Sunday, 15 July 2018

Community Economics Course

Level 1 – Beginners

·         Week 1: What is the purpose of an Economic System?  

·         Week 2: The Private Market and the parable of the Shipwrecked Islanders.

·         Week 3:  Factors of Production.

·         Week 4 : Value, Exchange and Role of Money.

Capitalist system

·         Week 5: What is the Fundamental Economic Problem to Solve?

·         Week 6: The role of the State in the Economy.

·         Week 7 : The role of the Central Bank in the Economy.

·         Week 8 : How the State and Central Bank manage the economy.

·         Week 9 : Good and Bad Wealth Inequality.

Islamic system

·         Week 10: What is the Fundamental Problem to Solve?

·         Week 11 : Role of the State in the Economy.

·         Week 12 : Regulation of the Market in Islam.

Level 2 – Intermediate

Capitalist System Cont...

·         Week 1 : Monetary History since WW1.

·         Week 2 : Economic Management via Fiscal and Monetary Policy.

·         Week 3 : Micro and Macro Economics.

·         Week 4:  The role of Interest.

·         Week 5:  The Great Depression and the rise of Keynesian Economics.

·         Week 6 : Inflation and Unemployment & Fall of Keynesian Economics.

·         Week 7 : Rise of Monetarism and growth of Neo-Liberalism.

Islamic System Cont....

·         Week 8 : Private, Public and State Property.

·         Week 9 : Gold Backed Money in the Islamic System.

·         Week 10 : Islamic Company Structures.

·         Week 11 : Taxation Policy.

·         Week 12: Is the Islamic System socialist?

Level 3 – Advanced

·         Week 1 : Islamic Rules which ensure wealth distribution.

·         Week 2 : Debt finance vs. Equity Financing.

·         Week 3:  Financial Industry and Islamic Perspectives.

·         Week 5 : Business Cycles – Causes and how Islam Avoids Systemic Causes.

·         Week 6 : Market Failure – How Islam is less prone to Ineffective Market Functioning.

·         Week 7 : Role and Effectiveness of Regulation within the Islamic Economy.

·         Week 8 : 2008 Financial Crisis Analysis – Causes and Cures.

·         Week 9 : Foreign Trade – Analysis of Globalization.

·         Week 10: Rise of Tiger Economics – Contrasting Development to Washington Consensus.

·         Week 11 : Analysis of Financial News presenting the Islamic Solutions.

·         Week 12: Muslim Lands & Economic Policies.

Sunday, 16 April 2017

Trumps Economic Plan - Will it Serve those who voted for him?

Trump’s Economic Vision

For years, the perception and truth of how Government and Corporations had been working in collusion at the expense of the working and middle classes had reached breaking point. The economics were to stark to ignore with all mainstream parties now being forced to talk about the need to address the growing extreme wealth inequality and those ‘left behind’ by what was argued to be the neo liberal flavour of Capitalism with its focus on global trade and the off shoring of jobs to the detriment of US workers.

In the recent US Presidential elections, the stage was set for a truly independent and establishment outsider to reclaim the ground lost for the ordinary American. A candidate that would put the US worker above all else and return jobs and growth to the US economy and take on the big corporations and make it economically unattractive for them to operate outside homeland borders. The vision is popular and helped draft the political novice Donald Trump into power, but the question is whether he has a viable plan?  

To put the background of wealth inequality into context, two key points must be stated. Wealth inequality is both inevitable and necessary to promote the incentives for economic agents to strive and seek higher levels of material wellbeing. It has been argued that globalization has reduced absolute poverty for millions, although the methods used to quantify what this is are heavily contested amongst theorists.

However, a consensus amongst the economics community has developed over the need to redress extreme wealth inequality were the very wheels of economic growth start to slow and absolute poverty starts to increase, a situation which is unsustainable and ripe for civil unrest in the long term.
The recent elections saw this topic a dominant theme amongst candidates. Trump for instance stated the need to provide more to the ordinary worker to help prosperity reach everyone and not just the 1% at the top as shown by the recent Oxfam report. In his words,

"In order to achieve the American dream, let people keep more money in their pockets and increase after-tax wages."

The question then is what is his plan and can he deliver on his promises? Or more importantly, can Capitalism as a whole deliver a system which is both sustainable and inclusive?
Looking at Trumps economic plan, three dominant themes can be assessed.
  •       Tax & Trade Policy
  •        Reducing Regulation
  •        Infrastructure Spending

The strategy is not fundamentally new and is categorised under the general rubric of Supply Side Policies and the idea is that the best way to help everyone is to make it easy for those engaged in the supply of goods and services to produce and this ultimately leads to wealth reaching those at lower levels through a process dubbed ‘trickle down’. So when companies are allowed through lower taxes and less regulations to innovate and produce better and cheaper products, such as iphones, and this spurs the incentive to work and boosts demand for such items and that spurs job creation and everything falls into place for everyone and not just the 1% at the top.

