Understanding the just economy

Toufic Machnouk exposes the reality behind our current age of “unprecedented progress” and explores the principles and justice upon which an economy in Islam would be based.

By the time you will have read through this article, approximately 210 children, under the age of five, would have died from starvation and easily curable diseases such as diarrhoea, the usual symptoms of extreme poverty. This is the consequence of the worst form of violence human kind has known; structural violence.

The illusion of progress

Professor George Kent of Political Science at the University of Hawaii explains that “Structural violence is harm imposed by some people on others indirectly, through the social system, as they pursue their own preferences. Its effects are clear in the massive mortality of children.”

Violence caused by the socio-economic and political system has a perpetual effect so widespread that it dwarfs th effects of the worst armed conflicts in human history. For example, the total fatality in WWII was a colossal 50 million people; or 8.3 million people per annum when averaged over the 6 years of the conflict. Yet, in this ‘day and age’ of unprecedented technological advancement, over 11 million children under the age of five perish every year as a result of extreme poverty.

The marginalisation of the majority of the world’s people brings the poor to rich ratio from 3 to 1 in 1820, to 72 to 1 in 1992. Half of the world now clings on to the edge of material existence on a mere $2.5 a day, when the wealthiest 3 individuals are worth more than the GDP’s of the ‘poorest’ 48 nations. This is an unprecedented social condition in an age that presents itself as the height of human progress.

Is this an acceptable consequence of economic development? Or are these the effects of a man made global order that has bought about an untold scale of suffering to most of us in an effort to serve a few, devouring the earth in its way?

Owning the world

This marginalisation is brought about by a separation between most people and productive capital. Productive capital, or means of production, is anything with a capacity to produce goods and services. This includes our intellect, finance, land, natural resources, tools and labour.

This separation is recorded in the 16th century as the enclosure movement, which formed a social reconstruct in which people lost the means to their subsistence. A social reconstruct is a change in the social structure, where for example the ownership of land becomes confined to a few people.

In the feudal systems before, the peasant population lived directly off the land and the Lords would use their wealth to force the peasants to pay a portion of their produce. But due to peasant rebellion, the Lords responded by expelling the peasants from the land, a dispossession that forced them to sell their labour in order to survive. This is when they had no other means to survive except by working in return for a wage. In this process they sold their labour to provide for their needs.

The incentive for the Lords, now the outright owners of productive capital, changed. Before they were concerned with the peasants paying them a greater portion of their produce, and they enforced this through mercenaries. However, now the incentive was to increase production and efficiency, and to develop new technological methods that would enable this, bringing about the onset of the industrial revolution.

Five centuries later, and this state of marginalisation has been exported across the world, all be it in more ‘civilised’ means. In 2005, the United Nations University report on World Wealth Distribution revealed that the top 2% of the world’s population now owns 50% the world wealth. Moreover, the top 10% owns 85%, effectively everything.

This leaves the lower half of the world, that’s 3.4 billion people, with a mere 1% of the world’s wealth, resulting in a fierce and perpetual struggle for intensely scarce resources in this ‘third world’.

One of the most effective and cunning methods used for such transfer of wealth is manipulation of the money supply. This is when the amount of money in the economy, its sources, and the conditions of its use are manipulated through policies that are exploitive, such that they allow the transfer of true wealth from the producers to the financiers

While our ancestors understood its cancerous effects, today we have grown so accustomed to accepting this as legitimate and necessary, that even questioning it would make you a heretic.

Whose interest?

Historically known as usury, interest is a non-productive reward given to a creditor at the expense of the debtor. In its simplest application, it is when a creditor lends money to a debtor on the basis that the debt is greater than the principle loan.

A creditor is a party that has a claim to the services of a second party. A debtor is simply an entity, e.g. a person or a company, that owes a debt to someone else.

The creditor is usually protected through collateral, so that if the debtor is unable to make payment of the loan plus interest, the creditor gains ownership of an agreed wealth belonging to the debtor, or in some cases, ownership of the debtor himself. Collateral is a security or guarantee (usually an asset) pledged for the repayment of a loan if one cannot obtain enough funds to repay.

A mortgage is a familiar example, where a loan is issued to purchase a house on the basis that the house is collateral which the bank would own if repayments stop, and the interest makes the debt several times greater than the original loan.

The fundamental problem with usury is that it allows a creditor to gain an increased share of the money supply without producing any goods or services for the real economy. The resultant effect is that the finite money supply in the economy is hoarded amongst a few, starving the rest of the economy of the money they need to facilitate the trade of goods and services.

The rich get richer, consolidating economic power, and therefore power in general amongst a narrow minority, while the poor get poorer, plunging into a cycle of debt very few come out of.

It is important to understand that money is not wealth; it is supposed to be a measure of value, a facilitator or mediator in trade. The real wealth in the economy is the productive capital of land and labour, and the goods and services that we produce from them.

Since the direct exchange of goods and services, known as barter, is very limited, the use of a mediator that the society has trust in, meaning that they believe it can be exchanged for the goods and services they require, is a practical solution. Money has taken many forms, from rice to gold coins to paper, to the virtual digits in a computer.

Although the concept of usury is condemned by the Abrahamic religions as unjustified and corrupt, it has evolved into a mechanism that is now institutionalised on a global scale. Whereas money is meant to be a measure of value, it is today a measure of debt.

