& Tuesday 27th January 2004
Professor Masudul Alam Choudhury,
Dept. of Economics and Finance, College of Commerce
Sultan Qaboos University, Muscat 123, Sultanate of Oman -
Fax: (968) 514-043 Tel: (office) (968) 515-845: (home) (968)
Money and the Real Economy
Presenting comparative studies in real
money linkages with
social issues, economic transformations, institutions and
Linking money to productive efficiency
(The Christian Council for Monetary Justice,
United Kingdom, London Global Table)
11, Charman House, Hemans
Estate, London, SW8 4SP, United Kingdom.
Tel: (UK) 020 7771 1107.
-1. Introduction - 1.1 The choice
- 1.2 The crucial issue - 2. The
present monetary system - 2.1 Fiat money - 2.2
Interest is added but is not necessary - 2.3 Summary of fiat
money/credit and breach of Islamic principle - 3.
Un-free market finance capitalism
- 4. Alternatives to the
present monetary system - 4.1 Gold (and silver)
- 4.2 Zakah - 4.3 Gold-backed money/credit - 4.4 Central banks
and the bete el mar - 4.6 Three key questions - 5.
Introduction to binary economics
- 5.1 The new paradigm - 6. The
new justice - 7. The new
monetary system - 7.1 Why should a government
have to pay interest? - 7.2 Interest-free money/credit - 7.3
Inflation and counter-inflation - 7.4 Interest-free loans
for public capital assets - 7.5 Clean green investment - 8.
A new understanding of how wealth
is created - 8.1 ‘Binary’ means ‘composed
of two’ - 9. Interest-free
loans for private capital investment if new owners are created-
9.1 Benefits of binary economics - 10. Basic
mechanism of binary economics - 11. Small
business - 12. A second basic income
- 13. The rise of the ummah
- 14. References
ummah can choose to rise or to languish. In order to rise
and have a fruitful destiny free from foreign control, the
ummah must address the nature of the money/credit supply,
its relation to the real economy and its relation to economic
and social justice. Gold alone is far from enough. Money/credit
100% backed by gold could be sufficient if there is a strong
will to implement justice.
xxxxxHowever, there is another
binary economics –
which, implementing genuinely just market principles in a
counter-inflationary way, uses interest-free money/credit
(i.e., repayable and cancellable loans) for:–
xxxxx• public capital expenditure
(thereby reducing it to half, one third, even one quarter
of the present cost)
xxxxx• private capital
expenditure if thereby new owners of capital, receiving as
income the full earnings of xxxxxcapital,
xxxxx• small and start-up
businesses (with no requirement for wide ownership) thereby
freeing them from the xxxxxcrushing
pressure of interest-bearing debt
xxxxx• green investment,
particularly for clean, renewable energy
xxxxxSuch use of interest-free
money/credit will implement a genuine free, fair and efficient
market, throw off foreign and financial elite control, implement
social and economic justice, and give hope for the environment.
Key Words: rise of ummah; binary economics;
real economy; money/credit supply; economic justice; social
justice, green investment.
The ummah is faced with a momentous
1.1 The choice
choose to rise and achieve a level of success exceeding that
of past Islam, a success embodying true Islamic values and
a profound implementation of economic and social justice.
In thus choosing to be self-reliant and independent, the ummah
will be giving an open, bold, exhilarating and very necessary
lead to the world today.
it can choose to languish, to be humiliated and oppressed,
to be dominated by Western neo-liberal values and the Western
(now worldwide) banking system. In thus choosing, the ummah
will have given up all hope of dignity, let alone justice.
1.2 The crucial issue
will not be able to rise, however, unless a crucial issue
is addressed –
the nature, control and use of the money/credit supply and,
in particular, its relation to the real economy.
Control and use of the money/credit supply have many outcomes.
They include the:–
|• level and quality of productive
• existence (or not) of plutocracy
• ability (or not) of a society to guide its own
• existence (or not) of economic and
• practice (or not) of riba/usury
(the imposition of interest)
• narrow, or widespread,
ownership of productive capital
or absence, of political freedoms.
The present monetary system
reason for the languishing of the ummah –
for its inability to control its own destiny; its uncertain,
often miserable, standards of living; its rich-poor divisions;
its social and political oppressions –
is the design and control of the present worldwide monetary
system together with the associated institutions and practices,
particularly riba. The Qur’an and Hadith state
that decline in the ummah happens because Muslims
do not follow their religion correctly. Muslims have unfortunately
allowed riba to arise and this is certainly one big
reason for societal weakness.
