Tuesday, 21 October 2014

The History of Capitalism

Evolution of Capitalist Economic Thought - Feudal System to Present


1)    Introduction

2)    Major Turning Points in Economic Thought
  • Feudal System
  • Mercantilism
  • Psysiocrats
  • Classical School 
  • Neo Classical School
  • Keynesian School 
  • Monetarism /Rational Expectations
3)    Other schools and contributions
  • Behavioural Economics
  • New and Post Keynesian/New Neo Classical
  • Austrian School/Gold Standard
  • Reaganomics (Monetarism/Supply Side / Military Keynesianism)
  • Neoliberalism and the Washington Consensus
  • Return of regulation and Keynesianism post 2008

The aim of this paper is to provide a synopsis of the evolution of Western Economic thought with a particular focus on the circumstances that lead to the various turning points that occurred in the development of such thought.

Each major school or viewpoint will be analysed and discussed according to areas :-
  • Timeline
  • Context
  • Contributors
  • Key assumptions
  • Policy Recommendation
Key terms

1)    Microeconomics
2)    Macroeconomics
3)    Neoclassical synthesis

The overall context of this analysis is to understand the current debate over economic thought with a view to present the Islamic alternative to economic management of society.

It also will aid the discussion in the West to debate the subject using the existing terms of reference so as to make the debate were Islamic solutions are presented seem relevant and contemporary.
Note: Marxism has been omitted as the socialist approach is not regarded as credible as far as the mainstream discourse and neither is it part of the sequence of phases which lead to the capitalist tradition.



Feudalism was a system of economic organization within Europe that lasted during much of what we refer to as the Middle Ages.

This system started around the 11 Century in England under the rule of King William I and started to unravel around the time the Reformation was in motion throughout Europe by around the 15th Century and lead to the mercantile era.


Feudalism arose in Europe during the Middle-Ages, due to the arrangement between land owners who offered protection to lower servants in exchange for working the land.

The society had a hierarchy starting with Kings, through Lords/Nobles and then their Knights and finally Merchants and Peasants who would work the land. The Church and its interpretation of religion was central to upholding the system which was orientated in favour of the church and clergy along with the Kings who took their legitimacy from the Church.


William I - ‘William the Conqueror’

Key Assumptions

The system is based on mutual interest. The tradition of serfdom and patronage may have originated from the Roman influence and also the Germanic tribal traditions of patronage and loyalty for hierarchy.

Policy Recommendations

The system was primarily agriculture based with the primary means of production being land and labour. No central planning or government policy intervention was associated with this economic order.



The time period of this system was approximately 1500 to 1800.


The power of the Feudal hierarchy started to unravel during the reformation due to the spreading of knowledge through inventions such as the printing press where books such as the Bible were translated into languages common people could understand and thereby unraveling the power of institutions such as the Church which had underpinned the absolute power of the Monarchies that anchored the Feudal order.

In the new context of a post Absolute Monarchical order, isolated feudal estates were being replaced by centralized nation states as the focus of power. Technological changes in shipping and the growth of urban centers led to a rapid increase in international trade


UK: Oliver Cromwell (1599–1658),
France: Jean-Baptiste Colbert (1619–1683).

Key Assumptions

Mercantilism taught that trade was a ‘zero-sum’ game with one country's gain equivalent to a loss sustained by the trading partner.

This lead to nations seeking to subjugate other nations into colonies and through such colonialism, pursuing a positive balance of trade and the acquisition of precious metals primarily in the form of gold and silver coinage.

Policy Recommendations

Mercantilism promotes governmental regulation of a nation's economy for the purpose of augmenting state power at the expense of rival national powers. This regulation is focused on increasing exports and minimizing imports with a view to capture precious metal in the form of gold and silver.



Mid to late 1700’s.


This school, which was prevalent in France during the height of the enlightenment struggle, was a spearhead for new thinking in the economic thought.

The reason they are considered a key school in the turning points of economic thought is due to their founders, especially Francois Quesnay who was a doctor in applying scientific methods to the field of economics and helping to bring to an end the hegemony of the mercantile era.

They are less important for the importance they attribute to agricultural production which is considered a very weak argument to this day.


Francois Quesnay (1694 – 1774)
Anne-Robert-Jacques Turgot (1727 – 1781)

Key Assumptions

They argued that land production was the key source of economic value and that agricultural products should as a result be highly priced.

Policy Recommendations

They were one of the first, along with Adam Smith who came later, to argue for a self regulated market approach.

Classical School


This school arose from the late 18th Century to early 19th Century with the rise of the neoclassical contribution which refined rather than presented a major upheaval.


Astute observers noted that Mercantilism was not a force for increasing the world’s wealth but instead was a system to move the world’s static wealth from the colonies to their respective mother countries.

