www.ebook3000.com Islamic Money and Banking Integrating Money in Capital Theory www.ebook3000.com Islamic Money and Banking Integrating Money in Capital Theory Dr Iraj Toutounchian John Wiley & Sons (Asia) Pte Ltd www.ebook3000.com Copyright © 2009 John Wiley & Sons (Asia) Pte Ltd Published in 2009 by John Wiley & Sons (Asia) Pte Ltd Clementi Loop, #02-01, Singapore 129809 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as expressly permitted by law, without either the prior written permission of the Publisher, or authorization through payment of the appropriate photocopy fee to the Copyright Clearance Center Requests for permission should be addressed to the Publisher, John Wiley & Sons (Asia) Pte Ltd., Clementi Loop, #02-01, Singapore 129809, tel: 65-6463-2400, fax: 65-6463-4605, e-mail: enquiry@wiley.com This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that the publisher is not engaged in rendering professional services If professional advice or other expert assistance is required, the services of a competent professional person should be sought Neither the authors nor the publisher are liable for any actions prompted or caused by the information presented in this book Any views expressed herein are those of the authors and not represent the views of the organizations they work for Other Wiley Editorial Offices John Wiley & Sons, 111 River Street, Hoboken, NJ 07030, USA John Wiley & Sons, The Atrium, Southern Gate, Chichester, West Sussex, P019 8SQ, United Kingdom John Wiley & Sons (Canada) Ltd., 5353 Dundas Street West, Suite 400, Toronto, Ontario, M9B 6HB, Canada John Wiley & Sons Australia Ltd, 42 McDougall Street, Milton, Queensland 4064, Australia Wiley-VCH, Boschstrasse 12, D-69469 Weinheim, Germany Library of Congress Cataloging-in-Publication Data: ISBN 978-0-470-82319-4 Typeset in 10.5/13pt Sabon by Laserwords Private Limited, Chennai, India Printed in Singapore by Saik Wah Press Pte Ltd 10 In the name of Allah, the Compassionate, the Merciful www.ebook3000.com Contents Acknowledgments ix Preface xi An Evaluation of Money: A New Perspective Commodity Money 1 Metallic Money Dinar and Dirham (D-D) What is (Paper) Money? 10 An Impure Public Good 14 Quantity Theory of Money and a Country’s Balance Sheet 22 Functions of Money in an Islamic Setting 28 The General Theory as Monetary Theory 34 Cooperation in Islam 51 A Just Voting System 56 Islamic Foundation of Norms for Cooperation 58 Equivalence between Functions of and Demand for Money 65 Notes 85 Interest on Money and Its Scope 89 A Brief History of Interest 89 The Place of Interest in Capitalist Economics 93 The Place of Labor 101 Western Justifications for Interest 111 Time Preference and its Relation to the Rate of Interest 118 Is Time Preference Positive in all Circumstances? 129 Some Further Thoughts on Interest 135 Exchange Cost, Seigniorage and Inflation 147 The Socially Optimal Provision of Money in the Capitalist System 150 Interest (Riba) in Islam 151 Notes 160 A Legal Perspective on Islamic Finance 163 Capital Theory: A Brief Recapitulation 163 The Legalities of Money and Capital 179 Money and Capital Reconsidered 182 Supply of Money Unidentified 190 Extended Model 193 vii www.ebook3000.com viii Contents Implications of the Model 197 Notes 200 Interest: Fact and Fiction The Place of Man in the Economic System 201 208 The Evils of Interest 215 Notes 225 Islamic Banking versus Conventional Banking The Structure and Functions of Banking 227 227 Underlying Conditions for Success in Islamic Finance 240 The Philosophical Foundations of the Place and the Ultimate Goal of Man 252 Islamic Modes of Finance 260 Islamic Bank Structure 263 Islamic Contracts 270 New Products 287 Notes 293 The Role of Conventional and Islamic Banks in Investment: Certainty and Risk Conditions Introduction 299 299 Investment in a Capitalist Economy 302 Investment Expenditure: A Function of Interest Rate? 304 Investment in an Islamic Economy 307 Portfolio Management for Households 315 Notes 317 The Role of Central Banks in Islamic Banking Revising Roles: Learning from Experience 319 319 Revisions (Beyond Amendments) 325 The Role of the Central Bank in Islamic Banking 333 Assertions 334 Classification of Islamic Modes of Contract 337 Application of IRR and Zero Cost of Capital 339 The Transmission Mechanism for Creating Money 346 Notes 349 Bibliography 351 Index 369 370 Index Austrian school, 107, 118, 128 Austrian theory of interest, 128 Auxiliary contracts, 337 Availability of factors of