Posts Tagged ‘economic system’

External article: What RBS and the banks can learn from early Islam

April 15, 2013 1 comment

I recently came across a short article about the economic benefits of an Islamic economic system. This was in Money Week and authored by Dr. Peter Frankopan titled “What RBS and the banks can learn from early Islam“.

It unfortunately takes a non-muslim Historian to point out the benefits of Islamic economics void of overburdening income taxes and interest/debt overhang that drag economies into the abyss.

The disastrous results released by RBS earlier this year were bad from a financial perspective – a loss of £5.2bn in 12 months. But they were even worse morally.

Contained in the 318-page report, and listed in the unfortunately named section “Highlights”, are a catalogue of sins, including fines for fixing Libor, for mis-selling “structured collar products by the cartload and the systemised scandal of PPI [payment protection insurance]”.

If the sentence that follows is not meant as a joke, it is certainly a brave one: “RBS is committed to serving its customers well and helping them realise their ambitions.” Who knew that those ambitions included being ripped off?

Nevertheless, the report does try to seek penance for past deeds. This been a chastening year, it says. A time “to put right past mistakes.” RBS is lucky it was not in the banking business around the time of the birth of Islam – or it would have found things much more uncomfortable than a light grilling by the Financial Services Authority and the series of humiliating fines and provisions. The bankers would not have been losing their bonuses; they’d have been losing their hands.

One of the great secrets of early Islam was the store that was set by justice and on fairness in commerce. It was significant that the spiritual revelations delivered to Muhammad promised a new way of doing things, a way that protected private individuals as well as businesses from being exploited by those with access to credit. Of particular concern was the issue of the principles of lending money – a topic that appears repeatedly in the Koran.

The customers of RBS and the other banks implicated in the current scandals would recognise the sins that Islam’s holy book warns about. Those who set out to exploit their customers by excessive borrowing charges are no different to “those controlled by the devil”, records the Koran.

Read more…


Getting to the root of world’s real problem – Global poverty (Part 3 of 3)

April 15, 2013 Leave a comment

Now for the finale… having understood what the problem is, what the current system is doing to amplify this problem… time to get a glimpse of what a to-be state of the economic system should be.

Amongst many other details of the futuristic economic system, I see 5 key pillars:

1. Understanding that world’s resources are in abundance and not scarce as proposed by economists like Adam Smith

2. Recognize the problem of poverty and solve it to offer home, health, and food security as a fundamental right of all human constituents

3. Manage resource control effectively… important to understand that all the world resources can be classified as either belonging to an individual, the State, or the public

4. Ensure equitable distribution of wealth by making sure that individuals/ organizations don’t hoard wealth but rather use it thereby increasing wealth circulation (think of this as if a neighborhood is independently run as an economy and there are $1,000 worth of wealth and everything has to be run within itself, if people start hoarding cash and not using it, eventually, everyone will have cash but there wouldn’t be any means of earning for so many people who could have otherwise been employed to offer goods/ services for that wealth)

5. Focus on productivity in creating a “real” economy
_ Do not sell what you do not have (you can see how not following this principle has screwed the whole financial services industry and precipitated the crisis)
_ Introduce the gold and/or silver standard to support real wealth creation and not just currency paper printing
_ Eliminate interest from the economy and introduce profit-loss sharing in all financial transactions

Getting to the root of world’s real problem – Global poverty (Part 2 of 3)

April 14, 2013 Leave a comment

Continuing from my previous post, I hope we all recognize that “poverty” is a real problem and a flagrant violation of fundamental rights of many of our fellow mankind.

Now, what is the current system doing to exacerbate this problem? Let’s apply different lenses…

1. Everyone in the multinational forums talks about reducing poverty by 50% by 2020… So, does it mean that millions of people (just 300 children die of hunger every hour) are destined to die of hunger since we cannot solve the problem soon enough. Nothing more to be said on this…

2. Capitalism… it’s just a virtual economy with no “real economy” fundamentals
_ Dollar and the gold –> Back in the times, currency was tied to the dollar to ensure that we don’t over-inflate our wealth by just printing money. Now, that this linkage is gone, value of currency paper can be set by the whims of people in power. Just the other day, I was trying to do simple math that if an economy had real wealth of $1 trillion and is spending $1 million every day, it would take them ~2,700 years to exhaust just that $1 trillion.
_ Regulations –> Society has become more individualistic where rules have been changed as deemed fit for certain section of the society to remove all regulations and allow individuals to hoard wealth thereby taking it out of circulation. The power of a real economy is in the continuous circulation of wealth to allow for an equitable wealth distribution.
_ Stock inflation –> Just because some analysts/ investors forecast great returns (remember, nothing is predictable), the stock price shoots through the roof… take some of the recent IPOs for example. There is no real alignment with what happens on the ground.
_ Usury explosion –> In my opinion, this is at the core of this economic system menace… people with more wealth are able to rip off the not-so-privileged by lending money at unfair terms (high interest rates) which means a common man borrowing will have to pay more to afford the same kind of goods/ services.