2.1 Fiat money
system generally uses fiat money/credit. In the case
of the banks, fiat money/credit is created out of
nothing by the press of a computer button. In the case of
government, fiat money is money created by manufacturing coins
(whose metal has little intrinsic value) and paper notes.
xxxxxIt is important to note
that when banks lend money/credit, they are not lending the
money of their depositors but are lending the money/credit
created by the computers. The UK percentages are an astonishing
97% of the new money supply being created by the banks and
3% by the government. Many, but not all, countries have similar
xxxxxThe creation of fiat
money/credit is never willingly admitted. In the West, the
banking system and its supporters in academia and government
do everything they can to hide, sideline, fudge or ignore
the facts, thus keeping the public in ignorance. The unwillingness
to admit that the banking system creates vast amounts of money/credit,
and has an effective monopoly of that creation is, in the
circumstances of public ignorance, a situation akin to fraud.
2.2 Interest is added but is not
fiat money/credit that they create, the banks add
interest. Thus in the UK today 97% of the new money supply
is issued as interest-bearing debt.
xxxxxJust as the creation of
fiat money/credit is never willingly admitted, so
there is an unwillingness to admit that interest (as opposed
to administration costs) is not necessary. Money/credit can
be created, lent and repaid without interest being involved
in the form of repayable and cancellable loans. In any case,
interest is something that ought always to be avoided if at
all possible rather than something which, as at present, is
allegedly necessarily imposed.
xxxxxThe imposition of interest
makes a huge burden. Throughout the world today, debt –
personal, corporate, town, city, regional and national –
is rising, in some cases, exponentially.
xxxxxBut interest is not
necessary. It only exists because, by imposing it, a financial
elite, creating money/credit out of nothing, can batten onto
society, particularly the poor, often forever.
2.3 Summary of fiat money/credit
and breach of Islamic principle
xxxxxIt is bad
enough that fiat money/credit stimulates and exacerbates
debt. However, it also causes inflation and, instead of being
used for investment in the real economy, is often traded as
a commodity or used for speculative or corrupt purpose.
|In sum, present fiat money/credit is:–
• not necessarily directed at productive capacity
• traded as a commodity
• of an origin
akin to fraud
In all these respects, fiat money breaches Islamic
market finance capitalism
money/credit is not only at the centre of the methods by which
individuals, corporations, governments and whole societies
are being put into exponentially increasing debt but is also
at the centre of the system of ‘free market’ finance
xxxxxSince the fall of communism
in1989, the ‘free market’ system, boasting that
it is the most efficient system possible and that all its
outcomes are just, has come to prevail throughout the world.
However, the purported ‘free market’ is not
free. Rather, it is un-free, un-fair and
xxxxxIt is un-free because
most people are in practice excluded from the markets for
productive capital and thus excluded from ownership of what
creates a large part of the wealth. The exclusion is the main
cause of rich-poor divisions.
xxxxxIt is un-fair because
of huge rich-poor divisions as well as an abysmal treatment
of many social groups including carers and women who often
have no income, let alone a secure one.
And it is inefficient with the basic evidence being
that, despite the world having huge, undoubted, technological,
natural and human resource and capacity, poverty is widespread
Furthermore, un-free finance capitalism does not enable societies
and countries to rule themselves – rather, they are
ruled by finance capitalists and foreigners.
As for the un-free market claim that all its outcomes are
just, well, anybody who believes that, will believe anything…….
So, despite its arrogant boasting, un-free market finance
capitalism, together with its associated fiat monetary system,
does not, or does not properly:–
|• address poverty and rich-poor division
introduce economic democracy including some form of secure
income (in addition to any income from labour)
focus financial activity on the real productive economy
• allow everyone to own productive capital
enable societies to control their own resources and their
• end, or at least mitigate, the
practice of riba
• end a financial system bent
on putting the whole globe into debt.
Alternatives to the present monetary system
alternatives to the present monetary system it should be observed
that it is not enough just to implement change. In addition
there must be borne in mind the need, among other things,
|• material prosperity
• economic justice
• social justice
• resources to be mobilized
into socially acceptable projects
• an extensively
relational overview relating to participatory purpose
• new, clean, green energy generation and technology
matter how desirable a change may seem in itself, all
aspects of the situation including outcomes and omissions
have to be considered. Bearing these things in mind, some
alternatives to the present fiat monetary system
can now be discussed.
4.1 Gold (and silver)
alternative to fiat money/credit is the use of only
gold (and silver). Gold has the virtues of intrinsic value
and a non-fraudulent origin. It is relatively (but far from
completely) stable –
one dinar (4.24 grams of gold) bought a sheep at
the time of the Prophet Muhammad, and still buys a sheep today.
Since the supply of new gold is limited, around 2000 tons
per annum, its use would not be inflationary. Very importantly,
gold is part of the Islamic tradition.
|The use of only gold, however:–
• does not directly address poverty and rich-poor
indeed, it would probably increase such division (zakah
is considered below).
