Most of the socio-economic ills can be attributed to the role of interest in economy, which is both a major source and a tool of growing injustices, observes DR. WAQUAR ANWAR adding that human society has no short cut way, other than course-correction, to effect a just world economic order.
Human quest for a just world order emanates from the feelingthat the world order in existence is unjust, or the justice available is not sufficient. The formeropinion means that justice does not exist, as such.The latter opinion means that justice, although available, is not enough. The latter situation may be true to some extent in the case of many issues like human rights, democracy, and liberalisation, etc. But in the case of world economic system the former situation holds good. Injustices galore are there in world economy, and economic exploitations are both organised and rampant.
The widespread injustice in the economic world order may be assigned to two aspects. One relates to the basic fallacies in economic theories and the other to the ill and maligned practices. We may refer to the former as the failure of conception and the latter to the result of hegemonies of individuals, families, corporations and nations.
CONVENTIONAL ECONOMICS
The development of world economy as we find today may be assigned to two juxtaposed sets of economic theories that were conceived and developed in the last couple of centuries; namely capitalism and communism. We shall limit our discussions to capitalism as communism is now a case of miscarriage of justice and has consequently been relegated to the dustbin, if not buried to the grave, of history. So we can afford to refer to the economic theories of capitalism as conventional theories, ignoring the theories related to communism as insignificant aberrations. Further, we are not involving ourselves in the classical and neo-classical approaches of economics as the system in vogue is the modern economic theory based on the concept of scarcity of resources.
Conventional economics begins with the definition of economics so that a justification for this as a separate branch of studies may be established. It says that scarcity of resources is a basic feature that demands an exclusive studyof the related phenomenon as a subject. Resources are required for human consumption and for producing further resources.As they are scarce and there too they can be put to alternative uses, their production, exchange, distribution and consumption should be studied carefully so that optimum utilisation of the scarce commodities may be done. Commodities which are not scarce like air, which nature has provided in abundance, need not be covered under this subject. That is why famous economist Ricardo, while studying agricultural produce,opined that had nature provided everything in abundance there would have been no worry. In his words, scarcity is the result of niggardliness of nature.
As commodities are scarce, what should be the basis of their distribution and possession? Conventional economics opines that their possession is linked with free competition and those who are more efficient win the race in the competitive market and get more than others. Market should be left to reach equilibrium according to such possessions on the basis of abilities (efficiency).
There is a dichotomy of interest between competing claims on resources. Resources are required for both consumptionand production. A consumer would like to get maximum utility out of the resources at the lowest possible cost. The producer wants to maximise his profit and he would tend to increase the price or intercept supplies.Conventional economics assumes that market is itself, without any external intervention, able to adjust to these conflicting pulls as ‘a perfect symmetry exists between private and public interests.’ These market forces may be called invisible filter mechanism which assists achievement of equilibrium in the market.
In fact, the above mentioned equilibrium of conflicting interests does not exist and mere invisible market forces are not capable of addressing the need of the economy. Visible filter mechanism like planning and taxation is required and the state has had to intervene and take the corrective actions. Conventional economics has accepted this situation as a necessary evil!
Conventional economics is concerned about the factors whose guided interplay results in production. These are land, labour, capital and entrepreneur. These factors get their share of produce in the form of rent, wage, interest, and profit respectfully. As the entrepreneur bears the risk of an enterprise, his level of profit cannot be predetermined. It may be high, low, marginal or negative. Other factors get fixed return with respect to time, e.g. rent per month of utilisation of the asset, wages per month of employment of labour and interest per month of making use of capital. For conventional economics justification of interest comes from usufruct of capital and it is continuation of logic by which rent and wages are paid.
THEORETICAL FALLACIES
Conventional economics begins its debate from a misleading premise. Scarcity of resources which are found and felt is not a result of short supply of any resource by nature. The Creator of the universe has provided everything in optimum quantity.Theinefficiency of human being in making proper use of resources, coupled with his greed and corruption,is to be blamed. The solution lies in addressing the inefficiency, greed and abuse of available resources by human beings, instead of taking scarcity as a fundamental trait of creation and address issues from that premise.Change of the premise leads to a basic change in approach. The correct and humane attitude is to base distribution of human resources not on relative efficiencies of persons and their group but make it a human function. Economy needs not only ‘justice’ for fair play of all economic activities (comprising production, exchange, distribution and consumption) but also ‘equity’ to take care of the needs of the individuals or groups who are either not relatively efficient or are differently abled (disabled).
A fundamental error of conventional economics is its attitude towards interest. Before the advent of conventional economics a couple of centuries ago interest was considered an evil in all societies. Although interest has always been present in economy right from ancient times but it was always abhorred.Conventional economics provided interest with justification and made it adorable. An analysis of injustices in world economy reveals that most of the socio-economic ills can be attributed to the role of interest in economy. It is both a major source and a tool of growing injustices.
The concept of usufruct or rental for capital provided in liquid asset is misconstrued. Usufruct relates to something which is ‘used’ and not ‘consumed.’ Services of land and labour are used for a fixed period so they are paid accordingly. Liquid capital is consumed as it does not in its original form so it should not get fixed return. Like the efforts of the entrepreneur, the capital brought in by him are the risks he is taking. He may get very good return or marginal return or he may be in loss. This is part of the game and bargain that is called business. If any entrepreneur brings in any machine or asset, he may get rental in the form of fixed periodical payment because that asset is not being consumed but used in production.
