Global
headlines continue to churn out news of economic meltdown. With the US debt
downgrade and the possibilities of defaults in the Euro zone by countries such
as Greece and Spain it appears the economic crisis of 2008 is still with us.
The issue of trying to increase economic growth continues to be the main
strategy in ending this crisis. Is growth the correct measure for economic
success?
What
is Growth and how is it Measured?
Growth
within a capitalist economy is calculated by measuring the amount that Gross
Domestic Product (GDP) has increased over the period of a year with checks done
every three months also known as every quarter. The following is a graph
showing growth over the last three years as a percentage:
fig
1: Growth over the last 3 years within the UK
Is
Growth a Good Measure for a Successful Economy?
GDP
is a measurement that does not capture many positive aspects of the economy. So
for example the creation of open source software such as the Linux operating
system, the creation of the java programming language, a friend that changes a
tyre on a car for free, house cleaning done for free, governmental
administrative tasks all create value within a society but are not part of GDP.
GDP
looks at the value added regardless of the cost to society so for example a
natural disaster can destroy towns as was seen with hurricane Katrina. The
building work associated with it however was considered a positive addition to
GDP. The riots that have happened within London have created much destruction
and devastation; the building work associated with this will be considered an
addition to GDP. Crime has an industry around it providing individuals with
locks, alarms, increased police presence all adds to GDP. The negative effect
of alcohol and cigarettes cause a huge burden on the health service and yet the
sale of the alcohol and cigarettes and the work created within hospitals as a
result of these products all add to GDP.
GDP
does not measure wealth distribution accurately. It takes into consideration
the total amount earned within society by individuals and companies.
Occupations with the highest earnings in 2010 in the UK were 'Health
professionals' (median pay of full-time employees of £1,067 a week); followed
by 'Corporate managers' (£757); and 'Science and technology professionals'
(£704). The lowest paid of all full-time employees were those in 'Sales
occupations', at £287 a week according to government national statistics
(Office of National Statistics, 2010). This disparity in wages highlights that
the standard of living of people varies significantly. Also the wealth creators
within society are top companies within the FTSE 100 (Financial Times Stock
Exchange). These include energy companies such as BHP Biliton (mining), Royal
Dutch Shell (oil), investment bank HSBC and telecoms provider Vodafone. These
top companies are but a few within the UK but add to GDP quite extensively
distorting the GDP figure of earnings across all companies.
The
Capitalist Economic Model
Interest
based debt is a major part of a capitalist economy. In order to make money, money
is required. So a property investor would borrow money from a bank in order to
facilitate purchasing a house and renovating it in order to sell it and make a
profit. As long as the value of the property is greater than the value of the
loan the property developer would be in profit after paying off the loan and so
the cycle continues. The buying and selling of property by taking loans would
mean that the price of the property would always have to be rising in order for
the property investor to be able to pay off their loan and make a profit. There
would come a time however when the value of a property is too much and cannot
be sold, a bubble is created. If too many properties cannot be sold then supply
is greater than demand and the property would come down in price until the
demand is greater than the supply. This is known as a property price crash,
which is what was seen recently in the crisis of 2008. This type of bubble is
associated with an economy based on interest based loans as short term profits
are required in order to control interest based debt. Short- term profit causes
issues with the environment also. The recent growth that has been highlighted
in Brazil has been a major factor in the deforestation of the Amazon.
Deforestation within Brazil can be attributed to land clearing for pastureland
by commercial and speculative interests, misguided government policies,
inappropriate World Bank projects, and commercial exploitation of forest
resources. All this is linked to short term profits to facilitate
interest-based loans and to make greedy men rich.
If
we look at such type of thinking at a national level, it can cause widespread
misery. A government needs money to run its institutions such as hospitals,
schooling, benefits, housing, roads, and infrastructure and so on. In order to
pay for all the expenditure, revenues need to be generated. One form of income
is taxation. However taxation does not always equal government expenditure and
so the government needs other forms of revenue. This second form of income is
in most cases borrowing money i.e. debt. These loans are known as a government
bond or GILT within the UK or T Bills within the USA and are auctioned by the
government. So the government borrows this money in the form of bonds and uses
it to pay off its expenditure. As long as its economy is growing more than the
repayments of this loan then they can keep borrowing and paying back the loan
with the proceeds from taxation. Without growth, these loans cannot be paid off
meaning that the government goes into arrears. This is known as the fiscal
deficit. If the economy of a government is not growing, then the deficit gets
bigger until the government defaults and therefore becomes un-credit worthy.
This is a problem because if a government defaults, getting loans becomes
difficult as the government is seen as risky to lend to. This means that the
government would have to pay a higher level of interest to create demand for
their debt. A good example of this is the USA, which has a fiscal debt of 14.46
trillion dollars and a growth rate currently of 1.9%. This debt is growing ever
more as it pays governments that hold its debt.
fig
2: Pie chart showing who America owes money to
The
USA wants to decrease this deficit by 4 trillion dollar. With a growth that is
near non-existent where will this money come from? The answer is taxation and
also from an increase in interest rates to reduce inflation and reduction in
public spending. But how can a government tax people who don't have money
because they don't have a job? And how can they increase interest rates when
this will stifle growth and potentially cause another recession?
Decreasing
public expenditure is done by reducing the amount of money given to the various
governmental departments such as a reduction to the NHS spending, a reduction
in council expenditure and so on. A good example of this is a reduction within
the UK of up to 50% on young people services. This reduction includes less
money for drug education, which has been a major factor to the reduction of
drug misuse. Without these type programs the youth will potentially go back to
the drugs which will affect the society that they live in whether it be them
stealing, mugging or prostituting to serve their drug addiction.
Growth
will need to be kick started also so interest rates will need to stay low to
encourage borrowing and therefore business growth and therefore economic
growth. Low interest rate however leads to inflation and inflation adds insult
to injury. So, inflation included with no jobs and a country decreasing
spending on public services leads to a life standard decrease.
All
this happens because of the interest based loans required to pay off public
expenditure. If the income of a country is not greater then interest based loan
repayments then a country is in trouble. As time progresses expenditure
increases meaning that the loans have to increase as well so growth will have
to increase to facilitate this. This means that growth needs to be constant.
But in a world where resources are finite growth is in fact unsustainable. This
means that interest based debt economies are bound to fail and cause issues to
the people that live in them. So is there an alternative to this?
Alternative
Economy
Islam's
economic system does not allow interest on loans and uses the gold and silver
standard as an exchange method for services and products. The removal of
interest from the economic system and taxation on savings encourages people to
keep money in the economy and invested in businesses. Investment within
business is done as a partnership where the partners share in profit and loss.
The non interest based money lent within a business partnership is positive
because
1.
The need for short term profits is not
required as there is not a big interest based loan to pay off leading to
sustainable growth.
2. The economic bubbles that have been
created as a result of short-term profits due to interest-based loans will be
averted. So the Islamic economic system will remove the economic bubble effect.
3. The partners both have an interest in
the business being successful so they will both try and make it work.
Taxation
within the Islamic economic system is done on wealth rather than income. This
means that individuals will have more disposable income. This disposable income
can be spent on luxuries which itself will encourage growth within the luxuries
industry.
Financial
instruments such as credit debt obligations (CDO), futures, options and the
stock exchange system are not permitted. This means that the Islamic economy
will not be affected by the dangerous explosive affects these financial
instruments.
This
is just an aspect of the Islamic economic system and its beauty. This can only
be implemented totally within an Islamic caliphate system. Only when this is
created will the true might of the Islamic economic system be shown.
Or,
See
this Link:
No comments:
Post a Comment