Sure, many people can agree that the current economic and financial system are broken. But what are the alternative? I decided to contemplate on the crossroad of great traditions and future thinking to seek out the answer.
This thesis is a response to the burning issues of income inequality, economic stagnation, market collapse and so on. Current issues in the form of GREXIT, 1MDB fiasco, runaway housing price and the rest are just symptoms of the underlying sickness. To cure it we need to rethink everything about economics, stripping it down to the bare studs.
First off, why does economics need to be so complicated while we engage in it everyday? Why is it so complicated and difficult just to buy a house for one’s family? Why do we have all these fluctuations of interest rate & currency exchange rate? Commerce should be straight forward; we work and we get the money, then we use the money to get what we need.
Muhammad al-Fateh examined the readiness of his people by their willingness to refer sales to their neighbours even though they have the item in stock. This is in contrary with modern business practices that want to gobble up all possible sales. Can you imagine Tesco asks you to buy tomatoes from a local merchant next door?
We all can feel that the current economic system particularly the financial sector is unjust. But what is so unjust about it and more importantly, what is the alternative?
I’m standing on the shoulders of giants before me, piecing together the visions they offered in an attempt to produce a coherent whole. These giants are; Alvin & Heidi Toffler, Benedikt Koehler, Seth Godin, Shaykh Abdal Hakim Murad, Harris Irfan, Peter Thiel, Nassim Nicholas Taleb, Thomas Piketty, Imam Muhammad al-Hassan al-Shaybani, Imam al-Ghazali, Dr. Adi Setia, Hasrizal Abdul Jamil, Ainon Mohd, David Graeber, Tim Harford and many more.
Admittedly, this is a very raw & rough thesis. It is meant to be challenged and refined in collaboration with others both scholars and practitioner, amateurs and professionals alike. I believe the raw-ness is an advantage since it allows me to break through silos of knowledge. I’m a total outsider here so let me ‘interlope’ as I please.
On Defintion and Assumptions
This is the most obvious place to start as definitions shape our understanding and worldview. It also inform our assumption and modern mainstream economic assumption are totally different compared to Islamic economic assumption.
Modern mainstream economics defines it as allocation of scarce resources but in Islam it is tadbir al-manzil — management of household. The objective are also different, one concerning of maximizing profit while the other is of provisioning for the need of one family.
Scarcity is built into the modern mainstream definition but in Islam the belief is that if we are grateful God will add more.
We will see that this difference will have ripple effect on many other definitions and assumptions.
Money have intrinsic value in modern mainstream economic system but only have extrinsic value in Islamic system. It is to equalize difference in trade rather than being the object of trade itself.
Ghazali analayzed the nature of money stating that Allah had created dinar and dirhams ‘so that they may be circulated between hands and act as a fair judge between different commodities and work as a medium to acquire other things’
In fact, it is forbidden to trade money in Islam. That applies even though the money is from valuable metal such as gold and silver. Even more so if it is fiat money.
‘Whoever affects the transactions of money is, in fact, discarding the blessings of Allah, and is committing injustice, because money is created for some other things, not for itself’
The implication is that there is no place for ‘Time Cost of Money’ in Islamic system. Money don’t have inherent value. It also negates ‘opportunity cost’ when you lend the money to someone else instead of using it yourself
‘So the one who has started trading in money itself has made it an objective, contrary to the original wisdom behind its creation, because it is injustice to use money other than what it was created for’
In modern mainstream economic system, you give out loan and set interest rate. But in Islam you only have Qardhul Hassan (Benevolent Loan) — which is interest free . You loan $1000 you get back $1000. The rule are so strict that you can’t even charge management fee in recovering the debt should the debtor pay you late. You can’t make money off money, you must work.
The way to earn from your capital is to invest through Mudharabah & Musharakah ventures. Investor can set the profit-sharing ratio in consultation with the fund manager / entrepreneur but can’t set profit rate.
Max Weber defines it as a particular frame of mind that make someone wants to produce and trade good. Capitalism follow from a special set of attitudes — specifically, a willingness to invest time and effort, with a view to reaping a profit in the long run.
This definition is not in contradiction with Islamic ethics as long as the profit doesn’t come from usury.
