World Economic Crisis

 

Question:-

Is there a Muslim or Islamic view about the present world wide financial and economic crisis (Autumn 2008)?

Answer:-

Muslims as individuals may have various different views. But if one is to base one's views on the type of values that Islam promotes then I would suggest that the following would apply:-

There have been two rival economic systems in the world - the Capitalist (that depends on the profit motive, the enterprise of individuals and market forces) and the Socialist (that depends on collective social action and central control). The Socialist system, though it arose as a protest against the injustices and inner contradictions of Capitalism, proved to be inefficient and, oppressive, failed. The present world financial and economic crisis has demonstrated the failure of the Capitalist system. The measures being taken to deal with the situation are Socialist measures. The pendulum, it seems, swings between two extremes, neither of which can solve the basic problem.

It is not widely known that there is a third balancing alternative, an Economic system based on Islamic principles. It could be that because suffering caused in times of troubles leads people to seek alternative solutions, that this system will be more widely studied and applied.

The present crisis appears to be the result of a combination of several inter-dependent factors:- Climatic and Geophysical changes that have affected agriculture; the rise of the human population and its increasing demands as previously undeveloped countries industrialise; the depletion of resources and increase in pollution; the tendency to sacrifice the future for present gratification by borrowing; mechanisation that has made manufacture relatively easy and less labour intensive, but requires mass production, has flooded the market with unwanted goods while creating unemployment or low wages for the unskilled and loss of purchasing power for those goods; malfunctions of organisation and human failure to understand matters, grasp problems, apply appropriate motives and values and control and management affairs. The Banks, in order to make a profit, lend out money saved by others who must be paid an interest. People borrow because they are stimulated to purchase goods that they may not need by propaganda but do not have the money. But because interest is charged they have to pay back more than they borrowed. They may not have this money especially if prices have gone up because of increase in demand or decrease in supply. So a time comes when they cannot pay back and the Banks make a loss. Their ability to lend out money to Businesses that need investment suffers. Businesses are so constructed that instead of using their income from the sale of their products to maintain themselves they need to borrow. When they cannot, they fail. They also fail if their products fail to be purchased because the public or other business customers have no money. People are thrown out of employment and this further reduces the amount of money available to purchase goods, which closes industries. There is vicious spiral downwards.

A contradiction exists between Industry and Finance:- In Industry, if there is a relative scarcity of supply relative to demand then prices and profits are high and this encourages greater production. This reduces scarcity and prices. When there is relative abundance then prices and profits are low and this discourages production which increases scarcity. There is, therefore, a self-regulating tendency and a cyclic fluctuation to various degrees around a point of balance that itself changes. In the realm of financial speculation, the tendency is that if the profit of a particular industry is high this increases demand for it and encourages more investment. When profits are low, this encourages sales of shares which increases their supply and this leads to a further fall of prices. There are vicious circles and a tendency for an increasing separation between the economic reality and the financial illusion that inevitably leads to a crash of various severities. Bubbles are formed expand and then burst.

Four solutions have been proposed for the present economic crisis, the motive appears to be to restore the wealth and power of the controlling group:-

(1) One is for the Government to inject money into the economy so as to increase public purchasing power. This is to be done by measures such as reducing taxes, reducing the interest rate and increasing allowances. The increase in demand will then encourage business and its profits. But this money can only come by borrowing. And this means that it must be paid back latter with interest by increase of taxes. It is hoped that the expansion of the economy using these measures will make such taxes less burdensome, otherwise the problem is intensified. This is a gamble. Note the contradiction: If spending is encouraged to boost industry then less is saved to invest in Industry. If interest rates fall then the incentive to save also falls and those who rely on the interest on savings, such as pensioners, become poorer and have less to spend.

(2) Another solution is to inject government borrowed money into the Banks so that they can lend again to businesses and for mortgages in order to maintain house prices. But Banks may simply swallow up the money to compensate for losses and maintain the incomes and profits of the Directors, the very ones whose social irresponsibility and mismanagement caused the crisis. However, the government can invest the money in return for shares in the Bank or partially or wholly nationalise the Banks.

(3) A third solution is to inject money directly into businesses. Investment in businesses does create employment, and therefore, purchasing power. But again the money could simply compensate for losses and boost the income of shareholders. However, investment could also be done in return for shares and control. But as before, the money comes by borrowing and must be paid back with interest. The State would gain from the profits if it had shares. But it does not guarantee that the products are required or will be wanted. Pressure salesmanship will have to be used to create demand or else the business will collapse. If it succeeds then the pressure on resources increases causing environmental problems.

