As the negotiations about the debt ceiling in USA run the final lap, many important long term issues remain unanswered. The Western economic system has yielded wonderful results in developing science and technology in the last two to three centuries. However, in the last few years, some of its vulnerabilities are being exposed. No economist can present suitable improvements and changes without thoroughly understanding the nuts and bolts of the present system or acquiring insights from other traditions.
The Western economy based on central banking system, primarily harnesses the self interest of the rich and the powerful and secondarily of the intellectuals and the innovators to keep the system running. It rewards them in a big way and in guaranteed ways, as those who own the debt are guaranteed payments from those who owe. However, the system tries to leave enough on the table for everyone else, so they do not create unnecessary noise. In this way it is able to recruit all national and at times international resources to serve the economic system. The Islamic system, on the other hand, banks on the generosity and piety of the rich and the honesty of the politicians, but does not extraordinarily reward the ‘haves,’ both in terms of the rich and the powerful. The third tradition deserving of our attention is one evolving from socialism. The exponential growth of the Chinese economy is not news anymore, so it is clear to most that it must have something to say for the future of mankind. I do not pretend to have enough insight in economy of China to summarize it, as I have attempted for the Western economy and Islam. For starters, however, the recent books by Fareed Zakaria and Henry Kissinger about China should suffice for the curious minds.
It is my belief that further developments in global economy will bring Western interest based economics, Islamic guiding principles about economics and the Chinese experiment to the forefront and require them to offer utilitarian solutions for the future of mankind. Perhaps, some sort of amalgam of the three may offer panacea for the world. However, one aspect is crystal clear in my mind that no one with knowledge of only one or two of these candidates is going to offer useful solutions. Recently, I read that some Muslims have started some sort of interest free banking in France. Many Muslims behave and write just from the conviction of their belief, in problems associated with interest, without understanding the intricacies and basis of the present economic systems. Sometimes they assume, just because they have spoken, somehow, the Western system will melt away. In their tall claims are they casting a spell or providing adequate reasons for evolution of the economic system that has served the West well for three centuries? How often have they given up their special perks because a new kid or claimant is on the block? Isn’t it terribly naive to suggest that the rich and the powerful in the West suddenly give up, what has served them and a lot of masses well for three centuries? It is indeed the very interest based economies that brought the Muslims, as immigrants, to the Western shores in search of better livelihood.
So, what is needed is an insightful discussion of limitations and strengths of all options. How to combine insights from the Western economy, Islam and Chinese experiment is a trillion dollar question and I do not propose to know all the answers. But, I do propose to put together here an excellent collection of materials from all three. So, let the discussions begin. I will start off with some heavy hitters and then add some recent faces and keep sprinkling my ideas here and there.
A book that should be mandatory for all politicians and for anyone who cares to comment on economic issues, in one disguise or the other, is by Niall Ferguson, to give you the historic background of our present day Western financial system. He is Laurence A. Tisch Professor of History at Harvard University and William Ziegler Professor at Harvard Business School. His book is titled:
The Ascent of Money: A Financial History of the World
Here I quote from a review of the book:
Whatever one thinks of his arguments, it’s impossible to ignore Niall Ferguson. He’s like the brightest kid in the debating club, the one who pulls all-nighters in the library and ferrets out facts no one thought to uncover. And in his latest book, “The Ascent of Money” — humbly subtitled “A Financial History of the World” — Ferguson takes us on an often enlightening and enjoyable spelunking tour through the underside of great events, a lesson in how the most successful great powers have always been underpinned by smart money. “The ascent of money has been essential to the ascent of man,” he writes, making a conscious reference to the BBC production he loved as a boy, Jacob Bronowski’s “Ascent of Man.” (In fact, like Ferguson’s three previous books, “Colossus,” “Empire” and “The War of the World,” “The Ascent of Money” was written as a companion to a TV documentary series.)