This approach of starting with helping the suppliers was initially advocated by the 18th/19th Century economist Jean-Baptiste Say from whose work the term Say’s Law originates which purports that fixing the economy from the perspective of supply (producers) will take care of everyone ultimately and the opposite approach, of directly empowering those at the bottom (through initiatives like minimum wage) as advocated by the Democrats and the Clinton campaign as a less effective strategy.

Tax & Trade Policy

On tax, Trump has called for massive tax cuts for all income groups with a particular focus on those at the top and for Corporate taxes to fall from 35% to 15% ! The idea is that consumers will have more money to spend and also corporations will have more budgets to develop more exciting goods and services. Although the short term will see a growth in the deficit (the difference between what the government spends and raises in taxes) but the believe is that if growth increases significantly as a result, more taxes will be recovered and the budget will return to surplus as happened in the Clinton years.

On international trade and US companies that have taken jobs to low income countries like Mexico and China, Trump seeks to make it unattractive for them to continue to do so by using the carrot of lower taxes at home and the stick of imposing large import duties to negate the cost saving of off the initial off shoring of production which stared and continued from the neoliberal brand of Capitalism under Ronal Reagan and Margaret Thatcher in the UK.


On regulation, it is clear that Trump views the rules set out to protect the environment and the excesses of the financial markets are mere inconveniences and obstacles to growing the economy. This prompted him to sign an executive order requiring federal agencies to cut two existing regulations for every new regulation they implement.
Regulations are in his view a straight jacket which are impeding the competitiveness and making the US less able to compete globally. This explains why he believes that global warming is a hoax and that rules to protect the environment need to be scrapped.

Infrastructure Spending

Trump has stated that the country’s infrastructure is crumbling and needs to be overhauled if the country is to compete globally.

His campaign put forward a vision that would leverage “public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years.” [1]
With the engagement of the private sector, his campaign claimed that the spending would not be taking anything from the tax payer (ie would be revenue neutral) and thus a major bonus to help the economy become more competitive and this would help with jobs and growth.

Can these policies work?

As mentioned, the central them of these supply side policies is the belief in trickledown economics but as the history of implementing this approach show, you have in effect a trickle up effect. Under the golden age of supply side policies under Reagan in the 1980s wealth disproportionately trickled up to the elite margin of the economy and although some of the fruits reached the average American, that trend started to reverse with growing rates of absolute poverty due to the extreme levels of this wealth inequality.

Lower taxes are an appealing selling point but studies show that many of the bottom earners, ex single parents, will be worse off as a result. Also, cutting taxes on the lower income groups is far more effective in creating jobs as lower income groups are far more likely to spend on basic consumer items unlike the top earners who are more likely to employ higher profits into off shore tax havens and engage in riskier financial activities that typically end up causing large tax burdens that are paid back by the ordinary workers through higher income taxes and less welfare payments.

Furthermore, many of the jobs that have been lost offshore are low paid and labour intensive in nature and with the increasing pace of technological unemployment, it is very questionable if such jobs would be made available to human labour as opposed to being automated.

As for regulations, the financial crisis of 2008 was largely as a result of the relaxing of regulations, in particular the financial services modernisation act of 1999 which dropped the old rules (Glass–Steagall Act of 1932) that prevented retails banks getting involved in high risk gambling activities (usually the realm of investment banks like Goldman Sachs) with money tied up with house purchase bring the entire economy into the sphere of insolvency; something which hadn’t been seen since the great depression of the 1930s.

As for infrastructure spending, it is telling that the projects chosen are not defined by what the country needs (although if that is achieved it’s coincidental) but by what brings further tax cuts and revenue streams for firms and investors. According to the scheme, private contractors have power over project selection. This makes public benefit, through job creation and the boost that the construction industry desperately needs, subservient to profits for the firms that chose projects such as those providing tolls and a share of energy bills.

The fundamental problem with these visions that keep cropping up in the debate in the West, whether one considers both extremes of the current discourse between left wing (demand side) or right wing (supply side) is that they fail to address the root cause which is how wealth has become an asset which doesn’t circulate fairly throughout all sections of the economy and instead has become a circuit amongst the elites who control policy and gear the rules of the game to maintain the status quo and only talk of policies to redress the inequity when the fear of rebellion and uprising surface as has happened in recent years.