The other key trigger was the onset of the industrial revolution and the mechanization of industry which opened up huge potential in wealth creation.


Adam Smith (1723 – 1790)
David Ricardo (1772 – 1823)

Key Assumptions

This school was a major paradigm shift from the schools which preceded it. The key tenant of this school was that wealth creation was not a ‘zero sum’ game and instead a ‘win win’ game.

It was upheld that rational self interest had an overall effect of increasing wealth for all and the key means for manifesting such self interest was through the division of labour whereby everyone would focus on the economic activity for which one was most suited and trade through a free market with others and this through an invisible phenomena (aka Invisible hand) would raise the prosperity of all participants.

Policy Recommendations

The axiom of the classical school is that markets are self regulating and self correcting and the best approach for the state is to leave the market free so that its beneficial effects in wealth creation can be manifested.

It was held that free markets, populated with self interest seeking actors lead to wealth creation via a hidden force, known as ‘the invisible hand’ which benefited all parties much more effectively than if society was full of benevolent actors trying to help each other. It was a major paradigm shift and one that helped raise the standards of living of all those who implemented its policy.
However the rate of wealth creation was disproportionately allocated to those who had more to start with and this lead and is leading to its downfall.

NeoClassical School


1860’s to 1930’s


Adam Smith’s ideas were in fact revolutionary but there were gaps in the Classical school of thought. Most notable was in the field of price theory and the question of how to arrive at value of commodities and services and the correct basis to judge the worth of such goods and services rendered for exchange. The ideas proposed by the Classical theorists were deemed to be inadequate and simplistic.

The school was thus a major contribution in the field of microeconomics and didn’t make its focus the macro economic sphere and neither did it detract from the Classical approach for the state to adopt a laissez faire stance towards the market.


William Jevons (1835 – 1882); Carl Menger (1840 – 1921); Leon Walras  (1834 – 1910)
Alfred Marshall (1842 – 1924)

Key Assumptions

The school rejected the Classical notion that Value was in the quantity of labour spent in the procurement of a good or service and proposed a new perspective. This new stance became known as the marginal revolution and in particular, gave rise to the theory of marginal utility as the basis to compare the value of goods and services.

According to this view, the value of a good or service is assessed at the utility derived from the weakest point of need and not the strongest point of need.

As an example, it would not be sound to assess the value of a meal to a person when he or she was close to death due to starvation as this would not be a normal situation within a market context. Neither would it be generally repeatable to extract from market participants the equivalent in price given by such a person in the situation in question.

What would be extractable would be the equivalent of how market participant view a commodity at the point of the weakest need.

Each unit of consumption, or marginal consumption, renders diminishing utility relative to the previous unit of consumption. It is the utility gained at the weakest point of need that forms the basis of the good or service’s value. It is this value or utility that is then compared with the value of other goods and services when considering the ratio of tradability through the price mechanism. 

Policy Recommendations

The marginal school, as stated, did not overhaul the Classical school at the macroeconomic level directly, instead it made a significant contribution towards the field of microeconomics. The insight between the Keynesian school at the macroeconomic level and the neoclassical school at the micro economic level became known as the neoclassical synthesis and governs economics today.

Keynesian School


1930s to 1970s


The background to the rise of the Keynesian school was the Great Depression of the 1930s and early to mid 1940s starting in the US and spreading to most of the modern world. The stock market crash in New York in the autumn of 1929 precipitated the longest and deepest global depression the modern world had ever seen.

The economy had deteriorated into a deeply stagnant phase, despite the society not having lost any physical wealth. It was in essence a collapse of the virtual economy that ultimately affected the real economy where wealth is generated.

The thinking of John Maynard Keynes, this schools founder, was that the Neoclassical macro-economic approach of allowing the market to self correct and reach equilibrium free of any government interference was not working in the context of the Great Depression and  that some form of government intervention was needed for assisting the recovery.


John Maynard Keynes (1883 – 1946)
Paul Krugman (1953 -)

Key Assumptions

A key premise of the Keynesian approach is that markets fail to reach the equilibrium needed to end the bust phase of the business cycle. In essence they disagree with the classical theorists in how efficient self regulated markets are in reaching the optimal resource allocation via pricing.

It notes phenomena such as wage rigidity, also known as ‘sticky wages’ explains the situation where wages tend not to fall and wages flexibility is a necessary condition for the Neo-classical schools recipe for getting an economy out of as recession.

It also asserts that market participants are driven by less than rational criteria when undertaking economic activity. He refereed this erratic behaviour as ‘animal spirits’ and equated it with waves of optimism and pessimism that glance over the collective psyche of people and the resulting collapse in confidence and spending that ensues, 

Policy Recommendations

The primary recommendation is at the macroeconomic level and is for the government to intervene by initiating government spending to increase demand in the economy when the private sector is retreating from economic activity. This is usually done with a reduction in taxation intended to increase disposable income and hence demand in the economy. It is due to the fact that demand drives economic growth that it is so keenly sought by policy makers.

