Introduction to Islamic Economics. Mirakhor Abbas

prices and thus the incomes (who can buy the economy's output). Thus the planning entity determines all that the markets do “invisibly” in a market system.

      In practice, no planner can predict individual demands for goods as well as the invisible hand of the market as consumers register their votes (by what they demand) and prices send the signal to producers. Similarly, planners cannot tell producers the best (most efficient) way to combine the inputs they need to produce the planned output. Instead, producers who have the profit incentive and who know the technologies and the relative cost of inputs are best placed to produce the highest-quality output at the lowest cost. Moreover, there is little incentive to innovate and work hard in a system where there are no private property rights and no ownership. It is easy to see why it would be difficult to develop a thriving economy in such a system. Economic waste, chaos, and stagnation are the likely outcome.

      Planned economies had their heyday after World War II in the Soviet Union and China but lost their cachet as the Soviet economy faltered. With the collapse of the Soviet Union, the mixed market economic system began to rule almost supreme. Russia turned to a market-supported system through shock therapy, and China started to gradually move toward a market-based system. We say “almost supreme” because income and wealth inequalities became glaring in a number of market economies. Economists began to question the relative importance of economic output for individual well-being as material success was no longer seen as synonymous with human happiness and welfare. Since the financial crises of the 1980s, excessive national debt and, more recently, the most serious economic downturn and stagnation since the Great Depression have renewed doubts about the ability of markets and governments to deliver economic prosperity and well-being.

      Current State of the Global Economic System

      Due to market failure and other reasons, there is no “pure” market economy in the world of 2014. There is a role for governments in any economic system, and hardly anyone denies an important role for the government. The questions relate to the areas and extent of government intervention. Generally speaking, the wealthy argue for very limited government intervention and low taxes to maximize their earnings and wealth, while the poor want extensive intervention to address unequal opportunities (education and healthcare), wealth disparities, and social safety nets.

      But even though they recognize these safeguards and address them, mixed market economies in practice all over the globe have come under considerable criticism. In 2014, there are five major criticisms of the mixed market economic system:

      1. Wide and growing income and wealth disparities

      2. Recurring and highly disruptive financial crises accompanied by rising unemployment and severe economic hardships, especially for the poorer segments of society

      3. Neglect of the human and societal well-being dimension of economic development

      4. Irrational assumption of rational self-interest

      5. Continuing environmental degradation

      Growing Income and Wealth Disparities

      In the United States, for example, income and wealth inequalities have deteriorated significantly over time.3 In 1982, those in the top 1 % of the U.S. income distribution received 12.8 % of the total national income; this percentage rose to 21.3 by 2006 and fell back to 17.2 in the aftermath of the financial crash of 2007–2008. Another popular indicator of growing income disparity is a comparison of average chief executive officer pay relative to the pay of an average factory worker; this ratio rose from 42 times in 1960 to a high of 531 in 2000 and fell back to 344 in 2007. An often-used comparator of income distribution across countries is the Gini coefficient (with zero representing perfect equality and 100 representing total inequality, or in other words, one person earning the entire national income); the most recent numbers for some countries are:

      United States: 45.0

      Iran: 44.5

      Japan: 38.1

      Egypt: 34.4

      United Kingdom: 34.0

      Switzerland: 33.7

      France: 32.7

      Norway: 25.0

      Sweden: 23.0

      The rankings among 133 countries (with 1 representing the most equal income distribution among countries, namely Sweden):

      South Africa: 133

      United States: 93

      Iran: 90

      Sweden: 1

      A standard method of addressing income inequality in a capitalist system is through progressive taxation. But this is not always the case in countries that profess progressive taxation. As the following article excerpt notes:

      The lowest 20 % of earners (who average about $12,400 per year), paid 16.0 % of their income to taxes in 2009; and the next 20 % (about $25,000/year), paid 20.5 % in taxes. So if we only examine these first two steps, the tax system looks like it is going to be progressive.

      And it keeps looking progressive as we move further up the ladder: the middle 20 % (about $33,400/year) give 25.3 % of their income to various forms of taxation, and the next 20 % (about $66,000/year) pay 28.5 %. So taxes are progressive for the bottom 80 %. But if we break the top 20 % down into smaller chunks, we find that progressivity starts to slow down, then it stops, and then it slips backwards for the top 1 %.

      Specifically, the next 10 % (about $100,000/year) pay 30.2 % of their income as taxes; the next 5 % ($141,000/year) dole out 31.2 % of their earnings for taxes; and the next 4 % ($245,000/year) pay 31.6 % to taxes. You'll note that the progressivity is slowing down. As for the top 1 % – those who take in $1.3 million per year on average – they pay 30.8 % of their income to taxes, which is a little less than what the 9 % just below them pay, and only a tiny bit more than what the segment between the 80th and 90th percentile pays.

      While income figures represent one measure of inequality, a more comprehensive measure is wealth; these figures are even more discouraging. In 2000, the percentages of the national wealth held by the top 10 % of the adult population in a number of Western countries were:

      Switzerland: 71.3

      United States: 69.8

      France: 61.0

      Sweden: 58.6

      Norway: 50.5

      Germany: 44.4

      Finland: 42.3

The numbers for the United States, where figures are readily available, are even more alarming when we look at the top 1 %. (See Table 1.1 and Figure 1.1.) Generally speaking, in 1976, the top 1 % held about 20 % of the total national wealth. This figure nearly doubled to 40 % in 1995 and in 2010 stood at over 35 %. The corresponding dollar figures (wealth and income) for the various percentiles are shown in Table 1.2.

Table 1.1 Share of Wealth Held by the Bottom 99 % and Top 1 % in the United States, 1922–2010

Figure 1.1 Share of Wealth Held by the Bottom 99 % and Top 1 % in the United States, 1922–2010

Table 1.2 Income, Net Worth, and Financial Worth in the United States by Percentile, in 2010 dollars

      Instability of Economic and Financial Systems

      A second major criticism of the mixed market system is the recurring financial crises and the heavy economic toll that follows, especially on the less fortunate members of society. While the Great Depression and the financial crisis of 2007–2008 are the two most prominent standouts, they are not alone.

3

For the U.S. data cited here, see G. William Anderson, “Who Rules America?” (http://www2.ucsc.edu/whorulesamerica/power/wealth.html). For Organisation for Economic Co-operation and Development (OECD) data, see “Growing Unequal? Income Distribution and Poverty in OECD Countries” (http://www2.ucsc.edu/whorulesamerica/power/wealth.html).