By Timur Abimanyu, SH.

MH

THE WASHINGTON POST

Alternatives to free market capitalism

The collapse of the Soviet Union in 1990 was heralded as a landmark event in history; it was
considered the wholesale rejection of a way of life and end of Communism. The post - WW2
world was dominated by the competition between the Capitalist free market led by the US and
state intervention led by the Soviet Union. Francis Fukuyama considered one of the most
important living public intellectuals considered the development of ideas to have ended in his
end of history' thesis as there was no meaningful debate left between Marxism and the market.
The Global credit crunch more then a year on shows no sign of slowing down and has now
reached boiling point due to the number of banks that continue to collapse. Comparisons
continue to be made with the great depression of the 1930's, as many of the conditions present
in the current crisis were also present on the eve of the great depression.

Cookery school
Prior to the collapse of many of Wall streets titans in September 2008 various thinkers and
free market ideologues continued to argue just as their free market ancestors did in the 1930's
and against mounting evidence to the contrary, that time and nature would restore prosperity
if governments refrained from manipulating the economy. Western governments have been
forced to throw their Capitalist free market blueprint out of the window and intervene in the
economy like never before. Over $5 trillion in total market capitalisation has been wiped out
since October 2007, with over a trillion of this accounted for by the unravelling of Wall
Street's financial titans.

This crisis is much more then a financial crisis, this has now been accepted by free market
ideologues that played down the prospects of a recession and labelled those who did as
doomsayers, talking themselves into a recession. Such thinkers are now in hiding with very
few economists prepared to remind the world of Capitalisms principled argument, as the
Economist reminded us all: "excess and calamity are part of the package of Western finance.
And still it is worth it." With consumer deposits, savings and jobs all at stake this crisis has
well and truly brought into question the suitability of the free market and as one geopolitical
expert put it: "as the details of the present crisis reveal, there are huge ideological fault lines
making for chaos and a potential meltdown of the Laissez Faire financial system."

There are three reasons why the credit crunch crisis occurred:
1. The financial industry created complex financial contracts like derivatives that would
securitize and make money from all forms of risk, this included exotic instruments such as
credit default swaps and subprime loans. Banks continued to sell debt to customers with
little ability to repay them, August 2007 was the point when such debt reached bursting
point.
2. The speculative frenzy that gripped both the American market as well as Europe in the
purchase of real estate which continued to send real estate prices to astronomical levels.
3. Greed played a direct role in the crisis as it led to predatory lending to people that had little
means to make repayments. It also led to credit ratings agencies to rate investments less
risky than they really were.

The events of September 2008 have for most brought to the forefront the potential demise of
Capitalism as we know it and a discussion on potential alternatives. Like all previous crises
any debate on alternatives is usually reduced to one of Socialist government intervention or to
tinkering with regulation and transparency rules, there a number of reasons why the global
credit crunch crisis represents a much deeper crisis at the heart of capitalism which was
outlined by world renowned speculator George Soro's: what we are going through is the crisis
of the gigantic circulatory system of a global capitalist system that is...coming apart at the
seams.'
1. The periodic crash and crises as well as the boom and bust phenomena capitalism
continues to historically descend into whether it is in Dutch tulips, the South sea bubble,
the technology bubble as well as the dot.com crash and now the sub-prime crisis are
fundamentally down to the aims Capitalism attempts to achieve with the economy.
Perpetual economic growth (increasing GDP) will always lead to the development of a
bubble in the economy as some section of the economy will always be needed to stimulate
the remainder of the economy to ensure the economy keeps growing. The current crisis
has at its heart the bubble in the housing market, the recession of 2001 across the Western
world was due to the bursting of the dot.com bubble. The cyclical recession free market
ideologues continue justify is something which proves the failure of Capitalism to
maintain stability and is in no way due to seasonal trends.
2. The greed shown by speculators is not something isolated that has occurred for the first
time in Capitalist history, it is something that forms the cornerstone of Capitalist belief
and thought. The founding fathers of Capitalism concluded that if all consumers in society
followed and acted upon their self-interests and greed then the right goods would get to
the right people in a free market, it would lead to innovation as society competed to make
items better and cheaper. Economists since then have continued to argue that greed goes
hand in hand with the free market as it is necessary for consumers to pursue their greed
for wealth to distribute around the economy. This has led to the current situation where
 hedge fund managers and company CEO's have earned bonuses in the millions to the
detriment of wider society. Greed is from the Capitalists belief; legislation and regulation
in no way can curtail actions built upon values which are the foundations of the Capitalist
belief.
3. The market has been sold to the world as the best method for sellers and buyers to conduct
transactions and the most efficient way to distribute wealth around an economy. For years
both the IMF and World Bank forced open economies in effect using the stick to ensure
government intervention was completely removed from the economy. Academic
textbooks in schools and colleges argued free markets mean competition will do away
with companies that make any product inefficiently and it was the best way for all to
partake in the wealth generation process as any individual with an innovation can meet
any demand in the economy. The free market apparently got the right goods to the right
people. In reality however the market works much differently, with little regulation sub-
prime mortgages were created as well as derivatives. Short selling is a direct result of the
free markets removal of regulation which resulted in speculative betting on the collapse of
companies. The free market in the US which was for long America's symbol of success
has in affect brought the nation to its knees, this was outlined by John Gray former
London Schools of Economics political philosopher: the American free-market creed has
self-destructed while countries that retained overall control of markets have been
vindicated. In a change as far-reaching in its implications as the fall of the Soviet Union,
an entire model of government and the economy has collapsed.'

