What’s Fundamentally wrong with
Capitalism?
Introduction
What is needed
is a much nuanced critique of the current Capitalist order and all its broad
variants. Otherwise one is just skirting
around the edge of the issue and calling for reform. We need such a ‘smoking
gun’ critique that the system is beyond salvation in the eyes of the masses and
root and branch alternatives are sought.
Let’s start
with a defence of Capitalism so we know the enemy in front of us. Let us
consider the general defences that come especially from right wing factions.
The default
state of man is poverty and Capitalism has been more instrumental in lifting
the state of man from this state on mass than any other system of economic
management. Although there is debate over the definitions of poverty and where
the poverty line is, this is indeed by and large true and particularly
impressive based on the exponential population growth that has happened in the
last few centuries.
Also, they
will argue what is wrong with inequality? Surely there needs to be an incentive
for people to work harder to reach the level of those above them and this
nurtures innovative and creative thinking vital for economic growth and making
the pie bigger and bigger to feed the masses according to what they deserve.
Yes they say
there are excess and areas to improve, such as the financial crisis and the
excessive relaxation of regulation related to the banking sector but these are
not systemic issues and society has learned its lesson and the general trajectory
is upwards despite some minor setbacks.
Such
arguments present a context for anyone who criticises Capitalism to be a
dreamer and an adversary to its self evident truths, of which there are some
which are also found in the Islamic Economic system such as a significant
private sector where people can find their own skills niche and maximize their
own wealth and income through specialization, an idea called the division of
labour.
Anyone who
criticises any core aspect of Capitalism is deemed to advocate the opposite
extreme which is a planned economy which is largely controlled by the central
state, the crisis in Venezuela being a contemporary example of how this policy
always ends in tears.
Such
criticizers are thus depicted as dreamers who deny the self evident power of
the market which without doubt is a powerful force for wealth creation through
the industrious and creative capacity of mankind as bestowed by Allah SWT on
the highest of his creation. This however is a straw man argument i.e. to
misrepresent the opposition to make it easy to topple to avoid critical debate
of the real core issues which is what we need to do to really turn the debate
in our favour and not be seen as another Michael Moore who crumbled in an
interview when asked how wealthy he had become by attacking the very system he
had profited so much from and told that he wouldn’t have become rich in Cuba if
he attacked their system. Even the humour against Capitalism is a form of
acceptance of its central tenants according to the rubric that it isn’t
perfect, but it the best there is and the only show in town.
What’s
the ‘smoking Gun’ argument then we have to Present?
In the Quran, in Surah Al
Anbiya, Allah SWT says
“Nay, We
hurl the Truth at falsehood so that it (the Truth) crushes it (falsehood), and
lo! it (falsehood) vanishes. Woe to you for what you utter!” (21: 18) TMQ
The perspective
that needs to be presented needs to both recognise the achievements of the
current methodology but at the same time show it’s systemic and irreconcilable
detects in a way that the current trajectory of the status quo seems bleak and
precarious and at the same time, a well thought out alternative needs to be
presented which ticks the valid boxes which are in the current debate.
These valid
boxes include to show how any alternative achieves the level of wealth that is
needed to sustain the ever growing population and at the same time creates a
more sustainable model to avoid the type of doomsday scenarios which are
brewing in the current discourse.
Such clouds
are in the form of ever increasing wealth inequality especially in the
developed countries and the scourge of absolute poverty which despite a overall
percentage fall in the last few decades (largely as a result of the development
of India and China) still plaques large areas of the human population. This is
particularly apparent in sub Saharan Africa where the number of people living
in extreme poverty, AKA absolute poverty, is growing even though the proportion
of such people is falling.
Inequality
Let us start
with the notion of inequality and poverty and to understand these ideas, we
need to consider some theory as to how they relate to each other.
Inequality
can relate to differences amongst a population in relation the spread of income
and wealth. The former is called income inequality and the latter is wealth
inequality. Also considered is inequality in consumption but that is a less
common metric.
Wealth is
the stored worth of all assets minus liabilities and can be assessed for
households or individuals. It is safer to consider the issue at the individual
level to create a better basis for comparison as household have been shrinking
in size since such measures have been recorded and to use households would thus
be misleading.
Income is
related to new wealth that is added to the pile of existing wealth and can be
primarily through work or investments but can include other transfers such as
government assistance programs.
