Inequality - Whats the issue?

What’s Fundamentally wrong with Capitalism?

Introduction

What is needed is a much nuanced critique of the current Capitalist order and all its broad variants.  Otherwise one is just skirting around the edge of the issue and calling for reform. We need such a ‘smoking gun’ critique that the system is beyond salvation in the eyes of the masses and root and branch alternatives are sought.

Let’s start with a defence of Capitalism so we know the enemy in front of us. Let us consider the general defences that come especially from right wing factions.

The default state of man is poverty and Capitalism has been more instrumental in lifting the state of man from this state on mass than any other system of economic management. Although there is debate over the definitions of poverty and where the poverty line is, this is indeed by and large true and particularly impressive based on the exponential population growth that has happened in the last few centuries.

Also, they will argue what is wrong with inequality? Surely there needs to be an incentive for people to work harder to reach the level of those above them and this nurtures innovative and creative thinking vital for economic growth and making the pie bigger and bigger to feed the masses according to what they deserve.

Yes they say there are excess and areas to improve, such as the financial crisis and the excessive relaxation of regulation related to the banking sector but these are not systemic issues and society has learned its lesson and the general trajectory is upwards despite some minor setbacks.

Such arguments present a context for anyone who criticises Capitalism to be a dreamer and an adversary to its self evident truths, of which there are some which are also found in the Islamic Economic system such as a significant private sector where people can find their own skills niche and maximize their own wealth and income through specialization, an idea called the division of labour.

Anyone who criticises any core aspect of Capitalism is deemed to advocate the opposite extreme which is a planned economy which is largely controlled by the central state, the crisis in Venezuela being a contemporary example of how this policy always ends in tears.

Such criticizers are thus depicted as dreamers who deny the self evident power of the market which without doubt is a powerful force for wealth creation through the industrious and creative capacity of mankind as bestowed by Allah SWT on the highest of his creation. This however is a straw man argument i.e. to misrepresent the opposition to make it easy to topple to avoid critical debate of the real core issues which is what we need to do to really turn the debate in our favour and not be seen as another Michael Moore who crumbled in an interview when asked how wealthy he had become by attacking the very system he had profited so much from and told that he wouldn’t have become rich in Cuba if he attacked their system. Even the humour against Capitalism is a form of acceptance of its central tenants according to the rubric that it isn’t perfect, but it the best there is and the only show in town.

What’s the ‘smoking Gun’ argument then we have to Present?

In the Quran, in Surah Al Anbiya, Allah SWT says

“Nay, We hurl the Truth at falsehood so that it (the Truth) crushes it (falsehood), and lo! it (falsehood) vanishes. Woe to you for what you utter!” (21: 18) TMQ

The perspective that needs to be presented needs to both recognise the achievements of the current methodology but at the same time show it’s systemic and irreconcilable detects in a way that the current trajectory of the status quo seems bleak and precarious and at the same time, a well thought out alternative needs to be presented which ticks the valid boxes which are in the current debate.

These valid boxes include to show how any alternative achieves the level of wealth that is needed to sustain the ever growing population and at the same time creates a more sustainable model to avoid the type of doomsday scenarios which are brewing in the current discourse.

Such clouds are in the form of ever increasing wealth inequality especially in the developed countries and the scourge of absolute poverty which despite a overall percentage fall in the last few decades (largely as a result of the development of India and China) still plaques large areas of the human population. This is particularly apparent in sub Saharan Africa where the number of people living in extreme poverty, AKA absolute poverty, is growing even though the proportion of such people is falling.

Inequality

Let us start with the notion of inequality and poverty and to understand these ideas, we need to consider some theory as to how they relate to each other.

Inequality can relate to differences amongst a population in relation the spread of income and wealth. The former is called income inequality and the latter is wealth inequality. Also considered is inequality in consumption but that is a less common metric.

Wealth is the stored worth of all assets minus liabilities and can be assessed for households or individuals. It is safer to consider the issue at the individual level to create a better basis for comparison as household have been shrinking in size since such measures have been recorded and to use households would thus be misleading. 

Income is related to new wealth that is added to the pile of existing wealth and can be primarily through work or investments but can include other transfers such as government assistance programs.  

