ISLAMIC ECONOMICS & COMMERCE: THE SOLUTION TO MONETARY INJUSTICE
Islamic Economics and Commerce:The Solution to Monetary Injustice Rahil Ahmed Khan
In the name of Allah, Most Gracious, Most Merciful. “ISLAMIC ECONOMICS AND COMMERCE: THE SOLUTION TO MONETARY INJUSTICE” - Rahil Ahmed Khan For an ebook version of this book, or for any other information on Islam visit: http://scanislam.com
No Copyrights ReservedThis book may be published and printed for sale or free distribution without any prior permissionfrom the author. However, the content of the book should not be edited or deleted in the leastsense.You have open license to reproduce this book in any other language. However, when translatingfor quotations from Quran or Hadiths, please do not try to translate on your own. Refer to astandard translation.First Edition : December 2009Second Edition: December 2010
Acknowledgement All Praise be to Allah (One True God) who has guided his slave to write this book andwho has provided me with adequate understanding on the topic of ‘Islamic Economics andCommerce’. Everything which has rightly been mentioned by me in this book is only by theblessings of Allah, and each and every mistake, if there exists, is only due to my ignorance. Then I’ll like to thank Dr. Rehmatullah Ahad for his brief but essential guidance inunderstanding the economic concepts. Also there are too many contributors over the years to thisproject, and thus it is not possible to mention them individually. I would like to express my gratitude and sincere thanks to my family and relatives,especially my brother Kamil Ahmed Khan for his consistent and inevitable supports right fromthe inspiration to take up this task to writing its conclusion. Rahil Ahmed Khan
Preface Economics and Commerce are usually seen as distant from religion. Howeverconsidering Islam claims to be a complete way of life, I was always interested in knowing itsconnection with economics and commerce. The first such opportunity came to me when Iattended the ‘Peace Conference’ in Mumbai in 2009. It was in this Peace Conference that Ilistened to brief introductions to Islamic economics. And in this same conference I purchasedfirst book on Islamic Economics. Soon my interest grew and I started a detailed study on thesame. Alhamdulillah (All praise be to God), with proper books, lectures, and research I learneda lot about this subject. The first edition of my book was thus written in early December, 2009.This edition i.e. second edition (December 2010) was originally written for University ofMumbai as a final year project of Management Course and with some minor corrections in thesame I am pleased to present to you the book on topic, “Islamic Economics and Commerce: TheSolution To Monetary Injustice”. The first section of this book, which I call ‘Islamic Economics’ starts with basicprinciples of Islamic Economics and then goes to explain the problems with the interest basedsystem. This has been done so as to create awareness about the problems. Also withoutpresenting the problems, it was impossible to elaborate on Islamic Solutions. The second sectionof the book, deals with ‘Islamic Commerce’ and the discipline it creates within Muslims. Some parts of this book are being mentioned with respect to India, as I am an Indiancitizen, but may actually be taken in general sense as it is applicable in most of the cases. Just a few days before the launch of this book, my brother and I successfully(Alhamdulillah) launched our website ‘http://scanislam.com’ with the subtitle, ‘Because evenfaith must have proof’. This website provides the best multimedia and literature on Islamavailable on internet for new Muslims and those non-Muslims who have an unprejudiced andunbiased mind towards understanding Islam or true message of major religions. On the samelines, this book explores the miraculous nature of Islam in the field of economics and commerce. Lastly, I welcome your suggestions, feedbacks, queries and comments on this book aswell as for my website (scanislam.com). Please feel free to write on ‘email@example.com’. May Peace, Mercy and Blessings of Allah (One True God) be upon you. Rahil Ahmed Khan
INDEX Section I – Islamic Economics1. Introduction to Islamic Economics 12. Sources of Islamic Economics 3 2.1 – Primary Sources 3 2.2 – Secondary sources 4 2.3 – Limitations of Data Collection 43. Executive Summary 54. Principles of Islamic Economics 7 4.1 – Prohibition of Ar-Riba 7 A) Difference Between Ar-Riba and Profit (8) B) Why Depreciation of Currency is Ar-Riba (9) 4.2 – Hoarding is Strictly Prohibited 9 4.3 – It is a Market Economy 10 4.4 – Redistribution is the Essence 10 4.5 – Opposes Monopoly in Necessity 11 4.6 – State Plays an Important Role 12 4.7 – Measurement of Economy 12 4.8 – Taxation is last option for Income 12 4.9 – Neither Communist nor Capitalist 13 A) Private ownership (14) B) Public Ownership (14) C) State Ownership (15) 4.10 – Zakat is Compulsory on all Muslims 15 4.11 – Law of God is to be taken as ultimate Law 155. Deception by Capitalism 16 5.1 – Fundamental mistake in definition of Demand 16 5.2 – Money that Never Existed 16 5.3 – Interest the root cause of improper utilization of resources 17 5.4 – Depreciation of a Currency 17 5.5 – Where is the Money? 18 A) Universally Acceptable? (18) B) Store in Value? (18) C) Unit of Account? (18) D) Standard of Deferred Payment (19) 5.6 – Unknown Taxes 19 A) Inflation Tax (19) B) Chain taxation due to Inflation (20)
6. Ill’s of interest at international level 217. Fraud: Integral Part of System of Interest 24 7.1 – A Mechanism of Exploitation of Labour & Masses 258. Arguments for Interest are Unsustainable 26 8.1 – Arguments 26 8.2 – Theories 279. Inflation due to Depreciation of Currency and its Effects 30 9.1- Relation Between Interest and Inflation 30 9.2 - Inflation and Exploitation of Have Nots 3010. Islam’s Solution#1: Currency fixed on a standard 33 10.1 – Comparing Price changes 33 A) Price changes in money based on gold/silver (33) B)Price changes in floating fiat money (33) C) Conclusion for Price changes (34) 10.2 – Stability of measure of Wealth 34 10.3 – Statistics of stability of Gold/Silver as a measure of wealth 35 10.4 – Problems faced by nations in adapting Gold standard &their Solutions 39 A) Refuting the argument: Correction of Fiscal Deficit (39) B) Refuting the argument: Financial Instability (47) C) Refuting the argument: Hampering of Growth (48)11. Islam’s Solution#2: System of Zakat 50 11.1 – The Meaning of Zakat and Its Importance 50 11.2 – The Spirit of Zakat 51 11.3 – The Benefits of Zakat 52 11.4 – Main differences between Zakah in Islam and Charity 53 11.5 – Guidelines of basic Taxation System 54 A) Those Required to pay Zakat (55) B) Types of Possession that require paying Zakat (55) 11.6 – Recipients of Zakat 58 11.7 – Collection of Zakat 59 11.8 – Zakatul Fitr 5912. Islam’s Solution#3: Investment & Loans without Interest 60 12.1 – Institutional Characteristics of an Islamic Bank 60 A) Sources of Funds (60) B) Lending operations of Banks (61) 12.2 – Is Islamic Finance Unwanted? 63 12.3 – Islamic Banking & Role of Central Bank 6413. Complete Prohibition of Ar-Riba 65
14. Conclusion for Islamic Economics 67 Section II15. Islamic Commerce 68 15.1 – Islamic Rules for Business 68 15.2 – Freedom of Enterprise 70 15.3 – Islamic Tenants concerning Business Transactions 70 A) Keenness to earn legitimate earnings (70) B) Trade through mutual consent (71) C) Truthfulness in Business Transactions (73) D) Generosity and Leniency in Business Transactions (73) E) Honoring and fulfilling Business Obligations (74) F) Fair Treatment of Workers (75) G) Importance to writing transactions (75) 15.4 – Prohibited Matters in Business Transactions 76 A) Sale of Al-Gharar (76) B) Free market Economy (77) C) Hoarding is strictly prohibited (77) D) Exploitation of one’s ignorance of market conditions (77) E) Al-Najsh - Trickery (77) F) Cheating and Fraud in Business Transactions (78) G) Swearing (79) H) Giving short measures (79) I) Dealing in Stolen Goods (80)16. Conclusion for Islamic Commerce 81---------------------------------------END OF SECTION II-------------------------------------------------17. Case Study (Islamic Economics and Banking: The Crisis proof system) 82 17.1 Key Statistics About The Crisis 82 17.2 What Caused The Crisis 82 A) History of Banking (82) B) Sub-Prime and Interest Only Mortgages (83) C) Interest-only adjustable-rate mortgages (83) 17.3 Consequences for the Government 84 17.4 Islamic Banks Weather Global Crisis 85 17.5 What IMF has to say on Islamic banks 86 A) Crisis Impact (86) B)Source of Stability (87)18. Conclusion 8819. Bibliography 8920. Glossary 91
Page |1 1. Introduction to Islamic EconomicsAll over the world religions are defined as the relationship between God and a person; wherebyGod guides humanity to justice, equality, and righteousness. But most of the major religions of theworld tend to look justice, equality and righteousness restricted to social interaction. HoweverIslam extends this framework to all the possible aspects of life and thus rises to be called ‘Acomplete way of life’.You must have heard about capitalistic economy, socialistic economy, mixed economy, etc.However if I speak about “ISLAMIC COMMERCE & ECONOMICS”, one would most probablyget surprised and say, “Hello!! Islam is a religion and not book of economics”. And that’s wherepeople go wrong. If religion is a way of life, then one must expect a religion to provide answers inall walks of life such as for regulatory (legal) laws, environmental laws, social laws, cultural laws,international behavior, political environment etc. Because when you live on earth you are bound toface dozens of conditions. (Fig 1.1 Dinar - 4.25 grams of Gold)As a complete way of life, Islam has provided guidelines and rules for every sphere of life andsociety. Naturally, a functioning economic system is vital for a healthy society, as theconsumption of goods and services, and the facilitation of this by a common medium of exchange,play a major role in allowing people to realize their material and other goals in life.Islam has set some standards, based on justice and practicality, for such economic systems to beestablished. These standards aim to prevent the enmity that often occurs between differentsocioeconomic sections. Of course, it is true that the gathering of money concerns almost everyhuman being who participates in transactions with others. Yet, while these standards recognizemoney as being among the most important elements in society, they do not lose sight of the fact
