An Overview of Public Borrowing in Early Islamic History

Islamic Economic Literature
			An Overview of Public Borrowing in Early Islamic History
			Secondary Title:  Islamic Economic Studies Vol. 2 No. 2
			Price: Free to Download
			By: Muhammad Nejatullah Siddiqi
	View
	Cover Page Table Of Contents  Back Page
	Literature Type:	Discussion Papers
	Literature Subject:	Public Finance, Zakah, Macroeconomics
	Language Of Text:	English
	Country:	Saudi Arabia
	Publisher:	Islamic Development Bank
	Date Of Literature:	June 1995
	Numbers Of Pages:	22
	ISBN/ISSN:	1319-1616
	Abstract:	Public borrowing has assumed great importance in recent years as indicated by the phenomenal rise in the volume of domestic as well as external debt. This is especially true of Muslim countries most of which belong to the group of poor developing countries of the world. There is a growing literature on the "solution" to the crisis supposedly faced by the world financial system because of these debts; some of which are now considered to be unrepayable. There have been attempts to look at the causes of this phenomenon of permanent indebtedness of nations. Islamic economists have also discussed the implications of abolition of interest for public borrowing. They have tried to find alternative ways of financing public needs hitherto financed by borrowing. It is in this context that scholars have felt the need to look back and see what lessons can be learnt from the Islamic heritage. Did the Islamic state in the past borrow? If so, why and on what terms? Were there any alternatives to borrowing? With these and related questions one can explore the historical records of the many governments, spanning vast regions of the globe over the long period of fourteen hundred years. This is however, a very ambitious project requiring extended teamwork. Yet another problem with such a study is the Islamic authenticity of what the Muslim rulers have been doing all these centuries in all these regions. Authenticity naturally belongs to the decisions and actions of the Prophet (pbuh). The consensus of the community has extended this authenticity to the period of the four pious Caliphs also, i.e. to the policies of the Islamic state till the year 40 after hijrah. In other words, in the context of public finance (including public borrowing) the policies of the Islamic state till the year 40 after hijrah can serve as examples of Islamic policy making and, taking into consideration other relevant factors such as need, scope and perceived functions of borrowing etc., guide to Islamic statecraft in the modern period. As regards other Muslims rulers, their decisions and policies have to be judged on the criteria of the Qur'an and the sunnah. In the context of public borrowing, the most important criterion on which the legitimacy of public borrowing by Muslim rulers has to be judged is the prohibition of interest. This means that if an incidence of borrowing on the basis of interest by a Muslim ruler is reported it has to be regarded as an aberration rather than a precedent, generally speaking. This does not mean, however, that recording and analyzing such cases is of no use to Islamic economists. There is a possibility that such a course of action was resorted to under `extreme necessity' (idtirar). In this case it becomes possible to condone the action despite the fact it can not be a precedent for others, being a violation of shari'ah. While a judgement in such cases may be beyond the scope of an Islamic economist's vocation, it is his job to study these cases and analyze the causes and consequences as benefits an economic historian. In fact such a study on his part will not only facilitate proper `judgement' on such matters, it is a necessary precondition to it. Another important dimension of the matter is the linkage of a particular policy decision with the realization of the goals of shari'ah. Did public borrowing serve a well recognized goal of shari'ah, is an obvious criterion on which its propriety or otherwise should be judged. This study covers only the periods of the Prophet (pbuh), the four pious Caliphs, the Umayyads and that of the Abbasids till the year 333 A.H/944 A.D. after which real power passed, in succession, to the Buwaihids and the Seljuks, and this continued till the sack of Baghdad by Holaku in 656/1258 which put an end to the Abbasid Caliphate at Baghdad. Our primary task has been to record the reported cases of borrowing by the rulers for public purposes. Then we look into such details as the need and circumstances which prompted borrowing, the amount borrowed (in cash or kind) the identity of the lender, the terms and conditions attached, if any. We also inquire whether the lending was voluntary or the ruler had to coerce the lender. We also look at the details, if available, of the repayment of the loan. Having noted these features we try to analyze these cases in relation to their causes and consequences. Finally we consider over the lessons that can be drawn, if any. A serious handicap faced by the writer has been the absence of any other study on the subject which could help in posing the questions or looking for the answers. This should be regarded as one of the reasons, should the discerning reader find the present study deficient in some ways.

Research Methods in Tourism: Quantitative and Qualitative Approaches

Research Methods in Tourism: Quantitative and Qualitative Approaches. By Larry Dwyer.

September 7, 2012

Author Articles, Geography, Research Methods

photograph: Harald Hoyer (CC BY-SA 2.0)

Professor Larry Dwyer examines established and emerging qualitative and quantitative research methods in tourism, offering a summary of his book Handbook Of Research Methods In Tourism: Quantitative and Qualitative Approaches, (Edited by Larry Dwyer, Alison Gill and Neelu Seetaram).

In the last two decades, the application of quantitative and qualitative techniques in the study of the tourism phenomenon has gained momentum. This can be traced back to several factors. The most prominent is perhaps the fact that, as the reliance of destinations on tourism has grown and the industry expanded globally, more resources have been devoted to the collection of quantitative data and the maintenance of tourism data sets. This may have encouraged researchers interested in quantitative data analysis to give higher priority to the tourism industry in their research agenda. At the same time stakeholders of the industry, including destination managers, local and federal governments, keen to make more informed decisions, by devising better policies and evaluating existing are paying more attention to results from quantitative research. The approaches used by tourism researchers are heavily informed by progress in econometrics and statistical analysis across all social science disciplines.
At the same time, qualitative research is a well-established approach to researching phenomena in the social sciences.  Comparatively, its application in the fields of tourism studies and management is a more recent occurrence dating from the late 1970s and 1980s. Increasingly, however, in the early decades of the twenty-first century, qualitative research is gaining broader acceptance within those fields. This acceptance is due to the ability of qualitative research to provide rich, in-depth knowledge from multiple viewpoints along with its emphasis on verstenhen, “empathetic understanding”, especially, with regard to the “how” and “why” of tourism related phenomena and experiences. The discussion makes it clear that our reflexive lenses on tourism phenomena have been heavily founded in western developed world contexts. The application of western centric concepts and dimensions assumes that these are universal and that different cultures and peoples of the world use the same lenses to understand and interpret the world. In the view of many theorists, Western epistemologies are insufficient to support alternate knowledge bases with regard to tourism phenomena. Tourism research needs to incorporate and promote ways of knowing and researching that are not just predicated on western worldviews, embracing multicultural research teams and multicultural studies, which are emically focused and are contextually and temporally situated.
The chapters in Handbook of Research Methods in Tourism: Quantitative and Qualitative Approaches address the most important established and emerging qualitative and quantitative research methods in tourism.The book comprises 25 chapters each devoted to a different research method. Each chapter is structured to provide detailed overview of the nature of the research method, its use in tourism, its advantages and limitations and future directions for research.  All chapter contributors are active researchers in tourism and all have international standing in the discipline. All have published works that use the technique that they write about. The 41 authors are based in 26 universities in 8 countries giving the book a truly international perspective. A bio for each contributor appears at the back of the book.
The question arises: why another book on research methods? Well, for starters, there is no book on the market that structures the material on research methods in the way that the authors have done for this book. All of the authors were required to structure their chapter in the same way. (a) Nature of the technique and its evolution; (b) Background and types of problems that the technique is designed to handle; (c) Applications of the technique to tourism, including discussion of studies that have used the technique and their findings; (d) Advantages and limitations of technique conceptually and for policy formulation; (e) Further developments and applications of the technique in tourism research
This structure makes the contents of each chapter much more informative to the reader, providing a comprehensive discussion of the technique itself as well as its application in tourism and related contexts. The editors are confident that the imposed structure will result in the individual contributions making an important contribution to tourism studies, ensuring that each will be highly informative and widely referenced in the literature. The chapters are constructed in a way that they provide a detailed overview of the different techniques irrespective of their tourism applications. In this way the volume should appeal to social scientists in general and not just to researchers in tourism.
If tourism studies are to be credible and add to our knowledge in this discipline area, researchers must employ methods of analysis that are at the cutting edge of social science research. The progress made in advancing tourism knowledge in recent years, and its increasing relevance to policy formulation, is due in no small part to the use of more sophisticated research methodologies by analysts.
Larry Dwyer PhD is Professor of Travel and Tourism Economics in the School of Marketing, Australian School of Business, at the University of New South Wales, Australia. He publishes widely in the areas of tourism economics, management and policy, with 200 publications in international journals, government reports, books, book chapters, and monographs. He receives many invitations to give keynote addresses at international tourism conferences and workshops worldwide, and has been awarded numerous research grants to contribute to tourism knowledge. He is President of the International Academy for Study of Tourism, the world’s peak academic tourism association. He is also President of the International Association for Tourism Economics. He is an appointed member of the Editorial Boards of twenty one international tourism journals. Larry’s main leisure interests are tennis and swimming.
Handbook Of Research Methods In Tourism: Quantitative and Qualitative Approaches.Edited by Larry Dwyer, Alison Gill and Neelu Seetaram.

