Putting Social Justice First: The Case of Islamic Economics

Please cite the paper as:
Asad Zaman and Junaid Qadir, (2016), Putting Social Justice First: The Case of Islamic Economics, World Economics Association (WEA) Conferences, No. 2 2016, Food and Justice, 5th November to 15th December 2016

Abstract

If we try to figure out the most pressing economics problems in the world today, most concerned citizens would prioritize those problems related to urgent societal welfare needs—e.g., feeding the hungry, housing the homeless, and treating the sick or disabled. But we find a huge mismatch between these objectives and the intents, priorities, and effects of modern economic systems, which are fixated on increasing wealth and production often at the cost of other factors that relate to human welfare. In this paper, we argue the case for a new economics in which social justice acts as the cornerstone. Towards this vision, we present the case of Islamic economics, which is an economic system based on justice, equality, and other principles that prohibit exploitation of others and social harm.

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6 comment

  • David Harold Chester says:

    The history of taxation methods as practiced by Islam leaders in Arab countries had at one time included a tax on land values. But this system is no longer current and not applicable today. It is time for the Islamic world to show the rest of the leaders on earth, the most just way for land tenure to be run on a national scale. The following essay explains how this should be done.

    Socially Just Taxation and Its Effects (17 listed)

    Our present complicated system for taxation is unfair and has many faults. The biggest problem is to arrange it on a socially just basis. Many companies employ their workers in various ways and pay them diversely. Since these companies are registered in different countries for a number of categories, the determination the criterion for a just tax system becomes impossible, particularly if based on a fair measure of human work-activity. So why try when there is a better means available, which is really a true and socially just method?

    Adam Smith (“Wealth of Nations”, 1776 REF. 1) says that land is one of the 3 factors of production (the other 2 being labor and durable capital goods). The usefulness of land is in the price that tenants pay as rent, for access rights to the particular site in question. Land is often considered as being a form of capital, since it is traded similarly to other durable capital goods items. However it is not actually man-made, so rightly it does not fall within this category. The land was originally a gift of nature (if not of God) for which all people should be free to share in its use. But its site-value greatly depends on location and is related to the community density in that region, as well as the natural resources such as rivers, minerals, animals or plants of specific use or beauty, when or after it is possible to reach them. Consequently, most of the land value is created by man within his society and therefore its advantage should logically and ethically be returned to the community for its general use, as explained by Martin Adams (in “LAND”, 2015, REF 2.).

    However, due to our existing laws, land is owned and formally registered and its value is traded, even though it can’t be moved to another place, like other kinds of capital goods. This right of ownership gives the landlord a big advantage over the rest of the community because he determines how it may be used, or if it is to be held out of use, until the city grows and the site becomes more valuable. Thus speculation in land values is encouraged by the law, in treating a site of land as personal or private property—as if it were an item of capital goods, although it is not (Prof. Mason Gaffney and Fred Harrison: “The Corruption of Economics”, 2005 REF. 3).

    Regarding taxation and local community spending, the municipal taxes we pay are partly used for improving the infrastructure. This means that the land becomes more useful and valuable without the landlord doing anything—he/she will always benefit from our present tax regime. This also applies when the status of unused land is upgraded and it becomes fit for community development. Then when this news is leaked, after landlords and banks corruptly pay for this information, speculation in land values is rife. There are many advantages if the land values were taxed instead of the many different kinds of production-based activities such as earnings, purchases, capital gains, home and foreign company investments, etc., (with all their regulations, complications and loop-holes). The only people due to lose from this are those who exploit the growing values of the land over the past years, when “mere” land ownership confers a financial benefit, without the owner doing a scrap of work. Consequently, for a truly socially just kind of taxation to apply there can only be one method–Land-Value Taxation.

    Consider how land becomes valuable. New settlers in a region begin to specialize and this improves their efficiency in producing specific goods. The central land is the most valuable due to easy availability and least transport needed. This distribution in land values is created by the community and (after an initial start), not by the natural resources. As the city expands, speculators in land values will deliberately hold potentially useful sites out of use, until planning and development have permitted their values to grow. Meanwhile there is fierce competition for access to the most suitable sites for housing, agriculture and manufacturing industries. The limited availability of useful land means that the high rents paid by tenants make their residence more costly and the provision of goods and services more expensive. It also creates unemployment, causing wages to be lowered by the monopolists, who control the big producing organizations, and whose land was already obtained when it was cheap. Consequently this basic structure of our current macroeconomics system, works to limit opportunity and to create poverty, see above reference.

    The most basic cause of our continuing poverty is the lack of properly paid work and the reason for this is the lack of opportunity of access to the land on which the work must be done. The useful land is monopolized by a landlord who either holds it out of use (for speculation in its rising value), or charges the tenant heavily for its right of access. In the case when the landlord is also the producer, he/she has a monopolistic control of the land and of the produce too, and can charge more for this access right than what an entrepreneur, who seeks greater opportunity, normally would be able to afford.