production, 200 Average productivity of labor, 250, 294 Average social cost, 158 Bai Muajjal (deferred payment sale), 286 Balance sheet, 22–27, 98–99, 193, 195, 229, 235 Bank guarantees, 287 Bank’s and firm’s share of capital, 309 Bank’s Board of Directors, 29 Bank’s relative share of profit, 309 Banking crisis, 299 Bankruptcy, 183, 225, 241, 276, 318 Barter, 1, 129, 147–148, 192 Beneficiary, 287 Bequeath, 131 Bequest, 131 Beyond Growth, 249 Borrower, 49, 86, 119, 153, 216, 227–229 Bubbles, 31, 82, 110–111, 186, 188, 197 Bureau of Labor Statistics, 327 Business cycle, 32, 77, 107–109, 180, 303, 317, 325, 349 Buy cheap and sell dear, 186 Buying and selling money, 136 CAB, See Certificate of Asset Building Canada, 125–126, 219–220 Cancer cell, 31, 39, 102, 264 Capability of the monetary policy, 304 Capacity utilization (CU), 219–220 Capital abundant, 338 Capital and interest, 120, 126, 173 Capital assets, 83, 117 Capital ceases to be scarce, 85, 106 Capital deepening, 170 Capital goods, 12, 22, 106, 109, 129, 168, 170–171, 284 Capital is a collective concept, 172 Capital produces the interest, the, 101 Capital structure, 170 Capital to be scarce, 106, 338 Capital which bears interest, 201 Capital widening, 170 Capitalism, 13, 36, 40, 82, 93, 97, 102, 106, 111, 137, 174, 195, 209–210, 221, 244, 248, 294, 331 Capitalist, 16–17, 73, 189, 218, 307 Capitalistic system, 199, 221, 226 Capital-labor ratio (K/L), 265 Cash-balance approach, 32–33 Casino, 110 Catastrophe, 326 Causality, 39, 77, 82, 220–221, 319, 322 Cause and effect of speculation, 106 CDA, See Common deposit CEE, See Code of Economic Ethics Central bank, 16, 20, 22–24, 229, 319, 336 Central bank under public control, 238, 319 Century of the enlightenment, 255 Certainty conditions, 274 Certificate of Asset Building (CAB), 337 CFP, See Common-fund pool Challenges, 329–331 Changes in equity prices, 324 Characteristics of the rate of interest, 29–31, 35–36 www.ebook3000.com Index Characteristics of the rate of profit, 99, 111, 294 Christian behavior and salvation, 254 CIF, See Cost/insurance/freights Circulating capital, 99, 166–167 Civil partnership, 275–276, 284, 288–289, 297 Civil procedure code, 275 Classical, 49, 95, 123, 174, 177 Classical theory of interest, 123 Classification, 32, 196–197, 336 C-M-C, See Commodity– Money–Commodity Code of Economic Ethics (CEE), 268 Codes of Ethical Conduct, 241 Coherence, 54, 93 Collateral, 74, 94, 186, 227, 241, 262–263 Collective, 43, 52–55, 93, 109, 172, 199 Collective action, 53–54, 93, 199 Commercial code, 275 Commercial partnership, 275–276 Commission, 239, 309 Commodity money, 1–4, 6, 148 Commodity–Money–Commodity, 4, 6, 175, 330 Common deposit (CDA), 315 Common-fund pool (CFP), 309, 311 Compensation principle, 144 Compensation variation, 144 Competing IRRs, 340 Complement, 53, 87, 183, 219, 263, 284, 297, 338 Completely Random Mating, 132 Completeness, 334 Compound, 42, 84, 89, 151–152, 184 Conflict, 39, 42, 64, 89, 142–144, 253, 331 Conflict of goals, 56 371 Conflict of interests, 144 Conquer stagflation, 102 Consistency, 93, 187 Consortium, 278 Consumer credit, 231 Consumer loans, 121 Consumer Price Index, 21, 159, 219 Consumer sovereignty, 108 Continuous aggregate demand for investment schedule, 311 Contribution of monetary policy, 322 Controversial issues, Cooperation, 168, 239, 242–243 Cooperative, 39, 41, 50, 52–54, 56–57, 78, 141–143, 209–210, 280, 331 Cooperative interaction, 243 Core of analysis, the, 199 Cost of debt-capital, 234 Cost/insurance/freight (CIF), 282 Counter-cyclical, 107, 199–200, 225, 290 Counter-equilibrium, 111 Credit cards, 133 Crucial cause of unemployment, 74, 317 CU, See Capacity utilization Culture, 131–132, 213–214, 244, 252 Cut-off rate, 95, 236, 303, 339, 345 Darb, 276 Day of Judgment, the, 257–258 Deadweight loss, 105 Debasement, 5, 149–150, 161 Debt-capital, 100, 194, 217, 228, 233–234, 300, 340 Deceptive device, 282 Defective methodology in economics, 141, 146 Deferred payment, 283, 289, 292 Define speculation, 75 372 Index Definition, 77, 115, 128, 177, 242, 278, 306 Definition of Riba, 151 Demand for and Supply of Investible Fund, 313 Demand for investible fund (DI ), 310, 314 Demand for money, 34–35, 45, 65–85, 156–159, 317 Demographic pattern, 131 Deposit, 227, 235, 264, 315 Deposit account, 315 Depositors, 54, 86, 154–155, 227–230, 232–233, 294, 297, 301, 309, 315, 318 Depositors’ share of profit, 310 Depreciation, 84 Depreciation allowances, 303 Depression, 12, 30, 77, 79, 104, 160, 220, 236, 319–321, 