“Behind each great historical phenomenon there lies a financial secret,” Ferguson says. He goes into fascinating detail about how “it was Nathan Rothschild as much as the Duke of Wellington who defeated Napoleon at Waterloo” by selling bonds and stockpiling gold for the British Army. The richest bankers on the Continent in the 19th century, the Rothschilds became known as die Finanzbonaparten (the Bonapartes of finance). And, as Ferguson argues, they also played a crucial part in the South’s defeat in the Civil War by declining to invest in Confederate cotton-collateralized bonds. Imperial Spain amassed vast amounts of bullion from the New World, but it faded as a power while the British and Dutch empires prospered because they had sophisticated banking systems and Spain did not. Similarly, the French Revolution was made all but inevitable by the machinations of an unscrupulous Scotsman named John Law, whom the deeply indebted French monarchy recklessly placed in charge of public finance. “It was as if one man was simultaneously running all 500 of the top U.S. corporations, the U.S. Treasury and the Federal Reserve System,” Ferguson writes. Law proceeded to single-handedly create the subprime mortgage bubble of his day. When it collapsed, the fallout “fatally set back France’s financial development, putting Frenchmen off paper money and stock markets for generations.” Wilhelmine Germany, meanwhile, came up short in World War I because it “did not have access to the international bond market,” Ferguson writes. Every one of these episodes sounds like a warning shot: Will America be the next great power to fall because of unsound finance?
My second expert is Hadhrat Mirza Tahir Ahmad, the previous head of the Ahmadiyya Muslim Community, for his insights about Islam and for his foresight in predicting problems, twenty years before the USA financial issues became common knowledge. His book is titled:
Islam’s response to the contemporary issues
With the USA federal debt predicted to balloon to 20 trillion dollars by 2019, Mirza Tahir Ahmad’s words appear prophetic, when he had written,
“Let us turn to the USA to see how things may work there. Without doubt, it is a country with the largest home-market to support its industry, so much so that some economists believe that even if America is cut off from the international community, the broad base of the home-market would guarantee the survival of its industry. But such economists do not take account of other related factors. If you apply, for instance, the case discussed earlier to the America scenario, you will certainly begin to see that there can be no logical conclusion other than the one drawn earlier. It is only a question of time. With a huge budget deficit and trillions of dollars in outstanding debts, the USA as a whole has already overspent and the American public is under very heavy debt to its own future. The buying power of the nation as a whole is bound to slow down or lending houses will have to go bankrupt. It is only a question of size. But the inevitable laws of nature must operate and apply equally to all similar situations.”
He wrote in his epic making book as he linked interest based economies to wars on a large scale:
The warning about a war from God in the verses just cited (2:279-280) means that the laws of nature governed by God would begin to punish the capitalist society when the factors which have been discussed earlier ultimately lead man to economic imbalance and warfare. Disorders, disturbances and wars always follow exploitation and usurpation of the rights of the poor. We warn you about a war with God and His Messenger means that the state, which thrives on interest, would inevitably end up in a situation where the nations will rise in arms against each other.
Time does not permit me to elaborate this aspect of interest. In the Holy Quran, verses prohibiting interest always follow verses on warfare. This indicates the inter-relation of interest and war. Those who are familiar with the history of the First and Second World Wars would remember that capitalism played a disastrous role in not only causing but also prolonging those wars.
The third expert I want to bring to witness stand is yours truly, Zia H Shah MD. I am a physician and not an economist, but, in that I see my strength that I do not bring to the table the prejudices and self interests that an average economists cannot free himself or herself from and cannot bring the complete picture to the table. My claim to fame in this field is a book review that I wrote in 2009, which goes beyond a conventional review and highlights many of my ideas on the subject. I bring to the table creativity of a generalist, a physician, a writer, an editor, a journalist, a documentary producer and last but not the least, an honest broker between different traditions bearing on the economic issues, who will not short sell his integrity.