Allah SWT warns us of this when he states in Surah Al-Hashr :-

And what Allah restored to His Messenger from the people of the towns - it is for Allah and for the Messenger and for [his] near relatives and orphans and the [stranded] traveler - so that it will not be a perpetual distribution among the rich from among you. And whatever the Messenger has given you - take; and what he has forbidden you - refrain from. And fear Allah ; indeed, Allah is severe in penalty.
TMQ 59:7

The Islamic economic model is not built on the false narrative of just increasing growth in the hope that this will benefit all sections of the society, rather it seeks to achieve the best of both world in achieving a growing (real) economy with value adding jobs and at the same time has safeguards to ensure that wealth is not pulled into an elite sub economy as has been seen under all flavours of Capitalism, both left and right. So the answer to the question is no, Trump’s plan will not help those that voted for him. The sad thing is that it will waste another 1 or 2 terms before this is apparent.


Tuesday, 21 October 2014

The History of Capitalism

Evolution of Capitalist Economic Thought - Feudal System to Present


1)    Introduction

2)    Major Turning Points in Economic Thought
  • Feudal System
  • Mercantilism
  • Psysiocrats
  • Classical School 
  • Neo Classical School
  • Keynesian School 
  • Monetarism /Rational Expectations
3)    Other schools and contributions
  • Behavioural Economics
  • New and Post Keynesian/New Neo Classical
  • Austrian School/Gold Standard
  • Reaganomics (Monetarism/Supply Side / Military Keynesianism)
  • Neoliberalism and the Washington Consensus
  • Return of regulation and Keynesianism post 2008

The aim of this paper is to provide a synopsis of the evolution of Western Economic thought with a particular focus on the circumstances that lead to the various turning points that occurred in the development of such thought.

Each major school or viewpoint will be analysed and discussed according to areas :-
  • Timeline
  • Context
  • Contributors
  • Key assumptions
  • Policy Recommendation
Key terms

1)    Microeconomics
2)    Macroeconomics
3)    Neoclassical synthesis

The overall context of this analysis is to understand the current debate over economic thought with a view to present the Islamic alternative to economic management of society.

It also will aid the discussion in the West to debate the subject using the existing terms of reference so as to make the debate were Islamic solutions are presented seem relevant and contemporary.
Note: Marxism has been omitted as the socialist approach is not regarded as credible as far as the mainstream discourse and neither is it part of the sequence of phases which lead to the capitalist tradition.



Feudalism was a system of economic organization within Europe that lasted during much of what we refer to as the Middle Ages.

This system started around the 11 Century in England under the rule of King William I and started to unravel around the time the Reformation was in motion throughout Europe by around the 15th Century and lead to the mercantile era.


Feudalism arose in Europe during the Middle-Ages, due to the arrangement between land owners who offered protection to lower servants in exchange for working the land.

The society had a hierarchy starting with Kings, through Lords/Nobles and then their Knights and finally Merchants and Peasants who would work the land. The Church and its interpretation of religion was central to upholding the system which was orientated in favour of the church and clergy along with the Kings who took their legitimacy from the Church.


William I - ‘William the Conqueror’

Key Assumptions

The system is based on mutual interest. The tradition of serfdom and patronage may have originated from the Roman influence and also the Germanic tribal traditions of patronage and loyalty for hierarchy.

Policy Recommendations

The system was primarily agriculture based with the primary means of production being land and labour. No central planning or government policy intervention was associated with this economic order.



The time period of this system was approximately 1500 to 1800.


The power of the Feudal hierarchy started to unravel during the reformation due to the spreading of knowledge through inventions such as the printing press where books such as the Bible were translated into languages common people could understand and thereby unraveling the power of institutions such as the Church which had underpinned the absolute power of the Monarchies that anchored the Feudal order.

In the new context of a post Absolute Monarchical order, isolated feudal estates were being replaced by centralized nation states as the focus of power. Technological changes in shipping and the growth of urban centers led to a rapid increase in international trade


UK: Oliver Cromwell (1599–1658),
France: Jean-Baptiste Colbert (1619–1683).

Key Assumptions

Mercantilism taught that trade was a ‘zero-sum’ game with one country's gain equivalent to a loss sustained by the trading partner.

This lead to nations seeking to subjugate other nations into colonies and through such colonialism, pursuing a positive balance of trade and the acquisition of precious metals primarily in the form of gold and silver coinage.

Policy Recommendations

Mercantilism promotes governmental regulation of a nation's economy for the purpose of augmenting state power at the expense of rival national powers. This regulation is focused on increasing exports and minimizing imports with a view to capture precious metal in the form of gold and silver.



Mid to late 1700’s.


This school, which was prevalent in France during the height of the enlightenment struggle, was a spearhead for new thinking in the economic thought.

