Posted on 10/16/2001 11:59:05 PM PDT by JohnHuang2
The cash-flow of God
Aug 4th 1994
From The Economist print edition
Islamic economics is not so special; but it has one insight other people may find valuable
TO MOST readers, these three articles may have a curious flavour, as if they came from the pen of a medieval scholar writing about the religion and politics of his time. That analogy is telling; for it is precisely how the articles have to be.
What is happening in the Muslim world today—a revolt against its own decay and humiliation—has taken the form of a return to the roots of the Muslim religion. This religious revival may prove to be no deeper and no longer-lasting then the Christian revival in Victorian England (though that lasted two-thirds of a century, and helped to build a British empire). But, while it lasts, Islam's revivalists will try to justify almost everything they say about politics and economics by quoting from the Koran and the stories of Muhammad's life; and those who argue with them had better be able to counter-quote.
Curiously, counter-quoting comes easiest in the field of economics. For the claim that there is a distinctively Islamic view of economic life, morally superior to but no less efficient than anything offered by the decadent, materialist West, does not—with one possible exception—stand up to examination.
In the general outlines of what they want, most Islamic economists say things quite similar to the sort of thing that is starting to be said by the people building a post-Marxist left in the West. The basic organisation of an economy should be left to the market. Both the Koran and Muhammad himself assumed a system based on individual enterprise and individual reward (the command economy, after all, was not going to be intended for another dozen centuries); the Prophet has nothing against profit. The role of the state, subsequent Muslim scholars have more or less agreed, should be limited to matters the market cannot really cope with—the broad direction of the economy, natural monopolies, sorting out the knots the market so often gets itself tied up in, and so on.
The good Muslim businessman should, however, be guided by his conscience—and by God's written instructions—to do the right thing by other people. He should pay a reasonable wage, charge a fair price, and be decently restrained in the way he spends his profits (which, the shrewd Islamic economist points out, ought to be good for investment and healthy counter-inflationary). He should also take care of the environment, God's handiwork around him. "Do you see how God has put all that is in the earth under your command?"
There are obvious difficulties in this. Who decides what a reasonable wage is, and where God stands in the choice between leaving a field under wheat and building a computer plant on it? How do you prevent a company that charges fair prices and looks after its workers from being bankrupted by a ruthless rival, unless there is a way of insisting that the rival becomes less ruthless?
But these difficulties are not peculiar to Islamic economics. They are shared by the people in the West who are trying to construct a new socialism, a de-Marxified alternative to the politics of pure individualism. These westerners also accept the market as the essential driving-force of any economy, but they too wish to set it within a moral framework that will ensure support for the weak through the compassion and self-discipline of the strong. What communism tried and failed to achieve through the state, one Islamic economist has written, "is to be established through the agency of man himself." It would be a good slogan for the possible new socialism of the 21st century.
Nor does the institution called zakat justify Islam's claim to economic superiority. Zakat is the word for charity, almsgiving, the means by which rich men become better men by helping the poor. The voluntary provision of charity is economically an excellent thing, since it reduces the need for public welfare organisations that usually cost more to run. But Muslim countries discovered long ago that voluntary zakat does not get you far, especially as people move out of villages into the anonymity of big cities.
Some of them have therefore imposed a zakat tax. Unfortunately, the tradition-bound nature of Islamic economics complicates the calculation of zakat. The percentages fixed in Muhammad's time applied only to mining and agriculture (and, agonised one early caliph, were pomegranates exempt?). Only recent have two or three countries tried to apply the tax to companies as well as to individuals. And there are all sorts of ancient opt-outs people can appeal to.
The result is that the tax raises very little money—less than 0.5% of GDP even in Pakistan, probably the most efficient country in this matter. It can cost a lot to administer; in one recent project, the zakat collectors were authorised to give themselves almost a quarter of what they collected. Worst of all, if often does not do the intended job; a Malaysian scheme taxed bone-poor rice farmers, while ignoring the city rich.
It would seem hugely more practical, in the modern world, for the government to extract money as precisely as it can from the rich and use the proceeds for the welfare of the poor. That could be called zakat. Alas for the pride of Islam, it would be indistinguishable from what is done, with varying degrees of efficiency, through tax systems all over the West.
The one possible exception, the area where Islam may have something distinctively useful to offer, is in the monetary system. This arises from the Koran's prohibition of riba, generally translated as "interest".
There are all the usual scholarly disputes about this. It is argued by some Muslims that the Koran's main reference to riba is in Chapter 3, Verse 130—"Believers! Do not live on interest, doubled and redoubled!"—and that this refers not to interest in the modern sense of the word but to uncontrolled usury. Christianity also prohibited usury, which is why rich Christians in the Middle Ages went to Jewish money-lenders. Some modern Muslims accept the interest-usury distinction. The present mufti of Egypt has issued a fatwa declaring that interest can sometimes be perfectly legitimate.
Be that as it may, Muslim theoreticians and bankers have between them devised ingenious ways of coping with the interest problem. One is murabaha. The Koran says you cannot borrow $ 100m from the bank for a year, at 5% interest, to buy the new machinery your factory needs? Fine. You get the bank to buy the machinery for you—cost, $ 100m—and then you buy the stuff from the bank, paying it $ 105m a year from now. The difference is that the extra $ 5m is not interest on a loan, which the Koran (perhaps) forbids, but your thanks to the bank for the risk it takes of losing money while it is the owner of the machinery: this is honest trade, okay with the Koran. Since the modern communications with bank's ownership may last about half a second, its risk is not great, but the transaction is pure. It is not surprising that some Muslims uneasily sniff logic-chopping here.
A more honest way of using the fact that risk-sharing is acceptable, though interest is not, comes in the practice known (confusingly) as mudaraba, and its variant musharaka. The bank, instead of lending money at interest to an entrepreneur, as it does in the West, in effect buys shares in his enterprise. If he does well, the bank gets an agreed share of his profits. If he flops, it shares the pain. The bank is an investor, not a lender.
This has its clumsinesses. The bank may know less about the business in question than the entrepreneur does, so it can be taken for a ride. Moreover, the depositors who in the first place put into the bank the money it invests are also deprived, under this system, of a guaranteed return on their money. They too have to take a risk, which is not much fun if your are an old-age pensioner; and, if this deters them from putting their cash into the bank, there will be less money to invest all round.
Despite this, some people in the West have begun to find the idea attractive. It gives the provider of money a strong incentive to be sure he is doing something sensible with it. What a pity the West's banks did not have an incentive in so many of their lending decisions in the 1970s and 1980s. It also emphasises the sharing of responsibility, by all users of money. That helps to make the free-market system more open: you might say more democratic.
The other big supposed disadvantage of an interest-free monetary system can also be exaggerated. How can a country control its money supply, it is asked, if it cannot use the interest-rate weapon?
The answer is that its central bank can still change the reserve requirements it imposes on commercial banks, and influence the volume of cash in the economy in other ways. The government's budget surplus or deficit is another big influence on the rate of monetary expansion. None of these instruments, perhaps, is as handy as the short-term interest rates, that are at the command of the Bundesbank, the Bank of England and the Federal Reserve (although these bodies have little practical control over long-term rates). But a purely Islamic economy would by no means be helpless in dealing with the money supply.
The economics of Islam, in short, is not as special as its enthusiasts claim; but neither does it deserve the usually rather ignorant sneer it gets from many non-Muslims. As one bright Malaysian banker says, "If the scholars of the Koran had economics degrees, they would understand what we are trying to do." And if western economists knew more about the Koran, so would they.
For Education And Discussion Only. Not For Commercial Use.
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