325 Derivative, 191, 201, 229, 235, 313, 329, 334, 337 Destructive, 12, 31, 75, 84, 143, 147, 201, 217 Deviations, 215, 219–221, 297, 316 Dichotomy, 93, 145, 203, 225 Different economic systems, 40 Differential capital cost, 237 Difficulty of identification, the, 190 Dignity, 257 Dinar and Dirham, 5, 7–9, 154 Direct investment, 278, 288, 296 Disequilibrium, 98, 107–108, 117, 126, 209, 240, 333 Dishoarding, 189, 304 Distribution of income and wealth, 92, 138, 157, 225, 331 Distributive and commutative justice, 254 Distributive shares, 170 Diversity in unity, 210 Divine Rules, 44, 253, 326, 331, 333 Division of labor, 51, 165 Double counting, 25–26, 206, 294, 336 Double the rate of interest, 166 Dow Jones, 30, 110, 321 Dual role, 54, 63, 163, 227 Durability, 167 Durable goods, 13, 100, 157, 159, 272 Early Islamic state, 5, 7, 9, 296 Easing-monetary policy, 320 Economic activity, 104, 183, 186, 190–192, 210, 229, 239, 269, 288, 324 Economic capacity, 308 Economic conditions, 235, 261, 265, 274, 301 Economic considerations, 273 Economic fluctuations, 299, 325 Economic growth, 184–185, 191–192, 213–214, 315, 322–324, 326–327 Economic justice, 10, 50, 215 Economic-Diagnosis Clinic (EDC), 268 Economics in Disarray, 245 ED, See Excess demand EDC, See Economic-diagnosis clinic Effective demand, 282, 345 Effective supervision, 336 Efficiency in a market economy, 144 Efficiency-equity trade-off, 151, 248, 273 Efficient Market Hypothesis (EMH), 109,160 Efficient resource allocation, 10, 14, 89, 236, 328 Embodied labor, 172 EMH, See Efficient market hypothesis www.ebook3000.com Index Endogeneity of money, 198 Endogenous, 16, 37, 40, 155, 180, 198, 200, 231–233, 266, 294, 338, 346 Engine, 43, 191, 245, 248, 263 Entrepreneur, 86, 94, 121, 137–138, 164, 203, 317, 344–345 Entrepreneurial ability, 121, 203, 235 Entrepreneurial profit, 121 Environmental technology, 251–252 Equal treatment of unequals, 214, 242 Equality of saving and investment, 63, 80, 117, 123 Equality only between equals, 242 Equilibrium in Capital Market, 314 Equilibrium volume of investment, 314 Equity, 48, 101, 145, 211, 229, 240, 294, 299, 317, 327–328, 331 Equity-based banking, 299, 300 Equity-capital, 233–235, 301 Equity-oriented, 144 Equity Participation, 45, 273–274, 278, 288 Equivalent variation, 144 ERE, See Evenly rotating economy Error-correction models, 221 ERS, See Evenly rotating system Ethical man, 259 Ethic-neutral, 82, 92 Ethics, 41, 90, 247, 260, 268 European Central Bank, the, 322 Evenly rotating economy (ERE), the, 129, 132, 180 Evenly rotating system (ERS), 345 Evils of interest, 140, 205, 216, 232 Evils of money, 208 Ex-ante, 121, 128 373 Excess, 76–77, 109, 151 Excess demand (ED), 11–12, 15–16, 22, 96, 134 Excess demand for investible funds, 314 Excess supply of investible fund, 314 Exogeneity of money, 197 Exogeneity of the nominal money stock, 32 Exogenous, 33, 36, 266, 297, 319–321 Expectation, 36, 75, 106, 212, 226, 238, 296, 321, 333 Expected rate of profit, 302, 311 Expected return, 189, 267 Expenses of production, 140 Exploitation, 91, 176, 234 Ex-post, 121, 123, 128 Extended IRR, 266, 339 Externality, 14–17, 20, 39–40, 53, 101, 242, 336 Extreme, 7–9, 17, 41, 241–242 Fair rate of profit, 136 Fairness, 52, 138, 251, 254, 291, 331 Fallacies, 13, 137, 143, 157, 190, 206, 271, 332 Fallacy, 13, 26, 31, 97, 123, 205–207, 283, 332, 336 Fashion, 22, 133, 210, 287 Fatal errors of socialism, 213 Federal Reserve, 103, 105, 160, 319, 327–328, 349 Fiat money, 6–9, 22, 86, 158, 148, 176, 206 Fighting against inflation, 302 Finance investment projects, 300, 337 Finance, 163–200, 232, 291, 296 Financee, 233, 238 Financial, 233, 273–274, 308 374 Index Financial bubble, 326 Financial institutions, 103–104, 154, 198, 233, 239, 294, 300 Financial policy, 300, 308, 310, 335, 338 Financial structure, 235, 261 Financial Study and Forecasts, 273 Financier, 233, 238, 289 Fine-tuning countercyclical monetary policy, 324 Fiqh (Islamic jurisprudence), 264 Firm, 96–99, 136, 179, 182–186 Firm’s and bank’s share of profits, 261, 301, 309, 313, 338, 342–343 First approximation to the concept of liquidity preference, 71, 73 First immediate derivative of interest, 229 Fiscal policy, 55, 338 Fixed capital, 107, 166–167 Fixed return, 291, 318 Flow, 184, 186 Flow of capital, 184, 334 Flow of investment, 184 Flow of knowledge, 214 Free lunch, 21 Free-rider, 19, 21, 65, 141–142, 243, 295 Friedman Rule, 13, 42, 105, 231, 235, 237–238, 290 From money to output and prices, 319 Full-bodied commodity, 