September 28, 2008

I Hate To Say I Told You So...

Metaphorically speaking, of course. One of the things I love about Islam is that it's a very practical religion. Non-Muslims may not like the various rules within the religion, but I have found, by and large, that Allah (swt) put them there for very good reasons. For example, "don't drink alcohol." How many benefits would there be to the individual, to society, if people didn't drink? How many lives would be saved, for example, if there were no drunk drivers? I used to read "Dear Abby." How many letter writers' lives would be changed for the better if they lived an Islamic lifestyle? "Dear Abby" would probably go out of business.

Likewise, the world is now in the midst of an economic crisis the likes of which no one has seen since my parents were toddlers. How much better would the economy be if it followed Islamic business principles? The following passage comes from one of the economics blogs I read, Angry Bear:

It was about an interview by Bill Moyers of John Bogle. He noted:

JOHN BOGLE: Well, it's gotten misshapen because the financial side of the economy is dominating the productive side of the economy...We've become a financial economy which has overwhelmed the productive economy to the detriment of investors and the detriment ultimately of our society.

I want to come back to the difference between the financial system and the productive system. The productive system adds to the value of our economy. And, by and large, the financial system subtracts. And, yet, it's growing and growing and growing. And this short term thing where short term orientation in which trading pieces of paper is regarded as a social value. It is not a social value.

Go listen to it. Then listen to Mr. Moyers latest interview with Kevin Philips.

But what's here that doesn't get the attention is the United States in the last 20 years undertook an enormous transformation of itself with no attention paid. And what it means is and what makes all this so frightening is the country is at risk because of the size of the financial sector that has never been graded on its competence and behavior in any serious way. They are the economy at this point. And we are now seeing what happens when a 20 to 21 percent of GDP financial sector starts to come unglued.

You had essentially a financial sector that, let's say, was sort of neck and neck with manufacturing back in the late 1980s. But they got control in a lot of ways in the agenda. Finance has been bailed out. I mean, everybody thinks this is horrible now what we're seeing in terms of bailouts. Even a lot of the people who do it think it's bad.

This has been going on since the beginning of the 1980s. Finance has been preferred as the sector that got government support. Manufacturing slides, nobody helps. Finance has a problem, Federal Reserve to the rescue. Treasury to the rescue. Subsidies this, that, and other.

I am certain we have to do something to help the money flow such that it does not take down the entire system. It would be cutting off our noses to spite our faces not to protect ourselves from what a few have done. We have to be adults, suck it up and clean up the alcohol aroma vomit all over our bathroom.

But, we do not have to let it happen again. There is only one solution to this and no one, not anyone is pointing it out: Put the financial sector of the economy back in alignment with the productive sector. What got us in this mess is our (well not all of us) belief that the financial sector can stand on it's own as a primary wealth/money creator. It can not. Never could. But, believing it put the impetus to the creation of “vehicles” for creating trades. You know all those securitized whatevers, and alphabet monikers, and insurance for insurance for insurance based on alphabet monikers of securitized whatevers. What did people expect would happen when you turn the part of your system that is dependent on activity in an other part for it's existence into a stand alone money creator. If you are going to keep generating money from money, then you are going to have to keep coming up with new “product.” New designs, new marketing to create an need and want, new packaging, BRANDING.

Again, Mr. Philip put's it this way:

But we've seen the central component of the rise of the financial sector is the rise of the debt industry. Mortgage, credit cards, all these gimmicks that Wall Street sells-- just all kinds of products. And, of course, the products are laying an egg all over the world right now.

Get it? We take an industry subservient to the needs of production and turn it into a competitor of production. I can polish and sell rocks without a bank to borrow from. I can accumulate wealth over time. My business may grow slowly and so may my wealth, but I can do it. But, remove all non-financial activities and what does financial do to survive? What does it do to survive with no one needing a loan, backing, no desire to produce in a way that increases our productivity such that we have more time to purse happiness (that constitution purpose)? We treat finance as if it is the chicken/egg question. It is not. Finance came second and is dependent.

This particular author, "Divorced one like Bush," isn't a Muslim as far as I know, but he actually advocates a principle of Islamic finance: Making money from money is not Islamically acceptable.

Money is only a medium of exchange, a way of defining the value of a thing; it has no value in itself, and therefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put in a bank or lent to someone else. The human effort, initiative, and risk involved in a productive venture are more important than the money used to finance it. Muslim jurists consider money as potential capital rather than capital, meaning that money becomes capital only when it is invested in business. Accordingly, money advanced to a business as a loan is regarded as a debt of the business and not capital and, as such, it is not entitled to any return (i.e. interest). Muslims are encouraged to purchase and are discouraged from keeping money idle so that, for instance, hoarding money is regarded as being unacceptable. In Islam, money represents purchasing power which is considered to be the only proper use of money. This purchasing power (money) cannot be used to make more purchasing power (money) without undergoing the intermediate step of it being used for the purchase of goods and services.

Principles Of Islamic Banking

In Islam, we use money for productive purposes that are for the benefit of the community as a whole. Money is not to be used to make more money directly, such as through interest. We use money to make more money indirectly, by investing money into productive assets, such as businesses, that will (insha'allah) make profits. It's a slower process, but it's a much more stable and safer system than the highly leveraged economy that's now melting down.

Update: For some similar posts, read Islamic Finance Shows Banks the Way Forward and Islamic Banking Restrains Bankruptcy.


Anonymous said...

Don't Western countries need to ban Chinese goods if they are to rebuild their own productive economies?

First world countries can't compete with 10 cents per hour workers...

JDsg said...

There are many more ways to compete - in any industry - than just on cost. The classical Chinese texts on management (which are popular here) give 36 competitive strategies. Read the Xerox case study (also here) to see how Xerox was able to regain its competitive advantage even though its Japanese competitors at the time were kicking its butt, including on the basis of cost.

The real problem Western businesses face against Asian businesses isn't cost, it's the fact that Asians are extremely competitive, far more so IMO than Westerners. They have to be; there are so many people here you have to be the best if you want to succeed. Some people will go to incredible extremes just to get a job (like potentially deforming surgeries). In Korea, my colleagues and I used to say, if we started up our own restaurants using Korean customer service techniques like those used in the restaurants there, we would make a fortune. The problem isn't here; the problem is largely the attitude back home.

M.G. said...

The answer could be simple if you think that living on debt or making money from money are moral issues. Why do we continue to oppose economic and philosophical categories? We continue to make a distinction between economic-financial matters and moral matters with hindsight. Opposing those matters may make things more complicate and tend to create problems rather than solve them. In trying to fix this crisis we should be a bit more forward-looking and holistic. Yet, these days economists seem to be oriented too much to the past and their schools of thought.
Why economists versus philosophers?