Islam and Economic Crises
It is estimated that in the global financial crash of 2008 the losses incurred in the real-estate mortgage market in the US alone stood at 300 billion dollars. This crisis led to the nationalisation of banks – a violation of the basic principles of the free market.
The crisis, following a period of unprecedented economic growth, has left the world feeling insecure. The value of currency is questioned; never mind the value of the stock market. The all-important foundation of the capitalistic economy – the free market – has been demolished.
At the same time, the bursting of this bubble (after an unparalleled boom) has exploded the myth that in global capitalism wealth would ever trickle down and make poverty history.
There are four key issues which have led to the inevitable demise of free market capitalism:
First: The abandonment of the gold currency standard. Initially, the dollar was made a parallel standard under the Bretton Woods treaty after World War II, but then finally replaced gold altogether in the early 1970s. This resulted in making the global economy susceptible to any economic unrest in the United States, since most other world currencies were linked to the dollar instead of gold, and the value of the dollar bill itself became little more than the paper on it was printed.
Second: The Interest based finance system. It results in great economic difficulties. Though the original amount loaned gradually decreases over time with respect to the interest against it, individuals and states still remain unable to repay the loans fully in many instances. This results in loan repayment crises, thereby slowing economic activity and production as well.
Third: The stock market system. The financial markets, the buying and selling of shares, financial instruments and commodities do not require the actual possession of goods. Rather they are bought and sold many times over without actually being transferred from the original seller. This practice spurs market unrest, and so profits and losses accrue through various speculative means -repeatedly and often unexpectedly - resulting in economic crises.
Fourth: A complete misunderstanding by Communists and Capitalists about ownership . The former believe that all ownership is vested in the state and the latter believe it should be held by the private sector, with no state intervention. A failure to have a balanced clear view of this has led to many economic tremors and crises.
Islam views the economy in a unique way. It views the main economic problem as one of distribution, not wealth production. How do you share and circulate wealth in the most effective way? What are the sources of revenue and must be done with wealth that is generated? Means of production are not restricted, but rather the most efficient and advanced means can be adopted. Economic policy in Islam is aimed principally at guaranteeing all the basic needs of all of its citizens.
But on the above four matters, which arguably produce the recurrent economic crises, Islam has a distinct view.
Firstly, Islam believes in a gold currency standard. This means currency has real meaning – i.e. it is the means of exchange of products and services and not a product in itself. Paper currency, that can be used purely as an article of exchange must be fully redeemable by its value in gold by the treasury.
Secondly, Islam prohibits lending on interest. Banks, therefore, have a role to secure people’s savings, and facilitate economic activity through interest free loans without trying to make indecent profits for themselves, and in so doing destabilising the world’s financial system.
Thirdly, the markets in Islam have certain fixed rules of regulation – including clearly defined company structures, trading with real products and services, no price fixing. Within this Shariah regulatory framework trading is open and welcomed.
Fourthly, Islam solves the ownership problem in a way that does not cause the ideological dilemmas of the 20th Century over privatisation and nationalisation, and which doesn’t allow the instability caused by the IMF when it intervenes in poor and developing countries. Islam defines 3 types of ownership .
- Public ownership . This comprises solid, liquid and gaseous minerals including petrol, iron, copper, gold, natural gases etc. found in the depths of earth, all forms of energies and the energy-intensive heavy industrial plants. These public properties are managed by the state and distributed to people as services.
- State ownership . The various taxes and revenues collected by the state, and accrued to the state from agricultural, trade and industrial activity outside the ambit of public properties. The state disposes these incomes as state expenses, for its functions and towards its financial responsibilities to its citizens.
- Private ownership . This, unlike the above two, is held by individuals and disposed of in accordance with the Shariah rules.
If these ownerships are categorised as one and are held either by the state or the private-sector, crises and failures are inevitable. This previously led to the collapse of the communist economic model, as they had vested all ownership in the state. In the communist economic system, the sectors that must naturally be owned by the state were a success story - like the petrol and heavy industry etc. Whereas sectors that should naturally have been held in private ownership like most agriculture, trade and small-to-medium industry were a disaster.
Similarly the capitalist economy is failing because it vested ownership of public utilities and properties like petrol, gases, energy sources, heavy and even strategic arms industry to individuals, enterprises and companies - while the state remained shut out of markets without owning the very things that it was responsible for.
The Islamic economic model cures and prevents the occurrence of such economic crises and prohibits such factors that lead to economic crises in the first place.
In this manner Islamic economic system has addressed and treated all economic problems and crises resulting from man’s heartlessness and thoughtlessness. This is the system mandated by the Creator of the universe who knows what is beneficial for His creation.