Islamic Macroeconomics

A Model for Efficient Government, Stability and Full Employment

Raja Almarzoqi, Walid Mansour, Noureddine Krichene

• Editorial: Routledge
• Año: 2018
• ISBN:
  9781351589499
• Edición: 1
• Categoría: Betriebswirtschaft
• Categoría: Finanzbuchhaltung

Islamic Macroeconomics proposes an Islamic model that offers significant prospects for economic growth and durable macroeconomic stability, and which is immune to the defects of the economic models prevailing both in developed and developing countries. An Islamic model advocates a limited government confined to its natural duties of defence, justice, education, health, infrastructure, regulation, and welfare of the vulnerable population. It prohibits interest-based debt and money, and requires full liberalization of all markets including labor, financial, commodity, trade, and foreign exchange markets. The government should be Sharia-compliant in its taxation power and regulatory intervention; it ought to reduce unproductive spending in favor of productive spending.

This book is essential reading for students and academics of Islamic economics and finance, economists, practitioners, and researchers.

1 Nature and dangers of statism

1. Introduction

Economic science established some basic truths:

• Richness can be achieved and poverty can be alleviated only through capital accumulation;
• The only force for growth and technical advance is the private sector;
• The role of the state is to secure for the private enterprise an environment free of crimes and propitious to free markets and competition where individuals can exert to the fullest their natural intelligence and creative capacity.

Economic history fully attested to these truths. Eminent classics, such as Adam Smith, J.B. Say, David Ricardo, and F. Bastiat (2011), noted the government’s false interference in the economy and advocated the theory of free markets. In contrast, an extreme ideology developed by the socialists and communists of the nineteenth century called for the elimination of the capitalist bourgeois class and the establishment of a fully state owned and planned economy. Besides millions of lives lost in communist revolutions, the application of this ideology was against the economic and social nature of individuals and had stifled entirely the individual’s creative capacity, made the individual depend on the state, and resulted in chronic food shortages and repeated disastrous famines.

Many advanced states had experienced a severe economic and financial crisis during 2007–2009. Years after, economic growth remained slow and unemployment high. These countries became entangled into unorthodox monetary policies and high fiscal deficits. Before this episode, industrial nations suffered the Great Depression of 1929–1939. Today, many developing countries, in spite of their immense natural potential, have not been able to reach auto-development and remained dependent on foreign aid. The Arabic Spring Revolts in 2011 attested to a dramatic failure of an economic model. Disappointed by the total failure of the development model of many countries, including in Latin America, McKinnon (1973) and Shaw (1973) became convinced that abundance of natural resources, vastness of cultivable lands, and abundant labor may not secure economic growth. Comparing post-war Germany, Japan, South Korea, and Taiwan to Latin American countries, McKinnon and Shaw emphasized that a main obstacle to economic development was government un-natural interference in the economy.

The model of extensive government interventions in the economy was often named the statist model. Statism designates a government that neglects its natural duties and intervenes in economic and social areas that do not fall into its natural jurisdiction. A statist government may be called a “big government,” or an “inefficient government.” It is a government that has stepped beyond its natural duties; it has enacted un-natural legislation and established un-natural institutions that curtail considerably the private sector; it is an over-expanded government that is over-taxing the private sector and a lot of its spending is wasteful. In its extreme version, statism was socialism and communism, whose toll in human lives and economic failure is well known and needs no review.

This chapter reviews some of the literature on the nature of statism and its harmful effects. It covers the following topics:

• Statism: un-natural and unjust intervention of the state in the economy
• The classics’ adherence to free market and opposition to state intervention
• Herbert Spencer: the man versus the state
• Lysander Spooner: the natural law and the un-natural statism
• Nock: our enemy, the state
• Mises’s human action: the fallacies and dangers of statism

2. Statism: un-natural intervention of the state in the economy

Statism is a form of government that has become omnipotent, extending its intervention to most or all of the economic and social affairs of the country. The more the government expands, the more rigidities are built into the economy, the more the private sector shrinks, the more economic freedom is stifled, the more wealth redistribution is exerted, and the more resources are consumed by the state at the expense of investment and capital, and the more poverty and crime worsen. Freeing itself from the commodity currency, the state has turned money into a costless paper money emitted out of thin air by its central bank and has used extravagant paper currency to expand its size, to finance its ever-rising expenditure, and to freely expand loans to borrowers (Freeman 2016). Inflation has become secular, and is an inherent ailment of statism; inflation tax is often used to finance government expenditure. Interest rates, wages, and exchange rates are often fixed or directly manipulated by the government with attending economic distortions. The government forces a redistribution of income and wealth in favor of its protected groups, through taxation, tariffs, inflation, or price controls, at the expense of taxed groups (Adam Smith 1776). Hence, near-zero interest rates are un-natural and are forced by a government; they amount to a redistribution of incomes and wealth in favor of borrowers at the expense of creditors.

