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.