Dr. Syed Thanvir Ahmed
Dominance of Interest and the way out
The subject of interest based transactions has evoked a lot of interest and hence generated a lot of literature over the years. The latest in this series is the book under reference.
The author has tried to argue that interest is responsible for many evils in the society. He states that the marginalisation of justice, prevalence of fraud, corruption and exploitation are all due to the dominance of interest. It is argued that interest is one of the main causes of inflation and it also leads to lower economic activity and unemployment. The author argues that Institution of interest is imposed upon the world by the proponents of capitalism as a conspiracy against the righteous and Islam. Objections have also been raised against the use of paper currency as a measure of value or wealth. The abolition of gold standard and the depreciation in the value of currency caused by inflation (for which interest is responsible) are considered to be a fraud upon humanity. The author, therefore, suggests that we should adopt a standard measure of wealth other than currency as was done in the past. The objections to the institution of interest could be based upon one’s faith which does not require any rational explanation because it would be a matter of faith. It could also be based upon some rational basis. However, if one wants tao convince the world that what is prescribed by religion is beneficial and superior in all respects even from the point of view of rationality, once has to be extremely careful. In this endeavour, there would be no room for emotions. We will have to use rational, logical arguments to convince others. When there are theories justifying interest and the entire wealth of economic literature based upon interest which goes into every aspect of economics, a person who wants to counter these will have to use the language, the economic framework and the tools which are already known and accepted. Unfortunately, the book under review does not live up to these requirements.
The author makes several statements which are not explained convincingly using any of the economic tools. Some of which are mentioned here. It is wrong to state that there was no inflation before the abolition of gold standard. Economies did experience inflation during the period when gold standard existed. Secondly, it may not be wholly correct to say that the institution of interest is solely responsible for low wages being paid to the labourers. Wages are a function of demand and supply of labour. In fact, it may be pointed out that during the periods in which the demand for labour is low due to low level of investment in the economy, the rate of interest has also been found to be low. Thus a high rate of interest is not the cause of low wages in such cases.
The author makes sweeping allegations against all the economists and calls them as paid agents. This is not true because many of them are ignorant about any alternative economic system and they work under a mental framework in which interest is accepted as something which is not sinful. This is the reason why they do not think of a system devoid of interest. To call them as paid agents is certainly unfair.
At some places, the author shows the ignorance of the basics of economics and makes allegations without substantiating them with an analysis of historical data or facts.
There is some confusion with regard to the purchasing power of the currency within the country and its foreign exchange value. Though these two are expected to move in the same direction they are not the same. The example given where the exchange value of Dinars appreciates against that of rupee is one sided (page 25). What happens when the rupee appreciates? There is no clarity in the argument.
Capacity utilisation in any industry is not at all related to the market rate of interest. It is related to several other factors. In fact even when the prices are low, firms may produce more and sell the produce at lower prices in order to get larger total revenue. Therefore it is wrong to blame rate of interest for everything under the sun.
Similarly there seems to be a lot of confusion with regard to the profitability of the Banks. Bank deposits, contrary to what is stated in the book, have never been negative. It is also wrong to say that the Banks are guaranteed high profits during times of inflation. The author does not give any statistical data to prove any of these points.
It must be made very clear that there is absolutely no dispute with regard to the undesirability of interest-based transactions both from the religious as well as economic point of view. No body disputes that interest leads to inflation and ultimately may lead to unemployment. However, if one wants to prove that these statements are true, one will have to use logic, economic tools and analysis of historical facts and data. Naive attempt will only end up in doing more harm than good to this cause.