• would certainly not
cause inflation but could cause a deflation with a much
• could result in such
a tight supply of money/credit that it would seem to be
impossible for large sums to become quickly available
for feasible investment projects. Such projects are essential
if poverty is to be removed and a green environment established.
Moreover, the use of only gold does not necessarily:–
• introduce economic democracy including some form
of secure income (in addition to any income from labour)
• focus on the real productive economy
allow everyone to own productive capital
societies to control their own resources and their own
• end the practice of riba
use of gold (and silver) alone, while undoubtedly having an
emotional and historical appeal to Muslims, is unlikely to
be the means by which the ummah can break from its
present lethargy and become a new comity of proud, self-reliant
to answer the objection that the use of gold does not address
poverty and rich-poor division, advocates of gold remind us
of the Koranic duty of zakah (a 2.5% wealth tax for
the benefit of the poor). This, they say, is the answer to
while commendable as a form of charity and an expression of
social responsibility, does not answer the question as to
why there is poverty in the first place. Nor does it address
the subject of rich-poor divisions, provide regular incomes,
or spread the ownership of productive capital.
breaches market theories of efficiency for it is a redistribution
of money after it has been earned whereas effort should be
concentrated on ensuring that the poor are individually more
productive (so that zakah is not needed). In any
case, the amount of money raised by the zakat wealth
tax will probably always be inadequate.
xxxxxIn summary, zakah
could perhaps be described as a charitable amelioration of
poverty, but not an attempt to solve it.(However, the author
of this paper has been informed of something which suggests
that zakah can solve poverty. It is reported that
in early times there was so much zakah money available in
the Yemen, and so few poor people, that the authorities in
Yemen sent the money to Medina for distribution. Whereon the
authorities in Medina –
who also had too much zakah available –
returned it to the Yemen!)
4.3 Gold-backed money/credit
than the use of gold alone, a much better solution is money/credit
backed 100% by gold. Such money/credit, in practice, maintains,
even increases, its value and thus would not be inflationary.
Because it is only linked to gold (rather than being gold
itself), the amount of money/credit available in the economy
is, in practice, much larger. Thus there is much less risk
of deflation and –
this is a key matter –
a much greater degree of possibility in addressing issues
of poverty, rich-poor division etc. Furthermore, the advocates
of such money/credit (e.g. Choudhury, 1997 and 2003 (1)) know
that such money/credit can, and should, be issued interest-free.
Most important of all, many of the advocates propose that
gold-backed money/credit could, and should, be directly linked
to the provision of real production, real goods and real services.
4.4 Central banks and the bete
issue the gold-backed money/credit? There is an Islamic concept
of a treasury, the bete el mar (bayt al mar, literally,
‘house of wealth’) which is a publicly accountable
body (and many Western monetary reform proposals include a
similar idea). There seems no reason why the bete el mar
could not issue interest-free money/credit if it
is issued for patently beneficial, productive and non-inflationary
purpose. The money/credit would have a small administrative
cost attached but in no way would it have attached the heavy
cost of interest. In Seven Steps to Justice(2), Shakespeare
and Challen, noting that the imposition of interest is not
necessary, record that interest-free money/credit (i.e., repayable
and cancellable interest-free loans) issued through the bete
el mar, can be used for:–
xxxxx• public capital investment
thereby allowing hospitals, roads, bridges, schools
etc. to be constructed for one half, one third or even less
of the present cost. Over time, a large part of the national
debt would be eliminated (because interest-bearing money/credit
would not be being used) and, consequently, taxes
would become much less.
capital investment (at one half, one third or even
one quarter of the present cost) if
such investment creates new owners of capital (rather than
the existing rich) and if such use
is patently for the benefit of all and is non-inflationary.
xxxxx• small and
start-up businesses (with no requirement for wide
ownership) thereby freeing them from the crushing pressure
of interest-bearing debt.
xxxxx• green investment,
particularly for clean, renewable energy
xxxxxVery importantly, these
uses would back the currency with assets, break the grip of
usury, and be patently non-inflationary, indeed, counter-inflationary.
The rationale for such uses is that resources are being mobilized
into socially acceptable and desirable projects in a context
of genuine participation by the general population. Please
note the significance of an Islamic country having an endogenous,
rather than exogenous, source for the money/credit supply.
An endogenous source originates from within the society. In
contrast, an exogenous source is one coming from the outside.