Inequality thus considers how the income and wealth are distributed amongst the individuals in a given population. 

Income inequality can also be considered between countries using measures such as GDP which is the sum value of all goods and services produced in a year, expressed in a common currency so as to enable a comparison of the relative rank of a country with another.  

This is closely related to the concept of poverty of which there are 2 types. First there is absolute poverty which means that you are living below the minimum monetary amount needed to survive which is estimated by the World Bank currently as living on less than $1.90 a day. Secondly, is the notion of relative poverty and this means you are earning at 60% or less than the median income within your country.

So these 2 concepts i.e. of inequality and poverty are related but also different.  You may be relatively poor i.e at or below 60% of median income but way above the earnings level to mark you are being in absolute poverty.

Broadly speaking relative poverty and inequality are problems expressed in the developed countries and absolute poverty is the focal point in the 3^rd world countries.

Regarding the latter, i.e the issue of absolute poverty, we have already mentioned that Capitalism has lifted the world out of absolute poverty, when looking at the proportion of people that have moved out of absolute poverty even in the last few decades which has seen the growth of the neoliberal phase of capitalism. This is despite the growing number of people as mentioned, in the continent of Africa, but they look at the proportion of people and that makes the statistics look good.

Let us then focus on the hot topic of inequality and its twin concept of relative poverty.

What is wrong with inequality you might ask? Should we care if the Jones are doing better than us? Isn’t this just jealously in disguise and Islam such things and to measuring against material things?

Doesn’t inequality breed the desire to educate ourselves so we can get ahead? After all there needs to be incentives to work hard and do well i.e. to sacrifice time and energy now to get a better job and improve material prospects later in life and this will inevitably lead to inequality in both income and wealth, so what is the fuss about? After all Capitalism is slowly eliminating absolute poverty (at least the proportion of people who are living in absolute poverty) so surely any criticism is baseless?

This is fair and the issue is not that we are against inequality per se, in fact some inequality is both necessary to spur the motivation to better ourselves and inevitable due to the qualities that Allah SWT has bestowed upon us. The alternative would be a command economy which is egalitarian in nature and divides the fruits of our labour equally or according to need and where is the motivation to become a skilled worker in such a system? In fact all such economies have failed and this is not what we are calling for. This is a straw man argument by the Capitalists to avoid deep scrutiny of their ideology and one that we do not want to be depicted as advocating.

So what are we against then? The issue is extreme inequality that is the issue not the inevitable inequality which is both inevitable and necessary.

This issue has been recently thrust into the mainstream discourse by popular movements such as the US based ‘occupy wall street’ movement with the idea of the 1% and their exorbitant share of global wealth and income and last year’s Oxfam report which headlined how 8 people owned the same wealth as half the world.

The measures used to show this extreme difference is to divide the world, or let’s say a country into 100 different segments or percentiles and look at the share of income or wealth, noting that the concentration of wealth is far more apparent than the concentration of income.

So for example if there were a 100 of us in this room and if I were to bring into this room a cakes with 100 equal slices and eat 70 and leave the rest to you all and most of you got just about enough to satisfy your minimum biological requirements and tomorrow I ate 75 and you had to make do with 25, BUT the cake on day 2 was bigger and the actual weight of your portion you got increased even though your share got smaller and I asked you why are were complaining? I ordered the cake, I had the knowledge of where to buy it, I made sure the supplier used halal ingredients etc  so I deserve more, was my logic? You’re getting more and more so you are just making a fuss and the alternatives are much worse, the cake can get smaller and your share can get bigger (if I give you a larger share) but in real terms you will be worse off, so be quiet and carry on with the status quo, “there is no alternative” being the slogan used by Margaret Thatcher.

This defence is predicated on the size of the cake getting bigger and bigger and there being no harm to anyone of me eating the ever increasing share I eat. This is where the fundamental problem lies. Let me explain.

A consensus is now emerging amongst the Capitalist thinkers that when inequality passes a critical point and turns into extreme wealth inequality, the size of the collective cake starts to shrink and this is a very damaging blow to the intellectual supremacy of the capitalist system, one they are nervous about, and one we can exploit to show how the system may have worked for a while, but it cannot be viable long term. We are definitely at that point and the inequality trends is accelerating at an alarming rate.

