tag:blogger.com,1999:blog-79323536280384809262024-03-06T12:03:02.146-08:00Breakthrough EconomicsBT Economicshttp://www.blogger.com/profile/09719522583828296792noreply@blogger.comBlogger13125tag:blogger.com,1999:blog-7932353628038480926.post-63921370608188413122018-10-14T14:39:00.002-07:002018-10-14T14:43:10.723-07:00Journey to the Present Economic System<br />
<div class="MsoNormal" style="text-align: justify;">
<b><u>Journey to the Present Economic System</u></b></div>
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<b style="mso-bidi-font-weight: normal;"><u><br /></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<u>Introduction<o:p></o:p></u></div>
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<u><br /></u></div>
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We are living in a time when the
system of Capitalism reigns supreme amongst all competing systems of social and
economic management. <o:p></o:p></div>
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If we are to appear credible in
unravelling the deeply entrenched dogma of the Capitalist system, we have to
start by understanding it deeply and to do that, we have to appreciate the
journey to the current mainstream economic thought and show how it is not fit
to meet the challenges of the present and future scenarios that it will
encounter.<span style="mso-spacerun: yes;"> </span><o:p></o:p></div>
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<span style="mso-spacerun: yes;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<u>Background to Capitalism<o:p></o:p></u></div>
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<br /></div>
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There have been several preceding
chapters leading up the birth of the Capitalism system that we know that are
worthy of mention very briefly. This is to appreciate how much Capitalism is
appreciated today from the past systems which are considered in retrospect to
be fundamentally flawed but suited for the unique circumstances of the time. <o:p></o:p></div>
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<br /></div>
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Let us start the journey from the
Feudal system which gathered momentum when Christianity came to the shores of
Britain and started to replace the disparate kingdoms under the Anglo Saxon
paganist rule after the demise of the centrally controlled Western Roman
Empire. The Feudal system really took its form due to the rule of William the
Conqueror after the battle of Hastings in 1066.</div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<o:p></o:p></div>
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With the demise of central
structures, the Christian Kings of Europe found it difficult to maintain their
dominium’s and due to the nature of land conflicts and constant threat of
invasion at the time, the masses found it difficult to secure much needed
protection. Feudalism solved this problem by allowing the peasants to be
protected and for the kings to allocate land to nobles<span style="mso-spacerun: yes;"> </span>and by so doing allocate them a share of the
wealth and for these nobles , via Knights, extract labour services from the peasants
and protect them from external attacks. This was a symbiotic relationship with
agrarian services being rendered in response to being protected. The boundary of
this system was the manor and trade and interaction beyond this realm was
limited. <o:p></o:p></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
The system worked until the
Protestant reformation when the central Roman Catholic Church lost its
influence across Europe and regional Kings sought to gather their newly
acquired independence from Roman control at a more national level under the
next system called Mercantilism. <o:p></o:p></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Mercantilism is based on
maximizing exports and minimizing imports and amassing the resulting gold and silver coinage. It views trade as a
zero sum game, i.e. one party cannot become better off without making the other
party worse off. Production was essentially controlled centrally and for the
benefit of the nation using the mercantilism corporation for example the East
India Company that was the doorway into India’s colonization. This system
started from the later 16<sup>th</sup> Century and lasted around 250 years and coincided
with the rise in Colonialism.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<u>Birth of Capitalism<o:p></o:p></u></div>
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<u><br /></u></div>
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This is when the Capitalist
chapter starts with the work of Adam Smith in his seminal book the Wealth of
Nations in 1776. His school is known as the Classical School of Economics and
introduced a profoundly new idea into the discourse when fundamentally shifted
the paradigm from all that preceded it. <o:p></o:p></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Question: What was this
fundamental shift which still provides Capitalism with its appeal?<o:p></o:p></div>
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<br /></div>
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Smith postulated that trade was
not a zero sum game and all parties could simultaneously benefit from specialisation
and free trade. This idea was radical at the time and was the catalyst that
ended mercantilist policies at least domestically although the colonial face of
the Western powers lasted much longer. He said that the free market was guided
by an “invisible hand” that ensured that all market participants would rise as
a result of everyone pursuing their self-interest. He called for the division
of labour or specialisation, both at an individual level and country level to
maximise the benefit to all market participants. The idea being that one
focuses on what one is best at (have a comparative advantage in) and trade with
others using the fruits of ones labour to acquire what one needs.<o:p></o:p></div>
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<br /></div>
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There were a few gaps in his
theory that were filled a century later by the neoclassical school which added
the discipline of micro economics when looks in more detail at the determinants
of price and the exchange of goods and services. This supplemented the
Classical school and was not a radical departure from it.<o:p></o:p></div>
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<br /></div>
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The neoclassical school went
unchallenged from then on until the Great Depression hit in the 1930's in the
US, an economic depression the like of which has never been seen before or
since. A central tenant of the Classical/neoclassical school is that
Governments needs to stay out of the way of the market mechanism which is
considered to be self-correcting and self-adjusting and it simply was not able
to shake the effects of this severe global depression that came as a result of
the Wall Street Crash of 1929.<o:p></o:p></div>
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<br /></div>
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The answer came in the form a
British Economist by the name of John Maynard Keynes whose 1936 book entitled
“The General Theory of<span style="mso-spacerun: yes;"> </span>Employment,
Interest and Money” brought a recipe in the form of government intervention to
lift the much needed absent demand that was perpetuating the global lull in
output and employment. The idea was that when other economic actors (i.e. consumers, firms and exports) are not spending, the government needs to even if
this means it goes into debt in the process. The logic being that it can tax the
citizens when times are good to pay for it. In short, the government needs to
break the deadlock and spend and spend until the economy picks up again. <o:p></o:p></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
The remedy of the classical
school, which is the power of markets to self-adjust without government meddling,
was seemingly proven to be flawed. Wages were not going down to the level
needed to allow firms to reduce prices to allow the economic machine to pick up
again. A phenomenon the Keynesian's called sticky wages. The invisible hand of
the free market was this said to have failed.<o:p></o:p></div>
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It must be stated here that there
was an observed inverse relationship between inflation and unemployment which
generally held true for the 40 years that Keynes solutions reigned supreme. The
relationship observed that when inflation increased, unemployment decreased so
one was a price to pay for the other. This relationship was named as the
Phillips Curve named after the economist who discovered it.<span style="mso-spacerun: yes;"> </span>It was when this relationship broke down that
Keynes ideas were thrown out and a new consensus was sought. <o:p></o:p></div>
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<br /></div>
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In the 1970’s, a new phenomenon
was observed where both inflation and unemployment started to rise at the same
time and nobody could understand it. The phenomenon was called Stagflation (i.e. stagnation and inflation at the same time).<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
The saviours this time were the
Monetarists, most notably a Chicago School economist by the name of Milton
Friedman. He and others such as Robert Lucas put forward a new idea as to
explain why the Keynesian medicine was failing to deliver, i.e. why inflation
and unemployment were both rising at the same time (an idea we have already
called Stagflation).<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
The idea was called Rational
Expectations. Let us briefly consider this.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Expectations are how economic
agents think about the future and act in the present. There are a few types but
to keep it simple, consider the following types:-<o:p></o:p></div>
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<br /></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo1; text-align: justify; text-indent: -18.0pt;">
</div>
<ul>
<li><span style="text-indent: -18pt;">Adaptive expectations – i.e. the future will be
a continuation of</span><span style="text-indent: -18pt;"> </span><span style="text-indent: -18pt;">the past</span></li>
<li><span style="text-indent: -18pt;">Rational Expectations – i.e. economic actors
will take all available info into consideration to evaluate the future.</span></li>
</ul>
<!--[if !supportLists]--><o:p></o:p><br />
<div class="MsoListParagraphCxSpLast" style="mso-list: l0 level1 lfo1; text-align: justify; text-indent: -18.0pt;">
<o:p></o:p></div>
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What was essentially happening
was that people started to factor in the expected future inflation which would
occur as a result of the government meddling into their wage expectations and
asking for higher wages and this was negating the positive effects of more
governments spending. <o:p></o:p><br />
<br /></div>
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Therefore the trade-off between
inflation and unemployment as depicted by the Philips curve was lost and
ineffectual. They were said to have moved from static expectations to rational
expectations where they were said to have factored in government interference
and pushed for higher wages which put things back to where they were before the
government got involved!<o:p></o:p><br />
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
The Monetarists medicine was to
control the money supply and let unemployment move to its natural rate. He
proposed that this was done by raising interest rates a policy which central
banks immediately embarked on. <span style="mso-spacerun: yes;"> </span><o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="mso-spacerun: yes;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
Milton Friedman’s policy recommendations
were so effective in curbing in the massive runaway inflation of the 1970's and
bringing the economies back to growth that he won the Nobel Prize as a result
and the debate seemed to have been sealed throughout the next 30 years until
the global financial crisis of 2008 where the dangers of unfettered free
markets was plan for all to see.<span style="mso-spacerun: yes;"> </span><o:p></o:p></div>
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The consensus then settled
between the two extremes namely more Keynesian treatment in the form of big
role for government spending (aka stimulus spending) as seen under Obama and
the British approach of austerity and regulation to both reign in the
government and prevent the free market from repeating the same reckless
mistakes.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
There were other variants of
these key approaches, such as the new Keynesian school who incorporated the
criticisms of the monetarists and reinvented themselves and the Austrian School
but essentially the 2 main approaches set the stage for the 2 extremes within
the Capitalist discourse also known as left wing vs right wing or big
government vs small government parties that occupy the political economic space
in the west. <span style="mso-spacerun: yes;"> </span>Put in other words, there
are policies that are closer to the Classical School end of the spectrum and
those closer to the Keynesian end of the spectrum with all variants in between.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
The preceding discussion
differentiates the main schools of thought under the hood of Capitalism. The
reality of these schools is in the way they diagnose the way markets work and
the policies they advocate for when the market fails. <o:p></o:p></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
This is different to the
discussion of the forms of Capitalism which is a different subject to which we
will briefly turn to and conclude with. Capitalism has in parallel to moving
through the various theoretical underpinnings as highlighted above, but has
also mutated through different forms..<o:p></o:p></div>
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<br /></div>
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These forms include, but are not
limited to the following:-<o:p></o:p></div>
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<br /></div>
<div class="MsoListParagraph" style="background: white; line-height: 14.55pt; margin-bottom: 6.0pt; margin-left: 36.0pt; margin-right: 0cm; margin-top: 2.4pt; mso-add-space: auto; mso-list: l1 level1 lfo2; mso-outline-level: 3; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="color: #222222; font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol; mso-fareast-language: EN-GB;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="color: #222222;">State
Capitalism which sees a heavy hand in owning many industries such as the UK
before mass privatisation under Thatcher when we had many nationalised
industries.<o:p></o:p></span></div>
<h3 style="background: white; line-height: 14.55pt; margin-bottom: 6.0pt; margin-left: 36.0pt; margin-right: 0cm; margin-top: 2.4pt; mso-list: l1 level1 lfo2; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="color: #222222; font-family: "symbol"; font-size: 11.0pt; font-weight: normal;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="color: #222222; font-family: "calibri" , "sans-serif"; font-size: 11.0pt; font-weight: normal;">Finance Capitalism which subjugates the real economy to the
financial sector.<o:p></o:p></span></h3>
<h3 style="background: white; line-height: 14.55pt; margin-bottom: 6.0pt; margin-left: 36.0pt; margin-right: 0cm; margin-top: 2.4pt; mso-list: l1 level1 lfo2; text-align: justify; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="color: #222222; font-family: "symbol"; font-size: 11.0pt; font-weight: normal;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";"> </span></span></span><span style="color: #222222; font-family: "calibri" , "sans-serif"; font-size: 11.0pt; font-weight: normal;">Crony Capitalism which involves firms lobbying the
governments to bend the rules to favour their interests over the masses.<o:p></o:p></span></h3>
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</div>
<ul>
<li><span style="text-indent: -18pt;">Welfare Capitalism (Mixed Economy) or free
market capitalism with a safety net to redistribute the fruits of the economy
broadly.</span></li>
</ul>
<!--[if !supportLists]--><o:p></o:p><br />
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<br /></div>
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<b style="mso-bidi-font-weight: normal;"><u>Conclusion<o:p></o:p></u></b><br />
<b style="mso-bidi-font-weight: normal;"><u><br /></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
The aim of this session has been
to try to summarise the last 1000 years of economic thought so we can more able
to frame the discourse that is taking place and present the proper solution
into the debate. <span style="mso-spacerun: yes;"> </span><o:p></o:p></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Capitalist contributors are in an
endless debate between a heavy role for the state on one side and for the state
to stand aside and let the market do what it does best when left alone as per
the invisible hand rhetoric of Adam Smith. Many have stated that the reason
both sides do not reconcile their differences is that the debate is not about
the merit of one’s argument but more about the interests that each side
represents, another sad fact about the alleged debate which is very seldom
mentioned. <o:p></o:p></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
To finish, let us bear in mind
one simple point in relation to what Islam has to offer. Islam achieves the
best of both. It allows the market to work its magic but not at the cost of
extreme inequality and market failures as we keep seeing in Capitalism and it
does this by using regulation which works as the rules are from the creed and
generally adhered to and not always being bypassed as they are in the Western
model using financial innovation and elaborate tax evasion schemes.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<br />BT Economicshttp://www.blogger.com/profile/09719522583828296792noreply@blogger.com0tag:blogger.com,1999:blog-7932353628038480926.post-59679977256045558622018-10-03T10:41:00.001-07:002018-10-03T11:21:05.969-07:00Inequality - Whats the issue?<br />
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><u><span style="font-size: 10.0pt; line-height: 115%;">What’s Fundamentally wrong with
Capitalism?<o:p></o:p></span></u></b><br />
<b style="mso-bidi-font-weight: normal;"><u><span style="font-size: 10.0pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><u><span style="font-size: 10.0pt; line-height: 115%;">Introduction<o:p></o:p></span></u></b><br />
<b style="mso-bidi-font-weight: normal;"><u><span style="font-size: 10.0pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">What is needed
is a much nuanced critique of the current Capitalist order and all its broad
variants.<span style="mso-spacerun: yes;"> </span>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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<u><span style="font-size: 10.0pt; line-height: 115%;"><br /></span></u></div>
<div class="MsoNormal">
<u><span style="font-size: 10.0pt; line-height: 115%;">What’s
the ‘smoking Gun’ argument then we have to Present?<o:p></o:p></span></u></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">In the Quran, in Surah Al
Anbiya, Allah SWT says<o:p></o:p></span><br />
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">“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<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><u><span style="font-size: 10.0pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><u><span style="font-size: 10.0pt; line-height: 115%;">Inequality<o:p></o:p></span></u></b></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">Inequality
thus considers how the income and wealth are distributed amongst the
individuals in a given population. </span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">So these 2
concepts i.e. of inequality and poverty are related but also different. <span style="mso-spacerun: yes;"> </span>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.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">Broadly
speaking relative poverty and inequality are problems expressed in the
developed countries and absolute poverty is the focal point in the 3<sup>rd</sup>
world countries.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">Let us then
focus on the hot topic of inequality and its twin concept of relative poverty.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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?<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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? <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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 <span style="mso-spacerun: yes;"> </span>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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">So this
brings us to the crux of the critique of Capitalism and the argument I bring is
twofold:-<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpFirst" style="margin-left: 19.5pt; mso-add-space: auto; mso-list: l3 level1 lfo2; text-indent: -18.0pt;">
<span style="font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;"><br /></span></span></div>
<div class="MsoListParagraphCxSpFirst" style="margin-left: 19.5pt; mso-add-space: auto; mso-list: l3 level1 lfo2; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">1)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 19.5pt; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpLast" style="margin-left: 19.5pt; mso-add-space: auto; mso-list: l3 level1 lfo2; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">2)<span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><span style="mso-spacerun: yes;"><br /></span></span>
<span style="font-size: 10.0pt; line-height: 115%;">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.</span><br />
<br />
<ul>
<li><span style="font-size: 10pt; line-height: 115%; text-indent: -18pt;"><span style="mso-list: Ignore;"><span style="font-family: "times new roman"; font-size: 7pt; font-stretch: normal; line-height: normal;"> </span></span></span><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: 10pt; line-height: 115%; text-indent: -18pt;">Why does wealth concentration beget ever
increasing wealth concentration i.e. why is there a positive reinforcement loop.</span></li>
<li><span style="font-family: "georgia" , "times new roman" , serif; font-size: x-small;">How does extreme inequality affect
the size of the pie or using the jargon, how does extreme levels of inequality
affect economic growth?</span></li>
</ul>
</div>
<div class="MsoListParagraphCxSpLast">
<br /></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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<span style="mso-spacerun: yes;"> </span>to remove the
cancer from the root to avoid it ever having the potential to grow back. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <span style="mso-spacerun: yes;"> </span>As these so called alternatives
are unworkable, we can conclude Capitalism has no alternative from within its
current paradigm.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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?<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">The reason
it matters is that the pie will and has started to shrink. This is due, but not
limited to, the following effects:-<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpFirst" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l0 level3 lfo4; mso-text-indent-alt: -9.0pt; text-indent: -108.0pt;">
<!--[if !supportLists]--><span style="font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">
</span>i.<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l0 level3 lfo4; mso-text-indent-alt: -9.0pt; text-indent: -108.0pt;">
<!--[if !supportLists]--><span style="font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">
</span>ii.<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">Leads
calls for damaging redistribution policies (ex Venezuela) that discourages
investment and FDI into poorer countries<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l0 level3 lfo4; mso-text-indent-alt: -9.0pt; text-indent: -108.0pt;">
<!--[if !supportLists]--><span style="font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">
</span>iii.<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">Increased
Instability due to financialization of economy and greater tax burden which destroys
demand which is vital for growth and circulation.<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l0 level3 lfo4; mso-text-indent-alt: -9.0pt; text-indent: -108.0pt;">
<!--[if !supportLists]--><span style="font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">
</span>iv.<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l0 level3 lfo4; mso-text-indent-alt: -9.0pt; text-indent: -108.0pt;">
<!--[if !supportLists]--><span style="font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">
</span>v.<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">Extreme
inequality causes social upheaval and conflict and this impacts on the
productive capacity of nations especially if it results in civil war.<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l0 level3 lfo4; mso-text-indent-alt: -9.0pt; text-indent: -108.0pt;">
<!--[if !supportLists]--><span style="font-size: 10.0pt; line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";">
</span>vi.<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 72.0pt; mso-add-space: auto;">
<br /></div>
<div class="MsoListParagraphCxSpLast" style="margin-left: 72.0pt; mso-add-space: auto;">
<br /></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">The
solutions of Capitalism are totally inadequate and the iceberg is approaching. Consider
very briefly a few</span><br />
<br />
<ul>
<li><span style="font-size: x-small;">Increase Minimum wage</span></li>
</ul>
</div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-size: 10.0pt; line-height: 115%;">Increases unemployment and often the act of politicians desperate to
appear to do the right thing to increase popularity, never advocated by
economic experts.</span><br />
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l1 level1 lfo5; text-indent: -18.0pt;">
<br />
<ul>
<li><span style="font-size: 10pt; line-height: 115%; text-indent: -18pt;"><span style="mso-list: Ignore;"><span style="font-family: "times new roman"; font-size: 7pt; font-stretch: normal; line-height: normal;"> </span></span></span><span style="font-size: 10pt; line-height: 115%; text-indent: -18pt;">Aggressive Redistribution such as
Increasing taxes on Rich</span></li>
</ul>
</div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-size: 10.0pt; line-height: 115%;">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.</span><br />
<span style="font-size: 10pt; text-indent: -18pt;"><br /></span>
<br />
<ul>
<li><span style="font-size: x-small;">Trickle Down Economics</span></li>
</ul>
</div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-size: 10.0pt; line-height: 115%;">The idea that if you do 3 things, namely <o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l2 level1 lfo6; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; font-size: 10.0pt; line-height: 115%;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">lower
taxes exp on rich, <o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l2 level1 lfo6; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; font-size: 10.0pt; line-height: 115%;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">reduce
regulation<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpLast" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l2 level1 lfo6; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; font-size: 10.0pt; line-height: 115%;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">shrink
welfare<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpLast" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l2 level1 lfo6; text-indent: -18.0pt;">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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”.<span style="mso-spacerun: yes;">
</span>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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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!<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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<o:p></o:p></span></div>
<h2 style="background: white; margin-bottom: 11.6pt; margin-left: 0cm; margin-right: 0cm; margin-top: 2.3pt;">
<span style="color: #777777; font-size: 10.0pt; font-weight: normal; line-height: 115%;"><br /></span></h2>
<h2 style="background: white; margin-bottom: 11.6pt; margin-left: 0cm; margin-right: 0cm; margin-top: 2.3pt;">
<span style="color: #777777; font-size: 10.0pt; font-weight: normal; line-height: 115%;">“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.”<o:p></o:p></span></h2>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">There is
also a Hadith by the Prophet SAW </span><span style="color: black; font-size: 10.0pt; line-height: 115%;">mentioned by
Tirmidi, the Prophet (saw) said: </span><i><span style="color: black; font-size: 10.0pt; line-height: 115%;">“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.”</span></i><span style="font-size: 10.0pt; line-height: 115%;"><o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="color: black; font-family: "tt160t00"; font-size: 10.0pt; line-height: 115%;">Security, education and
healthcare are also considered basic needs in Islam.</span><span style="font-size: 10.0pt; line-height: 115%;"><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">So all rules
are tainted by this guiding principle to maximise the circulation of wealth and
income:-<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-size: 10.0pt; line-height: 115%;">To quickly
list a few:-<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpFirst" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l5 level3 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "wingdings"; font-size: 10.0pt; line-height: 115%;"><span style="mso-list: Ignore;">§<span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">Karaj on potential produce –
incentivises maximum utilization of land (Contrast with incentives for excess
