Capitalism, Marxism, and Islam
How Islam solves the issues inherent in Capitalism to make it beneficial.
In the beginning of the 19th Century, Capitalism was touted as the best economic system, with its corollary, liberalism1, implemented by the UK in its colonial empire. This was heavily challenged with Marxism, which grew to its height at the end of the 20th century, until the fall of the Berlin wall, and the New World Order, recreated a world made for capitalism, the WTO opened foreign markets and made the transfer of capital seamless, the internet made everything interconnected and allowed transfers to happen at instantaneous speeds creating modern financial markets, and Reagan, Thatcher, and others implemented neoliberalist policies as the master economic policy.
Capitalism has many purported benefits as an economic system, in theory it tends to make consumer prices the lowest possible through competition. This same competition also leads to an improvement of services and products, and pushes innovation forward. It also favors the most resilient markets as the unresilient get destroyed. Further capitalism leads to an equitable sharing of wealth as the poorest areas are those with the most potential, this leads to investors coming, creating jobs, businesses and therefore making the economy grow and flourish.
Why then, is capitalism so criticied, why has marxism made a comeback since the 20th century?
This started in the 21st century, mainly with the crash of 2008. This showed that the system was inherently unstable, and that even those who talked endlessly about market self-regularization, still intervened to save those “too big to fail”, unlike Hoover in 1929, showing Keynesian policies when needed.2
Marxism
Marx, in the 19th century, outlined many criticisms of capitalism, in the era of the second industrial revolution. Some of these criticisms are still true today, others are questionnable in our modern economy. Indeed today our economies are financierized, with the vast majority of assets and capital existing only within electronic banking systems, being traded by automated agents, not even connected to the value of real commodities since the end of the Gold standard3. Further most “advanced economies”, meaning those of Western nations, are, beyond their finanicierization, deindustrialized, and now focused on the 3rd sector4.
His main criticism however, was the fact that the system reinforced already existing classes, and prevented class-equity, making one class more powerful over another, namely the capitalist class over the proletariat. This is still largely true today, in that social reproduction is still too common, and that To be a business owner still requires having capital to invest. But this is where the comparison ends. As we have seen, with the advent of the digital age, the upfront costs of busniess creation, have been reduced considerably. Further the invention of the limited corporation5 in the 19th century have made the risks involved very mitigated, and have made the possibility of business creation much more feasible.
Further, Marx attached more emphasis on the means of production, i.e. the factories, than to the capital itself, for it was only the legal structure which allowed the property of such means of production to be individualized, when they could be (and should be as marx believed) collectivied. This isn’t a very relevant today in the realms of the 3rd sector, or again in the realm of the digital age.
Another important criticism of capitalism however, is the inherent instability of the system. For unlike liberal economists whom take as an unproven (and actually factually disproven) a priori the idea that the market self-regulates. Marx described the boom-bust cycle much earlier than the coining of this term, as well as the tendency to the creation of monopolies, and the accumulation of capital by a small elite.
The Failure of Communism
As good as Marx’s criticisms of capitalism may have been, his solutions were far from perfect. Socialism rarely gave a comparable standard of living to people as Capitalism. More importantly, socialist countries’ economies were unsustainable, the idfficulty of planning economies on a scale as important as that of nations, or even international markets, made both the USSR under Gorbatchev and CHina under Deng Xiaoping move to more capitalist policies (even whilst calling it “market socialism” in the case of china). Beyond this there is the human element, which is that most people are fundamentally opposed, by nature to a system devoid of personal property, and the ability to build for onesself beyond the collective.
Beyond Marx
Since then however, socialist thought has gone further, describing and criticising namely the issues inherent in modern capitalism, the finance economy, and the golbal order. Let us briefly go over the contemporary criticisms of capitalism:
Capitalism values short-term profit over long-term benefits, this leads to, among other things, using fossil fuels instead of green energy and only investing in the climate when absolutely necessary.
The economic order or the 21st century is made as a neocolonial empire for the united states. with the institutions of the World Bank and IMF as guardians of western financial interests. These push countries to indebt themselves massively, then to restructure their economies only to benefit more developed economies, as satellite states, unable to diversify their own economies, or to have sovereignty to put in place the same economic policies which enabled the western economies to be so rich.
The deregulation of financial markets leads to extremely volatile and non-resilient economies, with the rapid formation of bubbles, and crashes, as with the 2000, 2008, 2014 and so on crashes, and busts.
“Free Market” policies, as codified by the WTO, benefit already strong economies like those of the west, and allow them to impose economic hegemony on the world and to kill competition before it is even born in the countries they expolit, preventing poorer nations from developing.
The Big 3’s6 tendency to use index-funds leads to a deincentivisation of competition, and leads to wanted, and orchestrated inflation which only increases the profits of large companies, killing small businesses, and destroying the lives of people whose salaries cannot keep up with the rates of inflation.
The Islamic Solution
Islam has a very robust economic system which imposes specific regulations and safeguards to the economy which would mostly solve all the problems of capitalism today.