Inequality
thus considers how the income and wealth are distributed amongst the
individuals in a given population.
Income inequality can also be considered between
countries using measures such as GDP which is the sum value of all goods and
services produced in a year, expressed in a common currency so as to enable a
comparison of the relative rank of a country with another.
This is
closely related to the concept of poverty of which there are 2 types. First
there is absolute poverty which means that you are living below the minimum
monetary amount needed to survive which is estimated by the World Bank
currently as living on less than $1.90 a day. Secondly, is the notion of
relative poverty and this means you are earning at 60% or less than the median
income within your country.
So these 2
concepts i.e. of inequality and poverty are related but also different. You may be relatively poor i.e at or below 60%
of median income but way above the earnings level to mark you are being in
absolute poverty.
Broadly
speaking relative poverty and inequality are problems expressed in the
developed countries and absolute poverty is the focal point in the 3rd
world countries.
Regarding
the latter, i.e the issue of absolute poverty, we have already mentioned that
Capitalism has lifted the world out of absolute poverty, when looking at the
proportion of people that have moved out of absolute poverty even in the last
few decades which has seen the growth of the neoliberal phase of capitalism.
This is despite the growing number of people as mentioned, in the continent of
Africa, but they look at the proportion of people and that makes the statistics
look good.
Let us then
focus on the hot topic of inequality and its twin concept of relative poverty.
What is
wrong with inequality you might ask? Should we care if the Jones are doing
better than us? Isn’t this just jealously in disguise and Islam such things and
to measuring against material things?
Doesn’t
inequality breed the desire to educate ourselves so we can get ahead? After all
there needs to be incentives to work hard and do well i.e. to sacrifice time
and energy now to get a better job and improve material prospects later in life
and this will inevitably lead to inequality in both income and wealth, so what
is the fuss about? After all Capitalism is slowly eliminating absolute poverty
(at least the proportion of people who are living in absolute poverty) so
surely any criticism is baseless?
This is fair
and the issue is not that we are against inequality per se, in fact some
inequality is both necessary to spur the motivation to better ourselves and
inevitable due to the qualities that Allah SWT has bestowed upon us. The
alternative would be a command economy which is egalitarian in nature and divides
the fruits of our labour equally or according to need and where is the
motivation to become a skilled worker in such a system? In fact all such
economies have failed and this is not what we are calling for. This is a straw
man argument by the Capitalists to avoid deep scrutiny of their ideology and
one that we do not want to be depicted as advocating.
So what are
we against then? The issue is extreme inequality that is the issue not the
inevitable inequality which is both inevitable and necessary.
This issue
has been recently thrust into the mainstream discourse by popular movements
such as the US based ‘occupy wall street’ movement with the idea of the 1% and
their exorbitant share of global wealth and income and last year’s Oxfam report
which headlined how 8 people owned the same wealth as half the world.
The measures
used to show this extreme difference is to divide the world, or let’s say a
country into 100 different segments or percentiles and look at the share of
income or wealth, noting that the concentration of wealth is far more apparent
than the concentration of income.
So for
example if there were a 100 of us in this room and if I were to bring into this
room a cakes with 100 equal slices and eat 70 and leave the rest to you all and
most of you got just about enough to satisfy your minimum biological
requirements and tomorrow I ate 75 and you had to make do with 25, BUT the cake
on day 2 was bigger and the actual weight of your portion you got increased even
though your share got smaller and I asked you why are were complaining? I ordered
the cake, I had the knowledge of where to buy it, I made sure the supplier used
halal ingredients etc so I deserve more,
was my logic? You’re getting more and more so you are just making a fuss and
the alternatives are much worse, the cake can get smaller and your share can
get bigger (if I give you a larger share) but in real terms you will be worse
off, so be quiet and carry on with the status quo, “there is no alternative”
being the slogan used by Margaret Thatcher.
This defence
is predicated on the size of the cake getting bigger and bigger and there being
no harm to anyone of me eating the ever increasing share I eat. This is where
the fundamental problem lies. Let me explain.
A consensus
is now emerging amongst the Capitalist thinkers that when inequality passes a
critical point and turns into extreme wealth inequality, the size of the collective
cake starts to shrink and this is a very damaging blow to the intellectual
supremacy of the capitalist system, one they are nervous about, and one we can
exploit to show how the system may have worked for a while, but it cannot be
viable long term. We are definitely at that point and the inequality trends is
accelerating at an alarming rate.