Page |2that its position is secondary to the real purpose of human existence, which is the worship of God,and hence world-peace.An Islamic economic system is not necessarily concerned with the precise amount of financialincome and expenditure, imports and exports, GDP, GNP, NNP and other economicstatistics. While such matters are no doubt important, Islam is more concerned with the spirit ofthe economic system.A society that implements Islamic laws and promotes Islamic manners will find that it bringstogether all the systems – social, economic, and so forth – that it deals with. Islam teaches thatGod has created provision for every person whom He has given a life. Therefore, the competitionfor natural resources that is presumed to exist among the nations of the world is an illusion. Whilethe earth has sufficient bounty to satisfy the needs of mankind, the challenge for humans lies indiscovering, extracting, processing, and distributing these resources to those who need them.1In the words of Quran:-Say: Who hath forbidden the beautiful (gifts) of God, which He has produced for Hisservants, and the things, clean and pure, (which He has provided) for sustenance? Say: Theyare, in the life of this world, for those who believe, (and) purely for them on the Day ofJudgment. Thus do We explain the signs in detail for those who understand.[Quran 7:32]Islam consists of a set of beliefs which organizes the relationship between the individual and hisCreator; between the person and other human beings; between the person and universe; and eventhe relationship of the person to himself. In that sense, Islam regulates human behavior, and onetype of human behavior is economic behavior. Economic behavior is dealt by Muslims as a meansof production, distribution, and consumption of goods and services. In Islam, human behavior -whether in the economic area or others - is not value free; nor is it value neutral. It is connectedwith the ideological foundation of the faith.1 For example food is being heavily wasted in America and Bangladeshis are dying with starvation. Also factors likeoverpopulation can convincingly be proven wrong. Say you want to maintain today’s population, so every mothermust bear 2 children (common sense); however this assumption is based on fact that there are no wars, epidemics,disasters etc which is a wrong assumption. For more details refer to study of ‘overpopulationisamyth.com’
Page |3 2. The Sources of Islamic Economics2.1 Primary sourcesThe fundamental sources of Islam - the Quran and the Sunnah of the Prophet2- provide guidelinesfor economic behavior and a blueprint of how the economic system of a society should beorganized. Therefore, the values and objectives of all “Islamic” economic systems mustnecessarily conform to, and comply with, the principles derived from these fundamentalsources. The purpose of this report is to outline the most salient characteristics of an economicsystem based on the fundamental sources of Islam. The focus here is on the principal features ofthe Islamic system.The Islamic economic system is defined by a network of rules called the Shariah. The rules whichare contained in the Shariah are both constitutive and regulative, meaning that they either lay therules for the creation of economic entities and systems, as well the rules which regulate existingone. As an integral part of the revelation, the Shariah is the guide for human action whichencompasses every aspect of life – spiritual, individual, social, political, cultural, and economic. Itprovides a scale by which all actions, whether on the part of the individual agents, society, and thestate, are classified in regards to their legality. Thus there are five types of actions recognized,namely: obligatory; recommended; permissible; discouraged; and forbidden. This classification isalso inclusive of economic behavior.The basic source of the Shariah in Islam is the Quran and the Sunnah, which include all thenecessary rules of the Shariah as guidance for mankind. The Sunnah further explains these rulesby the practical application of Prophet Muhammad, may the mercy and blessings of God be uponhim. The expansion of the regulative rules of the Shariah and their extensions to new situations inlater times was accomplished with the aid of consensus of the scholars, analogical reasoning -which derived rules by discerning an analogy between new problems and those existing in theprimary sources - and finally, through textual reasoning of scholars specialized in theShariah. These five sources - the Quran, the Sunnah, consensus of the scholars, analogicalreasoning, and textual reasoning - constitute the components of the Shariah, and these componentsare also used as a basis for governing economic affairs.Thus Primary Sources Directly referred for this report includes- 1. Al-Quran. 2. Hadith Saheeh Bukhari. 3. Hadith Saheeh Muslim. 4. Hadith Sunan Abu Dawud.The other primary sources of knowledge such as opinions of scholars are derived from fiqh books.As far as fiqh (Islamic jurisprudence) books are concerned I have not referred to any book directly.Such issues of fiqh are taken in this report from secondary sources.2 The Sunnah is general body of narrations of the speech, deeds, and tacit approvals of the Prophet (PBUH) that hasbeen recorded and authenticated.
Page |42.2 Secondary SourcesThe Secondary sources for this report has a vast range right from books, articles, websites,newspapers, magazines, to even public lectures and speeches.Extensive research and literature survey was undertaken to find the essence of ongoing and Islamiceconomic and commercial fundamentals. The Islamic websites referred were checked for theirauthenticity and it was ensured that all data included is true and real. However if any authentic datasuch as an authentic Hadith contradicts with this report, the authentic material must be taken overand above my opinion.The public lectures include all speeches from weekly Friday Congregation speeches to Islamicconferences.Thus the sources of secondary data are so vast and spread across years that listing all of them downis next to impossible. Thus in Bibliography too I have mentioned only the direct secondary sourcesused for this report.2.3 Limitations of Data Collectiona) There have been very few Islamic Economics Scholars for direct consultation. Though I havetried level best to comply with scholarly opinions and Sharia laws; there may arise a conflict. Insuch a scenario the Sharia law or scholar’s opinion must be considered first. Any mistake in thisreport related to sharia is purely my fault and any correct mentioning of fact or any correctinterpretation is purely due to guidance of One True God.b) The second limitation faced is the incapability of available non-muslim scholars to understandIslamic Economics. This was mainly because Islamic Economics is never introduced in any schoolor college level syllabus.c) Third limitation in data collection is the lack of adequate statistics to compare IslamicEconomics. This is due to non-compliance of Muslim countries with sharia laws (The classicexample of that being leaving currency based on standard). However efforts are been made incountries (like Malaysia) to rectify such mistakes but there’s no impact of these efforts until now.
Page |5 3. Executive SummaryWorld Assets: - Top 1% has 40% Top 10% has 85% Bottom half has only 1%Do you think Slavery still exists? If you think it doesn’t then it must be thought of again. It doesexist. It is the economic slavery which exists in the current capitalist system. Let me present to youa glimpse of the real facts and some solutions for it.Before we start, we first need to get our economic concepts right. What is Inflation & Deflation?Suppose a pen costing Rs 10, is being manufactured by latest computer technology and thus itscost reduces to Rs 8, so are computers causing Deflation? Certainly not. People often havemisconceptions with regards to actual definitions. So if you have such concepts then I advise youto clear them out3So inflation in our example will occur only when the Rs10 you hold is not worth buying that pen,mostly due to depreciation of currency caused by excess issue of currency by the RBI. Accordingto TOI report, if you had earned Rs100 in December 2008, your money is now just Rs92.82 thusdepreciating currency and thereby causing massive inflation4. Stealing money is a clear crime, soshouldn’t RBI or Government compensate to me for my loss? (I want my Rs7.18 rupees back onevery Rs100 I had earned). Also imagine what would have happened to your Rs100 if you hadearned it right back in 20th Century. This clearly exposes the robbery on the part of Government.Reasoning the causes of Inflation(Everything written in abstract requires no proof, because they are generally accepted and recognized by world-wideeconomists)Here we shall discuss one of the general causes of inflation. Due to burden of interest someentrepreneurs are under compulsion to raise prices of their products5, others want to raise prices oftheir products taking advantage of the protection provided by the dominance of interest. When theaverage prices are raised, people buy less.Thus increase in prices caused due to interest, lowers consumption. Industry reduces productionand employment, pretending shortage of demand. To arrest fall in output and employment, thegovernment raises the money supply. Following which the quantity of commodities that moneybuys falls or if they don’t people tend to buy all that they want. When more money is available butthere is no increase in supply they end up buying earlier quantities for more money6.3 Helpful link:- http://www.youtube.com/watch?v=eN7lEMXZRMM&feature=related4 As people tend to expend more money as money supply increases and thereby leading to rise in prices on the basis ofdemand-supply principle.5 Because they are not able clear the interest amount with actual growth. This point is proved by comparing growthrate and interest rates in an economy. Also explained in detail in ‘Fraud: Integral Part of the System of Interest’ andsome other parts.6 With everyone trying to buy more, but supply of the goods remaining at the previous level, they end up buying samequantity at larger amount of money.