(4) A fourth solution is to recover the money and redistribute wealth by increase in the taxes on the rich while reducing it for the poor. But the objection to this is that the rich are powerful and control the resources and they may take their businesses and wealth out of the country. Another objection is that it reduces the incentives for enterprise and excellence. Another objection is that the number of the very rich is small and redistribution their wealth among the many will make little differences  to the many, whereas much more can be done with large quantities of wealth than with small quantities especially when technology is complex and costly.

However, incentives may require only small differences of wealth and there are many other sources of motives than money, some much better than others. The good ones need to be encouraged by the value and cultural system and bad ones need to be discouraged. It also well known that the value per unit of wealth decreases with the increase in quantity of wealth. There is an increase in value when wealth is equalised, though this equalisation must be offset by the ability to maximise the use of wealth. Wealth and resources are wasted by the very rich but also by the ignorant and stupid.  This contradiction between individual and social interests and between human organisation and environmental needs creates several social and psychological problems that have not been considered by politicians and economists. And these in turn produce economic and political problems. There is an inter-dependence and a vicious circle that needs to be studied and controlled. But all present Economic and Political systems have dismally failed to do so. If the Industrial system had been organised on the basis of partnerships, cooperation and social responsibility instead of discardable employees that have no control over their affairs, then instead of having say 30% unemployment one could simply have a 30% reduction in average working hours and people could adjust their working time according to their needs. Industries and Retail Businesses can get a steady income from selling products by regular small instalments over a period without requiring to charge interest.

It has been pointed out in past articles that from the Islamic point of view much of the Western Political and Economic activities would be regarded as prosecutable criminal conduct. The system is based mainly on the pursuit of personal self-centred advantages and psychological, social and environmental irresponsibility. It is based on Profit rather than Justice where recompense is proportional to real services rendered. But even within Western laws where corporate, industrial and political secrecy is allowed, numerous Financial Institutions in the USA and elsewhere have recently been found guilty of misconduct and some of their prominent directors or employees have been made scapegoats for their failures.

Islam, as is well known, is against (a) Usury and also against (b) Gambling. But Western Financial institutions are based on just these two factors. What is not widely known is that in Islam (c) Property is a trust to be responsibly used; (d) hoarding is forbidden, spending is encouraged in order that circulation of money is maintained; (e) the equitable distribution of wealth is encouraged through zakat, inheritance laws, investment and partnerships; (f) wastage of resources through frivolous usage, greed and destructive behaviour is forbidden. Islam requires awareness, the seeking and application of knowledge objective behaviour and psychological, social and environmental responsibility which require a special type of comprehensive education. Unfortunately these principles have not been applied even by Muslims. For Islam, money is a medium of exchange - an amount of sacrifice, in goods or work for an amount of satisfaction or benefits, so that an amount of money stands for remuneration for work done as well as for the purchasing power of the goods, services or facilities that work provides. But for Western Capitalism it is commodity that can also be bought and sold and manipulated.

There are people who make or loose huge fortunes not by creating anything useful but simply by buying and selling and gambling. And the risks involved are also bought and sold and distributed in a number of complex ways. Figures on paper can be moved from one column to another. It becomes possible to spend or lend out more money than one actually has based on expectations of returns of profit. Governments can borrow money creating huge National Debts or they can revalue or print it. This causes a distinction to arise between the Real Economy where Industries are set up to employ people, explore resources, manufacture and distribute goods to fulfil human needs and wants, and an Illusory Parasitical Financial System. This latter, which is irrational and erratic, is imposed upon the Real Economy and destabilises any balancing forces that would otherwise operate.

It has also been pointed out in the past that though Western Systems claim to be Democratic, the fact is that it is only a small group that holds all the power and wealth and prestige and that controls, in their own interests, the Finances, Industries, Politics and the Culture. They also control the actions, minds, values and conscience of the people who depend on them for employment. For this group nothing, neither the products nor the worker or the environment, has any value except as a source of increasing their wealth and power. One could say: For the green-grocer it is the price he can get for his apples not the nutritional value that is important. He could sell them by making them look more attractive or by describing them by inventing or exaggerating their virtues and suppressing their defects. The employers also pay the employees amounts that have no relationship to their needs.

That is people do not work according to their different needs or wants and while some remain have little work or suffer deprivation others work too long or have too much wealth which they waste. There is, therefore, a big difference between the Real Value of things and their Apparent or False Value. The discrepancy between these must necessarily create a crisis from time to time.

