Islam and Economic Growth

By 16 December 2010 Opini Mahasiswa No Comments

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 rise 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 then $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 world 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, 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 weather 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 سبحانه وتعالى said:

ذَلِكَ بِأَنَّهُمْ قَالُواْ إِنَّمَا الْبَيْعُ مِثْلُ الرِّبَا وَأَحَلَّ اللّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا

“That is because they say: Trade is just like riba, whereas Allah permitted trade and forbade riba.” [Al-Baqarah, 2:275]

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 lead 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 سبحانه وتعالى ordained Zakat, a wealth ‘tax’:

وَآتُوا الزَّكَاةَ

“Give the Zakat” [Al-Muzzammil, 73:20]

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 create 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 صلى الله عليه وسلم 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 سبحانه وتعالى even mandated the central government to intervene in the economy in cases of misdistribution of wealth in the economy:

كَيْ لَا يَكُونَ دُولَةً بَيْنَ الْأَغْنِيَاء مِنكُمْ

“In case it (wealth) circulates solely among the wealthy from amongst you.” [Al-Hashr, 59:7]

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 سبحانه وتعالى despised extravagance. Allah سبحانه وتعالى through many verses praised those who seek and work with their own skills and wealth, Allah سبحانه وتعالى 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.(Adnan Khan)

[1]  World Bank Development indicators 2008

[2]  www.iariw.org/papers/2006/davies.pdf

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