Page |6Thus this excess of money supply creates illusion7 of rising prices. Since this increase in pricelevel does not remove the causes that lead to the price rise, the government goes on increasingmoney supply and the prices continue to rise. Thus the continuing depreciation of paper currenciesproduce the illusion of consistently increasing prices and it is thus called inflation. Thus inflationand depreciation of currency are two faces of same fraud.Fiat money has no real worth and can be depreciated without limit. Consistent and appreciableincrease in the money supply by the government/banks beyond the needs of the economy, resultsin consistent fall in the quantity of wealth represented by the currency that creates illusion ofconsistent increase in prices, and that is inflation.When average rate of return of economic activities fall (financial instability), producers8 tend tomaintain it by reducing output and employment. Trying to prevent fall in output and employment,the government raises money supply (in the pretext of growth and development) that increases rateof inflation. This reduces real interest rate of capital borrowed in past, and reduces minimum rateof return for the economic activity to shut-off. Thus increased rate of inflation acts as a relief forthe activities based on capital borrowed (on interest) in past. However this relief is at best,temporary, because increase in inflation reduces real interest rate and the capitalist creditors thenincreases lending rate. In case government tries to reduce lending rate, the capitalist creditors shiftcapital to real estate that reduces economic activity and compels the government to allow higherlending rates. Now, higher rate of inflation is required to maintain previous level of employmentand output 9 . Increase in disparity due to interest and inflation; reduce the aggregate humancapacity as well as the purchasing power of economy. This reduces the rate of return of theeconomic activities. Finally, the stage is reached where unemployment rises despite increase ininflation. This is known as stagflation. This forces the government to stop inflationary trend. Thusinflation finally results in reduced output and unemployment. Clearly, temporary relief thatinflation provides is small compared to the problems that it creates and this all started due toinflation caused by issuing more currency without proper backing.7 The price increase is with respect to depreciating currency (freely floating fiat money) that is a variablesymbolic measure of value. When supply of money is raised, the quantity of wealth represented by this variablesymbolic money falls. Thus this increase is similar to (i) apparent increase in our weight when unit of measure,say kg is made smaller and (ii) increase in prices when gold contained in gold coins is reduced. Thus, suchincrease in prices is illusion.8 Entrepreneurs have to pay interest on the capital borrowed for investment. Therefore, they are under compulsion toensure that the rate of return does not fall.9 Many economists have studied this relation between inflation and unemployment. Empirical data confirm ourcontention. Relevant data are available in standard Economics textbooks under the heading, ‘Philips Curve’.
Page |7 4.Principles of Islamic Economics4.1 Prohibition Of Ar-RibaO ye who believe! Fear God, and give up what remains of your demand for Al-Riba, if youare indeed believers.If you do it not, Take notice of war from God and His Messenger. But if you turn back, youshall have your capital sums: Deal not unjustly, and you shall not be dealt with unjustly.[Quran 2:278-279]It is a well known fact that Islam condemns Interest; however interest is not a proper synonym toArabic word ‘Ar-Riba’. In the above verses of Qur’an it is seen that Ar-Riba is strictly condemned.So what is ‘Ar-Riba’ which Islam forbids?Narrated Ubadah ibn as-Samit: The Apostle of Allah (peace_be_upon_him) said: Gold is tobe paid for with gold, raw and coined, silver with silver, raw and coined (in equal weight),wheat with wheat in equal measure, barley with barley in equal measure, dates with dates inequal measure, salt by salt with equal measure; if anyone gives more or asks more, he hasdealt in usury. But there is no harm in selling gold for silver and silver (for gold), in unequalweight, payment being made on the spot. Do not sell them if they are to be paid for later.There is no harm in selling wheat for barley and barley (for wheat) in unequal measure,payment being made on the spot. If the payment is to be made later, then do not sellthem. [Hadith Sunan Abu Dawud 22:3343]To understand this concept there are basically four main principles to be kept in mind: - - Any increase in demand for money without simultaneous production of Goods or Service constitutes ‘Ar-Riba’.1010 Same thing happens in Bank interest where interest rate is fixed though goods and services may or may not beproduced.
Page |8 - If capital by itself is generating more capital then there is ‘Ar-Riba’. Thus Capital can generate more capital only when used with other factors. (Land, Labour and Entrepreneur) - Prophet (PBUH) said, “There is no Riba in hand-to-hand (spot) transactions.” (Usman ibn Zaid is the narrator: Bukhari, Muslim and Musnad Ahmed)11-12 - Everything should be real in value. No illusions allowed.4.1.A Difference between Ar-Riba and ProfitBy reading the first two principles the point that must have struck you is then what is thedifference between Riba and profit? Even profit does not make simultaneous production. By theway then you are not the first one to say so, people used to say the same at the time of revelation ofQur’an:-Those who devour Ar-Riba will not stand except as stand one whom the Evil one by his touchHas driven to madness. That is because they say: "Trade is like Ar-Riba," but God hathpermitted trade and forbidden Ar-Riba. Those who after receiving direction from theirLord, desist, shall be pardoned for the past; their case is for God (to judge); but those whorepeat (The offence) are companions of the Fire: They will abide therein (for ever). [Quran2:275]However Profit is compensation of Entrepreneur’s skill and Riba is unnecessary illusion of wealthand money though there is no simultaneous production. Profit exists in spot transactions. Profit isdecided at once and Riba is decided over a period of time and thus in Riba value changes with timefactor. Also once you apply the above principles you would clearly get the difference.11 However there are some exceptions mentioned in Hadiths, such as 1)Money for Money where quantity is not equal,2)Barter transaction where goods are measurable and of same kind and quantity is not equal 3)Barter transaction wheredelivery from one side is deferred.12 This is because spot transactions take place in accordance with market forces (e.g. demand-supply).