    A wise and sensible government would recognize that this problem derives from lack of opportunity to work and earn. It can be solved by the use of a tax system which encourages the proper use of land and which stops penalizing everything and everybody else. Such a tax system was proposed 136 years ago by Henry George, a (North) American economist, but somehow most macro-economists seem never to have heard of him, in common with a whole lot of other experts. (I would guess that they don’t want to know, which is worse!) In “Progress and Poverty” 1879, REF. 4, Henry George proposed a single tax on land values without other kinds of tax on produce, services, capital gains etc. This regime of land value tax (LVT) has 17 features which benefit almost everyone in the economy, except for landlords and banks, who/which do nothing productive and find that land dominance has its own reward.

    17 Aspects of LVT Affecting Government, Land Owners, Communities and Ethics

    Four Aspects for Government:
    1. LVT, adds to the national income as do other taxation systems, but it should replace them.
    2. The cost of collecting the LVT is less than for all of the production-related taxes–tax avoidance becomes impossible because the sites are visible to all and who owns each is public knowledge.
    3. Consumers pay less for their purchases due to lower production costs (see below). This creates greater satisfaction with the management of national affairs.
    4. The national economy stabilizes—it no longer experiences the 18 year business boom/bust cycle, due to periodic speculation in land values (see below). The speculation in and withholding of unused land is eliminated, see item 7.

    Six Aspects Affecting Land Owners:
    5. LVT is progressive–owners of the most potentially productive sites pay the most tax. Urban sites provide the most usefulness and resulting tax. Big rural sites have less value and can be farmed appropriately to their ability to provide useful produce.
    6. The land owner pays his LVT regardless of how his site is used. A large proportion of the present ground-rent from tenants becomes the LVT, with the result that land has less sales-value but a significant “rental”-value (even when it is not used).
    7. LVT stops speculation in land prices because the withholding of land from proper use is not worthwhile.
    8. The introduction of LVT initially reduces the sales price of sites, even though their rental value can still grow over a longer term. As more sites become available, the competition for them is less fierce.
    9. With LVT, land owners are unable to pass the tax on to their tenants as rent hikes, due to the reduced competition for access to the additional sites that come into use.
    10. With LVT, land prices will initially drop. Speculators in land values will want to foreclose on their mortgages and withdraw their money for reinvestment. Therefore LVT should be introduced gradually, to allow these speculators sufficient time to transfer their money to company-shares etc., and simultaneously to meet the increased demand for produce (see below, items 12 and 13).

    Three Aspects Regarding Communities:
    11. With LVT, there is an incentive to use land for production or residence, rather than it being unused.
    12. With LVT, greater working opportunities exist due to cheaper land and a greater number of available sites. Consumer goods become cheaper too, because entrepreneurs have less difficulty in starting-up their businesses and because they pay less ground-rent–demand grows, unemployment decreases.
    13. Investment money is withdrawn from land and placed in durable capital goods. This means more advances in technology and cheaper goods too.

    Four Aspects About Ethics:
    14. The collection of taxes from productive effort and commerce is socially unjust. LVT replaces this national extortion by gathering the surplus rental income, which comes without any exertion from the land owner or by the banks– LVT is a natural system of national income-gathering.
    15. previous bribery and corruption for gaining privileged information about land cease. Before, this was due to the leaking of news of municipal plans for housing and industrial development, causing shock-waves in local land prices (and municipal workers’ and lawyers’ bank balances).
    16. The improved use of the more central land of cities reduces the environmental damage due to a) unused sites being dumping-grounds, and b) the smaller amount of fossil-fuel use, when traveling between home and workplace.
    17. Because the LVT eliminates the advantage that landlords currently hold over our society, LVT provides a greater equality of opportunity to earn a living. Entrepreneurs can operate in a natural way– to provide more jobs because their production costs are reduced. Then untaxed earnings will correspond to the value that the labor puts into the product or service. Consequently, after LVT has been properly and fully introduced as a single tax, it will eliminate poverty and improve business ethics.

    References:
    1. Adam Smith: “The Wealth of Nations”, 1776.
    2. Martin Adams: “LAND– A New Paradigm for a Thriving World”, North Atlantic Books, California, 2015.
    3. Mason Gaffney and Fred Harrison: “The Corruption of Economics”, Shepheard-Walyn, London, 2005.
    4. Henry George: “Progress and Poverty” 1897, reprinted by Schalkenbach Foundation, NY, 1978.