158 Full employment impossible, 79 Full-employment equilibrium, 237 Functions of Islamic Central Bank, 37, 294 Functions of money, 26, 28, 37, 39, 50, 65–37, 322 Fund intermediary function, 228, 297, 299 Fuqaha, 152, 154 Future generations, 14, 131, 209, 214, 237 Future income streams, 117–118, 339, 346 Gambling, 83 Game theory, 43, 56, 63, 87 GCIES, See Grand co-operative Islamic economic system GCS, See Grand co-operative Islamic economic system General equilibrium, 11, 12, 45, 100, 183, 192, 198, 201, 333 General Theory, the, 13, 34–36, 70, 107, 157, 166, 186, 202, 320 Germany, 91, 103, 124, 126, 211, 216–217, 219 Gestation periods, 233 Gini coefficient, 219–221, 327 Gold coins, 24–25, 148–151, 158 Gold standard, 148, 158, 349 Goods of the first order, 168 Governor Bernanke’s assessment, 320 Grand cooperative, 39, 41, 50, 53, 78, 92–93, 141 Grand Cooperative Islamic Economic System (GCIES/GCS), 294, 301, 331 Greasing the wheels, 323 Great Depression, the, 12, 30, 77, 79, 81, 104, 107, 111, 160, 319–321, 325 Great potential for success and profitability, 294 Greed, 82, 185, 242, 244, 294, 325–326 Green cheese, 319 Hadith, 10, 43, 86, 154, 264 Halal(Permitted), 10, 49, 230, 253, 264, 276, 278, 281–282 Happiness, 90–91, 256–257 www.ebook3000.com Index Haram (Forbidden), 5, 8, 10, 153–154, 253, 275, 281–282 Harvard Business School Survey, 305 Hatred, 210, 240, 256 Heavy price, 329, 333 Heterogeneity, 176–177 Heterogeneous capital, 196 High time preference individuals, 119 Higher the risk, the higher the return, the, 267 Highest Master of All, The, 256 Hire-purchase (leasing), 284–285, 288 Historic opportunity, 333 Historical cost, 344 History of Economic Analysis, 164, 204, 254 Hoarding, 8, 11, 67–69, 71–73, 77–78, 189, 303–304 Horizontal and vertical linkage, 225 Household needs, 288 Housing, 104, 277, 284, 288 How money is defined, 190–191 Human beings, 36, 41, 44, 100, 182, 213, 293, 334 Human capital, 133, 248, 323 Humane Economics, 213 ICT, See Information and communication technology Identification problem, the, 190 Identity, 12, 26–27, 123, 184, 203, 207, 225 Ideology, 252–253 Idle rich, 307 Idle-cash balances, 39, 71 IIBI, See Institute of Islamic banking and insurance Ills of capitalism, 102 Illusory wealth, 103 Imaginary world, 245 375 Immediate derivative, 13, 229, 235 Implicit figure, 230 Impossibility of inter-personal comparison of utilities, 144 Impossibility Theorem, 42–43, 86 Impotency, 102 Impure public good, 14–15, 18, 20–22, 80, 158–159, 161, 238, 294, 336 Incapability of the monetary policy, 190, 324 Income, 34, 146, 171–173, 209–210, 212, 229 Income-capital ratio, 171 Inconclusive theoretical and empirical evidences, 323, 325 Inconclusiveness nature of money and growth, 323 Individual time preferences are all positive, 132–133, 135 Individualism, 51, 111, 118, 229, 253 Individualistic behavior, 51, 181, 216, 242 Indivisibility, 18, 20–21, 336 Industrial Revolution, Industry, 54, 124–127, 135, 140, 150, 165, 269, 288 Inequitable distribution of income and wealth, 46, 92, 102, 157, 241, 244, 293, 324 Inflation, 149, 157, 225, 305, 323 Inflicting population, the, 80 Influence of non-monetary factors, 31 Information and Communication Technology (ICT), 270 Inherently built-in stagflation element, 221 Inherently unsustainable, 107 Injustice, 39, 210, 242, 250, 272 376 Index Inside money, 27–28 Instability, 5, 73, 180, 188–189, 324 Instability due to speculation, 106 Installment sales, 22–24, 262, 273, 281–284, 288, 318, 334, 337 Institute of Islamic Banking and Insurance (IIBI), 289, 297 Institution, 54, 179, 183, 228 Institution of cooperation, 145 Institution of the firm, the, 182, 185, 191, 199 Institutional economists, 185 Instruments of production, 139 Insurance premium, 137 Integrating money in capital theory, 106, 185, 192 Intellectual property rights, 57, 214 Interdependencies between distribution of income and general price level, 219 Interest and its necessity, 92, 114, 135, 146, 180 Interest charges, 91–92, 137, 144, 182, 218, 222, 227, 230, 294 Interest elasticity of demand for investment, 236 Interest rate is largely neglected, 305 Interest repugnant to Aristotle, 328 Interest-bearing sum of money, 120 Interest-free banking operations act, 134, 138, 145, 151, 157, 300, 343 Internal rate of return (IRR), 95, 118, 124–125, 136, 188, 192, 236, 265, 294, 337, 339–346 Internal sources, 296 Interpersonal comparison, 42, 144 Inter-temporal, 107–108, 131, 240 Inter-temporal maximization of utilities, 131 Inventory