Page |94.1.B Why Depreciation of currency is Ar-RibaApplying the same principles to depreciation of currency i.e. fall in the value of currency due toexcess production of notes or coins you may clearly see that Depreciation of Currency is also Ar-Riba. The Government reduces the value of currency (when compared with the promised value)without any simultaneous loss in value of goods, or similarly increases money supply without anysimultaneous increase in goods or services. If supply of money is regulated by actual production ofgoods and services then there is no problem, however when an illusion is created, then that isdefinitely Ar-Riba. In fact this is not only Ar-Riba but also theft and wrongful taxation and thussuch uninformed depreciation of currency or measure of wealth is completely forbidden in Islam.This is also seen by one of the Hadith:-Narrated Abdullah ibn Masud: The Apostle of Allah (peace_be_upon_him) forbade tobreak the coins of the Muslims current among them except for some defect.[Hadith Sunan Abu Dawud 23:3442]This shows how important it was 1400 years back to maintain a proper currency. Thus there wasno unnecessary increase or decrease in money supply. On the contrary Islam blocks all thosefactors which lead to such illusions (to be discussed later).4.2 Hoarding is strictly prohibitedSay: "In the bounty of Allah. And in His Mercy therein let them rejoice": that is better thanthe (wealth) they hoard.[Quran 10:58]On the Day when heat will be produced out of that (wealth) in the fire of Hell, and with it willbe branded their foreheads, their flanks, and their backs.- "This is the (treasure) which yeburied for yourselves: taste ye, then, the (treasures) ye buried!"[Quran 9:35]
P a g e | 104.3 It is a Market EconomyNarrated Anas ibn Malik: The people said: Apostle of Allah , prices have shot up, so fixprices for us. Thereupon the Apostle of Allah (peace_be_upon_him) said: Allah is the oneWho fixes prices, Who withholds, gives lavishly and provides, and I hope that when I meetAllah, none of you will have any claim on me for an injustice regarding blood or property.[Hadith Sunan Abu Dawud 23:3444]Thus Islam encourages Demand-Supply mechanism and does not interfere in any business unless itis unjust and harmful for society.4.4 Redistribution is the essence (Also failure of Trickle down system)Conventional Economic systems are based on the ‘Trickle down system’. Proponents of thesepolicies claim that if the top income earners invest more into the business infrastructure and equitymarkets, it will in turn lead to more goods at lower prices, and create more jobs for middle andlower class individuals. Proponents argue economic growth flows down from the top to thebottom, indirectly benefiting those who do not directly benefit from the policy changes.However Trickle down system has miserably failed. In fact this system was designed to rob peopleof their wealth. There are thousands of arguments to defeat this corrupt ideology however I wouldjust take one such example to prove the point. In Egypt, Pharaoh used to have a lot of wealth andproperty, so should a peasant working 18hrs a day to make a pyramid expect to become evenclosely rich to Pharaoh? This ideology is just against the human attitude of GAINING MORETHAN GIVING. An upper class person could probably live his whole life by earning interest onFixed Deposits but a lower or middle class person is actually the one who has to be productive.The Human nature clearly indicates that, proportionate increase in upper class wealth will be muchmore than others.Reagan’s trickle down policies in the U.S. can still be felt today:According to the Tax Policy Center, the top marginal tax rate in the U.S. stood at 70% whenReagan was elected in 1980, falling steadily to 28% by 1989, before it began to rise modestly. Thetop marginal rate now stands at 35% against a peak of 94% in 194513.These tax cuts were implemented with the support of the Democrats in the House, which explainswhy they have been upheld all these years. The result of this was, unsurprisingly, a higherconcentration of wealth in fewer hands:13 June 30, 2009, Wall Street Journal article By Michael S. Derby
P a g e | 11Source :-Congressional Budget Office (www.cbo.gov)Dan Andrews- Harvard University - John F. Kennedy School of GovernmentChristopher Jencks- Harvard University - John F. Kennedy School of Government andAndrew Leigh- Australian National University - Economics Program, Research School of SocialSciences. Analysed statistics of whole 20th century and found no proof to support Trickle downsystem.14 Coming back to point, economic system is by default a TRICKLE UP system. Thus Islamredistributes the income in the best way possible.4.5 Opposes Monopoly in NecessityThough no example for the above was found by me in the minimum amount of literature surveydone, to show restriction on Monopoly in the lifetime of Prophet Mohammed (Peace Be UponHim); Absence of example at the time of prophet in no ways shows that he accepted monopoly inevery case; rather it shows that such a situation didn’t arrive in his lifetime. Also there arenumerous examples where he said that hoarding for prices to rise is a grave sin and thus giving aframework for monopolized market.One more noteworthy point is that scholars have an opinion that according to Sharia governmentmust interfere only if monopoly is in the section of necessity. For example, if someonemonopolizes diamond jewellery market, the ruler must not be concerned with it. Howevermonopolization of wheat market requires ruler to intervene.14 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1077730
P a g e | 124.6 State plays a major roleState in an Islamic Economic system has a major role to play. It’s important to note at this pointthat a Khalifa (Viceroy) is not the one who makes laws in an Islamic State; he is just animplementer. Islam is of the belief that laws are made by God alone and that all the decisions if notdirectly conveyed should be at least be made in accordance of God’s laws (Sharia). Islam appointsa direct role on state to channelize the economic growth and welfare of the country15.4.7 Measurement of EconomyToday, the world measures its economy in terms of GDP, GNP, NNP, NDP etc. Though thesefigures are important, Islam will never accept it at the cost of poverty, injustice, inequality,unemployment etc. An Islamic state is successful only if it implements the teaching of Islameffectively and the teachings are very clear about this issue16.4.8 Taxation is the last option available as a source of income for government17The following Hadith gives us a picture of taxation in Islam. This is originally a long Hadith ofwhich I have taken a part, reported by Abdullah b. Buraida on the authority of his father:-... [Prophet Muhammad (PBUH) said] By Him in Whose Hand is my life, she has made sucha repentance that even if a wrongful tax-collector were to repent, he would have beenforgiven. Then giving command regarding her, he prayed over her and she wasburied. [Hadith Muslim 17:4206]In the above Hadith the Prophet is comparing the sin of a married woman who had illegal sexualrelations to the sin of the wrongful tax-collector. Also he goes on to indicate that the sin ofwrongfully collecting taxes is bigger than the sin which she did18. In the above Hadith, ‘wrongfultax-collector’ is originally, in Arabic, spelt ‘Sahabul Maks’. This phrase ‘Sahabul Maks’ refers tomainly two types of taxes existing in those days, which are SALES TAX and TOLL TAX.15 Narrated Abdullah bin Umar: I heard Allahs Apostle saying, "Every one of you is a guardian, and responsible forwhat is in his custody. The ruler is a guardian of his subjects and responsible for them; a husband is a guardian ofhis family and is responsible for it; a lady is a guardian of her husbands house and is responsible for it, and a servant isa guardian of his masters property and is responsible for it." I heard that from Allahs Apostle and I think that theProphet also said, "A man is a guardian of his fathers property and is responsible for it, so all of you are guardians andresponsible for your wards and things under your care." (41:592) Bukhari16 A worth mentioning Hadith: - Narrated Abu Huraira: The Prophet said, "If someone leaves some property, it will befor the inheritors, and if he leaves some weak offspring, it will be for us to support them."(41:583) Bukhari17 Taxation here does not include Zakah. Zakah is not a tax imposed by government. Rather it is enjoined by God onhumanity and only collected by a righteous ruler. This point only talks about taxation imposed by government.18 Married person having illegal sexual relations is such a grave sin in Islam that it’s punishment is directly ‘stone todeath’.
P a g e | 13The obvious inferences which can be drawn from this above Hadith are that, taxes must be just andmust not violate a person’s right to use his natural environment. For example, in India Gandhijiheld a march famously known as, “Dandi March”. His march was absolutely justified because inthat case British government enacted salt tax, thus taxing production of salt, which is naturally andabundantly available and in its production British government had no share. In the same way aperson earns his livelihood by business; society cannot exist without business. So selling andbuying activities are part of nature and no human can survive without it. Also usually governmentshave no role in facilitating private selling and buying. Thus in the same sense government has noright to charge sales tax19. Similarly, land is available naturally and no one can charge a personwho uses it for travelling. However, if government maintains it and has no option but to recovermoney it is a different scenario. In such a case too there has to exist a freeway to reach place Bfrom A. Something like Sales tax, income tax etc is as illogical as taxing on the number of breathesone takes, because just as breathing is unavoidable, doing business is also unavoidable. All taxesimposed must be in accordance with this ideology.In the opinion of scholars, even the taxes which are justified can be enacted only if all the wealthfrom all the available treasuries, if taken together too does not fulfil the requirement.4.9 Islamic Economy is neither a communist nor a capitalist philosophyThe communist philosophy, ‘to each according to his/her need and from each according to his/hercapacity is in direct conflict with the human nature. People are not willing to work hard and excelwhen the fruits of their work is distributed in the society without any respect to their preferences.In order to enforce the aforesaid utopian principle, Communism denies the people the right toownership and inheritance but this unnecessary restriction against human selfness results in loss ofmotivation that is essential to cause people to strive to excel. That reduces capital formation aswell as productivity of the resources; resulting fall in production of capital goods halts economicprogress.20Also under Capitalist Economy there are numerous flaws which are to be discussed from nextchapter onwards.Thus system of economy must be capable of motivating the people to strive to produce the desiredgrowth. However the economy propelled by interest is characterized by unemployment, injustice,exploitation, fraud, corruption and gross disparity of income and wealth and trade cycles(explained in further chapters).19 Unless, in anyways it causes expenditure on part of the government.20 History itself gives the proof of what happened after the collapse of USSR.
