I’ve made the argument in a free market interest charges would cease to be a market feature. I based my prediction on the premise interest agreements violate inalienable human rights, and people generally agree to this, in practice, now. Generally, we care if someone does not pay back a loan, we do not care if one does not pay interest. And if in a free market there is no sanction outside of the opinion of cooperators, and if few care if interest payments are made, as a money-maker, charging interest would wither on the vine. And with it would wither the prime tool of oppression, war and market destruction.
The argument was controversial. While the debate proceeded, I noted in the Hong Kong Standard John Wiley has published a textbook called The Stability of Islamic Finance by four Western-trained Moslem econ Phds.
With a dedication page reading “In the Name of Allah, the All Merciful, the All Beneficient” it should be no surprise the book takes an orthodox line on interest agreements. Few may realize that Islam spread in the chaos following the rolling economic bust after the fall of Rome. Mohammed (pbuh) was a merchant and well versed in praxeology, and clear about the danger of interest agreements.
The austrian business cycle theory may be esoteric in the West, but it is exoteric in the East. The Cantonese merchants I traded with in the 70’sI now realize were all “austrians” even though they never heard the term. By page two of The Stability of Islamic Finance the authors have laid out the danger of central banking, the fraud of unmatched maturities in deposits and loans, and gold as money. By page five they are citing Ricardo and Bohm-Bawerk among others favorably and discounting Keynes. What we call austrian economics they call obvious.
Their argument against interest in the introduction parallels my argument: it is a trap to agree to pay a profit no matter what; only participation in the risk is just in business. They add what might be an interesting concept to the argument we had as to whether money (defined again as gold) is a store of value. Money in reserve is only potential capital, “it becomes actual capital only when it is joined with other resources in undertaking a productive activity.” Interest is not rent on money, because rent is payment for usufruct of capital goods, not capital. I’ve only finished the introduction, and I am keen to read the full argument on this point.
I think I perceive in their argument that they are pitching to modern colleagues by grounding the teaching in utilitarianism. Interest agreements lead to nasty arrangements (moral hazard is covered in the introduction) and financial instability, and financial stability is the goal of Islamic finance.
There is a hint that Moslems have plenty to contribute to “austrian” economics. 25 years ago Peter Drucker, who claimed Mises as an early influence, pointed out entrepreneurs do not take risks. To any entrepreneur, this is obvious, in fact we are compensated in part for eliminating risks. Nonetheless, to this day austrian thinkers proceed from the premise that entrepreneurial activity is based on risk. Taking risk is fatwa in Islam.
Instead of reviewing a book after I am finished, in which case I rarely actually get around to revciewing the book, I’ll review it chapter by chapter as I read it.
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