Statism enacts un-natural laws, not to defend the harmonious natural rights of citizens, but to defend the conflicting interests of power groups who may be bureaucrats, military, bankers, industrialists, labor, etc. These laws are unjust and distortive, disable the free market mechanism, and force an excessive taxation on the private sector. A typical example of such un-natural laws was the Corn-Laws (1815–1846)¹ in Great Britain imposed by a power group; they contributed to damage manufacturing and caused a famine in Ireland (1845–1852), which famine forced the repeal of these laws. Other examples of un-natural laws are the mandatory minimum wage laws which created unemployment; the fixation of interest rates at a near-zero level which caused massive debt build-up, bubbles in asset and commodity prices, enormous free wealth to debtors and speculators, and excessive uncertainty; and trade barriers which hurt growth and employment. Un-natural laws severely restricted private enterprise and damaged the economy.

Statism forces the government in areas that do not fall under its natural competence. It acts against the natural laws of the economy and therefore yields injustice, desolation, and poverty. Despite repeated failure, statism still believes that the state is omnipotent and can achieve any of its ideals. To make its intervention effective, the state enacts un-natural and unjust laws such as minimum wage laws, progressive income tax, inheritance tax, price fixation and control, etc. To enforce these laws the state has to increase bureaucracy, the police force, the number of lawyers, judges, clerks, courts, and jails.

Statism has caused severe economic crises and long stagnation as shown by the Great Depression (1929–1939) and the 2008 financial crisis. Statism has established rigid laws and institutions that prevented the free market mechanism and perpetuated unemployment of the labor force. Often, statism has created competing credit expansion and money depreciation among countries,² and trade barriers. The impossibility of socialism, as illustrated by the collapse of communism in the 1990s, has shown that statism has been self-defeating and often failed to achieve its design; it has impeded the private sector and economic growth.

Statism has been an evolutive process; it is central to the people’s aspirations. The more government people get, the more they ask for. Nock (1935) maintained that a revolution will not change this thinking, and in the aftermath of a revolution, people will even ask for more government than prior to the revolution. Nowadays, statism has become deeply rooted in political, academic, and popular thinking. Today’s electorate is far more statist than previous generations, and only statist leaders, who promise more government doles and interventions, are capable of winning popular votes.

Under the influence of political, social, and vested interest forces, countries have evolved from a free market mechanism to statism with rigid and costly economic structures. Each force was moved by a social ideal, such as egalitarism, or a specific class interest, such as labor, farmers, miners, industrialists, or bankers. Each group used power or bribery to prevail. Labor unions proceeded via strikes in key sectors to force their demands; while farmers proceeded by blocking roads to submit the government to their exigencies. Other groups proceeded via electing representatives who would serve their interest. Each class of profiteers succeeded to establish institutions empowered by the state and laws that achieve its design or protect its interest at the expense of non-privileged groups. Each interest group forces a legislation to promote its respective interest regardless of the detrimental consequences on the economy. Often, laws to protect a group penalized another group (Adam Smith 1776). For instance, high tariffs protect inefficient industries and make consumers pay high prices for shoddy products. Moreover, exports are curtailed, since countries exchange commodities for commodities. If a country is precluded to export to a country, then it may not be able to buy from the restricting country. Minimum wages penalize a country twice; there is a loss of output due to institutional unemployment and there is also unemployment compensation to unemployed workers. Similarly, the Corn-Laws in Great Britain had penalized heavily consumers, they had curtailed corn output, caused famine in Ireland, and seriously disrupted manufacturing development.

Statism, be it communism, socialism, or Keynesianism, was un-natural, unjust, and self-defeating in a sense that it never achieved the ends sought by the statists; instead, it made the economy worse off. Statism discourages private investment. Advanced countries are suffering the consequences of statism. However, their industrial basis as well as their reserve currencies allow them to sustain the losses inflicted by statism. In contrast, developing countries that have adopted a statist model are unable to develop and became poorer and too dependent on foreign aid. As few opportunities of livelihood exist, a large number of their labor migrates to more prosperous countries. The reforms are obvious: limit the government to its essential and natural functions, and remove anti-market and un-natural laws and institutions. Yet, statists remained over decades oblivious to any reform that would streamline the role of the state.

3. The classics’ adherence to free market and opposition to state intervention

Statism, in the scale and depth as known today, was not known in the nineteenth century and earlier. Nonetheless, some harmful state interventions existed and drew criticism of many writers who attempted to establish the delusion of these interventions and their negative effects on the economy. Some of the state intervention originated in mercantilism doctrine which sought to erect trade barriers and provide bounties to exporters. The Corn-Laws were a typical example for prohibiting imports of cereals in order to enable domestic farmers to sell at high domestic prices.