So this
brings us to the crux of the critique of Capitalism and the argument I bring is
twofold:-
1) Just because Capitalism has had
relative success (i.e. relative to the even more dire systems that preceded it
i.e from hunter gatherer society to feudal society to the centrally controlled
mercantilist system) it doesn’t absolve it from its current standing and there
is a far more superior system on the table that delivers the long term
sustainable growth and also helps remove absolute poverty at considerably
faster rate and to resists it is a form of mass economic terrorism.
2) The inherent makeup of Capitalism and
its inherent mechanisms for ever increasing wealth concentration perpetuate
ever increasing concentration which reduces the growth of the pie and therefore
reneges on its promise to deliver on its basic premise.
Framing the
debate in this way will render the fatal blow and will catch the current
ideology at its blind spot. I say fatal as the solutions offered do not and
cannot fundamentally solve this systemic problem.
The following questions thus arise from my
proposition that greater and greater inequality leads to a shrinking of the pie
and over time a reversal of the trend of reducing absolute poverty which has
been its saviour.
- Why does wealth concentration beget ever
increasing wealth concentration i.e. why is there a positive reinforcement loop.
- How does extreme inequality affect
the size of the pie or using the jargon, how does extreme levels of inequality
affect economic growth?
Considering the
first question, they use the term Crony Capitalism to try in vain to
differentiate it from a Utopian form of Capitalism but the reality is that
Cronyism is the inevitable outcome of the corrupt secular creed upon which this
system is built.
Cronyism is
the idea that political power follows economic power and this manifests in the
form of those with economic power able to bend the rules of the game to
effectively kick away the ladder from the majority of those who live within the
system.
This works
primarily through the legal act of lobbying. Lobbying is legal and deemed to be
a healthy expression of democracy. It is where different interest groups lobby
politicians to get the law changed according to their particular area of
interest. I.e. to make their case and hope that there particular interest is
preserved and protected in new legislation.
What is also
legal is for such interest groups to make financial contributions to
politicians, especially at the time of election campaigns and to political
parties who think as their donors think.
What is
however not legal is to make a contribution to influence the outcome of
legislation. This is the classic notion of the ‘quid pro quo’ or expressed
colloquially as “you scratch my back and ill scratch yours” i.e unashamed bribery
the West so arrogantly holds up as a stain on the developing countries.
This is the
issue as it is so hard to prove and represents a major loophole in the very
design of all capitalist systems and one that is not resolvable. There have
been some movement within Capitalism to try to resolve this critical flaw such
as the anarchists who believe that the state will always be hijacked and the
only solution is to completely dissolve the state not even accepting a very
small state (i.e. the so called night watchman state model) as it will again
morph into the overbearing state that will again be captured by big business,
to take a medical metaphor to remove the
cancer from the root to avoid it ever having the potential to grow back.
This is also
the stance adopted by extreme libertarians or the so called left libertarians.
This movement has some other names such as anarcho-syndicalism with some high
profile advocates such as the world leading left wing public intellectual Noam
Chomsky. As these so called alternatives
are unworkable, we can conclude Capitalism has no alternative from within its
current paradigm.
This
backdoor bribery leads to the rules being changed to benefit the rich at the
cost of the majority who are outside the elite percentiles of wealth and
income.
Examples
being lobbying to lower corporation taxes, lobbying to avoid wealth taxes that
could solve many issues related to inequality, at least in the short term, to
create ineffectual tax rules allowing tax loopholes and the growth of tax
havens to avoid paying the low taxes that do exist, allowing the use of
technologies that pollute the earth ex trade-able pollution permits , create
monopoly preserving barriers for entry for new firms to enter existing markets
(aka strategic licensing) not to mention the global institutions that allow
such plunder on the international stage such as the IMF and world bank and
their infamous Washington consensus policies that took many countries in South
America backwards since they adopted its policy dictates as a condition to
taking out loans in the 90's.
The result
being wage slavery and increasing levels of debt to fund consumption; the
latter masking the true extent of how wages have stagnated and savings are
practically none existent for those who were told would over time transition to
the higher income brackets i.e. the so called middle class who are rapidly
following the path of the dodo in becoming an extinct species.
