All praises are due to Allah سبحانه وتعالى and Peace be upon Rasul Allah صلى الله عليه وسلم, to his family and his Companions (ra) and those who followed,
Before going into the details of today’s topic, we need to reflect on how we should view the economic related topics. Some people only discuss economic matters because they are interested in the topic. Some people look at economic matters from a learning point of view also. Some people with carelessness say that what we are going to get by discussing this, or that “you people have made Islam complicated”. As a Muslim and a caller to Islam, we look at the economic matters from the viewpoint of Islam and the Islamic Aqeedah. We see that at the time of Rasul Allah صلى الله عليه وسلم, the nobles of Makkah were rich and had a complete monopoly on trade. They had established a system trade through caravans. A big share of their trade was composed of extortion gained through cheating the pilgrims. Allah سبحانه وتعالى revealed in the Quran regarding their fraudulent practices,
وَيْلٌ لِلْمُطَفِّفِينَ * الَّذِينَ إِذَا اكْتَالُوا عَلَى النَّاسِ يَسْتَوْفُونَ * وَإِذَا كَالُوهُمْ أَوْ وَزَنُوهُمْ يُخْسِرُونَ
“Woe to Al Mutaffifin [those who give less in measure and weight (decrease the rights of others)], those who, when they have to receive by measure from men, demand full measure, and when they have to give by measure or weight to men, give less then due.”
(Al–Mutaffifin 83: 1-3)
In a similar manner today, we need to understand the Western Capitalist system and its economic basis. We need to expose how it has failed to solve the economic problems of the humanity. We need to present our alternative, the Islamic economic system. To understand the causes and effects of economic crises within the Capitalist system, we need to look at its reality in connection with other economic crises. Then, we could understand how these economic crises originated and quickly spread.
It is a routine within the Capitalist system to have periodic economic crises. They are part of what is called the “Boom & Bust Cycle”. According to the IMF, during the past thirty years there have been over a hundred economic crises in the world. Some economic crises are so extreme that they shake the foundations of the capitalistic economic order. Amongst these severe crises is the recent American economic crisis which effects are still present in the world today.
Since the inception of the Capitalist system, severe economic crises occur again and again. Their close observation reveals three shared characteristics in them:
1. Economic crises originate from Stock Markets, Banks, and Financial Institutions and then they spread across all economic activities whether financial or growth related.
2. The effects of the major economic crises are global. Due to globalisation, it does not take long for economic crises to strangle the whole world.
3. They occur suddenly, without warning. No one talks about them before their origination. However, once they are originated then everyone starts talking about the extent, lasting effects, and other matters.
So, we come to the question as to the causes of the Boom & Bust Cycle. The Capitalist system takes humans from the submission of Allah سبحانه وتعالى to the slavery of mankind. The purpose of human life becomes the satisfaction of physical desires. Benefit becomes the criterion to perform actions. The action which is beneficial is conducted irrespective of how harmful it is for others. The Capitalists consider that the economic problem is the scarcity of resources and services to fulfil unlimited needs. Therefore, their complete focus stays on the increase of growth. They leave the distribution of wealth to the price mechanism, so whoever has money can buy bread and eat it, and whoever does not have, dies out of hunger.
In the view of Capitalists, individual freedom is most important, one can buy whatever he wants and the state will not intervene in this matter. Banking system, interest-based business, stocks and shares, derivatives, futures and insurance have come from the concept of freedom of ownership. This results in a race to accumulate wealth through rate fixing, rumour and other illegal practices. To take our discussion forward, if we deeply reflect upon the Boom & Bust Cycle then we get to know that it is specific to Capitalism. As Capitalism stresses on the production of good and their consumption, it ensures that what is being produced is also brought. It takes care that whatever is being produced also has demand, so that it is bought and the capitalist elite can profit from it. Let us analyse the background of the 1923 Great Depression, a huge bust.
After the First World War, America adopted the policy of isolation and cut itself off from the rest of the world. It focused its complete attention on the fulfilment of the “American Dream,” according to which every American should have all the amenities for life and live life happily. To achieve this, President Herbert Clark Hoover initiated the setting up of many factories, mills and development activities. However, the problem was that if the people did not buy the goods, then how would the factories and mills make profit? They would produce more which will result in more profit. However, if the people did not buy what was manufactured, then the whole investment will be wasted. To solve this dilemma, the Capitalists created a demand through various marketing methods. An American lifestyle arose where man strives to buy luxury goods irrespective of whether he has money or not. If he does not have money then he takes loan on interest from the banks. Without expensive luxuries, he feels incomplete and backward in society and becomes a victim of sense of deprivation.
