Monday, October 15, 2018

Full Employment (3)

"Now, let us continue our discussion to Consumer Behavior, " said the economist. He then said, "The consumer behaviour in the capitalist economies is explained in terms of the sovereignty of consumers. It is contended that one is free to buy anything one likes. There are no moral checks on that. But the consumers are excessively influenced by the onslaught of advertisements. The temptation to buy new things is promoted as a social value which rates the pursuit of novelty very high. Psychologically, the consumers are persuaded to feel proud of themselves if they are in possession of something novel as compared to others in their social circle. Such a value system tends to stigmatize as inferior all who fail to acquire the new things possessed by their peers and neighbours. This creates an impulse to catch up and beat others leading to a never-ceasing rat race. The rich economies of the capitalist countries have become mass consumption societies with a great deal of waste.
The effect of such an attitude is that the people living in developed countries, who are barely 25 per cent of the globe’s population, consume 15 times as much paper, 10 times as much steel, and 12 times as much energy as the rest of the 75 percent people of the world. It is obvious that the resources of the world are just not sufficient to afford the same lifestyle for everyone on this earth. There is a great need for restraint. But the capitalist system does not have a mechanism to restrain people from wasteful consumption. Instead, its banks, media, business corporations, and governments all have a vested interest in encouraging consumption so that a high level of investment is sustained. Instead of abolishing interest which would remove the brakes from the free flow of capital to productive channels, a topsy turvy approach of increasing consumption is adopted in order to keep the wheels of the economy moving.

The kind of economy that seems to harmonize with the Islamic ethos is a low consumption economy. The Islamic approach would require individuals to use the resources as intensively as possible and not to replace them until they have truly outlived their utility. The Prophet (ﷺ) placed a very high premium on simple living and discouraged people from luxuries. This is not to suggest that Islam would like people to live a life of deprivation and misery even when they are in a position to afford a higher standard of living, Islam visualizes an egalitarian society where relative differences in socio-economic conditions will be a lot less than what we observe in the capitalist societies . The Islamic view of life would require that those who can afford to have a higher material standard should voluntarily forego some of their comforts and help others improve their economic lot so as to enjoy a similar life-style. It is only after most of the people have acquired a comparable living standard that the society as a whole should move to a higher socio-economic level.
The value system of Islam supports the above consumption pattern. In an Islamic society, taqwa (God-consciousness ) is considered very highly. The more a person is God-conscious , the more Highly he is esteemed in the society. Taqwa comprises a cluster of values like justice ('adl), benevolence (ihsan), benevolent spending in the cause of Allah (infaq), remembering Allah (dhikr), etc. Taqwa is a multi-dimensional value. One can excel in it by cultivating a number of virtues in oneself. People who seek a good status in an Islamic society try to excel in taqwa. In the economic jargon we may say that taqwa is a ‘satiable comfort'. It diverts the energies of the people away from acquisitiveness to a sustained effort aimed at spiritual self -enrichment and social improvement."

The young wayfarer asked, "What is Islamic Framework about poverty?" The economist said, "Poverty is a complex phenomenon, Islamic scholars are developing a body of doctrines to analyze and solve this problem. Some of the ideas are circulated so far.
First, an Islamic strategy to fight poverty should havelts distinct orientation in so far as the development effort is focused on human beings. It concentrates on the development of productive capacities of the people by education and skill training.
Second, the people ought to be organized in local cooperatives and made interchange of their own affairs. They should take all the decisions relating to themselves. They would give them an incentive for self-development and would involve them in the overall development effort.
Third, finance should be made available through cooperative banks on profit-loss sharing basis. People should be provided access to physical resources and to public organizations by encouraging them to organize themselves locally.
Fourth, Islam has laid great stress on honest government. Perhaps, it was for the first time in human history, that Islam introduced the distinction between private property and public property and made the rulers accountable to the people. In the present age, an Islamic society should strengthen its system of accountability in a similar manner. A number of new institutions will have to be established for this purpose.
Fifth, the Islamic strategy of development should focus on human needs. It should begin by making an assessment of human needs in terms of health, education, clean water, clean air, telecommunication and transport and then translate it into the investment required to fulfil these needs.
Sixth, since Islam lays great stress on the self-reliance and independence of human beings, the Islamic strategy for development should not visualize borrowing from other countries on interest, even as an ad hoc measure. However, it should encourage cooperation between different countries on the basis of equity participation in joint ventures or in the form of grants or interest-free loans.
Seventh, as a short-term measure, Islamic economics would recommend that as a way out of the present indebtedness the rentier nations should write off interest on their outstanding loans and convert the outstanding amounts — the principal — into equity capital of various public enterprises of the debtor countries. This will reduce the burden of the poor countries and will also reduce the outflow of resources from the poor to the rich countries.
Eighth, Islam does not treat human beings as a liability. Instead, they are the most precious asset of any country. Therefore, an Islamic development strategy should be geared to develop the potentialities of the people by education and skill training and remove obstacles in their way to having access to resources of the economy.
Ninth, the Islamic concept of economic justice revolts against the prevalent strategy of unbalanced development between rural and urban areas. As human beings, people in the villages are equally entitled to receive basic facilities such as education, health, transport, drinking water, electricity and telecommunication. The conventional investment criteria which uses cost-benefit analysis to determine the suitability of investment will undergo a change if investment is done with a view to developing human beings wherever they may live. As a first priority, an Islamic government in the present age will have to adopt the policies that will bridge the existing gap between the rural and urban areas and provide a similar lifestyle to all.
Tenth, Islamic economics visualizes a planned introduction of technology . As a practical measure, an Islamic state in the present age can institute a fund to which contributions may be made by the entrepreneurs out of the super-profits -they earn by introducing new technologies. This fund will be used to re-train and rehabilitate those who lose their jobs as a result of the introduction of newr technology.
Eleventh, on top of all these measures, the Islamic system of zakah would provide social security at the local level. The people of a locality should so organize their affairs that they may collect a prescribed percentage of their wealth to maintain and rehabilitate those who cannot meet both their ends meet. Since the collection and distribution of zakah is required to be done locally, the problem of ‘free rider' is also taken care of to a large extent. It is far more difficult for a person to remain on dole when the transfer grams are being given by the local people than when they are administered centrally by an anonymous state bureaucracy. In an Islamic set-up social security is, primarily, the responsibility of the family. In case a person is not able to receive support from the family, the local community is required to look after such a person. Assistance from the central treasury of the state comes only when all the local arrangements fall short of resources.