Recent Advances in Tourism Economics

Recent Advances in Tourism Economics – by Larry Dwyer

September 27, 2013

Author Articles, Economics and Finance

photo credit: joiseyshowaa via Flickr cc

September 27 has been established as World Tourism Day by the UN World Tourism Organization (UNWTO). The aim of the day is to raise awareness that tourism is vital to the international community and to show how it affects social, cultural, political and economic values worldwide.
It is not surprising that tourism has been highlighted as a significant world industry, and research in the area of tourism economics has increased substantially in recent years. Larry Dwyer is a leading scholar in this area and has recently co-edited a two-volume work which comprises a selection of seminal articles published over the past decade, specifically chosen for their theoretical content and contribution to informed policy making. 

Over the past six decades, tourism has experienced continued growth and diversification to become one of the largest and fastest growing economic sectors in the world. Despite occasional shocks, international tourist arrivals have shown virtually uninterrupted growth – from 25 million in 1950, to 278 million in 1980, 528 million in 1995, and 1,035 million in 2012. Domestic tourism accounts for an addition 5-6 billion tourists annually. The economic contribution of tourism to the world economy is substantial, accounting for $1.3 trillion, or 6% of worlds export, and 9% of (direct and indirect) GDP. The number of international tourist arrivals worldwide is expected to increase by an average 3.3% a year over the period 2010 to 2030.
Over time, an increasing number of destinations have opened up and invested in tourism development, turning modern tourism into a key driver for socioeconomic progress.  For many developing countries, it is one of the main income sources and the number one export category, creating much needed employment and opportunities for development. Factors underpinning this development include the growth of incomes and wealth, improvements in transport internationally and within destinations, changing lifestyles, consumer values and aspirations, increased leisure time, international openness and globaliza­tion, immigration, special events, education, information and communication technologies, destination marketing and promotion, improved general and tourism infrastructure etc. Travel is now part of consumer patterns for an increasing number of people in both emerging and advanced economies underlining the need to rightly place tourism as one of the key pillars of socio-economic development, being a leading contributor to economic growth, exports and jobs. Since there are economic consequences to all of these changes, it is not surprising that research in the area of tourism economics has increased substantially during the same period.
The importance of tourism to the world’s economy makes the two volume publication – Recent Developments In The Economics Of Tourism – very timely. The economic significance of tourism internationally and for individual countries indicates the importance of an understanding of the role that tourism economics can play in theoretical development, empirical research and policy formulation. This book provides a collection of some of the most important contributions to tourism economics over the past decade. It is published in two volumes: Volume 1 Demand, Supply, Pricing, Taxation, Employment and the Environment, includes 37 papers on the topics of tourism demand modelling and forecasting, supply and pricing, taxation, environmental economics, tourism transport, and employment issues. Volume 11, Trade, Development, Impacts, Competitiveness includes 36 papers on the topics of tourism and economic growth, international trade, social issues and welfare effects, economic impacts, tourism in crisis, and destination competitiveness. The contributions include content from many of the world’s leading tourism economists.

The editors acknowledge that the papers collected in this volume and the topic areas selected are only some of those worthy of inclusion. Clearly the choice of which papers and topics to include and which to exclude came down to matters of judgment. Inevitably, a number of important papers have not been included in this edition. Readers will have their own ideas, for and against, the editors’ selections.

Ongoing research is progressively expanding the boundaries of our knowledge of tourism economics. The directions for further research highlighted by the authors whose works constitute this volume are just some of those that could be formulated. Readers will have their own ideas as to which research topics are most relevant for the future. Changing global trends (economic, social, demographic, political, technological and environmental) will continually pose challenges to economic theory and policy and the ways tourism activity is analysed. Whatever the specific topics that researchers will address in the coming years, it is clear that tourism economics provides a fertile ground for research with the potential to inform policy-making to improve socio-economic prosperity in all destinations worldwide.
Interestingly, despite its importance, tourism is not an area that has engaged the widespread interest of academic economists. It is to be hoped that this volume of collected papers will inspire other researchers to develop the creative ideas of the authors to further progress knowledge creation in the dynamic discipline of tourism economics.
Larry Dwyer is Professor of Travel and Tourism Economics in the School of Marketing, Australian School of Business at the University of New South Wales. He publishes widely in the areas of tourism economics, management and policy, with 200 publications in international journals, government reports, books, book chapters, and monographs. He receives many invitations to give keynote addresses at international tourism conferences and workshops worldwide, and has been awarded numerous research grants to contribute to tourism knowledge. He is President of the International Academy for Study of Tourism, the world’s peak academic tourism association. He is also President of the International Association for Tourism Economics. Larry is an appointed member of the Editorial Boards of twenty one international tourism journals. His main leisure interests are tennis and swimming.
Recent Developments In The Economics Of Tourism, co-edited by Larry Dwyer and Neelu Seetaram, was published earlier this year.