risk taking knowing no downside)<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l5 level3 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "wingdings"; font-size: 10.0pt; line-height: 115%;"><span style="mso-list: Ignore;">§<span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">Prohibition on Hoarding currency
(Contrast : Tax havens) <o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l5 level3 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "wingdings"; font-size: 10.0pt; line-height: 115%;"><span style="mso-list: Ignore;">§<span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">Reclamation of unused land to ensure
maximum use of FOP which is key to real wealth generation (not artificial
financial wealth) <o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l5 level3 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "wingdings"; font-size: 10.0pt; line-height: 115%;"><span style="mso-list: Ignore;">§<span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">Riba/Interest – tool to progressively
move wealth up to top <o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l5 level3 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "wingdings"; font-size: 10.0pt; line-height: 115%;"><span style="mso-list: Ignore;">§<span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">Lack of Patents – small increments vs
big innovations, more can eat from pie<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l5 level3 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "wingdings"; font-size: 10.0pt; line-height: 115%;"><span style="mso-list: Ignore;">§<span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">Private/Public/State property to
avoid monopolise reigning over and exploiting consumers of vital goods and
services.<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l5 level3 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "wingdings"; font-size: 10.0pt; line-height: 115%;"><span style="mso-list: Ignore;">§<span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">Stable business climate – fosters
confidence for investment<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: 108.0pt; mso-add-space: auto; mso-list: l5 level3 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "wingdings"; font-size: 10.0pt; line-height: 115%;"><span style="mso-list: Ignore;">§<span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]--><span style="font-size: 10.0pt; line-height: 115%;">Entrepreneurial skills develop as no
easy savings option (debt finance replaced by equity finance) <o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-size: 10.0pt; line-height: 115%;">“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.<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle">
<b style="mso-bidi-font-weight: normal;"><u><span style="font-size: 10.0pt; line-height: 115%;">Conclusion<o:p></o:p></span></u></b></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpMiddle">
<span style="font-size: 10.0pt; line-height: 115%;">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 </span><span style="background: white; color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt; line-height: 115%;">Homo Economicus </span><span style="font-size: 10.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoListParagraphCxSpLast">
<span style="font-size: 10.0pt; line-height: 115%;">Let us engage in this debate and bring a novel insight into a true 3<sup>rd</sup>
way and show how only Islam can solve the problems of humanity, be they
economic, social or political through its divinely guided solutions.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<br />BT Economicshttp://www.blogger.com/profile/09719522583828296792noreply@blogger.com0tag:blogger.com,1999:blog-7932353628038480926.post-13435722549851930692018-07-15T10:06:00.003-07:002018-07-15T15:00:02.731-07:00Community Economics Course<br />
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><u><span style="font-size: 14.0pt; line-height: 115%;">Level 1 – Beginners<o:p></o:p></span></u></b></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><u><span style="font-size: 14.0pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l1 level1 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 1: What is the purpose of an Economic
System? <span style="mso-spacerun: yes;"> </span><br />
<span style="mso-spacerun: yes;"><br /></span></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l1 level1 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 2: The Private Market and the parable of
the Shipwrecked Islanders.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l1 level1 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 3: <span style="mso-spacerun: yes;"> </span>Factors of Production.<br />
<br /></div>
<div class="MsoListParagraphCxSpLast" style="mso-list: l1 level1 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 4 : Value, Exchange and Role of Money.</div>
<div class="MsoListParagraphCxSpLast" style="mso-list: l1 level1 lfo1; text-indent: -18.0pt;">
<br /></div>
<div class="MsoNormal">
<u>Capitalist system<o:p></o:p></u></div>
<div class="MsoNormal">
<u><br /></u></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l1 level1 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 5: What is the Fundamental Economic Problem
to Solve? <br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l1 level1 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 6: The role of the State in the Economy.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l1 level1 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 7 : The role of the Central Bank in the
Economy.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l1 level1 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 8 : How the State and Central Bank manage
the economy.<br />
<br /></div>
<div class="MsoListParagraphCxSpLast" style="mso-list: l1 level1 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 9 : Good and Bad Wealth Inequality.</div>
<div class="MsoListParagraphCxSpLast" style="mso-list: l1 level1 lfo1; text-indent: -18.0pt;">
<br /></div>
<div class="MsoNormal">
<u>Islamic system<o:p></o:p></u></div>
<div class="MsoNormal">
<u><br /></u></div>
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<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 10: What is the Fundamental Problem to
Solve?<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l1 level1 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 11 : Role of the State in the Economy.<br />
<br /></div>
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<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 12 : Regulation of the Market in Islam.</div>
<div class="MsoListParagraphCxSpLast">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><u><span style="font-size: 14.0pt; line-height: 115%;">Level 2 – Intermediate<o:p></o:p></span></u></b></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><u><span style="font-size: 14.0pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoNormal">
<u>Capitalist System Cont...<o:p></o:p></u></div>
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<u><br /></u></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l2 level1 lfo2; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 1 : Monetary History since WW1.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l2 level1 lfo2; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 2 : Economic Management via Fiscal and
Monetary Policy.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l2 level1 lfo2; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 3 : Micro and Macro Economics.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l2 level1 lfo2; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 4: <span style="mso-spacerun: yes;"> </span>The
role of Interest.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l2 level1 lfo2; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 5: <span style="mso-spacerun: yes;"> </span>The Great Depression and the rise of Keynesian
Economics.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l2 level1 lfo2; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 6 : Inflation and Unemployment & Fall
of Keynesian Economics.<br />
<br /></div>
<div class="MsoListParagraphCxSpLast" style="mso-list: l2 level1 lfo2; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 7 : Rise of Monetarism and growth of Neo-Liberalism.</div>
<div class="MsoListParagraphCxSpLast" style="mso-list: l2 level1 lfo2; text-indent: -18.0pt;">
<br /></div>
<div class="MsoNormal">
<u>Islamic System Cont....<o:p></o:p></u></div>
<div class="MsoNormal">
<u><br /></u></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l2 level1 lfo2; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 8 : Private, Public and State Property.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l2 level1 lfo2; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 9 : Gold Backed Money in the Islamic System.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l2 level1 lfo2; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 10 : Islamic Company Structures.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l2 level1 lfo2; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 11 : Taxation Policy.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l2 level1 lfo2; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 12: Is the Islamic System socialist? </div>
<div class="MsoListParagraphCxSpMiddle">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><u><span style="font-size: 14.0pt; line-height: 115%;">Level 3 – Advanced<o:p></o:p></span></u></b></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><u><span style="font-size: 14.0pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo3; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 1 : Islamic Rules which ensure wealth
distribution.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo3; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 2 : Debt finance vs. Equity Financing.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo3; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 3:<span style="mso-spacerun: yes;"> </span>Financial
Industry and Islamic Perspectives.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo3; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 5 : Business Cycles – Causes and how Islam
Avoids Systemic Causes.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo3; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 6 : Market Failure – How Islam is less
prone to Ineffective Market Functioning.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo3; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 7 : Role and Effectiveness of Regulation
within the Islamic Economy.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo3; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 8 : 2008 Financial Crisis Analysis – Causes
and Cures.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo3; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 9 : Foreign Trade – Analysis of
Globalization.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo3; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 10: Rise of Tiger Economics – Contrasting
Development to Washington Consensus.<br />
<br /></div>
<div class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo3; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 11 : Analysis of Financial News presenting
the Islamic Solutions.<br />
<br /></div>
<div class="MsoListParagraphCxSpLast" style="mso-list: l0 level1 lfo3; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Week 12: Muslim Lands & Economic Policies.</div>
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<br />BT Economicshttp://www.blogger.com/profile/09719522583828296792noreply@blogger.com25tag:blogger.com,1999:blog-7932353628038480926.post-75693566293265577172017-04-16T15:41:00.000-07:002017-04-16T15:45:26.980-07:00Trumps Economic Plan - Will it Serve those who voted for him?<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="font-size: 12.0pt; line-height: 115%;">Trump’s Economic
Vision <o:p></o:p></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<b><u><span style="font-size: 12.0pt; line-height: 115%;"><br /></span></u></b></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;">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.<o:p></o:p></span><br />
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;">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? <o:p></o:p></span><br />
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;">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.<o:p></o:p></span><br />
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;">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,<o:p></o:p></span><br />
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="color: #333333; font-family: "georgia" , "serif"; font-size: 13.0pt; line-height: 115%;">"In order to
achieve the American dream, let people keep more money in their pockets and
increase after-tax wages."<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;">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?<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;">Looking at Trumps economic plan, three dominant themes can be
assessed.</span></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo1; text-align: justify; text-indent: -18.0pt;">
<ul>
<li> Tax
& Trade Policy</li>
<li><span style="line-height: 115%; text-indent: -18pt;"> </span><span style="font-family: "times new roman"; font-size: xx-small; line-height: 115%; text-indent: -18pt;"> </span><span style="font-size: 12pt; line-height: 115%; text-indent: -18pt;">Reducing
Regulation</span></li>
<li><span style="line-height: 115%; text-indent: -18pt;"><span style="font-stretch: normal; line-height: normal;"> </span><span style="font-family: "times new roman"; font-size: 7pt; font-stretch: normal; line-height: normal;"> </span></span><span style="font-size: 12pt; line-height: 115%; text-indent: -18pt;">Infrastructure
Spending</span></li>
</ul>
<!--[endif]--></div>
<div class="MsoListParagraphCxSpLast" style="mso-list: l0 level1 lfo1; text-align: justify; text-indent: -18.0pt;">
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span>
<span style="font-size: 12.0pt; line-height: 115%;">This approach of starting with helping the suppliers was
initially advocated by the 18<sup>th</sup>/19<sup>th</sup> 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. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<u><span style="font-size: 12.0pt; line-height: 115%;"><br /></span></u>
<u><span style="font-size: 12.0pt; line-height: 115%;">Tax & Trade Policy<o:p></o:p></span></u></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span>
<span style="font-size: 12.0pt; line-height: 115%;">On tax, Trump has called for massive tax cuts for all income
groups with a particular focus on those at the top and for <span style="background: white;">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.<o:p></o:p></span></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span>
<span style="font-size: 12.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<u><span style="font-size: 12.0pt; line-height: 115%;"><br /></span></u>
<u><span style="font-size: 12.0pt; line-height: 115%;">Regulation<o:p></o:p></span></u></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span>
<span style="font-size: 12.0pt; line-height: 115%;">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 <span style="background: white;">requiring federal
agencies to cut two existing regulations for every new regulation they
implement.<o:p></o:p></span></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="background: white; font-size: 12pt; line-height: 115%;">Regulations </span><span style="font-size: 12.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<u><span style="font-size: 12.0pt; line-height: 115%;"><br /></span></u>
<u><span style="font-size: 12.0pt; line-height: 115%;">Infrastructure Spending<o:p></o:p></span></u></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span>
<span style="font-size: 12.0pt; line-height: 115%;">Trump has stated that the country’s infrastructure is
crumbling and needs to be overhauled if the country is to compete globally.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span>
<span style="font-size: 12.0pt; line-height: 115%;">His campaign put forward a vision that </span><span style="background: white; color: #2b2c30; font-size: 12.0pt; line-height: 115%;">would leverage “public-private partnerships,
and private investments through tax incentives, to spur $1 trillion in
infrastructure investment over 10 years.” [1]<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<u><span style="font-size: 12.0pt; line-height: 115%;"><br /></span></u>
<u><span style="font-size: 12.0pt; line-height: 115%;">Can these policies work?<o:p></o:p></span></u></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span>
<span style="font-size: 12.0pt; line-height: 115%;">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. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span>
<span style="font-size: 12.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span>
<span style="font-size: 12.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span>
<span style="font-size: 12.0pt; line-height: 115%;">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 (</span><span style="background: white; color: #222222; font-family: "arial" , "sans-serif";">Glass</span><span style="background: white; color: #222222; font-family: "arial" , "sans-serif";">–Steagall
Act of 1932</span><span style="font-size: 12.0pt; line-height: 115%;">) 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.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span>
<span style="font-size: 12.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span>
<span style="font-size: 12.0pt; line-height: 115%;">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.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;"><br /></span>
<span style="font-size: 12.0pt; line-height: 115%;">Allah SWT warns us of this when he states in Surah Al-Hashr
:-<o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; mso-outline-level: 2;">
<i><span style="font-family: "times new roman" , "serif"; font-size: 13.5pt;"><br /></span></i>
<i><span style="font-family: "times new roman" , "serif"; font-size: 13.5pt;">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 - <b><u>so that it will not be a perpetual distribution
among the rich from among you</u></b>. 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.<o:p></o:p></span></i></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; mso-outline-level: 2;">
<i><span style="font-family: "times new roman" , "serif"; font-size: 13.5pt;">TMQ
59:7<o:p></o:p></span></i></div>
<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; mso-outline-level: 2;">
<span style="font-size: 12.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;"><br /></span>
<span style="font-size: 12.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-GB;">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.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
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<br />
<div class="MsoNormal" style="text-align: justify;">
<span style="font-size: 12.0pt; line-height: 115%;">[1]http://thehill.com/policy/finance/311721-questions-hang-over-trump-plan-on-infrastructure<o:p></o:p></span></div>
BT Economicshttp://www.blogger.com/profile/09719522583828296792noreply@blogger.com2tag:blogger.com,1999:blog-7932353628038480926.post-37718839104836016762014-10-21T13:55:00.000-07:002016-05-16T23:24:35.997-07:00The History of CapitalismEvolution of Capitalist Economic Thought - Feudal System to Present<br />
<br />
Sections <br />
<br />
1) Introduction<br />
<br />
2) Major Turning Points in Economic Thought<br />
<ul>
<li>Feudal System</li>
<li>Mercantilism</li>
<li>Psysiocrats</li>
<li>Classical School </li>
<li>Neo Classical School</li>
<li>Keynesian School </li>
<li>Monetarism /Rational Expectations</li>
</ul>
3) Other schools and contributions<br />
<ul>
<li>Behavioural Economics</li>
<li>New and Post Keynesian/New Neo Classical</li>
<li>Austrian School/Gold Standard</li>
<li>Reaganomics (Monetarism/Supply Side / Military Keynesianism)</li>
<li>Neoliberalism and the Washington Consensus</li>
<li>Return of regulation and Keynesianism post 2008</li>
</ul>
<u><b>Introduction</b></u><br />
<br />
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.<br />
<br />
Each major school or viewpoint will be analysed and discussed according to areas :-<br />
<ul>
<li>Timeline </li>
<li>Context</li>
<li>Contributors</li>
<li>Key assumptions</li>
<li>Policy Recommendation</li>
</ul>
Key terms<br />
<br />
1) Microeconomics<br />
2) Macroeconomics<br />
3) Neoclassical synthesis<br />
<br />
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.<br />
<br />
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.<br />
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. <br />
<br />
<u><b>Feudalism</b></u> <br />
<br />
<u>Timeline</u><br />
<br />
Feudalism was a system of economic organization within Europe that lasted during much of what we refer to as the Middle Ages. <br />
<br />
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. <br />
<br />
<u>Context</u><br />
<br />
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.<br />
<br />
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. <br />
<br />
<u>Contributors</u><br />
<br />
William I - ‘William the Conqueror’<br />
<br />
<u>Key Assumptions</u><br />
<br />
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.<br />
<br />
<u>Policy Recommendations </u><br />
<br />
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.<br />
<br />
<u><b>Mercantilism</b></u><br />
<br />
<u>Timeline</u><br />
<br />
The time period of this system was approximately 1500 to 1800.<br />
<br />
<u>Context</u><br />
<br />
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. <br />
<br />
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<br />
<br />
<u>Contributors</u><br />
<br />
UK: Oliver Cromwell (1599–1658),<br />
France: Jean-Baptiste Colbert (1619–1683).<br />
<br />
<u>Key Assumptions</u><br />
<br />
Mercantilism taught that trade was a ‘zero-sum’ game with one country's gain equivalent to a loss sustained by the trading partner.<br />
<br />
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.<br />
<br />
<u>Policy Recommendations </u><br />
<br />
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.<br />
<br />
<u><b>Physiocrats</b></u><br />
<br />
<u>Timeline</u><br />
<br />
Mid to late 1700’s.<br />
<br />
<u>Context</u><br />
<br />
This school, which was prevalent in France during the height of the enlightenment struggle, was a spearhead for new thinking in the economic thought.<br />
<br />
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.<br />
<br />
They are less important for the importance they attribute to agricultural production which is considered a very weak argument to this day.<br />
<br />
<u>Contributors</u><br />
<br />
Francois Quesnay (1694 – 1774)<br />
Anne-Robert-Jacques Turgot (1727 – 1781)<br />
<br />
<u>Key Assumptions</u><br />
<br />
They argued that land production was the key source of economic value and that agricultural products should as a result be highly priced.<br />
<br />
<u>Policy Recommendations </u><br />
<br />
They were one of the first, along with Adam Smith who came later, to argue for a self regulated market approach. <br />
<br />
<u><b>Classical School </b></u><br />
<br />
<u>Timeline</u><br />
<br />
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. <br />
<br />
<u>Context</u><br />
<br />
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.<br />
<br />
The other key trigger was the onset of the industrial revolution and the mechanization of industry which opened up huge potential in wealth creation.<br />
<br />
<u>Contributors</u><br />
<br />
Adam Smith (1723 – 1790) <br />
David Ricardo (1772 – 1823)<br />
<br />
<u>Key Assumptions</u><br />
<br />
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.<br />
<br />
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.<br />
<br />
<u>Policy Recommendations </u><br />
<br />
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. <br />
<br />
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. <br />
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.<br />
<br />
<u><b>NeoClassical School </b></u><br />
<br />
<u>Timeline</u><br />
<br />
1860’s to 1930’s <br />
<br />
<u>Context</u><br />
<br />
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.<br />
<br />
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.<br />
<br />
<u>Contributors</u><br />
<br />
William Jevons (1835 – 1882); Carl Menger (1840 – 1921); Leon Walras (1834 – 1910)<br />
Alfred Marshall (1842 – 1924)<br />
<br />
<u>Key Assumptions</u><br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
What would be extractable would be the equivalent of how market participant view a commodity at the point of the weakest need. <br />
<br />
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. <br />
<br />
<u>Policy Recommendations </u><br />
<br />
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.<br />
<br />
<u><b>Keynesian School </b></u><br />
<br />
<u>Timeline</u><br />
<br />
1930s to 1970s<br />
<br />
<u>Context</u><br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
<u>Contributors.</u><br />
<br />
John Maynard Keynes (1883 – 1946)<br />
Paul Krugman (1953 -)<br />
<br />
<u>Key Assumptions</u><br />
<br />
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.<br />
<br />
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.<br />
<br />
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, <br />
<br />
<u>Policy Recommendations </u><br />
<br />
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.<br />
<br />
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.<br />
<br />
<b><u>Monetarism /Rational Expectations</u></b><br />
<br />
<u>Timeline</u><br />
<br />
Late 1970s to mid 1980s<br />
<br />
<u>Context</u><br />
<br />
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. <br />
<br />
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. <br />
<br />
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.<br />
<br />
<u>Contributors</u><br />
<br />
Milton Friedman (1913 to 2006)<br />
Robert Lucas (1937 - )<br />
<br />
<u>Key Assumptions</u><br />
<br />
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.<br />
<br />
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. <br />
<br />
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. <br />
<br />
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. <br />
<br />
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.<br />
<br />
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.<br />
<br />
<u>Policy Recommendations </u><br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
<u><b>Other schools and contributions </b></u><br />
<br />
<u><b>Behavioural Economics</b></u><br />
<br />
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. <br />
<br />
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. <br />
<br />
<u><b>New and Post Keynesian/New NeoClassical</b></u><br />
<br />
These schools are reinterpretations of the previously discussed school once the idea of rational expectations have been taken into consideration.<br />
<br />
<u>Contributors </u>: Steve Keene (1957 -)<br />
<br />
<u><b>Austrian School/Gold Standard</b></u><br />
<br />
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. <br />
<br />
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.<br />
<br />
<u>Contributors: </u><br />
<br />
Carl Menger (1840 – 1921), Murray Rothbard (1926 to 1995), Ludwig Von Mises (1881 – 1973)<br />
Frederich Hayek (1899 – 1992)<br />
<br />
<u><b>Reaganomics (Monetarism/Supply Side / Military Keynesianism)</b></u><br />
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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.<br />
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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. <br />
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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.<br />
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<u>Contributors</u>:<br />
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Arthur Laffer (1940 -)<br />
Ronald Reagan (1911 – 2004)<br />
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<u><b>Neoliberalism and the Washington Consensus</b></u><br />
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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. <br />
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<u><b>Return of regulation and Keynesianism post 2008</b></u><br />
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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.BT Economicshttp://www.blogger.com/profile/09719522583828296792noreply@blogger.com2tag:blogger.com,1999:blog-7932353628038480926.post-68748652115823403592014-06-07T00:27:00.000-07:002016-05-16T23:22:45.542-07:00Global Unemployment and the Islamic Solution<div style="text-align: justify;">
<b style="mso-bidi-font-weight: normal;"><u><span style="font-size: 14pt;">Unemployment & the Islamic Solution </span></u></b></div>
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This paper will attempt to investigate the phenomena of global unemployment with a focus on analyzing the root causes, and offer an Islamic alternative.</div>
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<u>Introduction</u></div>
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If we start with some facts and figures:</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·</span><span style="font-size: 7pt; mso-fareast-font-family: Symbol;"> <span style="mso-tab-count: 1;"> </span></span>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. </div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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. </div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·</span><span style="font-size: 7pt; mso-fareast-font-family: Symbol;"> <span style="mso-tab-count: 1;"> </span></span>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.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·</span><span style="font-size: 7pt; mso-fareast-font-family: Symbol;"> <span style="mso-tab-count: 1;"> </span></span>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. </div>
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<u>Types and Causes in Western model</u></div>
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<span style="font-size: 7pt; mso-fareast-font-family: Symbol;"> </span>Standard types of unemployment include :-</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Seasonal Unemployment </div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Frictional Unemployment </div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Cyclical Unemployment </div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Institutional Unemployment, including :-</div>