    • Walter Hanschitz-Jandl says:

      To help the poor cannot be the solution, we must prevent poverty! Only to propose redistribution and charity is a declaration of bankruptcy by an economist. Charity as a moral / religious commandment is good, but it should not be necessary. Where charity is needed, except for the disabled, there is no justice.
      Landlessness is obviously an important reason for poverty. And the distribution of land as it is in most countries is the most flagrant injustice. I am glad that David Chester contributed a „co-paper“ to stress the importance of the land question and the injustice of our prevailing order.
      But an equitable land order alone cannot solve the problem of poverty. David Chester maintains that the land value tax could solve the problem of „lack of opportunity to work and earn“. Keynes, however, has pointed to flaws in our monetary order which are at the root of an „underemployment equilibrium“. The denial of access to work and income has primarily monetary reasons. This is the message of Keynes.
      Clearer than Keynes Nobel laureate Maurice Allais analyzed our monetary order, and more consistent than Keynes he deduced a thorough reform of it, together with a radical land reform, namely the nationalization of land. The „socialisme concurrentiel“ which he developed would combine, he said, efficiency (being a market economy) and justice (abolishing all privileges). And only through this land and monetary reform („100%-money“ and the „continuous depreciation of the circulating money“) and the prevention of monopolies, all incomes would eventually be „earned incomes“, because all rents would disappear. It should be obvious what this would mean to the poor.
      Land is not the only problem for the poor – money is another one.
      Walter Hanschitz-Jandl

  • Asad Zaman says:

    Although this is a separate paper, rather than a comment, it is insightful and informative. The proposal s align with Islamic principles, and is worth pursuing. Of course, the reason Henry George didn’t get any traction is because his proposal hurts the interests of the 1 percent. Same problem s arise with any proposal for justice and equity.

  • Maria Alejandra Madi says:

    Dear Authors,

    Interesting paper that proposed new forms of thinking the foundations of economics. Considering the inter-relations between hunger and inequality, I would like to propose some questions for further discussion:
    What sort of fiscal policy does Islamic economics advocate?
    Within modern market economies and the spread of inequality and hunger, what is the Islamic view of taxation?

    Thanks

    Maria Alejandra Madi

  • Junaid Qadir says:

    In terms of the Islamic fiscal policy, the two most distinguishing features of an Islamic economy are the absence of interest-based transactions and presence of a well-functioning Zakah system, which act as two major institutional devices to establish a just social order. Zakah, or the obligatory charity due on every Muslim who has sufficient capital or Nisaab, is the quintessential Islamic fiscal mechanism for income redistribution, which ensures that the society does not suffer from grave inequality. With Zakah, every rich Muslim who has wealth above a certain well-defined threshold is bound to give 2.5% of his wealth annually to the poor and needy.

    Qur’an also exhorts Muslims also to spend voluntarily from their resources and give voluntary charity (Sadaqah) apart from Zakah. Many Islamic thinkers have taken note of this and have understood Zakah as an essential but not necessarily all-sufficient Islamic fiscal tool. Islamic thinkers have allowed for some welfare levies or taxes to meet the overall goals (Maqasid) of Islamic law (Shariah). The Islamic tax system is weaved around the central Islamic fiscal tool of Zakah and is structured to fill any gaps that are frustrating the goals and general design of Shariah which may persist even as Zakah is being made. In other words, Islamic taxation policy is primarily a `compensatory’ policy that acts complementary to Zakah.

    In the Islamic worldview, God has allocated ownership of things to individuals but not in an unchartered manner—an individual can use his resources for his permissible benefit but not encroaching on the rights of other individuals. Islam also closes the door to social ills such as interest, hoarding, gambling that can lead to social harm. Islam, in addition, makes a number of donations compulsory. Apart from Zakah, the other compulsory levies include Ushr (tax of one-tenth on agricultural produce), Sadaqah-Fitr (Eid day charity), Qurbani or Udhiya (Sacrifice of animal on Eid-ul-Adha), and Nafaqaat (maintenance allowance). Apart from these compulsory charity avenues, Islam also has a complete inheritance system that ensures that wealth is not confined only to certain families (e.g., by allowing a dedicated share to womenfolk and mandates a share for daughters instead of only for sons). Along with these legal requirements, Islamic also develops a certain personality that is inclined away from undesirable traits (such as greed, self-centeredness, lack of compassion) and towards desirable traits (such as compassion, magnanimity, moral courage, fear of God).

    A more detailed elaboration of the nuances of the fiscal policy and economic system in Islam can be seen in the following reference:

    Ahmed, Z., Iqbal, M. and Khan, M.F. eds., 1983. Fiscal Policy and Resource Allocation in Islam. Institute of Policy Studies.

    Our Socio Economic Order, Mufti Taqi Usmani

    http://muftitaqiusmani.com/en/books/PDF/Our%20Socio-Economic%20Order/our_socio-economic_order.pdf

  • foodconferenceadmin says:

    Dear Junaid,

    Really interesting approach to fiscal policy. Thanks for sending further references on the subject.

    Maria