Impediments in Developing Islamic Economics as Social Science

Impediments in Developing Islamic Economics as Social Science – by Muhammad Akram Khan

May 13, 2014

Economics and Finance

For the last three decades now, there have been significant developments in the production of research documents, books and journal articles on Islamic economics and finance. For example, the Harvard Islamic Finance Project databank had by April 2014 more than 9000 records available for free access.  A number of websites and several research journals publish material on the subject. A number of educational and training institutions now offer courses in Islamic finance.  During the last two decades literally thousands of publications and hundreds of discussion forums have been held on Islamic economics and finance. Despite significant progress in terms of literature and research, Islamic economics is yet not a social science. Generally speaking a social science studies some social phenomenon; has a clearly defined scope and boundary lines; and applies research methods to formulate theories for making predictions about the future. A literature review shows that Islamic economics does not meet the above criteria as discussed below.
We have not clearly defined the social phenomenon that is the subject of Islamic economics. We are as yet unclear whether economic problems as defined by conventional economics is the focus of our study or whether we are studying some other social phenomenon. We are uncomfortable with the expression ‘scarcity of resources’ as it seems to flout the almightiness of God who has created everything in abundance that human beings need. Once we deny scarcity of resources as a fact of life, we are left with a situation which does not have an economic problem. So, which social phenomena is the subject of our study? We have not faced this question. The scope of Islamic economics remains quite nebulous. The literature traverses a wide range of subjects that includes the economic teachings of Islam as enunciated by the Qur’an, Traditions of the Prophetand Islamic jurisprudence, writings of scholars during the last 14 centuries, alongside subjects like macroeconomics, microeconomics, money and banking, public finance, microfinance, and so on. The boundaries of the subject are yet not clearly drawn. We are also unsure about our methods of study. Some vexing questions are as follows: (a)  Should we follow, adopt or adapt the methods of conventional economics? If yes, how to go about it? If not, are there any distinctively Islamic methods to be used in Islamic economics? (b)  What exactly do we need to test when the primary sources of Islamic economics are divine and have to be taken as given? (c)   How to test our hypotheses in the absence of an ideal Islamic economy? (d)  Do we assume the existence of homo Islamicus or do we only theorize about ‘creating’ such a human species? We have paid scant attention to the study of real-life conditions in the contemporary world, although some of us think that our main business is to transform societies to Islamic patterns.  With such ambiguities about scope, approach, objectives and methods, Islamic economics could not claim the status of a social science.

Muhammad Akram Khan expands on the issues discussed in this post in his book ‘What is Wrong with Islam Economics?’

Impediments One problem is that we are talking to each other to the exclusion of the wider knowledge community. This is evident from a set of definitions presented by our colleagues. Some of us say that we mainly study application of the Shari’ah in economic matter. Others think Islamic economics studies only the conditions of Muslims. Still others require some sort of faith in Islam before a person contributes to Islamic economics. Further, most of us often use the idioms and jargon, the terms and phrases and the legal dicta that can be understood easily by Muslims only. Such approaches have made Islamic economics a branch of knowledge where Muslims are talking to Muslims. Literature on Islamic economics presents a confused picture about the relationship with conventional economics. One approach is to reject everything that conventional economics offers. Another response is to develop Islamic economics on a basis similar to conventional economics by using the tools of the latter. Still another approach is to modify conventional economics by incorporating ‘Islamic’ assumptions. The issue is still far from settled. We have confused the concept of Shari’ah by mixing up human thinking with the divine guidance. The Shari’ah consists of a small number of clear and unambiguous injunctions stated in the Qur’an or Traditions of the Prophet that require compliance but no interpretation. However, we have often treated human interpretation of these injunctions as Shari’ah whichcreated road-blocks for developing Islamic economics as a social science. If we treat human thinking from the last 14 centuries as part of the Shari’ah, the question of formulating hypothesis and theories becomes irrelevant. We have not rigorously reflected on the question: “What business are we in?” Are we in the business of acquiring and developing knowledge or in the business of transforming the society? If we are in the knowledge business our main activity would be observation, analysis, and reflection on divine sources and real-life facts for formulating theories and predicting the future. However, if we are in the business of transforming the society, we are only duplicating the effort of thousands of religious activists and organizations already in this business. In fact, this has been a continuous activity of religious activists during the last 14 centuries and there is not much now to be done through the forum of Islamic economics. We do not need to reinvent the wheel of Islamic reformation. Some of us have attempted mathematical modeling under conditions of the ideal Islamic society. However, the ideal Islamic economy does not exist and will not come into being in the foreseeable future. The assumption of the ideal Islamic society became a stumbling block for developing Islamic economic theory. Surprisingly, it did not occur to us that we could handle the problem from the reverse side by asking the following question: “What will happen if the economic units deviate from the ideal Islamic economic conditions?” Data for such conditions were available easily around the world on almost all economic issues. For example, we could theorize about situations where interest was prevalent or zakah was being avoided or contracts were not honored or property rights were not respected, etc. Proceeding on this train of thought we could formulate hypothesis and test them in real life. However, we did not adopt this route. Alternatively, we could use some real-life conditions as proxies for our postulates. For example, the orthodox position on financial interest is that it is unlawful under Islamic law. We could take the real-life data of, for example, Japan where the effective rate of interest has been about zero for the several years. Similarly, we could use the real-life data of the global effective interest-rate which has been declining for the last three decades and is now close to zero. Using such data we could formulate hypotheses about results of zero or near-zero rates of interest and test them to sharpen our understanding about legality or otherwise of the financial interest rate. However, we did not follow this route.  For developing Islamic economics as a social science we should:

• Join forces to develop a generally accepted definition of Islamic economics.
• Couch all knowledge in general terms and on rational grounds so that it does not claim any religious sanctity.
• Make a distinction between economic teachings of Islam, which is domain of theology, and Islamic economics which should consist of theories derived from human understanding of the divine sources and study of real-life conditions.

• Freely use tools of economic analysis which are the common heritage of humanity.
• Make efforts for developing generally accepted terminology.

Muhammad Akram Khan is a Former Deputy Auditor General of Pakistan (until 2003) and Chief Resident Auditor, UN Peacekeeping Missions (2003–2007). He took post-graduate degrees from University of Punjab, Pakistan (1967) and Aston University, Birmingham, UK (1970) in Commerce and Business Administration respectively. Since 2007, he has been working as a freelance consultant and writer whilst pursuing Islamic economics as a private hobby. He has published 12 books, 36 research papers and over 90 book reviews. His latest book, What is Wrong with Islamic Economics, was published in 2013; it contains a synthesis of his life-time thinking on Islamic economics and finance.

Is interest-free banking the answer to our prayers? Bernard Lietaer and Islamic Banking

Is interest-free banking the answer to our prayers? Bernard Lietaer and Islamic Banking – by Hans Visser

December 13, 2013

Asian Studies, Author Articles, Economics and Finance, Islamic Studies

photo credit: gfpeck via Flickr cc

Now that the conventional financial sector is in a bit of a mess, people are looking for alternatives. One solution that is enjoying popularity is the age-old ideal of interest-free banking. Two questions present themselves: 1. are the ideas behind interest-free banking sound, and 2. does it work?

Why Interest-Free Banking?

Objections to interest have been broadly of two kinds, religious and secular, though they partly overlap. A lot has been written on the religious interdictions. Here we are concerned with secular arguments.
Perhaps the most outspoken critic of interest-based banking and finance is Bernard Lietaer, a member of the Club of Rome and a former finance professor in the University of Louvain, Belgium. He has attained something of the status of a guru among NGOs critical of the present financial system. In his view, interest-based finance is disastrous:
(i) It pits people against each other because paying back interest on a loan requires using someone else’s principal. Some people consequently will have to go bankrupt.
(ii) It makes for a need for endless growth:

Debt-based money requires endless growth because borrowers must find additional money to pay back the interest on their debt. For the better-rated debtors […] the interest is simply covered through additional debt, resulting in compound interest: paying interest on interest. Compound interest implies exponential growth in the long run, something mathematically impossible in a finite world.

(Bernard Lietaer and Jacqui Dunne, Rethinking Money, San Francisco: Berrett-Koehler Publishers, 2013, p. 42.)
(iii) It causes an unrelenting concentration of wealth, through the stream of payments from debtors to creditors.
(iv) It leads to short-termism, thanks to investment decisions based on discounted cash flows.