The meaning of the difference is simple –
if a society has an endogenous source of money/credit, it
can largely control its own destiny: if the source is exogenous,
the society is controlled by outsiders.
scepticism has been expressed about the willingness of present
central banks to take on the role of issuing gold-backed,
interest-free money/credit. The scepticism comes about because
of an expected huge opposition from the ruling elites in the
existing interest-ridden financial system that serves the
money-masters in both the West and in Muslim countries. The
solution, the sceptics say, is to fulfill the 100% shari’ah
requirement by asking the Islamic private sector to ensure
that all monetary investment is made into the real economy
and for shari’ah-approved purposes including
social and economic justice.
xxxxxThis solution is very revealing
because it is asking the private sector to eschew any investment
that is not into the real economy and actively to promote
concepts of social and economic justice. However, just as
there is scepticism about the willingness of the central banks
to use interest-free money/credit, so there may also be scepticism
about the willingness of the private sector always to act
in an Islamic way, let alone to promote social and economic
4.6 Three key questions
Which brings us to three key questions:–
xxxxx1. If central banks
and the private sector cannot be relied on how, in practice,
is it possible to create the impetus necessary to ensure that
interest-free money/credit is issued and used for the real
economy while also implementing social and economic justice?
xxxxxThe author of this paper
and colleagues of the London Global Table think the only long-term
solution is the establishment of an informed religious, political
and economic movement comprising people of good faith from
all backgrounds. The movement would be committed to monetary
reform, justice and participatory purpose and, expressing
the needs of millions of people, would demand that
the power structures implement social and economic justice.
The London Global Table’s lead to the movement can be
found at www.globaljusticemovement.net and the matter
is dealt with extensively in Seven Steps to Justice.
xxxxxThis University Conference,
however, is of equal, if not greater importance for it is
focusing the minds of academia and business on the need for
clear new thinking. Such thinking is essential if the rise
of the ummah is to be achieved. Yet the thinking
will not happen unless there is a simple determination amongst
forward-looking thinkers to co-operate. Furthermore, and in
particular, that co-operation will not happen unless the thinkers
are imbued with a strong sense of the need for social and
economic justice. Without that sense, all proposals are ultimately
Is there anything (apart from gold-backed money/credit) which
can act on the real economy, be non-inflationary and yet still
achieve social and economic justice?
Is there anything which can use markets, and improve the efficiency
of markets, while still implementing justice?
to questions 2 and 3 is –
Yes. It is called Binary Economics and a brief description
is set out below.
to binary economics
observed in paragraph 4.4 above that interest-free money/credit
(i.e., repayable and cancellable interest-free loans) issued
through the bete el mar, can be used for:–
|• public capital investment
• private capital investment
• small and start-up businesses
• green investment
uses of interest-free money/credit would back the currency
with assets, break the grip of riba/usury, and be patently
non-inflationary, indeed, counter-inflationary. They would
implement a genuine free, fair and efficient market; would
throw off foreign and financial elite control; and would result
in social and economic justice.
5.1 The new paradigm
textbook on binary economics is Binary Economics –
The New Paradigm (3). The word ‘paradigm’
is important because without a new paradigm –
a fundamentally new way of understanding reality –
the present conventional paradigm of neoclassical ‘free
market ’ finance capitalism will continue to dominate.
xxxxxIf un-free market finance
capitalism is to be successfully challenged, the new paradigm
must comprehend three key matters:–
|• a new justice
• a new monetary system
• a new understanding of how wealth is created.
6. The new justice
is a set of universal principles defining right and wrong.
Its ultimate purpose is to elevate, under Allah/God, the dignity
and sovereignty of humans.
xxxxxJustice is concerned with
the structures of society. It is not charity. Although
charity is within justice, charity offers only expedients
and not long-term solutions. Charity can never be a substitute
xxxxxThe main aspects of justice
are social justice and economic justice together with ecological
Social justice guides us in the creation of social
institutions. Such institutions, if justly organized, provide
what is good for people, both individually and in their associations
with others. Social justice commands us to work with others
to perfect our institutions as tools for personal and social
development. Also embodied in ecological justice, social justice
requires us to maintain the environment because, without that
maintenance, all else becomes nought.
Economic justice involves individuals and the social
order. Like social justice, it is sensitive to ecological
justice which is the root of the sustainability upon which
the future of civilised life depends. Economic justice gives
moral principles to be embodied in economic institutions.
These institutions determine how each person earns a living,
enters into contracts, exchanges goods and services with others,
and otherwise produces an independent material foundation
for his or her economic sustenance. The ultimate purpose of
economic justice is to free each person to engage creatively
in the unlimited work beyond economics – that of the
mind and the spirit.
Economic justice has three principles:–
This is an equal opportunity to participate in the economic
process in order to make a living. Such opportunity cannot
be equal unless there is access to private property in productive
assets as well as opportunity to engage in labor. The principle
does not guarantee equal results, but requires that every
person be guaranteed the right to make a productive contribution
to the economy both through labor (as a worker) and through
productive capital (as an owner).
This principle says that individuals should receive from an
economic system what they have productively put into it (via
their labor or capital ownership). It involves the sanctity
of property and contracts in a truly free and open marketplace.