It is in the interest of the manufacturer who wishes to make a profit, to pay the workers less or employ fewer workers and to sell things to people whether or not they are useful for them. They have to be persuaded to buy them in various ways. This includes tempting advertisements, false descriptions, built-in obsolescence, appeal to greed, lust, envy, pride and rivalry, and lending them money to buy the goods. This increases the demand and therefore also the price they can charge. The Profits and Interests earned would accumulate in Banks without being used for purchasing the products, and this would cause the industries to close down and remove the profits. But, this extra money could, of course, be invested in the production of new or improved inventions, whether the enterprise was successful or not and the money would return as wages and purchasing power.

So to prevent the collapse of the economic system, there is a constant pressure for expansion. and for investment of the money in Innovation, Exploration and "Research and Development". But real resources are limited and become ever more expensive to extract as demand increases, not only because of the increase in population, but also because of the increase of demands per person. The weather and other Geophysical as well as Political conditions also change affecting the availability of resources. There is therefore a contradiction between the reality of the situation and the economic system. The third factor that mediates between these two, namely human Knowledge, motivation and abilities too, at any given time are limited, but can be expanded. But no adequate efforts might have been made to do so.

But the problem of the surplus money can also be solved by lending it to consumers to purchase goods. The Banks have to pay the Depositors interest for the money deposited with them. But in order to pay this they have to earn money. They do this by lending it out or investing. There is a pressure to do this. It is not a fault of the Bankers but of the whole system that people are persuaded to borrow. But this money also earns interest and makes the situation worse. People have to pay back more than they borrowed. If people cannot pay back the capital and the interest and the goods or houses they have purchased have to be repossessed then we have a crisis for both the Banks and the People. It would be possible for people to pay back more than they borrowed if their real incomes improved, for instance if investments were made that brought profits. But this often does not happen.

But though monetary incomes might improve the cost of living could go up by more than that owing to the pressure on resources. In fact, workers demand better pay to compensate for rising prices, but this adds to the cost of production causing the prices to rise still further. And if the monetary profit of the owners of the industry do not also rise, then industries would shut down resulting in loss of employment. So the real situation remains the same though the monetary incomes have changed. If they do not buy them then the industry would collapse and people would be thrown out of work. The employee is thrown out of work when no longer profitable to the employer. Yet he still has needs and the capability to do the work to satisfy those needs. The financial system has separated work from needs. They would then have no money to buy the things industry creates. They could not then bring profit to the owners.

So the interest of the citizens is linked with the interest of the Power Group and vice versa. But the relationship is very asymmetrical. In general, a problem is regarded as a crisis when it affects a certain percentage of the Power Group, but not if it affects many times greater number of the general public. For instance, ten percentage unemployment rate is seldom regarded as a crisis, nor is the fact that a large percentage of the population exists below the poverty line. The selfish motive also brings secrecy and competition and therefore, non-coordination. Competition can certainly lead to improvements but it can also be destructive. The lack of co-ordination leads to wastage, contradictions and unpredictable variations such as inflation or deflation which Governments try to control by changes in Interest Rates. But this contributes to inflation and loss of monetary value and savings.

When the Financial Crisis took place and the Banks began to get into trouble because of the miscalculation of a section of the power group, then the Government, also controlled by the Power Group, needed to mount a rescue operation. It was proposed that the Banks should be bailed out by the Tax payers. In other words, the general public was to pay for the incompetence of those who were making most of the profits. The idea that justified the Capitalist system, that those who took the greatest risk of losing are also entitled to the greatest profit for their success, was to be abandoned. The power group was to remain immune from its own mistakes and there is no incentive for competence at that level.

A section of the general public in the USA woke up and saw these implications and protested against the government proposal. They persuaded their representatives to throw it out even though the two candidates for the Presidential elections chosen by the two political parties, also controlled by the power group, supported the government measure. They wanted a different more equitable solution, which however was opposed on the grounds that it smelt of Socialism. Here we see the difference between people and their political institutions. However, the fact remained, that the Nation was in a Financial Crisis and something certainly needed to be done. The general public most certainly depends on the employment and investments provided by the Power Group. It is not, however, the case that there are no other alternatives. The fallacy lies in supposing that there is something sacrosanct about the Capitalist Economic Theory, that it is a Science about facts, rather than a method of organising resources to serve human needs, a bridge between fact and values. It is not a question of having either a free market or government regulation by law. Both are needed, but in balance, and that requires objective knowledge, values and abilities. In Britain and Europe there does not appear to have been such an awakening. This was probably due to the fact that the failing Banks were Nationalised, being taken into Public ownership. It was realised that better regulation of Financial Institutions was necessary. They had to be made more socially responsible. The British example was followed in Europe and later also in the USA, the home of militant Capitalism.