The reason they are considered a key school in the turning points of economic thought is due to their founders, especially Francois Quesnay who was a doctor in applying scientific methods to the field of economics and helping to bring to an end the hegemony of the mercantile era.

They are less important for the importance they attribute to agricultural production which is considered a very weak argument to this day.


Francois Quesnay (1694 – 1774)
Anne-Robert-Jacques Turgot (1727 – 1781)

Key Assumptions

They argued that land production was the key source of economic value and that agricultural products should as a result be highly priced.

Policy Recommendations

They were one of the first, along with Adam Smith who came later, to argue for a self regulated market approach.

Classical School


This school arose from the late 18th Century to early 19th Century with the rise of the neoclassical contribution which refined rather than presented a major upheaval.


Astute observers noted that Mercantilism was not a force for increasing the world’s wealth but instead was a system to move the world’s static wealth from the colonies to their respective mother countries.

The other key trigger was the onset of the industrial revolution and the mechanization of industry which opened up huge potential in wealth creation.


Adam Smith (1723 – 1790)
David Ricardo (1772 – 1823)

Key Assumptions

This school was a major paradigm shift from the schools which preceded it. The key tenant of this school was that wealth creation was not a ‘zero sum’ game and instead a ‘win win’ game.

It was upheld that rational self interest had an overall effect of increasing wealth for all and the key means for manifesting such self interest was through the division of labour whereby everyone would focus on the economic activity for which one was most suited and trade through a free market with others and this through an invisible phenomena (aka Invisible hand) would raise the prosperity of all participants.

Policy Recommendations

The axiom of the classical school is that markets are self regulating and self correcting and the best approach for the state is to leave the market free so that its beneficial effects in wealth creation can be manifested.

It was held that free markets, populated with self interest seeking actors lead to wealth creation via a hidden force, known as ‘the invisible hand’ which benefited all parties much more effectively than if society was full of benevolent actors trying to help each other. It was a major paradigm shift and one that helped raise the standards of living of all those who implemented its policy.
However the rate of wealth creation was disproportionately allocated to those who had more to start with and this lead and is leading to its downfall.

NeoClassical School


1860’s to 1930’s


Adam Smith’s ideas were in fact revolutionary but there were gaps in the Classical school of thought. Most notable was in the field of price theory and the question of how to arrive at value of commodities and services and the correct basis to judge the worth of such goods and services rendered for exchange. The ideas proposed by the Classical theorists were deemed to be inadequate and simplistic.

The school was thus a major contribution in the field of microeconomics and didn’t make its focus the macro economic sphere and neither did it detract from the Classical approach for the state to adopt a laissez faire stance towards the market.


William Jevons (1835 – 1882); Carl Menger (1840 – 1921); Leon Walras  (1834 – 1910)
Alfred Marshall (1842 – 1924)

Key Assumptions

The school rejected the Classical notion that Value was in the quantity of labour spent in the procurement of a good or service and proposed a new perspective. This new stance became known as the marginal revolution and in particular, gave rise to the theory of marginal utility as the basis to compare the value of goods and services.

According to this view, the value of a good or service is assessed at the utility derived from the weakest point of need and not the strongest point of need.

As an example, it would not be sound to assess the value of a meal to a person when he or she was close to death due to starvation as this would not be a normal situation within a market context. Neither would it be generally repeatable to extract from market participants the equivalent in price given by such a person in the situation in question.

What would be extractable would be the equivalent of how market participant view a commodity at the point of the weakest need.

Each unit of consumption, or marginal consumption, renders diminishing utility relative to the previous unit of consumption. It is the utility gained at the weakest point of need that forms the basis of the good or service’s value. It is this value or utility that is then compared with the value of other goods and services when considering the ratio of tradability through the price mechanism. 

Policy Recommendations

The marginal school, as stated, did not overhaul the Classical school at the macroeconomic level directly, instead it made a significant contribution towards the field of microeconomics. The insight between the Keynesian school at the macroeconomic level and the neoclassical school at the micro economic level became known as the neoclassical synthesis and governs economics today.

Keynesian School


1930s to 1970s


The background to the rise of the Keynesian school was the Great Depression of the 1930s and early to mid 1940s starting in the US and spreading to most of the modern world. The stock market crash in New York in the autumn of 1929 precipitated the longest and deepest global depression the modern world had ever seen.

The economy had deteriorated into a deeply stagnant phase, despite the society not having lost any physical wealth. It was in essence a collapse of the virtual economy that ultimately affected the real economy where wealth is generated.

The thinking of John Maynard Keynes, this schools founder, was that the Neoclassical macro-economic approach of allowing the market to self correct and reach equilibrium free of any government interference was not working in the context of the Great Depression and  that some form of government intervention was needed for assisting the recovery.