The idea is that the excess demand created via government spending or tax rate decrease, often done on deficit spending rather than currency reserves, drives the economic cycle back into the recovery phase.

Monetarism /Rational Expectations


Late 1970s to mid 1980s


The reality of the 1970s saw the demise in the Keynesian analysis and remedy for business cycles. Prior to the emergence of the Monetarist school, there had always been an observable trade off between inflation and unemployment. This inverse relationship was accepted by the economic community since the 1958s publication authored by the New Zealand born economist William Philips and the resulting Philips curve which depicts this trade off. 

The 1970’s saw a new phenomenon called Stagflation which equated with the simultaneous rise in unemployment and inflation and this contradicted the models developed by the Keynesian school.

To this conundrum, a highly knowledgeable professor named Milton Friedman proposed the reason for Stagflation and the cure using thorough scientific study which threw into question the Keynesian school place in the debate.


Milton Friedman (1913 to 2006)
Robert Lucas (1937 - )

Key Assumptions

The key assumption of the Monetarist school is that there is no long term trade off between inflation and unemployment and the trade off is very short term and even then, it only works while market participants do not realise the inflating effect of the government policies to help reduce unemployment.

Once market participants realize that the government’s actions to reduce unemployment will cause inflation,  they build inflation into their wage expectations resulting in higher wages and thus further inflation and thus nullifying the effects of the government’s actions.

This it was argued would be due to the concept of rational expectations (Robert Lucas 1972), that is the idea that people take into account all available information when making decisions about future economic variables and cannot be all collectively misled as was modeled by the Keynesian modelling were notions such as society having ‘animal spirits’ and acted on waves of optimism and pessimism were understood to be the case.

This notion of rational expectations was a development on the prior model of understanding how economic actors predict the future. Such previous modelling was known as the static and the adaptive expectations modes.

In the former, economic agents were assumed to look at the present value of economic variables such as the inflation rate and use that to interpolate future values and with the adaptive expectations, they were understood to look at the present and recent past to formulate their expectations about the future performance of economic variables.

The other key argument was that the government should not try to reduce unemployment which always comes back to its natural rate, hence the notion of a natural rate of unemployment. The government should instead just work on maintaining the most suitable volume of money in circulation.

Policy Recommendations

The key policy implications of the monetarist school is for the government policy, via the central banks remit, to be for there to be a careful setting of the money supply to be in line with the level of economic activity in the economy.

The Central Banks should ensure that the quantity of money is not short of the requirement so as to prompt a recession or in excess of the requirement so as to prompt inflation. Monetarists believe that there should be no attempt to create full employment as there is a concept of the ‘natural rate of unemployment’ and an economy left free of government meddling will find such a rate.

The Monetarists are also very keen to avoid the use of monetary policy (lowering of interest rates to stimulate the economy) and generally against large government and are very much free market orientated unlike the Keynesian position which sees an active role for government.

Other schools and contributions

Behavioural Economics

Behavioural Economics has made contributions within micro economics and seeks to bring insights from other social sciences such as Psychology to understand how individuals make decisions. An example is the concept of ‘anchoring’ where we set our mind on a value, such as a price and then use that to judge the merit of a good or service. For example if you see something in a sale which has been dropped down by 80% in price, you are much more likely to buy it at the lower price than if you had seen it being sold for the lower price. This is because you have ‘anchored’ to the higher price and feel you have a great bargain at the lower price.

Another example is the concept of social belonging. Governments have used this in trying to get people to return questionnaires and other important forms by informing residents that they are amongst the few remaining people on their road that haven’t returned their forms. This leads in the resident a sense of being ostracized from the group which goes against the desire for belonging.

New and Post Keynesian/New NeoClassical

These schools are reinterpretations of the previously discussed school once the idea of rational expectations have been taken into consideration.

Contributors : Steve Keene (1957 -)

Austrian School/Gold Standard

This school advocates an extreme form of laisse-faire which goes further than the monetarists in advocating no role for central banking and instead call for the return of the gold standard currency model.

There is much discussion within this school over how the central banks through setting interest  rates cause business cycles. This has been aptly labelled the ‘Austrian Business Cycle Theory’ or ABCT.


Carl Menger (1840 – 1921), Murray Rothbard (1926 to 1995), Ludwig Von Mises (1881 – 1973)
Frederich Hayek (1899 – 1992)

Reaganomics (Monetarism/Supply Side / Military Keynesianism)

Reagonomics was a reincarnation of the approach that preceded the Keynesian revolution.  It had some variation from the approach however which is why all advocates of the free market were not in agreement in its policy prescriptions. This would explain why it was colloquially referred to by its critics as Voodoo economics.

