{bit.ly/ssT2IE} Lecture at IBA 5 Dec 2022 on how we can move to an interest-free economy. Explains that Islamic Economy requires a lot more than zero interest. For a just economy, we need to ensure equal opportunities for education, provision of basic needs, and jobs for all who can make productive contributions to society. Creating such an economy requires a financial system radically different from capitalism - one which invests in socially profitable investments, rather than privately profitable ones. Many specific details of how we could create such a system are discussed.

1. These Slides Available from SlideShare:
http://bit.ly/ssT2IE

2. Transitioning
to
An Islamic
Economy
Dr. Asad Zaman
These Slides Available from
SlideShare:
http://bit.ly/ssT2IE

3. A Ray of Hope in the Darkness
The Government of the Islamic Republic of Pakistan withdraws its
objections to enforcing the Constitution.
This issue is far more complex than it appears on the surface
Both the Politics and the Economics are VERY deceptive.
I do not have sufficient time to clarify all issues.

4. In a Nutshell:
For an Islamic Economy, zero interest is necessary, but NOT SUFFICIENT
By itself, enforcing a zero interest today will cause a HUGE CRASH!
Zero interest emerges as a NATURAL OUTCOME of a well-organized
economy (both secular and Islamic).
High interest rates are the emergency measures required to handle
extreme mis-management of the economy – a band-aid for a wound.
Reducing interest to zero REQUIRES good management of the economy.
The Best Management can be achieved by using Islamic Principles.

5. Major Portions of the Talk
1. Politics – brief summary – not main goal of talk, and not my area of
expertise.
2. Economics – Replacing MYTHS by TRUTHS.
3. Islamic Economic System: What are the essentials we need to
implement, in order to be able to run a zero-interest economy?
4. TRANSITIONING: How to move from present highly unjust and
exploitative capitalist economy towards the justice of an Islamic
Economic System?

6. 1: Politics:
Currently, FSC is hamstrung.
Even a single objection filed in Supreme Court by anyone, blocks
execution of decision.
SBP has withdrawn objection, but there are still objections by private
parties.
Even deeper – it may be worthwhile to move objection to Supreme
Court – instead of withdrawal of objections.

7. Political Objectives
• Change the Law on the suspension of FSC decisions.
• Get the Supreme Court to hear and rule on Objections (rather than
withdrawal
• This will allow us to work out micro-details of implementation in a far
more satisfactory way.

8. Some Important Micro-Details
• CRUCIAL is validation of implementation: WHO will decide if
objectives have been fulfilled?
• Is replacement of conventional banks by Islamic Banks (as they are
today), sufficient to create an Islamic Economy?
• Miniature Objective – Get Shariah Compliance Boards to be paid by
SBP, rather than private Banks.

9. 2: Economic Objectives
Based on the Uloom-ul-Umran Approach: http://bit.ly/AZUUU
UuU is the Islamic Alternative to Western Social Science.
To understand why Social Science is the study of Western Society only,
and not a Science at all, see:
The Puzzle of Western Social Science: http://bit.ly/AZpss
Origins of Western Social Sciences: http://bit.ly/IR3owss
Recent Paper: How Theories Shape, and are Shaped by History.
Available from SSRN (search)

10. The 3-Dimensional Approach to Social Change
1. POSITIVE: Describe and Understand the situation on the Ground
2. NORMATIVE: Have clarity of vision about desired outcomes.
3. TRANSFORMATION: How to get from here to there? Strategies.
For our present purpose – creation of an Islamic Economy – all three
dimensions present great difficulties. We will describe these issues in
greater detail.
However, complete treatment is impossible

11. POSITIVE:
Describe Current Economic System
(in terms of Obstacles and Differences from Ideal)

12. The Biggest Obstacle: Economic Theory
Economic Theory is DESIGNED to prevent us from understanding how
the financial system works.
• Textbooks says that money is a veil – it only affects prices, but not the
real economy.
• This idea prevents us from understanding and resolving inflation.
See: Modern Money and Inflation: DAWN on Nov 12, 2022:
https://www.dawn.com/news/1720438

13. Four Myths about Money
1. Money is sole cause of Inflation – NO: Inflation caused by COSTS
2. Printing Money by the Government will cause Inflation – NO: It is
possible to create money, without causing inflation.
3. The Government must raise taxes, or borrow money, to finance its
expenditures. NO: Government is NOT like a household. It can
create money from NOTHING.
4. Government must borrow money from domestic sources, and from
foreign sources, to function. FALSE: By using the right strategies,
government NEVER needs to borrow, and has no need of TAXES.