The Alternative: Islam

The current financial crisis has seriously eroded confidence the Western world had in the
suitability of the free market. However the Western world when looking at alternatives only
see remnants of Socialism or some state intervention in economy as feasible and workable
systems. It is also this reason that allowes free market ideologues to continue citing more
regulation, transparency i.e. more capitalism with some tinkering as solutions. This crisis
represents an opportunity for all Muslims to present the Islamic alternative. It is important to
show Islamic economics as much more then Islamic finance and Banking. This is exactly
what Adnan Ahmed Yousif, CEO of the Bahraini-based Albaraka Banking Group and chair of
the Union of Arab Banks outlined in an interview with the Middle East's Asharq Al-Awsat
when asked about the global financial crisis: The success of Islamic banking will lead to
serious consideration of Islamic economics, which continues to realize numerous
achievements, as a viable alternative to the current global economic system which continues
to be hit by these crises.' With this in mind the following points should be borne in mind and
when presenting Islam:-
1. The Islamic economy follows a philosophy which is very different to Capitalism, as a
result the end objectives both economies attempt to achieve, widely differ and thus it
would be invalid to measure one against the other as they both have different foundations
and aims. Islam has detailed laws on the distribution of wealth and this is its ultimate aim
with the economy - to ensure wealth circulates around the economy so all can share in the
wealth that is generated. Cookery school
2. Because all economic systems aim to address the same issues, there are many peripheral
similarities between Islam and the free market. At a doctrinal level however Islam and
Capitalism are two distinct systems. The Islamic economic system is fundamentally about
people and their needs, this is the fundamental principal the Islamic economy is built
 around. In a narration from prophet Muhammad (peace be upon him) it was said that "The
son of Adam has no better right than that he would have a house wherein he may live and
a piece of cloth whereby he may hide his nakedness and a piece of bread and some water"
(Tirmidhi). The Islamic economy is geared towards fulfilling the basic needs of its citizens
and these in origin were defined as food, clothing and accommodation. This forms the
basis of the Economic system of Islam, all policies and rules are geared towards achieving
such ends. Islam focuses on the needs of the people which the hadith outlined and not
merely increasing Gross Domestic Product (GDP).
3. Islam does not view the human as an economic unit and then look to find the most
economically viable solution thus viewing all problems, whether from marriage to
pensions to drugs to education, from the angle of the economic effect and cost. Neither
does Islam view the human the way the Communists did which is that people are simply
matter, just one aspect of nature, nothing more. Islam views the human as being composed
of organic needs as well as instincts, all of which requires answers on how to satisfy them.
So Islam organised these instincts and needs in a way that ensures the satisfaction of them
all, such as the need to eat and the need to reproduce and others. However, this
organisation is not arranged in Islam by satisfying some of them at the expense of the
others, nor by suppressing some of them, setting others loose, or setting all of them loose.
Instead, Islam has co-ordinated the satisfaction of all of them in a way to ensure comfort,
preventing conflicts and a lapse to a primitive level through the anarchism of instincts.
4. Through its own economic system, Islam laid down rules for the means to acquire wealth
and commodities, how they can be utilised and their manner of disposal. It certainly did
not make freedom of ownership the basis of the economic system or even the socialist
principal of from each according to his ability, to each according to his needs'. It did not
define the basic problem as unlimited wants, limited resources'. Islam views the resources
to be ample enough to completely satisfy the basic needs of all. Therefore, amongst a host
of other detailed rules, one will find the Shari'ah aims to secure the satisfaction of all basic
needs (food, clothing and housing) completely for every citizen of the Khilafah State.
5. In order to facilitate the acquisition of goods and services Islam put forward rules related
to the manner of possessing wealth without any complications. Islam defined the legal
means of ownership, and it defined the contracts through which possession can take place.
This left humanity free to develop the styles and means by which they earn, as Islam did
not interfere in the production of wealth.
6. The Islamic economic system has extensive rules for ownership and disposal of citizen's
wealth and assets. Beyond this Islam recognises a sphere of the economy as the economic
science i.e. through study and research a solution can be derived. Hence how to develop
and economy or to industrialise, where the factories and the supply lines should be, how
the steel and iron mills should be constructed fall under this category, however what is
produced and how it is distributed falls under the ˜system' for which Islam has extensive
rules.
7. The Islamic economy is based upon wealth generation where participants partake in
investment, employment and trade in the real economy. Islam does not have a dual
economy where the real economy operates alongside a financial sector. The Islamic
economy focuses all participants on the real economy, through employment, company
profits, utilisation of land (agriculture) and manufacturing, wealth is generated in only one
sector. This brings the huge benefit of wealth only circulating in one sector - the real
economy, where all can participate. Derivatives would be withdrawn as this type of
 contract is not trade in real goods; rather it is betting on the price movements of a
commodity and one must posses what they sell in Islam.
8. The Islamic system does not recognise the financial markets in their current form. One is
able to purchase shares and transfer them without actually partaking in the running of the
underlying company that the shares are meant to represent. In Islam ownership is a direct
role in a company and not just a share certificate which in effect the stock market allows
to be traded and re-traded. It is this ability to not have a direct role in a company that
allows excessive speculation.