Bernard Lietaer
photo credit: PopTech via Flickr cc

Lietaer’s objections to interest-based finance are not wholly convincing:
ad (i). Lietaer assumes that interest paid to a bank disappears from circulation and thus reduces the money supply. Interest paid, however, does not vanish into thin air. Banks use their interest income for paying salaries and other expenses and what is left as profits after paying taxes will be divided between shareholders and reserves. Additions to reserves are not simply held in the form of cash or a deposit with the central bank, they will be matched on the assets side of the balance sheet by income-generating assets that require payments to other economic agents.
ad (ii). If something is impossible, it won’t happen. Lietaer states that:

one pfennig invested by Josef at the birth of Christ at 4% compounded interest would have grown … by 1990 to the value of 8,190 balls of gold the weight of the earth.

(Bernard Lietaer, The Future of Money, London: Century, 2001, p. 53)
However, interest is not accumulated without limit. It is used for pension payments, insurance claims and myriad other ends. And if a high percentage of interest income were reinvested, that would mean a high savings ratio, which would result in downward pressure on interest rates.
ad (iii). Interest payments flow from debtors to creditors. True, and rental payments flow from tenants to landlords, lease money flows from users of equipment to owners of equipment and users of intellectual property make patent payments to owners of intellectual property. These are all payments for the use of a form of capital and there is no reason to single out interest as more pernicious than the others, if pernicious it is. It is, moreover, highly likely that the increasing income and wealth inequality within countries that we have witnessed over the last three decades or so (disparities between countries are decreasing, by and large) is not caused by interest but by changes in the labour market, successful stock-market flotations, favourable tax treatment for the rich, golden handshakes, high bonuses, opaque business deals and the like.
ad (iv). The charge of short-termism is at first sight not unfounded. It is a manifestation of the phenomenon that present generations do not always fully take account of the interests of future generations. Abolishing interest is not the solution, though. That would make capital-intensive investments too attractive and lead to a waste of capital, as the example of the Soviet Union made all too clear. Better to apply a social discount rate to raise the discounted value of the future yield of environmental investments.

Does Interest-Free Banking Work?

Many attempts have been made to introduce interest-free exchange systems. By one count there are some 1,000 of these, over all continents. Total global turnover is no more than some $20 billion, with the Swiss Wirtschaftsring (WIR) the biggest with roughly $1.6bn annual turnover. These exchange systems alleviate the lack of trade credit for small and medium sized enterprises and, if small-scale, may foster social cohesion. The fact that participants can be in the red for limited periods without paying interest is not essential. WIR does in fact charge interest for larger borrowings and longer periods (and even Lietaer admits that we cannot do without interest-based credit for large investments). Other systems lack provisions for such borrowings.
The only fully-fledged interest-free banking and finance system existing is the Islamic finance industry. The ideal of Islamic finance is profit-sharing, as financiers should receive a reward for running entrepreneurial risk, not just for providing funds. However, in practice other financing methods are far more popular, first of all murabaha or mark-up sales. The client asks the financier to buy a good he needs and the financier sells it on to the client with a mark-up, often against deferred payment. The difference with an interest rate is often wafer-thin, but the financier acts as a trader and therefore runs some entrepreneurial risk, however briefly. Lease constructions are also popular. But what to do when clients need funds unconnected with the purchase of goods or services or want to invest money and do not want a variable profit yield? The preferred solution is to insert a goods transaction just to fulfil the formal requirements. In the Gulf countries banks will buy an easily tradeable commodity as agent of their clients, against deferred payment, and immediately sell the goods against cash payment. The net result is that clients receive funds against future repayment obligations, or a money loan. In Malaysia a more blatant circumvention of the ban on interest is popular, the bai einah, or repurchase. Banks will sell a good to a client against deferred payment and immediately repurchase the good against cash payment, without the client even seeing the good. Banks also offer savers a return that is in effect a pre-determined interest rate. HSBC Amanah Malaysia for instance offers time deposits with fixed profit rates, ‘based on the Shariah principle of Murabahah’. Presumably this implies a reverse bai einah, with the bank selling a good to the client against cash payment, buying it back against deferred payment with a markup. In a similar way, banks in the United Arab Emirates can deposit money with their central bank using a reverse tawarruq. There are various variants of these constructions. Their popularity suggests that the market has a need for fixed-rate financial instruments and that purportedly interest-free financial systems have to resort to ways that are to a greater or lesser extent circuitous in order to meet this demand.

Conclusion

The conclusion can only be that secular arguments against interest as formulated by Bernard Lietaer are not very compelling and that attempts to move over to fully interest-free banking and finance have so far been not entirely successful. It remains to be seen whether they ever will.
Dr Hans Visser is Professor Emeritus of Money and Banking and International Economics in the Faculty of Economics and Business Administration at the VU University Amsterdam and the author of Islamic Finance: Principles and Practice (the second edition of which has just been published).



Prohibition of riba: Modernist vs. Orthodox and the ‘need’ for Islamic Financial Institutions

Prohibition of riba: Modernist vs. Orthodox and the ‘need’ for Islamic Financial Institutions – by Muhammad Akram Khan

August 29, 2013

Asian Studies, Author Articles, Economics and Finance, Islamic Studies

photo credit: Masrur Ashraf via Flickr cc

The rationale for developing Islamic Financial Institutions (IFIs) parallel to Conventional Financial Institutions (CFIs) emanates from the Muslim orthodox interpretation that equates the Qur’anic prohibition of riba with all types of interest. Since the major business of CFIs involves dealing in interest, the orthodox interpretation concluded that the business of CFIs was prohibited in Islam. That led to the need for an alternative basis for banking business within the Islamic framework.

The rationale for establishing IFIs stems from two fundamental assertions:

• All types of interest are riba and the business of CFIs is unlawful in Islam.
• The IFIs should be able to do everything that the conventional banks do.

Both of these assertions require a closer review. We need to answer the following questions:

• Once we treat interest on finance as prohibited, are we able to find an alternative that can handle all types of transactions efficiently and effectively?
• If IFIs do everything that the conventional banks do—except by using different nomenclatures, terms and phrases—how effectively would it contribute to the welfare of humanity to establish IFIs as distinct institutions?

This article aims to address these questions.
The Prohibition of Riba
There are two schools of thought among Muslims about prohibition of riba:  orthodox and modernist.
The orthodox school claims that all types of interest are riba and all types of banking transactions involving interest are illegal. This school of thought is the most influential. It has persuaded the majority of Muslim scholars around the world. The movement of Islamic finance is based on arguments presented by this school. The school claims that there is a consensus about treating all types of interest as riba among Muslims. However, that claim is not well-founded. Several serious and well-meaning Islamic scholars differ on this issue. Even among orthodox scholars, the prohibition is not categorical. They have provided space for dealing in interest in certain ways.
The modernist school says that only exorbitant and high rates of interest, along with that taken from needy persons, are riba. Interest on commercial bank loans is not riba. The weakness in this position is that there are no benchmarks to decide which rate is exorbitant and which borrower is poor and needy.
Problems with the orthodox interpretation of riba
The orthodox school is unable to answer several questions:

• If all types of interest are riba, why are differences between the cash and credit prices of the same product allowed by orthodox scholars? The difference in these two prices is clearly interest although it is included in the credit price of the product.
• Getting cash for bills receivable is a real-life business need and no business can be run without this facility. If we prohibit all types of interest, how do we arrange the discounting of bills receivable?
• How do we deal with inflation which is eroding the value of money on a daily basis? If we disallow interest on deposits, how do we protect depositors from inflation?
• The orthodox school does not have a solution for helping the vulnerable segments of society like widows and orphans who may not be in a position to carry out any business with their money, if they have it. How can we ensure that they do not expend all their principal sums and become destitute?
• The orthodox school cannot find a solution to housing finance. How can we ensure that a person who requires funds to build a house gets the funds without interest? Schemes such as rent-sharing are only bad ruses to conceal interest; are they more exploitative and more risky for buyers of houses than the conventional finance?
• How can we ensure that the microfinance required by poor people comes without a cost? The present day cost of microfinance ranges from 20-100 percent (the cost of Grameen Bank funds, the star of microfinance, is 86 percent). How should we handle that?
• How can we develop a capital market for interbank financing deals for short periods like a day or so, if there is no interest to calculate the return on funds?
• How should we appraise projects in the absence of discounted cash flow analysis that applies the cost-benefit technique for appraisal?
• The orthodox school has not been able to find a viable and equally efficient and economical alternative to the conventional credit card facility.

These and several other questions remain unanswered. In their enthusiasm to implement the orthodox interpretation, a global movement of Islamic finance has developed. It is now 30 years old and has a volume of over a trillion dollars in terms of assets. The IFIs are growing at a rate of about 15 percent per annum. The orthodox school takes a lot of pride in this development. But what are the facts?
Have IFIs achieved their avowed objectives?
The IFIs started with an avowed objective of providing a different type of banking which should be more benevolent, egalitarian and just. But actually, the IFIs are now competing with each other to prove that they are the closest to CFIs in business terms. They have devised scores of ruses to hide interest behind Arabic terms. I have devoted over 40 pages in my book “What is wrong with Islamic economics?” (Edward Elgar, 2013) to listing these ruses. However, I must say, this chapter can never be complete as new ruses are being devised on a daily basis.
In terms of efficiency, several studies have shown that IFIs are equally or less efficient when compared with CFIs. Besides, they are more expensive and more risky. The question is: if IFIs had to do what CFIs are already doing – and furthermore to do it in a more expensive, more risky and less efficient manner – where was the need to establish these institutions in the first place? The other question is that if the orthodox interpretation of riba is correct then the alternative to conventional banking should be more benevolent, more just and more poor-friendly. There are no statistics to prove that. Finally, the IFIs should be able to demonstrate that they have achieved the objectives of the Islamic faith (maqasid al-shari’ah) more efficiently and effectively and that the CFIs were failing to achieve those objectives conclusively. In the absence of any such evidence, the mere establishment of IFIs may be a good business for bankers, but it is of less benefit to the common man.

Muhammad Akram Khan (b.1945) is a professional auditor and served in senior positions in the Department of Auditor General of Pakistan and Office of Internal Oversight Services, UN. He has a life-time hobby of writing and research in Islamic economics and finance. He has written several books on the subject including What is wrong with Islamic economics?, A glossary of Islamic economics and finance, a 4-volume Annotated bibliography of Islamic economics and finance, Economic teachings of Prophet Muhammad, An introduction to Islamic economics, and Islamic banking in Pakistan. He has published over 40 research papers and about 100 book reviews on the subject.

“The market cannot be usefully understood as separate from society” : Social Economics, Social Economists and the Real World

“The market cannot be usefully understood as separate from society” : Social Economics, Social Economists and the Real World – by Wilfred Dolfsma

April 28, 2015

Author Articles, Economics and Finance

Social Economics understands the economy as value-laden – laden with values not just of a ‘bourgeois’ kind, such as prudence and thrift. The values of prudence and thrift are values that are consistent with a view of the market as an means for actors of all stripes to maximize whatever it is that they want to maximize. But, Dr Wilfred Dolfsma explains, social economics acknowledges that there are more values than these that imbue the economy with meaning.

—
Values such as care and fairness are not just values that may be found in families, closely-knit communities, or that are discussed among only some philosophically-minded people as their working week ends and they enjoy a glass of wine.
While social economics does not tend to favour any particular set of values over others (values are discussed equally well over a glass of wine as over a pint of beer or a smoothie), social economists are concerned about inclusiveness. Values in support of inclusion of the disfavoured, allowing people to take part in the economy as a practice through which we can provide for ourselves and those we love, are still a broad set of values.
In this respect, the market is no different from any other social practice: all are value-laden, and practices are laden with a plurality of values. Indeed, even when adopting an academic mind, one that is trained to abstract, applying Ockam’s Razor, a social economist would emphasize that any single social practice must be understood as part of a larger social setting. Even such a multifaceted practice as the market cannot be usefully understood as separate from society.
The early economists have always understood this to be the case. For a plurality of reasons, one among these being a streak of physics-envy, economists have abstraction to an extreme in the name of academic rigour. Many economists have looked at the market as fully separate, oddly in line with Marxists. While precision has certainly increased, relevance has definitely not. Rather the opposite.
Fortunately, this is realized by many, and not just by economists, and so social economics has come into even more favourable light. Just as the first edition of the Elgar Companion to Social Economics, in 2008, offering cutting edge thought on core themes in social economics, the economic crisis hit much of the globe. To social economists this crisis did not come as a surprise – even though there is not a single social economists who will claim to have predicted the crisis’ occurrence to the day. Social economists are much too well aware of the complexity of the economy, and perhaps because of it too they are too modest too.
Not being afraid to go against the grain of contemporary economics that still separates the positive from the normative in science, and shuns the latter, social economists have developed a comprehensive approach to judging the current state-of-affairs of a setting. Is it duly serving the needs of all, and how can it be improved upon, tentatively? While recommendations will be provided with due care and caution, there is not the active resistance to stepping in to policy debates. Social economists want to change all society for the better, and particularly for those who are in danger of being excluded (and not just change in favour of some, for instance those who can cough up high speakers’ or consultants’ fees).
Social economists thus discuss high theory, connecting from what many will understand as economics-proper, but relate to domains in the social science that some might believe is beyond the scope of economics, even to domains that squarely no longer are economics. If a proper understanding of a problem demands that this be done, social economists should not and do not shy away from it. Social economists also do not shy away from philosophical discussions, continuously determining if its premises are in need of further strengthening. Never, however, is social economics involved in theory-for-theory’s sake, A’-C’ modelling exercises that only very few fellow economists can understand. Depth and rigour in analysis can never be an excuse for arcane academic work. Contributions to the Elgar Companion to Social Economcs, 2^nd Edition, are indications of this.

Dr Wilfred Dolfsma is a member of the University of Groningen School of Economics and Business. He is Editor-in-Chief, with Robert McMaster, of the Review of Social economy and Editor, with John Davis, of Elgar Companion to Social Economics, 2^nd Edition. Cheltenham, 2015

Schumpeterian ‘Great Gap’ Thesis Revisited

Schumpeterian ‘Great Gap’ Thesis Revisited – by Abdul Azim Islahi

December 19, 2014

Economics and Finance, Islamic Studies

Joseph Schumpeter famously claimed that there is a ‘great gap’ of 500 years in the history of economic thought, from the Greeks to Thomas Aquinas.  In this article, Professor Abdul Azim Islahi argues that this idea neglects some very serious scholarship which took place during those years within the Islamic world.