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Minimum Wage/Unionisation </div>
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Unemployment Benefits </div>
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<span style="font-size: 7pt; mso-fareast-font-family: Wingdings;"><span style="mso-spacerun: yes;"> </span></span>Employment Protection Laws</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Structural Unemployment</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Technological Unemployment and over supply of labour</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Mergers and Acquisitions : SME acquisition by large firms</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Regulation disproportionately affecting SME sector</div>
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There are specific factors in the current reality causing the lack of business activity vital for employment. These include :-</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Financial Crisis: austerity due to bailouts leading to higher taxation and poor demand due to lower disposable incomes. </div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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’. </div>
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Unemployment in Western Countries since 1970s has accelerated due to the following trends :-</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Off shoring production</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Increased entry of Women into the labour market</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span style="font-family: "" serif "" , "serif";">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.</span></div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Mass immigration into the developed world.</div>
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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.</div>
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<u>Proposed Solutions </u></div>
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In the mainstream discourse, the following remedies are put forward but none address the underlying systemic causes. The current remedies include :-</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Allow changing cost structure to take its course and introducing policy level incentives to incentivize companies to re-shore production.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Public / Private schemes ex g4s delivered by DWP to help long term unemployed</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Discovery of new market niches ex green economy</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Demand Side Policies: Stimulus programmes to create demand using government debt.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Supply side Policies designed to increase the productive capacity (PPF) of the economy.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Austerity programmes to foster confidence for investment</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Better regulation to make it easy for SME sector.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Focussing on education and work based skills</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Social Enterprise: Worker Co-operative model of business (ex Mondregon Corporation in Basque region of Spain)</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Diminish disparity between workers and owners</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Minimise pay differentials within organisation</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Representative decision making and better care of worker to create worker buy in and commitment.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Similar to German business model were worker welfare is catered for better.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Other capital sharing models such as Binary Economics, ESOP (employee share ownership plan)</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Assisting in labour mobility</div>
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<u>Futility of Proposed Solutions</u></div>
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<div style="margin-left: 18pt; mso-list: l3 level1 lfo6; text-align: justify; text-indent: -18pt;">
<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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.</div>
<div style="margin-left: 18pt; mso-list: l3 level1 lfo6; text-align: justify; text-indent: -18pt;">
<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>New Markets : Ex Space tourism. Automation/Technological unemployment will still pervade such new industries. Twitter for example has 400 staff generating 11 billion turnover.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Legal obstacles for heterodox models (ex social enterprise models) <span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;">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.</span><span style="font-family: "calibri" , "sans-serif"; font-size: 11pt;"> </span></div>
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<div style="margin-left: 18pt; mso-list: l3 level1 lfo6; text-align: justify; text-indent: -18pt;">
<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span style="font-size: 11pt;">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.</span></div>
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<div style="text-align: justify;">
<u>How the Islamic Economic System can resolve the Problem of Unemployment</u></div>
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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. </div>
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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!</div>
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The key offering of the IES to this ever increasing threat to global insecurity and mass labour upheaval is as follows:</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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. </div>
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<i style="mso-bidi-font-style: normal;">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.</i></div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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. </div>
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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.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Strong confidence as far as role of government in economy leading to greater longer term view, something that is vital to investment decision making.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Stable currency allowing for price stability, something that is vital for economic planning.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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.</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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. </div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>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. </div>
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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!</div>
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<span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span>Lower costs for public utilities leading to more disposable income and savings for new business ventures necessitating more job creation.</div>
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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.</div>
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7/6/14<o:p></o:p></div>
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BT Economicshttp://www.blogger.com/profile/09719522583828296792noreply@blogger.com0tag:blogger.com,1999:blog-7932353628038480926.post-44310419317006095012013-07-19T11:35:00.001-07:002016-05-16T23:22:01.147-07:00Islamic Economic System Questionnaire<br />
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">Test your knowledge of the Islamic Economic System.</span></u></b><br />
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">1) What is the view towards the private("free") market in Islam?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) Exists but not open to all property types.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) Does not exist.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) Exists and open to all types of ownership.<o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">2) What is the Islamic view on taxation?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) There is no taxation.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) There is taxation on wealth.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) There is taxation based on income.<o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">3) What is the Islamic view on inheritance?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) There is no requirement to pass property to one’s spouse and offspring.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) One can decide who to leave property to after ones death.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) There are pre defined proportions according to which ones wealth is disseminated after death.</span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">4) What is the currency model in Islam?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) Paper and digital currency that is not backed by any real asset like all current world currencies(FIAT currency).</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) Currency that can exist in electronically, paper or physical form that is 100% backed by gold and silver.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) Currency that is partially backed by gold and silver and partially exists as FIAT currency.</span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">5) What is the Islamic view about continual growth?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) The growth imperative is bad and rules seek to reduce growth or keep economic growth in line with population growth.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) Growth is vital and growth must be maintained to avoid recessions and depressions.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) There is no growth imperative and the economy adapt to a lack of growth without tail spinning into recession and rising unemployment.<o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">6) How does the Islamic economic system view public utilities like gas, electricity and water?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) These industries are available for private ownership and sale.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) These industries are owned by all the public and administered by the state for the people.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) These industries are owned by the government.</span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">7) Does the Islamic economic system experience the boom and bust cycle?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) The Islamic system experiences the business cycle as it is an inevitable part of private markets.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) The economy may experience a substantial boom or a bust from time to time but there is no cyclical pattern to such events as seen in the capitalist system.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) A boom or bust is not possible under the Islamic economic system which always experiences a steady state of growth.</span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">8) Is inflation a problem in the Islamic economic system?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) Inflation is never a problem as the currency is based on gold and silver and money printing beyond reserves is forbidden.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) Inflation can occur based on a rise in the price of goods but not as a result of excessive money printing as all money must be backed by 100% gold and silver cover.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) Inflation occurs in the Islamic economic system when goods and service production increases.<o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">9) What is the liability model within Islamic companies?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) An investor’s liability is limited to the property invested in the company.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) An investors liability is not limited by the amount invested in the company but by the proportion of capital invested.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) An investor is liable for settling liabilities in full from his or her own assets including the liabilities for other partners who have not fulfilled their obligations.</span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">10) What is the fundamental economic problem according to the Islamic economic system?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) Distribution of resources to ensure everyone has equal wealth.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) Ensuring production is increased to ensure that limited resources can be allocated most efficiently to meet ever increasing human wants and needs.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) The efficient allocation through a regulated private market to ensure wealth is adequately distributed to meet basic needs.<o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">11) What is the view towards regulation in the Islamic economic system?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) Regulation is bad and restricts the private sectors ability to generate wealth.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) Regulation is necessary to ensure markets operate efficiently and to prevent exploitation and wealth circulating amongst an elite segment of society.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) Regulation is vital for ensuring the market doesn’t allow for there to exist differences in wealth distribution.<o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">12) Is it allowed to hoard money in the Islamic economic system?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) Wealth including money is owned and the owner has the right to hoard it as a right of ownership.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) Hoarding of wealth is not permitted under any circumstances.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) Hoarding of money is not allowed unless it is being saved for an intended investment or consumption of a defined type or commodity within a predefined timescale.</span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">13) If a trade occurs and the price agreed upon deviated significantly from the market price due to a lack of knowledge of the market price by either buyer or seller, the recourse is to:</span></u></b><br />
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) Ask the trader that overcharged or underpriced to settle the difference.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) Cancel the contract and for both parties to return their respective side of the contract.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) Give the option to the defrauded party to cancel the contract and return both sides of the contracted considerations, or proceed with the trade but not settle the difference and keep the contract as it is.</span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">14) Is it allowed to lease land for agricultural use?</span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) The leasing of land for agriculture is haram.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) The leasing of land for agriculture is allowed.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) The rule depends on which crops are cultivated.<o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">15) If a company partner dies, what happens to the company that the partner was a member of?</span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) The company continues after the property of the deceased partner is disseminated to his or her relatives.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) The company technically dissolves and the remaining partners may form another company with fresh terms to ensure there is no effective break in trading.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) The company must terminate and the remaining partners are not permitted to continue the business.</span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">16) In the mudaraba company structure, with its body partner(s) and capital partner(s), is the capital partner allowed to intervene in the day to day operation of the business?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) The capital partner is allowed to intervene in the day to day running of the business as it is his/her capital that is being used.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) The capital partner can set out his terms at the outset of the contract and must then not interfere with the operation of the business.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) The capital partner is not allowed to specify his or her terms at the outset of the contract and is at the behest of the body partner who is responsible for all aspects of the operation of the business.</span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">16) In the mudaraba company structure, with its body partner(s) and capital partner(s), is the capital partner allowed to intervene in the day to day operation of the business?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) The capital partner is allowed to intervene in the day to day running of the business as it is his/her capital that is being used.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) The capital partner can set out his terms at the outset of the contract and must then not interfere with the operation of the business.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) The capital partner is not allowed to specify his or her terms at the outset of the contract and is at the behest of the body partner who is responsible for all aspects of the operation of the business.</span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">17) Can Muslims buy shares in joint stock (plc) companies?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) Islam encourages companies and trade through company structures and approves of becoming an owner in such joint stock companies.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) Islam permits Muslims buying shares only in joint stock (plc) companies if the trade is in an ethical sector.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) Islam forbids ownership in such companies due to the haram nature of the company structure.</span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">18) Is interest (riba) permitted on paper currency in Islam as the evidence forbids riba on 6 items including gold and silver and doesnt mention paper currency which is not backed by gold and silver.<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) Interest is allowed on paper currencies but not allowed on currencies based on 100% backing of gold and silver.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) Interest is allowed on paper currencies as long as it is not excessive such as the case with compound interest.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) The reality of gold and silver is that of a medium of exchange and paper currencies through analogy satisfy as a medium of exchange and interest of any type is haram.<o:p></o:p></span></div>
<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;"><o:p></o:p></span><br />
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">19) How to people wishing to invest do so in the absence of loan facilities available from private banks?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) Investors need to find people to lend money without any interest for their business project.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) Investors can ask people with money to join them to form a business and share in the profit and loss as an alternative to lending on interest.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) Investors need to rely solely on savings to finance their business ambitions.</span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">20) Is it allowed to hoard goods so that their prices increase with the intention to release the supply at a higher price to make more profit?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) Hoarding goods for this purpose is not allowed.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) Hoarding goods in this way is allowed as the trader has a right to sell and to time the manner in which he or she sells just as s/he has the right to never sell any goods or services at any time.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) This is allowed if the aim is to pass the proceeds of the extra profit this activity generates to charity.</span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">21) Will private banks exist in the Islamic economic system?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) It depends on the type of bank. Retail banks which take deposits and lend on interest will not but investment banks helping companies make investment may exist.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) All banking activities are haram and the only financial entity will be the state treasury the bait-ul-mal.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) Banks belonging to foreign countries will be allowed to operate but Muslims will not be permitted to form such banks.<o:p></o:p></span></div>
<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;"><o:p></o:p></span><br />
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">22) What is the rule regarding lost property?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) Any lost property is the right of the one finding such property.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) The rule of lost property depends on the amount found and the location of the find.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) All lost property must be returned to its owner and only were this is not possible will it go to the government.</span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">23) What does the Islamic economic system say about the division of labour, i.e. the idea that each person should focus on the work s/he is most efficient at to increase overall societal wealth?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) It rejects this idea as an innovation of Adam Smith's classical economics and prefers keeping labour general at the individual level.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) The Islam economic system acknowledges the concept of the division of labour as a self evident truth and necessity for wealth creation and is only averse to labour specialisation at the state level.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) Production specialisation is key at both the individual and state level.</span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;"></span></u></b><br />
<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">24) What does the Islamic economic system say about monopolies?</span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) Monopolies are good as they help bring down prices due to true economies of scale.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) Monopolies are not generally possible due to the limitations of scalability of Islamic company structures and most industries that lend to monopoly are not allowed for private enterprise.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) Monopolies are possible and likely and the state does not interfere with them unless they charge unreasonable prices.<o:p></o:p></span></div>
<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;"><o:p></o:p></span><br />
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">25) How does the Islamic economic system survive without conventional financial markets?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) The lack of interest based finance severely limits the ability to raise capital for entrepreneurial pursuits and people have to try to borrow without interest or save to raise capital.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) The focus on businesses is on intellectual capital and service industries not requiring physical capital.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) The finance model is equity finance based instead of debt finance so financiers join into the business and share profit and loss and this, coupled with disincentives to hoard capital and lack of interest creates incentive for capital partners and those with business ideas to come together for business.</span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">26) Do asset price bubbles, such as the housing bubble, form in the Islamic economic system?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) Price bubbles are a symptom of speculation made possible by central banks creating money from nothing and lending at artificially low interest rates and this is not a reality in the Islamic economic system.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) Price bubbles are only created when mischievous speculators seek to make short term profits in a private market and this could also happen in the Islamic economic system.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) Price bubbles are a part of price discover and nothing to be concerned about.</span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">27) Will there be consumer protection in the Islamic economic society?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) Consumers are expected to look out for their own interests and once the sale is concluded, nothing can be done to reverse or rectify any fraudulence in trade.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) There exists a specific judge called qadhi hisba who is responsible to make sure there is no cheating in the market and also products are for purpose and other judges to reverse injustice.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) The mechanism to resolve disputes is for the defrauded party to create negative publicity against the fraudulent party and his activity helps protect consumer rights.<o:p></o:p></span></div>
<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;"><o:p></o:p></span><br />
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">28) Are foreign companies allowed to operate within the Islamic economic system?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) Foreign companies are allowed to operate freely within the Islamic economic society.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) Foreign companies are not permitted to operate within the Islamic economic system but their goods, subject to certain conditions, may be imported and purchased within the Islamic society.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) Foreign companies and foreign goods are not allowed to operate or be imported under any circumstances.<o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">29) Are all products and services allowed to be traded within the Islamic economic system? <o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) The Islamic economic system allows all goods and services for which there is a demand and this is limited only by what society collectively deems to be harmful and abhorrent.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) There is a classification of goods and services into basic, luxury and harmful goods and the 3rd category, which is defined through divine texts and through its reality, is banned in public markets despite their potentially existing demand by some.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) All goods and services are permitted unless restricted by clear divine texts by name and description.<o:p></o:p></span></div>
<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;"><o:p></o:p></span><br />
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<b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">30) Market failure were private markets lead to sub optimal outcomes is minimised in the Islamic economic system through which means?<o:p></o:p></span></u></b></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">A) Government stimulus spending (fiscal policy) when markets are in recession and the private sector is contracting which makes up for the shortfall in demand</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">B) markets behave more efficiently due to factors such as government policy certainty, reliance of concepts like Rizq as opposed to 'animal spirits' reducing significantly the reliance on government meddling.</span></div>
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<span style="font-family: "cambria" , "serif"; font-size: 12pt; line-height: 115%;">C) Market failure is treated by charity from those who have wealth towards those that suffer when markets and livelihoods decline.<o:p></o:p></span></div>
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BT Economicshttp://www.blogger.com/profile/09719522583828296792noreply@blogger.com1tag:blogger.com,1999:blog-7932353628038480926.post-59637155653556537212013-05-11T01:03:00.004-07:002016-05-16T23:19:05.218-07:00Alternative Paradigm to Financialization : How Finance works in a non-Banking World<div class="MsoNormal" style="margin: 0cm 0cm 0pt; mso-layout-grid-align: none; mso-pagination: none; text-align: justify; text-justify: inter-ideograph;">
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<span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 15.0pt;">Alternative Paradigm to Financialization : How Finance works in a non-Banking World<o:p></o:p></span></div>
