The “credit crunch” has raised the question of whether it could have been prevented by a better use of our rational powers, or whether on the contrary it hasn’t been just a long-term consequence of the normal forms of rational risk-taking. The tendency to blame Wall Street, the bankers, the hedgefund managers, and all the others who rewarded themselves with such hefty bonuses as their businesses sank is understandable. But does it reflect any real understanding of the problem, and did those people do anything that you or I would not have done, had we been in their shoes?
After all, people invest in stocks when they anticipate a profit in doing so; the profit results from an increase in value of the quoted company, and this in turn results from the firm’s profitability. Firms become profitable when consumers demand their product. In this way the movement of money on the stock exchange both reflects and facilitates the free economy, being simply one part of the process whereby prices respond to demand and profits reward productivity. And those who take the big risks in order to keep the money flowing also deserve the big rewards: why else would they do it? Any other policy is stupid and benefits no one.
In the wake of the credit crisis the call was made, here and there, for the adoption of something called “Islamic banking,” operated according to principles laid down in the sharia. Now the Prophet Muhammad certainly objected to taking interest. But he did not object to borrowing, and was familiar enough with the credit mechanism, since without it the longrange trading across the Arabian Peninsula, in which he participated, would have been impossible. And of course the rule against interest has been circumvented from the earliest days of Islamic jurisprudence by the use of convenient legal fictions.
What Muhammad objected to, however, lies deeper than the practice whereby a lender compensates for the temporary loss of his money by demanding a rent. He objected to the growth of what one might call “unreal estate.” It seemed to him, as it has seemed to many before and since, that you don’t make a contribution to the economy merely by owning things. We flourish as a community because goods are produced and distributed among us, and because each person is able to satisfy his needs by contributing his labor. But the person who is simply sitting on a pile of money is doing nothing, so why should he be rewarded? Let him spend his money by all means, since this is a stimulus to production. But why should he be rewarded for not spending it?
Moreover, suppose we allow people to earn interest on loans. Does there not arise a strange spectral economy, in which people trade in debts—John lending to Bill, and then selling Bill’s debt to Henry at a profit? What kind of trade is this, in which the subject matter is simply a negative cipher in a bank statement? Furthermore, and this was particularly objectionable to Muhammad, John can insure his debt against Bill’s failure to pay, so that, whatever happens, he will make a return on his capital, having used it for no other purpose than to create a rent on Bill’s labor. To the Prophet this seemed like the Devil’s work: to make the whole productive process dependent upon the trade in unreal goods, and furthermore to preempt the will of God by insuring against failure. Contracts of insurance were there- fore forbidden by the original Islamic jurists, along with any loan that involved a rent on another’s production, rather than an offer of deferred payment for a service.
Islamic law has gone further, refusing to recognize either the rights or the duties of corporations, which are—from the moral point of view—mere fictions. It has therefore never accepted the idea of a “limited liability company.” Many argue that the development of this idea by the Dutch and English in the 17th century is responsible for the expansion of world trade and the lasting prosperity of capitalist societies. Be that as it may, it is also responsible for the legal protection that enables company directors to ruin their employees and shareholders while rewarding themselves with massive bonuses. In a sense there is no more vivid example of “unreal estate” than the limited liability company. And what we are witnessing, with the collapse of Wall Street, is the sudden disappearance of a dream.
SUPPOSE WE HAD FOLLOWED the Islamic model— would we have avoided the current crisis? There is no knowing exactly. But one thing is sure: we would not have witnessed the irresponsible trade in debts that has crippled the American banking system. Nor would we have encountered the kind of insane proliferation of risks that comes about when people are not personally liable for failure, and think that they can insure against risk in any case—putting out of mind the obvious fact that insurance companies can collapse like any other, and are the more likely to collapse the more risks we transfer to them. And maybe it is this habit of preempting God’s will—of thinking that we can always transfer the cost of our risk-taking—that has led to the crazy notion that, when all else fails, the government will step in to save us. Don’t governments fail? And are they not more likely to fail the more they borrow from the taxpayer? It surely matters little that their borrowing is coercive, and that they can shift things around for a while in order to cover up the hole in their accounts. In the end this escalating trade in unreal estate will come to a halt, and everybody will look down at what he has been holding in his hands and furiously trading with his neighbors, to discover that it is just a piece of paper, on which there is nothing written save an empty promise.