Central to the departure from the conventional classical free market approach was the idea that drastically lowering the tax rate would create a wider tax base and an ultimate increase in the tax revenue. This supposed phenomenon was described in the economic literature as the Laffer Curve. It suggested that there would be a ‘trickle down’ effect where wealth would filter down to all levels in society if the highest earners were given large tax breaks. 

Coupled with this was the idea that the government should bring about recovery by helping the supply side of the economy given that all previous attempts via monetary and fiscal policy were acting on the demand side of the economy. This thinking developed in the 1970s in the post Keynesian era.


Arthur Laffer (1940 -)
Ronald Reagan (1911 – 2004)

Neoliberalism and the Washington Consensus

Neoliberalism is a catchall phrase which describes the era of deregulation and globalization that has been the order of global economic institutions since the early 1980s. This policy has been implemented within the most powerful western states in re-regulating the financial sector and pushed to third world countries under the oversight of the IMF and World Bank.

Return of regulation and Keynesianism post 2008

The neoliberal approach came under intense scrutiny in the aftermath of the global mortgage backed securities financial crash of 2008. Since then there has been a return of the role of governments in creating a more regulated approach, especially in the financial sector along with the return of the Keynesian approach in the US.

Saturday, 7 June 2014

Global Unemployment and the Islamic Solution

Unemployment & the Islamic Solution

This paper will attempt to investigate the phenomena of global unemployment with a focus on analyzing the root causes, and offer an Islamic alternative.


If we start with some facts and figures:

·         Youth, that is people between the ages of 15 and 24, make up 17% of the global population but account for 40% of the world unemployed people. This figure is based on people of working age so excludes school age children and the retired.

·         The Middle East and North Africa region has one in four young people unemployed. In some parts of Europe, such as Spain and Greece, more than 50% are out of work.

·         In the United Kingdom, more than 15% of the youth population is not in education, employment or training. In the United States, a recent study found 10 million youth are unable to find full-time work.

·         To compound the analysis, we see the massaging of the numbers to mask the true picture. Underemployment, were someone wanting full time work but settling for part time work is also part of unemployment and is called disguised unemployment.

·         There is a notion of the natural rate of unemployment which is deemed necessary to avoid inflation (NAIRU or Non Accelerating Inflation rate of Unemployment) which is not the focus of this study.

Types and Causes in Western model

 Standard types of unemployment include :-

·         Seasonal Unemployment
·         Frictional Unemployment
·         Cyclical Unemployment
·         Institutional Unemployment, including :-
Minimum Wage/Unionisation
Unemployment Benefits
 Employment Protection Laws
·         Structural Unemployment
·         Technological Unemployment and over supply of labour
·         Mergers and Acquisitions : SME acquisition by large firms
·         Regulation disproportionately affecting SME sector

There are specific factors in the current reality causing the lack of business activity vital for employment. These include :-

·         Weak investment due to uncertain business climate and credit scarcity due to banks not lending. This prompted the BoE to charge a negative interest rate on deposits effectively charging banks to keep deposits with them. Also undertaking massive bond purchases to drive down yields.
·         Financial Crisis: austerity due to bailouts leading to higher taxation and poor demand due to lower disposable incomes.
·         Ineffectiveness of stimulus as people know that the false boom will lead to more austerity in future and plan for future negating effectiveness of stimulus. This phenomenon is known as ‘Ricardian Equivalence’.

Unemployment in Western Countries since 1970s has accelerated due to the following trends :-

·         Off shoring production
·         Increased entry of Women into the labour market
·         Technological Unemployment with automation increasingly displacing primary and secondary and now tertiary sector jobs leaving labour with no place to go up the jobs hierarchy. With artificial intelligence and artificial general intelligence imminent, this trend will increase at an alarming and unsustainable rate.
·         Mass immigration into the developed world.

These factors, coupled with the end of trade union power and the rise of inflation linked to the explosion of FIAT money since the end of the Breton Woods system in 1971 has resulted in a stagnation of wages in real terms since 1970s and the shortfall in purchasing power has been filled by increased borrowing. In short the squeezed middle class and the rise of the 1% as its characterised by the occupy movement.