Let me first outline these rules and regulations, and then explain their benefits:
Zakat: a tax of 2.5%7 anually is taken on savings of entities (individuals or corporations)
Banning of Riba: banning of any and all interest, or interest based systems.
Banning of Speculation: Speculation, when it done in an indirect manner, wherein a person tries to circumvent risks, is prohibited, a good example is, investing in a firm by buying shares is allowed, but speculating by expecting the value of shares to rise later, and to buy them later for the price they have today, or the opposite, that is shorting, is not allowed.
Zakat
The Zakat system ensures a healthy investment culture in the economy. Since Zakat is only paid on savings, this encourages the investment of this stagnant money8 which is currently not contributing to the economy, to be used, it incentivises taking financial risks since the alternative is a loss of 2.5% anually.
End of Riba
Riba or usury, is the practice of interest, that is to request a higher payment after loaning money. To begin with, we can see all the problems this has caused globally, from the colossal personal debt of regular people, living from their credit cards, to the level of states, whose debts are so large that it is literally impossible to pay those debts. In fact this was evidently impossible. If you give money to someone and expect someone to pay you back more than you lent him, you’re asking him to create value from nothing. Now this is of course more possible with the fiat currency system, but this leads to the devaluation of money, which readjusts interest rates to take this into account, so the problem isn’t circumvented. We change the issue of unpayable debt to deflated money. Linked to this, the entire system of fiat currency is problematic. As it can cause huge inflations, and deflations, the value of the money depends on trust in its value, which itself depnds on the value of the currency, Thus once a currency is untrusted, it can never be trusted again. Should this happen one day to the US dollar or the Euro, it would be an unsurmountable economic catastrophe.
The End of the Gold Standard appeared specifically to deal with the issue of deflating debt actually, as debts were rising to levels so high that printing bills to curb it would lead to complete devaluation of the currency. Thus a fundamentally unstable and financirized currency was brought about as a solution to interest.
Some wonder how banks would ever give loans if they couldn’t get interest to get some value to compensate risk. However there are alternatives which exist for this which we won’t go into the details of which.
End of Speculation
Derivative products, speculation, and the overall financierization of markets has led to the instability of those same markets. They are no longer grounded in the real economy. When Ukraine was attacked for example, wheat prices spiked, not because there was no more wheat (obviously the wheat we eat today was picked up a year ago, so before the war), but because trust in the value of wheat went down and this speculation caused investors to make the market change the value today. When in actuality with a full year, most countries would have found other sources of wheat and the problem wouldn’t even have surfaced. Derivative products are also too complicated to understand, even for those working with them, as remarked author Michael Lewis of The Big Short, whenever he asked people what subprime mortgages were they could never explain it (and he was asing people whose job it was to work in subprimes). Not understanding the complex object these people are manipulating means they cannot predict how they will react. Further, tendencies like shorting work actively against business growth, making investors work to kill businesses, this means pushing to have huge layoffs, and losses of money and livelihoods.
In general speculation only leads to one of 3 things:
Betting, and in general extreme risks which creates instability.
Pernicious tendencies in investment: like shorting, or the Big 3’s anti-comptitivity
Creation of bubbles of complexly connected capital which is not understood through derivative products, which makes the market more volatile as its far removed from the real economy, and unpredictable
Conclusion
After the ‘08 crisis, the Pope had urged world governments to implement policies from Islamic Rules. Today some countries are already trying to emancipate themselves from the non-islamic system, like Malaysia which is trying to recreate a gold-standard for it and other islamic nations. The problem with capitalism is not capitalism, its that it is a delicate balance that needs to be preserved, beyoind the regulations described above, an islamic system would also require a government implicated in keeping the economy healthy, that is removing monopolies, pushing competition, protecting soveriengty and national interests, etc..
Liberalism, like its successor Neoliberalism (whose difference is mainly in their implementation, and not on theory) believes in the self-regularization of the market.
Herbert hoover, after the 1929 crash, refused to act, and this only exacerbated the greatest economic crash of the 20th century, known as the Great Depression, his successor FDR however implemented Keynes’ idea of intervention in the economy to solve crashes.
This was done under Nixon, passing from the Gold standard which constituted the basis of the dollar standard for the economy imposed after WWII, the end of th eGOld standard meant that currencies were no longer attached to any commodity, and their value depended entierly on the market.
Not fully concentrated on the 3rd sector, as they still have large industries even if they are located in other countries, but the weight of industry is still much weaker, and the 3rd sector has still risen in eminence, it is simply wring to assert that industry is absent from western economies however.
A “limited” corporation, often written as “Ltd.” is a corporation which is bound by a specific contract, which ensures that the most it must pay back in case of bankruptcy is the amount invested, that is, even if its value becomes negative, and the owner technically owes more than they previously invested, these debts are cancelled and payed by the state.
The Big 3 are Blackrock, Vanguard and State Street.
This 2.5% is used to feed the poor, to free slaves, is given as compensation to the families of veterans, or is given to orphans, among other things.
What constitutes “savings” or not depends on the asset, if it is low risk, i.e. in housing, or simply liquidity, as opposed to shares in a business for example which is high risk.