investment, 79 Investment, 76, 79, 110, 153, 215, 225, 265, 303, 305–306, 335 Investment in capitalistic system, 221, 226 Investment project, 95, 124, 136, 183, 189, 229, 233, 241, 265, 301, 311, 337 Investment-development bank, 263 Invisible hand, 141, 234, 243, 248 Invisible hand of interest, the, 234 IRR, See Internal rate of return Islamic banking, 41, 46, 47, 227–293, 319–349 Islamic bazaar, 188 Islamic central bank, 37, 107, 200, 294, 334, 336, 338, 342, 346, 349 Islamic contracts, 16, 48, 115, 153–155, 264, 270–271, 288, 318, 337 Islamic economics, 27, 37, 39–40, 43, 49–50, 62–63, 74, 78, 80–81, 83, 87, 89, 141, 145, 180, 183, 209, 240, 346 Islamic interest (riba)-free banking, 134, 151, 157 Islamic jurisprudence, 152, 264, 278 Islamic school of economic thought, 252 Islamic Stock Exchange, 278, 293 IS-LM curve, 48, 157 Iso-quant map, 195 Istisna (Manufacturing), 117, 287, 289 It takes a theory to kill a theory, 259 Ivory tower, 36, 84 Japan, 80, 103, 124, 126, 219, 221, 332 www.ebook3000.com Index Jealousy, 210, 240 Jo’aalah, 286–288, 297, 337 Jo’ol, 286 Joint product, 263 Joint-stock company, 273 Joker, 79 Just price, 92 Just society, 243 Just, 18, 24, 44, 64, 86, 138, 160, 255, 264 Justice, 10, 40, 240, 249, 251–254, 327 Justice is equilibrium of opposing forces, 328 Kali-be Kali, 116, 160, 286 Keynesian Revolution, 12, 32 Knowledge-wealth of the nations, 213 Laissez-faire, 110, 134 Lead-Manager, 278 Learning by doing, 323 Lease, 284–285, 288 Lectures in political economy, 29 Legal, 96–97 Legal aspects, 181, 183, 185, 203, 227, 240 Legal combination, 185 Legal difference(s) of money and capital, 94 Legal entities, 39, 179, 182–183, 194, 227, 271–272, 276 Legal environment, 147, 179, 184, 197 Legal identity, 27 Legal process, 96, 138, 181–183, 191 Legal structure, 228, 232 Legal tender, 23, 66 Legalities, 48, 94, 96, 145, 196 Legitimacy of interest, 120, 128 Legitimate religious deception, Lender, 182, 216, 228, 271 Lending-borrowing, 48, 186 377 (Leontief) production function, 6, 96, 194, 250–252 Lessee, 284–285 Lessor, 284 Liability, 15, 17 Life expectancy, 129–130 Liquidity, 12, 35, 72, 77, 185 Loan, 8, 48–49, 99, 152–153, 155, 222–223, 227–228 Logical contradiction, 117–118 Lorenz curve, 129 Loss of welfare, 301 Love, 210, 240, 256, 315 Low time-preference, 119 Low time-preference individuals, 119 Loyalty, 267 Machine of happiness, 256 Macroeconomics, 49, 117, 124, 201 Main source of inflation, the, 335 Manager, 57 Manipulated market value, 293 Manufacturing aggregate hours, 219–220 Many objectionable features of capitalism, 145, 260 Marginal cost, 15, 21, 105, 149–151, 185 Marginal efficiency of capital (MEC), 12, 19, 85, 100, 106, 135, 204, 302, 306, 308, 311, 339 Marginal efficiency of investment, 318, 339 Marginal risk, 317–318 Marginal social benefit, 105 Marginal social cost, 105–106 Marginal utility, 112 Marginal-productivity interest, 171, 250 Market failure, 14, 18, 242–243 Market mechanism, 38, 87, 141, 145, 229, 234, 256, 343 378 Index Market value, 23, 86, 182, 186–187, 194, 197, 211, 281, 284, 293, 297 Master of none, 38, 329 Masterless man, 255–256 Material pleasure, 133 Maturity, 170, 227, 230, 281, 286 Maximizing positive externalities and minimizing negative ones, 257, 280 Maximizing the social welfare function, 265 M-C-M, See Money–Commodity–Money Meaning, not the measurement of ‘‘capital,’’ 164 Measurement of ‘‘capital,’’ 164 MEC, See Marginal efficiency of capital Medium of exchange, 2–4, 8–9, 20, 66 Metallic money, 5, 9, 24, 29 Microeconomics, 144 Mining, 165, 271, 282, 288, 295, 297 Misconceptions, 90, 94, 125, 238 Mistakes, 39, 111, 239, 315 Misunderstanding, 14, 45, 48, 78, 99, 119, 127, 153–153, 156, 170, 179, 236, 279, 285 Mobeen, 44 Moderateness, 236, 304 Monetary economics, 14, 34, 231 Monetary institution, 198, 228, 300 Monetary parasitism, 139 Monetary policy, 190, 198, 236, 317, 322, 324–325 Money is barren (sterile), 102 Money loan, 26, 119, 181, 230, 270–271, 283 Money which knows no limits, 244 Money whirlpool, 79–80, 82, 102, 159, 202, 211, 228, 332, 336, 342 Money–Commodity–Money (M–C–M), 4, 6, 74, 78, 175, 330 Money-value of time, 116 Monitoring cost, 266–267, 338 Monitoring, 234–235, 260, 266–267, 338 Monopoly producer of money, 148 Moral hazard, 50, 260, 336 Moral philosophy, 41, 90 Morality, 51–52, 90, 242, 247, 258, 260 More than sufficient rules, 10 Mosa’qaat, 273, 280–281, 288 Most destructive powerful force in the universe is compound interest, the, 89 Most fateful errors of our age, the, 