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There are Alternatives to Free Market Capitalism!

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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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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 the Prophet Muhammad صلى الله عليه وآله وسلم 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).

 

  1. 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.

  2. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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 صلى الله عليه وآله وسلم 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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. 

 

  1. 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.  

 

  1. 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:

 

وَعلَى الْمَوْلُودِ لَهُ رِزْقُهُنَّ وَكِسْوَتُهُنَّ بِالْمَعْرُوفِ

 "The duty of feeding and clothing nursing of mothers in a seemly manner is upon the father of the child." [Al-Baqarah: 233]

 

أَسْكِنُوهُنَّ مِنْ حَيْثُ سَكَنتُم مِّن وُجْدِكُمْ وَلَا تُضَارُّوهُنَّ لِتُضَيِّقُوا عَلَيْهِنَّ

 "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.

 

  1. 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 صلى الله عليه وآله وسلم: "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.

 

Conclusion

 

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. 

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Ikhtikar said:

I think that there is a lot of ignorance perpetuated by this article. The jahili idea that some kings or central authorities can run people's lives better than themselves and their own belief in god is disappointing to see coming from a supposedly scholarly source. The author refers to a grand solution of simply nationalizing every song service that is essential but fails to realize that it is totally subjective. Groceries are essential should we nationalize Walmart? Clothes are essential. Oh let's just take over malls and have the government run them. This is foolishness. Anyone who has looked at history realizes that this kind of invasive, inefficient micromanagement of the economy and people's lives dictated by a central government leads to ruin and oppression. I for one am not looking for government hospitals and a redo of the USSR. In a Muslim country especially we should trust our bothers to at the very least run a store equitably within the boundaries of the law instead of having a government takeover. There are many other oversimplifications in this article and a seeming misunderstanding of free markets. Inshallah Allah will guide us to knowledge and truth Salam.
 
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December 11, 2012
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Adam said:

Assalaamalaykum wmwb.

Oct 2012 and we are still here. With QE3(unlimited) just recently announced more devaluing of dollar and gold price adjusted increase. All playing to the predicted tune of collapse. Question is are we Muslims ready to deliver the alternative?

A bbc2 programme aired today called Masters of Money which looked at the current economic crisis and failure of capitalism against Karl Marixist predictions. And yet the programme concluded there is no real alternative.

Yet we have the alternative hidden in our books. Why isn't the west considering Islamic Finance as a real alternative?

A failure on our part? I intend to revive this post. It may take some time until the west is desperate for the alternative but we need to be ready to feed it to them soon inshAllah.
 
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October 02, 2012
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hasibullah said:

inshaallah after the building of khelfeh world will see the efficiency of islamic economics system
inshallah
 
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January 05, 2012
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Aiko said:

what about indices as GDP, GNP, inflation rate and so on... are there any criteries or economic indices to show the efficency of the economy in the country (in economic system of islam)?
 
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December 29, 2011
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Al habib said:

I think the world has already tried keeping gold and silver as teh monetory unit. Incase u havent realized teh world economy is bigger than all the gold and silver you can dig up. Islamic economic system is too vague, and is little different from free market capitalism. Stop trying to make it different.
 
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October 24, 2008
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Zeital said:

"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance". |John Adams

"The money power preys on the nation in times of peace, and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selsh than bureaucracy. It denounces, as public enemies, all who question its methods or throw light upon its crimes". Abraham Lincoln

"Anyone who believes exponential growth can go on forever in a nite world is either a madman or an economist".
Kenneth Boulding, economist

"Whoever controls the volume of money in any country is the absolute master of all industry and commerce".
James Gareld

"Money is a new form of slavery, and distinguishable from the old simply by the fact that it is impersonal|that there is no human relation between master and slave". Leon N. Tolstoy
 
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October 14, 2008
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guYasir said:

"I believe that banking institutions are more dangerous to our liberties than standing armies." ---Thomas Jefferson
The west capitalism aka cabalism financial system is like a rotten roof just kicked it off the whole structure gonna collapsed.
It has been rotten by usury and commercial interest which has been forbidden in every divine scriptures not only in Koran but Bible and Torah as well.
In my view if we eradicate these usury and commercial interest from capitalism then its gonna come on Divine track and if we follow Theo-democracy instead of democracy then we can call ourselves muslims or mankind on divine mission. Currently mankind is on devil-mission whose aim is not less than to complete destruction of mankind by creating war and economic chaos.
The "War on Terror" is part of the banking cabal's plan to consolidate its grip on humanity in a friendly (or not so friendly) fascist "New World Order." They want to secure their political, economic and social grip on the obstreperous Muslim world, as well as build up a security apparatus in case the docile populations of the West become restive.

Well, at least the cosmic battle between Good and Evil is out in the open at last!
 
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October 13, 2008
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yusuf said:

Salama alaikum, BarakaAllahufeek for the article.

I just have one comment, to the point you made about Banks in Khilafah. i don't believe there is any place or need for banks in Khilafah.

Money can't be collected and invested in society without the consent of the two or more participants in the investment. So if one should have anything in Khilafah it would be safe deposits, but again in a society where crime is not a faktor as in the corrupt western society this need would not exist, and if it does the state would handle such a task.

So banks would not exist in khilafah, but rather you would have individuals making partnerships and loans without interest. And You would have Bait al mal (state treasury) collecting taxes and other revenues which it would distribute in a fitting manner to achieve investment, and full employment in society, without neglecting all the other duties of the state.

SO I can't see the need for banks in any size or fashion in Khilafah.

Wa Allahu-alam.
 
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October 11, 2008
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Adnan said:

Wealth circulation refers to the ability of wealth to continually change hands and the ability of the system to aid this.

This is best understood by viewing every person and all companies’ incomes originating from another person or company. Taxes levied by the state are regarded as income for the state and an expense to individuals. The monies spent on projects by government and salaries paid would be income for the individuals and an expense to the state. The money spent by employees on goods is an expense to them and income to companies. Hence one persons expense is someone elses income. Hoarding money or leaving it in a bank account would in fact take it out of circulation. This would lead to a fall in spending, which would reduce production and result in the complete halting of the economy.

This is why Islamic economics has a huge number of rules for wealth circulation
 
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October 10, 2008
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Abu Jibreel said:

salam aleikum

Could you please explain what you mean, when you say the wealth should "circulate around the economy"?
 
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October 10, 2008
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Ibne Rizwan Al-Makhzoomi said:

JazakAllah khair ... written so well that it defines the evils of capitalism in detail and gives the right solution to all the problems ...

Ma Assalam
 
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October 09, 2008
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Ali said:

The Good News is that this crisis has resulted in the collapse of the right-wing free-market Thatcherite or Reaganite economic theories. Only the utterly deluded still cling to them as they have become discredited.

The bad news however is that Capitalism has not collapsed. Moves towards greater regulation and nationalisation is not moves towards Socialism or some radical alternative. Rather they are pragmatic attempts to 'patch' the current basic system. Even the Left seems unable to provide any coherence. Despite the severe shaking of the Capitalism system it seems that its very fundamental principles are still believed in due to lack of a perceived credible alternative.

This pragmatic, patch work solution will probably continue until the practical demonstration of the Islamic Economic system through the implementation of the Khilafah System. This will finally completely discredit Capitalism and allow humanity to truly progress.
 
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October 08, 2008
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Kaisar Wahed said:

nice article..:)
but i think there should be some mroe explanation..:)
 
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October 08, 2008
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Tareque said:

MashAllah nice
 
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October 08, 2008
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