Fall Of Capitalism and Rise of Islam by Mohammad Malkawi

There are two sides for the economic productivity: one is technical and the other is ideological. The technical side has to do with the scientific means and ways of increasing production and improving the quality of products. Included in this part are the management sciences, automation, information technology, decision support systems, enterprise resource planning, industrial engineering, and similar sciences. These sciences are universal and do not carry any religious or ideological connotation. Scientific methods can be used within the scope of any ideology, whether Islam or capitalism or socialism, to increase the quantity and quality of products. Therefore, the discussion of technology and the scientific means of increasing productivity do not fall within the scope of the economic system discussion. During the first rise of Islam, the Muslims found no harm in using the scientific techniques advanced by the Greek or Egyptian civilizations before Islam.

The other side of productivity is indeed a systemic one and is closely related to the ideological world view of peoples. The Islamic political economy provided several principles, which in the sum tend to create an environment for increased productivity. By productivity, here, I mean the production of goods and services which are used directly or indirectly to satisfy the needs of people within a given time frame.

It is interesting to note that some of the productivity issues carry both scientific as well as ideological character at the same time. Take for example innovation and invention. The invention of steam engine is a scientific breakthrough. But the political and economic environment which led to the creation of the engine is not pure scientific. Commenting on the relation between innovation and ideological framework, Carly Fiorina120 described Islam as a civilization which harnesses innovation. It has been noted by scores of historians and writers that the Islamic civilization as a whole was so conducive for innovation, invention, and productivity.

Before getting into the economic part of the productivity, I should mention that the spiritual part of Islam has a great impact on productivity both in quantity and quality. Let’s not forget that the Islamic society as a whole is established upon the creed of the belief in Allah as the only god and the necessity to adhere to his commands which are revealed through his messenger Mohammad (PBUH). Therefore, whatever Allah reveals either in the Quran or the Sunnah has a direct and strong impact on the Muslims who take note of this revelation.

In the Quran, Allah defines the main objective behind creating man, in the first place, is to exploit the abundant resources in this earth. In Surah Al-Baqara (chapter 2, verse 30), Allah says in reference to the creation of the first human (Adam):

[2:30] And when your Lord said to the angels: “Verily, I am going to place a viceroy on earth (one who exploits resources on earth)” This is further emphasized in references made in the Quran to the fact that Allah had created in the earth and in the heavens enormous amount of resources and he wants the people to reach out and exploit these resources for their own benefit. An example is the following verse from Surah Al-Jathia (chapter 45, verse 12):

[45:12] Allah it is He Who has subjected to you the sea, that ships may sail through it by His Command, and that you may seek of His Bounty, and that you may be thankful.

The Muslims understand these types of verses both as a statement of fact and as a command to do. It is no surprise, then, that as soon as the Islamic state stabilized, the Muslims engaged in all types of innovations and production.

Stressing the importance of production, the messenger of Allah (PBUH) commanded his companions to continue doing what they are doing in the field to the last minute of their life. In one narration, he said that one should continue planting a tree even if he sees the signs of life ending in front of his eyes.121 In another narration, the Prophet stated that any one who plants a tree will receive a reward from Allah every time someone eats the fruits of the tree; even if animals eat of it, the reward will be granted. Muslims in the early days of Islam took the statements of the Prophet seriously and pushed the production to the furthest limits.

On the quality side, the Prophet had called for perfection of the work done by people when he said, “Allah loves the one that perfects his job.122” The Prophet also had said that no one will enter heavens on the Day of Judgment unless he had perfected the work he was charged to do. Along this line, Islam prohibits the sale of any merchandise with a known defect. If a defect is detected after the sale, then the sale is revoked and the merchandise is returned, and the seller will have to pay the losses incurred due to the sale of a defected product. As such, the quality of production is an obligation in Islam for which Muslims are rewarded when they achieve it and defaulted when they violate it. The Quran further stresses the issue of quality when it says that the work performed by anyone will be monitored by Allah, his messenger, and the group of believers.123

The intellectual foundation of Islam, i.e., the belief in Allah and his Messenger, sets the stage for high-quality productivity. Productivity was one of the immediate fruits of the first rise of Islam and its civilization. When Islam declined, so did productivity (both quantitatively and qualitatively).

Besides the intellectual framework provided for productivity, Islam also provides a set of economic principles which facilitate productivity in the society. The components of the political economy which contribute to productivity are discussed in the next sections.

