Going by the expanding nature of global economics and varying national economies, today’s leaders should be compelled to understand that the best, much-applauded, and unanimously accepted form of fundamental economics is the capitalist market economy which contains many buyers and sellers of numerous goods and services where all of them are interested primarily in their own well-being. However, from Islamic perspectives, while the bond between the seller and buyer is accepted, the capitalist sellers demand for interest which is called Riba (usury) is totally haraam (forbidden). In modern times, Muslim banks have introduced what is referred to as “La Riba”–meaning no usury. From the Greek word oikonomos, economy denotes “one who manages a household.” However, according to the great 19th-century economist Alfred Marshall, “economics is a study of mankind in the ordinary business of life.”[i] In essence, economics is the study of how society manages its scarce resources.[ii]
Two prominent economists, Adam Smith and David Ricardo inspired the modern
economics we cherish today. Adam Smith’s 1776 book titled An Inquiry into
the Nature and Causes of the Wealth of Nations, shed light on the subject
of trade and economic interdependence. Likewise, inspired by Adam Smith’s
writings, David Ricardo, millionaire broker turned economist, in his 1817 book Principles
of Political Economy and Taxation, developed the principle of comparative
advantage as we know it today. The principle of comparative advantage explains
interdependence and the gains from trade. As a member of the British parliament
of the day and in his defense of free trade and his opposition to the Corn Laws
which restricted the import of grain, Ricardo put his economic beliefs to work
by displaying total rejection and repugnance at the British government’s
infringement on free trade. Undoubtedly, the legacies left behind by Smith and
Ricardo continues to empower the values and ideals of today’s capitalist
economies.
Based on decentralized control and delegation, a leader who has the will and
commitment to steer a nation to its right course must understand that
micromanaging economies, people’s lives or jobs is nothing but a futile
enterprise. Likewise, a leader cannot save, motivate, and satisfy everyone.
Leaders must understand that when people associate no risk or cost to
something, they will abuse it. That is why all social programs like welfare,
social security, and Medicare fail to have rigid foundations despite concerted
government efforts at their resuscitation. With markets being a good way to
organize economic activity, boosting trade makes everyone better-off. Though
not always positive, governments can sometimes improve market outcomes. During
the Cold War era, the former Soviet Union and her Communist allies in Eastern
Europe experienced retarded economies because their economies were based on
outdated centralization systems managed by irrational central planners which
culminated in their collapse in the 1980s.
Because of
corruption, insecurity, coup d’états, political obscurantism, dictatorships,
and a host of other natural and human calamities, Africa, a continent abundant
in natural resources, remains entangled in a protracted economic mess that make
it a laughing stork in every sector of the economic scale and a burden to
international financial institutions like the IMF and the World Bank. Lack of
human capital, grinding poverty and diseases like HIV/AIDS and malaria, and the
collective theft of state coffers, has diminished the continent’s prospects for
economic prosperity and political maturity. Despite minor modifications, the
economic principles left behind by Adam Smith and David Ricardo continue to
drive the nerves and fibers of many nations including the United States while
resourceful African nations continue to suffer from self-inflicted economic
woes without any prospect for recovery.
Some important aspects of managing a capitalist economy include:
(1) a strong national defense–if people do not feel safe, economic growth will
be retarded and suffering and destitution will reign.
(2) Property rights–when people own something, they have the tendency to invest
and protect it.
(3) Judicial system to handle disputes.
(4) Low taxes and low regulatory environment.
(5) Few entitlement programs like welfare, social security, and Medicare. These
programs are inefficient and wasteful (transfer payments-taking money from one
citizen and giving it to another is always counterproductive). A program like
welfare falls under what economists refer to as “the Law of unintended
consequences” which occurs when government actions or policies fail to produce
the desired results. Initially, welfare was intended to help the poor but only
created more poverty and an underclass that grew reliant on government. We have
to be careful what behaviors we reward because if people associate no cost or
risk to something they will abuse it.
Said another way, production possibilities curves can be expanded with the
following in mind: (1) movement towards capitalism and free trade (India,
China), (2) education, (3) technological advances, and (4) discovery of new
natural resources. By raising taxes, consumer and producer surplus is destroyed
beyond measure and automatically the standard of living of the ordinary citizen
is lowered. Leaders need to understand that people get what they earn and that
there are no other solutions except trade-offs. Thus, growing economies need
energy to safeguard and maintain their demand and supply. A country’s standard
of living depends on its ability to produce goods and services.
Consequently, leaders and politicians have caused extensive miscalculations to
numerous national economies by thinking that they know more about economics
than economists. In broad terms, this is what is referred to as “fatal conceit”
by economists. Both golden rule and fatal conceit, malevolent in context, are
based on self-interest and are detrimental to the economic well-being of any
nation and must be shunned at all cost.
One other form of unwarranted government exploitation or practice that place
unnecessary hardships on businesses is price gouging. A firm’s costs are a key
determinant of its production and pricing decisions. This practice is
outlandish and absolutely authoritarian in nature. Leaders fail to grasp the
theory that demand is based on ability and willingness to pay. On the ability
notion, one may have the ability to pay but unwilling to pay for the product
either because the product is inferior or exorbitant. Apparently, wary
consumers understand the implications of buying cheap and inferior Chinese
products that flood the markets. Everything, regardless of make or model, has a
price attached to it. Unquestionably, above that price, no one is willing to
pay. Supply and demand of goods and services determine price. As a result, when
the price of a commodity goes up, demand goes down; when price goes up it
provides an incentive for suppliers to supply more of the goods or services if
they can.