Proposed Solutions 

In the mainstream discourse, the following remedies are put forward but none address the underlying systemic causes. The current remedies include :-

·         Allow changing cost structure to take its course and introducing policy level incentives to incentivize companies to re-shore production.
·         Public / Private schemes ex g4s delivered by DWP to help long term unemployed
·         Discovery of new market niches ex green economy
·         Demand Side Policies: Stimulus programmes to create demand using government debt.
·         Supply side Policies  designed to increase the productive capacity (PPF) of the economy.
·         Austerity programmes to foster confidence for investment
·         Better regulation to make it easy for SME sector.
·         Focussing on education and work based skills
·         Encouraging banks to lend to the real economy by schemes such as QE making other products such as govt bonds less attractive for banks due to a drop in the yield of such financial products.
·         Social Enterprise: Worker Co-operative model of business (ex Mondregon Corporation in Basque region of Spain)
·         Diminish disparity between workers and owners
·         Minimise pay differentials within organisation
·         Representative decision making and better care of worker to create worker buy in and commitment.
·         Similar to German business model were worker welfare is catered for better.
·         Other capital sharing models such as Binary Economics, ESOP (employee share ownership plan)
·         Assisting in labour mobility

Futility of Proposed Solutions

·         Re-shoring doesn’t address global problem and without addressing global unemployment, weak demand will adversely affect global trade and growth opportunities even at national level.
·         New Markets : Ex Space tourism. Automation/Technological unemployment will still pervade such new industries. Twitter for example has 400 staff generating 11 billion turnover.
·         Demand side policies : Mounting debt and effects of such stimulus plans are short lived. Even infrastructure projects have limited gain as much of western world is now industrialized and developed so the gains seen in the 19C in America with the advent of the railroads is unlikely to be gained now.
·         Supply side policies : Without unlocking the wealth which has become a circuit amongst the few, ex financial economy which extracts value from the real economy, it is difficult to see how growth and investment will lead to people escaping their debt predicament and carry on consuming.
·         Legal obstacles for heterodox models (ex social enterprise models) Spanish law permits owner-members to register as self-employed enabling worker-owners to establish regulatory regimes that support cooperative working, but which differs considerably from cooperatives that are subject to Anglo-American systems of law that require the cooperative (employer) to view (and treat) its worker-members as salaried workers (employees) The implications of this are far-reaching, as this requires cooperatives to establish authority driven statutory disciplinary and grievance procedures (rather than democratic mediation schemes), impacting on the ability of leaders to enact communal forms of management and counter the authority structures embedded in the dominant system of private enterprise centred around the entrepreneur. 

·         Labour mobility programs and regional identities in the form of nationalism and patriotism negates the effectiveness of these programs across countries in Europe but are less of a factor in countries such as the US.

How the Islamic Economic System can resolve the Problem of Unemployment

None of the proposed methods address the root causes and therefore at best can only have limited success. For examples re-shoring doesn’t help the global problem as jobs gained are lost elsewhere. Also, due to systemic flaws in the Capitalist model, demand side policies are always short lived and cannot replace the fundamentals of savings and investment to create new products and markets creating employment in the path.

Even supply side policies such as austerity as implemented in Greece are not aimed at helping Greece structurally to fix its issues, but merely to ensure the lines of credit remain open to avoid the collapse of the Euro. It is effectively a ‘kick the can down the street’ policy with no aim of every picking the can up and placing it in a bin!

The key offering of the IES to this ever increasing threat to global insecurity and mass labour upheaval is as follows:

·         Strong SME sector, example is Taiwan’s rise after WWII. Key difference however is that Taiwan was part of supply chain of bigger firms based elsewhere. Here the Islamic Model’s (Caliphate System) public and state sector will substitute for private sector supply chain. The effect will be the same as far as creating a strong middle class which equates with good distribution of wealth.

·         Less scope for large private sector companies to consume SME’s and create oligopolies and monopolies that may be adequately placed to preserving existing jobs and poor at creating new jobs.

Note the act of larger firms buy out innovating smaller firms is not illegal per se but it is argued that the propensity for this to occur is minimised due to the limits imposed on company structures in the IES. Note the illusion of choice is preserved despite many of these takeovers by preserving the former brand names. For example Ariel, Braun, Crest, Duracell, Gillette, Head and Shoulders, Lenor, Olay, Oral-B, Pampers, Vicks all distinct brands that we equate with distinct competing companies are wholly owned by Procter & Gamble.

·         Pre-distribution instead or redistribution! Better distribution of wealth leading to less reliance on labour for all. Twitter for example is a $9bn company and only employs around 400 staff worldwide! As technology moves up the industry hierarchy all will benefit not a few leading to the masses competing for fewer and fewer jobs at abysmal wages. The alternative vision on offer is for the masses to be working less hours for the fewer human only jobs. As wealth will be more shared, the ownership of the new factors of production, namely automation will also be more evenly shared allowing more time for attention to other responsibilities such as family, and spiritual pursuits. In essence, our labour based factor of production will be replaced by a capital based factor of production and we will reap the rewards of our new type of capital ie complete the circle from human physical to human intellectual to full none human automation.

Even the forefathers of modern economics namely Adam Smith and Keynes himself foresaw the end of work within a few centuries, but neither had any counter to the divisive distribution that leads to the wealth converging into the hands of the few and in this future paradigm, that means the majority will have no access to jobs or technological capital and hence cannot exchange value and will face mass slavery en route to mass extinction.