Usury, otherwise known as Riba in Islamic terms, or interest in capitalistic terms, is categorically prohibited in Islam. When Islam made the first critical assault on usury, it observed that usury allows the cycle of wealth growth to exclude production. In other words, the money grows as a result of monetary exchange only. The Quran explained that usury (Riba) is a process by which the monetary wealth of one human entity grows at the expense of the monetary wealth of another human entity.124

Usury in ancient civilizations, e.g., Babylonia and Assyria, produced what was known as debt slavery. Lenders could lend their money to people who would bind their persons as collateral security and sell them into slavery, in the event of nonpayment.125 The same practice existed in old Greek cities of Athens and Sparta where the peasants were oppressed by the rich and encouraged to get into debt and then were reduced to slavery and exile.126 This practice continued in different forms within the Roman Empire and tribal societies of Arabia before Islam.

Perhaps the most outstanding and dramatic visualization of the evil impact of usury on societies is the famous play by William Shakespeare The Merchant of Venice.127 Shakespeare dramatized the personality of Shylock, the Jewish banker, who lends money with larger interest rates versus Antonio, the merchant, who lends money without interest. The usurious Shylock was willing to take the life of Antonio for unpaid or delayed debt.

Most recently, Richard Wolf in a speech at the University of Massachusetts exposed the impact of usury on the working class in the United States and on productivity.128 The average wages of the workers continued to flatten since the 1970s, while the consuming habits continued to rise, which pushed the majority of the Americans into a borrowing spree. Borrowing money with high interest rates (credit card interests average over 20%) against the already-low wages and the real estate possessions exhausted the workers and turned them into what amounts to a “labor slave.” Labor slavery allows the master to own the labor without having to care about the laborer.129

The impact of usury on productivity was most visible when large corporations, such as General Motors, decided to lend the huge amount of accumulated profit to its workers. Corporations were able to make profit twice. On one hand, they are no longer under the pressure of raising the wages, since the workers are getting more money, albeit in terms of loans. On the other hand, the loans generate profits in the form of interest (usury). Over time, it turned out that generating profit through interest is much easier and more guaranteed than making money through selling cars. Consequently, the auto industry was compromised for the benefit of the usury based banking industry. When General Motors filed for bankruptcy and asked for government bailout money, its bank (GMAC) was indeed making profit.

Money generated through usury is one major cause for the creation of virtual wealth, where money grows at much higher rate than production. The claim that interest baring loans constituent a strong mechanism for financing projects is a mere myth. Say for example, a bank provides one million dollars loan to finance a machine shop with 10% annual interest rate. Assuming everything goes well with the project, the amount of real money which goes to the project is $900,000 instead of the million which was borrowed. The other $100,000 is retained by the bank. So the usurious part of the loan does not go into the production cycle at all. The principle of the loan alone is what participates in the production of goods. Islam did encourage loan giving without interest; Islam called such loan “a good loan.” Allah praised the believers who provide good loans and promised to multiply the rewards for them. Allah considered a good loan giving to anyone in the society as if it was a loan given to Allah Himself.130

The bank, which lends money with interest, makes everything possible to guarantee the return of its money plus interest in full; even when the projects fail, the bank still takes back its money in full. In other words, the bank is the least party interested in the production of goods because its money and profit is guaranteed either thorough collateral, or through government-backed insurance. In the case of Shakespeare’s character Shylock, the guarantee was the flesh of the merchant. In the older civilizations, the guarantee was the freedom of the person or his family members.

In contemporary economic systems under the dominance of capitalism, it has become a common practice for the same amount of money to be loaned multiple times such that bank A lends the money to bank B, and bank B lends the money to bank C, and so on. Every bank in the process gets a share of the usury in the cycle of loans. The main victim in this cycle, besides the people who have to pay the interest, is the production itself.

Profit generation through money lending adversely impacts productivity. Over time, societies which excel in the banking and usurious practices tend to move away from the more complex production economy, which requires factories, machining, management of employees, and so on. The United States provides one of the best examples, where big corporations like GM have shifted their weight to money lending with interest more so than making cars for people to use. Outsourcing of a large portion of the industry in the United States to China and India is another example, where large corporations turned into investors rather than producers.

Islam considered Riba (usury) a disastrous practice in the society. And thus it made any practice of usury in any form or format illegal and prohibited. In one verse in the Quran, Allah vows to destroy and eradicate whatever is built upon usury.131 What really this means is that the virtual economy which is built upon usury cannot survive and is bound to collapse and vanish. After the collapse of Lehman Brothers Bank in 2009, the assets and wealth and power of the bank vanished in no time.