One other principle
why price rise is when government prints too much money. Nations experience
inflation when there is an increase in the overall level of prices in the
economy. An observable fact where prices in the economy rose by similar
standards was experienced by Germany in January 1921 when the price of a daily
newspaper that cost 0.30 marks rose to 70,000,000 marks in less than two years.
The best tool to defeat inflation is to limit the growth in the quantity of
money. The U.S. experienced high inflation in the 1970s and high inflation in
the 1980s because of high and slow growth in the quantity of money. Despite the
U.S. experiencing “Every time we break down barriers to trade and investment,
we open up new markets for American ranchers, farmers, workers, and
entrepreneurs. ...”[iii]
Economics and leadership are two inseparable and intertwined subjects with
significant advantage and contributions to free market economies. To have an
effective economy, it is of vital importance for a leader to come up with
effective planning and implementation. Economists are of the view that planning
is never perfect and that plans are absolutely nothing without action and that
at all times the trickiest thing to do is executing a plan.
There is a popular consensus among economists which affirms that in economics
demand is easy and there is no limit to the wants and needs of human beings.
The most difficult thing is meeting the supply of goods and services. What a
country can do to encourage its people and how corporations and businesses can
supply the necessary products and services demanded by the people is a pressing
issue and a daunting task in the science of economics. As mentioned earlier,
the answer of course is capitalism as reflected in the decentralized economy.
An important resolution could be the 70 % solution adopted by the US military
and corporations which states that if you feel that you have 70% of a problem
covered –take action!! Because of the law of diminishing returns, trying to
make a plan perfect is futile. The art of economics consists not merely looking
at the immediate but at the longer effects of an act or policy; it consists in
tracing the consequences of that policy not merely for one group but for all
groups.
Because people respond to incentives, leaders must remain rational by weighing
or comparing benefits and costs just as those they govern perceive it to be so.
A situation in which the market price has reached the level at which quantity
supplied equals quantity demanded, is called equilibrium. Also called
market-clearing price, equilibrium is found where the supply and demand curves
meet. At the equilibrium price, the quantity supplied equals the quantity
demanded. In free markets, a so pervasive phenomenon that brings into balance
the quantity of goods supplied and the quantity of goods demanded is referred
to as the law of supply and demand–meaning the price of any good adjusts to
bring the quantity supplied and quantity demanded for that good into balance.
In economics, deadweight loss is referred to as the fall in total surplus that
results from a market distortion, such as a tax. Because taxes cause deadweight
losses, they prevent buyers and sellers from realizing some of the gains from
trade. What determine whether the deadweight loss from a tax is large or small
are the price elasticities of supply and demand. Henry George, the 19th century
American economist and philosopher, in his 1879 book, Progress and Poverty,
argued that the government should raise all its revenue from tax on land. To
him, this “single tax”, was both equitable and efficient. However, not many
economists of our era and age support George’s proposal for a single tax on
land. Because governments have no money, the only way they can obtain it is
through taxation which carries with it a deadweight loss to society as a whole.
With rigorous debate mounting in the U.S. regarding immigration, opponents and
proponents of this contentious issue base their arguments on the supply of
labor. Some factors that would cause the labor supply curve to shift include
changes in tastes, changes in alternative opportunities, and immigration. For
instance, when immigrants come to the United States, the supply of labor in the
United States increases and the supply of labor in the immigrants’ home
countries contracts. The never-ending policy debate about immigration centers
on the effects of immigration and its effect on labor supply-equilibrium in the
labor market.
A new field of economics known as behavioral economics has made basic
psychological insights in human behavior. Some exclusive studies on human
decision-making have come up with the following findings:
People are overconfident.
People give too much weight to a small number of vivid observations.
People are reluctant to change their minds.
Because economists have differing views regarding the imperfections of Homo
sapiens, some economists have suggested that humans are “near rational” or that
they exhibit “bounded rationality”. It was Herbert Simon, a social scientist
who worked at the boundaries of psychology, who suggested that humans should
best be viewed as satisficers and not
rational maximizers. Thomas Sowell, an African American economist stated that
the mark of a good economist is "thinking beyond stage one". In
essence, this is part of leadership. Professor Richard Epstein University of
Chicago Law School, commenting on Thomas Sowell’s book Applied economics:
Thinking beyond Stage One, had this to say, “In Applied Economics, the
companion volume to his earlier work, Basic Economics, Thomas Sowell uses
rudimentary economic theory to unmask the cant that surrounds too many policy
debates.”[iv]To further add more weight
to Sowell’s book, the Publishers Weekly had a commentary that read: “The great
achievement of Sowell's book is its simplicity. His writing is easy and lucid,
an admirable trait considering the topic at hand. . .His target audience is the
average citizen who has little or no economics background, but would like the
tools to think critically about economic issues.”[v]
In broader terms, economics is an appealing subject, informative, and educative
to the core. It is part sociology, part philosophical, and undoubtedly a
subject meant for every human being seeking to overcome barriers in daily
financial and economic handicaps.
Adan Makina
WardheerNews
[i]
Marshall, A.
(2009). Principles of economics: unabridged eighth edition. Cosimo,
Inc.
[ii] N. Gregory Mankiw: Principles of Microeconomics (2007). Thomas Higher
Education, 5191 Natorp Boulevard, Mason, OH 45040.
[iii] http://www.ustreas.gov/.
Retrieved August 21, 2022.
[iv] http://www.tsowell.com/Appliedecon.htm. Retrieved August 21, 2022.
[v] www.publishersweekly.com.
Retrieved August 21, 2022.