247 Most important issue of economics, the, 247 Most powerful financial policy tool, 310 Movies, 133 Mozara’ah, 273, 278–280, 288 Mudarabah (or Qirad), 48–49, 86, 87, 273, 276–278, 296, 52, 318, 334, 337 Mudarib or Amel, 276–277, 296 Multi-national corporations, 291 Multiple money creation, 156, 237 Multiple-roots problems, 266 Murabaha, 281–284, 288 Musharakah, 48–49, 86, 153, 262, 264, 272–273, 277, 301, 309, 318, 334, 337 Muslim, 9–11, 40, 52, 58–59, 154, 240, 258–259, 290–292, 307–308, 333 www.ebook3000.com Index Mutual fund, 235 Myths, 201 National capital, 120, 169 Natural agents, 139, 164 Natural monopolist, 159 Natural risk, 83, 189 Nature of capital and income, 146 Necessary and sufficient condition for speculation, 77, 187, 202, 330 Necessary condition for full-employment, 79, 235, 332 Necessity and justification of interest, 118 Negligence, fraud, or breach of trust, 276 Neoclassical school, 122 Net Present Value (NPV), 265, 339 Neutrality of money, 322 New institutional economists, 185 New master, 256 New products (Islamic contracts), 270, 287–293 New sources of instability, 324 New theory, 34, 43, 145, 163 New York Times, 326 Nisab, No fear of inflationary pressure, 233 Nominal value, 9, 11, 234, 299–301 Non-depreciating asset, 297 Non-excludability, 18, 20–21 Non-rivalry, 18 Normative and positive issues, 294 Normative argument, 138 Normative economics, 308 Norway, 219, 221 NPV, See Net present value Objectionable features of capitalism, 12, 63, 70, 145, 157, 180, 190, 338 379 Opportunity cost, 230, 343–345 Optimality, 18–19, 40–43, 143, 328 Optimum money supply, 200 Optional (not obligatory and executable), 275–276 Organic composition of capital, 178 Origin of confusion, 14, 18, 20, 78, 111, 282 Origin of inflation, the, 225 Origin of interest, the, 126 Originary interest, 129 Our hypothesis, 129, 134, 345 Output volatility, 324 Output-determined variable, 37 Output-sharing, 279 Outside money, 27 Outsourcing, 269 Overlapping generations, 180 Pakistan Federal Shariah Court, 151, 154 Paper money, 5, 7–9, 24–26, 101, 147–148, 158 Parasite, 19, 141–142, 243, 261–262 Pareto efficiency, 41, 225, 253 Pareto’s value judgments, 253 Parsimony, 165 Partner, 232, 260–261, 275, 344 Partner-firms, 268, 345 Partnership, 54, 233, 275–276, 284, 288–289 Passive role, 299–300 Pastime, 183 PDA, See Preferred deposit Perfect Assortive, 132 Philanthropic contribution, 59, 296 Philosophical foundation of individualism, 111 Pillar of capitalism is interest (Riba), the, 210 380 Index Pillar of Islamic banking, the, 232, 272 Pleasing Allah (God) as ‘‘the ultimate goal’’ of a Muslim, 60, 272 PLS, See Profit-and-loss sharing Plurality of individuals, 42 Popular fallacy, 205–206 Population, 103, 129–132, 139, 197, 326 Portfolio, 33, 315–316, 318, 338 Portrait of a genius, 225 Positive economics, 138, 308, 345 Positive Theory of Capital, 126 Possibility Theorem, 43 Postponement of enjoyment, 140 Potency, 102 Potential capital, 6, 16, 96, 101–102, 115, 179, 185, 237, 308, 334, 342, 346 Potentiality of money, 35 Poverty alleviation, 265 Poverty, 247, 292 Power of creating money, 347 Predetermined rate of return, 233 Predetermined return, 234, 299 Preferred deposit (PDA), 315 Premature hypothesis, 26, 39 Price elasticity of output, 306 Primary markets, 75–76, 186, 188, 212, 317 Prime fallacy, 13, 31, 332 Primitive society, 94, 144 Principal and the interest, 241, 299 Principal-Agent, 49, 277, 296 Principle of ‘‘supply creates its own demand,’’ the, 11, 128 Principle of increasing risk, the, 306 Principle of individualism, 111 Principles of cooperation, the, 144 Private Capital, 120 Private creation or destruction of money, 231 Private good, 12–17, 19–20, 105–106, 136, 159, 238, 300, 336 Problem of valuation, 120 Production (Manufacturing), 288 Production function, 96, 135, 177, 250–252 Production loan, 114, 216 Production-possibility schedule, 111–112 Productive capacity, 189, 205, 334 Productive capital, 176–177, 188, 212 Productivity of capital, 95, 101, 112, 115, 138, 171–172, 203, 303 Productivity theory of interest, 250 Profit-and-loss sharing (PLS), 83, 93, 181, 272, 331, 194 Profit and loss statements, 98, 197 Profit maximization, 101, 122, 145, 194, 249–250, 263, 266, 310, 317, 340, 343 Profit share, 49, 234, 274, 310, 344 Profit sharing ratio, 62, 301 Profitability, 170, 274, 294, 337, 342 Profit-maximizer, 301, 306, 346 Profits, 124–125, 137–138, 189, 230, 317 Progress of ignorance, 247 Project Appraisal, 265–266, 338 Property Rights and Time