But even this is not likely to work unless it is recognised that the basic problems are those of Irresponsibility, Usury, Gambling, Secrecy, the distinction between owners and employees, Greed, Wastage and Mismanagement of resources, Pollution and Disruption of ecological balances. These are inter-dependent. Instead there is an attempt to restore the position and interest of the original power group and its wealth. In fact, incidents are created and intensive propaganda is made to increase the control of the power group globally and over all aspects of life. Many of the problems could have been better solved by replacing the employer/employee relationship with partnerships that allowed mutual consultation and responsibility. A more fundamental problem is that of values and goals - the aim of the economy should be human happiness and self-fulfilment and not just material wealth and power. However, there is a more fundamental problem, that of perception, motivation and ability and that is one of education in a wider and deeper sense that includes the social and cultural system. Unfortunately, it is difficult to establish such a system.

It is not merely the case that the Economy is based on institutional Greed, but we see that the system itself requires constant expansion and that creates and justifies Government Policy. But the Human Economy is not independent of the rest of the Planet and its resources are limited at any given time. The Economic system receives an input from the environment, transforms it and produces an output into the environment. This modifies the environment and affects the input as well as the transformation process and subsequent output. In so far as the amount of order or negentropy is limited at any one time, the increase in order must produce disorder elsewhere, construction must involve destruction But this does not only affect the environment, but also the whole society and the psychological condition of the people. Some nations can get richer but at the expense of others, but also at the expense of their own social and psychological welfare. The greater the material riches the less is their value per item and the greater do their disadvantages become. Much more effort and resources are needed just to maintain the system. It becomes largely a self-propagating entity with its own momentum, controlling human beings, not controlled by them.

It is gradually being realised that neither Capitalism, that depends on the irresponsible greed of individuals nor Socialism, that depends on oppressive central or bureaucratic power, have the answer to the economic problems of humanity and that economic problems are not independent of other Social, Psychological and Ecological problems. A synthesis of the two economic systems as the Dialectical Theory of History demands is, therefore, also inadequate. What is required is a Comprehensive Self-consistent Unitary System. This is where a third alternative, an Economic system based on Islamic Principles could enter if the resistance by prejudice could be gradually overcome.

The power group that runs most affairs and forms an international network is not always self-aware as a single entity and operates in secret, but it produces an image that is propagated through the media of communication. There is a type of Social Censor that separates the two worlds, the Real and the Apparent, created mostly subconsciously but also deliberately by propagandists, advertisers, pressure groups, spin doctors, publicity agents, public relations experts and so on. It corresponds to the Barrier in Psychology that separates the unconscious and the conscious mind - a barrier of suppression and invention, of fantasy, habit, prejudices and rationalisation. The social conditions reflect the psychological ones and vice versa. The barrier can only be removed through self-consciousness when the light is let into the darkness. But there are subconscious as well as deliberate tendencies to obstruct or prevent the expansion of such awareness by means of the suppression or distraction of attention into trivialities and illusions. It is probably impossible there can be any social enlightenment without psychological enlightenment or vice versa.

One of the reasons for the Financial crisis, apart from people being tempted to spend on credit, sacrificing the future welfare for present dubious pleasures, is undoubtedly the massive National debt, amounting to more an a trillion dollars that the USA had accumulated, much of it was the result of expensive secret campaigns wars the American Power group launched in its own interests ignoring those of others. The excuse was protection of American or even Western interest and security. In fact, of course, it was American secret subversions of foreign nations and these invasions and the death and destruction in foreign lands that provoked the retaliation and created the need for expensive security measures. It should be noted that President Bush of the USA thought that war was good for the economy because it provided a means of absorbing surplus money, and provided employment and profits for the Armament Industries and opportunities for US Businesses, Construction Industries and Security firms.

The Wars though profitable for the power group, would of course be paid for by the invaded nations or the general public in the USA, and by other nations who could be persuaded to join the delusion. It even managed to set up puppet regimes in some countries that would mount murderous military campaigns against its own citizens at the behest and in support of US ambitions. This can hardly make the regimes and the US masters popular, except, of course among a similar associated power group. Consequences eventually return to the perpetrators in one way or another.

One lesson that should be learnt is that Globalisation that creates a single uniform rigid and fully interdependent system throughout the world is a dangerous thing, mainly because of human limitations and partial knowledge. Evolution requires diversity and selection of that which is best adapted to Reality. It is not only the science of Biology that tells us this, but it is a truth that Muslims could have easily gleaned from the Quran. But this uniform system arises from the domination of a particular group. It is the consequent major disaster that destroys the grip of that system and that group, allowing new experiments to arise. On the other hand global stagnation and degeneration could follow if that group regained domination. Human Beings, however, have been given intelligence as well as Guidance through Revelations, which is ignored at peril.

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