Locke (1691) severely criticized the British government policy for lowering the interest rate by decree; which policy is presently forcefully applied by advanced countries in the form of near-zero interest rates, massive credit expansion, and sharp currency depreciation. In respect to interest rates, Locke pointed to the fact that the lower interest rates in Holland, which were at about 4 percent, were not dictated by decree; they were equilibrium rates that showed higher real capital abundance in Holland than in England. Fixing the interest rate at 4 percent in England, below its equilibrium rate, would not make capital abundant; instead, it would make it scarcer; it would confer undeserved gain to borrowers and an unjust loss for creditors. A number of borrowers would be excluded. In respect to reducing the silver content of the pound, Locke demonstrated that this measure was a sheer violation of property rights and arbitrary alteration of the standard of value which ought to be kept unchanged. It will increase prices, since traders are interested in the true metal content of the pound, and not its name. If the silver content is reduced by 20 percent, then prices will tend to rise in the same proportion, all contracts made before the currency devaluation are altered, and creditors and rentiers lose in real terms. He strongly rejected a role of the state that deranges contracts and inflicts injustice on a party in favor of another party.

Adam Smith (1776) showed the futility of mercantilism: bounties (subsidies) were distortive and totally unnecessary, and unhampered markets (i.e., the Invisible Hand) never ought to be deranged by state intervention. He maintained that when a country restricts, either by high duties or prohibitions, foreign trade, it necessarily harms its own interest in three different ways. First, by raising the price of all foreign goods and all industrial products, it lowers the price of agricultural products. Second, by affording a monopoly of the home market to its own industrialists, it raises the rate of profit in the industrial sector in proportion to that of agricultural profit, and, consequently, either diverts from agriculture a part of the capital which had before been employed in it, or hinders investment in it. Agriculture may be rendered less advantageous, and industry more advantageous, than they otherwise would be. Third, curtailing imports necessarily reduces exports. If Britain did not import cotton from the United States, the latter cannot buy manufacturing from Britain, since commodities are exchanged against commodities.

Adam Smith advocated free markets and free trade across countries. David Ricardo (1817) fully developed the theory of free trade and comparative advantages, another contribution aimed at demolishing mercantilism. Following the famine in Ireland, caused essentially by the Corn-Laws and government’s misguided intervention in the agriculture sector, the Anti-Corn Laws movement finally triumphed with the repeal in 1846 of those foolish laws.

4. Herbert Spencer: the man versus the state

Spencer (1851, 1884) presented the notion of a limited state based on a doctrine of natural rights. His “first principle” enunciated that every citizen is entitled to fullest freedom to exercise his faculties in harmony with every other man’s rights to the same freedom. Spencer wanted a reduction of state power over citizens to an absolute minimum, and an enhancement of the private sector, in contradiction with the statist model which expanded too much the state at the expense of the private sector. Spencer stressed that a vital and natural responsibility of the state is to establish the most secure environment by punishing crimes against persons or property; this attribution of the state was deemed as the common sense of mankind. A safe environment is a prerequisite for economic and social advance. Spencer believed that the state should enforce the obligations of contracts; it should make justice costless and easily accessible. Countries where the government is unable to safeguard full security and eradicate lawlessness suffer poverty and social disorder. Beyond enforcing law and order, the state should put no further coercive restraint upon the citizens. All that the state can do for the best interests of citizens is by way of restricting its interventions to its natural attributions. If the state promotes social well-being by positive coercive interventions upon the citizens, any apparent and temporary social good that may be achieved will be at the great cost of real and permanent social good.

Spencer noted the costly errors made by the government through its wrong interventions in the economy. He acclaimed the power of the private sector in creating wealth and inventing new technologies. He stressed that the private enterprise developed the agriculture, the industry, the mining, constructed immense infrastructure in canals, ports, and railroads; invented machinery; and promoted banking, insurance, and capital markets, etc. This truth about private enterprise remains unshakable. The innovative capacity of the private enterprise is inexhaustible. Industrialization has been expanding as the private sector kept inventing airplanes, iphones, computers, cars, satellites, medications, etc. In contrast, Spencer observed that the State, in conducting its judicial attributions, ruins many, misleads others, and discourages away those who need help.

Spencer showed that often government intervention was self-defeating. He exposed the futility of minimum wage legislation which forced business to relocate to a freer environment. He noted that the Spitalfields weavers afforded a case in point. The fixing of minimum wages for the weavers led to a relocation of the textile industry from Spitalfields to cities where labor markets were competitive. He supported the abolition of institutions that harmed the p...