14. Myth 1: Inflation is a Monetary Phenomenon

15. Friedman’s Folly: Inflation is everywhere and
always a monetary phenomen
OBVIOUSLY FALSE:
Stagflation in USA was caused by OPEC oil price hikes in 1971.
Current Inflation in Pakistan is imported.
KEY ISSUE: What determines PRICES?
Neoclassical Answer: Supply and Demand.
MMT Answer: Costs of Production.
Ancient unresolved controversy among Economists.

16. WHY Monetarism, when it is Obviously False?
Monetarism says that money only affects prices, it cannot create
employment. Government should not create Jobs.
This was the RESPONSE to Keynesian Economics, which says that free
markets DO NOT guarantee full employment. It is the responsibility of
Government to create jobs.
WHY was this FALSE doctrine created to counter a TRUE and
BENEFICIAL theory?

17. Statistics are Designed to HIDE Inequality

18. Benefits of Keynesian Economics
Keynesian Era
Monetarist Era
Reagan-Thatcher

19. Naomi Klein: The Shock Doctrine
I learned more Economics from this book, than from my Stanford Ph.D.
The top 1% watched their share erode, as a result of Keynesian theory
An era of unprecedented prosperity in USA and Europe: 1945 to 1975
The Reagan-Thatcher Revolution AGAINST Keynesian Economics
Rise of Chicago School, in wake of the Oil Shock, following Yom-Kippur
War.
Dramatic Rise in Inequality. Share of top 1% skyrockets.
Alkire-Ritchie: Winning Ideas: Lessons from Free Market Economics
https://www.ophi.org.uk/wp-content/uploads/OPHI-wp06.pd

20. The Forest-Level View
• Dominant Economic Theories support power structures, and have
nothing to do with reality.
• Keynesian Theories are far closer to truth, but were rejected by
mainstream economists.
• Key Difference between Keynesians and Monetarists:
Monetarists: Free markets automatically provide jobs for everyone
Keynesians: The Government must use Fiscal and Monetary Policy to
provide jobs for everyone.

21. The Truths About Money

22. Capitalist Economies Require Money Creation
Gold and Silver Are Not Adequate As Money – BECAUSE these cannot
be created according to requirements of the economy.
Fundamental Equation:
Created Money = Business Profits + Household Savings + Trade Surplus
Money Must Created to Allow Capitalism to Function.
Who Will Create Money?
Where Will the Money Go?
Who Will Derive the Benefits?

23. Transitioning Strategy:
An Islamic Economic System is
radically different from Capitalism
BUT, in transitioning, removing
capitalism will be the final step.
Working WITHIN a capitalist
economy, we must focus on
• WHO will create money?
• HOW will this money be used?

24. Crucial Function of Banks: Money Creation
Myth: Banks are financial intermediaries. They take money of
depositors and lend it to investors.
Truth: Banks CREATE the money they lend (contrary to textbooks)
See: Money Creation in the Modern Economy – Bank of England
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-
creation-in-the-modern-economy
Some implications of this understanding:

25. The Battle for the Control of Money
Over the centuries, there has been a struggle between Private Financial
Sector and Governments over the privilege of money creation.
https://ssrn.com/abstract=2766855
The power to create money by banks is a central privilege of the state.
It can be given to private banks only by will and consent of
governments. (Shari’a also supports this view)
Without government support via Central Bank, Private Banks cannot
exist.
Banks MUST be organized as public sector entities! Not as commercial,
for-profit, private sector entities.

