inflation will be rare in an Islamic economy, this allows for stable
purchasing power which causes certainty in the economy.
Conclusion
The
Islamic economy fundamentally creates growth through unrestricted wealth
circulation. Allah (swt) even mandated the central government to intervene in
the economy in cases of misdistribution of wealth in the economy:
"In case it (wealth) circulates
solely among the wealthy from amongst you." [Al-Hashr: 7]
Islam
also mandated the central government to create the necessary environment where
the basic needs of society can be fulfilled. At the same time Islam has made it
obligatory initially upon the family to cater for each other in cases where
ones basic needs cannot be fulfilled. The state will intervene if an individual
cannot fulfil their basic needs and has no dependents to fall upon.
Islam
allowed society to increase its wealth and is in no way prescriptive in the
methods this can be achieved with. However Islam regulated and has not set society
completely free in accumulating wealth, as this inevitably leads to corruption
and the creation of the poor. The Islamic economy has restricted through a
number of quranic verses and ordered citizens in an Islamic economy to live
within their means, at the same time Allah (swt) despised extravagance. Allah (swt)
through many verses praised those who seek and work with their own skills and
wealth, Allah (swt) praised those who benefit from their accumulated wealth,
all this shows that Islam has promoted making money and enjoying life's
pleasures. Islam at the same time has the necessary tools to achieve
sustainable economic growth and a distributive wealth system where all can live
in relative comfort and ease.
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