So this
answers the first question on how inequality begets inequality due to those
that have bending the rules of the game to preserve their dominance and only
allow minimal wealth to trickle down to avoid the system imploding. The second
question is how this practice takes away the fig leaf of capitalism which is
that at least the pie is growing so why does it matter?
The reason
it matters is that the pie will and has started to shrink. This is due, but not
limited to, the following effects:-
i.
Rewards
and encourages cronyism and replaces a meritocratic system built on rewards for
productivity improvement which is vital for a growing and more equitably
distributing economic model.
ii.
Leads
calls for damaging redistribution policies (ex Venezuela) that discourages
investment and FDI into poorer countries
iii.
Increased
Instability due to financialization of economy and greater tax burden which destroys
demand which is vital for growth and circulation.
iv.
Inequality
causes psychological issues for people which is especially acute in the
materialistic western societies where all status is measured through
materialism. It is often stated that relative wealth is tied to a feeling of
wellbeing and self esteem once the basic survival needs are met. These issues
leads to a lack of engagement in the wealth ladder for those who are relatively
poor as measured by the medium income and this acts as major impediment on the
growth potential of the economy.
v.
Extreme
inequality causes social upheaval and conflict and this impacts on the
productive capacity of nations especially if it results in civil war.
vi.
Gutting
of real economy by financial (virtual) economy leading to real wealth transfer
to wall street/city of London. For example consider the practice of financial
strip mining – discussed by writer Les Leopold in his book ‘Runaway inequality’).
This is seen in how the great depression was a classic example of how Wall
Street Crash filtered into the real economy which suffered for around 17 years
without having lost real wealth like in the case of a famine or earth quake or
war.
The
solutions of Capitalism are totally inadequate and the iceberg is approaching. Consider
very briefly a few
Increases unemployment and often the act of politicians desperate to
appear to do the right thing to increase popularity, never advocated by
economic experts.
- Aggressive Redistribution such as
Increasing taxes on Rich
Never work and fear is that companies will move out to lower tax
countries or shift their profits to lower tax countries so do not work and if
fact make matters worse as jobs will be lost and income tax will be impacted so
disastrous policy and never seriously entertained.
The idea that if you do 3 things, namely
·
lower
taxes exp on rich,
·
reduce
regulation
·
shrink
welfare
Those at the
top through greater investment will create wealth and it will trickle down to
everyone. This has also clearly failed to bear fruit in the developed countries
as evident by the shrinking middle class who have lost their purchasing power,
and has had the opposite effect of polarizing the wealth which has accelerated
much more rapidly since such Trickle Down or Supply Side policies are they are
more accurately called took off during the Reagan/ Thatcher era which we are
still living through.
You may be
asking that if the system is unsustainable and the looming result is mass
unrest and this is not in the interests of the capitalists, especially as they
need consumers to buy the things that they produce and to pay their taxes to
enrich those who really drive this system, then what will be the outcome? The
outcome is that there will be the minimum wealth permitted to flow to
perpetuate the system and that will continue until a viable alternative is
witnessed to humanity. No prizes for guessing what that is.
So this
brings us to the the crux of the issue. What, in simple and axiomatic terms, is
the alternative? In a word it’s all about circulation of wealth and Islam is
the only system that maximises wealth circulation and the removal of barriers
that have lead to the misery that the capitalist system has inflicted upon
humanity.
Consider the
circulation of blood in the body. If blood only travels in the torso, the legs
and arms and head will suffer and over time will lose vitality and cause
sickness and disease and misery. Allah SWT has given us a system that ensures
that wealth does in fact circulate and does not just circulate amongst the
elite 1% as has been seen in the pinnacle of the capitalist system which has
move more and more to its founding principles of deregulation and unfettered
free markets as prophesied by its founding father Adam Smith in his seminal
1776 work entitled “The Wealth of Nations”.
Although he did not advocate cronyism and the emergence of an elite
economy, in fact he warned of its possibility, the problem is that these
thinkers are at most deep and not enlightened and as such do not consider the
problems from a multi faceted dimension as only our creator can.