John Maynard Keynes (1883 – 1946)
Paul Krugman (1953 -)

Key Assumptions

A key premise of the Keynesian approach is that markets fail to reach the equilibrium needed to end the bust phase of the business cycle. In essence they disagree with the classical theorists in how efficient self regulated markets are in reaching the optimal resource allocation via pricing.

It notes phenomena such as wage rigidity, also known as ‘sticky wages’ explains the situation where wages tend not to fall and wages flexibility is a necessary condition for the Neo-classical schools recipe for getting an economy out of as recession.

It also asserts that market participants are driven by less than rational criteria when undertaking economic activity. He refereed this erratic behaviour as ‘animal spirits’ and equated it with waves of optimism and pessimism that glance over the collective psyche of people and the resulting collapse in confidence and spending that ensues, 

Policy Recommendations

The primary recommendation is at the macroeconomic level and is for the government to intervene by initiating government spending to increase demand in the economy when the private sector is retreating from economic activity. This is usually done with a reduction in taxation intended to increase disposable income and hence demand in the economy. It is due to the fact that demand drives economic growth that it is so keenly sought by policy makers.

The idea is that the excess demand created via government spending or tax rate decrease, often done on deficit spending rather than currency reserves, drives the economic cycle back into the recovery phase.

Monetarism /Rational Expectations


Late 1970s to mid 1980s


The reality of the 1970s saw the demise in the Keynesian analysis and remedy for business cycles. Prior to the emergence of the Monetarist school, there had always been an observable trade off between inflation and unemployment. This inverse relationship was accepted by the economic community since the 1958s publication authored by the New Zealand born economist William Philips and the resulting Philips curve which depicts this trade off. 

The 1970’s saw a new phenomenon called Stagflation which equated with the simultaneous rise in unemployment and inflation and this contradicted the models developed by the Keynesian school.

To this conundrum, a highly knowledgeable professor named Milton Friedman proposed the reason for Stagflation and the cure using thorough scientific study which threw into question the Keynesian school place in the debate.


Milton Friedman (1913 to 2006)
Robert Lucas (1937 - )

Key Assumptions

The key assumption of the Monetarist school is that there is no long term trade off between inflation and unemployment and the trade off is very short term and even then, it only works while market participants do not realise the inflating effect of the government policies to help reduce unemployment.

Once market participants realize that the government’s actions to reduce unemployment will cause inflation,  they build inflation into their wage expectations resulting in higher wages and thus further inflation and thus nullifying the effects of the government’s actions.

This it was argued would be due to the concept of rational expectations (Robert Lucas 1972), that is the idea that people take into account all available information when making decisions about future economic variables and cannot be all collectively misled as was modeled by the Keynesian modelling were notions such as society having ‘animal spirits’ and acted on waves of optimism and pessimism were understood to be the case.

This notion of rational expectations was a development on the prior model of understanding how economic actors predict the future. Such previous modelling was known as the static and the adaptive expectations modes.

In the former, economic agents were assumed to look at the present value of economic variables such as the inflation rate and use that to interpolate future values and with the adaptive expectations, they were understood to look at the present and recent past to formulate their expectations about the future performance of economic variables.

The other key argument was that the government should not try to reduce unemployment which always comes back to its natural rate, hence the notion of a natural rate of unemployment. The government should instead just work on maintaining the most suitable volume of money in circulation.

Policy Recommendations

The key policy implications of the monetarist school is for the government policy, via the central banks remit, to be for there to be a careful setting of the money supply to be in line with the level of economic activity in the economy.

The Central Banks should ensure that the quantity of money is not short of the requirement so as to prompt a recession or in excess of the requirement so as to prompt inflation. Monetarists believe that there should be no attempt to create full employment as there is a concept of the ‘natural rate of unemployment’ and an economy left free of government meddling will find such a rate.

The Monetarists are also very keen to avoid the use of monetary policy (lowering of interest rates to stimulate the economy) and generally against large government and are very much free market orientated unlike the Keynesian position which sees an active role for government.

Other schools and contributions

Behavioural Economics

Behavioural Economics has made contributions within micro economics and seeks to bring insights from other social sciences such as Psychology to understand how individuals make decisions. An example is the concept of ‘anchoring’ where we set our mind on a value, such as a price and then use that to judge the merit of a good or service. For example if you see something in a sale which has been dropped down by 80% in price, you are much more likely to buy it at the lower price than if you had seen it being sold for the lower price. This is because you have ‘anchored’ to the higher price and feel you have a great bargain at the lower price.

Another example is the concept of social belonging. Governments have used this in trying to get people to return questionnaires and other important forms by informing residents that they are amongst the few remaining people on their road that haven’t returned their forms. This leads in the resident a sense of being ostracized from the group which goes against the desire for belonging.