26. Global Losses From Failure to Understand
• Global Financial Crisis Cause: Private Sector Banks pursuing private
profits AGAINST public interest KNOWINGLY. Trillion dollar bailout.
• Same pattern all over the globe.
• Reagan deregulates S&L Industry in USA. Pursuing private profits
leads to S&L crisis, wiping out all private sector banking profits since
the Great Depression of 1929.
• Huge Bailout protects the banks.
• Privatizing the GAINS, and Socializing the Losses.

27. Key Consequence:
Essential for Interest Free Economy
Money Creation MUST be done in public interest, NOT for private
profits.
Many ways to accomplish this goal.
1. Sovereign Money, 100% Reserve Banking – takes power away from
private sector, and gives it to the Government.
2. Strong Bank Regulation: Created Prosperity in USA for fifty years.
3. Islamic Banks: Instead of working for Private Profits, start working
to SERVE the public interest!

28. Main Cause of Global Economic Stagnation:
Financial Sector Takeover.
Future of Society is determined by Investments in the future.
New Money Created is Invested.
Fundamental Equation (with trade balance):
Created Money = Business Profits + Household Savings
Business uses internal profits to invest. Household Savings encourage
higher consumption, creating demand for more production.
Business = Real Business + Financial Parasites.
Financial Parasites = Profits without Productive Activity.

29. Keynesian Insights: ‘Socialization of
Investment’ and ‘Euthanasia of the Rentier’
“Capitalism is the astounding belief that the most wickedest of men will do
the most wickedest of things for the greatest good of everyone.”
Investments in a Capital Economy are Gambles: "When the capital
development of a country becomes a by-product of a casino, the job is likely
to be ill-done.“
Key argument: Future depends on GOOD Investments in Production, not BAD
investments in speculation.
High Investments require Low Interest Rates. In an economy with full
employment, Interest Rates will go to zero, leading to Euthanasia of the
Rentier Classes, which make money without productive activity.

30. Hiding the Rentier in Economic Theory
Production Function: Q=F(K,L,T) T:Terra (Land)
Labor Deserves its Marginal Product (or Average Product)
Manufacture Capital Also plays important role in industrial production.
Dispute between Marxists and Capitalists on role of Kapital
Terra: is not produced. Natural Resource. TRUST given by God to
Humanity.
What is the justification for RENTS? Question occupied classical
economists. Rents REDUCE productivity, being payments for idleness.
Modern Economic Theory MERGES K and T, HIDING the rentier.

31. Operational Lessons
Banks Should Serve Public Interest.
Banks exist because of government support, and cannot exist without it
Pursuit of private profits at expense of public interest has caused huge
damage to the world.
Banks finance investment. It can be in lands and stock (non-productive)
Or in the future of the nation, for maximum social profits (not private)
HOW to do this?

32. A New Vision for Islamic Banks
http://bit.ly/AZibf Talk at IBA 4th ICIBF 2020.
A New Paradigm for Islamic Finance: http://bit.ly/AZnpif 12th IFSB,
Bank Negara, Malaysia.
Since Banks are performing Public Service, they get money at 0% from
Central Bank.
Transition in 5 years: First Year: 20% of total credit from Central Bank to
be provided at 0% interest to Private Banks, earmarked for investments
in public interest.
Invest in Schools, Hospital, Roads, Energy, other socially beneficial
projects.

33. Governments can FORCE Banks to Serve
• Central Banks have legal right to regulate bank activities.
• If Central Bank refuses to provide Overnight Loans, Banks will
collapse, due to reputational problems.
• The Japanese Experience: Princes of Yen by Richard Werner
• Central Bank set targets for lending by prioritizing sectors of the
economy where lending would be most socially productive.
• Banks which met targets were rewarded, and those which did not
were penalized.

34. Meso-Economics:
The Key to Islamic Economics
In transition to secular society, the community was lost.
Secular society based on the idea of religious conflict, no agreement on
common goals.
Transition of idea of society as a body, united in purpose, to a collection
of individuals with conflicting interests. Darwinian metaphor: Survival
of the fittest in jungle of fierce selfish competition
Governments now regulate and adjudicate conflicts via rule of Law. No
consensus on common code of social conduct.
ONLY place for collective action is the government.