So this brings us to the crux of the critique of Capitalism and the argument I bring is twofold:-

1)       Just because Capitalism has had relative success (i.e. relative to the even more dire systems that preceded it i.e from hunter gatherer society to feudal society to the centrally controlled mercantilist system) it doesn’t absolve it from its current standing and there is a far more superior system on the table that delivers the long term sustainable growth and also helps remove absolute poverty at considerably faster rate and to resists it is a form of mass economic terrorism.

2)       The inherent makeup of Capitalism and its inherent mechanisms for ever increasing wealth concentration perpetuate ever increasing concentration which reduces the growth of the pie and therefore reneges on its promise to deliver on its basic premise.

Framing the debate in this way will render the fatal blow and will catch the current ideology at its blind spot. I say fatal as the solutions offered do not and cannot fundamentally solve this systemic problem.

The following questions thus arise from my proposition that greater and greater inequality leads to a shrinking of the pie and over time a reversal of the trend of reducing absolute poverty which has been its saviour.

•  Why does wealth concentration beget ever increasing wealth concentration i.e. why is there a positive reinforcement loop.
• How does extreme inequality affect the size of the pie or using the jargon, how does extreme levels of inequality affect economic growth?

Considering the first question, they use the term Crony Capitalism to try in vain to differentiate it from a Utopian form of Capitalism but the reality is that Cronyism is the inevitable outcome of the corrupt secular creed upon which this system is built.

Cronyism is the idea that political power follows economic power and this manifests in the form of those with economic power able to bend the rules of the game to effectively kick away the ladder from the majority of those who live within the system.

This works primarily through the legal act of lobbying. Lobbying is legal and deemed to be a healthy expression of democracy. It is where different interest groups lobby politicians to get the law changed according to their particular area of interest. I.e. to make their case and hope that there particular interest is preserved and protected in new legislation.

What is also legal is for such interest groups to make financial contributions to politicians, especially at the time of election campaigns and to political parties who think as their donors think.

What is however not legal is to make a contribution to influence the outcome of legislation. This is the classic notion of the ‘quid pro quo’ or expressed colloquially as “you scratch my back and ill scratch yours” i.e unashamed bribery the West so arrogantly holds up as a stain on the developing countries.

This is the issue as it is so hard to prove and represents a major loophole in the very design of all capitalist systems and one that is not resolvable. There have been some movement within Capitalism to try to resolve this critical flaw such as the anarchists who believe that the state will always be hijacked and the only solution is to completely dissolve the state not even accepting a very small state (i.e. the so called night watchman state model) as it will again morph into the overbearing state that will again be captured by big business, to take a medical metaphor  to remove the cancer from the root to avoid it ever having the potential to grow back.

This is also the stance adopted by extreme libertarians or the so called left libertarians. This movement has some other names such as anarcho-syndicalism with some high profile advocates such as the world leading left wing public intellectual Noam Chomsky.  As these so called alternatives are unworkable, we can conclude Capitalism has no alternative from within its current paradigm.

This backdoor bribery leads to the rules being changed to benefit the rich at the cost of the majority who are outside the elite percentiles of wealth and income.

Examples being lobbying to lower corporation taxes, lobbying to avoid wealth taxes that could solve many issues related to inequality, at least in the short term, to create ineffectual tax rules allowing tax loopholes and the growth of tax havens to avoid paying the low taxes that do exist, allowing the use of technologies that pollute the earth ex trade-able pollution permits , create monopoly preserving barriers for entry for new firms to enter existing markets (aka strategic licensing) not to mention the global institutions that allow such plunder on the international stage such as the IMF and world bank and their infamous Washington consensus policies that took many countries in South America backwards since they adopted its policy dictates as a condition to taking out loans in the 90's. 

The result being wage slavery and increasing levels of debt to fund consumption; the latter masking the true extent of how wages have stagnated and savings are practically none existent for those who were told would over time transition to the higher income brackets i.e. the so called middle class who are rapidly following the path of the dodo in becoming an extinct species.