Through the distributional features of private property within
a free and open marketplace, distributive justice becomes
automatically linked to participative justice, and incomes
become linked to productive contributions.
The principle of harmony detects failure in implementing the
principles of participation and distribution, and makes the
corrections needed to restore a just and balanced economic
order for all. The principle is violated by unjust barriers
to participation, by monopolies, or by the use of property
to harm or exploit others. It opposes greed because greed
leads to the exclusion and exploitation of others. The principle
is also violated by environmental depredation since such depredation
ultimately harms all.
new monetary system
know that they pay interest but do not generally realise that
they also pay interest even when not borrowing because
every price they pay contains an element, often a
very large one, of interest. In Aachen, Germany, interest
on capital is 12% of the cost of rubbish collection; 38% of
the cost of drinking water; 47% of the cost of sewage; and
up to 77% of the cost of public housing(4). Remembering also
that the prices a manufacturer pays to his suppliers include
the suppliers’ borrowing costs (and so on with the suppliers’
suppliers) it has been estimated that such costs (principal
and interest) amount on average to an amazing 50% of the price
of goods and services.
xxxxxMoreover, the payment of
that interest does not affect everyone equally –
there are huge differences between what people pay. In Germany,
80% of the population pay out more than they receive; 10%
receive twice as much as they pay. Thus the rich get richer
and the poor get poorer. But, since nowadays money/credit
is created by pressing a computer button, interest is not
necessary so there can be no justification for the imposition
of riba/interest (administration and other costs are
separate) and that is the insight which founds the new monetary
7.1 Why should a government have
to pay interest?
why should a government have to pay interest? In
the UK and other countries, countries borrow to fund their
public capital expenditure. This is called the national debt
and, in the UK, it amounts to £8/9 per week per
xxxxxThat is an outrage. If money/credit
is borrowed to pay for public capital spending (e.g., low-rent
public housing or a hospital) it might be repaid over 50/60
years. However, even if borrowed at the prime, lowest interest
rates, the effect of the interest is that three to four
times the original borrowing would eventually be paid
back. Thus a $100,000,000 governmental housing project would
pay back $300,000,000 or $400,000,000 when the risk is virtually
nil (governments can raise taxes to pay off their debt) and
the administrative cost is tiny.
xxxxxSo why does a government
have to pay interest? Why do governments have to
borrow billions from the banking system and have to repay
even more billions? Why?
xxxxxThe answer is that the
banking system owns the money/credit it has created and riba/interest
is the charge it chooses to make. Thus governments have
allowed the most fundamental thing of all – the money/credit
supply – to become owned by the banking system (5).
In past times, kings and governments in need of money (in
the form of metallic coin) borrowed from bankers who charged
interest. Today, when money/credit is not metal with intrinsic
value but is created merely by pushing computer buttons, the
banking system has ended up with a virtual monopoly power
to create money/credit and to add interest. A power inherent
to government on behalf of all – the power to decide
on money/credit matters – now lies with the banking
system over which the government only has some influence (by
deciding interest rates).
xxxxxThat is shameful. Action
must be taken.
7.2 Interest-free money/credit
The basis of the new monetary system can
now be seen:–
|• Since a government has an inherent, existing,
power to issue its own money/credit,
it can increase the amount of new money/credit that it
• The money/credit can be interest-free
• The interest-free money/credit can be used
instead of interest-bearing money/credit
When repaid, the interest-free money/credit can be cancelled
7.3 Inflation and counter-inflation
a supporter of the Western banking system can be expected
to jump up and shout, “What about inflation? You are
proposing the unlimited printing of money as in Germany in
1923!” (6) The response is simple – there can
be no inflation if the interest-free money/credit is used
instead of interest-bearing money/credit, and if
it is made repayable and cancellable and if it is
used to create productive assets. Put shortly, if the money/credit
is issued in the form of an interest-free loan for a productive
asset and the loan is repaid, the money/credit no longer circulates.
Indeed, since productive assets are, by definition, productive
and the money/credit has been repaid (and can then be cancelled),
nothing is left except the productive asset. Thus
something extra has been gained and the money/credit which
created it has been withdrawn. Such a situation can only be
counter-inflationary. Even more importantly, the
cost of the asset will, in general terms, be one half or even
one third, even one quarter of what it would otherwise have
been simply because no element of interest is involved.
7.4 Interest-free loans for public
have an inherent power to create money/credit. Yet, amazingly,
they all have been bamboozled into believing that,
when in need of money/credit, they should let the banking
system do the creation and pay it interest. Thus
power has ebbed from states and national governments and has
gone to financiers in the world’s financial centres.
