slideshow

Speculation, Uncertainty, Interest, and Unemployment

Posted on 15th July 2012 by Camille Paldi,

Firenze (Caravaggio)

 

Thoughts from Iraj Toutounchian’s Islamic Money & Banking: Integrating Money in Capital Theory 

ASSERTION: Speculation, in any market, produces a rate of interest in terms of itself.  Keynes proved the opposite; therefore, interest is both a necessary and sufficient condition for speculation to take place.

ASSERTION: Store-of-value makes of itself a triangular trap whose equal sides are hoarding, liquidity preference, and speculative demand for money – none of which can be studied independently from the rate of interest.

ASSERTION: Speculative activities with any durable commodity produce the rate of interest in terms of themselves.  This is done on the basis of the M-C-M relationship.  This is nothing but indirect demand for money; that is, an Islamic interest-free economic system is not only futile and misleading but it is also the result of confusion and misunderstanding.

A corollary to the above assertions is that in the absence of interest (and hence speculation) in any market, stability, full employment and a self-correcting mechanism are brought about in an Islamic economic system. 

ASSERTION: In an interest-free Islamic economic system, money can no longer perform the conventional store-of-value function.  No speculation in any market is allowable because of the interest (Rate) that it naturally bears.  All in all, there is a one-to-one correspondence between the store-of-value function of money and speculative demand for money.

Unlike a grand cooperative Islamic System, capitalism can be visualized as a zero-sum game in which for every gain there has to be found a loss of equal amount.  Speculation in any market brings about income for the major speculators behind the scenes.  The gains are enjoyed by a few and the losses borne by the rest of society.  The money whirlpool, which emerges from every speculative activity does not allow the equality between saving (S) and investment (I) to hold.

This means that speculation and the interest bearing on it produces a savings gap; that is S>I.  Hence, the necessary condition for full employment is never satisfied.  The loss to society is the cost of unemployment.

The social cost of speculation goes far beyond its private benefits.  By allowing interest (rate) to operate, the capitalist system gives speculators the opportunity to hunt the most profitable monetary opportunities and inflict the most harmful consequences on society.  The proper expected rate of interest emerging from speculation, particularly in the money market, is necessarily higher than the going rate in any other money markets.  This gives another reason for the saving gap to deepen even further, other things being equal.  The unavoidable consequence of allowing interest and speculation is unemployment.

ASSERTION: the money whirlpool resulting from speculation in the money market does not allow the equality between saving and investment to hold.  The natural consequence of this is unemployment.

ASSERTION: By allowing interest (Rate) to prevail in a society, speculators are given the opportunity to hunt the most profitable chances inflicting an equivalent loss to society in a zero-sum game.

There are two reasons to believe that in an interest- free Islamic economic system, money cannot be speculated upon: firstly, it is an impure public good; and secondly, speculation on any commodity in any market which brings forth with it a rate of interest is totally prohibited.  These factors bring about equality between saving and investment, the consequence of which is full employment.

ASSERTION: the abolition of interest and speculation in an interest-free Islamic economic system eliminates the store-of-value function of money.  This reduces the demand for money to irrelevance.

Unlike capitalism, the Islamic economic system provides the necessary conditions for money to perform its logical and universally accepted functions…

Pierce and Shaw’s Assertion:

People want to hold money, Keynes said, not only for transacting current business but also as a store of value or wealth…The reason … is the existence of uncertainty: uncertainty as to the future of the rate of interest…Once the future of the rate of interest is uncertain people have the opportunity to speculate in the hope of securing profit from knowing better than the market what the future will bring forth.  In his analysis of the speculative motive, Keynes considered only one alternative to money as a store of value, namely bonds.

Interest is an obvious attribute of both money and bonds.  Less obvious is speculation, which, as Keynes pointed out, is one of the most profound characteristics of capitalism and the root cause of the Great Depression.  The clear intention of speculators in both buying and selling commodities is not to hold and consume them but to make profit through the exchange of money for money.

From the point of view of Islamic teachings, the importance of intention in transactions cannot be exaggerated.  The intention of traders is not hard to trace back in some cases.  Uncertainty – artificial risk – is an essential element in all speculative activities, the sole purpose of which is to make the environment suitable for a few speculators to make a profit.  Such a risk manifests itself directly in the rate of interest.  If my understanding of this point is correct, it makes interest rates even more volatile.  What a sound and stable economic system needs is as much certainty as possible for all economic agents.  Artificial risk might  explain frequent variations in the investment function, via its mutual relationship with interest rates in capitalist economies. This has to be added to the money whirlpool produced as a result of speculation; combined these factors do not allow full employment to be maintained.