Economic thinking has been associated with the very existence of man. But the written record available about economic thinking is not so old. Generally the historians of economic thought start with the Greek philosophers, Roman jurists and administrators and Indian scriptures. They also mention some of the early Christian fathers who lived in the first few centuries of Christian era. Then they just leap to the Middle Ages, when Europe came out from the darkness and fresh thinking on different natural and social sciences started, leaving a gap of many centuries.
This has been practice on the part of almost all writers on the history of economic thought. But Joseph Schumpeter has explicitly mentioned it. In his famous History of Economic Thought and Analysis in chapter 2 part ii, after discussing the Greek-Roman economics, Schumpeter begins with a discussion of the ‘great gap’. He says:

So far as our subject is concerned we may safely leap over 500 years to the epoch of St. Thomas Aquinas (1225-1274) whose Summa Theologica is in the history of thought what the south western spire of the Cathedral of Chartres is in the history of architecture.¹

The implication of this statement is that for a period of five centuries no worth mention of economic ideas were found. Such a claim of discontinuity in the evolution of human intellect in general and in the history of economic theory in particular, is untenable. Much earlier, Frank Knight, the Chicago economist, while reviewing the book in the Southern Economic Journal ² pointed out this deficiency of the work saying that

if Schumpeter was writing to start with the Babylonians albeit with only a brief reference, he surely should have been able to make some, even if limited reference to Indian (and presumably other Asian) sources as well ³  (quoted by Mark Perlman in his ‘Introduction’, 1997, p. XXIII).

Harry Landreth wrote in a personal letter:

I … agree … that Schumpeter erred and that modern historians of economic thought have followed Schumpeter in failing to appreciate the Arab-Islamic writings in the approximately 500 years before Aquinas. … the failure of economists on this issue is part of a broader failure of Western scholars to fully understand the important contributions of Arab-Islamic scholars.⁴

He has included a section on Arab-Islamic thought in the latest edition and provided some references for the interested readers.⁵
The long established tradition of considering a number of centuries as blank as regards to economic thought and the idea of ‘great gap’ seems to be grossly absurd and a blind spot in the subject.
It is a matter of satisfaction that this missing link in the history of economic thought is now being traced and economic ideas of hitherto neglected scholars are being established. The period termed as ‘the great gap’ is the period of Muslim leadership over the world in politics, science and civilization and it is they who contributed in the field of economics, philosophy, medicine and the natural science. While their work in other branches of knowledge is openly acknowledged, their contribution in the area of economics is still ignored.
In 1987, Mirakhor penned a well-documented paper in which he questioned the Schumpeterian great gap thesis and pointed out to the ‘serious omission in the history of economics of profound contribution made by Muslim scholars’. He showed that ‘both motive and opportunity existed for the Medieval European scholars to be influenced by the economic ideas and institutions developed in medieval Islam and that based on the available evidences, they availed themselves of such an opportunity by using some of the available knowledge to advance their ideas’.⁶ The echo of this paper was heard at the History of Economics Society Conference in Toronto, Canada, June 1988 in which Ghazanfar presented his study on ‘Scholastic Economics and Arab Scholars: The Great Gap Thesis Reconsidered’. By survey of some major works on the subject, he has also shown that the literature gap is ‘manifest in almost all relevant works in economics’.⁷
I have discussed economic ideas of scores of Muslim scholars who belonged to the so called period of ‘the great gap’ in my forthcoming book History of Islamic Economic Thought.

For example: Abu Yusuf’s (d. 798) analysis of various forms of taxation, al-Shaybani’s (d.805) emphasis on agriculture, Ibn Hazm (d.1063) on removal of poverty, al-Ghazali’s (d.1111) discussion on the difficulties of barter and his exposure of nature and functions of money and Ibn Taymiyah’s (d.1328) treatment of pricing mechanism and administrative fixation, to name but a few. It shows how Muslim scholars played an important role in continuity and growth of mainstream economics. When Greek works were translated into Arabic, Muslim scholars enhanced their utility by writing commentary over them and added their own views and interpretation. When re-translation activities from Arabic to Latin languages started, they transferred the whole stuff to the West which included their economic ideas as well. Not only translation, but their ideas reached the European West through a number of other channels, such as, education, oral transmission, travel accounts, trade, crusades, diplomatic missions, pilgrimages, etc. and influenced the scholastic scholars.
The Muslims had practical experience of dealing with the economy and state, spread over many centuries. Their ideas bore pragmatic orientation. The scope and subject matter of their economic thinking was not confined only to want-satisfaction, economy of self-sufficient households, division of labor, barter and money; they discussed a host of other problems and developed several new ideas – an account of these major issues has been presented in the History of Islamic Economic Thought. As the Muslim scholars based their ideas on both the revealed knowledge and human reason, they were more suited to scholastic scholars who benefited from them to a great extent. This is clear from the gap which is found between their voluminous body of thought on economic matters and almost no contribution of this from their predecessors, who could not have access to the Arabian sources. Through the scholastic scholars, contribution of Muslim scholars became part, though yet to be recognized, of the family tree of economics.

Dr. Abdul Azim Islahi is Professor at the Islamic Economics Institute, King Abdulaziz University, Jeddah. He has spent more than 30 years in research, teaching and expanding the frontiers of the discipline of Islamic economics. He did his Ph D. from the Aligarh Muslim University, on Economic Concepts of Ibn Taimiyah (Leicester UK 1988). He is a world authority on history of Islamic economic thought. He has to his credit 15 books and more than 100 research papers, reviews and article in English, Arabic and Urdu.  His new book, History of Islamic Economic Thought, is published by Edward Elgar. He can be contacted on aaislahi@hotmail.com or aaislahi@kau.edu.sa

References as occurred in the text

1. Schumpeter, Joseph A. (1997), History of Economic Analysis, London: Routledge.
2. Knight, Frank H. (1955), “Review article on The History of Economic Analysis, by Joseph A. Schumpeter”, Southern Economic Journal, Vol. 21, pp. 261-72.
3. Landreth, Harry and C. Colander David (2002), History of Economic Theory, 4^th edition, Boston, M A, Houghton Mifflin.
4. Perlman, Mark (1997), ‘Introduction’ to History of Economic Analysis by Schumpeter, Joseph A., London, Routledge.
5. IAFIE (2000), Islamic Economics Bulletin, (Aligarh, India), Indian Association for Islamic Economics, November-December, 10: 6.
6. Mirakhor, Abbas (1987), “Muslim Scholars and the History of Economics: A Need for Consideration”, American Journal of Islamic Social Sciences, 4 (2), 245-276.
7. Ghazanfar, S.M. (ed.), (2003), Medieval Islamic Economic Thought, London and New York, Routledge Curzon.

Aristotle Ethical Theory (Ethical Dominant)

Aristotle Ethical Theory (Ethical Dominant)

Posted by Zera | 10:18 |

Aristotle Ethical Theory, Plato and Aristotle Theory

Ethics Dominant. — It is to be emphasized that the ideal of most of the Greek thinkers was highly ethical. To be happy one must be good, was a dominant note, and the interests of the soul were placed foremost. "For there are in all three things," Plato says,1 "about which every man has an interest; and the interest about money, when rightly regarded, is the third and lowest of them: midway comes the interest of the body; and first of all, that of the soul; and the state which we are describing will have been rightly constituted if it ordains honours according to this scale." And Aristotle's dictum is: "But a state exists for the sake of a good life and not for the sake of life only."