Human society from time immemorial has been working on this clear distinction being usable and consumable. Bringing in capital has always been the function of an entrepreneur. He brings in liquid capital and the payment received by him as profit covers both his efforts and his capital. The fallacy of creating distinction between entrepreneurship and capital is the creation of the conventional economics and this has hit hard the human society,almost below the belt!
The visible (planning and taxation, etc.) and invisible (market forces) filters in economic activities are not sufficient. There is the need of moral filters too, based on permanent values. Conventional economics ignored, rather disregarded, this aspect, and thought that mere temporal and mundane laws will serve the purpose. But man is not made like machines; his is a moral entity.
CORRUPTION IN PRACTICE
The unjust world economic order is in turmoil. Conventional economics with its own fallacies coupled with the hegemony of the dominant nations of the world and corruption of resourceful persons, families and corporations have reached a stage where the world economic order has become a sinking ship. Thingshave come to such a sorry pass that it has become the talk of the day.We are, hereunder, involving ourselves in a fast track overview of some features of the sinking ship of conventional economicsso that we may discuss major causes of the downward movement.
Downfall Phenomenon:It is said that trade cycle is an ingrained phenomenon of conventional economics. Economy goes down south at regular intervals. However, at times great tsunami struck the economy, as happened recently in the US, which cannot be explained through normal cause-and-effect methods. Conventional economics has no methodto ensure regular, all-pervading and continuous growth. Its fallacies take toll regularly and sometimes they hit hard.
Lion’s Share of Unreal Economy:In a normal economy, growth shall be commensurate with creation of goods and services. There shall not be any major deviation between the size of real economy and financial economy. Real economy represents the value of goods and services created and financial economy the amount payable as presented in financial and debt documents. It is agreed that the latter may be slightly higher than the former owing to credit purchases and sales but the change in both should always be directly proportionate to each other. Conventional economics as practised today has brought in a situation wherein the real economy is not more than one-tenth of the financial economy. In other words, amounts payable through debt documents are more than ten times the available assets created in the economy. As most of the financial documents are based on speculation, any variation of even 10 per cent in it is capable of wiping off the whole real economy.
Debt Crises: The subjugation of real economy by financial economy has led to debt crises fromnations to nations, from region to region. The much talked about financial meltdown of the US was a debt crisis of financial institutions. It was not controlled through any positive measures but by providing more debts for the market! It is a precarious situation as debt crisis can only be resolved through further creation of debt. Conventional economy has no real solution. The US recently avoided sovereign debt crisis by increasing the debt taking ability of the state through constitutional amendment. The same perilous point of no return has arrived in European nations. They need further debts to avoid the impending sovereign debt crisis. Be it dollar-zone or the Euro-zone, the story is same that the economy based on debt is sinking day by day.
International Capital Taking over Nation States:Corporates of today are playing the same role which the colonisers of yesterdays were playing. International corporations have become more powerful than most of the nation states. They are dictating terms and are taking undue advantages of their position. The advantages available to these monster corporations emanate not only because of their capital size but also because they are capable of installing corrupt and authoritarian governments which are capable of pushing unpopular reforms in their respective countries which are suitable to these corporations and harmful to their own economies.These corporations succeed in arranging active connivance of police, courts and army in these nation states in their own advantages. Corporatised and commercialised press also serves them, despite pretending to be free.
99% sufferers and 1% beneficiaries: There is stark truth in the slogans of the Wall Street Movement. In terms of Gross Domestic Products and other norms indicating growth in economies, the statistics may show boom after boom but the position is true everywhere that the benefits of the growing economies are not percolating to the down. It is skimmed off and filtered above, leaving the rest high and dry. Be it North-South divide, or developed, developing and under developing countries, or Western and Eastern nations, we find heterogeneous developments. Even in so-called developed countries the phenomenon of 99% sufferers and 1% beneficiaries is a truth.
REASON & SOLUTION
These are basic questions. In fact, these are two aspects of one question. If we know the reason, we know the solution too. There are a number of ailments in economic theories and wide ranging corruptions and injustices in practices. However, one basic aspect relates to justification of the maligned concept of interest provided by conventional economics and practices emanated therefrom. This has encouraged the concept that growth can be based on future income. It has come to be understood that an individual and an economy should plan growth based on income which has not yet been earned. This concept has encouraged scope of easy credit where agencies are ready to provide loans so that the task that was not possible otherwise can be performed. These credits are provided on the basis of fixed payment of interest. Had the financial accommodation been provided on profit and loss sharing basis, there would have been positive growth in the economy. But the interest element as take-all and give-none basis kills the economy in the long run. Interest-based debts are taken even for non-productive projects and uncontrolled consumerism sets in which has no relationship with the actual income of today and tomorrow. Economy consumes more than what it can pay. Individuals are caught in the trap of unbridled consumption and nations are trapped in deficit financing wherein fresh loans are taken to pay off old loans and new currencies are printed to cover up the gap between expenses and income.
The solution lies in correction of fallacies in theories, and corruptions and injustices in practice.No short cut method, other than course-correction, is available to human society for a just world economic order.
waquaranwar@yahoo.com