Preference, 133 Proportionality of money, 31 Prospects, 72, 309, 313, 329, 331–333 Prosperity, 59, 90, 240, 263 Protestant Ethics and the Spirit of Capitalism, 255 Protestant Reformation, 254 Public control, 238, 319 Public debt, 217 Public goods, non-rivalry, 18 www.ebook3000.com Index Purchasing power of the general public, 21–22 Qard-ul Hassan, 48, 55, 153, 239, 271–272, 288, 296 Qirad, 276 Quantitative criterion, 215 Quantity theory of money, 23, 26, 28, 34, 38 Quran and Hadith, 10 Quran, 42–44, 51–52, 58–61, 87, 28, 29, 152, 154, 161, 232, 253, 257, 264, 271–272, 294, 307–308, 318 R&D, 57 Rab al-Maal, 276–277, 296 Radcliffe Committee, the, 190 Rate of interest elasticity, the, 305 Rate of profit, 124–126, 178, 180, 311–312, 335 Rate of return, 29, 46, 118, 136, 274 Rate of surplus value, 178 Rational man, 259 Real assets, 299 Real compound, 42 Real entities, 40, 182, 194 Real identity, 27 Real liabilities, 299 Real long-term rates of interest, 126 Real wealth, 205–206, 293, 324 Really crucial cause of unemployment, the, 74, 317 Reason and faith, 254 Recession, 30, 301–302, 326 Recessionary downturn, 301–302 Reciprocal behavior, 256 Reciprocal marginal externalities, 256 Reciprocity, 258, 294 Redundancy, 12, 92, 141, 194, 207, 341 381 Reflexivity, 334 Relative profit share of the investor, 274 Religious verdicts, 7–8, 10 Remote goods, 121 Renaissance, the, 254 Required reserve ratio (RRR), 198, 231, 233, 308 Resource allocation, 10, 14, 89, 108, 174, 236, 328 Restricted zones, 89 Revisions beyond amendments, 325–333 Reward to capital, 203–204 Riba (Interest), 4, 5, 7, 9, 20, 76, 161, 198, 230 Ricardian economic rent, 139 Ricardian theory of value, 139 Rich and poor, 208, 247, 345 Rights and responsibilities, 182–183 Risk lover, 315 Risk neutral, 315 Risk of default, 227 Risk averter, 314 Risk premium, 274, 306–307, 343 Risk, 185, 229, 274 Risk-bearing, 83, 203 Robber bands, 243 Root cause of inflation, 225 Root of all economic evils, 102 Roundabout, 112, 169, 172 RRR, See Required reserve ratio Salam, 116–117, 160, 285–286, 288 Saved-up labor and saved-up land, 171 Saving, 27–28, 152, 328 Say’s identity, 12 Say’s law, 11, 128, 304 Say’s theory of interest, 138 Scarcity of capital in capitalistic system, 199, 221, 226 382 Index Scarcity of capital, 85, 106, 217, 238, 346, 348 Scientific revolution, 325 Secondary markets, 74, 76, 186, 211 Secularism, 254 Seigniorage, 16, 86, 149–151, 158–159, 346 Self-correcting mechanism, 78, 195 Self-correcting mechanism is either absent or very slow and painful, 73, 187 Self-defeating argument, 80, 160, 293 Self-interest, 41, 51, 65, 210, 253, 255–256 Selfishness, 152 Self-sufficient, 144 Separation Theorem, 203 Services, 6, 85, 206, 288 Shadow of goods, 206 Share Economy, the, 31, 39, 221, 333 Share of the profit, the, 49, 145, 183, 274 Sharecropping, 279–280 Shariah Committee or Shariah Board, 264, 287 Shariah compliance, 291 Shariah principles, 10, 240, 293 Shariah-compliant, 116–117, 264, 282, 286–287, 291–292, 297 Shia scholars, 10 Shocks cannot be controlled, 324 Shocks, 267, 299–300, 325 Slavery, 256 Small Is Beautiful, 245 Social benefits, 136, 267 Social capital, 214, 226, 239, 241–242, 251, 331 Social commitment, 251, 260, 268 Social contract, 3–5, 179, 182, 199 Social costs, 321 Social interest, 39, 41, 134, 234, 241, 252–253, 255 Social legal structure, 228, 232 Social order, the, 43, 255 Social responsibilities, 236 Social spirit, 42 Social-welfare, 15–16, 40, 54–55, 184, 235, 242, 252, 263, 337, 346 Social-welfare function, 43, 144, 256–259, 265, 305 Social-code of conduct, 268 Socialism, 174, 205, 213, 248, 252 Socially efficient, 105 Socially optimum provision of money, 346 Society, 15–16, 39–40, 154, 225, 257, 346 Society as a cooperative, 141, 163 Society is a real compound, 42 Solution, 83–84, 197 Some objectionable features of capitalism, 12, 63, 70, 145, 157, 180, 190, 260, 338 Speculation, 30, 39, 68, 72–84, 106, 110, 186–187, 284, 327, 335 Speculation on Wall Street, 319 Speculation whirlpool, 191 Speculation-if mistaken, 73, 187, 335 Speculative demand for money, 33, 67–72, 74, 77–79, 96, 159, 317 Speculative profit, 211 Speculative purposes, 11, 34–35, 100, 347 Speed of life, 130, 134 Spot sell/purchase, 286 Stabilizing mechanism, 199 Stable equilibrium, 126 Stagflation, 195, 219–221 Stamped money, 83–84, 328 Standard deviation, 267, 316 www.ebook3000.com Index 383 State-owned Islamic banks, 272 Static and dynamic equilibrium, 201 Stationary state, 170 Sterility of money, 120, 165 