New and Post Keynesian/New NeoClassical

These schools are reinterpretations of the previously discussed school once the idea of rational expectations have been taken into consideration.

Contributors : Steve Keene (1957 -)

Austrian School/Gold Standard

This school advocates an extreme form of laisse-faire which goes further than the monetarists in advocating no role for central banking and instead call for the return of the gold standard currency model.

There is much discussion within this school over how the central banks through setting interest  rates cause business cycles. This has been aptly labelled the ‘Austrian Business Cycle Theory’ or ABCT.


Carl Menger (1840 – 1921), Murray Rothbard (1926 to 1995), Ludwig Von Mises (1881 – 1973)
Frederich Hayek (1899 – 1992)

Reaganomics (Monetarism/Supply Side / Military Keynesianism)

Reagonomics was a reincarnation of the approach that preceded the Keynesian revolution.  It had some variation from the approach however which is why all advocates of the free market were not in agreement in its policy prescriptions. This would explain why it was colloquially referred to by its critics as Voodoo economics.

Central to the departure from the conventional classical free market approach was the idea that drastically lowering the tax rate would create a wider tax base and an ultimate increase in the tax revenue. This supposed phenomenon was described in the economic literature as the Laffer Curve. It suggested that there would be a ‘trickle down’ effect where wealth would filter down to all levels in society if the highest earners were given large tax breaks. 

Coupled with this was the idea that the government should bring about recovery by helping the supply side of the economy given that all previous attempts via monetary and fiscal policy were acting on the demand side of the economy. This thinking developed in the 1970s in the post Keynesian era.


Arthur Laffer (1940 -)
Ronald Reagan (1911 – 2004)

Neoliberalism and the Washington Consensus

Neoliberalism is a catchall phrase which describes the era of deregulation and globalization that has been the order of global economic institutions since the early 1980s. This policy has been implemented within the most powerful western states in re-regulating the financial sector and pushed to third world countries under the oversight of the IMF and World Bank.

Return of regulation and Keynesianism post 2008

The neoliberal approach came under intense scrutiny in the aftermath of the global mortgage backed securities financial crash of 2008. Since then there has been a return of the role of governments in creating a more regulated approach, especially in the financial sector along with the return of the Keynesian approach in the US.

Saturday, 7 June 2014

Global Unemployment and the Islamic Solution

Unemployment & the Islamic Solution

This paper will attempt to investigate the phenomena of global unemployment with a focus on analyzing the root causes, and offer an Islamic alternative.


If we start with some facts and figures:

·         Youth, that is people between the ages of 15 and 24, make up 17% of the global population but account for 40% of the world unemployed people. This figure is based on people of working age so excludes school age children and the retired.

·         The Middle East and North Africa region has one in four young people unemployed. In some parts of Europe, such as Spain and Greece, more than 50% are out of work.

·         In the United Kingdom, more than 15% of the youth population is not in education, employment or training. In the United States, a recent study found 10 million youth are unable to find full-time work.

·         To compound the analysis, we see the massaging of the numbers to mask the true picture. Underemployment, were someone wanting full time work but settling for part time work is also part of unemployment and is called disguised unemployment.

·         There is a notion of the natural rate of unemployment which is deemed necessary to avoid inflation (NAIRU or Non Accelerating Inflation rate of Unemployment) which is not the focus of this study.

Types and Causes in Western model

 Standard types of unemployment include :-

·         Seasonal Unemployment
·         Frictional Unemployment
·         Cyclical Unemployment
·         Institutional Unemployment, including :-
Minimum Wage/Unionisation
Unemployment Benefits
 Employment Protection Laws
·         Structural Unemployment
·         Technological Unemployment and over supply of labour
·         Mergers and Acquisitions : SME acquisition by large firms
·         Regulation disproportionately affecting SME sector

There are specific factors in the current reality causing the lack of business activity vital for employment. These include :-

·         Weak investment due to uncertain business climate and credit scarcity due to banks not lending. This prompted the BoE to charge a negative interest rate on deposits effectively charging banks to keep deposits with them. Also undertaking massive bond purchases to drive down yields.
·         Financial Crisis: austerity due to bailouts leading to higher taxation and poor demand due to lower disposable incomes.
·         Ineffectiveness of stimulus as people know that the false boom will lead to more austerity in future and plan for future negating effectiveness of stimulus. This phenomenon is known as ‘Ricardian Equivalence’.