P a g e | 14Keeping the above factor in mind Islam about 1430 years back divided the ownership issue underthree main heads:4.9.A Private ownershipIslam has made ownership legal right for the individual, and it does not impose limit on wealth onecan own. Accordingly, people may own moveable property, such as livestock, money, cars andclothes, or immovable property such as land, houses or factories. However Sharia controls themeans of ownership such that people acquire the right to wealth in a just manner, and it alsoregulates the way in which it is disposed of.Means of ownership: - There are variety of ways in which ownership of wealth can be achieved.Out of them working is the best way. In the words of Prophet:Narrated Al-Miqdam: The Prophet said, "Nobody has ever eaten a better meal than thatwhich one has earned by working with ones own hands. The Prophet of Allah, David(PBUH)used to eat from the earnings of his manual labor.[Hadith Bukhari 34:286]Other means of ownership which Islam has permitted include inheritance, grants of states propertyto citizens, gifts, blood money and marriage transfers. Islam restricts the means in which wealthcan be earned or invested by forbidding pursuits such as fraud, gambling, theft and bribery ortrading of forbidden items. The worst means of gaining wealth is debt in form of loan214.9.B Public OwnershipThis is defined as commodities which Islam has made property of citizens as a whole, such thatindividuals are allowed to utilize them, but are forbidden from owning them as their own property.These commodities come under three main categories:-- The utilities of the community without which the everyday life of community cannot properlyfunction. Under the category comes things like water, oil reserves, machinery for drawing waterfor public as whole, public water pipes, power stations etc.- Commodities that by nature cannot be individual property like seas, river, public parks, places ofworship, public highways etc- Natural uncounted minerals. These include many minerals such as salt or sand which are vast inquantity. These are property of all citizens and individual or corporate ownership is forbidden.21 Narrated AbuMusa al-Ashari: The Prophet (peace_be_upon_him) said: After the grave sins which Allah hasprohibited the greatest sin is that a man dies while he has debt due from him and does not leave anything to pay it off,and meets Him with it.(22:3336) Sunan Abu Dawud
P a g e | 15Since the public property is property of all citizens it is accordingly right of all to utilise it. In caseof properties like rivers, seas etc there is no problem however in case of mines State mustundertake proper distribution.4.9 C State ownership:-This includes every property which is connected to the right of public but is not included underpublic ownership. It includes properties like unclaimed land, captured land, Governmentdepartments, schools, hospitals etc. This ensures proper distribution of necessary needs.22Interestingly this three dimensional ownership model was applied formally only in 1950s bycountries like India, Egypt and some others after the Khalifah periods though it was proposed byIslam in 8th Century.Though India calls itself as taking a middle way in economics, it has not failed in picking up flawsof both the systems. Henceforth thus we will be discussing those flaws in detail and see whatsolution Islam provides for it.4.10 Zakat compulsory upon all MuslimsZakat is compulsory on all Muslims who fit in the eligibility criteria. It is paid and used inaccordance with sharia law. This topic has been explained in detail in Chapter 11.4.11 Law of God is to be taken as the Ultimate LawIt is not fitting for a Believer, man or woman, when a matter has been decided by God andHis Messenger to have any option about their decision: if any one disobeys God and HisMessenger, he is indeed on a clearly wrong Path.[Quran 33:36]22 Under capitalist system people are considered as units of production and theoretically those who can’t produce (e.g.handicapped) must not even exist.
P a g e | 16 5. Deception by capitalism.5.1 Fundamental mistake in definition ofDemandWhen a person wants to buy something to satisfy his/hernecessity or need, it has to be agreed that there is ademand. For example: a person who wants to buy bread tosatisfy hunger has a valid demand even if the person is notable to buy it for want of money. However, the economistsdefine demand as the quantity sold at the prevailing pricethat automatically ignores the demand of the poor whomay not be able to afford to buy. Thus the economists havecontributed to the exploitation of the poor by ignoring thevalid claim of the poor over the resources.5.2 Money that never existedA major part of net income of most of the developing and under developed countries getstransferred to the greedy capitalists. The following example nicely explains the severity of thisproblem:Amount lent at 15% yearly compound interest doubles in less than 5 years, it multiplies 10 foldevery 16.5, and it multiplies 1,000 fold every 49.5 years and 1,174,313 fold every 100 years. Netreal rate of growth of world is below 2% 23 . Therefore, even if capital worth 15% of the totalresources of the world could be invested at 15% interest compounded yearly, the over-all growthof the economy will not be enough even for clearing the interest24. Really, money borrowed oninterest is enough to kill any economy. Yet short sighted, corrupt and incompetent politicians areseen to be trying to borrow larger and larger amount on interest 25 . These are the real traitorsalthough some of them may not be aware of this treachery.Thus, suppose there is 100units of money in economy and bank lends 50units through deposits at10% annual interest, so next year bank would demand 5 units extra, making total money requiredin economy to be 105 units. But as already mentioned average world GDP is about 2%. In short,demand of money in our case would be 105 units whereas supply would be 102 units afterconsidering growth, making money shortage of 3 units. So form where will the borrower pay hisdebt when money does not exist? By taking more debt/loan? For a short-term you might say otherswill lose their money and thus the debtor to bank will pay Rs3, but in that case you would clearlyobserve that within a few years all resources will end up in bank’s pocket. At the Macro level, suchmultiplying levels of money cause something like Dubai Debt crisis or forces the government to23 As per Central Intelligence Agency’s World Fact Book.24 Hifzur Rab25 As per RBI combined Debt of central and state governments has reached 76.6% for 2009-10 of GDP due to excessof interest rate over growth rate.
P a g e | 17depreciate the currency i.e. issue more currency and thereby reduce the value of each unit and atthe micro level either farmers sell their land for illusionary money to pay the debt or they attemptsuicide. This is a new form of colonialism or call it Economic slavery.5.3 Interest, the root cause of improper utilization of resourcesInterest is the root cause of shortage of supply, unemployment, inflation and exploitation andgrowing disparity of income and wealth. The following example clearly demonstrates it:Suppose that our cement factories are producing at 70% of their capacity. Now if their productionis raised to 85% of capacity, then the cement price will fall (Demand-Supply Theory). Suppose thatprice per bag prior to and after increase in production are rupees 110 and 100 respectively. Let costof production per bag excluding interest paid on capital borrowed prior to and after the increase inproduction be Rs 100 and Rs 95 respectively and the interest paid per bag is Rs8 and Rs7respectively (Interest rate will fall slowly as capital is needed for expansion, most of the timesinterest payable per bag actually increases). Note that prior to increase in production the cementfactories were having a net profit of rupees 2 per bag but when the production is raised there is netloss of rupees 2 per bag. This loss is due to interest, as in the absence of interest the factorieswould have been making a profit of rupees 5 per bag even after increasing production. Clearly, it isdue to interest that the companies (who have taken loans on interest) will not increase production.Thus, it is due to interest, that most of our industries produce far below their capacity and employlesser labour. Due to interest, entrepreneurs can’t get capital for investment unless they are willingto pay the prevailing rate of interest. Therefore, there is no investment in a business that is notexpected to produce profits much higher than the prevailing interest rate. If the interest rate isabolished, industries will be set upon profit sharing basis and then the completion from theentrepreneurs who will be willing to produce for lower profit margins it would increase the rateincrease in employment, labor wage and increased production will reduce prices.5.4 Depreciation of a currencyDepreciation of a currency produces an illusion of increasing prices and it is what constitutesinflation. Depreciation of the currency is the same as reduction in the quantity of wealthrepresented by measure of wealth. Currency is a measure of value, therefore measure and itsdepreciation constitutes worst fraud against humanity. It is used as a unit of account. That resultsin part of capital being accounted as profit or interest.A large number of industries in the organized sector are based on the capital entrepreneurs whohave borrowed on interest. Entrepreneurs are said to be the owners. Rate of return can fall belowexpected value due to large number of causes and new causes may develop. After the loan iscontracted they are under compulsion to keep the cost of produce high. This is because they agreedto pay prior to setting up the industry, when they could not have taken into considerations the fallin rate of return due to factors that might not have existed then.Shortage of supply causes the price to rise and abundance causes price to fall. This is very naturaland it leads to price increase and fall in prices respectively; but it has nothing to do with inflationthat is a consequence of fraudulent reduction in quantity of wealth that (fiat) money is
P a g e | 18(Depreciation of Currency). This causes severe losses to the have-nots. Planned inflationaryeconomy constitutes an institutionalized exploitation of the masses and the labor (To studyexploitation caused due to depreciation of currency, read the topic “Mechanism of Exploitation ofLabour & Masses” and “Inflation”).5.5 Where is the Money?Money is any object that is generally accepted as payment for goods and services and repaymentof debts in a given country or socio-economic context. The main functions of money aredistinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, astandard of deferred payment. Thus we could list down few properties of money as defined byReserve banks across the Globe: - A. Universally acceptable. B. Store of value. C. Unit of Account. D. Standard of deferred payment.Now we would compare today’s money with the definition given:-5.5.A Universally AcceptableIt is worth mentioning here that paper is not universally accepted! It is the gold backed currencywhich people accepted. Once you remove gold backing from currencies it no longer remainsuniversally accepted. No one exchanges a piece of paper for something. A piece of paper is ascheap as a stone lying on road. Rather what now remains is just FORCED ACCEPTANCE. Ifgiven a choice people will still conduct trade in gold backed currencies because universalacceptance arises due to intrinsic value of element and not by force.5.5.B Store of valueNo sane person in this world would agree that today’s so called, “Money” has store of value. Valueof money continuously goes on depreciating due to over issue of currency by government(constituting Ar-Riba in Islam). C.Rangarajan 26 in his book ‘India: Monetary Policy FinancialStability and other Essays’ mentions that India is issuing 20% more currency annually from past 3years and if you lessen Growth rate from it, you get 11-12% extra money. So every next year yourmoney reduces by about 11%. So does anyone still think that our current money has store in value?5.5.C Unit of accountMoney in general has always been unit of account. However the current fiat money system wasnever really given this status. Let’s take an example, suppose a business in terms of current units ofmoney (n India Rupees) earns 10% Profit; and in the same year government depreciated currencyby net 12%. So the business actually will be in an illusion of earning profits however in reality it isin 2% loss. Indeed Prophet Mohammed (PBUH) rightly prophesied: -26 Former Governor of RBI (1992-1997), Former Governor of Andhra Pradesh (1997-2003), Head of Twelfth FinanceCommission (2003-04) and currently Rajya Sabha member.