·         Better entrepreneurial skills in population due to lack of easy investment options ex interest bearing bank accounts or share and bond investment based on limited liability. This will ensure there is no limited supply to innovation and it is innovation that breeds new business opportunities and creates demand that replaces lost demand in obsolete industries. A classic example is the smartphone which created many new jobs and new demand.

·         Availability of capital will be facilitated due to rules prohibiting and dis-incentivising hoarding. The paper on alternatives to financialization has more on this alternative to the stock market model works in practice.

·         Strong confidence as far as role of government in economy leading to greater longer term view, something that is vital to investment decision making.

·         Stable currency allowing for price stability, something that is vital for economic planning.

·         Free market for labour allowing for prices to fluctuate freely and opportunity for lower skilled workers to gain access to job market without fear of being exploited and cheated. The fear expressed here is what drives the argument for minimum wage which increases unemployment and this will not be common in the IES due to a different culture that frowns on denying the right of the worker unlike the case in the sweatshops across the poorer countries.

·         No special relationships between companies and government(aka State Monopoly Capitalism) leading to a negation in the appeal of trade unions which through collective bargaining drive up wages and hence unemployment.

·         Automatic stabilisers or the benefits system has been known to create a poverty trap where people find it profitable to stay out of work and cause a needless tax drain on those already in work. The argument for benefits is they take the sting out of the extremities of the business cycle as when the business cycle experiences a downturn and unemployment rises, giving the unemployed benefits increases spending and spending is vital for recovery. However there is a significant cost in that it allows those who keep on taking benefits when they can find work, stay within this benefits system fuelling the unemployment numbers further.

·         Lack of regular business cycle leading to absence of cyclical unemployment. The business cycle is largely driven by the flooding of cheap credit through low interest rates and the inevitable rise in interest rates causes the correction in the form of the recession. Cyclical unemployment always leads to some structural unemployment and that creates long term labour market issues in an economy leading to ever increasing burden on the state. This type of economic management through central banking is not existent in the IES as an alternative exists to the whole process of financialization.
·         Business friendly Regulation : Much of the regulation that has been invented has the result of disproportionately affecting the smaller scale companies which helps the larger companies hence the term state monopoly capitalism. There is also much financial regulation to curb the excesses of finance which is supposed to aid the real economy and not threaten it as has happened in the last few years. However as the regulation is at odds with the value of profit, there is a natural inclination to try to bypass it, often legally or through lobbying politicians. This has resulted in a pillar to post debate about regulation and getting the balance right with the right arguing for less and the left arguing for more. In the IES, this friction between the rules of trade and trade behaviour is not at friction and in fact deeper values tied to seeking halal income acts as a mechanism to keep the majority adhering to the spirit and letter of the trade laws unlike the case in the Capitalist system were a significant proportion of financial innovation is designed to achieve regulatory bypass. The degree of legal tax avoidance being spoken about bears testimony to this problem.

Paul Volcker, a previous head of the Federal Reserve once stated that the only useful financial innovation in the last 30 years was the ATM!

·         Lower costs for public utilities leading to more disposable income and savings for new business ventures necessitating more job creation.

In conclusion, there is a massive structural flaw at the heart of the capitalist system which, from the perspective of jobs creation and wealth circulation, has lead to an unsustainable situation. Let us understand these dynamics and present the alternative solution with confidence and substance.


Friday, 19 July 2013

Islamic Economic System Questionnaire

Test your knowledge of the Islamic Economic System.

1) What is the view towards the private("free") market in Islam?

A) Exists but not open to all property types.
B) Does not exist.
C) Exists and open to all types of ownership.

2) What is the Islamic view on taxation?

A) There is no taxation.
B) There is taxation on wealth.
C) There is taxation based on income.

3) What is the Islamic view on inheritance?

A) There is no requirement to pass property to one’s spouse and offspring.
B) One can decide who to leave property to after ones death.
C) There are pre defined proportions according to which ones wealth is disseminated after death.
4) What is the currency model in Islam?

A) Paper and digital currency that is not backed by any real asset like all current world currencies(FIAT currency).
B) Currency that can exist in electronically, paper or physical form that is 100% backed by gold and silver.
C) Currency that is partially backed by gold and silver and partially exists as FIAT currency.

5) What is the Islamic view about continual growth?

A) The growth imperative is bad and rules seek to reduce growth or keep economic growth in line with population growth.
B) Growth is vital and growth must be maintained to avoid recessions and depressions.
C) There is no growth imperative and the economy adapt to a lack of growth without tail spinning into recession and rising unemployment.

6) How does the Islamic economic system view public utilities like gas, electricity and water?

