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.
