Policy #3.1 "Let them Eat GDP!"

The health of the economy is measured by assessing how well the wealth is distributed. Human beings have always been driven to acquire more wealth and hence people's private fortunes will grow  - so there's no need to worry about economic growth. Instead, we need to ensure the wealth is circulating throughout the society and it isn't just collecting in the hands of the few

We explore this idea over a number of posts. In this post, we look at how the wealth generated doesn't actually "trickle down" to the masses and what is the correct way to measure economic health. In the remaining posts, we will in sha Allah explore the focus on jobs, how the Capitalists got the problem so wrong, and the problems with the wealth being concentrated in the hands of the few. 

Part 1: Economic Growth Does Not "Automagically" Reduce Poverty

Mainstream economists measure the health of the economy by the growth in "Gross Domestic Product" (GDP). For example, the New York Times looks at "economic health" as follows:

“The economy keeps underperforming...the United States is still producing around $800 billion a year less in goods and services than it would if the economy were at full health...”

In other words, what is needed to get the economy back in health is to produce $800 billion worth of goods and services and "everything will be okay". 

The reality is that maximizing production will only increase the economic output: it will not "automagically" cause the wealth to flow to those who need it to meet their basic needs or those who want to acquire luxurious goods & services (i.e. those goods and services beyond the basics). 

We can test this idea by comparing the growth in GDP from 2007 to 2014 to the corresponding change in the level of poverty. For these 5 years, the GDP in the US grew from $14.4 trillion to $16.6 trillion. During the same period, the number of poor people didn't fall but actually rose from 37.3 million people in 2007 to 46.5 million people in 2014. So despite the fact that the GDP rose by over $2 trillion, there were 9.2 million more poor people. Consequently, those trillions of dollars added to the economy for 7 years did not improve the welfare of 15% of the US population!  

Consequently, GDP is not even an indirect measure of how well people are doing.

Do we really need incentives to chase money? 

Anyone who follows the business press understands that they key players in the economy are constantly looking at ways to increase production. For example, the US Federal Reserve has kept interest rates at “near 0 percent for almost six years”. The theory is that low interest rates encourage investment in assets (e.g. stocks, machinery, business expansion, etc.) as it's cheap to borrow money and investing in projects will earn a higher rate of return than investing in interest bearing investments such as bonds or US treasury bills.

If policy makers stopped offering incentives would we stop producing?

No, we wouldn't.  

Human beings have always sought to be rich and have pursued all types of commercial activity and have even died fighting wars to subjugate other nations to exploit them and take their wealth - that's how far people will go to acquire wealth. 

The productivity of previous civilizations can be seen by the massive structures that they built, whether it’s the pyramids of Egypt, Great Wall of China or the massive mosques built by the Ottomans. Prophet Muhammad (saw) explained that the nature of man is to constantly seek wealth - even if he is rich:

“If the son of Adam were given a valley full of gold he would always want another.” [Bukhari]

Interesting side point: according to Islam greed is not the problem. Rather Islam channels this greed in a productive way, for example, the Quran encourages trade but not banking. So it's okay for us to be a wealthy trader - as long we play by the rules. It should also be noted that Islam channels this drive in pursuing the reward in the afterlife as well. 

The point is the key problem is not the lack of production - that will occur naturally - and so we should not focus on that from a policy perspective. 

Why should we focus on distribution?

Allah (swt) revealed:

“ And what Allah restored to His Messenger from the people of the towns - it is for Allah and for the Messenger and for [his] near relatives and orphans and the [stranded] traveler - so that it will not be a perpetual distribution among the rich from among you. And whatever the Messenger has given you - take; and what he has forbidden you - refrain from. And fear Allah; indeed, Allah is severe in penalty. For the poor emigrants who were expelled from their homes and their properties, seeking bounty from Allah and [His] approval and supporting Allah and His Messenger, [there is also a share].”  [TMQ Hashr 59:7-8]

According to usul-al-fiqh (principles of Islamic jurisprudence), the verse that commanded the Muslims at the time to distribute the wealth to the poor was accompanied with the "illah" (legal reason) that the wealth is not meant to circulate in the hands of the wealthy. Rather, the priority is to circulate wealth to the poorer sections of society - such as the muhajireen (emigrants) who migrated to Madinah and were poor, i.e. just as any refugee fleeing his land would be. Consequently, even if a transaction is initially deemed to be halal - and it causes the wealth to concentrate - it can be overruled by this ayah (verse). 

More generally, the Islamic rules overall are in harmony with this concept. We covered the prohibition of interest and illustrated how partnerships act as a distributor of wealth. However, this also applies to the zakat, which redistributes 2.5% of a person's assets (that haven't been used in a year) to the poor, the travelers, the debtors etc. We will cover this topic in more detail  in sha Allah in the future, but it should be clear that this tax is based on assets and not income. Also, consider the inheritance laws that distribute the assets from the estate to many members of the family instead of just allowing it to be passed on to, say, the eldest child.  

The Islamic Culture of Sharing

In addition to what's mentioned above, Islam has a rich tradition of sharing and hospitality. We often see Muslims fighting each other to pay the bill when we go out to eat. However, from what I have seen recently, what really illustrates this concept is how the children of Gaza were ready to welcome refugees from Syria: 

What's amazing is how different these kids see the issue of "resource scarcity" compared to mainstream economists. These kids despite their resource deprived situation are able to appreciate that they can share what little they have with others. It really illustrates how we view our situation based on our mindset. 

What are the practical implications of this?

Going back to the 46.4 million impoverished Americans - we need to identify the reason why they are not able to access wealth. This is not just the $2.2 trillion produced by the economy but the 100+ trillions of dollars wealth that exists in the economy altogether. Why is 15% of the population unable to access capital to start their own businesses? Why are the wealthy not investing? Are the wealthy hoarding the wealth for no reason? Why are more people unable to meet their basic needs? These are the types of questions that must be asked instead of trying to figure out how to produce more goods and services.

From an Islamic perspective, the first thing to do is to ensure all the rules related to the economy are implemented (e.g. banning interest, distributing the zakat, distributing proceeds of oil and mineral wealth, etc.). Second, if there still is a problem then this is where economists must work to understand where the wealth is jamming up and then figure out how to release that jam and let it flow into society. 

In the next post, in sha Allah, we will look at why economists look at employment numbers and explore the preoccupation of finding a "good job".

Thumbnail image attribution: Trey Ratcliff