Unemployment in Western Countries since 1970s has accelerated due to the following trends :-

·         Off shoring production
·         Increased entry of Women into the labour market
·         Technological Unemployment with automation increasingly displacing primary and secondary and now tertiary sector jobs leaving labour with no place to go up the jobs hierarchy. With artificial intelligence and artificial general intelligence imminent, this trend will increase at an alarming and unsustainable rate.
·         Mass immigration into the developed world.

These factors, coupled with the end of trade union power and the rise of inflation linked to the explosion of FIAT money since the end of the Breton Woods system in 1971 has resulted in a stagnation of wages in real terms since 1970s and the shortfall in purchasing power has been filled by increased borrowing. In short the squeezed middle class and the rise of the 1% as its characterised by the occupy movement.

Proposed Solutions 

In the mainstream discourse, the following remedies are put forward but none address the underlying systemic causes. The current remedies include :-

·         Allow changing cost structure to take its course and introducing policy level incentives to incentivize companies to re-shore production.
·         Public / Private schemes ex g4s delivered by DWP to help long term unemployed
·         Discovery of new market niches ex green economy
·         Demand Side Policies: Stimulus programmes to create demand using government debt.
·         Supply side Policies  designed to increase the productive capacity (PPF) of the economy.
·         Austerity programmes to foster confidence for investment
·         Better regulation to make it easy for SME sector.
·         Focussing on education and work based skills
·         Encouraging banks to lend to the real economy by schemes such as QE making other products such as govt bonds less attractive for banks due to a drop in the yield of such financial products.
·         Social Enterprise: Worker Co-operative model of business (ex Mondregon Corporation in Basque region of Spain)
·         Diminish disparity between workers and owners
·         Minimise pay differentials within organisation
·         Representative decision making and better care of worker to create worker buy in and commitment.
·         Similar to German business model were worker welfare is catered for better.
·         Other capital sharing models such as Binary Economics, ESOP (employee share ownership plan)
·         Assisting in labour mobility

Futility of Proposed Solutions

·         Re-shoring doesn’t address global problem and without addressing global unemployment, weak demand will adversely affect global trade and growth opportunities even at national level.
·         New Markets : Ex Space tourism. Automation/Technological unemployment will still pervade such new industries. Twitter for example has 400 staff generating 11 billion turnover.
·         Demand side policies : Mounting debt and effects of such stimulus plans are short lived. Even infrastructure projects have limited gain as much of western world is now industrialized and developed so the gains seen in the 19C in America with the advent of the railroads is unlikely to be gained now.
·         Supply side policies : Without unlocking the wealth which has become a circuit amongst the few, ex financial economy which extracts value from the real economy, it is difficult to see how growth and investment will lead to people escaping their debt predicament and carry on consuming.
·         Legal obstacles for heterodox models (ex social enterprise models) Spanish law permits owner-members to register as self-employed enabling worker-owners to establish regulatory regimes that support cooperative working, but which differs considerably from cooperatives that are subject to Anglo-American systems of law that require the cooperative (employer) to view (and treat) its worker-members as salaried workers (employees) The implications of this are far-reaching, as this requires cooperatives to establish authority driven statutory disciplinary and grievance procedures (rather than democratic mediation schemes), impacting on the ability of leaders to enact communal forms of management and counter the authority structures embedded in the dominant system of private enterprise centred around the entrepreneur. 

·         Labour mobility programs and regional identities in the form of nationalism and patriotism negates the effectiveness of these programs across countries in Europe but are less of a factor in countries such as the US.

How the Islamic Economic System can resolve the Problem of Unemployment

None of the proposed methods address the root causes and therefore at best can only have limited success. For examples re-shoring doesn’t help the global problem as jobs gained are lost elsewhere. Also, due to systemic flaws in the Capitalist model, demand side policies are always short lived and cannot replace the fundamentals of savings and investment to create new products and markets creating employment in the path.

Even supply side policies such as austerity as implemented in Greece are not aimed at helping Greece structurally to fix its issues, but merely to ensure the lines of credit remain open to avoid the collapse of the Euro. It is effectively a ‘kick the can down the street’ policy with no aim of every picking the can up and placing it in a bin!

The key offering of the IES to this ever increasing threat to global insecurity and mass labour upheaval is as follows:

·         Strong SME sector, example is Taiwan’s rise after WWII. Key difference however is that Taiwan was part of supply chain of bigger firms based elsewhere. Here the Islamic Model’s (Caliphate System) public and state sector will substitute for private sector supply chain. The effect will be the same as far as creating a strong middle class which equates with good distribution of wealth.

·         Less scope for large private sector companies to consume SME’s and create oligopolies and monopolies that may be adequately placed to preserving existing jobs and poor at creating new jobs.