A) These industries are available for private ownership and sale.
B) These industries are owned by all the public and administered by the state for the people.
C) These industries are owned by the government.
7) Does the Islamic economic system experience the boom and bust cycle?

A) The Islamic system experiences the business cycle as it is an inevitable part of private markets.
B) The economy may experience a substantial boom or a bust from time to time but there is no cyclical pattern to such events as seen in the capitalist system.
C) A boom or bust is not possible under the Islamic economic system which always experiences a steady state of growth.
8) Is inflation a problem in the Islamic economic system?

A) Inflation is never a problem as the currency is based on gold and silver and money printing beyond reserves is forbidden.
B) Inflation can occur based on a rise in the price of goods but not as a result of excessive money printing as all money must be backed by 100% gold and silver cover.
C) Inflation occurs in the Islamic economic system when goods and service production increases.

9) What is the liability model within Islamic companies?

A) An investor’s liability is limited to the property invested in the company.
B) An investors liability is not limited by the amount invested in the company but by the proportion of capital invested.
C) An investor is liable for settling liabilities in full from his or her own assets including the liabilities for other partners who have not fulfilled their obligations.
10) What is the fundamental economic problem according to the Islamic economic system?

A) Distribution of resources to ensure everyone has equal wealth.
B) Ensuring production is increased to ensure that limited resources can be allocated most efficiently to meet ever increasing human wants and needs.
C) The efficient allocation through a regulated private market to ensure wealth is adequately distributed to meet basic needs.

11) What is the view towards regulation in the Islamic economic system?

A) Regulation is bad and restricts the private sectors ability to generate wealth.
B) Regulation is necessary to ensure markets operate efficiently and to prevent exploitation and wealth circulating amongst an elite segment of society.
C) Regulation is vital for ensuring the market doesn’t allow for there to exist differences in wealth distribution.

12) Is it allowed to hoard money in the Islamic economic system?

A) Wealth including money is owned and the owner has the right to hoard it as a right of ownership.
B) Hoarding of wealth is not permitted under any circumstances.
C) Hoarding of money is not allowed unless it is being saved for an intended investment or consumption of a defined type or commodity within a predefined timescale.
13) If a trade occurs and the price agreed upon deviated significantly from the market price due to a lack of knowledge of the market price by either buyer or seller, the recourse is to:

A) Ask the trader that overcharged or underpriced to settle the difference.
B) Cancel the contract and for both parties to return their respective side of the contract.
C) Give the option to the defrauded party to cancel the contract and return both sides of the contracted considerations, or proceed with the trade but not settle the difference and keep the contract as it is.
14) Is it allowed to lease land for agricultural use?
A) The leasing of land for agriculture is haram.
B) The leasing of land for agriculture is allowed.
C) The rule depends on which crops are cultivated.

15) If a company partner dies, what happens to the company that the partner was a member of?
A) The company continues after the property of the deceased partner is disseminated to his or her relatives.
B) The company technically dissolves and the remaining partners may form another company with fresh terms to ensure there is no effective break in trading.
C) The company must terminate and the remaining partners are not permitted to continue the business.
16) In the mudaraba company structure, with its body partner(s) and capital partner(s), is the capital partner allowed to intervene in the day to day operation of the business?

A) The capital partner is allowed to intervene in the day to day running of the business as it is his/her capital that is being used.
B) The capital partner can set out his terms at the outset of the contract and must then not interfere with the operation of the business.
C) The capital partner is not allowed to specify his or her terms at the outset of the contract and is at the behest of the body partner who is responsible for all aspects of the operation of the business.

16) In the mudaraba company structure, with its body partner(s) and capital partner(s), is the capital partner allowed to intervene in the day to day operation of the business?

A) The capital partner is allowed to intervene in the day to day running of the business as it is his/her capital that is being used.
B) The capital partner can set out his terms at the outset of the contract and must then not interfere with the operation of the business.
C) The capital partner is not allowed to specify his or her terms at the outset of the contract and is at the behest of the body partner who is responsible for all aspects of the operation of the business.
17) Can Muslims buy shares in joint stock (plc) companies?

A) Islam encourages companies and trade through company structures and approves of becoming an owner in such joint stock companies.
B) Islam permits Muslims buying shares only in joint stock (plc) companies if the trade is in an ethical sector.
C) Islam forbids ownership in such companies due to the haram nature of the company structure.
18) Is interest (riba) permitted on paper currency in Islam as the evidence forbids riba on 6 items including gold and silver and doesnt mention paper currency which is not backed by gold and silver.

A) Interest is allowed on paper currencies but not allowed on currencies based on 100% backing of gold and silver.
B) Interest is allowed on paper currencies as long as it is not excessive such as the case with compound interest.
C) The reality of gold and silver is that of a medium of exchange and paper currencies through analogy satisfy as a medium of exchange and interest of any type is haram.