9. The Islamic economic system does not recognise the financial markets in their current
form and has made the Western style Public Limited company (joint stock (share))
companies haraam for a number of reasons. Fundamentally this type of contract
contradicts the Islamic rules for contracts. The company in the West represents a
particular type of contract - the Solitary Will,' this is where an individual agrees to the
written constitution of a company by purchasing its shares with no formal offer from
anyone. This has come to be termed as the Individual Will whereby shares could be
exchanged very quickly without the need for two people to continuously sit down and
have a formal offer and acceptance. An example of this is the take-over bid of the world's
richest football club, Manchester United FC by Malcolm Glazier in 2005. He imposed his
will on the company (i.e. he brought shares) and even though other shareholders were
against such an action it was a legal form of acquiring ownership even though there was
only one person in the contract. Most contracts involve two parties where one party offers
terms and the other accepts, however under corporate law in the West setting up a
business is a contract of ‘olitary will.' It is not a contract between two or more people;
rather it is an agreement that stipulates that all parties agree to it when they subscribe for
shares in the company. So an individual joins himself to the conditions of a company -
through purchasing their shares. This means to become a partner one does not need
approval from the existing owners - this contradicts Islam.
10. Islam's monetary policy is centred around a legal tender based upon the Gold and Silver
standard and not one based upon interest rates to regulate inflation and the economy. In
Islam when it comes to exchanging a commodity with a specific monetary unit, Islam has
guided Muslims to the monetary unit by which the exchange is to take place. It has
restricted the Khilafah to a specific type of money, which is 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. This
means the notes and coins circulating in the economy would all be backed by gold and
silver. This will no longer make possible the free printing of currency as the Khilafah
would need to increase the actual holdings of gold and silver. This has a unique effect on
Inflation which free market economies have been unable to contain.
11. Islam contains inflation by changing the role of banks. Currently banks practice fractional
reserve banking whereby they create credit, borrow money from the financial markets and
lend to depositors. This creates a big problem in the economy as very little equity can be
used as collateral to borrow large sums of money which creates a bubble waiting to burst.
Islam strips the ability of banks to create money and transfers this to the central treasury -
bait ul mal. Money creation will be the sole role of the state.
12. The role of banks in Islam will be to collect the nation's deposits and to also act as a central
 pool whereby money can be collected and invested in the economy, with the returns being
distributed amongst investors. The banks would only be able to invest what they have in
deposits and cannot create money as this is the role of the central treasury - bait ul mal. As
interest (Riba) is haraam the main function of banks will become the pooling of wealth
which can then be invested across the economy aiding wealth distribution and economic
growth.
13. The Islamic economy is stripped of ‘nterest' as this is something Islam has categorically
forbidden in the Qur'an. Holding wealth in a bank account will no longer accrue interest
and any unused wealth for a year is liable for taxation. In this way such wealth is only
productive if invested or spent, and this can only take place in the real economy. The
removal of interest in the economy will act as a multiplier affect circulating wealth around
the economy.
14. Islam does not have a concept of income tax; value added tax, excise duties, nor national
insurance contributions. Rather Islam puts the emphasis of taxation on wealth rather than
income. Take the average salary in the UK of £24,000. At current tax rates the tax
burden alongside National Insurance contributions falls at 33%. This alongside indirect
taxation (that is taxation on spending rather than income) as well as council tax, road tax
and so forth mean that the real tax burden falls at closer to the 40-50% mark. This means
that the average person in UK is losing between £10,000-12,000. So at higher wage
levels, the monetary amounts lost towards taxation is much greater.