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<b><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Finance in a non-Banking World</span></b><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<u><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Introduction</span></u><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">The world financial system came into global focus in the aftermath of the 2008 financial crisis that saw companies such as Lehman Brothers, Bear Stearns and AIG effectively collapse under the liabilities that they had amassed.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Many questions were raised but as has happened before, such as during the depression of the 1930’s, the story we were told was that the failing was due to the degree of over sight by the regulators as opposed to being due to the core idea of the capitalist economic model itself. Therefore no root level scrutiny was ever undertaken as the core ideals of capitalist markets are taken as self evident truths and the key point for us is that the capitalist manner of achieving these self evident truths are also taken as if there is no realistic alternative in the modern age. <o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">This is however now being questioned and the debate is shifting with the help of ground breaking books such as “Capital in the Twenty-First Century” by a French economist called Thomas Piketty which attributes the wealth inequality to the Capitalist model itself and not to its improper implementation as is the current mainstream narrative. <o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">This paper focuses on the financial market element of the capitalist system and attempts to show that it leads to wealth inequality rather than as advertised to serve the requirements of genuine entrepreneurs in creating wealth for all. The paper also seeks to differentiate between the valid aims of the current financial system and those goals which are conducive to generating market instability and great wealth disparity.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">The paper will then present alternative approaches to achieve the valid aims that are sought under Capitalism. Not everything upheld within Capitalism is rejected. There are some self evident truths that are equally acknowledged and promoted in the Islamic Economic System. The key one being the benefit of the benefit of specialization or 'division of labour'. The paper will also identify the erroneous aims of the financial markets, and bear in mind that such aims are not in need of an alternative approach within the Islamic Economic model.<o:p></o:p></span></div>
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<u><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Debt vs. Equity Financing</span></u><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">The first area of comparison (and one which is a valid aim) is related to capital allocation or the role of financial markets in bringing capital into contact with business entrepreneurs to generate wealth. This is currently done to a large degree via the interest based debt model in the Capitalist system were owners of capital can loan their financial assets to people wanting to undertake business activity.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">In the Islamic Economic System (henceforth referred to as IES) the finance model is based on Equity finance as opposed to interest based debt finance. In this context, equity refers to funds available from savings as opposed to funds borrowed from banks on interest.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">The way equity finance works is capital partners ie people with money </span><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"> </span><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">typically from savings, enter into partnership with other capital partners or partners who bring the entrepreneurial aspect alone to the partnership and engage in a risk and reward sharing contract.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">A number of distinct company structures exist, such as Mudharaba, Al-‘Inan, Al-Abdan etc, to cater for the various combinations of capital and entrepreneurial partnership roles but the essential principles are the same. These are all of the Musharakah structure.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">In all such structures, profit is shared according to a ratio (pre agreed between partners) and the losses are in proportion to the capital share of the partner. There is no concept of limiting the liability of the partner. In the case of the body partner, that is the partner who only inputs enterprise without any capital, the loss is only upon the effort exerted as there was no capital investment by that partner. The company is thus formed of partners not their capital, unlike Capitalist companies where the corporate entity is formed of the capital contributions of the investors.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">The Prophet Muhammed SAW said</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "garamond" , "serif"; font-size: 9.0pt;">“The loss (<i>Al-Wadhi’a</i>) is upon the capital and the profit is</span><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"> </span><span lang="EN-US" style="color: #1a1a1a; font-family: "garamond" , "serif"; font-size: 9.0pt;">according to what they stipulated.”</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<u><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Incentives for Equity Finance</span></u><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">The question arises of what incentive may exist to bring capital into such arrangements unlike the incentive to loan money on interest or loan equity without risk to personal assets. To understand this question, one needs to consider other rules and realities in the IES, which discourage the hoarding of wealth and this ensures funds find their way to new and creative business ideas creating an environment ripe for business investment and consequently employment and wealth distribution.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">These rules include the following:-</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<!--[if !supportLists]--><span style="color: #222222; font-family: "symbol"; font-size: 10.0pt;">·<span style="font-family: "times new roman"; font-size: 7pt;"> </span></span><!--[endif]--><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"> Zakat, a tax levied on unused wealth at the rate of 2.5% payable annually.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<!--[if !supportLists]--><span style="color: #222222; font-family: "symbol"; font-size: 10.0pt;">·<span style="font-family: "times new roman"; font-size: 7pt;"> </span></span><!--[endif]--><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"> Prohibition of hoarding the medium of exchange (money) which provides a religious obligation to use </span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">the money in a productive manner. Hoarding is this context refers to storing money with no aim or <o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">objective. This is contrary to saving money for a project or specified aim with a timescale.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<!--[if !supportLists]--><span style="color: #222222; font-family: "symbol"; font-size: 10.0pt;">·<span style="font-family: "times new roman"; font-size: 7pt;"> </span></span><!--[endif]--><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"> Lack of interest bearing bank accounts or any other interest based investment vehicle, which motivates </span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">other creative forms of money investment.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<u><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">How do large scale industries cope without public equity market availability?</span></u><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">As the Islamic company structures are formed of partnership and agreement between partners as opposed to their capital. This is a natural limiting factor to how large the Islamic structures can scale as partners may be wary of the potential liabilities that may be incurred. They are also dissolved and reformed when partners leave which may limit the practicality of having partners with hundreds of partners. However they can grow as large as the capital and body partners are prepared to accept and methods such as online agreements are plausible to bring together agreeing parties.</span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">In the joint stock PLC structure, shareholders do not contract with each other, instead their share capital contracts with the capital of other investors and this enables them to grow to a significant scale as no inter-partner agreement is involved as to who can and cannot be included in the ownership of the company entity.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">This contrasts as mentioned, with the Islamic model were partners need to engage on offer and acceptance amongst each other as the company is formed of their person and not their properties.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">The question of how natural monopolies or industries such as oil and gas exploration would survive in an environment without conventional stock markets arises. Such industries often have huge start-up costs that need thousands of investors pooling their capital to make such projects viable.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">In the IES, there is a separation between private property, public property and state property and such projects fall within the purview of public and property. Public property is owned by the public at large but managed by the Islamic Government which levies a charge for the supply and maintenance of such industries. Therefore the pooling of funds still occurs via the pooling of fees and in this case for the provision of a service as opposed to for the profit motive.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<u><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">How effective will Equity Finance be ?</span></u><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">There will be far greater disposable income and savings in the IES, due to a number of factors too plentiful to list but as an insight one can consider the following:</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">The monetary unit is the gold and silver currency which will cause a stable to mild deflationary environment which will ensure incomes can easily keep pace with prices unlike the scenario we see with monetary inflation eating into the disposable income of families. Unlike in the 1950’s through 1970s, both partners often now need to work to maintain the standard of living that the previous generation enjoyed with only the male working.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">The fact that the taxpayer today is paying more and more for bailouts that the casino behaviour of the financial markets caused in the 2008 crisis and ongoing sovereign debt crisis in Europe, is another reason why we are so impoverished that most people have no savings and rely on borrowing on interest. Compounding this impoverishment is the right afforded to banks to ‘print money from thin air’ and then loan such money back to the government on interest paid back by the taxpayer! Surely it would be less impoverishing on the common man for the government to be allowed to print the money to avoid the interest payments back to the banking establishment, an idea sought by Abraham Lincoln when he devised the green back monetary unit. So the focus should be on the systemic impoverishment under Capitalism and not why the IES does not have such loan facilities.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">note: Both approaches are rejected in the IES, were money must be fully backed by Gold & Silver.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Finally, unemployment will be lower as smaller companies create more price competition and greater innovation which in turn creates jobs which translates to wealth and savings for all and this means a higher pool of investable funds to fund novel business ideas. This contrasts with the mass consolidation of business and the relative death of the SME sector which is key for job creation. This wealth concentration and job destruction has been occurring by stealth in the Capitalist model were many brands, which cunningly maintain their original brand names to create the illusion of competition are in fact owned by fewer and fewer organizations.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<u><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Why is there such a reliance on loan based finance in the Capitalist System?</span></u><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">The previous paragraph goes some way to answer this but let us probe this further.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Due to some fundamental traits that are systemic to the way Capitalism works, based on its fundamental utilitarian view, powerful entities come to dominate weaker entities within the free market system and the political class is not exempt from this.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Nowhere is this more painful than in the system which governs the supply and control of money itself.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Money, due to the covert power and subversive influence of the global banking establishment over the last few hundred years has come to reign over the system that issues currency through the adoption of the central bank model of banking. In the UK this institution is known as the Bank of England and in the US it is known as the Federal Reserve or the FED for short.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">The way these private institutions work as far as the issuance of currency is concerned leads to mass impoverishment as money is created out of virtually thin air and lent to the government on interest and paid back through taxation. So the Banks are able to take the real wealth that hard working members of society create and give back money that was created through the action of entering digits into a computer. It is of no surprise that wealth has flowed from the real economy to the virtual financial economy since this monetary system was accelerated towards this system since the demise of the gold standard.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Under the Gold standard, this would not be possible as there would be a natural anchor to the issuance of currency that would limit such powers.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">So in conclusion to this point, the prevalence of such high taxation, amongst other things, keeps the majority of the population below the level of wealth that they would otherwise reach, and as such savings are in decline and the reliance on loans are on the rise relative to what should be expected had society been free of the dictates of the global system of central banking. This cannot be said for the IES and as such we can be confident that equity finance will be an effective alternative to the debt based financial approach of capitalism.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<u><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">How are other aims of the Financial Sector realized under the IES</span></u><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">What about other functions of the financial sector that are projected as being vital for effective market participation and without which wealth to the scale seen in the west is supposedly unobtainable?</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">These functions include hedging, price discovery for various financial products including exchange rates by conducting trades through regulated exchanges and the clearing of trades through large entities (called clearing houses) that act as financial intermediaries to buyers and sellers which reduces the risk of the other party defaulting and thus encourages trade?</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">It is true that such functions encourage trade that would not have otherwise occurred. Such products are non-existent in the IES, so is this not a weakness of the IES one may ask?</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Hedging or limiting exposure to risk:</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">The exposure that is supposedly mitigated through various products, called derivatives, such as Credit Default Swaps, is exposure that is largely created by the idiosyncrasies of the Capitalist system itself and not exposure that is universal to private sector markets.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">To substantiate this, consider the following realities that are endemic to the Capitalist version of the private sector:-</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "symbol"; font-size: 9.0pt;">·</span><span lang="EN-US" style="color: #1a1a1a; font-family: "times new roman" , "serif"; font-size: 9.0pt;"> </span><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Business cycles that cause cyclical upturns and downturns in markets due to the abundance of cheap credit (FIAT currency coupled with artificially maintained low interest rates by central banks) and assets bubbles which have economy wide repercussions when prices ‘crash down’ to market fundamentals.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "symbol"; font-size: 9.0pt;">·</span><span lang="EN-US" style="color: #1a1a1a; font-family: "times new roman" , "serif"; font-size: 9.0pt;"> </span><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Weak demand due to weak confidence, which is based on irrational fears. This phenomenon was referred to by Keynes as ‘animal spirits’ and has also been called the ‘paradox of thrift’ in the literature.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">President Franklin D. Roosevelt summed this phenomenon well when he said:</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<i><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">“the only thing we have to fear is fear itself!”</span></i><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">This fickle and temperamental nature is not prevalent in the IES due to different fundamental concepts held by adherents of the Islamic belief, such as the concept of Rizq (God provided all provisions but we are obliged to seek it) which make market participants more robust and confident and not prone to such irrational herding behaviour that brings instability to markets.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<!--[if !supportLists]--><span style="color: #222222; font-family: "symbol"; font-size: 9.0pt;">·<span style="font-family: "times new roman"; font-size: 7pt;"> </span></span><!--[endif]--><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Gold and Silver based currency which avoids exchange rate unpredictability removing the need for derivative products that compensate for wild fluctuations in fiat currency based exchange rates.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Furthermore, the idea that risk can be completely mitigated through such products known as derivatives is a complete misnomer and what really happens is that risk mitigation at the scale of individual trades is building up systemic risk which causes instability in the entire system. This is a realization from the prior position, proposed in the 1990’s of the idea of complete risk elimination via such financial products, an idea embodied in the Black-Sholes model which was manifested in the business model of Long Term Capital Management (LTCM). The idea that risk could be eliminated completely was proven to be false when LTCM failed within 4 years of its adoption of this assumption. The recent credit crisis of 2008 is thus the second climb down from this position with the view now being that even partial risk elimination is at a cost of systemic risk. This would explain why Warren Buffet described derivatives as “weapons of mass destruction”.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Furthermore, the notional value of the derivative industry dwarfs the size of the real economy by a factor of 20, which proves that it is not in line with hedging risk and paradoxically, such products actually increase the risk of the underlying asset defaulting! This is due to the higher price of such insurance protection raising the market perception of default leading to selling in large quantities which can crash the price of the underlying asset that protection was sought for by those who took protection for genuine hedging purposes.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">As far as the price discovery function of financial markets for products traded over exchanges, this is not a handicap in the IES as the products that are traded in the financial markets and in need of such complex pricing models, for example derivatives and stocks or equities are not traded so we do not need to tick this box.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">However foreign currencies are traded on the international markets (known as the FOREX market) and traders in the IES can obtain foreign currency when importing goods at the spot rate as this has been permitted by the Sharia rules, so the lack of a currency market within the IES will not present issues as far as establishing a fair price for currencies needed by traders within the IES when importing goods. It should be noted that only around 3% of all currency trading is relating to import and export requirements according to the Bank of International Settlements.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">As far as the clearing house function, what happens in conventional markets is that traders, who often do not trust each other trade with what is known as a central counter party (CCP); so trader A sells to the CCP which in turn sells onto trade B. Ultimately trader A wished to sell to trader B but lacked confidence in trader B unlike the case with the CCP. This gives financial institutions such as investment banks a key role in facilitating trade and a criticism of the IES could be leveled that without CCP’s the volume of such trade would be impacted.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">What such critics fail to factor in is that such large trade volumes are usually composed of over blown financial products which are by their nature prone to the risk of default. </span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Also the Islamic ethos in the IES for honoring contracts and rights coupled with having sufficient collateral and no limitation of liability reduces the likelihood of wild speculative behavior which eliminates the need for such trade guarantees. Therefore such solutions are a fix for a problem made by the capitalist system and not a performance indicator for the IES.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Finally, it is often argued that the financial markets have managed to quell the excesses of the boom and bust cycle or business cycle through various means such as via the control of the money supply via interest rate manipulation. This may be used to criticize the IES as such a lever, does not exist as a policy option.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">The problem with this argument is that it presupposes that the business cycle is an inherent feature of private market activity. However this is far from accurate and the more accurate explanation is that the business cycle is a consequence of the interest based FIAT monetary system as cheap money by artificially created interest rates fuels false booms which burst when interest rates rise and the mal investments are liquidated.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">So this is not a valid criticism of the IES and another plaster for a cut that the IES doesn’t suffer from.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<u><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">What role, if any, will Banks have in the Islamic Economic System</span></u><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">In the IES, conventional retail banks would not exist as there is neither fractional reserve banking that allows for money to be created from nothing, nor interest based lending.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">However a bank function could be in helping capital partners meet and form partnerships structures. This is similar to one of the functions of investment banks which are involved with mergers and acquisitions helping companies grow into new larger entities however the scale of the companies will be considerably smaller than the capitalist PLC structures as mentioned above.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Also, there may be a role for them in providing a clearing mechanism to enable people to use credit cards and cheques instead of notes, which themselves are used instead of carrying physical gold and silver. This system (Sakk system) was in fact in use since the time of the Khalif Harun al-Rashid in the 9<sup>th</sup></span><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"> </span><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Century so would not be a novelty in the IES. However some of these functions could also be undertaken by the state treasury (Bait-ul-Maal).</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<u><span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">Conclusion</span></u><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">The myth we are sold is that the financial sector, despite its recent ills, is vital to provide credit which is the lynchpin of growth and wealth creation. The financial sector is thus depicted as the facilitator of the real economy which is where real wealth is created. However the reality is quite the opposite. It has grown disproportionately large; ingesting the loss of jobs from the real economy and replacing those for parasite financial sector jobs and it is now is attacking the real economy through the financial burden that has been placed on each and every taxpayer.<o:p></o:p></span></div>
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<span lang="EN-US" style="color: #1a1a1a; font-family: "arial" , "sans-serif"; font-size: 9.0pt;">The alternative must be brought to the fore of the debate so that the myth is dispelled and the masses are liberated from the financial sector octopus which through its tentacles is drawing real wealth from the efforts of the common man into the hands of the global bankers and financial elites. With mainstream attacks such as Piketty’s book now starting to unravel the historical fig leaf used to defend capitalism, the opportunity has never been so potent.</span><span style="color: #222222; font-family: "arial" , "sans-serif"; font-size: 9.0pt;"><o:p></o:p></span></div>
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BT Economicshttp://www.blogger.com/profile/09719522583828296792noreply@blogger.com5tag:blogger.com,1999:blog-7932353628038480926.post-23290357648338233242012-11-24T01:51:00.001-08:002015-05-09T12:12:38.130-07:00Economic Problems faced by the common man<div style="text-align: justify;">
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This blog is an introduction to some of the issues we face and a high level insight into the alternative vision that the Islamic Economic System has to offer. This alternative does not exist anywhere in the world today. The aim of this blog is to create awareness of a radically different economic paradigm which forms part of the wider Islamic civilization that lead the world in science, education, economy, order, justice and equality for many centuries until its formal demise in 1924.</div>
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1. House Prices</div>
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<li style="text-align: justify;">We have seen a disproportionate rise in house prices over the last 10 years.</li>
<li style="text-align: justify;">A bubble occurs when a buying frenzy pushes prices of specific commodities way above those of other goods. Such prices are not sustainable and inevitably crash down to be in line with market fundamentals.</li>
<li style="text-align: justify;">The bubble in property prices is similar to other bubbles for ex the .dot com bubble of the 90's, the food bubble of '08 and the oil price bubble that were currently seeing.</li>
<li style="text-align: justify;">Bubbles are more prevalent when there is an over supply of paper money that is created out of 'thin air' and is not based on any tangible asset like gold.</li>
<li style="text-align: justify;">Such funds tend to get channeled into speculation and many buyers cause the prices to sky rocket looking to pull out before the inevitable crash.</li>
<li style="text-align: justify;">This devastates people who have a genuine need for the underlying commodity.</li>
<li style="text-align: justify;">In Islam, money is backed by Gold and Silver and this prevents bubbles forming and for prices to constantly rise.</li>
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2. Tuition Fees and Student Loans</div>
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<li style="text-align: justify;">Governments used to pay all university tuition fees and give grants to students.</li>
<li style="text-align: justify;">Over time, governments have been living beyond their means and are now massively in debt.</li>
<li style="text-align: justify;">This has lead to a variety of measures to reduce the role of the state including funding such study.</li>
<li style="text-align: justify;">For Muslims, this presents an additional issue as the loans come with interest.</li>
<li style="text-align: justify;">For students generally this means that they often have to work and study and some students have resorted to extreme measures to help finance themselves. They also have a major liability as soon as they graduate and many find to difficult to find jobs commensurate with their education.</li>
<li style="text-align: justify;">In Islam education is a free service provided by the state.</li>
<li style="text-align: justify;">Governments do not have the option of living beyond their means by printing money.</li>
<li style="text-align: justify;">There are adequate job opportunities in the Islamic economic system due to its distribution of wealth mechanisms</li>
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3. Unemployment and lack of new Jobs</div>
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<li style="text-align: justify;">Wages have been in decline since the 1970's in real terms and personal debt has made up the shortfall.</li>
<li style="text-align: justify;">Smaller companies are responsible for the bulk of job growth.</li>
<li style="text-align: justify;">Despite the outwards appearance of diversity, behind the scenes company consolidation has been occurring and this has destroyed competition. This is a negative development as new business growth and innovation in the private sector is key for new job creation.</li>