Book Review: ‘The Case Against the Fed’ by Murray Rothbard, reviewed by Zia H Shah MD
If Muslims are to have interest free economy they need to fully understand the history of present day economy and all its pros and cons in depth. The Islamic teachings about interest should not be studied in the limited scenario of what happens when you take a loan on interest to buy a car, but in the larger context of what interest based economy does to the global economy, what money supply and central banks have to do with the US Government Federal loan of more than 11 trillion dollars and why the state of California, the sixth largest economy in the world is nearing bankruptcy. Many of the other USA states are failing economically. Dreams of retirement for millions of Americans have been shattered. We no longer have the luxury of burying the proverbial head in the sand! What keeps us from the understanding the basics of the economic system is our unreasonable awe of the system. Demystifying the system is not matter of available time or intellect; it is an issue of trust in our own wisdom.
Murray N. Rothbard (1926-1995) was the S.J. Hall distinguished professor of economics at the University of Nevada, Las Vegas, and dean of the Austrian School of economics. He served as vice president for academic affairs at the Ludwig van Mises Institute, was editor of the Review of Austrian Economics, and his writings appeared in many journals and publications. This short book of 150 pages is a well written book, easy to read, that does not assume any prior knowledge of the reader and explains this greatest mystery of our times beginning from the scratch.
Some of his other writings can be reviewed on the web.
According to Murray the Federal Reserve is virtually in total control of the nation’s vital monetary system, is accountable to nobody–and this strange situation, if acknowledged at all, is invariably trumpeted as a virtue. Read the review of the book by Zia H Shah MD online by clicking here.
My next expert on the issue at hand is Dr. Faheem Yunus for introducing the subject of Islamic principles on the subject in popular press, in Huffington Post in August this year. Dr. Younus serves as the Adjunct Faculty for Religion and History at the Community Colleges of Baltimore County and a Clinical Associate Professor of Medicine at the University of Maryland. He is a recipient of the prestigious Presidential Service Award (Gold) by Barack Obama in 2009 for his work with Muslim Youth in America, Dr. Younus served as the National Youth President of Ahmadiyya Muslim Community USA (MKA USA) from 2006-10. He wrote in Huffington Post:
How Islam Can Eliminate the U.S. Debt
Despite a bipartisan agreement yesterday, I think of the debt ceiling debacle like you are trying to keep your cholesterol normal despite daily consumption of Big Macs, fried chicken and ice cream. So when your blood work reveals a cholesterol of, say, 271mg/dl, you somehow snooker your doctor into agreeing that the upper limit of normal cholesterol is 300mg/dl instead of 200mg/dl. Over the next few years the cycle gets repeated, and each time you are able to negotiate a higher upper limit for “normal” cholesterol.
From an Islamic standpoint, the Big Mac in this case is America’s penchant with an interest-based financial system. Neither slashing trillions in spending nor creating a Super Congress would prove beneficial. Unless we address the fundamental issue of interest, raising debt ceilings is just like increasing the upper limit of “normal cholesterol”: it doesn’t make you healthy.
But the true blue capitalists keep hammering the Keynesian economic concepts, arguing that demand alone is not always enough to stimulate full employment. Thus requiring external forces, such as governments, to create jobs and regulate business cycles, even if it means borrowing more money.
My next expert is none other than the Presidential candidate for the Republican party Congressman Ron Paul for his writings and countless interviews on CNN and CNBC on the issue.
End the Fed by Ron Paul
A book review by Justin Moyer says:
During libertarianish Republican Ron Paul’s 2008 presidential campaign, thousands of his supporters burned dollar bills while chanting the anti-monetarist mantra “End the Fed!” Fresh from writing “The Revolution,” a bestselling rant against big government, the Texas congressman has made that Jeffersonian slogan the thesis of his new book, a meandering diatribe against central planning, inflationary monetary policy and “the swollen ego of a Fed chairman.”
“Nothing good can come from the Federal Reserve,” Paul writes. It’s “immoral, unconstitutional, impractical, promotes bad economics, and undermines liberty.” In light of America’s possibly-over-or-maybe-just-beginning economic downturn, Paul’s fetish for the free market and the gold standard may be appropriate: If we’re still not sure whether FDR-sponsored Keynesianism ended the Great Depression or contributed to it, perhaps Ben Bernanke-sponsored bailouts aren’t such a super idea.