During this period, the casino of stock market became much stronger. The people started to see that stock market trading could be an easy and quick way to earn wealth. They had become accustomed to this luxurious lifestyle, where greed and love for wealth had seeped into their hearts. Their luxurious needs grew to the point they could not be satisfied. Taking loans on interest from the banks had become a norm. People in large numbers then took interest-based loans from the banks and invested in the casino of the stock markets. This situation was as fragile as a house of cards, waiting to collapse. Finally, the day came when on 27th October 1929, the stock markets crashed and within a day there was an 87% decline.
So, the 1923 Great Depression was the consequence of the Boom and Bust. At the beginning of the decade of the 1920s, everything seemed good because growth was happening and development work was progressing, stock markets were also rising sharply and the standard of living of a common man improved rapidly. However, this ‘Boom’ was based on the interest-based loans, with the bubble of the stock markets swelling until it burst. The ‘Bust’ was such that the American would stand in a queue for hours to get the bread to eat two times a day. Their situation had become worse than beggars. For the next whole decade, America kept trying to come out of this great depression, without notable success. Then in 1941, when Japan attacked Pearl Harbour, it proved for America to be a blessing. Ending isolation, America participated in the Second World War and a substantial weapons industry was established. The one-third of Americans who were unemployed for a decade found employment and in economic activity resumed, including the buying and selling of war bonds.
After the end of the Second World War, the American economy was standing on strong industrial basis. However, then America started to outsource all their factories and mills to countries which had cheap labour available. 80% of American factories and mills moved to China, Japan, Korea, Mexico and various Third World countries where America ordered the goods to be manufactured. It then bought the finished good which meant that its trade deficit increased rapidly, as it was importing more and exporting less. To substitute these factories and mills, America turned its attention to the Hi-Tech industry in which America manufactured aerospace, computers, telecommunications and similar goods. It either did not commonly share the technology with anyone or transferred it after setting restrictive conditions. However, irrespective of this, the Hi-Tech industry does not have enough breadth to offer widespread employment, as the workers needed more skills.
Today, America’s reliance is more on the service industry, which is 65% of American economy, whereas 15% of the American economy is based on insurance companies, banks, stock markets and other financial markets. These matters are interconnected through the vast mortgage loan market. People seek loans from the banks to acquire houses, they get their houses insured and then chasing the American lifestyle, they purchase appliances and furniture from retail stores which are local, but are made in factories abroad. In addition, after 1950, the capitalists invented another form of loans, the credit card. People were convinced that they can purchase whatever they want and then can repay it in instalments. Initially people were reluctant to use it and preferred to save and then buy. The credit cards were then introduced as shopping cards. The target consumers were women because housewives went shopping for appliances but were reliant on cash from their husbands. Through shopping credit cards, they were more relaxed in spending during shopping. With time, the popularity of credit cards increased rapidly. Today it has become an essential element of the Western lifestyle. In 1940, 44% of Americans had entered the housing market, in 1960 this figure rose to 62% and now it is 70%. It was the sub-prime mortgage market, loans for houses to the poorer people that became the epicentre for the recent global crisis. Financial institutions took loans from others, then sold these on higher interest rate further adding fragility which led to a huge crash. It is not surprising as most of the American economy relies on Americans purchasing houses on interest-based loans from banks, getting them insured and household goods. Today, the situation is such that the loans of many Americans are more than their total assets, whereas as the debt in the whole American economy is seven times more than the actual American wealth.
Why does America insist on a debt driven economy? Interest-based loans created both the Boom during the Twenties of the Twentieth Century, but then caused the Bust of 1929, which persisted throughout the Thirties. Yet, why did America not learn lessons from history and is repeating the same mistake? The reason is the false doctrine of the ideology to which they adhere to, Capitalism. Capitalism takes humans away from the slavery of Allah سبحانه وتعالى to the slavery of oneself and one’s desires. In Capitalism, the purpose and pursuit of life is the satisfaction of sensual pleasures. This concept makes humans greedy and this was the greed which forced the Americans to pursue the American dream. It is this greed which persuaded the grey suited men, the large scale capitalists, to develop banking and financial markets to exploit this dream for themselves.
As for the financial institutions that are issuing loans and are continuing to do so, can they not see this situation? They are aware of the situation but the wealth accrued from interest rates has blinded them. They do not even think that the wealth compared to the loans they have issued is not even available in the market. It is as if they expect that when people will return their loans the wealth will automatically be created from out of thin air. This has become virtually true in the form of Fiat currency, which is not backed upon real wealth such as gold or silver, but on the government’s promise to pay. More and more money is printed as the government issues treasury bonds, feeding more debt into a collapsing system. Due to the influence of the grey suited men upon the government, these financial institutions are bailed out by the American government and their greed is rewarded. In 2008, these financial institutions were saved from bankruptcy by giving them $1700 Billion from the public’s funds. They thanked the public by resuming their exploitation with increased ferocity, like a pack of hungry wolves.