<li style="text-align: justify;">Innovation by small business has been replaced by the acquisition of innovating firms by large firms.</li>
<li style="text-align: justify;">Technological unemployment is another factor with more and more jobs being replaced by automation.Historically the displaced jobs were reabsorbed by the services (tertiary) sector but increasingly these jobs are also being replaced by technology (ex Google car replacing taxi drivers). The long term impact of technology creeping up the job sectors and replacing jobs is that there will be mass structural unemployment as the loss of jobs to technology exceeds the ability of the economy to re-absorb such workers in new jobs in the tertiary and quantinery sectors. </li>
<li style="text-align: justify;">Coupled with increasing wealth concentration based on this trend of displacing labour, we have to consider mass growing unemployment and unrest.</li>
<li style="text-align: justify;">This will lead to extinction of the masses leaving the elites who own such technology obtaining value via their respective technology and trading goods and services amongst each other in a very elite economy. It will not be the masses who can afford the goods and services as they will not have a job and they will slowly start to grind into greater and greater servitude working for next to nothing to just survive as is the case currently were often both partners have to work just to survive. The next step will surely be de-population. </li>
<li style="text-align: justify;">In Islam the propensity for mass polarization of wealth is removed through rules relating to capital and company structures and intellectual property such that technology and its fruits will be shared more evenly so that many jobs will still be replaced but everyone can benefit.</li>
<li style="text-align: justify;">Another cause of job destruction has been off-shoring and also bubble economics once the bubbles burst many people become unemployed. The business cycle being another.</li>
<li style="text-align: justify;">Wealth is so protected by the upper classes and exempted from tax and re-circulation that the wealth forms a circuit amongst the few elites who extract greater and greater effort from the weakening working and middle classes that they resort to a live of servitude to banks and debts to make their way rather than share in the overall pie.</li>
<li style="text-align: justify;">If the wealth was unlocked, then more disposable income would lead to more creativity and business ideas and more businesses being formed and more demanded products which would trigger more purchases which would trigger more reinvestment and this would act as a positively reinforcing mechanism that would benefit everyone through a ripple effect.</li>
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4. Job Security</div>
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<li style="text-align: justify;">Increasingly we see companies off shoring jobs to cheaper and cheaper labour markets were wages are lower and employee rights are not secured</li>
<li style="text-align: justify;">This trend has arisen due to the trend towards globalization which operated at an accelerated level during the Reagan and Thatcher era.</li>
<li style="text-align: justify;">This has lead to many jobs being lost and off shored</li>
<li style="text-align: justify;">Lack of worker rights is as a result of imperialist regimes that serve the interests of the west and not their subjects</li>
<li style="text-align: justify;">Lack of jobs in foreign countries due to corrupt governments living of debts and selling resources to sustain their systems and accept IMF terms that turn their societies into states of servitude.</li>
<li style="text-align: justify;">This leads foreign workers accepting very low pay and conditions and this out prices jobs in the west leading to off shoring.</li>
<li style="text-align: justify;">Furthermore, many jobs which leave the various vertical sectors cannot be filled by higher level jobs due to lack of investment by companies facing so much uncertainty.</li>
<li style="text-align: justify;">Uncertainty is in form of prices, business cycles, long term demand etc</li>
<li style="text-align: justify;">All rights including worker rights are protected through contracts enforced through the legislative apparatus of the state. The state would not be permitted to off shore jobs in this way to countries operating such ‘sweat shops’</li>
<li style="text-align: justify;">In Islam, job creation is a by product of the way wealth flows through the economy and various rules are stipulated that ensure wealth flows and benefits all.</li>
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5. Inflation</div>
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<li style="text-align: justify;">In the West, money is FIAT meaning that it can be created from nothing and is not based on any tangible asset like gold.</li>
<li style="text-align: justify;">This leads to a tendency of printing more money that the available supply of goods and services which causes monetary inflation</li>
<li style="text-align: justify;">This endless increase and unpredictability of long term in prices leads to a poor investment climate and weakening wage purchasing power</li>
<li style="text-align: justify;">In Islam, money is backed by Gold and Silver which restrains the ability to print money and cause such monetary inflation</li>
<li style="text-align: justify;">Purchasing power is constantly increasing as there is a general deflationary effect in the society which operates gold and silver.</li>
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6. Unfair Taxation</div>
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<li style="text-align: justify;">As governments have been living beyond their means and creating ever expanding debt levels to serve special interest groups and having avoided taxation that leads to lack of popularity, the inevitable tipping point comes were the state is in potential crisis as far as the interest rates on their credit and the purse needs to tighten and austerity and taxation hikes come into effect.</li>
<li style="text-align: justify;">The imminent withdrawal of benefits for the needy will be a very painful symptom of this problem with weak and disabled people being pushed into work or face losing the social safety net</li>
<li style="text-align: justify;">Tax comes in direct and indirect ways and lead for well over 50% of income going back to the government (VAT, fuel duty, capital gains, income tax etc etc)</li>
<li style="text-align: justify;">The large companies often avoid paying tax and engage in tax evasion and tax avoidance through loopholes in tax laws. This creates a greater and greater tax burden on the ordinary citizens.</li>
<li style="text-align: justify;">In Islam, taxes are levied on wealth and this doesn’t disproportionately penalise the less privileged classes of society. This system ensures that wealth is not accumulated and instead is reinvested back into the wealth cycle which benefits all market participants.</li>
<li style="text-align: justify;">In Islam, the families of the weak act as the safety net lowering the burden on the state which only gets involved in the person has no family member obligated to supporting them.</li>
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7. Fuel Prices</div>
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<li style="text-align: justify;">Approximately 70% of the prices we pay for petrol is a tax</li>
<li style="text-align: justify;">Approximately 30% of the prices for petrol is driven by oil speculators via commodity futures trading.</li>
<li style="text-align: justify;">Large taxes such as these are not levied in Islam and speculation through the parasitic financial sector does not exist as alternative capital model exists in Islam. Credit is available through partnerships and not financial institutions such as banks.</li>
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8. Pensions Crisis</div>
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<li style="text-align: justify;">Demographic trends is leading to an ever imminent crisis with the ratio of people working to retiring shrinking every year</li>
<li style="text-align: justify;">Pension fund looting is rife in the corporate world. This will lead to massive problems for those who are reliant on such income once they retire</li>
<li style="text-align: justify;">In Islam, the demographic trend of towards population growth</li>
<li style="text-align: justify;">Investments are made by people themselves so they have transparency over their wealth.</li>
<li style="text-align: justify;">Children are a form of investment as the parent/child relationship is radically different under the Islamic family structure negating the need for the elderly to be so reliant on their own income.</li>
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9. Credit Scarcity</div>
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<li style="text-align: justify;">Credit is often very difficult to obtain unless collateral can be provided and interest rates are usually very high which discourages people from accessing credit</li>
<li style="text-align: justify;">Credit is only available with interest and this makes it impossible for Muslims to access credit despite having good business ideas. Such business ideas subsequently never reach the market place and this stifles economic activity and entrepreneurship.</li>
<li style="text-align: justify;">In Islam, due to the rules which penalise those who sit on their wealth, there is a natural tendency for people with capital to seek out people with business ideas and form partnerships. So the credit will be more accessible for people wanting to start a business.</li>
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10. Consumerism</div>
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<li style="text-align: justify;">Marketing has become a means of manipulating human emotions to switch from needs to wants and wants are based on products which have no clear connection with any underlying legitimate need. See torches of freedom, 1929)</li>
<li style="text-align: justify;">This manipulation started in the 1920's with the work of Edward Bernays, the master of Public Relations.</li>
<li style="text-align: justify;">As the nephew of Sigmund Freud, he was well acquainted with how to reach into the subconscious mind and manipulate society.</li>
<li style="text-align: justify;">Today, products are desired and sought even when people go into debt to obtain such useless items whose price does not reflect their utility or genuine value.</li>
<li style="text-align: justify;">Perceived and planned obsolescence have become ways to force consumers to buy and convince people to buy what they wouldn't ordinarily buy. </li>
<li style="text-align: justify;">Parents are under pressure to help their children keep up with the trends and this puts a big drain on their already stretched resources.</li>
<li style="text-align: justify;">In Islam, society learns to evaluate things without such manipulation of desires and for the utility of things and how this utility directly meets a need.</li>
<li style="text-align: justify;">Also, Islamic society does not build personalities were people try to impress others via displaying wealth so the drive for consumerism is eliminated from its roots.</li>
<li style="text-align: justify;">Islamic society looks down on people who spend beyond their means which further minimize the possibility of people buying commodities against their means.</li>
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11. Personal Debt</div>
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<li style="text-align: justify;">The weakening of the real value of wages has lead many to resort to debt to make ends meet.</li>
<li style="text-align: justify;">Often both partners have to work to stay afloat or many jobs are taken on by one partner. In the case of the former option, over supply of labour brings wages down further and family values suffer leading to juvenile delinquency.</li>
<li style="text-align: justify;">Destruction of unions a key factor in explaining why wages rates have fallen below labour productivity increases.</li>
<li style="text-align: justify;">Up until 1970’s, the west had a thriving middle class were one partner could work and afford all the usual luxuries that are now only possible through debt and excessive work.</li>
<li style="text-align: justify;">Rampant inflation a key factor in explaining the weakening purchasing power of wages.</li>
<li style="text-align: justify;">Other reasons include technology gains leading to excessive labour supply in service sector and also women’s liberation explaining growth of women in labour market further driving down wages.</li>
<li style="text-align: justify;">Increasing size of state has resulted in growing tax burden to fund states expansionary role leaving less disposable income and hence more reliance on debt.</li>
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September 2012</div>
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mailto: bteconomics@gmail.com</div>
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BT Economicshttp://www.blogger.com/profile/09719522583828296792noreply@blogger.com0tag:blogger.com,1999:blog-7932353628038480926.post-7808942931865440122012-11-24T01:38:00.000-08:002013-08-18T08:20:56.453-07:00Response to Timur Kuran<br />
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<b><u><span lang="EN-GB" style="font-family: Arial, sans-serif;">Response to ‘Is Islamic law to blame for the Middle East's economic failures?’<o:p></o:p></span></u></b></div>
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<span lang="EN-GB" style="font-family: Arial, sans-serif;"><br /><br />In a recent Time magazine article by journalist Michael Shuman, it was suggested that Islamic Law was the impediment for economic growth and prosperity. The basis of this claim was attributed to the work of an American Economics Professor named Timur Kuran and the reference for his work was quoted in the article as his 2010 book entitled ‘The Long Divergence’.<o:p></o:p></span></div>
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<span lang="EN-GB" style="font-family: Arial, sans-serif;">The crux of Kuran’s argument is that the structures enshrined within the Sharia limited the ability of the Islamic World to grow in line with the correspondence growth that emerged in the West during the industrial revolution.<o:p></o:p></span></div>
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<span lang="EN-GB" style="font-family: Arial, sans-serif;">The essence of the division he argues was that the West developed not only on the means of production front, but critically on the ability to form large capital structures were the resources could be pooled for large projects like never before. So essentially through the joint stock company and the peripheral institutions such as stock markets the West had the edge as the Company structure and institutions in Islam were orientated towards small partnerships and the private equity model of finance.<o:p></o:p></span></div>
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<span lang="EN-GB" style="font-family: "Arial","sans-serif";">If the end game was to have a world where the distribution of wealth was so skewed that the year on year trend, as measured by the Gini Coefficient, was heading towards greater and greater wealth concentration then perhaps Kuran’s argument holds. However this is far from what most societies aspire towards and an alternative branch and root vision is required for economic management that moves the goal posts from the paradigm of absolute growth.<o:p></o:p></span></div>
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<span lang="EN-GB" style="font-family: "Arial","sans-serif";">The economic axiom upon which the Classical school emerged was to allow the free market to maximise production and this would lead to solving the problem of distribution as a by-product. This is in contrast to the axiom of the Shariah which is to solve the issue of distribution and growth being a by-product. So to judge both solutions through the prism of the same axiom conceals the correct frame of reference.<o:p></o:p></span></div>
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<span lang="EN-GB" style="font-family: "Arial","sans-serif";">It is true that the Sharia rules relating to corporate ownership are based around the partnership model and there are natural limits to the amount of stock that can be amassed. However what Kuran fails to state is the context of this rule in the overall economic solution enshrined within the Sharia framework. To consider the correct context would dismiss the argument very quickly and to not present the Islamic argument in the native context is tantamount to indoctrinating unaware readers into a ‘sound bite’ narrative that is hardly academically rigorous to be treated seriously by anyone wanting to see an alternative vision for economic management.<o:p></o:p></span></div>
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<span lang="EN-GB" style="font-family: "Arial","sans-serif";">This context is that of the private sector vis-a-vis its scope and limits in the Shariah model. The projects that historically lend themselves to the large scale corporate entities, such as public utilities, are in public ownership and not in the private sector so the need for such public pooling of capital is not a reality in the Islamic model. These projects, which have very large setup costs, are owned collectively in the public sector and fees are taken for the delivery of such programs which are delivered free of the profit motive. This means that things like plasma TV’s, microwave ovens etc can be developed and traded in the private sector but public properties like oil procurement and refining, electricity generation and distribution, healthcare and drug research are all owner collectively through mass projects that the society as a whole pools resources towards. So the limitation cited does not hold. <o:p></o:p></span></div>
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<span lang="EN-GB" style="font-family: "Arial","sans-serif";">Furthermore one might argue that those areas left to the private sector would also crawl as far as innovation and technological progression and this would limit the ability of the private sector to growth at a rate needed for effective competition with the Western economies. This argument is predicated on large private sector entities able to generate large R & D facilities that would not be possible without the stock market model. This is a misnomer as there is baggage inbuilt within the Capitalist paradigm that at face value favours enterprise but on deeper inspection limits advancement and innovation. In particular is the concept of intellectual property.<o:p></o:p></span></div>
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<span lang="EN-GB" style="font-family: "Arial","sans-serif";">In the Sharia, there is a different concept towards ownership. Ownership is the right of disposal and this includes the right to benefit from technology developed by others. So if a company developed a technology in an area, then another company would be entitled to dissect that technology were possible, and improve it and bring to market the newer technology. This would lead to technology progressing much faster that the fewer but larger advancements made under the patent protection model. The former approach is in line with the distribution perspective enshrined within the Sharia alternative and the latter is more in line with the concentration of wealth paradigm that has caused such misery across the world were the Capitalist model has permeated to. In short more companies would be able to taking smaller bites from the pie than the fewer but larger bites taken by the joint stock companies protected by patents. The net effect would be a more rapid development to market lifecycle leading to more innovation and technological advancement in real terms further negating the need for large scale stock market centric wealth pooling. Furthermore with more eating from the pie there will be stronger demand as more are raised out of poverty and this would have a strong positive reinforcement effect on overall development. <o:p></o:p></span></div>
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<span lang="EN-GB" style="font-family: "Arial","sans-serif";">As far as the other argument such as laws of inheritance acting as a disincentive for wanting to grow companies under a family legacy even under the private equity model, this argument presupposes that concentration is desirable and wealth is the means of happiness. Clearly another offshoot of the secular Capitalist philosophical basis that has alternative concepts to fend off when the Shariah equivalents are brought to the table. <o:p></o:p></span></div>
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<span lang="EN-GB" style="font-family: "Arial","sans-serif";">So if the Islamic model was so robust, why did it fail to keep pace one may ask? <o:p></o:p></span></div>
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<span lang="EN-GB" style="font-family: "Arial","sans-serif";">The confusion between economic concepts such as company structure and physical objects and technologies lay at the core of this question. Some in the Islamic world were calling for everything to be rejected and by so doing ‘throwing the baby out with the bathwater’. As a knee jerk reaction to this others started to call for everything the west was calling for to be adopted and the hybrid that was settled upon did nothing to offer a genuine alternative able to make full use of technological advancement but not at the cost of more equitable distribution, a balance that is impossible in the liberated free market model. The lack of a coherent response was itself a symptom of the political and intellectual decline when ironically the Islamic world substituted material wealth for intellectual wealth as the basis of its strength. The complacency that crept into the Islamic world after the zenith of its strength shortly before the renaissance in the West is a more accurate reason for the Islamic world lagging behind and not, as suggested by Kuran, the Sharia itself which is as applicable today as it ever was.<o:p></o:p></span></div>
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<span lang="EN-GB" style="font-family: "Arial","sans-serif";">So what is the message for the Arab spring? The Islamic institutions and concepts need not be modernised but understood as having been the basis of the strength of the Islamic world and not the cause of its weakness. Once this is understood, the entire world will see that only the Shariah model can deliver on the twin goals of growth and distribution that has availed western theorists from the Classical school to date.<o:p></o:p></span></div>
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mailto: bteconomics@gmail.com</div>
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BT Economicshttp://www.blogger.com/profile/09719522583828296792noreply@blogger.com2tag:blogger.com,1999:blog-7932353628038480926.post-54630442762064856042012-11-24T01:32:00.000-08:002015-05-09T12:18:35.519-07:00The Capitalist Economic Growth Imperative & the Islamic Viewpoint<b style="mso-bidi-font-weight: normal;"><span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 18.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";"><br /></span></b>
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<b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Section 5 Islam’s vision regarding Growth</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Section 6 Strategic Growth Advantages of the Shariah</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"> 1 Gold Silver based Currency</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"> 4 Taxation Policy</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"> 5 Equity/Partnership financing</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"> 7 Prohibition of Gambling</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"> 10 Land Reform</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">There has been much discussion during the on-going financial crisis, on how to initiate a sustained recovery and the consensus shown by the mainstream commentators has been through returning to sustained economic growth. </span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Such is the focus in the capitalist discourse towards growth, that any program or strategy that is not able to demonstrate how compounding levels of growth can be achieved is not given credibility and hence many, such as the Turkish economics professor Timur Kuran, have written extensively showing how the Shariah has rules which limit the ability of economies to grow and hence are an impractical alternative to the current order. </span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">It is the aim of this paper to demonstrate that the current capitalist economic paradigm with its fractional reserve banking model has within it a destructive growth imperative which is on an unsustainable trajectory and to present Islam’s alternative approach to the subject. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Economic output is the volume of goods and services produced over a financial year. The measure is called GDP or Gross Domestic Product. Other measures such as the Gini-Coefficient have been developed to measure the distribution of wealth among the population.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">A coefficient of 0 suggests a completely even distribution and 1 suggests totally uneven distribution where a small number of market participants own the majority of wealth. It is worth noting that this figure is moving towards 1 in the states which adopt the growth strategy and is something the Occupy movement has tapped into.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">The disruption in continual growth in output for 2 successive quarters is defined as a recession and this is regarded as a severe harm to the economy necessitating economic management to minimize the duration of the slowdown in output. This is the essence of the business cycle which is the alternating phases of growth and contraction which have been witnessed for hundreds of years under capitalism. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">What then are the stated outcomes sought from economic growth?</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">According to all mainstream schools of Capitalist economic thought, growth in production is the solution to the fundamental economic problem facing society due to the coupling of the unlimited wants of man in relation to the limited resources available to satisfy such wants. This definition includes both needs and wants and not just basic needs. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">The thinking of the founders of the first modern economic school of thought argued that increasing production was the key to maximizing happiness for the individual. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Adam Smith, the founder of modern Capitalism, considered that if the society focused on maximizing production, this would equate with distributing wealth to the greatest number of individuals. His focus was not on targeting distribution as he felt that distribution would be a natural by-product of materialistically driven individuals all seeking their self-interest. In his book “The Wealth of Nations” Smith quotes:</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">"<i style="mso-bidi-font-style: normal;">By pursuing his own interest he frequently promotes that of the society more effectually (sic) than when he intends to promote it".</i></span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Soon it became clear that the unregulated free market approach of the Classical school of Adam Smith was good at increasing production but deficient as far as the distribution of the gains of higher rates of production. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">The next development was the neoclassical school, which emerged at the end of the 19<sup>th</sup> Century, proposing new ideas relating to value. As far as the breakthrough in the view of value and exchange, its input was to bring in a more accurate way of price formulation as far as considering both demand and supply and at the micro economic level. This had some positive impact on wages being more likely to be linked to the value that the labourer’s service provided, however no distinct policy changes were associated at the macro-economic level with the emergence of the neoclassical school as far as formal re-distribution of wealth. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Since then, new thinking came in the latter part of the 20th Century through works such as the 1956 book entitled ‘The Future of Socialism’ which argued for a new way of breaking the disparity between rich and poor by not focusing on the size of the slice but the size of the pie. The argument being the same slice of a bigger pie would give more wealth to the less privileged classes. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">We shall now turn to a discussion on the schools of modern capitalist economic thought relating to growth and demonstrate the single minded attitude of the mainstream approaches towards endless and exponential growth. These schools fundamentally differ over key factors that hinder growth through the mechanics of what is called the business cycle. It is of no surprise that much focus is thus placed on the business cycle by all capitalist schools of thought.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">A key argument is that if a theory can help minimize the slowdown in growth that occurs during a downturn in the business cycle, its policy proscriptions should be adopted by nations seeking endless growth.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">However there are some non-mainstream schools, which reject the paradigm of growth. Rejection of growth as an endless strategy was in fact advocated by the mainstream schools including Adam Smith himself and Keynes given the obviously limited capacity of the earth to sustain growth indefinitely. Renewed interest in this area was spurred by a study by a think tank called Club of Rome whose study in 1972 called ‘Limits to Growth’ argued that the ecosystem imposes limits to growth. From this have arisen branches such as those who argue for a steady state economy that plateaus after a period of exponential growth, and Welfare Economics who differentiate between good growth and bad growth, the latter being termed uneconomical growth. More extreme movements have also arisen such as the De-growth movement who argue for down-scaling production. However these are considered fringe ideas and we now turn to the mainstream view which advocates continual growth.