P a g e | 19Abū Bakr ibn Abi Maryam reported that he heard the Messenger of Allah (PBUH) say: "Atime is certainly coming over mankind in which there will be nothing (left) that will be of use(or benefit) save a Dinār (i.e., a gold coin) and a Dirham (i.e., a silver coin)[Both haveintrinsic values].”[Hadith Musnad Ahmad]5.5.D Standard of deferred paymentThere is really no way in which one could call something like Euro, Rupees or Dollars anywhereclose to a standard for deferred payment. Suppose I took 100 rupees from someone in 1950s and Ihave to return it now to him. In no ways will I be doing justice if I return today’s 100 rupees back.This is because of continuous excess issue of currency (Ar-Riba) undertaken by governments. Infact, organized businesses have actually nowadays developed systems to cope this problem of timevalue of money. Indeed the Hadith stands true:-Narrated Abu Hurayrah: The Prophet (peace_be_upon_him) said: A time is certainlycoming to mankind when only the receiver of usury will remain, and if he does not receive it,some of its vapour will reach him. Ibn Isa said: Some of its dust will reach him.[Hadith Sunan Abu Dawud 22:3325]So the question arises, where is the real money? This important question has been discussed indetail in Quran and the Sunnah (tradition of Prophet s.a.w) and mentioned later in chapter 10.(Constancy/Stability of Gold).5.6 The Unknown Taxes5.6.A Inflation taxWhen central banks print notes and issue credit, they increase the amount of money available inthe economy. This is sometimes done as a reaction to worsening economic conditions. It isgenerally held that in the long run, an increase in the money supply causes inflation. In effect,increasing the money supply and causing the holders of money to pay an inflation tax is a form oftaxationIf the annual inflation rate in the United States is 5%, one dollar will buy $1 worth of goods andservices this year, but it would require $1.05 to buy the same goods or services the next year; thishas the same effect as a 5% annual tax on cash holdings, provided there is 0% economic growth, orother price-reducing factors, such as efficiency-enhancing technology. With price reducing factorsat play, a 5% inflation rate indicates a tax rate of higher than 5%.Governments are almost always net debtors (that is, most of the time a government owes moremoney than others owe to it). Inflation reduces the relative value of previous borrowing, and at thesame time it increases the amount of revenue from taxes. Thus it follows that a government canimprove the debt-to-revenue ratio by employing inflationary measures.
P a g e | 20An inflation tax is the economic disadvantage suffered by holders of cash and cash equivalents inone denomination of currency due to the effects of Expansionary monetary policy, which acts as ahidden tax that subtracts value from those assets. Many economists hold that the inflation taxaffects the lower and middle classes more than the rich, as they hold a larger fraction of theirincome in cash, they are much less likely to receive the newly created monies before the markethas adjusted with inflated prices, and more often have fixed incomes, wages or pensions5.6.B Chain taxation due to inflationThings do not end at Inflation tax. If due to inflation, value of capital assets such as real estate,metals etc increase then surely you will again be taxed in the banner of ‘Capital Gains’ tax. Thechain still does not end, again due to inflation if your returns increase e.g. your salary increases ascompensation to inflation then you will be subjected to income tax. It depends on countriestaxation policies of how much a chain stretches. This is just a big scam to which people areunaware.
P a g e | 21 6. Ills of Interest at International levelInternational trade between inflationary economies leads to fraudulent transfer of wealth of the lessdeveloped economy towards the more developed ones.For e.g.: Currencies of the developed world have higher stability and they command worldwideacceptance and recognition. Everyone likes to have dollars but no one, not even Indians prefer tohave Indian rupees. This causes massive loss to the less developed economies. Majority of have-nots live in less developed countries and it results in the exploitation of the have-nots. Thus the socalled champions of the human rights (developed countries) are the worst exploiters of the have-nots. It exposes their hypocrisy. On an international level, the situation is much more devastating and dangerous. There is no question that when looked at from an international perspective, interest kills people. The debt servicing of lesser developed countries today is so great that they must sacrifice essential health and nutritional needs. It is dumbfounding to think that untold numbers of children are dying daily in lesser-developed countries due to the “tool” of modern capitalism: interest. Some African governments are forced to spend more on debt servicing than they spend on health or education. In this context, the United Nations Development Programme, UNDP(1998) predicted that if the external debt of the 20 poorest countries of the world was written off, itcould save the lives of 20 million people before the year 2000. In other words, it means thatuncancelled debt was responsible for the deaths of 130,000 children per week up until the year2000.Ken Livingston, Former Mayor of London, claimed that global capitalism kills more people eachyear then the number of people killed by Adolf Hitler. He blamed the IMF and World Bank fordeaths of millions due to their refusal to ease the debt burden. Susan George stated that every yearsince 1981 between 15 and 20 million people died unnecessarily due to debt burden “becauseThird World governments have had to cut back on clean water and health programs to meet theirrepayments.”Debt, with its increasing amount of interest compounded upon it, is dangerous for any nationbecause it means loss of sovereignty and control. This aspect, incidentally, is no accident. Lesser
P a g e | 22developed countries—especially their elites and corrupt rulers—are not free of guilt when it comesto the issue of the debt that they have accumulated. At the same time, if they did not borrow andget in debt, pressure would definitely be put on them to do so. Caufield noted:Thus it has been with the World Bank; refunding operations have become more and more of thetotal of its lending. The result has been an accumulation of debt by the Bank’s borrowers—and agradual loss of sovereignty as well. No creditor is willing to keep refunding forever withoutasserting some control over the way the debtor conducts business. In earlier times, the greatpowers did not hesitate to use military force to bend recalcitrant debtors to their will. In his classic essay, “Public Debts,” published in 1887, the American economist Henry CarterAdams wrote that “the granting of foreign credits is the first step toward the establishment of anaggressive foreign policy, and under certain conditions, leads inevitably to conquest andoccupation.”The Bank’s approach to its debtors is not so crude. Instead of sending in the Marines, it offersadvice on how countries should manage their finances, make their laws, provide services to theirpeople, and conduct themselves in the international market. Its powers of persuasion are great, dueto the universal conviction that, should it decide to ostracize a borrower, all other major nationaland international powers will follow its lead. Thus, by the excessive lending—born of anunderlying inconsistency in its mission—the Bank has added to its own power and depleted that ofits borrowers.John Perkins’ now famous “Confessions of an Economic Hit Man” details contemporary economicintrigues. While describing his job of evaluating projects, he wrote:The unspoken aspect of every one of these projects was that they were intended to create largeprofits for the contractors, and to make a handful of wealthy and influential families in thereceiving countries very happy, while assuring the long-term financial dependence and thereforethe political loyalty of governments around the world. The larger the loan, the better. The factthat the debt burden placed on a country would deprive its poorest citizens of health, education,and other social services for decades to come was not taken into consideration. Perkins’ work has now been followed up by “A Game as Old as Empire: The Secret World ofEconomic Hit Men” and “Web of Global Corruption” edited by Steven Hiatt. Hiatt writes,Debt keeps Third World countries under control. Dependent on aid, loan reschedulings, and debtrollovers to survive—never mind actually develop— they have been forced to restructure theireconomies and rewrite their laws to meet conditions laid down in IMF structural adjustmentprograms and World Bank conditionalities.The current debt situation, with the major role that interest is playing in it, is potentially verydevastating for the world as a whole. In “Global Trends 2015”, the Central Intelligence Agency(CIA) recognized:The rising tide of the global economy will create many economic winners, but it will not lift allboats. [It will] spawn conflicts at home and abroad ensuring an ever-wider gap between regionalwinners and losers than exists today. [Globalization’s] evolution will be rocky, marked by chronicfinancial volatility and a widening economic divide. Regions, countries and groups feeling left
P a g e | 23behind will face deepening economic stagnation, political instability and cultural alienation. Theywill foster political, ethnic, ideological and religious extremism, along with the violence that oftenaccompanies it.Noreena Hertz has an excellent chapter in her work, “The Debt Threat: How debt is destroying thedeveloping world… and threatening us all”, delineating many of the dangers that the massivedebt—and, again, which would not be as massive without the ever-growing aspect of interest—poses for the world today. She details the dangers of extremism, terrorism, depletion of theworld’s natural resources, and more. To cite just one aspect, she writes:Debt’s ugly progeny—poverty, inequality, and injustice—are also called upon to justify, and evenlegitimize, acts of the greatest violence. Only a few weeks after the World Trade Center wasattacked, leading African commentator Michael Fortin wrote: “We have to recognize that thisdeplorable act of aggression may have been, at least in part, an act of revenge on the part ofdesperate and humiliated people, crushed by the weight of the economic oppression practiced bythe peoples of the West.” Fortin’s language—“crushed,” “oppression,” “desperate,”“humiliated”—is deliberately evocative. And it is manifestly clear that there is an audience withwhom such words powerfully resonate.In reality, there are yet other ills related to interest that could be discussed but the above shouldsuffice for the purposes here.
