As the world’s richest individuals and companies and the world’s most powerful gathered at the Davos Summit in Switzerland. It was a shock to many when Oxfam, the UK charity, confirmed a mere 1% of the world’s population owns 48% of the world’s wealth. It also concluded that at the current trajectory 1% of the world’s population will in a few years own 99% of the world’s wealth! This was after its 2014 report ‘working for the few,’ revealed he richest 85 people across the globe shared a combined wealth of £1trillion, as much as half of the world’s population (3.5 billion people).
Despite the global economy generating $74 trillion in 2014 – the largest in world history and global trade generating $36 trillion, (again, the largest in world history) never have so few been so rich and never have so many been so poor. The Oxfam report is a chilling reminder of the depths of wealth inequality across the globe; widening inequality has created a vicious circle where wealth and power is concentrated in the hands of a few, leaving the rest to fight over crumbs.
Capitalism has been the dominant global economic system for decades. It has organised the global economy and dominated wealth distribution but has failed in distributing wealth in any equitable manner. Even in the birth place of Capitalism and today’s epicentre, Europe and the US, wealth distribution remains a massive failure. Richard Robbins in his award winning book ‘Global Problems and the Culture of Capitalism’ encapsulated the situation: “The emergence of Capitalism represents a culture that is in many ways the most successful that has ever been deployed in terms of accommodating large numbers of individuals in relative and absolute comfort and luxury. It has not been as successful, however, in integrating all in equal measure, and its failure here remains one of its major problems.”
As capitalism solely focuses on economic growth and increasing GDP it left the distribution of wealth to the free market. In effect Capitalism as an economic system has no specific position on distributing wealth aside from leaving it to the invisible hand in the free market – which is not working for most of the world. The trickle-down effect which was meant to make wealth flow from the top to the bottom remains as elusive as ever and is in fact worse today then Victorian Britain.
One of the main reasons for this economic inequality is because the rich have huge influence upon political leadership and political institutions. These have become undermined as governments overwhelmingly serve the interests of economic elites to the detriment of ordinary people. The Oxfam report recognizes the curse of capitalism – money and politics, “Since the late 1970s, weak regulation of the role of money in politics has permitted wealthy individuals and corporations to exert undue influence over government policy making.”
The reformation separated religion and politicians but left money and politics intact. It is money that should have been separated from politics rather than religion. The rich have been able to preserve such a status quo as the lowest tax rates, the best health and education and the opportunity to influence are handed down to their children. Without a concerted effort to tackle inequality, the cascade of privilege and of disadvantage will continue down the generations. Economic growth today amounts to little more than a ‘winner takes all’ windfall for the richest.
The existence of the financial markets has created dual economies in the West – the financial and the real economy. The global financial markets are currently worth $893 trillion whilst the real economy $74 trillion. However the financial economy does not produce anything, it doesn’t manufacture anything and neither does it provide much. What it provides is an opportunity for bankers, hedge funds and the rich elite a way to make money out of money by gambling on shares, interest rates, currency and anything else they can find. The money used is therefore no longer in the real economy but in a parallel financial economy and thus circulating amongst the rich elite amongst themselves at the expense of the world’s population in the real economy. This is one of the main reason for global inequality. When this financial economy collapsed in 2008 they received government bailouts and Quantitative Easing (QE) – another form of bailout, whilst many received government cuts and austerity.
Capitalism’s Achilles heel is its inability to distribute wealth equitably which has only got worse since the demise of communism. Intellectual discourse has been dominated by free market liberals and this has ensured alternatives have little air time and presence. Despite the worst recession since the Great Depression, liberals have continued to argue that capitalism is the best system on offer. However capitalism is in reality on life support as it tries to cover the cracks.
Islam and Islamic economics offers a completely different economy, based on the Qur’an and Sunnah. Key aspects of Islamic economics include:
The Islamic economy is built around the real economy and does not have a Western style parallel financial economy. The Islamic economy is built upon the real economy with agriculture and manufacturing the key sectors in the economy that generate wealth. Islam does not recognise the interest-based, speculative driven financial markets in their current form as seen in the west. The Islamic economy creates wealth through the manufacturing of real goods and the value added at each stage of production. This in no way means Islam is against a service sector, in an Islamic economy the emphasis is upon the real economy. By removing the role dubious financial markets in the economy, their remains the real economy where trade, investment, salaries and wealth is generated and circulated. This creates the much needed stability absent in free market economies as speculation has been effectively removed.
The Islamic economy has a secure and stable monetary policy with the gold and silver standard. The Islamic ruling on a Gold and Silver standard creates a stable economy allowing long term decisions to be made. In Islam when it comes to exchanging a commodity with a specific monetary unit, Islam has guided us to the monetary unit by which the exchange is to take place. It has restricted the state to a specific type of money, which is primarily gold and silver. The Islamic evidences have designated gold and silver as the primary measuring unit for prices and labour. This is understood from the actions of Muhammad (saw) when he collected Zakat, levied taxes and imposed fines, all were measured according to gold and silver. Having a gold and silver backed currency will bring the much needed stability to the economy by containing inflation. Currently the world is plagued by the spectre of inflation as governments across the world continue to print money at will. Islam solved this problem by pegging the currency to metal; this essentially restricts the state as any increase in money supply requires more gold and silver.
Islam’s Fiscal policy removes direct and indirect forms of taxation, which leads to economic growth. The level of taxation in any nation will affect people’s behaviour, including their choices with regards to working patterns, saving and investing. Taxation in the west has created a number of problems in wealth distribution where the burden falls heavily upon the poor with the rich utilising tax loopholes and tax havens. Islam has a completely different perspective on the economy and tax as the Islamic basis is different to that of capitalism. Fundamentally taxation in Islam places emphasis of taxation on wealth rather than income. The Islamic taxation system does not tax income, but taxes wealth. This means that the average person will be left with much more disposable income and will be liable for tax on whatever wealth is left at the end of the Islamic tax year. This will have a significant effect on the economy as in such an economy one will have much more disposable income. Islamic taxation is not comprised of income tax, value added tax, nor excise duties. The effect of this on the economy is significant as calculations on average salaries in Europe have shown that between 50% – 60% of one’s income can be taxed due to income based taxation systems. A wealth based tax regime means one has more disposable income at the end of a tax year which means more wealth is available for spending or investment which would stimulate the economy, causing economic growth.
The Islamic prohibition of interest frees up idle wealth. The existence of interest causes wealth to remain in banks in order to accrue interest rather than circulate in the economy. In free market economies all banks use most of their customer deposits to speculate on the financial markets which is a double whammy as money again is not circulating in the real economy. The removal of interest removes the incentive to deposit excess wealth in banks for long periods. The only way to increase wealth is through investing it across the economy in projects or entering into business. In this way an Islamic economy will grow and it will be real growth built upon wealth which is invested in the economy rather than debt. Unrestricted wealth circulation is what primarily will lead to economic growth in the Islamic economy.
These represent just some Islamic economic principles. Islam has a comprehensive economic system addressing all areas of the economy. As Capitalism has an epic situation of inequality, the only hope for mankind lies with Islam. We as an Ummah need to realise this and take up the challenge of showcasing this to the world.
Written for the Central Media Office of Hizb ut Tahrir by