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">2) <u>Current Approaches to Economic Growth</u></span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">The main schools can be broadly grouped into the following camps:</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">1. Classical </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">2. Keynesian </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">3. Neoclassical which includes Monetarists and Rational Expectations </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">4. New Keynesian/New Classical </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">The formulation of the classical school as stated was the overwhelming belief in the efficiency of free markets to self-regulate themselves. It was felt that the laws of supply and demand were sufficient to ensure the allocation of resources would always flow to the most worthy projects and temporary gluts would be short lived as unemployed workers would easily accept lower paid jobs to regain employment. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">It became clear very early on that in reality many market imperfections would act as impediments to this idealistic model and some type of interventionist approach by the state would be required to ease the market mechanism along to achieve this level of efficiency. Such intervention takes the form of monetary and or fiscal policy as the primary means of perpetuating the boom phase and minimizing the bust phase of the business cycle.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">The period from the work of Adam Smith in 1776 with the publication of his famous book “The Wealth of Nations” to the onset of the Great Depression following the 1929 stock Market crash in the US was the golden era of the neoclassical school which deemed there to be a minimal role for the state. It became clear after a short while that the market was unable to recover by itself and needed active governmental efforts to kick start a recovery.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Prices were declining and unemployment was rising and the market was unable to self-correct from this situation. The saviour was the British economist John Maynard Keynes who entered the debate with his influential book “The General Theory of Employment, Interest & Money” published in 1936.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">The central concept from the work of Keynes was that markets when in a downward spiral would not recover and the government needed to act as a catalyst to reinvigorate demand for goods and services through increased spending when the private sector was saving. This would however increase government deficits, nevertheless the argument was put that when times are good, taxes could be used to pay for such emergency spending for when times are bad.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">This approach, adopted by the 1933 Roosevelt administration, was so instrumental in ending the Great depression that Keynes ideas ruled supreme until the 1970’s when a new phenomenon called stagflation baffled economists on both sides of the Atlantic. This reality threw into question the policy proscription devised by the Keynesian revolution and the new saviour was the Chicago School economist named Milton Friedman whose ideas formed the Monetarist school which remained popular from the late 70’s until the high inflation induced after the end of Bretton Woods was reigned in.</span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Stagflation saw the simultaneous upward climb of unemployment and inflation. Prior to this, as depicted by the Philips curve, there was always perceived to be an inverse relationship between the two where governments could bring down unemployment at the cost of some inflation and vice versa. As far as unemployment and the supply of money, if there is inadequate money in circulation to sustain trade requirements, then traders will be unable to trade at current prices as they lack the means to conduct their transactions. This would cause unemployment as traders would be unable to trade and be forced to start laying off staff due to the lack of sales for their production.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Therefore Friedman argued that the supply of money should be kept at an optimal level to avoid either extreme. Furthermore, he advocated that there was a `natural rate of unemployment’ which the government shouldn’t take action to reduce and instead the government should try to control the money supply so that it was in line with the level of economic activity. This theory was implemented through aggressively raising interest rates to soak up the excess money supply which brought the hyperinflation of the 1970’s to an end.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Other schools such as the Rational Expectations School lead by Robert Lucas came to prominence since the mid 1980’s that added that people could no longer be tricked by the government policy tools and that they would anticipate the actions that the state’s economists would try to do and by so doing would be able to negate the intended aim of such governmental policies. For example when the government would increase the money supply economic agents would tend to bargain for higher wages ahead of time and firms would increase prices, so the effect of lowering unemployment which would otherwise have occurred, is not realized.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">This insight was not new in that Friedman also used expectations to explain stagflation by arguing that economic agents anticipate the actions of the government when the government increase the money supply and the effect of lowering unemployment does not occur as economic agents would tend to bargain for higher wages ahead of time and similarly firms would increase their prices ahead of time and this would fuel inflation above the level intended by government policy and hence would render the attempt to reduce unemployment ineffective. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Regarding the development in ideas related to rational expectations, both Keynesians and neoclassical schools reinvented themselves with new and post prefixes.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Other schools such as the Austrian School are variations of these themes and more recent contributions have come from what is known as behavioural economics which try to incorporate the physiological disposition of individual behaviour to explain the un co-ordinated and often irrational behaviour of economic agents which prevents markets behaving in an optimal self-adjusting manner. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">The final question to ponder is the issue of what the Policy differences are between the major schools. The preceding discussion is quite abstract as far as how theorists such as Keynes and Hayek, who is popularly characterized as the extreme end of the spectrum of mainstream thought, see the economic fundamentals necessary to prolong boom and minimize the bust phase of the business cycle. As far as policy, this difference manifests in the form of monetary and fiscal policy and which instrument is favoured to help return an economy that was in growth, towards growth in a downturn. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Other ways of framing this difference are also well known such as big government vs. small government or whether to regulate or ‘get out of the way of business’ a game cry of the right popularised by the ‘tea party movement' in the US. Ultimately these labels all point back to the fundamentally different views presented by the schools mentioned above.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Section 3) Monetary and Fiscal policy intervention mask Market Failure in the Capitalist Model</span></u></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">What the brief historical analysis demonstrates is the single mindedness of the mainstream and heterodox schools towards seeking growth albeit through some variation of two principle economic levers being monetary policy, including its non-conventional forms such as quantitative easing or expansionary fiscal policy </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">None of these schools however demonstrate any profound understanding of market failure and therefore rely on trying to treat the effects rather than eliminate the cause. As a result the growth paradigm is not met with any credible alternative in the mainstream discourse and growth as an imperative to keep the system afloat is treated as the only option. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">As evidence of this inability to remain immune from market failure, even with the slightest disruption to growth, the effects are severe and massive intervention or patchwork is needed to prop the frail system up for a little while longer. This delays the moment of reckoning for economy which when governed along these lines, is on an unsustainable trajectory as the finite resources of the earth are a limiting factor to endless growth. This was clearly demonstrated in the 1972 study called ‘Limits to Growth’ mentioned above. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">This is not a justification for the Islamic Economic system not having at its disposal the lever of monetary policy due to the currency model being Gold and Silver based. Neither is there much scope for fiscal policy with the exception of emergency taxation (with restricted limits), so neither does there exists any mechanism for Keynesian based deficit spending or stimulus programs as we know them. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Fundamentally, market failure explains why economies are unable to deal with falling or stagnating levels of GDP. When these failures affect the micro economy, the result can be less economic trade and hence output, than would otherwise have been the case. Or the effects can be more serious such as an economy wide recession which we all know as a downturn in the business cycle. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">The question being asked is whether these failures are inevitable features of free market activity or due to certain factors unique to Capitalism. If it can be shown that the Islamic Economic system can work in an expanding, contracting or stable environment as far as GDP is concerned, then it can be concluded that there is far less propensity to market failure and by extension there is no growth imperative in the Islamic Economic system being presented.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">If we focus of four types of market failure, this will help answer these questions:-</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">1) Counter-party risk and price knowledge asymmetry</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">2) Destruction of competition and Monopoly</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">3) Trade restricting Regulation</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">4) Labour Market inflexibility</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Let us consider each in turn:-</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">1)</span><span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 7.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";"> </span><span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Trade that would otherwise happen often does not happen, as trading parties often do not have trust in each other. Furthermore when there is knowledge asymmetry as far as knowledge of fair market prices between trading parties, exploitation may arise. The building industry is a prime example were so many potential building contracts especially in the domestic sector simply do not happen as there is so much fear of unscrupulous builders in the industry. A similar argument applies to financial trade where central counter-parties such as investment banks who were considered on the door of insolvency due to holding toxic assets on their balance sheets were no longer able to satisfy their role of being financial intermediaries or central counter-parties to trade and hence trade suffered.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">2)</span><span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 7.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";"> </span><span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Smaller companies are responsible for the bulk of job growth. Despite the outwards appearance of diversity, behind the scenes company consolidation has been occurring and this has destroyed competition. As an example the computer networking company Cisco has bought out close to 200 companies since the early 1990s.This is a negative development as new business growth and innovation in the private sector is key for new job creation. Innovation by small business has been replaced by the acquisition of innovating firms by large firms. This trend has virtually destroyed the potential for new start-ups to survive and create new jobs. Historically the trend for large scale production was to allow the harnessing of information that would otherwise be more difficult to obtain in a flatter market structure. Accordingly, information key to decision making and product development was channeled up to the highest levels within the organization and back into the production process. This analysis follows the work of Ronald Coase in his 1937 paper entitled “The Theory of the Firm”.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Now the potential to amass information exists without the macroeconomic baggage of large organizations so a fundamental rethink is required over why the economy needs such highly scaled up organizations. As far as natural monopolies where the argument is made that there is a need for large private sector companies via the PLC model to undertake the investment, these industries are publically owned in the Islamic model and run by the Islamic government on behalf of the public good. Fees can be charged for the upkeep of such services and this offsets the need for public wealth pooling via the stock markets.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">3)</span><span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 7.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";"> <span style="mso-spacerun: yes;"> </span></span><span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Two aspects of regulation work as a significant means of market failure in Capitalism. Firstly regulation that is on balance useful in protecting the less powerful often gets bypassed through loopholes and other legislative oversight and secondly much regulation is hijacked by powerful economic actors and used to penalize the weaker market players, for example creating barriers to entry, resulting in it becoming a big impediment to growth and the development of trade. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Taking the first point, in the Secular marketplace, the disposition of market participants is to maximize profit as a means and an ends and this places them in direct confrontation with regulatory frameworks which are designed to protect all market participants especially the more vulnerable. As evidence of this, one needs to look no further than the amount of financial innovation being targeted towards bypassing financial regulation. For example the Repo 105 fraud undertaken by Lehman brothers to conceal the bankrupt state of its Balance Sheet allowing Lehman brothers to take on more debt and risk exposure.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">As for the second problem, countless examples exist of how regulation is devised to aid the powerful by for instance creating barriers to entry into the marketplace for small start-ups that help consolidate the power of the few firms that become dominant in the market.This leads to an obstacle to new job creation and lost demand as there is less diversification and competition needed that would have helped create more employment and stronger aggregate demand which fosters trade in a market less prone to market failure.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">4)</span><span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 7.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";"> </span><span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Labour market inflexibility is another major impediment to achieving sustainable growth. When the economy is in recession, firms usually fire workers rather than drop salaries to the level they can afford. This increase in unemployment results in less demand which causes further layoffs as products are not being sold. In an efficient labour market, salaries and wages would need to fall until all workers could be employed and the market would clear i.e. surplus labour would be allowed back into the labour market. Due to factors unique to the Capitalist models, this failure is inbuilt into the workings of markets and the recessionary phase is needlessly prolonged and the impact on growth which benefits all citizens is severe and avoidable as will be made clear in the Islamic solution section.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">The unique factors referred to above include, but are not limited to, firstly, the constant fear of monetary inflation which is not a reality under the Islamic based Gold and Silver currency model and secondly </span><br />
employer fear of workers sabotaging production associated with worker grievance when wages are reduced.</div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">When the societal values of people are changed from the utilitarianism advocated by the champions of Capitalism</span><span lang="EN-GB" style="font-family: "Arial","sans-serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";"> </span><span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">such as Smith and Jeremy Bentham, to those of accountability to a creator of mankind namely Allah (SWT), the potential for this behaviour is significantly minimized and hence less of a factor under the Islamic model.</span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Money illusion is a phenomenon that leads workers to see the nominal wage above the real wage and this fuels the reluctance to accept lower wages despite the lower wage having the same purchasing power and the overall positive effect on the level of aggregate demand in the macro economy associated with a higher employment level. Money illusion is prevalent in all societies that see constantly rising prices as the norm with central bank intervention to avoid deflationary effects in the market. This is not the norm in the Gold Silver based system and the Islamic system is exempt from this phenomena. </span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Section 4: The destructive Growth Imperative within Capitalism</span></u></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">The current model of economics in the secular capitalist tradition is not robust enough to tolerate periods of slowdown or reduction in growth unlike the Islamic model which can flourish in a deflationary and equity finance environment due to a number of unique factors.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Another primary cause of this growth imperative is the fractional reserve based monetary system which imposes an imperative on the expansion of the M1 money supply so that debt service is possible on the current loans in circulation. In this monetary system, all money is loaned into existence and therefore all money exists as debt. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Therefore the monetary base needs to constantly grow along with the underlying growth in goods and services so as to avoid rampant monetary inflation when the money supply outstrips the growth in goods and services, and to meet interest payments, or a debilitating deflation when the money supply fails to grow in the form of new loans. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">This deflation is debilitating under the Capitalist system due to certain factors unique to it such as the fact that monetary policy becomes ineffective when prices are declining as low interest loans intended to increase the money supply are unattractive when prices are falling and the low interest rate cannot offset the inflating money. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Also debtors are penalized in a deflationary climate. The former is not a reality and the latter as shall be shown is less of a concern in an equity financing environment unlike the debt based finance model prevalent in Capitalism. Therefore to avoid a deflation, there must be a constant increase in money supply and a corresponding increase in production. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">The final argument of the anti-deflation camp is that deflation causes consumers to delay purchasing goods and this leads to contraction. This view is not held by all the Capitalist schools, for example the Austrian school is pro-deflation. This argument fails to convince when one considers the growth in industries that have seen falling prices over the last few years such as the TV industry. Furthermore the question of whether consumers would delay the purchase of goods when there is the equal possibility of their wages deflating prior to their intended purchase, rules out any positive correlation between deflation and a downward spiral in economic transactions. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">This race to produce more than is needed, under the umbrella of consumerism, as started by mind manipulators such as Edward Barnays and his ‘Torches of Freedom’ campaign, ensure that the practice of endless consumption endures. Furthermore practises such as ‘planned obsolescence’ where time bombs are built into products so as to ensure consumption and demand is constantly being recycled to sustain the fragile system, along with perceived obsolescence become the norm as far as manufacturing methodologies. This is very destructive as far as the Earths finite resources and is tantamount to stealing from the future to consume irresponsibly in the present. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">In contrast, the Islamic model is immune to the effects of crazed consumption and deflation and is thus immune from the growth imperative. The Islamic economy can yield output at variable levels to achieve the objective of providing the necessary goods and services for its citizens in a much more robust and independent way. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<b><u><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Section 5:</span></u></b><u><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"> <b>Islam’s vision regarding Growth</b></span></u><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Measurement of the economy in Islam is not driven by empirical measures such as growth, rather the purpose of the economy is to meet certain inalienable rights (including food, shelter and clothing) and enabling individuals and companies to flourish within a comprehensive and stable regulatory environment according to the Shariah law. Muslims have an obligation to implement Shariah law within the Islamic Society and an examination of the Shariah with respect to economy indicates factors highlighting its suitability in engendering growth, although growth is not the objective of the Shariah.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">With debt and off balance sheet liabilities spiraling out of control in western economies , a return to growth is seen as essential, not only to generate tax revenues to pay back loans, but also to restore growth in employment. But, with the economy so beholden to the finance industry – whether via expensive bailouts or protective legislation – and with the banks sitting on cash to bolster their weakened balance sheets, there is a significant drain on the economy. The only solution put forward has been a toxic mix of money printing and austerity. There is another way. To encourage public investment back on track requires an environment in which spending and investment is encouraged. Islam tackles this in two ways. Firstly, by removing all interest based investments, and coupling that with laws preventing the hoarding of wealth/money, society will naturally seek returns on capital via business investment. Consequently, the Islamic company investment market in an Islamic society is very vibrant and participants share in risks and rewards with investment dependent upon actual participation in the company rather than anonymous “trading” in/out as espoused by western markets. </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">A second key element is the taxation system which taxes heavily un-invested capital, providing another incentive for full investment.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Core characteristics of the economy within the Islamic Society includes a stable currency based on gold and silver bullion, no interest allowed on any transaction, prohibiting the hoarding of wealth coupled with wealth based taxation and equity/partnership rather than debt based financing.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Of great importance is circulation of wealth amongst all in society, with incentives for investment and strong dis-incentives for hoarding maintaining the momentum and velocity of the economy.</span></div>
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<b><i><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">"In case it (wealth) circulates solely among the wealthy from amongst you." [Translation of the meaning the Quran surah Al-Hashr, 59:7]</span></i></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<b><u><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Section 6 Strategic Growth Advantages of the Shariah</span></u></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">12 distinguishing characteristics of Islam with respect to growth:</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">1) <b style="mso-bidi-font-weight: normal;">Gold/Silver</b> <b style="mso-bidi-font-weight: normal;">based currency</b> </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The currency is fully administered and managed by the treasury (Bait al Mal). The state is obliged to back 100% any issued currency notes (with physical gold and silver) – no fractional banking is tolerated by Shariah and gold/silver reserves are fully open to public audit. As a consequence fractional reserve banking is not allowed within the state and no growth of money (open market money creation) via banking groups or the state is tolerated. Money is treated as a medium of exchange and consequently is not a monetary tool for banking interests. With monetary supply dependent upon wealth within the state, currency induced inflation is minimal and cannot reach levels seen during the 1970’s for example when the US took the world unilaterally away from the gold standard in 1971. Historically the level of inflation and deflation under the gold standard was low and within a 2% variation (not more than 2% inflation or deflation) </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Maintaining currency stability and the absence of high levels of inflation is a key requirement for business. The volatility of fiat/paper based currencies, particularly where governments engage in aggressive monetary easing due to excessive spending runs directly against the needs of business.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Inflation from the viewpoint of price instability, is harmful as business proprietors cannot calculate prices and hence do not undertake investment given uncertainty towards costs, sale prices and profitability. Under the gold standard, prices are more stable over the long term leading to a more stable environment for investment decision making. Businesses struggle to plan and gain investment within high inflation environments.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The passing of power to central banks to enable manipulation of the money supply in recessionary times risks uncontrollable inflation. The recessionary business cycle in which a fiat currency/fractional reserve banking environment is a factor through inflation risk, adds to business uncertainty and can delay the growth cycle.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Lastly gold and silver is the ultimate currency and physical gold and silver (not paper based investment products) have no counter-party risk.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">2) <b style="mso-bidi-font-weight: normal;">Non Interest Economy</b></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Islam forbids all usurious (interest) based transactions. </span></div>