However, the way is wide open for any state to create money/credit
for its own spending at no interest. If the money/credit is
repayable, and is so repaid and cancelled, there cannot possibly
be any inflationary effect. There would, in particular, be
no inflationary effect if the interest-free loan were to be
spent on public capital works. Repayment of the loan, of course,
would come from taxes, but taxes much lower than they would
otherwise have been.
xxxxxAt which point the supporter
of the Western banking system may be expected to jump up (again!)
shouting that state-issued interest-free loans will reduce
the resources available for the private sector. As everybody
knows, he will shriek, the private sector is a much more efficient
user of resources than the public one. The supporter, however,
is completely missing the point that there is always a large,
necessary amount of public capital spending – low cost
public housing, roads, bridges, sewage systems –
and when that spending is made it should be done at the lowest
possible cost i.e., without interest. This in no way crowds
out the private sector. It only means that when public capital
spending is done, it is done cheaply, instead of expensively.
Thus if the state issues $1,000,000 as an interest-free loan
for building a hospital only $1,000,000 needs to be repaid
instead of perhaps $3,000,000 as at present. Taxpayers will
give a sigh of relief.
7.5 Clean green investment
world will also give a sigh of relief, however, if global
warming and other major environmental problems are solved.
By using interest-free repayable and cancellable money/credit
(instead of interest-bearing debt), societies would be able
to take advantage of technologies that, at present, do not
appear to be commercially viable. Thus, for the purpose of
generating electricity, tidal barrages, dams, windmills, wave
machines, solar electricity, and geothermal power stations
could all be used. Moreover, there are some extraordinary
other alternative technologies which could soon become available
e.g., the Motionless Electromagnetic Generator.
xxxxxIt is a shocking thing that
clean, green energy generation is not substantially in existence
and thus the world could destroy itself through global warming
all because of the insidious grip of usury.
8. A new
understanding of how wealth is created
new in binary economics but perhaps the most important thing
is its view of who or what actually creates the wealth.
This is the binary reality check which starts by observing
that the prevailing obsolete neoclassical paradigm can never
answer a very important question –
Why is it that, when sufficient productive capacity undoubtedly
exists, billions of people throughout the world (and even
whole strata within the developed economies) still remain
in poverty? The various conventional answers are always
unsatisfactory not least because they never explain why the
world is full of people who labor long and arduously but who
still have poverty-stricken lives.
xxxxxIndeed, every day, we are
taught that people must work to earn their living. The slogan
is always jobs, jobs, jobs and understandably so
because, in practice, jobs are at present the only way by
which most people can earn. However, the slogan ignores the
facts that a lot of people cannot labor and that jobs are
not always available. Moreover, many jobs do not pay enough
for a reasonable standard of living and, in many parts of
the world, pay only a pittance; and, everywhere, jobs are
insecure. The slogan ignores these facts because society (and
conventional neoclassical economics) says that jobs create
xxxxxYet suppose it were true
that it is not labor but rather productive capital that really
does most of the work and creates most of the wealth. Then,
indeed, there would be a new situation in which all individuals
would have to have at least some ownership of capital if they
were to be genuinely economically productive.
xxxxxThat said, most people probably
still have some difficulty in re-thinking who or what creates
the wealth. Nevertheless, they could start to consider why
the rich are rich and might then notice that the rich tend
to own a very large amount of productive capital that produces
a lot of valuable income. They might also notice that in large
parts of the world, millions of people labor ceaselessly every
day yet they are, and always will be, in poverty because
they own little or no capital.
xxxxxWealth is created by labour
and productive capital. Machines, hydroelectric power
stations and technological processes have extraordinary productive
powers. Binary economics clearly establishes the significance
of the productive contribution of capital to wealth creation
and so it becomes a matter of the highest importance that
everyone should have some ownership of productive capital.
(In contrast, conventional economics, concerned with keeping
capital narrowly owned, says that it does not matter who owns
xxxxxWhen everybody owns capital,
moreover, a balanced growth becomes possible. Binary economics
states that the more broadly productive capital is acquired
over time on market principles, and its income fully distributed
to its new owners, the larger the economy will grow.
Binary economics gives a capital acquisition right, to every
individual. Operating on market principles, this right enables
any individual to acquire efficient, income-generating capital
assets. The assets pay for themselves out of their earnings
xxxxxThe neoclassical and binary
views are in further opposition when jobs are considered.
The conventional paradigm alleges that jobs and welfare are
enough for most people. In contrast, the binary view, particularly
in the face of technical advance, is that jobs and welfare
can never be enough (not least because, even with jobs, many
people remain in poverty). Indeed, binary economists insist
that there can be never be proper market efficiency, or substantial
growth, or any hope of social and economic justice, without
the ownership of productive capital extending widely throughout
8.1 ‘Binary’ means ‘composed
present, most people do not own substantial amounts
of productive capital. People (unless they are slaves) own
their own labor but they certainly do not own the
other big factor in production – capital. ‘Binary’
means ‘composed of two’ and there are two factors
in production – capital and labor. Thus there are only
two ways of genuinely earning – either through
owning capital and/or though owning your own labor.