Stock Exchange, 73, 77, 110, 181, 211, 278, 293, 332 Stock market volatility, 109, 111 Stock of capital, 75–76, 79, 306 Stock of knowledge, 214, 226 Stocks and flows, 172 Store of value, 13, 26, 28, 30, 39, 66–69, 72, 190, 308 Strategy of Conflict, the, 143 Studies in Investment Behavior, 301 Substitute, 183, 196, 219 Sukuk (taskeek), 289, 290 Sunnah, 10, 44, 86, 154, 161 Sunni scholars, 9, 10 Superneutrality of money, 322 Supply of aggregate investible fund, 310, 313–315 Supply of money being exogenous to the system, 231 Supply of money function ought to be made endogenous, the, 232 Supply of money is demand-determined, 321 Supply of money, 11, 32–33, 36–37, 96, 190–191 Supreme principle of human life, 328 Surplus value, 121, 174–176, 178, 204–205 Sweden, 219, 221 Symmetric information, 260 Syndication, 278 Synergy, 39, 50, 52, 55, 144, 183, 195, 269 Technical considerations, 273 Technicalities of the production, 94, 195–196 Technological progress, 111, 114 Testable hypothesis, 121–122, 124, 133 Theoretical findings, 145, 320 Theory of capital, the, 163, 173, 192 Theory of Moral Sentiment, the, 255 Theory of value, 1, 139, 172–174 Three markets, in an Islamic system, 309 Thriftiness, 131 Tightening policy, 320 Time period of production, 120, 165, 167 Time preference, 107–108, 112–116, 118–119, 121–122, 127–135 Time-value of money, 116, 291 Total exchange cost, 147–148 Total Revenue Costs of Deposits, 230 Total risk, 317 Trade, 8, 38, 75, 106, 288 Transaction costs, 9, 147–148 Transformation, 26, 175, 177, 184, 191, 214 Transmission mechanism, 263, 346–347 Transparency, 260, 267–269 Treatise, 13, 33, 70 Triangular Trap, 71–72, 77 Trilateral agreement, 289 Trilateral co-operation, the, 269 Trinity criteria, 40, 45 Trustee agent, 262, 277 Tullock’s assertion, 10 Twisted terminology, 135 Tawaruq, 292 Tax authorities, 192, 197, 260, 335, 338, 344 U.K., 125–126, 220 U.S., 13, 102–105, 126, 219–221, 294, 320–321, 326, 328 384 Index Ultimate goal, 39, 44, 92, 128, 144–145, 209, 257–258, 275 Uncertainty, 14, 36, 69, 77, 81, 100, 106, 172, 189, 323, 325 Undistributed profits, 303 Unemployment costs, 160 Unemployment, 38, 80, 82, 155, 160, 326–327 Unit of account, 2, 22, 38, 66–67, 97, 308 Unity in diversity, 210 Universal public good, 214 Use value and exchange value, 174, 176 Usury (interest), 39, 92, 166, 308, 328 Utility, 15–16, 41, 61 Utopia, 107, 242 Validity and effectiveness of monetary policies, 190 Value and distribution, 166 Value judgment, 39, 41–42, 138, 247, 253 Value of marginal product, 195 Value-added, 241 Value-neutral, 239, 294 Value-oriented, 239 Variable capital outlays, 178 Variable return, 318 Veil, 28 Velocity of circulation, 3, 15–16, 20–21 Velocity of money, 22, 159, 186 Velocity, 32, 130, 185, 336 Verdict, 7–10, 86, 154–156 Vertical bias, 111–112 Vertical summation, 17–18, 21, 159, 336 Veto power over wisdom, 294 Vice and virtue, 257 Vicegerent of Allah (SWT) on earth, the, 258 (Virtual) asset prices, 324 Virtual wealth, 104, 185, 237, 293 Virtue and material life, 244 Visible hand, 19, 141–143, 234, 243, 248 Visible hands of co-operation, 19, 142, 243 Von Thunen’s law, 171 Voting system, 56–58, 214 Vulnerable feature of capitalism, 200 Wage bill, 137 Wage rigidity, 323 Wage-Cost Theory of the price level, 226 Waiting cost, 147 Waiting, 127, 140–141, 156 Walras’ Law, 12 Wealth of Nations, 97, 136, 206–207 Weighted average rates of return, 301 (Weighted) average rates of profits in the common-fund pool (CFP), the, 311 Wekalah (Trustee agency), 277 Welfare cost of inflation, 328 Welfare economics, 41, 144, 253 Whirlpool of speculation, 110–111 Who really ought to pay for the risk, 307 Wikipedia, 287, 290–291, 297 Wisdom, 44, 58, 246, 253 Working capital, 285 World War II, 326 Zakah, 7–10, 86 Zero cost of capital, 339 Zero nominal rate of interest, 231 Zero-sum game, 40, 50, 78, 80, 144, 218, 229, 235, 242–244, 259, 280, 324 Zulm (injustice), 39 www.ebook3000.com ... Islamic Money and Banking Integrating Money in Capital Theory www.ebook3000.com Islamic Money and Banking Integrating Money in Capital Theory Dr Iraj Toutounchian... the number and types of markets we can have in the Grand Cooperative Islamic economic system I believe that this book succeeds in integrating money in capital theory and that three interdependent... 208 The Evils of Interest 215 Notes 225 Islamic Banking versus Conventional Banking The Structure and Functions of Banking 227 227 Underlying Conditions for Success in Islamic Finance 240 The Philosophical