Getting to the root of world’s real problem – Global poverty (Part 1 of 3)

April 12, 2013 2 comments

Over the last few years starting with my pre-MBA job, then the business school, and subsequently my current occupation… I have heard and seen closely the issues facing organizations. More often than not, what happened since 2008 is easily blamed on the “financial crisis” without delving any thought to understanding what’s behind this so-called crisis and what the fundamental underpinnings on this issue are…

At the heart of all this is the collapse of the economic system… the primary purpose of an economic system is to ensure economic well-being of all constituent individuals – a fundamental right to live for all mankind. Unfortunately, we have often taken this economic system as given, reclining to the belief that some people have to go hungry for some other people to have a lavish dinner spread.

Why poverty

So, now it’s a question of who falls into which bucket? And so does the flawed theory of “survival of the fittest” find its way. There are countless of articles on economic system and what can be done. I have decided to take a different approach and start with what is the prime objective of a “rational and just” economic system… and then build on how the ideal economic system will handle it robustly than the current systems – be it capitalism or socialism.

Even before we get there, let me share what someone says in support of what I am about to share…
“The causes of the economic crisis are a combination of greed, incompetence, and a number of additional negative character traits.”
– Steven Pearlstein, a Pulitzer Prize winner and a Washington Post columnist

(1) At the core foundation, the purpose of an economic system is to ensure economic well-being of every individual by solving the problem of poverty.

(2) This economic system has to co-exist in harmony with the other important systems of any well-run civilization – the social system, the political system, the legal system, and the moral system. What we see today is exactly the absence of this… where the ecosystem is so corrupt and degraded that I cannot think of any of these five systems being in a good shape.

(3) Now, everyone is very well aware of poverty in developing countries… how rare is it to see images of starving children in Asian countries or malnutrition-related deaths in almost the entirety of Sub-Saharan Africa? However, what we are not aware of is that hunger has embraced shores of the “developed world” as well. The US Department of Agriculture’s Economic Research Service reports that ‘in 2011, 50.1 million people lived in food-insecure households and prevalence rate of food security in the US has gone up from ~10% households in 2000 to ~15% households in 2011’. Even the so-called glorious boom years of 2003-2007 did little to stem this rising tide.

(4) We, living in America, have no clue about this given the media whitewash such fundamental issues get. It was eye opening for me to see a CBS video on “hunger in America” to show how one in six Americans are going hungry every night. So, even within the capitalist stronghold, there are one in six Americans who need a REAL CHANGE!!!

(5) And to add urgency to the situation, it was touching to see how some regions in the world have seen hungry push people back to the stone age… with adults selling off their kids just to afford food. This is really the bottom a civilization can get to… even though all this is happening away from many of us who are fortunate to live easy lives, it is our collective responsibility to rise above the “individualism” mindset to solve this problem.

What the new economic framework will entail…

March 24, 2013 Leave a comment

When we talk about economic framework, there are two different fundamental issues – economic science and economic system. This is because there is a fundamental difference between the method of production of goods and services (economic science) from the manner of their distribution (economic system). Economic science is universal and scientific with no effect from ideology or mindset. However, the distribution of resources, how goods and services should be given to the public, whether they should go to the rich or the orphans, the aristocracy or the landlords is different and dependent on either the belief system or ideology.

In an ideal setup, a human is neither an economic unit (as viewed in a capitalistic system) for whom all decisions from marriage to pensions to drugs to education are viewed from an angle of economic effect and cost. Neither is a human simply matter (as viewed in a communist system), just one aspect of nature, nothing more. A human is in fact someone composed of organic needs and instincts, all of which requires answers on how to satisfy them.

This economic system is built upon three principles:
1. Ownership
2. Disposal of ownership
3. Distribution of wealth amongst the public

However, economic science is left untouched to avoid interference in the production of wealth and let that be driven by human curiosity and quest. There are no rules on economic science since it is dependent on scientific advancement of society.

It has to be recognized that humans will undertake a number of actions to survive. These range from the buying of food, taking ownership of property, selling goods, investment, agriculture, taking loans, exchanging currency, taking up employment and giving work, setting up a company, importing and exporting abroad, disposing of assets, etc. Hence, the economic system has to put forward clear rules to seamlessly facilitate acquisition of goods and services (ownership). And the means of ownership/ possession are limited to just five which are:
1. Work
2. Inheritance
3. Obtaining wealth for the sake of life
4. State granting wealth to the citizens
5. Wealth and commodities that individuals take without exchange (gifts, donations and the like)

It cannot be claimed that this framework is restrictive and hinders economic activity because it has rigid rules, which cannot evolve with time as economic activity increases and changes via the invention of new technologies. This is because humans want to own things in order to survive.

This system will bring in equality and bridge the gap between the haves and have-nots while ensuring fundamental rights for everyone (no exception whatsoever). One emerging trend we are seeing in the world is homelessness. Current sociologists and economists, both capitalist and communist alike, try and explain the causes of homelessness: poverty, mental illness, disability, unemployment, alcoholism, drug abuse, domestic violence and so on. And after hundreds of years, it is clear that all the “political solutions” have not ended this misery.

The calamity of homelessness, it seems, is one of the defining features of current economic systems, and one of the bitter prices paid for the delusion of freedom, wherein the weak must sacrifice their material wellbeing for the benefit of the strong. It seems like freedom in a democracy means the freedom to be able to fail, and to suffer a life of great hardship, alone and destitute in the streets of the worlds’ richest and busiest cities.