The main object of binary economics is to ensure that all
individuals have access to both ways of earning. The result
is the founding, on just market principles, of a private property
system which diffuses, rather than concentrates, capital ownership
so that 100% of the population come to be substantial owners.
loans for private capital investment if new owners are created
realize that the state can issue interest-free loans for public
capital investment, it becomes easily comprehensible that
the same basic mechanism – interest-free loans –
can also be used for private capital investment.
In both cases, public and private, repayable, cancellable
interest-free money/credit is used to create productive capital.
This is patently sensible for public capital investment and
is even more sensible for private capital investment done
on market terms, because such investment, by definition, pays
for itself. In practice, such private capital investment
is not just non-inflationary but counter-inflationary
(9). Yet – it might be asked
– why should private capital investment have the benefit
of interest-free money/credit? That’s allowing the rich
to get richer.
xxxxxYes, indeed, but it would
be a completely different matter if, on the principles
of binary economics, the interest-free loans were used to
ensure that all individuals, over time, on market
principles, should come to have a substantial independent
income from their ownership of capital. If all really
did mean all – carers, retired, sick, unemployed,
women, children and men – then poverty would be banished.
Moreover, the rich-poor gap would be properly addressed and,
most importantly, the economic base that empowers
individuals and deepens democracy would have been established.
9.1 Benefits of binary economics
of binary economics include:–
|• A basic income for all.
• The balancing
of supply and demand.
• A change in attitudes
• A green growth.
Clean green energy investment.
benefits include the provision of old age pensions; a huge
reduction in the need for welfare benefit; an income for children
(sufficient to pay for their basic needs); and the ability
to stop people getting their income in ways harmful to the
environment by giving them another means of being productive.
Basic mechanism of binary economics
the binary mechanisms work in exactly the same way as happens
at present, using existing institutions and practices with
a little modification. Each year in the USA new capital investment
is made – somewhere around $7,000 per woman, man and
child per year. That is a huge amount and it remains huge
even when depreciation is taken into account. Yet, each year,
it stays narrowly owned, and will always stay narrowly owned,
because ‘free market’ practices are un-free
and ensure that narrow ownership.
xxxxxBinary economics, however,
uses principles now well established in USA ESOP (Employee
Share Ownership Plan) legislation, but extends the principles
to cover 100 % of the population(10). The credit privileges
and special tax advantages that the U.S. government has given
to workers who adopt ESOPs, allow workers without savings
to purchase shares on credit wholly secured by the future
profits of the company. Because employees are directly linked
to productivity increases and profits through their ownership
rights, studies indicate that firms financed through ESOPs,
when combined with participatory management and gain sharing,
generally perform better than their competitors. Knowing about
the ESOP helps towards understanding how binary economics
enables everyone, over time, to come to individual ownership
of productive capital.
xxxxxSuppose a big corporation
or company wishes to expand. It could go to a local bank for
the money/credit which would be lent at riba/interest. Yet
the corporation could also decide to ask a Constituent Trust
(similar to an ESOP) to put up the money/credit – the
Trust would offer to give the money/credit to the corporation
and, in exchange, the corporation would issue new shares to
the Trust which would then hold the shares in the name of
its constituent clients. Acting for employees or for anyone,
the trustees then makes a proposal to a local bank which independently
evaluates the soundness of the proposed expansion.
xxxxxAt which point binary economics
proposes that cheap money/credit should be available. The
state’s central bank (e.g., the US Federal Reserve)
would issue the money/credit at a 0% rate of interest, and
give it to the local bank which would then lend it to the
Trust. So this would be interest-free loan money/credit for
market-driven productive investment as long as the
investment makes capital owners of people who previously had
little or no capital (11).
xxxxxFor the next five to seven
years, on average, the Trust will receive dividend income
from the stock held in trust for the client. This income is
credited towards the cost of the stock bought in the client’s
name and is repaid to the local bank which provided the original
loan. The local bank, upon receiving repayment from the Trust,
in turn repays the Federal Reserve. The Federal Reserve can,
of course, then cancel the money or recycle it into further
industrial expansion (12). As each share of stock is paid
for in full, it is released from the Trust and ownership accrues
to the clients who thereafter will receive the cash income
from their investment in the form of dividends or capital
xxxxxThe specific result of all
this is that the clients become the independent owners of
a capital estate providing income. The overall result is,
among other things, an increase in productive and consuming
capacity but no corresponding increase in the money/credit
supply, so there is no inflation; rather counter-inflation.
A new word is needed – perhaps ‘doeflation’.