The young wayfarer asked, "What about Fiscal Management?" The economist said, "The Islamic principles of fiscal management are also distinct. First, the principal tax of zakah which sets the trend for other taxation is simple to administer. Its rates are low. Its coverage is wide. Its incidence is in proportion to one’s wealth so that people with greater means pay more than people with smaller means. Second, Zakah is collected locally by the people on behalf of the central government and distributed in the same locality. This principle takes care of a host of problems which arise due to regional complaints against transfer of resources from one locality to the other.
The Islamic teachings of moderation (iqtisad) apply to state budget as well. The Islamic approach to economics would seem to favour a balanced budget . The evils of deficit financing are too obvious to need any mention here. The problem of creating effective demand by government intervention does not remain relevant in the context of Islamic economy since it abolishes interest which is the main obstacle in achieving full employment. However, if people want the government to play an active role in economic life, they must pay for it in the form of higher taxes. Borrowing for development — and that too on interest — is altogether alien to Islamic principles. However, in the case of longterm projects whose benefits will be spread over several generations, the state may raise interest-free loans in the interest of inter-generational equity. To alleviate the hardship of unemployment, social security schemes may also be introduced.

Fiscal management in the capitalist economies is topsy turvy. It relies on deficit financing to stimulate the economy. The whole cycle starts like this. Interest has an inverse relationship with the marginal efficiency of capital. The higher the rate of interest, the lower will be the marginal efficiency of capital and the lower will be the level of investment, leading to an increase in unemployment. Taxes are levied to pay for social security benefits. When the burden of taxes becomes unbearable, governments borrow from banks and private savers on interest, which in turn adds to the public expenditure in the form of debt servicing, leading to a greater deficit and starting the vicious circle all over again.
In an Islamic economy, instead of getting into this vicious circle, the evil can be nipped in the bud. Since interest on capital is abolished, it will be possible for full employment equilibrium to take place. To cope with the problem of involuntary unemployment or other hardship cases, there are the institutions of zakah and infaq. But these institutions would operate at the local levels. The state budget would not be overburdened with public debt or additional taxes to provide for social security benefits."

Then the aconomist said, "O young man, we have briefly discussed the main features of an Islamic economy. While doing so, we have compared them with the features of the contemporary capitalist economic order. Islam seeks to build a totally new economic order. Its strategy to build such an economy is, however, evolutionary rather than revolutionary."
The young wayfarer asked, "So, where do we begin?" The economist said, "We begin with ourselves by distancing ourselves from all matters of Riba'. Then, always remember the words of the Prophet (ﷺ), "Unity is a mercy and division is a punishment.”
"Allah destroys interest and gives increase for charities. And Allah does not like every sinning disbeliever. Indeed, those who believe and do righteous deeds and establish prayer and give zakah will have their reward with their Lord, and there will be no fear concerning them, nor will they grieve. O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers. And if you do not, then be informed of a war [against you] from Allah and His Messenger. But if you repent, you may have your principal - [thus] you do no wrong, nor are you wronged. And if someone is in hardship, then [let there be] postponement until [a time of] ease. But if you give [from your right as] charity, then it is better for you, if you only knew." - [QS.2:276-280]
[Part 1]
[Part 2]
Reference :
- Muhammad Akram Khan, An Introduction to Islamic Economics, Institute of Policy Studies.