15. In Islam, although simplified, the wealth tax falls at 2.5%. This means that within one year,
on average one can save at least £10,000. Therefore two or three people could easily
enter into a business contract such as Mudharabah (An Islamic company where one
provides the Capital and the second partner works with it) to supply some of the demand
in the economy for consumer or manufactured goods thereby creating more employment
in the economy. With no concept of interest rates and hoarding forbidden in Islam wealth
will circulate quickly ensuring the public can purchase what they specifically need,
creating employment and giving all more and more disposable income.

16. Islam considers poverty as one matter for humans in any country and in any generation.
Poverty in the view of Islam is the non-satisfaction of the basic needs in a complete way.
Islam defined these basic needs as three things, which are food, clothing and
accommodation. This is seen from the following evidences "The duty of feeding and
clothing nursing of mothers in a seemly manner is upon the father of the child." (Al-
Baqarah: 233) and "Lodge them where you dwell, according to your wealth." (At-Talaq:
6). Specifically Islam made the financial support (Nafaqah) compulsory from the revenues
of the Bait ul-Mal and from Zakah. From a Macroeconomic perspective the removal of
interest, the financial markets and direct taxation allows wealth to freely circulate around
the economy so all citizens can partake in the wealth generation process.

17. Islam has ordained the state to play a direct role in the economy and does not leave things
completely to the market. Islam lays out three types of property; state, public and private.
It designated any utility regarded as indispensable for the community, such that its
absence would require people to search far and wide for it, as public property. It would
then be publicly owned and the revenue generates would be administered for the benefit
 of all citizens. This is derived from the hadith of the Prophet (SAW) "Muslims are
partners in three things: in water, pastures and fire". Although the hadith mentioned just
three things we can utilise qiyas (analogy) and extend the evidence to cover all instances
of indispensable community utilities. Thus water sources, forests of firewood, pastures for
livestock and the like are all public utilities as well as the mosques, state schools,
hospitals, oil fields, electricity plants, motorways, rivers, seas, lakes, public canals, gulfs,
straits, dams etc. Islam would allow ownership if it were not indispensable for the
community. This solution will have a unique effect, as it will ensure all will receive the
basic requirements to live and not be at the will of monopolies or high prices.

Conclusions
The rejected $700-billion and all subsequent buyout of banks' bad mortgaged-backed
securities is not a strategy but mainly a desperate effort to shore up confidence in the system,
to prevent the erosion of trust in the banks and other financial institutions and preventing a
massive bank run such as the one that triggered the Great Depression of 1929. Having created
the conditions that produced history's biggest bubble, America's political leaders appear
unable to grasp the magnitude of the dangers they are facing. As the rejection of the original
bailout package showed they are mired in their rancorous squabbling among themselves.
What has been very clear from the contradictory moves of allowing Lehman Brothers to
collapse while taking over AIG, and engineering Bank of America's takeover of Merrill
Lynch - there's no strategy to deal with the crisis, just tactical responses.
Islam offers the Western world its last salvation from descending into complete chaos as the
Western world's deposits continue to shrink through further collapses and the last remaining
strategy the Western world has left - the printing of more money. By Afghan Voice

Referency :
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