This is a brief analysis of why the Islamic economic system (Zero Interest Model) is better than the Modern capitalist and Modern communist (State Capitalism) interest-based system
First, let us discuss how all three of these work – a simplified explanation of all 3 (These explanations are very brief so that even layman can understand)
Capitalist system: A free market where land/ goods can be owned and sold for profit by individuals (Demand and supply) without any direct interference by the State. It is a corporate-run economy where People or companies can start any business from their own money but mostly start with loans taken from private banks. The biggest flaw is that wealth is not well circulated due to segmentation thus give rise to inflation and economic dis-balance.
Communist system: A state-regulated market where land and goods are owned by the state and resources are distributed according to the need of the people. The state decides who gets how much resources and circulates wealth based upon the situation. The biggest flaw is the lack of liberty and freedom. If you are a good businessman or entrepreneur, you can never grow. In simple words “equality but no equity”.
Islamic system: It is a hybrid system that involves elements of both capitalist and communist systems of economy. A free market where land and goods can be owned and sold for profit by individuals (Demand and supply). But not full liberty the natural resources which are fundamental to human existence are owned by the State. Just like this difference many other features make it quite a unique system. Another difference is Zero interest. State abolish Usury/ Interests which cuts down the role of private banks to a greater extent. In this system, wealth keeps circulating in the society because of the concept of Zakat. This keeps a check on inflation as well as on the balance of wealth in a society.
Why Islamic system is better
Before going in detail of that let us look at the recent recessions around the globe. The 2008 recession and this 2020 recession which is apparently caused by the COVID-19 pandemic.
What is the main cause of these recessions?
The economies around the globe have become very inflexible due to the debt concept that has dominated major markets for years. 2008 recession started because of house debts and individual debts as back in those days banks were loaning out money to people at an alarming rate, the concept had become popular as people could afford housing or cars and slowly repay the debt + interest over several years but it had reached a point where many people started defaulting on their payments, as a chain reaction property owners didn’t receive their rent which meant they couldn’t pay the banks which meant banks couldn’t repay the government on their promised credit which triggered the recession.
Fast forward 2020 and we are in another recession, most will blame the pandemic, but it is not the reason. Yes COVID-19 served as catalyst, but the actual gun was debt. Companies and governments by 2020 had become so dependent on debt and loans that most of the portion of income is spent making large interest payments. The problem is the cycle continues if these companies and governments continue to raise capital and pay interest but with little room for any shortfall.
Anything which stops this cycle gives birth to a new economic crisis this is what COVID-19 did. This disturbs everything not just the micro but both macroeconomy. From a life of an individual to the economy of corporations and governments. A decrease in income means an increase in the burden of interest. Slowly this becomes a problem throughout the chain as borrowers cannot payback and lenders cannot get money, here both parties end up losing and a recession starts. This is the curse of a capitalist system
What about the communist system? Well on paper the communist system is perfect and a gateway to utopia however in practice it is also a ticking time bomb. As the communist system puts most operations in the state hands it can make the state defenseless against massive corruption and highly dependent on the competency of the leadership.
The system brought up against the status Quo itself creates a ruling elite that controls all the pillars of the state with little or no accountability.
The problem with this system is the lack of opportunity for the private sector which can play a vital role in sustainable development. Despite its advantage’s idea of spending resources regardless of its implications in the long term creates problems. Basically, even if any industry is performing horribly the state will just keep pumping more and more money into it removing any sense of competition and damaging quality of work as workers will still get paid regardless of how good they work.
So how does the Islamic system fair better?
The ideal system can only be the one that offers both the liberty and freedom to do business as well as keeps the circulation of wealth. It is a hybrid system that involves elements of both capitalist and communist systems of economy. It encourages the “Free market” i-e. the sale and trade by corporations and individuals without state intervention. This gives rise to an open market that can play its part in the economy regardless of how the government is managing the affairs.
But the main thing which distinguishes it from capitalism is the debt system being outcasted. Islamic system abolishes interests both in the private and government sectors, eventually eliminating the debt trap. Individuals and companies are instead encouraged to raise capital by Zero Interest investments and partnerships.
Additionally, with the introduction of Zakat (wealth tax), wealth starts circulated within the society. Overall, as more and more people start earning and are not under debt the economy rises without breaks improving everyone’s quality of life. These two concepts help in overcoming wealth hoarding along with that also help in building a sustainable balanced economy with much less inflation, which can deal with such crises like recessions.
Yes, in this system economy grows at a slower rate as compared to the capitalist system but it is a great long-term system that gives long term sustained growth without recessions and ultimately gives the best social benefit.
Important Note: This is the first part of the Article. The integration within the Global Neo-Liberal Capitalist Economic World Order is a separate topic. Is it feasible or is it itself a separate Economic World order is a part of the debate?
But this cannot work in a controlled environment that is for sure.