God has permitted trading and made usury unlawful. (Quran 2:275)
Invest time and effort, not money alone by itself. Money alone should not bring you profit.
But what we have now is exactly the opposite — we have the non-working rich and working poor. This phenomenon is captured by Thomas Piketty in his book Capital in the 21st Century.
This structural disparity comes from allowing money to beget money seemingly without effort. Furthermore, it is aided by lower tax on income from investment. Arguably, this isn’t Capitalism anymore but Money-ism. Or perhaps in a world dominated by Fractional Reserve Banking System, the term Credit-ism is more apt.
Credit-ism is the real problem, not Capitalism.
Note that I use the phrase Islamic Economic System here instead of Islamic Banking and Finance. My standpoint here is attempting to unearth Shariah-Based Economic System and not ‘Shariah-Compliant Credit-ism’.
As Ghazali had presciently noted about the financier, ‘it becomes easy for him to earn more money on the basis of interest without bothering himself to take pains in real economic activities. This leads to hampering the real interests of humanity because the interest of humanity cannot be safeguarded without real trade skills, industry and construction
Rich & Wealthy
Credit-ism puts a premium on individual wealth — everybody is expected to behave rationally in order to maximize their personal wealth. Pursuit of happiness through wealth is demeed as everyone’s right. To a certain extent, Credit-ism adherents even implies that it’s only your own fault that you remain poor.
Bur Shariah-based economy have a different view. It is the community that must be rich and wealthy, not the individual. In today context, the community is in the form of cities, states & nations.
Community members help each other to generate value and income. Then the wealth is spread around to ensure that everyone had their basic needs fulfilled.
If we examine closely, it’s illogical that everyone could be invididually rich. This is especially true in the context of Credit-ism that assumes resources are limited.The scarcity necessarily implies that some people will be denied access to sufficient resources. Without sufficient resources they are of course by definition are poor.
The benchmark of wealth in Shariah-based economic system is when every community member have their basic need met. Meanwhile, Credit-ism creed promote that individuals must reach the coveted the financial freedom status.
This is the obsession of Credit-ism. Revenue growth, profit growth, customer growth — just name it. Making the same amount of profit as last year is deemed as a failure. It is not even enough to measure the growth yearly, now it even measured quarterly and weekly.
This is just an outgrowth from using credit as money. As the money itself have interest to be paid, then creating more money is a must. How more money could appear? Just take more loan!
Thus the winner in contemporary Credit-ism based world is just simply those who can borrow at a low interest rate and pay it back using other people money; that they borrow at a higher interest reate. It doesn’t matter how you get your hand on other people money — whether it is through business, loan, wager or outright robbery.
Shariah-based economic system focus on qanaah or sufficiency. You just work to fulfill your need and those under your care. If there’s surplus, spread it around.
Classic muamalah textbook illustrates how a merchant decided not to go to market on a particular day because somebody returned the money he lent. That filled his need for that day so he didn’t need to go to the market. Could you imagine Tesco closes early today because it already reached it’s daily target by noon?
It is not growth doesn’t have a place in Shariah-based economic system. Your business do need to reach a certain level of profit to enable it to fulfill your basic needs. You can’t come to the market only once a month selling just one apple to fulfill your need. Even a tree need to grow to a certain level before it can bear fruit and provide shade.
As in the case of human desire, Shariah-based economic system doesn’t seek to deny growth. Growth still have its place albeit with a different quantum and pace.
Muslims readily plant trees which he know that he knows very well that he will not see the tree grow big enough to bear fruit. He readily accepts that his children and grandchildren will get to enjoy it.
Wealthy Muslims throughout the ages gave away their money for education regardless the benefit they can gain. It doesn’t matter whether the research produced can benefit their business. Or whether the graduates will work for them.
Contemporary practice in Credit-ism take it to the other extreme. Not only educational institutions are expressly set up for profit, they even primarily make money from student loan. Thinking deeper, the money created from student loan is just backed by an assumption that the graduates will be able to gain employment in the future.
In effect, it’s like eating the all the seeds now to extract benefit from future fruits that the seed will spring forth.
In the next part we’ll see how these difference of definition leads to divergence in outlook and attitude towards economy.