When Riba is prohibited, then the only way money finds its way to the market is either through good loans, or partnerships. Good loans are typically provided by people in support of friends or relatives for whom the money lender cares. So the loan giver has a direct or indirect interest in the success of the people whom he provides the loan to. The fact that no interest is retained by the giver allows the use of the full amount of money in the project for which the loan was given.

The other, and more common, practice is to provide the money in the form of investment and partnership in the project. The investor in this case receives profit from the project. The investor shares the profit as well as the losses of the project. The only way the investor can benefit is through the success of the project. In this case, the money can grow only if there is a product which results out of the investment. Thus, productivity is guaranteed to increase through a non usurious participation in the production cycle.

It is interesting to note that Islam did not prohibit Riba until the Islamic state was created after the migration of Prophet Mohammad and his companions to Medina. Although, the Quran condemned the practice of Riba while in Mecca. But it was not until the migration took place that the verse in Surah Al-Baqara was revealed saying, “Allah permitted trade and prohibited Riba.”132 After the conquest of Mecca, the Prophet made a public declaration by which he demanded the end of all usury practices in Mecca. This was done on the day of pilgrimage.

The point here is that the Islamic rules on Riba will be able to generate the expected results of enhanced productivity only when the entire political economy of the society adheres to the principle of “no Riba or zero interest.” The coexistence of Riba-free financial institutions side by side with interest-based banks will only produce mixed results and have marginal impact on the overall health. When individuals abstain from receiving loans with interest, they at least protect their property and avoid the ugly consequences of interest-bearing loans.

With the prohibition of Riba, Islam eliminated one of the main hurdles to productivity. To guarantee the deployment of wealth in the production cycle, Islam further prohibited the hoarding of wealth.

Hoarding is defined as the process of collecting and putting away wealth such that it may no longer be used in the production of goods and services. Islam categorically prohibited the hoarding of wealth when it prohibited the hoarding of gold and silver, being the main currency of the Islamic state.133 The prohibition of hoarding of gold and silver is a major principle in the political economy of Islam aimed at sustaining productivity. Paying the Zakah charity does not change the status of hoarding to a permissible act. Zakah is one principle aimed at eliminating poverty, while the prohibition of hoarding is aimed at sustaining productivity. These two principles cannot be at odd with each other. Rather, they complement one another and allow for a more stable economy.

The gold and silver during the early days of Islam were the currency used for financial transactions. Gold and silver continued to be the currency of the Islamic state until the state collapsed in 1924. So when Islam prohibited the hoarding of gold and silver, it really prohibited the hoarding of money, or wealth. The concept of hoarding does not apply for regular jewelry used by women. Putting money aside for a particular project, such as building a house, performing hajj, or preparation for wedding is not considered hoarding as well. Hoarding, in essence, is a means of keeping money outside the production cycle for indefinite time.

When a person accumulates a large amount of wealth and keeps that money in a safe deposit box or in any account where the money is not used in any project, whether for buying merchandise, a real estate, a business, or any other project of financial merit, then that stockpiled money is a big loss for the economy. Production can only be sustained if the wealth generated as a result of production is reused in the cycle of production. The produced wealth can be used either for consuming goods, commodities and services, or for producing more goods, commodities, and services. In either case, the production cycle grows in strength and rate. The moment part of the produced wealth leaks out to be hoarded, the production cycle will suffer weakness and may come to a complete halt if wealth leak does not stop; see figure 32.

In the normal production cycle, the wealth is used to consume products and services, which in turn generate profit for the producer who produces the goods and services. As a result, the economy of production grows in terms of produced goods and services and in terms of wealth, which is necessary for the production and consumption. When hoarding occurs, part of the wealth leaks out of the cycle, which reduces the amount of wealth available for consumption and production. Essentially, Islam prohibited this phenomenon, where part of the wealth is removed from the production cycle through the process of money hoarding.

One of the causes of the most recent financial crisis in the world of capitalism was in fact the hoarding of wealth. Investing firms and banks in the United States and Europe decided to withhold a large portion of their money investment and drastically reduced the amount of loans issued to the public. A major motive for the stimulus packages and bailout money given by the government to banks was to encourage or force the banks to resume the process of giving loans to the public. In other words, the banks withheld a large portion of the money and kept it away from the production cycle. Of course, there are reasons for this behavior; but whatever the reasons are, when part of the wealth of a nation is stacked away from the production cycle, the production slows down, the economy downturns, and the financial system suffers a great deal.

