IV

ISLAMIC CRITIQUE OF CONTEMPORARY ECONOMIC

Criticism of Capitalism and Communism dates back quite early in the literature on Islamic Economics. It started during the twenties and the thirties and it was largely the challenge of these alien economic ph1osophies which provided the impetus for the first works on the subject that appeared during the fourth decade of this century.

Both laissez faire capitalism and Marxian socialism have been subjected to severe criticism. This criticism is generally based on the end products or these systems, in terms of injustice, human suffering and loss of individual freedom. But the philosophical and theoretical bases of the two systems have also been examine and refuted. The philosophy of Natural Law, Individualism, Utilitarianism and the view that pursuit of self-interest by individuals results in ensuring. the social good, have all been rejected as baseless. Similarly the Labour Theory of Value, the view that forces of production determine relations of production which determine "the superstructure of values" and the Marxian Theory of state have also been criticised and rejected. The two systems have been characterised as two extreme and unbalanced approaches to solving man’s economic problems and Islam has been projected as the Middle Way assimilating the good points in both the systems and free from the imbalances from which they suffer. The great poet of Islam Muhammad Iqbal (d. 19M) had already popularised this approach long, before scholars and Journalists took up the subject.Capitalism

Mawdudi (607: 26-51) mentions private property, freedom of enterprise, profit motive as the sole incentive, competition, discrimination between the rights of the employees and those of the employer, reliance on natural, forces for growth and the principle of non-intervention by the state as the basic tenets of modern capitalism. He recognises an element of truth in these principles but finds them carried to extreme by capitalism. Undue emphasis on rights, of individual ownership and freedom of enterprise played havoc during the industrial revolution causing widespread suffering and privation. The legalisation of usury added to the anti-social character of capitalistic enterprise leading to concentration of wealth and pauperisation of the masses. Undue emphasis on self-interest and the profit motive produced a society devoid of humane character, brotherhood, sympathy and co-operation. He reviews the reforms introduced in capitalistic countries allowing an active role for the state and a better deal for labour. Despite these changes, large-scale unemployment and the existence of unsatisfied needs when production resources lie unutilised, the occurrence of trade cycles and the domination of society by usurious financiers continue today (607: 100-106).

Mahmud Ahmad rejects capitalism’s claim of being a self-adjusting process leading to maximum satisfaction of human wants, by pointing out the chaos it has led to. Economic crises are sufficient to refute such a claim 168: 4-17). Quoting Halm, A. Mannan (132: 37-38) criticises capitalism due to its failure in maintaining full employment and ensuring free competition.

The main weakness of capitalism according to Baqir is its failure on the distribution front. Its emphasis on more and more production is misplaced as more production does not ensure greater welfare (171: 240-241). Mabid Mahmud(624) and Chawdhri (620) make the additional point that it is through equitable distribution of the social product that welfare and satisfaction can be ensured and the size of the cake is not always relevant in this context. Every increase in the size of the cake in the capitalist system decreases human welfare and satisfaction as it increases the gap between the rich and the poor.

A strong condemnation of capitalism comes from Syed Qutb (500) who finds it to be thoroughly inhuman and un-Islamic.Modern Theories of Interest

While the main targets of attack have been the absolute conception of individual ownership rights and the unrestrained nature of freedom of enterprise in capitalism and the cut-throat competition, the inevitable rise of monopoly capitalism, exploitation of labour and emergence of Imperialism, the most criticised institution is interest which is regarded as the source of many evils in the system. While we summarise the Islamic economist’s views on the institution as such in the next chapter, here we note their criticism and rejection of the various theories which seek to explain and justify interest.

Mawdudi (521) and Anwar Iqbal Qureshi (526) are the earliest contributors in this field in which Mahmud Ahmad (168), Issa Abdouh (504; 505), Mahmud Abu Saud and Nasser A. Sheikh (154: 71-75) have also contributed.

Abstinence and waiting cannot entitle the capitalist to a reward Unless it is proved that the use of borrowed capital necessarily results in profits. In the same manner merely taking a risk does not ensure augmentation of the capital risked. Productivity theory is without any proof as Value productivity of capital is subject to the uncertain conditions of demand and supply. Mawdudi finds Time Preference and Liquidity theories as partly valid in so far. as an explanation of interest in the modern economy is concerned. But an explanation does not amount to a justification. An institution can be justified only with reference to its role in society and its usefulness for mankind. Mawdudi examines this role and finds interest to be the cause of many ills in society; economic and political as well as moral and spiritual. .

