Economic activity by its very nature is risky as those who partake in it directly can gain or lose wealth. Hence in all economic systems, there is always an understanding by those who participate that they may lose their capital or effort. However, there are other phenomena that adversely affect the economic life of a nation by artificially creating an atmosphere of insecurity, and thereby reducing the level of economic activity. These arise because of the specific economic system implemented, for example in the Capitalist system, we find :
i) Booms and Busts: In the Capitalist system, periods of good and bad trade have become evident from the records. Although opinions differ widely among economists on the conditions responsible for trade fluctuations, a common feature is that the root cause of these conditions stems from the foundations of the Capitalist economic system.
ii) Runaway Inflation: The fact that money continually loses its value has become an intrinsic part of Capitalist economies. Here again there are many opinions from economists as to what causes runaway inflation. But the recipe for runaway inflation lies at the heart of established financial controls in the Capitalist system.
iii) Money market crashes: These occur irregularly in the form of sudden exaggerated changes in foreign exchange rates and sudden falls in share prices.
The most fundamental characteristics of the Capitalist economic system which forms the root of these phenomena are speculation and false representation. These are manifested in, for example, the artificial creation of money.
As such, there is nothing to prevent governments from literally creating money at will. Excessive creation of paper money which cannot be represented by real wealth is the root cause of inflation. Further, governments and banks refer to this blandly as increasing money supply, i.e. they have printed more money while the assets the money represents remain constant.
In addition, high street banks can lend money that is not existent by crediting peoples accounts on paper. This false representation that is meant to keep the system going actually creates more artificial money.
In Islam it is prohibited for the State to artificially alter the supply of money which is based on real tangible assets (gold and silver). Therefore there is no increase in money supply beyond real increases in wealth and accordingly inflation is not a problem. In such an environment businesses have far greater stability and bust/boom, inflationary/ recessionary cycles will not occur. In Capitalist economies governments often use instability in money supply as a form of additional taxation upon the people. As the value of their earnings or assets and savings rapidly plummet there is a massive transfer of value to the government/ banking system that controls the currency. The ex-Yugoslavia and Russia are recent examples of economies where governments used hyperinflation for these ends. That inflation may be 2-6% in many western countries is little comfort as it is still eating of the wealth of the people.
In conclusion, the above points clearly outline certain fundamental differences between the Capitalist economic system and the Islamic Economic System. The inherent failing of Capitalist economies can be seen today throughout the world, even in the Muslim countries, where it has been forcibly applied by corrupt rulers. The details of Islamic economics should fill us with confidence that Islam provides solutions to the ‘economic problem’, which the world around us currently faces.