Yes, debt. Today money is created by the private banking industry as interest bearing loans. This means that the money supply is always less than the social debt owed to the banking industry. Social debt is the total debt held by society. As a result of this musical chairs scenario, the economy is at continuous risk of collapse unless there is a continual re-loaning process, a constant expansion of credit, or in other words, a perpetual growth of debt.

The perpetual increase in the production and consumption of goods and services (or GDP) is the only way to sustain this perpetual growth of debt. This is why a ‘credit crunch’ would cause a recession in economic activity; ever wonder why the economy is so debt-dependent in the first place?

It doesn’t take a genius to realise that infinite growth of production and consumption is impossible in a finite world. As a result, in the attempt to achieve infinite growth, the expansion into other markets, making the world economy subservient, and the marginalisation of other people’s rights become economic necessities, or even ‘national security interests’.

International financial institutions issue ‘development loans’ to rich-in-resource but under developed countries in return for policy concessions that structurally adjust their economies. These structural adjustment programmes usually allow multinational corporations to own the resources of these countries, consuming the loans as private investment contracts, exporting the wealth to their owners, leaving the native population with an un-payable debt to service which they hadn’t asked for in the first place.

This allows Europe to now consume at the bio-capacity of 2.1 planet earths. This means that if everyone consumed like Europe, 2.1 planet earths would be required to sustain the world. In the United States this is at 4.9, meaning the average American is using 5 times more of the planets bio-capacity than is apportioned to them; taking away someone else’s natural right to survive.

Due to this imbalance, the ‘third world’ now pays $25 in debt repayments for every $1 they receive in grants. Analogous to lending you the air that you breathe in return for a part of your lungs with every breath you take.

The world of Islam

In Islam, Allah (swt), The Deity, is Absolute Existence, or Reality (with a capital R) and all that exists is therefore a manifestation of that Absolute Reality.

Islam’s values are derived from this understanding of Reality and are prescribed on the basis that particular modes of behaviour serve to harmonise us with our own nature and the natural world. Other modes of behaviour serve to degrade it, and thus degrading our relationship with Reality. The justice that is so central to Islam is conceived from this recognition.

The fundamental objective of the Islamic economy is ‘to achieve a state of equilibrium’. This is apparent in the root of the Arabic word Iqtisaad, the alternative to economics, which literally means equilibrium or balance.

Economic democracy

…so that this (wealth) may not circulate solely  among the rich… {Quran; 59:7}

In Islam, the outright ownership of capital without effort is unjustified. No individual is permitted to develop a monopoly over natural resources or the money supply. Everyone is equally entitled to derive benefit from them. These primary sources of wealth belong to society as a whole, who manage it through consultation and representation.

And do not swallow up your property among yourselves by false means, neither seek to gain access thereby to the judges, so that you may swallow up a part of the property of men wrongfully while you know. {Quran; 2:188}

Private ownership is recognised as legitimate within a moral framework as property is held in trust for God and is morally accountable. Islam specifies that the source of property rights is precisely labour. It is through effort that private property rights are acquired. One cannot lay claim to land unless one cultivates it oneself. This allows the democratisation of productive capital.

Under Islam, the current status quo where transnational corporations, owned by a narrow minority, control 80 per cent of the world’s resources is illegitimate. By emphasising ownership as a function of labour, Islam envisaged a dynamic role for the worker who not only uses his tools of production to earn wages, but who is entitled to a share in the profits resulting from technological innovation.

Ownership as a function of labour is when ownership of land is granted to a person so long as that person works that land himself, thus the ownership becomes dependent on his effort, and not merely his claim to it.

Furthermore, it is the financier, not the entrepreneur, who is responsible for covering any losses, and this justifies the financier’s return in the form of a share in any profits that the commercial venture generates.

Thus, the relationship between labour and finance is not exploitative, but mutually interdependent. Islam envisages production as a decentralised affair distributed among the producers themselves.

Those who are constant at their prayer, And those in whose wealth there is a fixed portion. {Quran; 70:23-4}

Islam also stipulates a number of taxation mechanisms, such as Khums and Zakat, which are designed to guarantee a minimum standard of living for all in an Islamic state for those requiring financial assistance, in order that basic needs for food, water, housing and sanitation are fulfilled. Those requiring assistance in society have a right to a portion of an individual’s property, and not merely charity, a concept unique to Islam.

Money as a balance

Those who swallow down usury cannot arise except as one whom Shaitan has prostrated by (his) touch does rise. That is because they say, trading is only like usury; and Allah has allowed trading and forbidden usury… {Quran; 2:275}

Islam is clear that there can be no reward without effort. Interest is therefore an unjustifiable form of reward that tends toward the deepening of social debt and the illegitimate concentration of wealth. Merely making money from money doesn’t generate any real wealth, only the illusion of it, and creates a structural imbalance that is unsustainable in the long-term

The money supply is the property of the society as a whole that is regulated through consultation and representation to solely facilitate trade. Creating a sustainable economy based on a sound monetary structure also ensures that no activity endangers our relationship with nature and the environment which is explicitly prohibited in Islam.

Sustainable economic development for the benefit of all people rather than a narrow minority is a fundamental objective in Islam and the short lived illusion of progress that has destroyed so much must be superseded by a truly progressive civilization. That civilization is not beyond us, but is one that will take recognition that social transformation begins with the individual – with me, and that the time for such transformation is long overdue.

…Surely Allah does not change the condition of a people until they change that which is within themselves… {Quran; 13:11}