The Islamic way of seeing things is incompatible with a modern economy. For one thing, if taken seriously, it would dry up the flow of credit. It would compel people to trade only in what is already produced and provide no motive to put their spare money (itself the result of savings and therefore of production) into circulation. Economists are well aware of this. In the modern theory of the market interest appears simply as the price of money, and debts are treated as commodities that can be traded like any other. Those deep spiritual intimations that caused Muhammad and many others in the prophetic tradition, from Ezekiel to Marx, to warn against the trade in unrealities and against the mirages and illusions of a money economy have no place in the account books of economists, and are canceled out from their final calculations. So should we ignore them entirely?
There is no greater contrast of character than that between Muhammad and John Maynard Keynes, the flippant aesthete, homosexual lover of Lytton Strachey and Duncan Grant, and leading light of the Cambridge apostles, who was also the greatest influence on economic policies during the first half of the 20th century. And since we are now seeing a revival of Keynes’s ideas, it is worth comparing them with Muhammad’s, if only to sound out their real spiritual worth. Muhammad warned against interest and insurance, because each involves transferring a debt to the future, which belongs not to men but to God. Keynes took the opposite view, famously declaring that “in the long run we are all dead”—in other words, the more we can postpone to the future, the less will we have to account for it. In the face of an economic downturn governments should stimulate demand, embarking on large-scale projects that will bring employment to the millions, who will spend their money here and now, so creating more demand which will in turn create more jobs which will…
Is this just another example of one of those “money illusions” against which the prophets warn? Is this just building one promise on another in an infinite regress of transferred liability, so that no one is really committed? Keynes did not see things that way. Governments can stimulate demand by borrowing money against their own credibility, and nothing is more credible than a government. And when the time for payment comes, the government can borrow more, so constantly shifting its obligations to future generations who, after all, are not part of any long run in which we will exist. And the strange thing is that a government’s stealing from the next generation in order to buy the votes of the present one is supposed to be perfectly acceptable, while Bernard Madoff is now facing many years in jail, accused of doing the same. The contrast with Muhammad’s religious view, based as it is on the eternal liability of all of us here and now, could not be more telling. But it is Keynes who has carried the day in America, with a government borrowing $800 billion from future taxpayers without the faintest intention of paying it back.
THE PRESENT CRISIS was brought about precisely by postponing liabilities to the future. For the future has a habit of catching up on you, turning profitable mortgages to bad debts and equity to bankruptcy. A credit economy depends at every point on trust, and trust exists only between virtuous people who are in the habit of taking full responsibility for their debts. At a certain point someone, somewhere, realizes that in an economy where everybody buys by borrowing no one is really taking responsibility for his present consumption; hence no one can really be trusted. Once one person sees this, within days everybody has seen it. And the flow of credit ceases. The future has arrived. So what do you do? President Obama’s policies, like those of his European counterparts, are those that Keynes would recommend: find a way to make credit available, once again removing the responsibility to balance the books from the existing generation and transferring it to the next. After all, in the long run we are dead, and in the short run we are out of office. If the future arrives unannounced, tell it to come back tomorrow.
There are those who argue that the adoption of this strategy at the time of the New Deal caused the Depression to deepen, and postponed by 20 years the recovery of Western economies, meanwhile making war in Europe inevitable, as Germany chose the quick route out of recession. I don’t know whether this is true. Indeed, I don’t know whether anything that economists say is true. For almost all of them argue as though it were not human beings who are the subject of their discipline, but “profit maximizers,” acting according to the principles of cost and benefit, and never troubling to make the distinction between real and unreal products, between right and wrong ways of behaving, and between responsible and irresponsible attitudes to future generations.
Nevertheless, it does seem to me that a middle road between Muhammad and Keynes ought to be available, that this road would encourage the responsible use of our powers, and that it would teach us to bear the full cost of our own mistakes and pleasures, and not to transfer them to people whom we shall never know.