So this answers the first question on how inequality begets inequality due to those that have bending the rules of the game to preserve their dominance and only allow minimal wealth to trickle down to avoid the system imploding. The second question is how this practice takes away the fig leaf of capitalism which is that at least the pie is growing so why does it matter?

The reason it matters is that the pie will and has started to shrink. This is due, but not limited to, the following effects:-

                                                               i.      Rewards and encourages cronyism and replaces a meritocratic system built on rewards for productivity improvement which is vital for a growing and more equitably distributing economic model.

                                                             ii.      Leads calls for damaging redistribution policies (ex Venezuela) that discourages investment and FDI into poorer countries

                                                           iii.      Increased Instability due to financialization of economy and greater tax burden which destroys demand which is vital for growth and circulation.

                                                            iv.      Inequality causes psychological issues for people which is especially acute in the materialistic western societies where all status is measured through materialism. It is often stated that relative wealth is tied to a feeling of wellbeing and self esteem once the basic survival needs are met. These issues leads to a lack of engagement in the wealth ladder for those who are relatively poor as measured by the medium income and this acts as major impediment on the growth potential of the economy.

                                                              v.      Extreme inequality causes social upheaval and conflict and this impacts on the productive capacity of nations especially if it results in civil war.

                                                            vi.      Gutting of real economy by financial (virtual) economy leading to real wealth transfer to wall street/city of London. For example consider the practice of financial strip mining – discussed by writer Les Leopold in his book ‘Runaway inequality’). This is seen in how the great depression was a classic example of how Wall Street Crash filtered into the real economy which suffered for around 17 years without having lost real wealth like in the case of a famine or earth quake or war.

The solutions of Capitalism are totally inadequate and the iceberg is approaching. Consider very briefly a few

• Increase Minimum wage

Increases unemployment and often the act of politicians desperate to appear to do the right thing to increase popularity, never advocated by economic experts.

•       Aggressive Redistribution such as Increasing taxes on Rich

Never work and fear is that companies will move out to lower tax countries or shift their profits to lower tax countries so do not work and if fact make matters worse as jobs will be lost and income tax will be impacted so disastrous policy and never seriously entertained.

• Trickle Down Economics

The idea that if you do 3 things, namely

·         lower taxes exp on rich,

·         reduce regulation

·         shrink welfare

Those at the top through greater investment will create wealth and it will trickle down to everyone. This has also clearly failed to bear fruit in the developed countries as evident by the shrinking middle class who have lost their purchasing power, and has had the opposite effect of polarizing the wealth which has accelerated much more rapidly since such Trickle Down or Supply Side policies are they are more accurately called took off during the Reagan/ Thatcher era which we are still living through.

You may be asking that if the system is unsustainable and the looming result is mass unrest and this is not in the interests of the capitalists, especially as they need consumers to buy the things that they produce and to pay their taxes to enrich those who really drive this system, then what will be the outcome? The outcome is that there will be the minimum wealth permitted to flow to perpetuate the system and that will continue until a viable alternative is witnessed to humanity. No prizes for guessing what that is.

So this brings us to the the crux of the issue. What, in simple and axiomatic terms, is the alternative? In a word it’s all about circulation of wealth and Islam is the only system that maximises wealth circulation and the removal of barriers that have lead to the misery that the capitalist system has inflicted upon humanity.

Consider the circulation of blood in the body. If blood only travels in the torso, the legs and arms and head will suffer and over time will lose vitality and cause sickness and disease and misery. Allah SWT has given us a system that ensures that wealth does in fact circulate and does not just circulate amongst the elite 1% as has been seen in the pinnacle of the capitalist system which has move more and more to its founding principles of deregulation and unfettered free markets as prophesied by its founding father Adam Smith in his seminal 1776 work entitled “The Wealth of Nations”.  Although he did not advocate cronyism and the emergence of an elite economy, in fact he warned of its possibility, the problem is that these thinkers are at most deep and not enlightened and as such do not consider the problems from a multi faceted dimension as only our creator can.