Note the act of larger firms buy out innovating smaller firms is not illegal per se but it is argued that the propensity for this to occur is minimised due to the limits imposed on company structures in the IES. Note the illusion of choice is preserved despite many of these takeovers by preserving the former brand names. For example Ariel, Braun, Crest, Duracell, Gillette, Head and Shoulders, Lenor, Olay, Oral-B, Pampers, Vicks all distinct brands that we equate with distinct competing companies are wholly owned by Procter & Gamble.

·         Pre-distribution instead or redistribution! Better distribution of wealth leading to less reliance on labour for all. Twitter for example is a $9bn company and only employs around 400 staff worldwide! As technology moves up the industry hierarchy all will benefit not a few leading to the masses competing for fewer and fewer jobs at abysmal wages. The alternative vision on offer is for the masses to be working less hours for the fewer human only jobs. As wealth will be more shared, the ownership of the new factors of production, namely automation will also be more evenly shared allowing more time for attention to other responsibilities such as family, and spiritual pursuits. In essence, our labour based factor of production will be replaced by a capital based factor of production and we will reap the rewards of our new type of capital ie complete the circle from human physical to human intellectual to full none human automation.

Even the forefathers of modern economics namely Adam Smith and Keynes himself foresaw the end of work within a few centuries, but neither had any counter to the divisive distribution that leads to the wealth converging into the hands of the few and in this future paradigm, that means the majority will have no access to jobs or technological capital and hence cannot exchange value and will face mass slavery en route to mass extinction.

·         Better entrepreneurial skills in population due to lack of easy investment options ex interest bearing bank accounts or share and bond investment based on limited liability. This will ensure there is no limited supply to innovation and it is innovation that breeds new business opportunities and creates demand that replaces lost demand in obsolete industries. A classic example is the smartphone which created many new jobs and new demand.

·         Availability of capital will be facilitated due to rules prohibiting and dis-incentivising hoarding. The paper on alternatives to financialization has more on this alternative to the stock market model works in practice.

·         Strong confidence as far as role of government in economy leading to greater longer term view, something that is vital to investment decision making.

·         Stable currency allowing for price stability, something that is vital for economic planning.

·         Free market for labour allowing for prices to fluctuate freely and opportunity for lower skilled workers to gain access to job market without fear of being exploited and cheated. The fear expressed here is what drives the argument for minimum wage which increases unemployment and this will not be common in the IES due to a different culture that frowns on denying the right of the worker unlike the case in the sweatshops across the poorer countries.

·         No special relationships between companies and government(aka State Monopoly Capitalism) leading to a negation in the appeal of trade unions which through collective bargaining drive up wages and hence unemployment.

·         Automatic stabilisers or the benefits system has been known to create a poverty trap where people find it profitable to stay out of work and cause a needless tax drain on those already in work. The argument for benefits is they take the sting out of the extremities of the business cycle as when the business cycle experiences a downturn and unemployment rises, giving the unemployed benefits increases spending and spending is vital for recovery. However there is a significant cost in that it allows those who keep on taking benefits when they can find work, stay within this benefits system fuelling the unemployment numbers further.

·         Lack of regular business cycle leading to absence of cyclical unemployment. The business cycle is largely driven by the flooding of cheap credit through low interest rates and the inevitable rise in interest rates causes the correction in the form of the recession. Cyclical unemployment always leads to some structural unemployment and that creates long term labour market issues in an economy leading to ever increasing burden on the state. This type of economic management through central banking is not existent in the IES as an alternative exists to the whole process of financialization.
·         Business friendly Regulation : Much of the regulation that has been invented has the result of disproportionately affecting the smaller scale companies which helps the larger companies hence the term state monopoly capitalism. There is also much financial regulation to curb the excesses of finance which is supposed to aid the real economy and not threaten it as has happened in the last few years. However as the regulation is at odds with the value of profit, there is a natural inclination to try to bypass it, often legally or through lobbying politicians. This has resulted in a pillar to post debate about regulation and getting the balance right with the right arguing for less and the left arguing for more. In the IES, this friction between the rules of trade and trade behaviour is not at friction and in fact deeper values tied to seeking halal income acts as a mechanism to keep the majority adhering to the spirit and letter of the trade laws unlike the case in the Capitalist system were a significant proportion of financial innovation is designed to achieve regulatory bypass. The degree of legal tax avoidance being spoken about bears testimony to this problem.

Paul Volcker, a previous head of the Federal Reserve once stated that the only useful financial innovation in the last 30 years was the ATM!

·         Lower costs for public utilities leading to more disposable income and savings for new business ventures necessitating more job creation.

In conclusion, there is a massive structural flaw at the heart of the capitalist system which, from the perspective of jobs creation and wealth circulation, has lead to an unsustainable situation. Let us understand these dynamics and present the alternative solution with confidence and substance.