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Islamic Economic Theory Can Prevent Recession

J_Khan
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3/10/2016 2:43:33 AM
Posted: 8 months ago
Economic inequality is bad news for both rich and poor, as economists are slowly realising. House of Debt, acclaimed by the Financial Times as the "most important economics book" of 2015, by Princeton"s Professors of Economics, Atif Mian and Amir Sufi, demonstrated this well. They showed that the main cause of the 2008 U.S-led global recession was that indebted households pulled back on spending more during an economic downturn than the less indebted, driving businesses big and small into the ground and putting the whole economy into recession. Given that as of December 2015 household debt in the UK stands at a staggering 135% of income, and that U.S household debt is the highest it has been since 2010, we have good reason to worry.

The root of this problem is debt and the consequent wealth-gap between creditors and debtors. Interestingly, Islamic economic theory addresses such inequality and provides real solutions. Did you even know that Islam teaches economics?

Islamic economic theory differs from our current model in two particular ways: firstly, capital taxation, known as zakat (meaning: "that which purifies") is advocated over income taxation, and secondly, interest is prohibited. In truth, these two mechanisms go hand in hand. Here"s how.

There are two things in an economy: 1) money; 2) goods (like ice cream) and services (like launderettes). The value of money is only in its ability to obtain goods/services. Beyond this, it has no value in and of itself. This is the basic premise of money and the basic premise of Islamic finance. It is this principle that is violated by interest. How so? More here:
https://religionandotherthings.wordpress.com...
Naturalmoney.org
Posts: 25
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3/13/2016 8:19:26 AM
Posted: 8 months ago
The principal problem is that interest rates are a consequence of market forces, and that taxing capital would force interest rates upwards. It is true that interest is the root of many economic problems, but it is also true that interest is a natural phenomenon. Still, the usury-free economy is just around the corner, simply because of the efficient financial markets allowed such a capital build up that interest rates on low risk loans go negative. At that point banning interest becomes feasible, and such a measure will curb moral hazard, because interest is also a reward for risk.