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<b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">“Whereas Allah has permitted trade but forbidden usury (interest)” </span></i></b><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">[TMQ Al-Baqarah 2:275]</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The provision of interest across most financial transactions acts as a form of taxation, it is an additional cost and consequently is a drag on profitability, investment and growth. Rather than equity/partnership based investment the interest/debt model popular in western economies has meant that banks and finance providers can not only create money from nothing (fractional reserve banking) but can charge interest (expense). </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Furthermore via collateral lending, lenders can guarantee virtually risk free returns via the requirement for valued assets to be put up as collateral against non payment of principal and interest.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">As all fiat money exists as debt, then the need for interest payments on debt necessitates an ever increasing expansion of the money supply to keep the system afloat. This drives a corresponding increase in the growth in the production of goods to avoid hyperinflation resulting from too much money in relation to goods. In the ten years prior to the financial crisis of 2008 over 100 Trillion dollars of money (debt) was created, the deleveraging of this debt is continuing to this day and acts as an anchor against economic recovery and growth. </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The enabling of banks to set interest rates and then bet on the movement of such rates is manipulative and runs counter to the notion of open markets. The LIBOR (London Interbank Offered Rate) scandal highlighted the damage caused to market confidence and the record levels of fines indicated the seriousness of this damage. Such manipulation of markets is not possible where interest in all forms is forbidden.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Despite steadily decreasing interest rates in the Japanese economy - an indication that policy makers recognize that interest is injurious to growth - growth has been been elusive over the past 20 years. Current attempts by the US and other central banks (for example the UK) to steadily reduce interest rates to generate growth through lowering the costs of borrowing clearly show that interest is costly to the economy. </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">It is strange that governments now are close to a zero interest rate policy – given to some banks – whereas a zero interest rate policy for all borrowers is not adopted.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Having brought significant numbers of investors into government bond markets who depend upon interest to provide investment returns including significant pension assets, those investors are now suffering with tiny returns as interest rates have been reduced to close to zero for government bonds (and are less than inflation – negative real rates). Current typical asset allocation for pension funds is 40% invested in interest bearing securities. Gillian Tett, deputy editor of the Financial Times called this “financial repression” against these bondholders (<b style="mso-bidi-font-weight: normal;">28 Jan 2013 Newsnight, BBC</b>). If the whole system was based upon equity/partnership returns rather than interest as advocated by Islam, then the consistency of investment approach would provide greater certainty and stability based on business profitability rather than variable interest rate returns.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">3) <b style="mso-bidi-font-weight: normal;">No hoarding of wealth</b></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">A key element of financial management in Islam is the requirement that wealth is not hoarded. </span></div>
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<b><i><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">“And those who hoard gold and silver and do not spend them in the Path of Allah then announce to them a painful torment” </span></i></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-bidi-font-style: italic; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">[TMQ 9:34]</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">With interest based economies and the associated bust and boom cycle means, wealth is alternately readily available for investment in times of growth and withdrawn from investment in recessionary times. </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">A consistent environment for growth in the economy requires a consistent flow of wealth into the economy for investment. The interest based banking system is dominated by banks which provide liquidity when it suits them and withdraw capital when deleveraging as in the current cycle. When felt not to be profitable banks will not lend money and this forms obstacles to the circulation of wealth and a return to growth in the economy.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Furthermore, taking money out of circulation leads to a heavy taxation penalty upon the perpetrator.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">4) <b style="mso-bidi-font-weight: normal;">Taxation policy</b></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Islam maintains a wealth and productive capacity of the land based taxation system which encourages full investment and a rapid circulation of wealth.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The plethora of taxes imposed on the public in western economies is a great oppression. Islam has a simplified approach, which is predominantly based on wealth as opposed to income tax. By focusing upon accumulated wealth which is not invested (<i style="mso-bidi-font-style: normal;">Zakat</i> at 2.5% per annum), taxes on the productive capacity of the land (<i style="mso-bidi-font-style: normal;">Kharaj</i>) and head taxes (<i style="mso-bidi-font-style: normal;">Jizya</i>) for those who can afford them, the State is encouraging work/enterprise and investment, and discouraging the withdrawal of wealth from circulation, exactly the conditions which bank/debt dominated western economies are suffering most from. Inevitably, the consequence is a smaller footprint for the state which coincides with the general perception that governments in the western world have taken on too much responsibility (and high budget deficits) and are stifling recovery with ever higher taxes—taxes which fall unevenly on the poorer via income and consumption taxes.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">With little or no disincentive from taking wealth out of circulation, banks, large corporations, and wealthy individuals will hold onto wealth and perpetuate the dis-investment cycle. Contraction in business, fewer jobs and further declines in government taxes results.</span></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">5) Equity/Partnership rather than debt based financing</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Capital markets in the Islamic Society are dominated by partnership and company formation in which the key features are: offer and acceptance, defined profit and loss sharing between investors/partners, a specific corporate body (not anonymous share ownership), and no limited liability. Additionally there is no organized share trading market (stock market), as transfer of ownership must be agreed between owners on a case by case basis. As a consequence the ownership and management of companies is tightly controlled and all partners/investors have specific responsibilities rather than the often anonymous and opaque ownership structures in western markets.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Whilst large companies can form under Islamic company governance rules, most of the largest projects including management of public resources such as oil, gas, water and electricity are administered by the state. With no corporation tax or business taxes and only zakat payable on certain of the business inventories (including livestock) there is no little incentive for business formation and growth. The requirement for all partners/owners to agree in the formation, objectives, profit disposition and other major decision making ensures direct accountability and closer association with the running of business, rather than that detached ownership model driven in the secular stock markets, where employees (company Directors) can take decision largely separate from day to day review and the active oversight of shareholders.</span></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">6)</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"> <b style="mso-bidi-font-weight: normal;">Absence of</b> <b style="mso-bidi-font-weight: normal;">limited liability</b></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Leading to more measured risk taking.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">A necessary requirement for all company formations in Islam is the existence of partners/owners who take full responsibility for all transactions/contracts entered into. Losses are apportioned to partners/owners in the proportion of capital invested in the business. This contrasts with the excessive risk and borrowing approach adopted by the large Wall Street banks. Large Wall Street banks who regarded themselves as ‘too big to fail’ i.e. operated with the knowledge that their liabilities would be covered by the taxpayer in order to avoid systemic collapse. At the height of the financial crisis large US banks balance sheets were more than 40 times levered. Shareholders are not technically responsible for all commitments of these companies with limited liability. </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The consequent bailouts of these banks have placed immense burdens upon taxpayers and the economies of these western countries. Bailouts in the UK alone have amounted to more than £1.2 Trillion greater than the size of UK yearly output. Under Shariah the State and its leaders are not authorized to bailout any failed companies. </span></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">7) Gambling is prohibited</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">No Derivative or virtual economy leading to massive volatility in financial markets and which have spilled over into the real economy. Much of the need for many of the financial products that act as insurance to the volatility of the current economic approach is negated as the same degree of uncertainty does not exist with the Islamic economy.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The role of Goldman Sachs in the problems of Greece is adequate to demonstrate how such manipulation is possible through the use of these complex financial instruments that often beat the ability of regulators to understand in time. </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Gambling and derivative contracts also add nothing to the economy but heightened counter-party risk. As winning and losing bets are between respective parties it is often felt that the economic impact is neutral, however the counter-party risk of a bank failure, and an attendant domino collapse was highlighted at the time of the collapse of Lehman brothers in 2008. The taking on of risk equal to more than 20 times the size of the world economy owes more to a drive to earn greater fees and earnings rather than a reduction in risk. One commentator likened the market to a 40 pound flea on the back of a 4 pound dog, with the dog now dying. </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">8) <b style="mso-bidi-font-weight: normal;">No intellectual property rights</b> </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Rapid technological innovation with improved distribution.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">It is argued that intellectual property i.e. patent protection is vital to create entrepreneurial drive, as without knowledge protection, there is insignificant incentive to develop innovative productive science. In Islam knowledge is purchased along with the purchase of the good or service as far as this knowledge can be obtained. This means that many firms can develop on existing knowledge and bring the new innovations to market quickly, leading to rapid increments to innovation. This approach negates some of the limitations in development of commercial projects on the same scale as the capitalist PLC companies. </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">9) <b style="mso-bidi-font-weight: normal;">Flexible labour markets where wages are able to adjust to deflationary environments</b></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Efficient markets due to sound concepts of value and <i style="mso-bidi-font-style: normal;">Rizq</i> (God given provision) </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">A significant factor in explaining why recessions occur is due to market pricing failure. Employers do not drop wages and salaries to levels necessary to ensure that they can keep their existing staff employed. Instead they prefer to preserve fewer staff at current wage levels. However this increases unemployment and is very damaging for the wider macroeconomic environment due to a decrease in aggregate demand at current price levels.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The reason why dropping prices or deflation is considered a great evil under Capitalism is due to unique factors which do not exist in Islam. Firstly, monetary policy becomes ineffective during deflationary times as banks would need to pay interest on the loans they issue to incentive borrowers to borrow money, which means borrowing declines and monetary policy becomes ineffective. Secondly, existing debtors are penalized in deflationary environments as the value of their debts increase in real terms. This reality also does not exist in Islam as borrowing is not the norm instead equity investment is the prevalent mode of finance. </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Money illusion is additionally a key reason why workers are averse to pay cuts despite their not being any worse off in real terms as lower wages in an environment where prices are falling does not equate with a lower standard of living. In this regard, the Capitalist theorists failed to capture the real essence of the meaning of value as far as separating it from money as a gauge and this has led to a disconnect from seeing value, in this case the value of wages, away from the prism of the nominal amount and hence this irrational attachment to the nominal amount of wages and salaries being the paramount consideration in wage negotiation. Furthermore the fear of monetary inflation is never far from the fear of deflation and this further disincentives workers from accepting pay cuts. </span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">As these factors do not exist in the Islamic model, there is no reason to suspect that workers will be averse to having flexibility in wage negotiation and hence offers a much more versatile and robust feature to the economy.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">10) <b style="mso-bidi-font-weight: normal;">Land reform</b></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The Quran stresses:</span></div>
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<b><i><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">“In order that it does not make a circuit between the wealthy” [TMQ Hashr 59:7]</span></i></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">The aggregation of vast land tracts into the hands of a few has led to widespread poverty amongst the masses. In the US, 15% of the population now depends upon food stamps for basic food needs. Land ownership in one of the largest and most fertile countries in the world is but a dream for most, as it sadly is in most of the Muslim world, as Islamic law is not currently applied. Shariah law in this regard is very dynamic and enables widespread ownership amongst the many. If land is not utilized for a period of 3 years, it reverts to the State and will be re-allocated to those that will use it. Any member of the public can claim dead or unused lands, and leasing of lands by those that cannot utilize it directly is forbidden. This coupled with strict restrictions against any form of price fixing translates into dynamic land utilization and far wider participation in the core wealth of the land.</span></div>
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">11) Ethical trade and trader rights</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">In Islam, there are numerous rules and provisions which ensure traders feel confident that either contracting party will not be subjected to any form of exploitation and in the event that this has happened, to have fair and decisive redress in the form of annulling of the contract. Therefore market failure due to knowledge asymmetries is not a reality in Islam. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">Furthermore the Prophet said as narrated</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";"> from Muhammad ibn Yahya ibn Hibban: </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">“If you purchased say there is no deception, then in</span></b><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";"> <span style="mso-bidi-font-weight: bold;">every commodity you purchased you have the choice after three nights to accept (the commodity) and thus hold it or to return it back to its owner.”</span></span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-bidi-font-family: Calibri; mso-bidi-font-weight: bold; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">This is conditional of their having been ignorance on the part of the buyer or seller as to the market price and the deviation from the market price being excessive. Under such an environment, traders will be more forthcoming to trade, knowing that a fair mechanism to seek redress exists. Trade can be expected to flourish under such a business friendly environment. This is just one example of the rules, further examples of the business friendly principles can be found on pa</span><span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">ge 22 of ‘Economic Thought of Al-Ghazali’ by </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-bidi-font-family: Calibri; mso-bidi-font-weight: bold; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman";">S. Mohammad Ghazanfar and Abdul Azim Islahi.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">12) Regulatory framework In Islam</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">Regulation in Islam aims to foster a safe and productive environment where wealth that is generated can be more equitably distributed than the current Capitalist economy. It is not a means of creating entry barriers for small business or allowing favours to be granted by the political structure in response to lobbying and other underhand means.</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">One may argue that the goals of regulation, namely to curtail open trade, are inherently in conflict with the goals of traders who are profit seekers and as such they will always have a limited ability to achieve their desired aims. In Islam, as wealth procurement is not the ultimate aim in life, as is earning the pleasure of Allah, such frictions have no reality as both the wealth and the means to obtain it lie firmly under the domain of the individuals desire to adhere to the Shariah rules which manifest this goal in life. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span lang="EN-GB" style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-GB; mso-fareast-font-family: "Times New Roman";">As far as the second concern highlighted above, there is no possibility of lobbyists creating a biased agenda for regulation to protect the few dominant players as the rules are clearly defined by the Shariah rules. Furthermore many rules are aimed at aiding traders to enter markets to create a healthy competitive environment for sustainable growth unlike the regulations which penalise small businesses and lead to substantial barriers for entry. </span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">Conclusion</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">There is a growth imperative within the capitalist solution and this permeates all mainstream Capitalist schools of thought. This growth imperative is leading to an implosion of the current system given the finite and rapidly diminishing resources of the world, which are to be used to try and meet the demands of compounding interest and ballooning derivatives gambling. The world is ready for an alternative root and branch vision based on the unique solution offered by the Islamic alternative and it is the aim of this document to start laying the framework for the debate so that one can enter it with effectiveness.</span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">This alternative will show how the economy should function and grow through sustainable practices so as to attain a more equitable distribution of wealth. It will offer an approach with the correct balance of savings, investment and consumption to achieve real wealth for all. The Islamic economy is not founded upon forced re-distribution of wealth in efforts to drive some form of equality, nor completely un-regulated markets where strong corporate interests can dominate the economy. The Islamic economy focuses upon a clear and consistent set of rules which are consistently applied across society. The emphasis is upon ensuring ownership of land far and wide and low tax to encourage spending and investment. The results throughout history of the Islamic Government (Caliphate) has been one of widespread circulation of wealth to ensure all can benefit from it, rather than a divisive accumulation of wealth in the hands of the few.</span></div>
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<span style="font-family: "Arial","sans-serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">February 2013</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";"></span></div>
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<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-fareast-font-family: "Times New Roman";">mailto: bteconomics@gmail.com</span></div>
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<br />BT Economicshttp://www.blogger.com/profile/09719522583828296792noreply@blogger.com4tag:blogger.com,1999:blog-7932353628038480926.post-8393123207964404292012-11-24T01:24:00.001-08:002016-05-16T23:13:07.864-07:00Stimulus or Austerity, is there an alternative?<span style="font-size: x-small;"></span><br />
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<b><u><span style="font-size: 10pt;">Stimulus vs. Austerity. <o:p></o:p></span></u></b></div>
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<u><span style="font-size: 10pt;">Structure:<o:p></o:p></span></u></div>
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<span style="font-size: 10pt;">Section 1) The Origins of the current Problem.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">Section 2) Current solutions.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">Section 3) Theory and practice for the Current Solutions.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">Section 4) The Contest for global economic leadership.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">Section 5) Market Failure & the Islamic Alternative.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">Section 6) Conclusion.<o:p></o:p></span></div>
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<b><u><span style="font-size: 10pt;">Section 1: The Origins of the current Problem<o:p></o:p></span></u></b></div>
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<span style="font-size: 10pt;">The US housing market which started to collapse from around 2007, started a chain of events which included a sovereign debt crisis affecting many economies of the West. In reality it brought out systemic flaws in the entire system.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">In essence governments, corporations and individual consumers had been living beyond their means by engaging in excessive and unsustainable borrowing. This was possible due to central banks setting very low borrowing rates, an ability they have due to their legal right to increase the money supply by creating money out of ‘thin air’. This encouraged reckless borrowing for unsustainable and damaging purposes such as speculation in the housing sector. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">The results of the cheap credit include such phenomena as price bubbles where the price of certain items inflate way above the general prices of things. These are things that speculators target for making a quick gain. An extreme example was the Dutch tulip bubble of the 1630’s where the price of a single bulb of some varieties of tulip rose to 3 times the annual salary of a skilled craftsman. Modern equivalents are the dot.com bubble of the 1990s, the housing bubble that proceeded it and the food bubble of 2008 and the current Oil price bubble were prices are at least 30% driven by speculative forces.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">Government had also spent too much when times were good and were not in a position to sustain further borrowing when credit markets started to dry up as the interest rates started rising due to the shortage of credit. The credit market dried up as financial institutions didn’t trust each other and short-term inter-bank lending and borrowing which is a key factor in the lending market came to a crawl.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">For households, the fact that people couldn’t further the practice of borrowing and spending, market activity started to decline due to falling levels of demand. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">For firms, as demand was affected and credit became more expensive and difficult to obtain, then potential for growth and investment became none existent. This dampened the prospects of businesses to take on credit and expand investments, assuming they even wanted to in such an uncertain climate.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">The net result of these developments was that economic activity started to decline and many felt that the current path could not be expected to self correct and some type of government intervention was deemed necessary by many leading economist. Others disagreed and believe that the countries needed to tighten their finances at all costs and for government to effectively ‘get out of the way’ so that the market can self correct itself out of the situation. So there are 2 dominant and polarized views within the capitalist mainstream discourse. <o:p></o:p></span></div>
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<i><span style="font-size: 10pt;">Note: even within the free market and small government camp there is disagreement over the degree of government ie regulation that is good. Consensus seems to be that financial sector needs to be regulated{see Vickers report(UK), Dodd Frank(US) }<o:p></o:p></span></i></div>
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<span style="font-size: 10pt;">The remainder of this article will analyze these contrary positions and offer an Islamic viewpoint towards them and the underlying cause of why we are where we are.<o:p></o:p></span></div>
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<b><u><span style="font-size: 10pt;">Section 2) Current Solutions?<o:p></o:p></span></u></b></div>
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<span style="font-size: 10pt;">The current solutions to address these issues are known as by the terms stimulus and austerity. The US has adopted the stimulus route whereas the weaker Europe countries and Britain have adopted the austerity route.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">A simplified explanation of these approaches follows. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">Stimulus entails increasing government spending using money that is borrowed primarily from abroad in the case of the US from countries such as China, or simply created by central banks literally by entering digits into a computer. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">The idea is that when markets are contracting, consumers are not spending, companies are not investing; then the government needs to make up for the missing demand. This entails creating paying for new jobs and engaging in various projects to jump start a recovery in the economy. The belief is that this recovery will self sustaining after the government withdraws its intervention. The government would then recoup its prior spending through higher taxes when things pick up when recovered firms and households can pay more in taxes. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">This government spending is referred to as fiscal stimulus. Fiscal describes a government’s taxation and spending policy. The argument is that for every pound the government spends, the income the recipient will receive will be re-spent and the ultimate result will be more consequential spending in the overall economy than the initial pound spent. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">This effect is known as the fiscal multiplier effect and is measured as a ratio to the initial spending. So a multiplier of 1.5 means that for every pound the government spent on projects, then it will increase overall demand in the economy to the tune of 1.5 pounds of additional income in the economy once the money has reverberated around the economy and caused a chain reaction of spending. In the US the </span><span style="font-size: 10pt;">American Recovery and Reinvestment Act of 2009 was the implementation of this strategy. In the UK, this is what Ed Milliband is referring to when he calls for Plan B.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">Austerity on the other hand entails government attempt to reduce the government deficit and create an environment when businesses can help themselves out of the situation. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">The argument of this camp is that govt spending programs aka fiscal stimulus programs are ineffective and don’t lead to a self sustaining recovery or kick start and just delays the recovery. Therefore advocates of austerity argue that countries balances need to be corrected and the government needs to get out of the way of the private sector so it can grow its way out of the debt and recession it is in. This correction is in the form of reducing spending, shrinking the size of the government by controversial actions such as annexing public sector jobs as we have seen in this country, and removing cumbersome regulations which slow down companies in their pursuit of investment and expansion, such as the reform of planning regulation in the UK.<o:p></o:p></span></div>
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<b><u><span style="font-size: 10pt;">Section 3) Theory and practice for Stimulus and Austerity<o:p></o:p></span></u></b></div>