The Islamic political economy prevents all forms of hoarding, no matter what the reason was. Hoarding continues to be prohibited, even when a Muslim spends part of his wealth in support of the cause of Islam, and pays the Zakah dues in full. Al-Qurtubi, the famous Quran commentator, says that the “hoarding verse” at once prohibits hoarding and obligates the spending in the cause of Allah; in other words, the verse contains two separate rules.134 One rule makes the hoarding of money a prohibited act; and the second rule makes the spending in support of the cause of Islam an obligation. Within the Islamic society, hoarding will be prevented by two forces. The piety of a Muslim and the full obedience to Allah in pursuit of his pleasure and reward and in evasion of his wrath and punishment is a strong motive for many Muslims to abstain from hoarding and to keep their wealth in the market. Besides the internal Islamic drive, the Islamic state will enforce the “no hoarding” rule by the power of law, since it is the responsibility of the Islamic state to guarantee the full implementation of the Islamic code. In the same manner, as the state will prevent monetary transactions involving usury, it will prevent acts of money hoarding.

As discussed above, hoarding is a process which keeps money and wealth outside the production cycle; instead of investing the money, the hoarder will stack it up and deprives the economy form investment opportunity. The prohibition of hoarding automatically calls for investment of the accumulated wealth, especially when the amount of wealth is excessively large. Since wealth is not allowed to grow through usury, then the only means of growing the accumulated wealth is to keep it in the production cycle. One of the mechanisms introduced by Islam is a form of partnership called “Mudharabah.” Mudharabah is a form of company in Islam where one partner provides wealth and the second partner provides labor. The wealth partner(s) can be one or more individuals. The labor partner can also be one or more individuals. The wealth provider is typically someone who has more wealth than he can spend and does not have sufficient time or skills to invest his money. The labor partner is typically someone who has the time and skills but does not have enough wealth to invest and produce. The Mudharabah partnership brings both parties to the market such that the wealth is invested rather than hoarded, and the labor, skills, and knowledge are utilized. Unlike the employment of labor and skills, the Mudharabah partnership exploits the maximum energy of the labor partner, since he becomes one of the owners of the company.

Mudharabah partnership eliminates one of the common reasons for hoarding. The wealthy person, who may refrain from investing his money in the market due to lack of time, skills, or knowledge of investment, will be forced to seek a partner who lacks the wealth. In essence, Mudharabah boosts production from both sides: the money and the labor.

In the Mudharabah partnership, both partners (the laborer and the investor) are equally responsible for the success or the failure of the company. If the company fails, then the one who supplied the money loses his wealth investment and the laborer loses his labor investment. Under the rules of partnership in Islam, the labor partner does not receive any salary, no matter what role he plays in the company. He is only entitled to receive dividends based on the amount of share he holds in the company. Note that the shares in the company do not have to be equally divided between the labor part and the money part; usually, an agreement between both sides will determine the shares of each. No matter what the share distribution is, the responsibility for the company is equally shared by both parties. The rules of Mudharabah in Islam are such that each partner in the Mudharabah is vigorously interested in the success of the company. This should, in principle, increase the confidence of the money partner and reduce his concern for his investment. Since the labor partner does not receive any compensation for his effort, he should be more interested in the profitability of the company, because this is the only way he can get rewarded for his effort.

While there are other ways in Islam to channel both wealth and labor investments, the Mudharabah partnership provides an economic opportunity for a class of wealthy people and a class of skillful laborers to merge and contribute to the production cycle. In its simplest form, the Mudharabah allows the investor to invest his wealth and avoid hoarding, and allows the laborer to become an owner of wealth and the means of production. In a more complex form, Mudharabah provides a mechanism for project funding, especially when the projects require a large amount of money. In this case, a group of wealthy investors partner with a group of variety of labor skills. It is envisioned that Mudharabah partnership will substitute the role currently played by banks and financial institutions. A major difference, of course, is that banks provide loans which are recoverable in full plus usurious interest.

In essence, the Islamic political economy sustains the highest level of productivity by utilizing the three principles: prohibition of usury, prohibition of hoarding, and Mudharabah. Money cannot make money without being invested in the cycle of goods and services production; otherwise, the gained money will be considered Riba or usury, which is categorically prohibited in Islam. The profit gained through the cycle of production must come back to the same cycle, either by consuming some of the produced goods and services or by producing more of the goods and services. Otherwise, hoarding will occur and that is not allowed. When the money owner lacks the skills and knowledge for proper investment, he can resort to Mudharabah, instead of investing in usury, which is prohibited, or hoarding, which is also prohibited. Thus, the wealth in the society will remain in the production cycle, and the skills of individuals will be part of this cycle. Consequently, Islam guarantees the utilization of both components of productivity: money and labor. On top of that, Islam provides the moral and spiritual framework for production and perfection of products as explained earlier: produce until the last moment of life, and perfect whatever you do.