The Muslim world in the 21st century is not held currently as a beacon or model for others to follow, particularly because most of our lands suffer from the most basic economic challenges, from feeding our population to generating wealth. A host of policies, packaged and implemented by free market ideologues have been exported to the Muslim world, which has only made matters worse. The persistence of these very policies poses a serious threat to the prosperity and success of the Muslim world, which, contrary to popular belief, does not need foreign ideas on how to run its economy. In fact, it has an illustrious history in the region with its own alternative civilization.
Poverty: It is certainly a damming indictment on the free market, that it harbours many people who are not able to afford basic necessities such as food, clothing and shelter. Islam’s position on poverty is that it should not exist, insofar as it is defined by man’s inability to satisfy his basic necessities. This is because Islam has given man a right to these fundamental goods as detailed by Muhammad (saw), when he 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 cover his nakedness and a piece of bread and some water’ (Tirmidhi).
In order to completely eradicate poverty, the Khilafah would render all essential goods public property, which it would make readily available to the people. It would also distribute wealth through various government transfers, both direct and indirect. Perhaps the greatest example of this is the use of revenues from certain taxes that enter the Bait-ul-Mal (State Treasury) such as the zakat. In addition to this, the Khilafah would act in a preventative manner to ensure that poverty never arises, by redistributing wealth through a wealth based taxation system – leaving more money for the poor to spend on what they need.
This is in stark contrast to the capitalist system, which defines poverty in relative terms and does not treat it with great urgency. In fact, the free market has pursued a trick-down policy that places its importance on growth as a way to overcome poverty; an ideological position that has clearly failed. Unlike Capitalism, the Khilafah places an extremely high priority on the distribution of wealth such that no one is left without their basic rights as a human being. In doing so it would work to eliminate poverty in all facets of the economy.
Inequality: At present, inequality is at the highest it has even been, particularly within the developed world. In fact, according to a recent Oxfam report, 8 people currently own more wealth than half of the world combined. Islam’s position on severe levels of inequality is that wealth should not be allowed to circulate amongst the rich. This is mentioned in Surah Al-Hashr, where the Almighty says in reference to capital, ‘that it should not be a perpetual distribution among the rich from among you’ (TMQ 59:7).
In order to ensure that wealth does not circulate amongst the wealthiest in society, Islam implements an efficient, wealth-based taxation system that would seek to redistribute capital from the elite who have too much of it towards the lower-middle class, who have too little. This transfer of wealth is a natural result of the implementation of Islam in its entirety, and it is achieved through various mechanisms, such as better financial regulation, stronger taxation systems and better distributive (expenditure) policies.
This is in stark contrast to the free market, which focuses entirely on growth as opposed to wealth distribution, which has consequently led to high growth rates but poor levels of inequality. Unlike Capitalism, Islam defines its economic problem not in terms of production, but in distribution, thus placing a greater priority on ensuring that society is balanced in terms of wealth.
Debt: Public and private debt is currently growing at a rapid rate across the world, with some countries having more aggregate debt than the value of their entire economy alone! This has created a world of instability and high risk within the global economy. Islam’s position on debt is one of aversion and seriousness. This is given by various hadith such as the one in which Muhammad (saw) said that ‘the soul of the believer is suspended because of his debt until it is paid off’ (Tirmidhi).
In order to diminish the staggering amount of debt that currently exists in the world today, the Khilafah will do the following: In terms of private debt, it would implement a more efficient system of finance on a profit and loss sharing basis as opposed to a debt-based system, from which most private debt originates. It would also remove interest, and alleviate the pressure of those struggling to pay back their loans. In terms of public debt, the Khilafah would raise more revenues through better fiscal policy. This is because Islam’s taxation system ensures consistent receipts and less exploitation. Furthermore the expenditure policies of the Bait-ul-Mal are designed to stimulate the economy within its capacity – meaning that the Khilafah would not need to borrow money in order to sustain unsustainable levels of growth.
This is in stark contrast to capitalism, whose private debt is spiraling out of control, not only due to interest, but also due to a poor financial system that forces households to borrow in order to invest or purchase goods and services. Furthermore, credit has become utterly ubiquitous, such that it is commonplace to be drenched in insurmountable levels of debt. Additionally, the free market sustains poor fiscal policy, insofar as its taxation system leaks great wealth from the economy due to mass exploitation, whilst its expenditure policies are riddled with corruption and malpractice. Unlike capitalism, Islam offers a more efficient method of finance and a fiscal alternative that reduces the tendency towards debt in both the public and private sphere.
Prices: The regular debasement of fiat money by way of credit creation is due to the lack of intrinsic value in unbacked currency. Some currencies have lost over 90% of their value as a result, which as led to long run price instability. The Islamic economic system mandates the gold and silver standard, which has, for many years, sustained civilisations. This is proven by many textual evidences that relate only gold and silver to money, which would mean that un-backed fiat is impermissible.
In order to stabilise prices within the economy, the Khilafah will reintroduce a bimetallic system and would put an end to fiat money, which has, for decades, been exploited by many. This would strip any ability to create credit, and it would secure prices in the long run by suppressing phenomena such as inflation. This arrangement would mean that any paper in circulation would be backed by a certain troy ounce of gold, in addition to silver. Through an effective monetary system, society would prosper with better trade and investment, creating a healthy economy, characterised by stability as opposed to volatility.
This is in stark contrast to capitalism, a system based on principles that naturally gave rise to the fiat currency. Credit creation is a tool to sustain artificial growth, which is a free market imperative. Unlike such a system, Islam’s bimetallic system (of gold and silver) would ensure natural growth, with little price instability, allowing for a more prosperous economy in the long run.
Employment: Unemployment is a key problem across world, with almost 200 million without a job. The effects of unemployment are harsh, such an extent that many are unable to earn an income so as to purchase their basic necessities. Islam’s position on employment is that it should be sought by every capable person and it should be made available to society by the state in this regard. This is because Islam encouraged man to work, so as to seek his provisions, as detail in the Quran, when Allah (swt) says ‘Work; so Allah will see your work and (so will) His Apostle and the faithful; and you shall be brought back to the Knower of the unseen and the seen, then He will inform you of what you did.’
In order to minimise unemployment, the Khilafah would undertake a number of actions to preserve the labour market. As the main source of unemployment is due to financial crisis, the Islamic economic system would regulate the financial sector to protect the labour market from sharp reductions in aggregate demand. Furthermore, it would rid the market of extremely imperfect competitors in both the goods and labour market (such as the monopoloy and monopsony) so as to ensure it is competitive, which would increase the number of jobs available. It would also prevent the hoarding of wealth, so as to stimulate investment and spending, which would allow for more job creation and an increase in the demand for labour.
This is in stark contrast the labour market within a free market system, that favours risk and volatility, the monopsony and monopoly, the hoarding of wealth and miserly. As a result, unemployment continues to grow, with no end in sight. Unlike capitalism, Islam secures the interests of the people by giving them the opportunity to seek wealth and to consume over and above their basic necessities with their income.