The dumb economics of government debt; is the solution in Islamic economics?

I find it very difficult to understand, even as an economist, why in a period of prosperity (on the average – admitting that averages are not the whole picture) we can’t afford to clean the streets properly, or decent schooling and health.

The reason given, and is accepted almost without question, is that to provide these things would involve increasing government debt.


This is a weird argument; more weird, since it is conventional wisdom.


The standard criterion for justifying investment is that the expected net present value of the investment expenditure should be positive; i.e. the expected returns should exceed expected cost when discounted by the appropriate interest rate, or more generally that expected social benefits should exceed expected social costs when discounted by an appropriate social rate of discount.


The social rate discount usually being lower than the crude interest rate because it takes account of wider social considerations, than private profit making firms do.


Almost everyone agrees that education, health, social services are underfunded. Presumably this means that further investment in them would be beneficial; i.e. have a positive net present value.

So why not invest in them? The reasons given are various; the main ones being that it would entail increases in government debt and impose a cost on future generations because interest would have to be paid on the increased debt.

But if education, health, social services are said to be underfunded, then future generations will benefit from the investment.

So why not invest? The real reason is that we or they don’t want to. Why not is a separate question.




There are many reasons for being worried about debt. But consumers are every day encouraged to increase their indebtedness for the benefit of the economy as a whole.


Suppose that we take the reasons to be worried about debt thisseriously; remembering that debt doesn’t worry bankers very much if creating it (by fabulous instruments) awards them (fabulous) bonuses.


We could instead take a lesson from Islamic finance and think of sharing the risk of investments in society. Instead of the government issuing debt, it could fund investment projects through equity. Social equity.


Of course, to an extent the government already does this through private finance initiatives, paying private companies through the nose for it. I mean, allowing private companies to absorb much more than the net present value of the projects they undertake.


Of course, this more or less guarantees jobs for retiring government ministers and senior civil servants. But that’s another matter.


In the sort of Islamic solution I am proposing, the return on social equity, should the expected net present value of social projects be positive (and it’s not difficult to assess whether this is so at the end of the project), the consequent return on such social equity goes to the community in benefits; lower taxes from higher productivity, increase in happiness and there are such things, we all know, as non-monetary benefits.


Perhaps instead the return and social equity could go to the poorest in society.


That would be a good thing.


But it would mean unlearning dumb economics.


Maybe a matter of not recruiting so many economists and cabinet members from PPE graduates.


That would be a good thing.


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