The western theorists attempt to fix their issue with regulation and as their creed is working in the opposite direction, the adherents of this flawed ideology find ways of bypassing the rules so the solution is one dimensional and not multi dimensional as in the case with the Islamic rules which bring in the spiritual dimension aswell as the economic dimension to create rules which are much more likely to be followed. Take the example of the prohibition of alcohol in Medina vs the same attempt in 1930's US. In the former the regulation worked as the value system was in tune with the rule unlike the Capitalist culture of greed and breaking the rules due to their disjointed and incoherent ideology.

Let us conclude with this principle of wealth circulation and offer some insight into what the lawgiver has given us as the real way forward.

This should be the guiding and focal point when we discuss this amongst the society and show how the solution cannot come purely via regulations such as the raft of regulations that emerged after the recent financial crisis as the solution needs to be multi faceted and regulations, especially financial regulations are always bypassed through clever financial innovations that are always one step head of the regulating agencies. This is perhaps why Paul Volker, ex chairman of the Federal Reserve once said that the only useful financial innovation of recent times was the ATM!

Regarding circulation and its opposite which is when wealth circulates amongst the few, Allah SWT mentions the principle in the Quran in Surah Al Hashr the beginning of verse 7

“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.”

If you consider all the rules in Islam on Economics, circulation and the effective regulation which ensures it actually occurs, pervades all the solutions in a very clear and unambiguous way and there is also no idea of denying the self evident power of private markets to generate wealth (in the real economy which is what really matters) based on the maximum use of the human potential.

There is also a Hadith by the Prophet SAW mentioned by Tirmidi, the Prophet (saw) said: “The son of Adam does not have a right except to these things: a house to accommodate him, a dress to conceal his private parts (awrah) as well as a piece of bread and water.”

Security, education and healthcare are also considered basic needs in Islam.

This ensure that absolute poverty is not a reality and the state has many means to secure such rights including placing the onus on the mahrem relatives to reduce the burden on its finances. So poverty is clearly defined in the shara. It is also defined as relative when those being cared for by the state are satisfied bil marouf or to the level which is considered respectful for the society and not made to feel inferior. I.e. not just given the bare minimum to survive biologically speaking. So the rules are clear.

The prospect of absolute poverty however should not be a reality as we believe in predistribution as opposed to redistribution, the latter is akin to bolting the door after the horse has bolted.

So all rules are tainted by this guiding principle to maximise the circulation of wealth and income:-

To quickly list a few:-

§  Karaj on potential produce – incentivises maximum utilization of land (Contrast with incentives for excess risk taking knowing no downside)

§  Prohibition on Hoarding currency (Contrast : Tax havens)

§  Reclamation of unused land to ensure maximum use of FOP which is key to real wealth generation (not artificial financial wealth)

§  Riba/Interest – tool to progressively move wealth up to top

§  Lack of Patents – small increments vs big innovations, more can eat from pie

§  Private/Public/State property to avoid monopolise reigning over and exploiting consumers of vital goods and services.

§  Stable business climate – fosters confidence for investment

§  Entrepreneurial skills develop as no easy savings option (debt finance replaced by equity finance)

“Pre-distribution not redistribution” can be one if our rallying slogan for our unique approach as it ensures the problem doesn’t occur in the first place rather than try to ameliorate the symptoms after the event.

Conclusion

The Islamic solutions cannot be presented purely as economic solutions as if they are, they will be met with the usual criticism levelled at the left of centre contributors such as nice in theory, but don’t work in reality. This is a valid criticism in many ways as a savings tax, using the capitalist paradigm, which is effectively what Zakat is, would be mocked as totally ineffectual as people could easily remove their savings or hide them under for example an offshore company which according to the system doesn’t even need to have its directors registered. The solution must be a comprehensive in nature bringing multiple dimensions and not purely an economic problem, in other words a human solution for a Homo Sapien as opposed to Homo Economicus to use the words of the ex chancellor George Osborne. Else the Islamic solution will not always appear to be a competent solution if presented purely economically.

Let us engage in this debate and bring a novel insight into a true 3^rd way and show how only Islam can solve the problems of humanity, be they economic, social or political through its divinely guided solutions.