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<span style="font-size: 10pt;">The austerity camp argue that people react negatively to stimulus spending as they realize that government spending now will need to be paid back through higher future taxes and start saving for such a situation, a phenomena called Ricardian Equivalence and proposed by George Osborne.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">They also argue that when the government borrows heavily and spends, the effect of this borrowing is higher interest rates that occur as a result of the government borrowing as it reduces the supply of available credit which pushes up the cost of borrowing. Private sector investment thus shrinks as loans become more expensive and the private sector is denied the opportunities that would otherwise avail it. This phenomena is called ‘crowding out’ of the private sector who its argued suffer as a result such higher borrowing costs.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">The stimulus camp (tied strongly to the Keynsian school of thought)on the other hand believe that markets rise and fall on waves of optimism and pessimism and during periods of pessimism people feel that the future is not stable and start to save and this creates a death spiral as the more people save, they less they consume and the less they consume the less demand there is and businesses start to fail as nobody is buying and layoffs and unemployment increase which positively reinforces the downward spiral even further. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">They argue that only government can be relied upon to break this death spiral when all else fails and halt the decline and kick start what becomes a self sustaining recovery. This is through increased spending on projects such as building roads and creating public sector jobs. The rational is that every pound paid to a worker will be spent and the net gain is greater than the original pound creating a multiplier effect that acts as a snowball that the free market then feeds of until a self sustaining recovery results. The justification in the government funding the initial explosion of spending is through higher future taxes when times are good and the boom is creating greater tax revenues that can pay back the debt created now.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">The austerity camp in fact argue that the problems we are in are the direct result of previous government meddling in the economy in the first place and had the government stayed on the fringes were it belongs, the problem would not have existed.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">The last time the economy was as bad as it is currently was the Great Depression which lasted for approximately 16 years in the US from the beginning of the 1930s to end of the second world war around 1946. It was also a global economic breakdown affecting the entire industrialized world at the time. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">In very broad terms the Great Depression is similar to the current Great Recession as it is known in that there was a collapse in the New York stock market in October 1929 and according to the Keynesians (the stimulus camp) the recovery didn’t result until the government stepped in under the leadership of Franklin D Roosevelt with his massive spending programs known as the New Deal. So according to this version of history the free market failed and should not today be relied upon to self correct and only a modern stimulus ie government spending spree is required. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">It is not true that government intervention including spending was the catalyst for ending the Great Depression as Roosevelt predecessor who was Herbert Hoover engaged in many interventionist policies including government spending to no avail. In fact there was evidence that many of his interventions such as minimum wage legislation exacerbated the problem and had the market been allowed to self adjust, then the recession of the 30s would have been as short lived as the less known recession of 1921 which lasted around 2 years which had far less government interference. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">In a book called Depression, War and Cold War by Robert Higgs, Higgs offered a better explanation of what ended the Great Depression and it was confidence in the private sector towards the economic climate and the end of what he termed ‘regime uncertainty’ that restarted the economy in the 1940’s. This is quiet significant as advocates of stimulus programs generally point to the stimulus programs of Franklin Roosevelt as the trigger to ending the depression and the only viable solution today by direct inference.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">Does this mean that the free market and a small government role is the best solution? It is the aim of the concluding section to demonstrate that the Islamic free market and not the free market under the capitalist model is robust to self heal and in fact far less prone to sink into this abyss in the first place. <o:p></o:p></span></div>
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<b><u><span style="font-size: 10pt;">Section 4) The Contest for global economic leadership.<o:p></o:p></span></u></b></div>
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<span style="font-size: 10pt;">Today there is much debate as stated between the best approach with policy makers in the US adopting a stimulus approach whereas the European and UK are adopting the austerity and market route. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">In 2010 at the G20 meeting in Seoul for example there were stark exchanges between the Germans and the Americans as to which is the best route for the future of the global economy. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">Merkel along with the majority of the other countries including China and Japan were suggesting the unsustainable growth model of the US with its cheap credit and debt fueled growth from the governments perspective using stimulus funds was obsolete. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">Her finance minister described American policy as ‘clueless’ and said the American growth model is stuck in a deep crisis. “The USA lived off credit for too long, inflated its financial sector massively and neglected its industrial base.” Note here that stimulus entails living of credit hence the link between the statements and the stimulus policies of Obama.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">In conclusion, Stimulus just props up government and service industry jobs which die off when the stimulus is withdrawn leaving a large tax liability with nothing to gain. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">The analogy to understand the stimulus narrative is that of the ‘Broken Window Fallacy’. According to this, if a shopkeeper has his window broken by a vandal, then he needs to hire a glazier to fix the damage and the money the glazier earns is re-spent in the economy on say clothes and the retailer who sold the clothes will re-spend the money on restaurants and a chain reaction starts as a result of the initial vandalism who is the hero in this story. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">It ignores the fact that the shopkeeper may have been saving to buy a suit and now this purchase will not happen so in effect the spending has been redirected and there is no new spending that has resulted in this chain of events. The government spending is likened to the act of the vandal as if the government like the vandal has kick started spending that would not otherwise have happened. In reality it is special interest groups that benefit from this redistribution as the beneficiaries of these stimulus projects.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">It is difficult to answer conclusively as to which camp is right as each camp relies on often complex assumptions beyond the reach of other than experts and hence many counters can be made on both sides. For example the stimulus camp would argue that the vandalism of the window will force the shopkeeper to spend at a time when he would otherwise save and not engage in market activity. They also argue that the government spending doesn’t raise interest rates under certain circumstances (known as the liquidity trap) so the crowding out phenomena doesn’t occur. Finally they suggest that the situation would have been much worse had they not engaged in stimulus spending and although job growth may be small or negative, it would have been more negative without stimulus. So its not easy to prove either way hence the reason this debate survives to this day. However in the medium to long term, the evidence demonstrates that there is no positive correlation between govt stimulus and increase in GDP so clearly the increase in GDP is only as long as the government is engaged. Needless to say the stimulus camp argue that the reason there is no correlation is due to the stimulus not being big enough!<o:p></o:p></span></div>
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<span style="font-size: 10pt;">Therefore a new and fresh angle is needed which can sidestep such endless and ongoing technical debate resting on complex assumptions. This alternative angle which will conclude this presentation.<o:p></o:p></span></div>
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<b><u><span style="font-size: 10pt;">Section 5) Market Failure & the Islamic Alternative<o:p></o:p></span></u></b></div>
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<span style="font-size: 10pt;">The question to ask is why is there a hole from which to climb out of through either stimulus plans or austerity programs in the first place? Surely if the market was efficient then we would always be relatively immune from these dire circumstances and not in need of these drastic remedies.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">So how would an efficient market work?<o:p></o:p></span></div>
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<span style="font-size: 10pt;">In any market, there is a balance between supply and demand. If the supply increases then the price declines. Conversely if the supply decreases the price increases. The same applies to increasing and decreasing demand as far as its effect on price. If the market is left alone, then the price will be free to move up or down to ensure all products are priced at the level at which everything is sold i.e. the market clears at this price.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">Take an example for the price for labour services were many people are unemployed. If the workers accept lower wages, then more workers would be employed and this would help the economy stay strong.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">It is my assertion that only the Islamic model works in this efficient way and is the real preventative solution to the problem highlighted. The question arises of why markets fail in the current man made approach to economic management? <o:p></o:p></span></div>
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<u><span style="font-size: 10pt;">Market Failure under Capitalist version of the Free Market<o:p></o:p></span></u></div>
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<span style="font-size: 10pt;">A set of key Capitalist market failures in the context of our discussion are the following types :<o:p></o:p></span></div>
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<span style="font-family: "symbol"; font-size: 10pt;">·<span style="font-family: "times new roman"; font-size: 7pt;"> </span></span><span style="font-size: 10pt;">Labour market failure<o:p></o:p></span></div>
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<span style="font-size: 10pt;">When there is a recession, firms usually fire workers rather than drop salaries to the level they can afford. This increase in unemployment results in less demand which causes further layoffs as products are not being sold. In an efficient labour market, salaries and wages would need to fall until all workers could be employed and the market would clear i.e. surplus labour would be allowed back into the labour market.<o:p></o:p></span></div>
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<span style="font-family: "symbol"; font-size: 10pt;">·<span style="font-family: "times new roman"; font-size: 7pt;"> </span></span><span style="font-size: 10pt;">Interest rate meddling <o:p></o:p></span></div>
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<span style="font-size: 10pt;">The pricing of money is reflected in the rate of interest. If the market sets the rate, then the interest rate represents a signal for the amount of savings in the economy i.e. when savings are high then the need and hence demand for borrowing money is low and hence the interest rate will be low. If however the central bank bypass this key market signal and set the base rate of interest low through policy intervention, then this vital signal is masked and businesses take the wrong decisions and this leads to a massive waste of resources as unsuitable projects are started for which there is no long term demand as the low interest rate was not an indication of a high level of savings but instead was artificially created rate by the central bank which once rises causes the chaos we know as the business cycle which disproportionately hurts the working and middle classes. <o:p></o:p></span></div>
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<li><span style="font-size: 10pt;">Credit failure.<o:p></o:p></span></li>
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<span style="font-size: 10pt;">Currently, the Central banks have created money through programs such as Quantitative Easing, which means creating new money that can be loaned out to desperate firms especially small to medium sized ones to new job creation. However the banks are not lending and are instead looking for ultra safe investments such as buying government bonds which pay interest and are sought due to their being considered risk free. This is starving the private economy of credit and thus cant invest and rejuvenate the market.</span></div>
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<li><span style="font-size: 10pt;">Moral hazard.<o:p></o:p></span></li>
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<span style="font-size: 10pt;">Alan Greenspan, the former Federal Reserve Chairman said that the big banks on Wall Street operated with knowledge that their losses would be covered by the taxpayer. This is the so called moral hazard situation. The effect of this moral hazard is that governments go further and further into debt by bailing out these banks and this impose higher and higher taxes which hurt the spending power of citizens. When individuals are over burdened taxation, it becomes difficult to spend and this hampers recovery.<o:p></o:p></span></div>
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<li><span style="font-size: 10pt;">Confidence and expectations </span></li>
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<span style="font-size: 10pt;">The nature of the secular mindset is clearly disconnected from creedal concepts and as a result suffers from waves of optimism and pessimism and herd behavior. John Maynard Keynes called this tendency of humans the ‘animal spirits’. When the herd moves towards pessimism this creates downturn in confidence and this manifests in recession which is a failure of the market.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">Allah SWT has decreed a system which is immune from these failures. Consider each area highlighted above:</span></div>
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<span style="font-size: 10pt;">A primary reason why employers do not drop wages is that workers are always in fear of inflation and a decline in their buying power. Under our currency model, monetary inflation is not a significant reality as we operate according to the gold standard. This is because we have a fully backed bi-metallic currency (Gold and Silver Standard) which stops us from printing money causing inflation.</span></div>
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<span style="font-size: 10pt;">In Islam we have the concept of Equity based financing which negates the need for interest rates and interest based loans. In Islam pooling of capital were fund holders form partnerships with people with creative ideas and this replaces the interest based loans market and consequently much needed finance reaches projects. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">As a secondary point, any type of price fixing is not permitted and the example of fixing the price of money through artificially setting interest rates can be refuted from another perspective. <o:p></o:p></span></div>
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<span style="font-size: 10pt; mso-bidi-font-family: Arial;">The Prophet's said as part of one hadith “Allah is the One Who fixes prices”. (Reported by Ahmad, Abu Daoud, al-Tirmidhi, Ibn Majah, al-Dari and Abu Y'ala.)</span><span style="font-size: 10pt;"> <o:p></o:p></span></div>
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<span style="font-size: 10pt;">There is a clear evidence to prohibit the hoarding of money due to its effect on making trading difficult in the short term. This coupled with taxes (ie zakat) on unused funds acts as 2 key disincentives which ensures funds are constantly being reinvested back into the economic cycle. <o:p></o:p></span></div>
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<i><span lang="EN-GB" style="font-family: "garamond-italic" , "serif"; font-size: 11pt;"> “And let those who hoard gold and silver and do not spend them in the way of<o:p></o:p></span></i></div>
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<i><span lang="EN-GB" style="font-family: "garamond-italic" , "serif"; font-size: 11pt;">Allah know that a severe and painful punishment is awaiting them.”<o:p></o:p></span></i></div>
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<span lang="EN-GB" style="font-family: "garamond" , "serif"; font-size: 11pt;">[At-Tauba: 34]</span></div>
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<li><span style="font-family: "symbol"; font-size: 10pt; text-indent: -18pt;"><span style="font-family: "times new roman"; font-size: 7pt;"> </span></span><span dir="ltr" style="text-indent: -18pt;"></span><span style="font-size: 10pt; text-indent: -18pt;">No need for large firms which cuts out the need for stock markets which has resulted in overgrowth of </span><span style="font-size: 10pt; text-indent: -18pt;">financial </span><span style="font-size: 10pt; text-indent: -18pt;">sector or virtual economy over real economy.</span></li>
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<span style="font-size: 10pt;">Critics of our system argue that the means to foster large companies do not in the Islamic model as it lacks stock markets and other financial systems. 1991 Nobel Laureate Ronald Coase who wrote an article back in the 1930s called ‘The Theory of the Firm’ and argued that firms grow needs are in line with their need for information. Today information is attainable without such large sized companies and furthermore our concept about intellectual property ensures knowledge and hence intellectual capital flows much more freely in the economy. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">Furthermore public property, an areas which in the West relies on huge pooling of capital via stock markets is taken care of via fees levied by the state who manages such industries on behalf of the public for public benefit and not the monopolistic desires of a few private firms, so this is not a shortfall in our system.<o:p></o:p></span></div>
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<span style="font-size: 10pt;">Too big to fail and reckless business practices causing moral hazard and massive taxpayer liability which turns spenders into savers.</span></div>
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<span style="font-size: 10pt;">Liability in Islam is not limited to the assets of the partnership but extend to the personal assets of the partners according to the capital share of the partner. It is an interesting observation that off shore banks are not prone to take the type of risky ventures that other banks take as they are not privy to government bailouts and have far greater stability records than the banks on wall street that push the society towards austerity once they have been rescued.<o:p></o:p></span></div>
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<span lang="EN-GB" style="font-family: "garamond" , "serif"; font-size: 11pt;">Abdurrazzaq narrated in Al-Jami’ from ‘Ali (ra) that the Prophet said: “The loss (</span><i><span lang="EN-GB" style="font-family: "garamond-italic" , "serif"; font-size: 11pt;">Al-Wadhi’a</span></i><span lang="EN-GB" style="font-family: "garamond" , "serif"; font-size: 11pt;">) is upon the capital and the profit is according to what they stipulated.”</span><span style="font-size: 10pt;"><o:p></o:p></span></div>
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<span style="font-size: 10pt;">The Islamic society understands that provision (Rizk) is predetermined and this gives much more stability to the edgy inclinations which induce the herding and irrational behavior of economic agents we see in the Western markets. This concept is a key stabilizer to many market failures that lead to the type of recession and rigidity in western markets. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">Furthermore stimulus programs are not needed as the commands of Allah not only oblige the Muslim from such irrational fear of loss that prevents spending in times of such pessimism, but also direct evidences that encourage and oblige the open hand with respect to spending on the permissible things. Allah SWT says in Surah Al-Isra verse 29<o:p></o:p></span></div>
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<i><span lang="EN-GB" style="font-family: "garamond-italic" , "serif"; font-size: 11pt;">“And let not your hand be chained to your neck, nor open it with complete opening lest you sit down rebuked, derided.” </span></i><span lang="EN-GB" style="font-family: "garamond" , "serif"; font-size: 11pt;"><o:p></o:p></span></div>
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<span lang="EN-GB" style="font-size: 10pt; mso-ansi-language: EN-GB; mso-bidi-font-family: Garamond;">Furthermore, the beloved Prophet Muhammed SAW said <o:p></o:p></span></div>
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<span lang="EN-GB" style="font-size: 10pt; mso-ansi-language: EN-GB; mso-bidi-font-family: Garamond-Bold; mso-bidi-font-weight: bold;">“Allah loves to see the sign of His favour on His servant”</span><span lang="EN-GB" style="font-size: 10pt; mso-ansi-language: EN-GB; mso-bidi-font-family: Garamond;">, narrated by At-Tirmidhi.<o:p></o:p></span></div>
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<span lang="EN-GB" style="font-size: 10pt; mso-ansi-language: EN-GB; mso-bidi-font-family: Garamond;">The Prophet</span><span lang="EN-GB" style="font-size: 10pt; mso-ansi-language: EN-GB; mso-bidi-font-family: TT7C2O00;"> </span><span lang="EN-GB" style="font-size: 10pt; mso-ansi-language: EN-GB; mso-bidi-font-family: Garamond;">said also: “</span><span lang="EN-GB" style="font-size: 10pt; mso-ansi-language: EN-GB; mso-bidi-font-family: Garamond-Bold; mso-bidi-font-weight: bold;">If Allah gave you property, let Him see the sign of His bounties and dignity on you”, </span><span lang="EN-GB" style="font-size: 10pt; mso-ansi-language: EN-GB; mso-bidi-font-family: Garamond;">narrated by Al-Hakim from the father of Abu Al-Ahwas. </span><span lang="EN-GB" style="font-family: "garamond" , "serif"; font-size: 11pt;">So if someone has property and was miserly when spending on himself, he would be sinful in the sight of Allah. Such rules help prevent slowdown in economic transactions that are key to market efficiency.</span></div>
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<span style="font-size: x-small;">Higgs, as stated earlier, argued emphatically and convincingly that the reason the GD lasted for as long as it did, by most accounts from 1929 to 1946 is that there was so much uncertainty in the private sector towards what the government would do as far as interventions and this stifled confidence. In Islam the rules for intervention are clearly defined and ad hoc government intervention, such as setting minimum wages, high degrees of borrowing and imposing import tariffs and other price meddling would not be a reality. <o:p></o:p></span></div>
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<b><u><span style="font-size: 10pt;">Conclusion<o:p></o:p></span></u></b></div>
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<span style="font-size: 10pt;">In summary the point being made is that Stimulus is a sure way to increase debts further and help special interest groups with projects and not a means to lift a sinking economy. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">The alternative, i.e. the free market approach were the budget is brought back into balance (i.e. austerity when spending has taken the government debt to unsustainable levels) doesn’t work very well as there are too many market failures in the Capitalist model for markets to work efficiently. So I am not advocating what the austerity camp argues by refuting what the stimulus camp argue. Islam offers a unique position. <o:p></o:p></span></div>
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<span style="font-size: 10pt;">The alternative economic paradigm now needs to be brought into the mainstream debate as the entire world is tolerating the system that stands on the basis that there is no coherent alternative narrative that is being articulated. The debate needs to be taken to audiences according to the level of understanding to bring across this different branch and root approach. The lack of a viable alternative vision has caused everyone both Muslims and non-Muslims alike to have suffered for far too long and this must end. We must not allow the military industrial complex and the international banking establishment from usurping our natural rights any more. The time to make a stand is now.<o:p></o:p></span></div>
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August 2012<br />
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mailto: bteconomics@gmail.com</div>
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BT Economicshttp://www.blogger.com/profile/09719522583828296792noreply@blogger.com0tag:blogger.com,1999:blog-7932353628038480926.post-48227976928239879272012-11-24T01:20:00.000-08:002016-05-16T23:11:49.308-07:00Basic Flaws of Capitalism<br />
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<u>As an ideology, what are the basic flaws of the Capitalist ideology?<o:p></o:p></u></div>
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The fundamental flaw in the Capitalist ideology is that it is based on reconciliation between two contradictory positions and hence reconciliation is regarded above truth in a matter were truth should be regarded above reconciliation.The implication of the opposing ideas necessitated a clear verdict one way or the other and not a compromise which has elements of both views merged into a single view which must contain truth and falsehood and by definition must be false overall. <o:p></o:p><br />
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These opposing ideas were the supremacy of the divine order through Church and that of the human mind. A consensus emerged which traded the Church’s notion of ‘original sin’ or mans inherent wickedness and need for Church’s control for ideas such as the philosopher Rousseau who argued man is born noble and hence freedom will manifest nobility and goodness.<o:p></o:p></div>
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The truth is that man is born neutral of good or evil and instead has no information with which to form correct judgments. <o:p></o:p></div>
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The mind became sovereign and as there is no innate goodness, man’s judgement falls prey to power which corrupts and the system that is setup favors the few that have acquired more wealth and influence. <i><o:p></o:p></i></div>
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In Islam, the creator of Man, Life and the Universe (Allah) has the right to define right and wrong and the possibility of ruler corruption in determining the will of this creator in any given situation is mitigated through political parties accounting the ruler. It is further mitigated by the existence of a judicial branch of the legal system of the Islamic model of government that has the executive powers to remove a deviating ruler. Furthermore the values inculcated in all of societies members are different to those found under the secular model of society and as such that the pursuit of worldly power is subservient to seeking the pleasure of Allah the creator. This in itself reduces the problem from its cause. <o:p></o:p></div>
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<u>Is the system of economy, which is the fundamental aspect of the Capitalist ideology, a flawed system?</u></div>
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Freedom of ownership is the narrow definition of Capitalism. Capitalism includes differing degrees of government intervention in the market. Without critiquing the basis of all variations along this spectrum the system as a whole survives root level scrutiny.<o:p></o:p></div>
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The truth is that all variants are tainted with the same error which arises from the creed. In this context, the human mind is unable to get the balance between free markets and government regulation at the point where wealth can be created and distributed. This presupposes that this is the intention of economic management. In reality it is not and the system is hijacked to benefiting the elites.<o:p></o:p></div>
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<i>“The art of government consists in taking as much money as possible from one party of the citizen to give to the other.” Voltaire 1770<o:p></o:p></i><br />
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Even if government attempt to regulate the free market were intended to create a meritocratic system, market participants seeking freedom and utility above all else, tend to find ways to bypass or reform regulation or ex retail banks and speculative investments. Thus this approach is unworkable due to the lack of intention or ability to regulate the market.<o:p></o:p></div>
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Islam provided the correct framework to allow the market to be unleashed in a safely regulated environment. In addition regulatory bypass is not the norm due to the values of the Islamic society being in harmony with wanting to follow laws and not find creating ways to bypass them through means such as boot legging during the prohibition, and tax avoidance and tax evasion, Repo 105 in the case of Lehman Brothers etc. Examples were the values of the people are not in line with the rules hence negating their effectiveness.<o:p></o:p><br />
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July 2012<br />
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mailto: bteconomics@gmail.com</div>
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BT Economicshttp://www.blogger.com/profile/09719522583828296792noreply@blogger.com0