If one could conceive of Plato making a definition of eco­nomics, one might imagine it would run somewhat as follows: "Economics is the science which deals with the satisfaction of human wants through exchange, seeking so to regulate the in­dustries of the state as to make its citizens good and happy and so promote the highest well-being of the whole." That would make it an applied science, in which ethical aims would play a great part.

Summary. — From the foregoing discussion we may draw certain summary generalizations concerning the fundamentals of the economic thought of Aristotle and Plato:
a. Passive Idealism. — The spirit was considered to exist independently of the body. Innate differences among men were emphasized. Man's wants were held to be of primary importance in valuations; but wants were to be directed and limited accord­ing to ideals. Man-made institutions were given an important part. But after all, man wins only by making certain adjust­ments in his conduct. (A recognition of the limited perfect­ibility of mankind, and of the necessity of man's adjusting him­self to some extent to his environment, makes their idealism less extreme, particularly in Aristotle's case.)

b. Subjective Standards and an Emphasis on Human Wants. — Objective tests were not accepted as validating economic phe­nomena, for example, market prices. Some concept of "just" valuation, or the "just price" idea, and an emphasis on " value in use," or "utility," were corollaries. Justice in exchange, said Aristotle, depends upon wants. Similarly specialization of occupation, and the state itself, depend upon man's wants.

c. A Subordination of Individual to State, Accompanied by a Leaning toward an Undemocratic Sort of Communism. — The individual was regarded as a dependent part of the whole — the state. Thus there could be no real democracy, at least in the nineteenth-century sense. Their thought was opposed to the social contract concept of the state and tended toward an organismic concept.

d. A Normative Economics Mixed with Politics. — They thought of a purposive economy, with the state existing for the sake of "the good life." Ideals or standards of perfection were set up. Free choices by individuals were not accepted as the test. Economic values were so mixed with ethical and political values, that the science of Economics, as it was to develop later, was impossible.

Contrast with Hebrews and Hindus. — As already observed, there are important differences between the economic ideas of the Hebrews, Hindus, and other Oriental peoples, and those of the Athenian philosophers. They were similar in emphasizing the state, and the ethical point of view. Neither differentiated economics from politics or morals. Both were conservative and undemocratic. Moreover, with both, agriculture was the only industry in very good repute. But the Greeks were more concerned with the individual, going further in the analysis of the state into its citizens. They, too, were possessed of some small degree of historical method, though it was quite abstract. They analyzed economic wants, and based the oikonomik and chrematistik of their philosophy upon this analysis. The Athe­nian philosophers were more appreciative of material wealth as an agency in furthering human happiness than were the sacred writers of the Hindus, at least. The well-known care for the body by the Greeks had its economic significance.

Most important of all, the Greeks were more rational. In­stead of forbidding interest in pursuance of some divine edict, they argued about it and reached the conclusion that it was unjust. Thus the writings of Plato and Aristotle mark a great step in advance in economic method, as well as in scope and depth of analysis

he Greek Stoics and Epicureans

He Greek Stoics and Epicureans

While Aristotle and Plato made the chief direct Greek contributions to economic thought, one must remember that such thought is greatly influ­enced by epistemological and ethical ideas. Even the economist, therefore, should not leave a discussion of Greek philosophers without some mention of Zeno and Epicurus.

Zeno, who was the founder of Stoicism, emphasized virtue above all else, and treated it not only as the source of happiness but as the goal of human life. The Stoics believed that pleasure is not to be sought for itself — that it is the by-product of a virtuous life. Incidentally, they taught that the individual exists for society, which alone makes virtue possible. The idea of a "moral sense" innate in man, is implied. Thus Stoicism had idealistic tendencies. It also contained, however, a vague concept of living "in accord with nature." Accordingly, Stoi­cism was to affect economics through its contributions both to (1) the idea of a "law of nature," and to (2) the optimistic idea that the individual has an innate sense of justice which may be relied upon.

The Epicureans, on the other hand, made pleasure the goal of life; and they found pleasure to lie in sensations (not neces­sarily "sensual"). Their thought was thus materialistic and hedonistic, and this thought tendency came to dominate eco­nomics during part of the nineteenth century.

Of both these schools of philosophy it may be said that they tended toward sensationalism and the doctrine that knowledge comes only through the senses, which doctrines have a bearing upon the nature and determination of economic value, and upon the nature and validity of economic law. And both strongly tended to minimize the individual's responsibility toward his fellows. The Stoic could say, "If social troubles are the result of natural law, am I to blame?" The Epicurean (who, inci­dentally, believed in no God) could ask, "If right lies in my pursuit of pleasure, what responsibility have I for wrong doing? Indeed, what is wrong? "

Aristotle and Plato Theory on Money

Aristotle and Plato Theory on Money

Posted by Zera | 10:12 |

Aristotle and Plato Theory on Money and Interest

Money and Interest. — As regards that particular form of wealth known as money, the teaching of the Greeks has been of signal importance in the history of economic thought. In general, they saw and explained the necessity of money, and recognized a part of its economic function, namely as a medium of exchange. Aristotle is especially explicit. He remarks that "as the benefits of commerce were more widely extended the use of a currency was an indispensable device. As the neces-sanes of nature were not all easily portable, people agreed for purposes o barter mutually to give and receive some article, which, while it was itself a commodity, was practically easy to handle in the business of life, some such article as iron or silver, which was at first defined simply by size and weight; althought finally they went further and set a stamp upon every coin to relieve them from the trouble of weighing it…” and he goes on to distinguish between money and wealth, referring to the fable of King Midas. Aristotle elsewhere clearly shows an understanding of money’s functions as a measure of value and a standard of deferred payments.

Xenophon is equally clear in distinguishing between Money and wealth.

Plato, in keeping with his more communistic ideals, would have had no gold nor silver for the private man, but only domestic coins to be used in payment of hirelings and the like, but he thought that the state should have a common hellenic currency for the use of embassies, expeditions, and journeys.

With all this, however, the thought of these men was tainted with error. They virtually regarded Money as nothing but a medium of Exchange, and as such they denied the productivity of loans of it. A piece of Money cannot beget another piece, was the doctrine of Aristotle, and no economic idea of his had more lasting effects. The obvious conclusion was that interest is unjust. Plato, too, seems to have thought that neither should interest be given nor even the principal of a debt be repaid.

It must not be supposed, however, that this view of interest which seems so strange to us owed its existence entirely to the inferior insight of the ancients. It is to be explained largely by economic conditions. In Athens the circulation of capital was inconsiderable, and money was not lent for productive purposes so often as for the purpose of relieving distress. If today loans were chiefly made to embarrassed friends or neighbors to be used in alleviating distress in matters of consumption, we too would undoubtedly regard interest in a different light. The modern theory of interest is based upon loans for productive investment.

Another erroneous monetary idea, which was held by Xeno-phon at least, was that the value of silver is absolutely fixed regardless of supply. Aristotle, however, recognized that the value of money is subject to the same law as other things and that it is liable to change, although it tends to be more constant.

Aristotle Economic Thought

Aristotle Economic Thought

Scope and Classification of Aristotle's Economic Thought

The nearest approach made by Greek philosophy to developing a distinct theory of economics came in discussing the elements of household management. Here a distinction was drawn between economics (oikonomik) and chrematistics (chrematistik); the former embraces chiefly wealth consumption in the satisfaction of wants, and the provision of such necessary and useful com­modities as can be stored to meet those wants; the latter deals with wealth-getting, including money-making and exchange. Concerning the latter, Aristotle says, "And there is another element of a household, the so-called art of money-making (or finance) which, according to some, is identical with household management, according to others, a principal part of it."