The western
theorists attempt to fix their issue with regulation and as their creed is
working in the opposite direction, the adherents of this flawed ideology find ways
of bypassing the rules so the solution is one dimensional and not multi
dimensional as in the case with the Islamic rules which bring in the spiritual
dimension aswell as the economic dimension to create rules which are much more
likely to be followed. Take the example of the prohibition of alcohol in Medina
vs the same attempt in 1930's US. In the former the regulation worked as the
value system was in tune with the rule unlike the Capitalist culture of greed
and breaking the rules due to their disjointed and incoherent ideology.
Let us
conclude with this principle of wealth circulation and offer some insight into
what the lawgiver has given us as the real way forward.
This should
be the guiding and focal point when we discuss this amongst the society and
show how the solution cannot come purely via regulations such as the raft of
regulations that emerged after the recent financial crisis as the solution
needs to be multi faceted and regulations, especially financial regulations are
always bypassed through clever financial innovations that are always one step
head of the regulating agencies. This is perhaps why Paul Volker, ex chairman
of the Federal Reserve once said that the only useful financial innovation of
recent times was the ATM!
Regarding
circulation and its opposite which is when wealth circulates amongst the few,
Allah SWT mentions the principle in the Quran in Surah Al Hashr the beginning of verse 7
“And what Allah restored to His Messenger
from the people of the towns - it is for Allah and for the Messenger and for
[his] near relatives and orphans and the [stranded] traveler - so that it will
not be a perpetual distribution among the rich from among you.”
If you
consider all the rules in Islam on Economics, circulation and the effective
regulation which ensures it actually occurs, pervades all the solutions in a
very clear and unambiguous way and there is also no idea of denying the self
evident power of private markets to generate wealth (in the real economy which
is what really matters) based on the maximum use of the human potential.
There is
also a Hadith by the Prophet SAW mentioned by
Tirmidi, the Prophet (saw) said: “The son of Adam
does not have a right except to these things: a house to accommodate him, a
dress to conceal his private parts (awrah) as well as a piece of bread and
water.”
Security, education and
healthcare are also considered basic needs in Islam.
This ensure
that absolute poverty is not a reality and the state has many means to secure
such rights including placing the onus on the mahrem relatives to reduce the
burden on its finances. So poverty is clearly defined in the shara. It is also
defined as relative when those being cared for by the state are satisfied bil
marouf or to the level which is considered respectful for the society and not
made to feel inferior. I.e. not just given the bare minimum to survive
biologically speaking. So the rules are clear.
The prospect
of absolute poverty however should not be a reality as we believe in
predistribution as opposed to redistribution, the latter is akin to bolting the
door after the horse has bolted.
So all rules
are tainted by this guiding principle to maximise the circulation of wealth and
income:-
To quickly
list a few:-
§ Karaj on potential produce –
incentivises maximum utilization of land (Contrast with incentives for excess
risk taking knowing no downside)
§ Prohibition on Hoarding currency
(Contrast : Tax havens)
§ Reclamation of unused land to ensure
maximum use of FOP which is key to real wealth generation (not artificial
financial wealth)
§ Riba/Interest – tool to progressively
move wealth up to top
§ Lack of Patents – small increments vs
big innovations, more can eat from pie
§ Private/Public/State property to
avoid monopolise reigning over and exploiting consumers of vital goods and
services.
§ Stable business climate – fosters
confidence for investment
§ Entrepreneurial skills develop as no
easy savings option (debt finance replaced by equity finance)
“Pre-distribution not redistribution” can be one if our rallying slogan
for our unique approach as it ensures the problem doesn’t occur in the first
place rather than try to ameliorate the symptoms after the event.
Conclusion
The Islamic solutions cannot be presented purely as economic solutions as
if they are, they will be met with the usual criticism levelled at the left of
centre contributors such as nice in theory, but don’t work in reality. This is
a valid criticism in many ways as a savings tax, using the capitalist paradigm,
which is effectively what Zakat is, would be mocked as totally ineffectual as
people could easily remove their savings or hide them under for example an
offshore company which according to the system doesn’t even need to have its
directors registered. The solution must be a comprehensive in nature bringing
multiple dimensions and not purely an economic problem, in other words a human
solution for a Homo Sapien as opposed to Homo Economicus to
use the words of the ex chancellor George Osborne. Else the Islamic solution
will not always appear to be a competent solution if presented purely
economically.
Let us engage in this debate and bring a novel insight into a true 3rd
way and show how only Islam can solve the problems of humanity, be they
economic, social or political through its divinely guided solutions.