Qureshi (526.. 10-43) notes that there is no agreed theory of interest - a point emphasised by several writers on the subject. He criticises the classical theory of interest along familiar lines. Rejecting the Productivity Theory as circular in its reasoning and the Time Preference Theory as based on false psychological assumptions he finds the Monetary Theories of Interest in their neo-classical and Keynslan versions as less concerned with causes of existence of interest than with how its rate is determined. He quotes Keynes to establish the possibility and desirability of a zero rate of interest. Mahmud Ahmad (168) and Farid (514) cite Harrod to establish the same point. Siddiqi (158: 113-114) quotes Shackle to belittle the role of interest and underline its "paradoxical nature".

In his brilliant essay on "Semantics of the Theory of Interest" Mahmud Ahmad (628) notes the confusion that is found in economic literature between the terms profit and interest. He gives numerous excerpts from Smith, Ricardo, Say, Malthus, Sismondi, Marshall, Fisher and even Bhom Bawerk in this context. He distinguishes between the entirely different economic roles played by loan capital and risk capital. Defining capital as "that part of wealth which is used to create further wealth" he notes that "risk capital is that variety of capital which agrees to relate its reward for its service of participation in the productive process to the measure of value that its participation creates" (623: 179) but "loan capital dictates its price of participation in the shape of a fixed rate of interest. Its charge i.e. interest, is the first charge to be met out of the value of our product . . ." (628: 176). "Loan capital for this reason imparts a peculiar rigidity to the entire range of economic consideration, risk capital, on the other hand, projects a peculiar flexibility to "the enterprises concerned Loan capital by virtue of its interest, sets a limit to the marginal efficiency of productive effort, risk capital imposes no such limit and leaves it free to exploit all natural resources and employ all available manpower" (628:.1 176). He regards interest to be the "primary cause, with certain secondary causes which are themselves, reflex projections of this primary cause, which, virtually perpetuates underemployment equilibrium Interest raises prices, profits and rents (628: 182-187). Mahmud Ahmad examines the arguments in justification of interest by analogy with rent and hire and finds their faulty. As to rent he notes that land is essentially productive. whereas money capital is not: "Money without labour will not produce anything at all.... Land even without labour will produce something, it may b only grass to graze cattle on or bushes to provide fuel" (628.- 185).

In case of hire: "When there is loss by mischance or miscalculation, in the case of a hired item, it is the lender who suffers the loss; whereas in the case of money loan, every loss, whether by mischance, miscalculation or any other reason has to be borne by the borrower". He castigates Marshall for having invoked this false analogy between hire price and interest.

He concludes that interest is neither of the nature of profit nor of the nature of rent and hire. Mahmud Ahmad discusses the nature and purpose of savings and finds the claim that advancing savings as loan is equivalent to foregoing a need or that it involves a sacrifice. to be a false claim with no basis in reality (628: 191-192).

Uzair also notes that, the-origin of capital and the accompanying justification of its remuneration are derived from the concept of physical capital - capital goods - accumulated in the primitive society. When the same justification for reward is applied to money capital it creates confusion. As stressed by several writers the uncertain world in which production takes place does not guarantee a positive value-productivity even to physical capital.

A searching criticism of some recent attempts to justify interest has been made by Mahmud Abu Saud who also warns "against the tendency of treating money capital as if it were capital goods or real assets, a tendency that has become quite frequent in modern literature". He examines the views of Samuelson, Patinkin, Joe S. Bain besides those of Schumpeter and Keynes. Samuelson equates the price with the rental of use of money, giving the impression that to use the service of money is exactly as to use the service of a doctor. The obvious objections to treating interest as rent are that money as a medium of exchange is not supposed to depreciate and that you do not rent something that perishes or disappears once you use it.

Patinkin considers interest as one of the forms of income from property. The argument is fallacious as interest is paid not only before the realisation of income but also irrespective of such a realisation. Moreover, Patinkin’s justification falls to cover the interest paid on consumption loans. Joe S. Bain equates t he loanable funds with capital goods. Abu Saud points out that the owner of money capital is not the investor.

Of the two definitions of interest given by Keynes, the money rate and the commodity rate, the former is paramount to. his time preference maxim as he considers that interest is the difference between the price of money today and its price at a future date. But what is that price? asks Abu Saud. "The only way to find the price of money is to define its purchasing power ... this can be done for the present, but how can we find this price of money in the future ?"

Keynes Implicitly mentioned another definition of interest, a definition more indicative about its raison dètre. In the course of analysing the reasons that make money rates of interest more acceptable than commodity-rates, he mentioned that "... the power of disposal over an asset over a period may offer a potential convenience of security, which is not equal for assets of different kinds, though the assets themselves are of equal value. There is, so to speak, nothing to show for this at the end of the period in the shape of output,, yet, it is something for which people are ready to pay something (General Theory, p. 225). Is it a fact nowadays that we have more security in future payments in money than in any other asset? Or is It the contrary? It is of course more convenient to be paid in currency, but it is not safer at all, so much so that it would have been more true to say that the interest at present is a premium - not of security, but- of in security Inherent in future money. Keynes went on describing his liquidity money reference, ending by approving a "depreciating or stamped-money". If this is the case, then the whole concept or positive interest becomes void and the liquidity preference attribute would no longer be valid as a Justification for interest.

