UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Capitalist v Islamic Economic System

Outskirts of the Vatican

Thoughts from Iraj Toutounchian’s Islamic Money & Banking, Integrating Money in Capital Theory

Negatives of the Capitalist Economic System

1. Non-satiation: the primary assumption in utility theory;

2. Denial of society: assumed Pareto efficiency;

3. No cooperation: due to both impossibility of comparison of utilities and fixed-wage payment to labor;

4. Emphasis on self-interest to the neglect of other aspects of the complexities of human nature;

5. Self-interest overwhelming social interest;

6. Denial of externality, based on self-interest and impossibility of comparison of utilities;

7. Equity, a second-hand argument with no guarantee of success;

8. Conflict between efficiency and equity;

9. Equilibrium guaranteed by efficiency but not optimality;

10. Unchecked greed due to non-satiation and to denial of society;

11. Zero-sum game as a result of no cooperation;

12. Virtual wealth, resulting from non-satiation and to denial of society;

13. Endorsement of all kinds of risks, artificial or resulting from non-satiation;

14. Positive interest rates in all markets: basically characterized by individualism;

15. Scarcity of capital arising from positive nominal interest rates on money and the resulting speculative activities;

16. Unemployment as a result of scarcity of capital;

17. Inflation and business cycles arising from speculative activities;

18. Failure of ‘invisible hand’ to direct each person to promote the benefit of all;

19. Free market, resulting from mutual unconcern;

20. Profit maximization, which means least remuneration possible given to the factors of production;

21. Fixed-wage rate for labor determines the productivity of labor, rather than vice versa;

22. Endorsement of speculative activities in all markets;

23. Money treated as a private good, despite being an almost perfect expression of a large externality, and put in the hands of the private sector;

24. Denial of public sector to a large extent;

25. Wealth-based voting system;

26. Given constant technology unethical actions such as aggression serve to increase social welfare;

27. Either Aggregate Demand or Aggregate Supply can be increased, but not both at the same time;

28. Interest (Riba) forces the monetary sector to be separated and treated independently from the real sector;

29. Interest (Riba) and money market make money an exogenous variable with all the problems attached to it.

Positives of the Islamic Economic System

1. Satiation checked via social considerations;

2. Existence of society as a top priority;

3. Cooperation guarantees equity, to a large extent, via labor’s share in profits;

4. Social interest overwhelming private interest;

5. Emphasis on human nature in all its complexity;

6. Presence of all kinds of externalities on a large scale;

7. Equity as the ultimate goal;

8. Coexistence of equity and efficiency;

9. Cooperation guarantees both efficiency and optimality;

10. Greed held in check through cooperation;

11. Increasing sum-game arising from cooperation;

12. Denial of virtual wealth;

13. Denial of any artificial risk; endorsement of all natural risks;

14. Zero nominal interest rates in any market;

15. Adequate capital arising from abolition of interest and from speculative activities;

16. Full employment resulting from removal of restrictions on the supply of capital;

17. Stable prices and sustained growth resulting from equitable distribution of income and wealth through cooperative enterprises and through abolition of interest (RIBA) and of its derivatives;

18. Cooperation provides a visible hand to promote the benefit of all;

19. Managed market;

20. Maximazation of social welfare function as if labor force and the whole population matter;

21. Labor’s share in profits of cooperative firms leads to increased production and to an increasing-sum game;

22. Denial of speculative activities in any market;

23. Money endorsed as an ‘impure public good’ and thus in the hands of the public sector;

24. Emphasis on private-public partnerships;

25. Knowledge-based voting system;

26. Given constant technology, social welfare increases through cooperation between and among individuals and institutions;

27. Aggregate Demand and Aggregate Supply can simultaneously be increased; the importance of which cannot be exaggerated.  This unique feature is absent in the proposed stimuli plans to combat the present global financial crisis;

28. Monetary sector is not allowed to be treated independently and separated from the real sector;

29. In the absence of interest (Riba) and of the money market money becomes an endogenous variable being determined from within the system.

‘It has to be noted that greed being ‘shrewd’ in nature has several origins that have to be tamed and checked in order to prevent further economic unrest.  Fiat money is inherently a virtual phenomenon and one of the strongest factors in encouraging the kind of unchecked greed which played such a pivotal role in the recent global financial crisis in the form of virtual financial derivatives.  It is imperative that this is revised so that it cannot happen again.

If all the positives of the Islamic economic system outlined above are correctly launched, they will provide the world with a new challenge and bring it to the zenith of prosperity.  They will expand man’s utility frontiers beyond those in effect and substantially increase social welfare.

The Islamic economic system might provide a slower rate of growth than that of capitalism, but it will be steady.  The capitalist system has had a bad record in producing economic turbulence that causes suffering for millions before it returns to its normal trend.  It is a matter of choice whether rapid economic growth accompanied by severe cyclical movements and injustice is preferable to a slower but steady growth rate accompanied by equitable distribution of income and wealth.  (Iraj Toutounchian)

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