P a g e | 24 7. Fraud: Integral Part of the System of InterestAs already said, amount lent at 15% yearly compound interest doubles in less than 5 years, itmultiplies 10 fold every 16.5, and it multiplies 1,000 fold every 49.5 years and 1,174,313 foldevery 100 years. Net real rate of growth of world is below 2%. Therefore, even if capital worth15% of the total resources of the world could be invested at 15% interest compounded yearly, theover-all growth of the economy will not be enough even for clearing the interest. Leary, moneyborrowed on interest is enough to kill any economy. Yet short sighted, corrupt and incompetentpoliticians are seen to be trying to borrow larger and larger amount on interest. These are the realtraitors although some of them may not be aware of this treachery. At the Macro level suchmultiplying levels of money cause something like Dubai Debt crisis or forces the government todepreciate the currency i.e issue more currency and thereby reduce the value of each unit and at themicro level either farmers sell their land to pay the debt or they attempt suicide.The amount that is returned by previous borrowers is again lent on interest to new borrowers andtherefore this process of doubling of dues continues despite the fact that many borrowers are ableto repay the loan within a few years. Interest is a mechanism to enslave the people and any law thatenforces its payment is unjust and inhuman.Further, since it is not possible for any economy to continue to grow like this, it will have to go onreducing its yardstick of measurement of wealth i.e., currency. Considering that wealth is mostwidely sought after, it is clear that manipulation of its unit represents a massive fraud. Moreovercurrency is normally used as unit of accounts; its manipulation corrupts the accounting process and thus, incorporates elements of fraud in all our dealings. It confounds truth with falsehood and masses fail to distinguish between right & wrong. Considering that the system of interest cannot survive unless currency is consistently depreciated (i.e., quantity of wealth expressed by currency is reduced) it is clear that fraud is an integral part of the system of interest. (Depreciating currency is like saying that from now on 500gms will represent 1kg. I mean this is clearly a crime not known to us). Thus interest saves inflation and inflation saves interest.
P a g e | 257.1 A mechanism of exploitation of the labour and the massesIn the capitalist system, the entrepreneurs are considered as the owners and this result in grossunderstatement of the rate of return of the economic activities. For example, if the actual rate ofreturn of the activity set up on capital borrowed on 12% interest is 13%, then due to adoption ofthis fraudulent definition of ownership, the rate of return will be shown as just 1%. By showing therate of profit to be much less than what it really is, the entrepreneurs are able to compel thelaborers to accept lower wages and similarly the suppliers of raw materials are also persuaded andcompelled to accept lower prices. Further the entrepreneurs raise the price of their product on theground of very poor profit margin.Now suppose that the farmers also start summing up the cost of supply of land, in that case the costof production of the food grains will come to be much higher than prevailing prices of the foodgrains. As there is no substitute for food grains, we will have to buy these at whatever prices theysell. This will cause the cost of food grains to multiply. Since people need food to sustain them,they will be compelled to cut most other requirements so as to satisfy hunger. In such a case,agricultural sector alone will flourish while all other sectors will tremble. In such a scenario, thefarmers will earn much higher wages than specialists and farm laborers will earn much higherwages than what engineers earn. This demonstrates how deductions of interest in the form of costof supply of capital help, the owners derive undue benefits.Interest based investment compels the entrepreneurs to raise the rate of return of the economicactivities under their control up to the rate of interest of the capital borrowed. Further, normally itallows them to raise the rate of return to twice the prevailing interest rate, as no investment can bemade in activities having lesser rate of return for their owners than twice the prevailing interestrate. Entrepreneurs can do this by increasing the price of their products or by reducing the labourwages, or by causing the raw materials prices to fall or a combination of the above methods. Allthis results in exploitation of the masses and this is due to the prevalence of interest.In this perspective, the cost-push argument of the proponents of the capitalist system is irrelevantbecause it is interest that causes the cost of production to rise. The proponents of interest justify iton the ground that the entrepreneurs and creditors agree to it on their free will and then allowmassive injustice and exploitation on the ground that it is essential to sustain the economy. It isalso noted that by adopting these fraudulent procedures, the masses and the laborers are made topay a major part of the interest that is agreed between the creditors and entrepreneurs. Clearly, useof interest as a basis of sharing of profits between the creditors and the entrepreneurs is unjust,exploitative and oppressive.
P a g e | 26 8. Arguments for Interest are unsustainableThe advocates of interest do not have any substantial argument to support their contention. Theyought to correct themselves and the following reasons may be enough to convince those who seekjustice.8.1 ArgumentsA. Economist often justifies interest as fixed charge on capital. Comparing with fixed labour wage,they justify it on the ground that both are factors of production. Proponents of this anti-humanconcept ought to realize that labour, being members of human race, have a right to sustenance.Most efficient way of fulfilling this right is to guarantee payment of just wages irrespective ofwhether their employers make profit or loss. However, capital has no such rights and therefore,there is no reason to allow a predetermined charge for capital. Also in most case wages are toosubjected to fines, cuts etc depending on performance.B. Capitalist creditor has nothing to do with the conduct of business as his or her interest lies onlyin interest of and the ability of the entrepreneurs to provide collateral alone that matters. Thusincompetent entrepreneurs who can provide collateral get the loans, while the entrepreneurs whofail to provide collateral due to their poverty do not get loan despite their competence. Thus,interest based mechanism result in selection of rich entrepreneurs who may be incompetent insteadof competent entrepreneurs who are poor.C. It is well known that in a market based economy, rate of return of economic activitiesconstituting economy is widely distributed. Rate of return on investment varies widely. No profitcan be earned without some form of investment. Productivity of capital is only due to itsinvestment and therefore, it can’t be independent on the rate of return on its investment. When therate of return of investment falls, the amount payable to the creditor must also fall. Rate of returnon investment is subject to natural laws of distribution and therefore, it is not possible to assign afixed rate of return on capital. Frequently there is sudden fall in the rate of return for someenterprises due to reasons that are beyond the control of the entrepreneurs; there is no reason whythey should bear the loss. Therefore the creditor must provide the capital either free of cost or mustalso share the losses. Creditors are owners of capital and thus have better capacity to bear the loss.Thus, interest based mechanism creates inefficiency by assigning losses to entrepreneurs who havelower capacity to bear the losses.D. The interest based mechanism tends to ensure that the rich will ever remain rich because mostof gains arising out of economic activity pass to them in form of interest. Thus they continue togrow richer, while the poor do not have an opportunity even to get higher education and trainingthat is essential to compete for well- paid jobs. Thus interest allows greedy capitalists to controleconomic resources even if they are not fit to ensure proper economic growth. Clearly the interestof humanity lies in its ability to provide opportunities to its efficient members to rise to the top,and interest acts as an artificial barrier against the natural process of rewarding the efficient.(Youdeposit more in accounts you get more interest and thus more control on economy)
P a g e | 27E. Interest can’t be justified as time value of money. When future value of money is defined at itspresent value plus profit expected to be made by its investment in the intervening period, it will bemore than the value of equal amount of future money. If this difference is defined as time value ofmoney it is not correct to hold that time value of money does not exist. However, in the case, timevalue of money will depend upon its investment and thus it is uncertain. Therefore, it cannotjustify a fixed charge (just imagine food prices if farmers start adding time value of land!!).F. It is well known that interest has to be paid by everyone, as it is included as a cost in the price ofthe products. It is well known. It forms 40 to 50 percent of the cost in most of the countries.Entrepreneur-creditor combine has no right to force everyone to pay interest that they mutuallyagree. Therefore it ought to be strictly banned.G. Some incompetent economists try and compare interest to rent paid for using capital. Howeverthey must be made aware that one can take hammer on rent but not nails. Rent is given when theobject is used and given back in its original form. E.g.:- While taking house on rent, you returnsame house back and not a new one. Similarly, capital is used up to generate more and thus it losesits original form. It’s just the case where you cannot take rice on rent.H. Interest grows exponentially and all other things are subject to law of growth and decay. Thusits conflict with nature is obvious and therefore systems driven with interest can never be efficient.As discussed above fraud is an integral part of interest and therefore it can only lead to growingfraud and corruption, injustice and exploitation. Thus it can never lead o human welfare.I. Cost of Capital argument does not have any substance in it because the currency consists ofprinted piece of paper only and cost of its production is negligible compared to interest that ischarged year after year.J. Prevailing interest acts as a ceiling and the resources that cannot be so employed as to ensurerate of return higher than prevailing interest rate, remain unemployed. This producesunemployment of material resources that produces corresponding unemployment of labour. Thusthe system ails to properly utilize its productive capacity.8.2 TheoriesThe mere plethora of opinions attempting to explain the existence of interest and justify itspayment—accompanied by the credible critiques of all of these views by noted and respectedeconomists —should be a sign to everyone that something is not quite right. In the history ofeconomic thought, one can find the following theories justifying interest (among others):A. The “Colorless” Theories (as Boehm-Bawerk calls them): These were advanced by AdamSmith, Ricardo and other early economists. This theory has many flaws, including confusinginterest with gross profit on capital. Ricardo further traced all value of capital back to labor—butsomehow he failed to note that it was never labor that was receiving the payment for said value.B. The Abstinence Theories: These kinds of theories have popped up every now andthen. Economists discovered that “abstinence” may not be a good word to use and would often