Turning to time preference Abu Saud notes that "the conception or future demand or the preference of present goods over future ones, seems to me more of an arbitrary postulate than a real fact". With reference to Bhoem Bawerk’s first two grounds of time preference he asks how come the lender charges a majoration because the borrower prefers present to the future? And what is the counter-value of the agio, or what right has the money lender acquired to entitle him to this extra amount? As to the third ground, technical superiority of present over future goods, a reference is made to its refutation by Keynes. Further "it is extremely important to notice that neither Bhoem Bawerk nor Irving Fisher distinguished between liquid or money capital and capital goods," and in fact Fisher is telling us why there is interest by assuming the existence of interest, as the word "capitalised values" inevitably implies interest. Thus the confusion between money capital and capital goods is the bane of all modern theories of interest.

To emphasise again the importance of discriminating between the two terms, one would simply consider the case of an investor who is in need of tangible assets (capital goes into the market for buying an al1 goods) and who them. The "price" is then negotiated on the basis of the conditions prevailing strictly in this specific market of capital goods. In course of settling the price of the purchased goods, the buyer, takes into consideration the three Fisherian elements: time preferences, capital productivity and approximations or enterprise risks. On the sellers side there would be the cost of production, the profit, the risk (here represents the price of replacement plus the carrying cost plus obsolescence).

If the buyer has got the money in cash, the deal would be smoothly concluded. If he has no liquid means of exchange he will have to go to a money holder who would charge a price for the money needed. This new deal is completely different and independent from the first. To start with, there are no real goods involved, and if we apply the term "medium, of exchange of a good for another" adopted by the neo-Keynesian's, and taking for granted that money in this see and transaction would be rendering a service to the investor by facilitating his deal, we are now talking of a different transaction of a different nature. Here we have the capital market where savings are mainly decided by incomes and where the final price, if it is a price at all will be decided on elements other than the simple demand of investors.

For Schumpeter the socially significant kind of interest is the payment made by the entrepreneurs to the capitalist for the use of purchasing power which enables him to earn profit. What if the entrepreneur falls to earn profit? asks Abu Saud. The argument is hardly convincing in periods of depression and cases of loss and failure. As to Schumpeter’s argument that "the demand for productive loan funds with interest at zero would always be greater than supply which is always limited", Abu Saud regards it to be the old classical theory, linking saving and investment via interest, which has been refuted by Keynes.

Schumpeter implied that there would be no positive rate of interest unless there is either innovation or some positive demand for capital goods with marked time preference. Abu Saud regards it to be a description of the actual practice rather than a valid explanation or justification of interest. Would there be no innovation at zero rate of interest? he asks. In conclusion he notes that Schumpeter was convinced that interest is a tax on profits and suggests that "its elimination would be an extra stimulation to more developments as long as funds are available".Speculation and Forward Transactions

Another institution of capitalist economy severely criticised by Islamic economists is speculation. Many writers have briefly referred to this, institution and have noted that Islam does not permit it.

Maulana Muhammad Taqi Amini, in a detailed juridical discussion on speculation and stock exchange transactions, declared purchase and sale on the stock exchange to be illegal (556: 118-155). Qureshi had also characterised speculation to be unlawful in Islam. He considers trade cycles to be the result of brisk activity of foreign transactions (526: 101102). Naseer A. Sheikh (154: 128-135) regards speculation to be antisocial. He examines the arguments given in defence of forward trading and finds them to be unconvincing. A great harm done by speculation is that "money that ought to have been invested in industry and commerce finds its way into the speculative market where it is feeding disguised and parasitical workers like brokers and shrewd operators" (154: 132). A. Mannan (132: 195-10) thinks that "in so far as speculation renders social service by helping production and controlling sudden fluctuation of prices it is in conformity with the spirit of Islam". But speculators being interested in private gains create artificial scarcities which result in inflationary pressure on the economy". Such speculative practices, as well as forward transactions, were condemned by Islam.