There are two kinds of chrematistics: the natural and the unnatural. Thus the first simple barter by which things are given in exchange for what one wants "is not contrary to nature, but is needed for the satisfaction of men's natural wants"; but "retail trade is not a natural part of the art of money-making." Or, again, husbandry and stock-raising make the "true or proper art of money-making," while the other consists in exchange. It is the "natural" or "proper" branch of chrematistics alone which should be included in economics or household management Thus Aristotle's classi­fication might be represented by the accompanying diagram. Closely connected with the preceding analysis is the distinc­tion between the natural or proper and the unnatural or improper uses of a thing. "Of everything which we possess there are two uses: both belong to the thing as such, but not in the same manner, for one is the proper, the other the improper or secondary use of it. For example, a shoe is used for wear, and is used for exchange; both are uses of the shoe." This distinction rests upon Aristotle's notion of exchange, which, in its turn, is founded on the idea that there is a certain consumption which is sufficient for a proper life; for, when he says that retail trade is not a "natural" part of money-making, he adds that "had it been so, men would have ceased to exchange when they had enough." In other words, natural chrematistics concerns the satisfaction of natural or proper wants by "natural" or "proper " or "primary" uses.

This idea clearly suggests later distinctions between value in use and value in exchange. Its consciously ethical content, how­ever, is absent from much of the later usage. In the same idea, a trace of the notion held by some later economists (the Physio­crats) may be distinguished, namely, the notion that extractive industries are the only ones which are productive. One could easily get the idea from Aristotle that the growing, or digging up, or catching of things which satisfy the more elemental wants in the simplest way, is more productive than the elaboration of these things by artisans or their exchange by merchants, — that the latter occupations do not add to the real wealth of the state.

Aristotle and Plato Communism

Aristotle and Plato Communism

Aristotle and Plato Communism

Probably the most discussed phase of that part of Greek philosophy which has distinct economic bearing is communism. As this subject has a close relationship to the question of social solidarity and individualism, it is naturally mentioned in this connection.

Plato and Aristotle differed greatly in their ideas as to the scope to be given communism. Plato desired a complete com­munism, embracing not only property, but also wives and children. He did not give the details of his scheme for com­munism in property. He made it clear, however, that his object was to promote harmony by removing the ground for civil suits and uniting all citizens by common interests. His ideal state is characterized by a community of wives and children, partly with the aim of diminishing discord and jealousy, partly with the idea of eugenics and control of population. "The children of the inferior, or of the better when they chance to be deformed, will be put away in some mysterious, unknown place, as they should be. . . . This must be done if the breed of guardians is to be kept pure." Thus Plato's communism did not stand for an absolute mechanical equality, but recognized authority and class distinctions.

Aristotle was entirely opposed to Plato's communism of wives, and did not go any great way with him as to property. His arguments against communism are classic.

"Next let us consider what should be our arrangements about property: should the citizens of the perfect state have their posses­sions in common or not? This question may be discussed separately from the enactments about women and children. Even supposing that the women and children belong to individuals, according to the custom which is at present universal, may there not be an advantage in having and using possessions in common? Three cases are pos­sible: (1) The soil may be appropriated, but the produce may be thrown for consumption into the common stock; and this is the practice of some nations. Or (2) the soil may be common, and may be cultivated in common, but the produce divided among individuals for their private use; this is a form of common property which is said to exist among certain barbarians. Or (3) the soil and the produce may be alike common.

"When the husbandmen are not the owners, the case will be dif­ferent and easier to deal with; but when they till the ground them­selves the question of ownership will give a world of trouble. If they do not share equally in enjoyments and toils, those who labour much and get little will necessarily complain of those who labour little and receive or consume much. There is always a difficulty in men living together and having things in common, but especially in their having common property. The partnerships of fellow-travellers are an example to the point; for they generally fall out by the way and quarrel about any trifle which turns up. So with servants: we are most liable to take offence at those with whom we most frequently come into contact in daily life.

"These are only some of the disadvantages which attend the com­munity of property; the present arrangement, if improved, as it might be by good customs and laws, would be far better, and would have the advantages of both systems. Property should be in a cer­tain sense common, but, as a general rule, private; for, when every one has a distinct interest, men will not complain of one another, and they will make more progress, because every one will be attend­ing to his own business; and yet among the good, and respect of use, 'Friends,' as the proverb says, 'will have all things common.' Even now there are traces of such a principle, showing that it is not impracticable, but, in well-ordered states, exists already to a certain extent and may be carried further. For, although every man has his own property, some things he will place at the disposal of his friends, while of others he shares the use with them. The Lacedaemonians, for example, use one another's slaves, and horses, and dogs, as if they were their own; and when they happen to be in the country, they appropriate in the fields whatever provisions they want. It is clearly better that property should be private, but the use of it com­mon; and the special business of the legislator is to create in men this benevolent disposition. Again, how immeasurably greater is the pleasure, when a man feels a thing to be his own; for the love of self is a feeling implanted by nature and not given in vain, although selfishness is rightly censured; this, however, is not the mere love of self, but the love of self in excess, like the miser's love of money; for all, or almost all, men love money, and other such objects in a measure. And further, there is the greatest pleasure in doing a kindness or service to friends or guests or companions, which can only be rendered when a man has private property. The advan­tage is lost by the excessive unification of the state. Two virtues are annihilated in such a state; first, temperance towards women (for it is an honourable action to abstain from another's wife for temperance' sake); secondly, liberality in the matter of property."

Aristotle, it will be observed, although opposing Plato's ideas, did not rush to the opposite extremes. Some things should be private; some should be held in common. He desired that more things should be common than there then were, and protested against the excessive individualism of the Greeks. He advocated common meals, and especially noteworthy is his wish for a cer­tain community in the use of property along with its private ownership.

Aristotle did not confuse the end, happiness, with the means, as radical reformers are so apt to do. Thus he did not stand for an equality in goods, but for equality in want-satisfactions, a position which is in accord with idealism in that it recognizes the importance of differences in the wants of different individuals. It must not for a moment be fancied that these ancient philosophers thought of communism as implying any general democracy. Quite the reverse. There were three classes of men fashioned in the bowels of the earth, one of gold, another of silver, the third of iron or copper. These were, respectively, the philosophers or guardians, the warriors or auxiliaries, and the artisans and tradesmen. Such communism as they advocated was to be applied to the first two alone. It was an aristocratic communism. Slavery was considered to be " natural."

Plato and Aristotle Theory (Population)

Plato and Aristotle Theory (Population)

Posted by Zera | 10:02 |

Plato and Aristotle Theory

Population

But the question arises, what was to become of children other than those who were heirs to the father's lot? In answer, Plato provided for a careful regulation of population. This was necessary to preserve the social equilibrium. His state was to consist of a limited number of citizens (5040). If the number began to decrease, prizes might be offered to encourage a growth of population; if there were an excess, colonies would be established. In this way that precise regulation of life con­templated by the philosopher might be rendered possible.

Thus the thought of the leading Athenian philosophers was hardly individualistic, though they went further than the Orientals in recognizing the importance to the state (society) of its individual members; for, like their government, the spirit of their philosophy was somewhat more democratic, and they saw that the welfare of the state depended upon that of the individual.