Despite all the destruction, the West calls the rest of the world to Capitalism. Its example is that of the rat in a sewer that cannot conceive of a better. About these kinds of people, Allah سبحانه وتعالى says:
لَهُمْ قُلُوبٌ لاَ يَفْقَهُونَ بِهَا وَلَهُمْ أَعْيُنٌ لاَ يُبْصِرُونَ بِهَا وَلَهُمْ آذَانٌ لاَ يَسْمَعُونَ بِهَا
“They have hearts wherewith they understand not, they have eyes wherewith they see not, and they have ears wherewith they hear not (the truth).”
Western capitalists also have a problem that they compare their sick and disabled system with the system which died recently, Communism. They content themselves by saying that their system, though has chronic diseases, but at least it is still alive. However, if they use their mind then they can come to the system revealed by the Creator which not only was implemented for 1300 years and but also gave economic stability to humanity. It prevented economic crises and today it can take the humanity out of its misery and grant welfare, prosperity and economic stability.
Only the Islamic Economic System can save humanity from the Boom and Bust cycle and economic recessions. The Islamic Economic System and its details are referenced in the vast culture of Hizb ut Tahrir. Here, only a brief reference of it is being presented:
1. Economic Policy of Islam: The economic policy of Islam mandates on the state that people’s basic needs such as food, clothing, and shelter are fulfilled in any case and to provide more and more opportunities for them to enjoy the luxuries of life as per their own capabilities. It does not accept the concept of scarcity of resources as there are enough resources to secure the basic needs, but never enough to fulfil the endless pursuit of luxuries.
2. Islam’s viewpoint regarding wealth: There are normally three purposes of wealth – saving, spending or investment, and its transfer – and then the Shariah through detailed rulings have addressed these three objectives in a way that not only an individual benefits, but the whole society benefits from it.
3. Currency in the Khilafah: Rather than adopting Fiat currency, Shariah has decreed Gold and Silver as the basis of the currency. This abolishes inflation from its root.
4. Prohibition of Interest: About the prohibition of the Interest, clear and definite rulings exists in the Shariah sources. If any sensible person who looks at these economic crisis in depth, he will conclude that a major factor for the economic chaos in the world is interest-based loans. Capitalists have noted that if in the society the economic activity and liquidity needs be created, then the interest rate needs to be reduced as much as possible. The reality is that the interest brings economic stagnation in the market, because people, instead of investing in their business or making investments, keep their money in the banks so that they get a fixed amount of money through interest. In Islam, through the prohibition of interest, people spend their wealth in trading, industry and agriculture, which increases the growth and economic activities are created and wealth circulated.
5. Circulation of Wealth and Definitions of Ownership: There are three types of ownership in Islam – State Property, Public property, and Private Property. Shariah has given clear rulings about it which organises the distribution of wealth. Whereas in capitalism, individual freedom leads to a few depriving both the state and public of immense resources by rampant privatization.
6. Islam’s view on stock markets and related financial markets: Stock markets are part of an artificial economy which has no relevance to the production and distribution of real goods and services. Instead, this business is only based on speculation and gambling. They contribute to and worsen the crises.
This is a brief overview of the Islamic Economic System gives an insight into a tried and tested alternative to Capitalism. Under Islam, economic activities will thrive, businesses will grow, employment opportunities will become available, and economic prosperity will occur. However, all this is possible when the Khilafah will be established on the ideology of Islam, which will implement Islam, taking humanity from the darkness of injustice and oppression to the light of truth and guidance. Allah سبحانه وتعالى said,
فَإِمَّا يَأْتِيَنَّكُمْ مِنِّي هُدًى فَمَنْ اتَّبَعَ هُدَايَ فَلاَ يَضِلُّ وَلاَ يَشْقَى * وَمَنْ أَعْرَضَ عَنْ ذِكْرِي فَإِنَّ لَهُ مَعِيشَةً ضَنكًا
“Then if there comes to you guidance from Me, then whoever follow My Guidance shall neither go astray, nor fall into distress or misery. But whoever turns away from My Reminder verily, for him is a life of hardship.”
Written for the Central Media Office of Hizb ut Tahrir by
Munib ur-Rahman, Karachi, Pakistan