Consequently, efficiency and justice are forwarded. In binary
economics, the efficiency creates the justice and the
justice creates the efficiency. Yet, in contrast, neoclassical
economics thinks that nothing much better than the present
can be reasonably expected and that those who have little
or no labor income (or no security of income) are only getting
what they deserve.
xxxxxCrucially, binary economics
ensures that all individuals can become, and remain,
economically productive (whereas conventional economics only
conceives of people being productive when they are in paying
jobs). Thus binary economics serves everybody, and not just
a few, with remarkable benefits. Without inflation or recession,
the binary economy offers to release the full potential of
technology to the immense advantage of humankind and the environment.
It offers to lower and eventually remove the need for redistribution,
consumer debt, and deficit spending. It offers to tame, if
not eliminate, the destructive economic cycles that have blighted
history. It will establish economic justice and, eventually,
eliminate material poverty. In a binary economy, moreover,
freed from the constraints and pains of poverty, people will
have happier, more balanced and independent lives. They will
have a greater freedom to be creative. There will be an overall
increase in our physical capacity to do Allah/God’s
11. Small business
principle of interest-free loans for productive capital investment
(if new capital owners are created) can be used for
small business but without the requirement for new owners
to be created. There would still be a requirement for collateral
as security against the possible loss of the loan and it might
be desirable for eligibility for the loans to be confined
to socially beneficial businesses. That said, the key point
is that riba/interest-free loans could be used for
small businesses in exactly the same circumstances as today
except that the small businesses would not be suffocated by
12. A second
been seen binary economics and its provision for all of a
basic income stemming from capital ownership is counter-inflationary
– greater output and consumption, particularly for the
previously poor, but in the context of generally lowered prices.
Yet it is a generally agreed aim that the general level of
prices should be stable. Whereon a remarkable possibility
arises – of a second basic income. When the
context is counter-inflation, prices could be raised to a
stable level by the issuance of debt-free (non-repayable)
money on the lines of the proposal made by Joseph Huber and
James Robertson (13). Such issuance would not be directly
related to productive capacity but, such is the counter-inflationary
power of binary economics, the issuance becomes acceptable
as the price of achieving a stable level of prices.
13. The rise
of the ummah
achievement in the past, a massive intellectual and cultural
heritage in the present, and bundles of obvious talent and
resource with which to build the future the ummah
can correct the unhappy present and build a magnificent future.
To do that, however, it will not be enough merely to propose
a reform of the monetary system. Without a central concern
for social and economic justice, all reform will be nugatory.
spearheads the call for an Islamic worldwide transformation
into 100 per cent reserve requirement with the gold standard
and has made a series of publications on endogenous money
and Islamic capital markets including (1989), Islamic
Economic Co-operation; (1990) Journal of Economic
Cooperation Among Islamic Countries; and (1998) Reforming
the Muslim World.
Rodney & Challen, Peter (2002), Seven Steps To Justice
(New European Publications, UK).
Ashford, Robert & Shakespeare, Rodney, (1999), Binary Economics
– the new paradigm (University Press of America). See also the website of the Center for Economic and Social
Justice, Washington, D.C., at www.cesj.org
Margrit (1995),. Interest and Inflation-Free Money.
In 1694 the founder of the Bank of England gave £1.2 million (@8% interest)
to King William III to fight the war with France.
This was the first UK National Debt and, in effect,
the government’s inherent right to issue money had been
sold to the banking system.
The National Debt principle has been copied worldwide.
At one period, the exchange rate was about 50,000,000,000 marks to £1.
Chapter Three of Binary Economics, op. cit.
The true, full dividend earnings of shares, in a binary economy, could
be as much as five, possibly eight or nine, times what is
paid out at present.
When, for a sum of money, productive capital has been brought into being
and the money is then repaid and cancelled, just the productive
capital is left. That
capital, however, continues to produce wealth and incomes
for its owners worth many times the original formation cost.
Although there are now well over 11,000 ESOP schemes, embracing around
eleven million people in the USA, present ESOPs are not
binary ESOPs because, alas, the ESOP has never been legislated
to conform with the demands of binary theory.
In order to protect the bank and the Trust against possible losses from
business failure and default by the corporation, the Trust
pays a premium to buy insurance from a commercial capital
credit insurer. The
cost of the premium is added to the cost of the investment
and charged to the client, as is the administrative cost
of operating the Trust.
The financial soundness of the privately owned capital
credit insurer will be guaranteed by new legislation creating
a state capital credit re-insurer (similar to the USA Federal
Deposit Insurance Corporation – ‘FDIC’ – which safeguards
bank deposits against loss).
Although, of course, it is possible to arrange things so that the money
is held on trust for the client, if that is appropriate;
and it is also possible to arrange things so that (e.g.
for new-born children) previously paid-up capital is used
thus giving immediate income
Huber, Joseph & Robertson, James (2000), Creating New Money
(New Economics Foundation, London).