Kahf notes (612: 75-76) that Islamic economists disapproval of speculation is based on two reasons. Firstly, it is considered as a kind of gambling, and secondly, it involves a sale of what one does. not own. Discussing speculation in the context of international monetary crises Akram notes that it is not generally acknowledged "that until speculation is retired, stability for the world economy would remain an illusion" (558: 15). Efficient arbitrage through time is, however, as much a social need as is the one through space, and the. Islamic economists discussion on speculation has yet to corne to grips wit this issue.Lottery

Another modern institution attacked by our scholars is the system of lotteries. While the ulama giving their opinion on the subject have unanimously declared it to be unlawful on account of gambling, and have indicated the economic and social evils consequent upon the adoption of this method (560; 561 562), a thorough analysis by some economist is still awaited.Socialism and Communism

Islamic criticism finds Socialism in conflict with the basic requirements of the moral and spiritual growth of human personality, chief among them being freedom of choice and action. Private property and freedom of enterprise, within certain limits and subject to public good, are regarded essential for such freedom. Total nationalisation of means of production is considered to be incongruous with democracy which is an essential feature of the political structure of Islam. The methodology of change adopted by communism is bound to lead to a coercive regime. Materialism, class conflict and moral relativism, essential tenets of communism, are inimical to the Islamic way of life. As an economic system socialism is found to be wanting in many respects as it fails to answer important questions relating to organisation of society and strategy of economic development.

Exploitation of man by man cannot be eliminated by changing the hands that control the means of exploitation. The only way to achieve this end is a moral reorientation of the individuals which makes them servants of society and workers for the social good. This i what Islam does by relating man to God and making him live in accordance with His will so that he treats property as a trust and exercises his freedom with restraint. As a trustee of God he looks upon the welfare of fellow human beings as his own responsibility for which he will be accountable to Allah on the Day of Judgement. The extent of this accountability is directly related to the wealth and power possessed by one.

Mawdudi, examining the various schools of socialism, finds that evolutionary socialism failed to make any headway and it was Communism that actually took roots. It succeeded in appropriating the Social Surplus for the state which could now use it for furthering the social good. Centralised planning succeeded in removing unemployment and decreasing waste. But this was achieved at a great cost in terms of human. lives. Communism deprived people of their liberty and denied moral values. Corruption became rife and a totalitarian regime took recourse to more and more repressive measures. A sizeable portion of the social surplus had to be spent on internal security and defence (607: 52-83).

Baqir regards the Marxian approach to be no less individualistic than that of capitalism, as it appeals to the self-interest of the have-nots to seize power and wealth from the capitalists. Real socialism required a change of attitude and not merely a change of the hands that wield power and wealth ( 171: 218).

Masud Alam Nadvi (589) regards the undue emphasis on distribution and the move to abolish private property to be mere reactions to the evils of capitalism. Man does not have to opt for such an extreme solution as the Middle Path shown by Islam is sufficient to ensure the elimination of these evils and secure the legitimate ends of socialism.

Siddiqi examines and rejects the arguments in favour of socialisation of all means of production (221, I: 93-118) and concludes that individual ownership is a necessary condition for democracy and spiritual and moral growth (221, I: 119-124). A balanced approach would accommodate in individual ownership under social supervision as well as socialisation whenever necessary.

Mirza Muhammad Husain condemns socialistic doctrines as they ferment class war (580). Dawalibi also finds instigation of the have-nots against the haves and a belief in the inevitability of class war to be the features of Revolutionary Socialism (575). Abdul Hameed (181) refutes the Marxian theories and finds that Communism has created more problems than it has solved. Husain Khan (584: 198-284) seeks to establish, on the basis of the historical experience of Socialism, that it is a hindrance in economic development. Mahmud Ahmad (168: 77-78) regards the problem of efficiency as the greatest one faced by communism which completely disregarded incentives and rewards. A. Mannan (132: 48-52) accuses Communism of having grossly over-emphasised that problem it sought to solve, with the result that the solutions are highly unrealistic and unworkable.

An his comprehensive study, Khurshid Ahmad accepts economic planning as a useful contribution of Socialism which should be assimilated contemporary Islam without recourse to totalitarianism (584: 138). The and forward looking exposition of Islam’s Economic System by Mustafa Sibai finds Islam to be far superior as a system ensuring social justice while upholding human dignity and liberty. Yet Muslims can benefit from the Communist experiment, as an economic system seeking to bring about social justice which was denied to mankind by Feudalism and Capitalism (70: 237-238).Dialectical Materialism, Labour theory of Value and Surplus Value

Time and space do not permit us to summarise Islamic criticism of the various Marxian theories. They have been examined in detail, among other writers, by Mazheruddin Siddiqi (595), Baqir (171: 17-212), Tahawi (77: II: 111-196), Khurshid Ahmad (584: 15-160), Siddiqi (221, I:96-112), Mirza Muhammad Husain (580: 18-20), Dawalibi (595) and Abaza (598).Other Systems

Besides Capitalism, Socialism and Communism, Islamic writers have also criticised State Socialism, Fascism and Nazism (607: 84-95; 168: 136-168; 132: 53-60). These systems were reactions to the other systems, and they achieved very little, at great cost to humanity (for sake of brevity we do not go into details).