19) How to people wishing to invest do so in the absence of loan facilities available from private banks?

A) Investors need to find people to lend money without any interest for their business project.
B) Investors can ask people with money to join them to form a business and share in the profit and loss as an alternative to lending on interest.
C) Investors need to rely solely on savings to finance their business ambitions.
20) Is it allowed to hoard goods so that their prices increase with the intention to release the supply at a higher price to make more profit?

A) Hoarding goods for this purpose is not allowed.
B) Hoarding goods in this way is allowed as the trader has a right to sell and to time the manner in which he or she sells just as s/he has the right to never sell any goods or services at any time.
C) This is allowed if the aim is to pass the proceeds of the extra profit this activity generates to charity.
21) Will private banks exist in the Islamic economic system?

A) It depends on the type of bank. Retail banks which take deposits and lend on interest will not but investment banks helping companies make investment may exist.
B) All banking activities are haram and the only financial entity will be the state treasury the bait-ul-mal.
C) Banks belonging to foreign countries will be allowed to operate but Muslims will not be permitted to form such banks.

22) What is the rule regarding lost property?

A) Any lost property is the right of the one finding such property.
B) The rule of lost property depends on the amount found and the location of the find.
C) All lost property must be returned to its owner and only were this is not possible will it go to the government.
23) What does the Islamic economic system say about the division of labour, i.e. the idea that each person should focus on the work s/he is most efficient at to increase overall societal wealth?

A) It rejects this idea as an innovation of Adam Smith's classical economics and prefers keeping labour general at the individual level.
B) The Islam economic system acknowledges the concept of the division of labour as a self evident truth and necessity for wealth creation and is only averse to labour specialisation at the state level.
C) Production specialisation is key at both the individual and state level.

24) What does the Islamic economic system say about monopolies?
A) Monopolies are good as they help bring down prices due to true economies of scale.
B) Monopolies are not generally possible due to the limitations of scalability of Islamic company structures and most industries that lend to monopoly are not allowed for private enterprise.
C) Monopolies are possible and likely and the state does not interfere with them unless they charge unreasonable prices.

25) How does the Islamic economic system survive without conventional financial markets?

A) The lack of interest based finance severely limits the ability to raise capital for entrepreneurial pursuits and people have to try to borrow without interest or save to raise capital.
B) The focus on businesses is on intellectual capital and service industries not requiring physical capital.
C) The finance model is equity finance based instead of debt finance so financiers join into the business and share profit and loss and this, coupled with disincentives to hoard capital and lack of interest creates incentive for capital partners and those with business ideas to come together for business.
26) Do asset price bubbles, such as the housing bubble, form in the Islamic economic system?

A) Price bubbles are a symptom of speculation made possible by central banks creating money from nothing and lending at artificially low interest rates and this is not a reality in the Islamic economic system.
B) Price bubbles are only created when mischievous speculators seek to make short term profits in a private market and this could also happen in the Islamic economic system.
C) Price bubbles are a part of price discover and nothing to be concerned about.

27) Will there be consumer protection in the Islamic economic society?

A) Consumers are expected to look out for their own interests and once the sale is concluded, nothing can be done to reverse or rectify any fraudulence in trade.
B) There exists a specific judge called qadhi hisba who is responsible to make sure there is no cheating in the market and also products are for purpose and other judges to reverse injustice.
C) The mechanism to resolve disputes is for the defrauded party to create negative publicity against the fraudulent party and his activity helps protect consumer rights.

28) Are foreign companies allowed to operate within the Islamic economic system?

A) Foreign companies are allowed to operate freely within the Islamic economic society.
B) Foreign companies are not permitted to operate within the Islamic economic system but their goods, subject to certain conditions, may be imported and purchased within the Islamic society.
C) Foreign companies and foreign goods are not allowed to operate or be imported under any circumstances.

29) Are all products and services allowed to be traded within the Islamic economic system?

A) The Islamic economic system  allows all goods and services for which there is a demand and this is limited only by what society collectively deems to be harmful and abhorrent.
B) There is a classification of goods and services into basic, luxury and harmful goods and the 3rd category, which is defined through divine texts and through its reality, is banned in public markets despite their potentially existing demand by some.
C) All goods and services are permitted unless restricted by clear divine texts by name and description.

30) Market failure were private markets lead to sub optimal outcomes is minimised in the Islamic economic system through which means?

A) Government stimulus spending (fiscal policy) when markets are in recession and the private sector is contracting which makes up for the shortfall in demand
B) markets behave more efficiently due to factors such as government policy certainty, reliance of concepts like Rizq as opposed to 'animal spirits' reducing significantly the reliance on government meddling.
C) Market failure is treated by charity from those who have wealth towards those that suffer when markets and livelihoods decline.