35. Community Driven Development
Key to Prosperity
Secret of Grameen Success: Lending was to communities, not
individuals.
Communities create social norms.
Loss of communities in Europe, USA has caused massive damage.
Minister of Loneliness in UK, Decrease in Life Expectancy due to
increase in Suicides in the USA.
Credit Creation should be community based.

36. Three-Part Solution to Credit Creation
Governments are corrupt – Private Firms are greedy.
Socially Productive Loans by Community Based Banks: Lend to
Communities for Productive Projects.
ONE index of productivity is profits.
Some aspects of this solution are covered in my SBP talk on:
Modern Monetary Theory for Pakistan: http://bit.ly/MMT1Pak
ABC’s of Modern Monetary Theory: http://bit.ly/ABCmmt

37. 3-Way Partnership for Credit Creation
Credit Creation is the most powerful tool to manage the economy.
It controls investments in the future of the economy.
In private sector, mismanagement leads to speculation in land and
stocks, creating price runs and crashes.
In government sector, massive failures of public infrastructure projects
– combined was shining examples of massively beneficial public
infrastructure. NOT to be eliminated.
Middle Path: Community Based Investment.

38. Community Building: Essential to Islam
Communities are built on foundations of strong families. Families have
broken down in the West – more than 50% children born to single
mothers –
WHY: Pursuit of Individual Pleasure – ignoring social responsibility –
highly encouraged by Hollywood.
Marriage is a commitment to build future – not a contract for fulfilment
of pleasure.
Massive Emphasis on rights of neigbhors, neighborhoods, Masjid, and
common prayers – meant to build a community.

39. Pioneer of Community Based Development
• Akhtar Hameed Khan – East Pakistan – Comilla Project.
(My father – Masihuzzamn – headed Village Aid Program in Pakistan)
Key Contribution: Build Communities and help them to solve their own
problems.
Orangi Pilot Project.
Legacy: NRSP: 250,000 Communities organized.

40. Community Based Credit Creation
All communities entitled to Qarz-e-Hasna, proportional to size of
community.
Communities score creditworthiness points on repayment of loan.
Quality of Projects accomplished evaluated, and used to increase size
of loan.
Banks serve the monitoring and evaluation purpose for community
based loans.
Communities can build schools, roads, infrastructure, businesses, green
projects, vegetables, dairy, etc. etc. etc.

41. Two Specific Suggestions
Skills Training Loans: Anyone who needs skills to get suitable job should
be able to take a loan to get this training.
Life-Loans: Long term loans provide all children with complete financial
support to enable them to become productive members of society.
ONCE they start producing, they can repay society for this loan.
Community Participation and Responsibility is essential to make this
work.

42. MMT meets Islam
MMT is intellectual heir of Keynesian legacy.
Theoretical Structure of Economy built around zero-interest rate.
Chicago School policies create boom-bust business cycles.
MMT provides Job Guarantee Program by Government as a buffer, to
prevent swings in economy and zero inflation. This is necessary and
sufficient to have zero interest rate economy.
Job Guarantee is built on the principle that Governments can create
money to provide productive jobs to everyone who can contribute
productively to society.

43. Concluding Remarks
Islamic Economy is not JUST a 0% interest rate. Rather, it is a JUST
economic system.
Equal Opportunities for Education to all.
Everyone who wants to contribute productively to society MUST be
provided with a job.
MMT provides a theoretical framework for achieving ZERO inflation,
and thereby enables its recommended 0% interest rate system.

44. Concluding Dua’s
Translation: O Allah! show us the truth as true, and inspire us to follow
it. Show us falsehood as falsehood, and inspire us to abstain from it.
O Allah, benefit me by that which You have taught me, and teach me
that which will benefit me, and increase me in knowledge. Praise is to
Allah in all situations, and I seek refuge with Allah from the torment of
the Fire.

45. Some Links to Relevant Materials
These Slides: http://bit.ly/ssT2IE
Islamic Monetary Policy: http://bit.ly/AZRiba1
New Vision for Islamic Banks: http://bit.ly/AZibf
Modern Monetary Theory for Pakistan: http://bit.ly/MMT1Pak
ABC’s of Modern Monetary Theory: http://bit.ly/ABCmmt