Any kind of artificial risk attached to the expectation and put into the future course of interest rates will transform itself into the actions of speculators.  Speculators – and the word here is used in a morally neutral sense to mean anyone who buys a financial asset at the lowest expected price in the hope of selling it at a higher expected price in the near or distant future – typically operate on borrowed money.  Obviously, the return on such activities must be higher than the interest rate on borrowed funds.  Furthermore, sane speculators never bet against central banks, which are the center of the entire financial universe in that they create money, regulate credit, and often decide whether troubled private banks will live or die.  The central banks are in fact playing in the market with other people’s money.


Posted on 15th July 2012 by Camille Paldi


Comment on this post







Twitter

    • 12th February @camille paldi
    • https://t.co/4BvUWezoOb
    • 12th February @camille paldi
    • Register for the Africa Islamic Investment and Economic Forum, March 15, 2016 in Dubai, UAE! https://t.co/x5WmYG74mb
    • 12th February @camille paldi
    • The Business Daily https://t.co/QAmtb1Uzgb
    • 12th February @camille paldi
    • The Inter-faith Daily https://t.co/CElmuxouLa
    • 12th February @camille paldi
    • The Halal Daily https://t.co/PKO7OsRJbJ
    • 12th February @camille paldi
    • The Islamic Finance Daily https://t.co/hMHtkctXA6
    • 12th February @camille paldi
    • The Business Daily by FAAIF is out! https://t.co/b0rFEzQIVJ
    • 12th February @camille paldi
    • The Inter-faith Daily is out! https://t.co/yxxquNYdd9
    • 12th February @camille paldi
    • The Islamic Finance Daily is out! https://t.co/1YIKCNBsOh Stories via @RFIFoundation @GGRESH @nafisalam
    • 12th February @camille paldi
    • The Halal Daily is out! https://t.co/8sgtxZICCI Stories via @hdcglobal @InstitutoHalal @HalalWelt
    • 11th February @camille paldi
    • The Business Daily by FAAIF is out! https://t.co/xsDjf69Ix3
    • 11th February @camille paldi
    • The Inter-faith Daily is out! https://t.co/ItT8pBjp0s Stories via @SurreyIntrfaith @churchofireland @StMatthiasNews
    • 11th February @camille paldi
    • The Islamic Finance Daily is out! https://t.co/RfWQ7qLzHJ Stories via @BUCLtd @IRTIIDB @ecopoliticsNG
    • 11th February @camille paldi
    • The Halal Daily is out! https://t.co/vxSjFgosrn Stories via @SousVideToday @karatekurako @PriorycofeRe
    • 10th February @camille paldi
    • Disguising the Bible as the Qu'ran and then Reading it in Public ... https://t.co/eT0QDilSQM
    • 10th February @camille paldi
    • The Business Daily by FAAIF is out! https://t.co/H7O18TYUYU
    • 10th February @camille paldi
    • The Inter-faith Daily is out! https://t.co/Zq903PZpSS
    • 10th February @camille paldi
    • The Islamic Finance Daily is out! https://t.co/g32U2tFRpZ Stories via @sharingrisk @LankaBreaking @TimeQuran
    • 10th February @camille paldi
    • The Halal Daily is out! https://t.co/MtHHddtYfT Stories via @AdnanHalawi @HIDALGOFRANCIA @ZhaboomCanada
    • 10th February @camille paldi
    • Join Upcoming FAAIF Events! https://t.co/e2UIPYWKag

Articles

Islamic Finance, Opportunities, and Challenges

Islamic Finance, Opportunities, and Challenges

Islamic Finance – Opportunities and Challenges

By Mufti Ismail Ebrahim Desai

The Islamic Financial system has witnessed considerable developments in the past four decades and is now regarded as one of the fastest growing segment of the g...

Posted on 19th January 2016 by Mufti Ismail Ebrahim Desai

Book Review for Islamic Banking: Theory and Practice (2012) by *Dr. Muhammad Hanif

Book Review for Islamic Banking: Theory and Practice (2012) by *Dr. Muhammad Hanif

Book Review for Islamic Banking: Theory and Practice (2012) by *Dr. Muhammad Hanif

 

By: Camille Paldi

 

This textbook is a masterpiece on Islamic Banking combining financial th...

Posted on 21st December 2015 by Camille Paldi

Economic Efficiency of Islamic Financial Institutions Part II

Section 4         Alternative Policy Options and Steps

 4.1      Proper Risk Management: A Necessity Posted on 13th December 2015 by Muhammad Ayub and Camille Silla Paldi

Economic Efficiency of Islamic Financial Institutions Part I

Economic Efficiency of Islamic Financial Institutions Part I

Tense Dichotomy between Shari’ah Compliance and the

Economic Goals of Islamic Finance Institutions

Muhammad Ayub and Camille Silla Paldi

Video

Find all our videos here, and also a link to our YouTube video channel so you can view our 'video of the week'

Submit

We would like you to get involved with our site. So if you want to submit Articles, Videos, Events and Call for Papers, please click the button below:

Submit

Valid XHTML 1.1 |  Valid CSS |  Web Design in Durham and Newcastle |  Copyright © 2016

* Prices are converted at USD$0.2723 per AED 1