Monday 26th & Tuesday 27th January 2004
Professor Masudul Alam Choudhury,
Dept. of Economics and Finance, College of Commerce
Sultan Qaboos University, Muscat 123, Sultanate of Oman
- Email: email@example.com
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
-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 social justice
• practice (or not) of riba/usury (the
imposition of interest)
• narrow, or widespread, ownership of productive
• existence, or absence, of political freedoms.
The present monetary system
main 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
monetary 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
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
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
|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
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’
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
• focus financial activity on the real productive
• allow everyone to own productive capital
• enable societies to control their own resources
and their own destiny
• 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, for:–
|• material prosperity
• economic justice
• social justice
• resources to be mobilized into socially acceptable
• an extensively relational overview relating
to participatory purpose
• new, clean, green energy generation and technology
no 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 slower-moving economy.
• 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
• focus on the real productive economy
• allow everyone to own productive capital
• allow societies to control their own resources
and their own destiny
• end the practice of riba (interest)
the 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 poverty.
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
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.
and start-up businesses (with no requirement for
wide ownership) thereby freeing them from the crushing pressure
of interest-bearing debt.
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 justice.
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
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
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 worthless.
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
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
• 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.
new understanding of how wealth is created
is 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 the wealth.
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 the capital).
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 the population.
8.1 ‘Binary’ means
‘composed of two’
at 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
we 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 towards consumption.
• A green growth.
• Clean green energy investment.
obvious 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
briefly, 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 appreciation (12).
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 work.
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 interest payments.
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.
rise of the ummah
splendid 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
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
ì 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
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
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 ì åFDIC¯
ì 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