P a g e | 28change it to other terms, such as “waiting” (a la Marshall). Interest is, in essence, the wage onereceives for “waiting” or “abstaining” from immediate consumption. This theory failed because itseems to think that savings are solely a function of interest, which has been found not to be true.C. Productivity Theories: The proponents of this theory see productivity as being inherent incapital and therefore interest is simply the payment for that productivity. The theory, as putforward by Say, assumes that capital produces surplus value but, again, there is no proof to supportthat claim. The most that one can claim is that some value has been created, which is a payment tocapital, but one cannot prove that excess or surplus value has been created, which is the essence oftheir claim that interest is justified. Of course, these theories also complete ignore the monetaryfactors when analyzing interest.D. Use Theories: “Boehm rejected the validity of the assumption that there was beside each capitalgood a ‘use’ thereof which was an independent economic good possessing independent value. Hefurther emphasized that ‘in the first place, there simply is no such thing as an independent use ofcapital,’ and, consequently, it can not have independent value, nor by its participation give riseto the ‘phenomenon of excess value.’ To assume such a use is to create an unwarrantable fictionthat contravenes all fact.”E. Remuneration Theories: This group of economists sees interest as the remuneration of “laborperformed” by the capitalist. Although supported by English, French and German economists,perhaps this view needs no comment.F. The Eclectic (combination of earlier theories, such as Productivity and Abstinence) Theories:Afzal-ur-Rahman writes:This line of thought seems to reveal a symptom of dissatisfaction with the doctrine of interest aspresented and discussed by the economists of the past and the present. And, as no single theory onthe subject is in itself considered satisfactory, people have tried to find a combination of elementsfrom several theories in order to find a satisfactory solution of the problem.G. Modern Fructification Theory: Henry George was the developer of this theory but it nevercarried enough weight to have many, if any, followers.H. Modified Abstinence Theory: Yet another unique theory, proposed by Schellwien; it never hadmuch impact.I. The Austrian Theory (The Agio or Time-Preference Theory): This is the view that Boehm-Bawerk himself endorses. According to this theory, interest arises “from a difference in valuebetween present and future goods.” Cassel has critiqued this theory in detail. It boils down tobeing a fancy “waiting” theory.J. Monetary Theories (the Loanable Funds Theory, the Liquidity Preference Theory, the Stocksand Flows Theory, the Assets-Preference Approach): More recently, economists have tried tointroduce and emphasize the influence of monetary factors into the issue of interest. In reality,though, the emphasis here begins to be switched from why interest is paid to what determines theprevailing rate of interest. “According to Robertson, interest in liquidity preference theory is
P a g e | 29reduced to nothing more than a risk-premium against fluctuations about which we are notcertain. It leaves interest suspended, so to speak in a void, there being interest because there isinterest.” Similar critiques have been made of the other views in this family of theories.K. Exploitation theory: Incidentally, socialist economists have always considered interest asnothing but exploitation. It should be recalled that the “founding fathers” of capitalist theory,Adam Smith and Ricardo, believed that the source of all value is nothing but labor. If that is true,then all payments should be made to labor and interest is nothing but exploitation.
P a g e | 30 9. Inflation due to depreciation of Currency and its EffectsConsider the following example. Suppose that thenumber of grams that constitute a kg is reduced to 500.Then, with respect to the new ‘kg’, our weights will befound to have doubled. This doubling of our weight is anillusion. Similarly, with respect to the new ‘kg’’ theprices will fall to half their previous level. Clearly thisfall in prices is no more than an illusion. Similarly, if aunit of currency represents 10mg of gold and later it ismade to represent 5mg of gold, compared to previousvalue, the price of goods will double with respect to latercoins. Clearly, this price increase is illusory as thedoubling of weights and the fall of prices. Economists define inflation to include increase inthe prices due to natural causes. However, in order todifferentiate increase in prices due to natural causes from the increase in prices due to artificialreduction in the quantity of goods represented by currency, we ought to define inflation as theincrease in prices due to artificial reduction in the quantity of goods represented by currency.Accordingly, if the currency was real or linked to a basket of real goods, it will always representdefinite quantity or quantities of goods. Thus, inflation will not exist.9.1 Relation between interest and inflationIncreased rate of inflation acts as a relief for the activities based on capital borrowed in the past. Ifthe prevailing interest rate is near the balanced rate of interest, it will require lower relief andminor increase in the rate of inflation will be enough. Similarly, if the prevailing rate of interest issufficiently higher than the balanced rate of interest, it will require higher increase in moneysupply (to prevent fall in output and employment) that will create more inflation.9.2 Inflation & exploitation of have-notsInflation is the worst tool of injustice, exploitation and oppression that humanity ever invented.There are many ways in which it harms the poor and the oppressed. In its absence the interestbased capitalist system would have collapsed and therefore, it is responsible for the massiveexploitation and oppression produced by interest. Some of the mechanisms by which inflationharms the poor are given below:- A. Prior to 1920-30 the prices as well as labour were more or less fixed and the masses actively participated in the market mechanism of price determination. Any effort by industry/ commerce to increase the price of the products of the organized sector or to lower the labour wages or the prices of raw materials was strongly resisted. The massive response it used to generate prevented the owners of the organized sector from indulging in injustice and exploitation.
P a g e | 31Inflation eliminates the active participation of the masses in the mechanism of pricedetermination by the market. This allows the owners of the activities in the organized sector tomanipulate the prices to their advantage that results in the massive transfer of the earnings andthe wealth to the rich.B. It allows the developed and powerful economies to exploit the under-developed anddeveloping economies. Currencies of developed economies have higher stability than thecurrencies of the under-developed and the developing economies and command worldwideacceptance and recognition. For example, everyone likes to have USA’s dollars but no oneprefers to have Indian currency. This causes massive loss to the developing and the under-developed economies. For example, let us assume that the USA’s dollars held by the Indiangovernment and by the Indians amount to 10 billion. Clearly, India and Indians can get thesedollars only by selling off some goods or services or as a loan. In the first case, Indians aredeprived of the resources and in the second case; they have to pay interest on it.Further in the absence of inflation, the producers will not be able to exploit the masses andlabour and therefore, average rate of return of the economic activities will be lower than theaverage rate of return in the inflationary situation. Lower rate of return of the economic activityimplies lower interest rates as well as lower cost of technology transfer. The under developedand the developing economies buy capital as well as technology from the developed economiesand therefore, this increases the rate of transfer of earnings and wealth of the masses of theunder-developed and the developing countries to the developed countries. Majority of themasses live in developing and under developing countries and exploitation of their economiesamount to their exploitation.C. It eats away small savings of the poor. Major part of the earnings of the poor is consumedby their immediate requirements and therefore, to meet their heavier experiences they arerequired to save over a long period of time. For example, they save over 15-20 years forowning a house, for 5 to 10 years of marriage, 10-15 years for marriage of their children.Meanwhile, inflation goes on eating away their marriage.Those who deal in interest may partially reduce the losses for example, either by buying thehouse by supplementing the savings with borrowings on interest that are freely available or bypartially reducing the effect of depreciation by keeping the savings in the time deposit scheme.D. It reduces the availability of interest free loans to almost nil. This results in severe loss tothe masses as they pay higher interest when they borrow but receive little or no interest whenthey lend. If someone tries to avoid interest bearing loans, he/she is required to save over longperiod of time and meanwhile inflation eats away most of their savings. Inflation has killed thespirit of mutual help and that aggravates the exploitative potential of the capitalist creditors.E. It assists the greedy capitalists and their agents in divesting the masses of their control overthe resources. Due to the gross disparity, the masses have lost the capacity to derive properbenefits from the resources owned by them. The rate of return of the resources owned by themasses stands further reduced due to price differential created by inflation. Additionally themasses are not fully aware of the extent of depreciation and know that currency to be worthmore than what it is. Accordingly, they consider the worth of the resources owned by them tobe worth less than what they are. The rich are aware of the real worth of these resources. Thus